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Bitstream Inc. (NASDAQ:BITS)

NYSSA IRC Team D

Feb 5, 2010

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AgendaExecutive Summary

Company Overview

Investment ThesisValuation Methodology

Q&A

BitstreamCLEAR Fonts, BLURRY Future.

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Recommendation: SELL12-month price target: $5.18 (-40%)

1) Core business erosion over next 3-5 years

2) New Mobile Browsing Venture is likely to disappoint

3) Sky high multiples are headed for a fall

Blurry

BitstreamCLEAR Fonts, BLURRY Future.

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Agenda

Executive Summary

Company Overview

Investment ThesisValuation Methodology

Q&A

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BITS AND PIECES

BitstreamCLEAR Fonts, BLURRY Future.Source: Company Documents and Student Analysis.

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AgendaExecutive Summary

Company Overview

Investment ThesisValuation Methodology

Q&A

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Investment Thesis

I. Core businesses losing market share

Products lack competitiveness

Customers moving toward proprietary

products

Absence of pricing power

BitstreamCLEAR Fonts, BLURRY Future.

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Investment Thesis Continues

II. Mobile browser likely to disappoint

Late entrant into an over-crowded market

Small and inactive user base

On the losing end of a

technology arms race

42 M450

3 M 27

Opera BITS

Page Per MonthNumber of Download

BitstreamCLEAR Fonts, BLURRY Future.

Source: Company Documents and Student Analysis.

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Projected Revenue Mix

0%

10%

20%

30%

40%

50%

FY 09E FY 10E FY 11E FY 12E FY 13E FY 14E

FONT TECH FONTS PUBLISHING TECH MOBILE TECH

BitstreamCLEAR Fonts, BLURRY Future.

Investment Thesis

Source: Company Documents and Student Analysis.

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-150%

-100%

-50%

0%

50%

100%

FY 09E FY 10E FY 11E FY 12E FY 13E FY 14E

FONT TECH FONTS PUBLISHING TECH MOBILE TECH

Projected Operating Income Mix

BitstreamCLEAR Fonts, BLURRY Future.

Investment Thesis

Source: Company Documents and Student Analysis.

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III. High price due for a fall

Stock up over 50% in ~90 days since launch ofmobile browser

Yet fundamentalsremain unchanged

EBITDA MultipleSkyrocketed from 13.5xto 22.0x

$4

$5

$6

$7

$8

$9

J-09 A-09 J-09 O-09 J-10

BITS Price

New Mobile

Browser launch

22.0x

13.5x

BitstreamCLEAR Fonts, BLURRY Future.

Investment Thesis

Source: Company Documents and Student Analysis.

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AgendaExecutive Summary

Company Overview

Investment ThesisValuation Methodology

Q&A

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2005A 2006A 2007A 2008A 2009E 2010E 2011E

EV/EBITDA BITS Peer Average

BITS is trading at a premium to peers

Source: Company Documents and Student Analysis.

BitstreamCLEAR Fonts, BLURRY Future.

Valuation Methodology

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-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%10%

12%

14%

2008A 2009E 2010E 2011E

YOY Revenue Growth BITS Peer Average

BITS is trailing in Revenue Growth

Valuation Methodology

Source: Company Documents and Student Analysis.

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2008A 2009E 2010E 2011E

EBITDA Margin BITS Peer Average

BITS EBITDA Margins are below Peer Average

BitstreamCLEAR Fonts, BLURRY Future.

Source: Company Documents and Student Analysis.

Valuation Methodology

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Discounted Cash Flow Valuation for Bitstream

Dollars in thousands, except per share

FY 09E FY 10E FY 11E FY 12E FY 13E FY 14E

Free Cash Flow to the Firm 1,257$ 2,021$ 2,054$ 2,020$ 2,267$ 2,431$

WACC @ 10 .53% 0.905 0.819 0.741 0.670Perpetuity Growth 4.5%

Terminal Value @ FY 14E 42,116

Enterprise Value 35,036

Less: Long-Term Debt 0Add: Non-Operating Assets 17,431

Equity Value 52,467

DCF Value Per Share $5.12

Projected Fiscal Years

BitstreamCLEAR Fonts, BLURRY Future.

Source: Company Documents and Student Analysis.

Valuation Methodology

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Valuation Summary

BitstreamCLEAR Fonts, BLURRY Future.

Source: Company Documents and Student Analysis.

Valuation Methodology

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Risks to our recommendation

External factors:

Faster than expectedeconomic recovery

Weaker dollar

Market inefficiency

Takeover risk

Internal factors:

Improved operationefficiency

Signing new largecontract

Technology innovation

Stock buy back ordividends

BitstreamCLEAR Fonts, BLURRY Future.

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AgendaPresentation Summary

Company Overview

Recommendation and SupportValuation Methodology

Q&A

Bitstream CLEAR Fonts BLURRY Future