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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

For the fiscal year ended: December 31, 2002

Commission File Number 000-26933

LIONBRIDGE TECHNOLOGIES, INC.

(Exact Name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (781) 434-6000

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 Par Value

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 report(s), and (2) has been subject to such filing requirements for the past 90 days.    Yes x    No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2.)    Yes ¨    No x

The aggregate market value of the voting stock held by non-affiliates of the registrant, as of June 28, 2002, was approximately $30 million (based on the closing price of the registrant’s Common Stock on June 28, 2002, of $2.00 per share).

The number of shares outstanding of the registrant’s $.01 par value Common Stock as of March 14, 2003 was 31,690,295.

DOCUMENTS INCORPORATED BY REFERENCE

Lionbridge intends to file a proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 2002. Portions of such proxy statement are incorporated by reference into Part III of this Report.

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LIONBRIDGE TECHNOLOGIES, INC.

ANNUAL REPORT ON FORM 10-K

YEAR ENDED DECEMBER 31, 2002

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PART I

Except for the historical information contained herein, the matters discussed in this Annual Report on Form 10-K are forward-looking statements that involve risks and uncertainties. Lionbridge makes such forward-looking statements under the provision of the “Safe Harbor” section of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements should be considered in light of the factors described below in Item 7 under “Factors That May Affect Future Results.” Actual results may vary materially from those projected, anticipated or indicated in any forward-looking statements. In this Annual Report on Form 10-K, the words “anticipates,” “believes,” “expects,” “intends,” “future,” “could,” and similar words or expressions (as well as other words or expressions referencing future events, conditions or circumstances) identify forward-looking statements.

Item 1.    Business

General

Lionbridge Technologies, Inc. provides outsourced globalization and testing services that enable clients to develop, release, manage and maintain their enterprise content and technology applications. Lionbridge solutions include product and content globalization; multilingual application development and maintenance; software and hardware testing and product certification and competitive analysis. The Company serves global organizations in the technology, consumer, retail, industrial, life sciences, financial services and manufacturing industries and provides the following core benefits to clients:

Integrated Full-Service Offering.    Lionbridge serves as an outsourced partner throughout a client’s product and content lifecycle from development, to globalization, to testing and certification through maintenance. Clients rely on Lionbridge’s globalization services to develop, release and maintain their global technology applications and to deliver multilingual content to their customers, partners and employees throughout the world. Lionbridge’s testing services enable clients to achieve superior product quality and reduce downstream support costs, while its product certification and competitive analysis testing services confirm that independent software vendors’ applications meet industry-defined standards for quality and deliver measurable performance against competitive offerings. This unified suite of solutions allows Lionbridge to serve as its clients’ single outsource provider for developing, releasing, testing and maintaining multilingual technology and content across global end markets.

Established Global Presence.    Lionbridge operates 18 globalization and testing service centers in nine countries on four continents. Lionbridge leverages its global resources and proven program management capabilities to provide client delivery teams that have the optimal technical, linguistic and industry expertise and skills to meet each client’s specific needs. Lionbridge’s strong global infrastructure enables the Company to meet its clients’ budgetary and geographic needs and deliver high-value, cost-effective globalization and testing services.

Proven Methodologies.    At the center of all Lionbridge services are its Company-wide methodologies that provide a systematic, specific approach for the delivery of globalization and testing projects. This enables Lionbridge to establish accountability, communications, and processes throughout a client program to ensure high quality, reliability and consistency across all Lionbridge production sites. They also increase Lionbridge’s productivity and provide a baseline for continuous process improvement and the transfer of knowledge and expertise within the Lionbridge organization.

Lionbridge, is a corporation, which through its predecessor, Lionbridge America, Inc., was incorporated in Delaware in September 1996. Its principal executive offices are located at 950 Winter Street, Waltham, Massachusetts 02451, its telephone number is (781) 434-6000, and its Web site is www.lionbridge.com.

