The Type 1 font format is a compact way of describing a font outline using a well-defined language that can be quickly interpreted. The language contains operations to provide the rasterizer with additional information about a character, known as hints. The hints are additional information which describes how to adjust the representation of the character to make it look good when the font size is small compared to the device resolution. The Type 1 font format is defined in the book ``The Adobe Type 1 Font Format'', also known as the black book, for the colors on its cover.
The Type 1 font format has nothing to do with TrueType, which is another font format defined by Apple. The Type 1 font format has been around quite a while, and is used on a wide variety of platforms to obtain scalable fonts.
Most clone interpreters will not have Adobe's proprietary rendering technology which interprets font hints to improve the appearance of fonts shown at small sizes on low-resolution devices. The exceptions (PowerPage and UltraScript) have their own hint interpreters.
The Type 3 font format is a way of packaging up PostScript descriptions of characters into a font, so that the PostScript interpreter can rasterize them.
It is easier to create a Type 3 font program by hand than to create the corresponding Type 1 font program. Type 3 font programs have access to the entire PostScript language to do their imaging, including the 'image' operator. They can be used for bitmapped fonts, although that is certainly not a requirement. The Type 3 font format contains no provisions for 'hinting', and as such Type 3 font programs cannot be of as high a quality at low resolutions as the corresponding Type 1 font program.
Both formats are scalable formats, and both can be run on any PostScript interpreter. However, because of the requirement that a Type 3 font program have a full PostScript interpreter around, Type 3 font programs cannot be understood by the Adobe Type Manager. Only Type 1 font programs can.
Why bother making a font that's just made up of bitmaps? Once a character from a font has been rendered, the bitmap will be saved in a cache, and another instance of the same character at the same size and orientation can be quickly drawn without recalculation.
Because of Adobe Type Manager's wide availability on a large number of platforms (PC, Mac, and Unix), the Type 1 font format makes an excellent cross-platform scalable font standard.