The decrease in license revenue for the Pageflex segment for the three and six months ended June 30, 2001 as compared to the three and six months ended June 30, 2000 was attributable to non-recurring OEM licensing fees from an existing long-term contract with Atex Media Solutions, Inc. (“Atex”) of $252 and $336, respectively, during the three and six months ended June 30, 2000.  Pageflex license revenues increased $129 and $274, respectively, for the three months and six months ended June 30, 2001 as compared to the three months and six months ended June 30, 2000, excluding these license fees, primarily due to increases in direct sales and subscriptions of the Company’s Mpower product.  Revenues from services decreased as a result of a decreased emphasis on consulting, and specifically due to the completion of certain non-recurring consulting projects during the six months ended June 30, 2000.

Consolidated Gross Profit:

             The decrease in the gross profit for the three months and six months ended June 30, 2001 as compared to the three months and six months ended June 30, 2000 is primarily attributable to decreases in revenues discussed above totaling $599 and $1,153, respectively, partially offset by a decrease in cost of revenues totaling $72 and $190, respectively.  Type and technology’s cost of revenues for the three and six months ended June 30, 2001 as compared to the three and six months ended June 30, 2000 decreased $70 and $147, respectively, primarily because of the elimination of outside subcontractors whose services were utilized during 2000 and a reduction in time spent by type engineers on customer specific projects.  Pageflex’s cost of revenues for the three and six months ended June 30, 2001 as compared to the three and six months ended June 30, 2000 decreased $87 and $191, respectively, as a result of a decreased emphasis on consulting which has a higher cost than licensing revenue and included $67 of non-recurring development costs associated with Atex consulting revenue during the three and six months ended June 30, 2000.  These decreases were partially offset by increases for the three and six months ended June 30, 2001 as compared to the three and six months ended June 30, 2000 of $85 and $148, respectively, in MyFonts.com cost of revenues related to royalties paid to outside font foundries for the sale of their fonts.

             Cost of revenue is composed of direct costs of licenses, as well as direct costs of product sales to end-users. Included in the cost of licenses are fees paid to third parties for the development or license of rights to technology and/or unique typeface designs and 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 product.

Consolidated Selling and Marketing:

             Selling and marketing expenses for the type and technology segment increased $18 or 4.7% to $404 and decreased $25 or 3.1% to $778, respectively, for the three months and six months ended June 30, 2001 as compared to the three and six months ended June 30, 2000.  Selling and marketing expenses for the MyFonts.com segment remained unchanged at $6 for the three months ended June 30, 2001 and June 30, 2000, and increased $15 for the six months ended June 30, 2001 as compared to the six months ended June 30, 2000.  Selling and marketing costs associated with the Pageflex segment decreased $238 or 42.6% to $321 and $359 or 32.0% to 763, respectively, for the three months and six months ended June 30, 2001 as compared to the three months and six months ended June 30, 2000.  These reductions resulted from management’s decision to reduce marketing expenses including our trade show expenses and from non-recurring costs related to new product introductions and branding which took place on a limited basis during the first two quarters of 2000.  Specifically, trade show and print and production expenses decreased $108 and $203, respectively, and marketing consultant use decreased $24 and $45, respectively.

Consolidated Research and Development (“R&D”):

             R&D costs associated with the type and technology segment decreased $17 or 3.7% and increased $26 or 2.9%, respectively, from $460 and $903 for the three months and six months ended June 30, 2000 to $443 and $929 for the three months and six months ended June 30, 2001.  R&D costs associated with the Myfonts.com segment increased $83 or 92.2% from $90 for the three months ended June 30, 2000 to $173 for the three months ended June 30, 2001, and $118 or 59.6% from $198 for the six months ended June 30, 2000 to $316 for the six months ended June 30, 2001.  These MyFonts.com expenses relate to employee and subcontractor costs for the continued enhancement of the MyFonts.com web site.  R&D costs associated with the Pageflex segment decreased $8 or 1.2% and $46 or 3.3%, respectively, from $657 and $1,394 for the three months and six months ended June 30, 2000 to $649 and $1,348 for the three months and six months ended June 30, 2001.