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Lionbridge Services

Lionbridge provides globalization and testing services that enable global organizations to increase market penetration and speed adoption of global products and content, enhance return on enterprise applications and content management system investments, and reduce costs. Lionbridge’s full suite of service offerings are described below.

Globalization Services.    Lionbridge provides the following globalization solutions:

Lionbridge uses a combination of internal and external translators, as well as translation software, for its globalization services. Lionbridge directly employs over 130 translators and editors. Lionbridge also maintains relationships with approximately 4,000 third-party individual, local-country translators, including independent agencies and freelance professionals. This global network of employees and third-party translators gives Lionbridge the ability to provide client delivery teams that have the appropriate combination of linguistic, technology and industry domain expertise, and local country presence, to meet each client’s specific needs. This flexible and scalable model also enables Lionbridge to manage large complex client engagements while minimizing its fixed costs.

Lionbridge’s delivery of its globalization solutions centers on its Rapid Globalization Methodology^™. RGM^™ is a proven, repeatable process designed to ensure consistency around the world. A roadmap for effective globalization, RGM offers a systematic approach to adapting products and content to a target locale’s technical, linguistic and cultural expectations. Lionbridge’s RGM also standardizes processes throughout every Lionbridge solution center, defines key activities, and specifies goals for each localization project. This enables Lionbridge to deliver high quality, localized versions of products and content across multiple languages and cultures in a timely fashion.

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Lionbridge globalization services incorporate the Localization Globalization Platform^™, an array of technologies that augment the methodology and expertise employed by Lionbridge’s globalization teams. LGP^™ combines Lionbridge proprietary technology with standard, off-the-shelf tools to provide customers with a flexible technology platform to support efficient, high-quality globalization. LGP integrates with Lionbridge’s clients’ production environments. LGP includes a collaboration portal for all project participants; a repository connector to select, extract and route content for localization; process automation tools; and language management tools which leverage previously translated segments across multiple file formats. Lionbridge’s technology solutions increase the quality of multilingual content, make the globalization process more efficient and minimize translation costs as client programs grow in scope and duration. This technology-based approach to client programs allows Lionbridge to increase its opportunities for recurring customers and enhances its ability for margin growth.

Testing Services.    Lionbridge provides a variety of testing, benchmarking and certification services to its clients through its VeriTest division. These services ensure the quality, reliability, and usability of software applications, hardware products and Web sites across complex, global technology environments. VeriTest services include:

VeriTest conducts testing activities for its clients through its advanced technology labs located in Asia, Europe and the United States. VeriTest also provides clients with onsite test engineers, architects and project managers to execute specific testing activities within the client’s own development center.

VeriTest uses its Structured Testing Methodology (STM) to develop a specific testing process for each project that meets clients’ technical, geographic and economic needs. STM also ensures quality and reliability throughout each VeriTest lab and throughout a client’s testing process.

See Note 13 of Notes to Consolidated Financial Statements included as part of Item 15 of this Form 10-K for financial information relating to Lionbridge’s operating segments and geographic areas of operation.

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Sales and Marketing

Substantially all of Lionbridge’s revenue has been generated through its dedicated direct sales force. Lionbridge currently has 57 direct sales professionals based in the United States, Europe and Asia who sell the full range of Lionbridge services. The Lionbridge sales approach involves planning for an organization’s unique ongoing requirements, including future versions of products, and ongoing support, maintenance, and training, related to both technology products and content.

Clients

Lionbridge clients are predominantly Global 2000 companies in the technology, consumer, retail, industrial, life sciences, pharmaceutical, financial services and manufacturing industries. During the year ended December 31, 2002, Lionbridge provided services to approximately 490 clients worldwide. The following companies are representative Lionbridge clients, each of whom purchased more than $1,000,000 in services from Lionbridge in the year ended December 31, 2002:

In 2002, Lionbridge’s largest client, HP, accounted for approximately 21% of total revenue. This percentage includes revenue from Compaq, a Lionbridge customer that merged with HP in May 2002. During the year, Lionbridge provided testing and globalization services for 22 functional divisions within the HP organization. In 2001, HP accounted for 13% of total revenue. No other client individually accounted for more than 10% of revenue in 2002, 2001 or 2000. In 2002, 2001 and 2000, Lionbridge’s five largest clients accounted for approximately 39%, 32% and 33% respectively, of revenue.

