BITSTREAM INC. AND SUBSIDIARIES

INDEX


_{PART I. FINANCIAL INFORMATION}

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2002 AND DECEMBER 31, 2001

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

PART II. OTHER INFORMATION

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

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

ITEM 5. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURES

BITSTREAM INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)

	June 30,			December 31,
	2002			2001
ASSETS
Current assets:
Cash and cash equivalents	$	5,412		$	5,716
Accounts receivable, net of allowance of $34 and $53 at June 30, 2002 and December 31, 2001, respectively	736			679
Prepaid expenses and other current assets	136			122
Total current assets	6,284			6,517

Property and equipment, net	367			473
Other assets:
Restricted cash	300			300
Goodwill	727			727
Investment in DiamondSoft, Inc.	641			599
Intangible assets	250			218
Other assets	6			5
Total other assets	1,924			1,849

Total assets	$	8,575		$	8,839

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	286		$	93
Accrued expenses	1,198			1,126
Current portion of deferred revenue	555			610
Total current liabilities	2,039			1,829

Long-term deferred revenue	17			14
Total liabilities	2,056			1,843

Stockholders’ equity :
Common stock, $.01 par value Authorized–30,500 shares Issued and outstanding–8,440 at June 30, 2002 and 8,428 at December 31, 2001	84			84
Additional paid-in capital	32,386			32,383
Accumulated deficit	(25,591		)	(25,111		)
Treasury stock, at cost; 126 shares as of June 30, 2002 and December 31, 2001	(360		)	(360		)
Total stockholders’ equity	6,519			6,996

Total liabilities and stockholders’ equity	$	8,575		$	8,839

The accompanying notes are an integral part of these consolidated financial statements.

BITSTREAM INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2002		2001		2002		2001
Revenue:
Software licenses	$	1,949	$	1,673	$	3,785	$	2,969
Services	264		198		561		530
Total revenue	2,213		1,871		4,346		3,499

Cost of revenue:
Software licenses	496		268		808		468
Services	91		92		194		176
Cost of revenue	587		360		1,002		644

Gross profit	1,626		1,511		3,344		2,855
Operating expenses:
Marketing and selling	532		731		1,127

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

or

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

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

215 First Street Cambridge, Massachusetts		02142
(Address of principal executive offices)		(Zip Code)