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

             G&A costs associated with the type and technology segment decreased $18 or 7.9% and $93 or 16.1%, respectively, from $257 and $577 for the three months and six months ended June 30, 2000 to $239 and $484 for the three months and six months ended June 30, 2001, respectively. Bad debt expense decreased $126 and $288, respectively, for the three months and six months ended June 30, 2001 as compared to the three months and six months ended June 30, 2000.  G&A expenses, excluding bad debt activity, increased $108 and $195 for the three months and six months ended June 30, 2001 as compared to the three months and six months ended June 30, 2000, respectively.  These increases are primarily attributable to increases in professional service fees of $52 and $101 and facilities related costs of $46 and $74, for the three and six months ended June 30, 2001 as compared to the three and six months ended June 30, 2000, respectively.  G&A costs associated with the Pageflex segment decreased $108 or 39.7% and $235 or 42.7%, respectively, from $272 and $550 for the three months and six months ended June 30, 2000 to $164 and $315 for the three months and six months ended June 30, 2001.  Bad debt expense decreased $120 and $252, respectively, for the three months and six months ended June 30, 2001 as compared to the three months and six months ended June 30, 2000.  G&A expenses, excluding bad debt activity, increased $12 and $17 for the three months and six months ended June 30, 2001 as compared to the three months and six months ended June 30, 2000, respectively.  G&A costs associated with the MyFonts.com segment increased $9 and $24, respectively, to $18 and $34 for the three months and six months ended June 30, 2001 from $9 and $10 for the three and six months ended June 30, 2000.  Bad debt expense decreases resulted from the net decrease in reserves for doubtful accounts during the first six months of 2001 resulting from the collection of several accounts receivable balances which had been reserved for during the year ended December 31, 2000.

             A significant portion of the Company’s operating expenses are fixed, and planned expenditures in any given quarter are based on sales and revenue forecasts.  Accordingly, if products are not completed and/or shipped on schedule and revenues do not meet the Company’s expectations in any given quarter, the Company’s operating results and financial condition could be adversely affected.

(Loss) Income on Investment in DiamondSoft, Inc.:

             The Company made a $500 equity investment in DiamondSoft, Inc. in March of 1998 and made additional investments totaling $150 during the three months ended March 31, 2001 and $100 during the three months ended June 30, 2001.  As of June 30, 2001 the Company’s ownership percentage in DiamondSoft, Inc. is 28%.  DiamondSoft, Inc. is a California corporation primarily engaged in the business of developing, marketing and distributing software tools to a variety of professional markets.  The Company recognizes its share of DiamondSoft’s income or loss during each quarter and recorded a loss of $(76) and income of $3 for the three months ended June 30, 2001 and 2000, respectively, and a loss of $(151) and income of $11 for the six months ended June 30, 2001 and 2000, respectively.

Interest income, net:

Interest income consists primarily of interest income earned on the Company’s cash equivalents.

Provision for income taxes:

             The Company’s income tax expense for the three and six months ended June 30, 2001 and June 30, 2000 primarily represents foreign income taxes.

LIQUIDITY AND CAPITAL RESOURCES (in thousands)

             The Company has funded its operations primarily through the public sale of equity securities, cash flows from operations and cash received from the sale of the Company’s MediaBank and InterSep OPI product lines to Inso Providence Corporation in August of 1998.  As of June 30, 2001, the Company had net working capital of $5,412 versus $7,371 at December 31, 2000.

             The Company’s operating activities used cash of $266 during the six months ended June 30, 2001 as compared to $1,208 during the six months ended June 30, 2000.  The cash used during the six months ended June 30, 2001 was primarily due to losses in all three business segments offset by the collection of $1,112 in receivables during the period.  The cash used during the six months ended June 30, 2000 was primarily due to the net losses from the Pageflex and MyFonts.com businesses, partially offset by the income from the type and technology business. The net loss adjusted for non-cash expenses resulted in a use of $1,604 and $1,127 in cash during the six months ended June 30, 2001 and June 30, 2000, respectively.