Competition

Lionbridge provides a broad range of solutions for worldwide deployment of technology and content to its clients. The market for its services is highly fragmented, and Lionbridge has many competitors. Lionbridge’s current competitors include the following:

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Lionbridge may also face competition from a number of other companies in the future, including some companies that currently seek localization services from it. As businesses shift from telephonic support centers to Web-based support, technical support call centers and others that currently provide traditional outsourcing services may decide to provide comparable globalization services over the Internet. Other potential entrants into Lionbridge’s market include India-based offshore development organizations that are providing a range of software development, testing and maintenance services for global technology companies that require localization of the products and applications they provide. As content management software is deployed internationally these firms may be required to assist their customers with maintaining multilingual databases. While today these companies are often working with Lionbridge to assist in meeting their customers’ needs, it is possible that over time they will expand into offering competitive services.

From time to time, new companies may enter Lionbridge’s globalization industry. Although Lionbridge builds unique applications on top of standard translation memory software licensed from third parties in its localization process, and to a lesser extent machine translation software also licensed from third parties, Lionbridge’s technology does not preclude or inhibit others from entering its market.

Lionbridge believes the principal competitive factors in providing its services include its ability to provide clients a comprehensive set of services that address multiple phases of a client’s technology application and content lifecycle; its global infrastructure that supports cost effective, high quality client delivery onsite, onshore, near shore and offshore; project management expertise; quality and speed of service delivery; vertical industry expertise; expertise and presence in certain geographic areas and corporate reputation. Lionbridge believes it has competed favorably with respect to these factors and has a strong reputation in its industry.

Intellectual Property Rights

Lionbridge’s success is dependent, in part, upon its proprietary methodologies and practices, including its Rapid Globalization Methodology and Structured Testing Methodology, its Lionbridge Globalization Platform technologies, its proprietary testing practices and methodologies, and other intellectual property rights. Lionbridge has patents or patent applications pending relating to its language automation translation memory engine. Lionbridge relies on a combination of trade secret, license, nondisclosure and other contractual agreements, and copyright and trademark laws to protect its intellectual property rights. Existing trade secret and copyright laws afford Lionbridge only limited protection. Lionbridge enters into confidentiality agreements with its employees, contractors and clients, and limits access to and distribution of Lionbridge’s proprietary information. Lionbridge cannot assure you that these arrangements will be adequate to deter misappropriation of its proprietary information or that it will be able to detect unauthorized use and take appropriate steps to enforce its intellectual property rights.

Human Resources

As of December 31, 2002, Lionbridge had 1,170 employees. Of these, 919 were consulting and service delivery professionals and 251 were management and administrative personnel performing marketing, sales, operations, process and technology, research and development, finance, accounting, and administrative functions.

Lionbridge has been successful in hiring individuals with leading-edge technical skills and project management experience. In addition, Lionbridge is committed to employee training and retention. Lionbridge has a dedicated knowledge management team that initiates and oversees the training and development of its service delivery professionals. Key organizational development initiatives include ongoing technical and project management classes as well as career path management and guidance.

Most employees are eligible to participate in Lionbridge’s stock option program. Additionally, a large number of Lionbridge’s employees are eligible to participate in its employee stock purchase program.

Lionbridge’s employees in France are represented by a labor union, and there are works councils in The Netherlands and Germany. Lionbridge has never experienced a work stoppage and believes that its employee relations are good.