             The Company’s investing activities used cash of $477 during the six months ended June 30, 2001 as compared to using $430 during the six months ended June 30, 2000.  The purchase of property and equipment used $97 and $160 of cash during the six months ended June 30, 2001 and June 30, 2000, respectively.  During the six months ended June 30, 2001, the Company made additional investments in DiamondSoft, Inc. totaling $250. For the six months ended June 30, 2000 the Company also used $300 to secure a $300 line of credit granted by Wells Fargo Bank to DiamondSoft, Inc.  This cash is presented on the Company’s consolidated balance sheet as restricted cash.

             The Company’s financing activities provided cash of $148 and $453 during the six months ended June 30, 2001 and 2000, respectively, 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, 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.  As of June 30, 2001, the Company had no material commitments for capital expenditures.  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.

             In November 1996, the Company completed an initial public offering ("IPO") of 2,415 shares of its Class A Common Stock. Net proceeds from the IPO were approximately $12,200, of which approximately $1,500 was used to repay outstanding indebtedness.

RECENT ACCOUNTING PRONOUNCEMENTS

             In September 2000, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.  SFAS No. 140 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities.  Under SFAS No. 140, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished.  SFAS No. 140 also provides standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings.  SFAS No. 140 is effective for certain transactions occurring after March 31, 2001 and certain disclosures for the year ending December 31, 2001.  The Company has adopted SFAS No. 140, which did not have a material impact on the Company’s financial position or results of operations.

             In June 1998, the 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, as amended by SFAS No. 137 and SFAS No. 138, is effective for fiscal years ending December 31, 2001.  The Company has adopted SFAS No. 133 as amended, which did not have a material impact on the Company’s financial position or results of operations.

             On June 29, 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. These statements establish new standards for accounting for business combinations, goodwill, and intangible assets.  Statement 141 eliminates the pooling-of-interests method of accounting for business combinations except for qualifying business combinations that were initiated prior to July 1, 2001 and changes the criteria to recognize intangible assets apart from goodwill.  The requirements of Statement 141 are effective for any business combination accounted for by the purchase method that is completed after June 30, 2001.  Statement 142 supersedes APB Opinion No. 17, Intangible Assets (which required that goodwill and intangible assets be amortized over a life not to exceed 40 years), and carries forward its provisions related to internally developed intangible assets without the FASB’s reconsideration.  Under Statement 142, goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed annually for impairment, or more frequently if impairment indicators arise.  Goodwill is required to be tested for impairment between the annual tests if an event occurs or circumstances change that more-likely-than-not reduce the fair value of a reporting unit below its carrying value.  An indefinite-lived intangible asset is required to be tested for impairment between the annual tests if an event occurs or circumstances change indicating that the asset might be impaired.  Separable intangible assets that have finite lives will continue to be amortized over their useful lives, for which Statement 142 does not impose a limit.  Any required goodwill impairment charges would be presented as a separate line item within the operating section of the income statement.  The Company has adopted Statement 141, which did not have a material impact on the Company’s financial position or results of operations.  The Company is required to adopt Statement 142 on January 1, 2002 and is currently evaluating the impact on the Company’s financial position or results of operations.

PART 1, ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments.

             As of June 30, 2001, 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 inter-company transactions was immaterial for the three and six months ended June 30, 2001.  Currently the Company does not engage in foreign currency hedging activities.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is not a party to any litigation.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

             As of June 30, 2001, the approximately $12,200,000 of net proceeds from 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: (1) 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.; (2) approximately $6,041,000 for the acquisitions of Mainstream Software Solutions, Ltd., Archetype, Inc., Type Solutions, Inc., and certain assets of Alaras Corporation; (3) 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; (4) approximately $1,761,000 for royalty payments to others; (5) $750,000 for the investment in DiamondSoft, Inc.; and (6) approximately $1,678,000 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

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

             None.

ITEM 5. OTHER INFORMATION

             Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K