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Item 2.    Properties

Lionbridge maintains operational service centers in the United States, Brazil, Ireland, France, Germany, The Netherlands, China, Japan and South Korea. Lionbridge maintains sales offices throughout the United States as well as in Dublin, Ireland; Paris, France; Rendsburg and Hamburg, Germany; Reading, England; Beijing, China; and Tokyo, Japan.

Lionbridge’s headquarters and principal administrative, finance, legal, and marketing operations are located in leased office space in Waltham, Massachusetts. Lionbridge’s lease is for a term of 4 years and expires on August 31, 2006. Lionbridge operational facilities are under leases of various terms. Its principle operational facilities are located as follows:

Item 3.    Legal Proceedings

On or about July 24, 2001, a purported securities class action lawsuit captioned “Samet v. Lionbridge Technologies, Inc. et al.” (01-CV-6770) was filed in the United States District Court for the Southern District of New York against the Company, certain of its officers and directors, and certain underwriters involved in the Company’s initial public offering. The complaint in this action asserted, among other things, that Lionbridge’s initial public offering registration statement contained misstatements and/or omissions regarding the underwriters’ alleged conduct in allocating shares in Lionbridge’s initial public offering to the underwriters’ customers. In March 2002, the United States District Court for the Southern District of New York entered an order dismissing without prejudice the claims against Lionbridge and its officers and directors (the case remained pending against the underwriter defendants). On April 19, 2002, the plaintiffs filed an amended complaint naming as defendants not only the underwriter defendants but also Lionbridge and certain of its officers and directors. The amended complaint asserts claims under both the registration and antifraud provisions of the federal securities laws relating to, among other allegations, the underwriters’ alleged conduct in allocating shares in the Company’s initial public offering and the disclosures contained in the Company’s registration statement. The Company understands that various plaintiffs have filed approximately 1,000 lawsuits making substantially similar allegations against approximately 300 other publicly traded companies in connection with the underwriting of their public offerings. On July 15, 2002, the Company together with the other issuers named as defendants in these coordinated proceedings, filed a collective motion to dismiss the complaint on various legal grounds common to all or most of the issuer defendants. In October 2002, the claims against officers and directors were dismissed without prejudice. In February 2003, the Court issued its ruling on the motion to dismiss, ruling that the claims against Lionbridge and virtually all of the other issuer defendants under the registration provisions of the securities law may proceed. The Court also ruled that the claims under the antifraud provisions of the securities laws could proceed against the Company and a majority of the other issuer defendants. The Company along with several other issuer defendants has notified the Court that it intends to seek reconsideration of the Court’s ruling as to the claims under the antifraud provisions. The Company and its officers and directors believe that the allegations in the lawsuit against them are without merit. The litigation

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process is inherently uncertain and unpredictable, however, and there can be no guarantee as to the ultimate outcome of this pending litigation. The Company is currently unable to estimate any potential loss associated with this matter.

In January 2003, the Supreme Court of the State of New York entered an order dismissing with prejudice the claims alleged against Lionbridge in a lawsuit captioned “Ziff Davis Development Inc. and Ziff Davis Media Inc. v. Lionbridge Technologies, Inc.” (02/603858), following the execution of a settlement agreement among the parties. The complaint in this action asserted, among other things, that Lionbridge breached its obligations under the Stock Purchase Agreement by and among Ziff Davis Media Inc., Ziff Davis Development Inc. and Lionbridge, to pay a portion of the purchase price in connection with its purchase of eTesting Labs, Inc.

Item 4.    Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of Lionbridge’s security holders during the fourth quarter of the fiscal year ended December 31, 2002.

PART II

Item 5.    Market for Registrant’s Common Equity and Related Stockholder Matters

Lionbridge commenced its initial public offering of common stock on August 20, 1999 at a price to the public of $10.00 per share. As of March 14, 2003, there were 368 holders of record of Lionbridge’s common stock. Lionbridge’s common stock was listed and traded on the Nasdaq National Market under the symbol “LIOX”, until August 30, 2002, when its common stock became listed on, and began trading on, the Nasdaq Small Cap Market under the same trading symbol.

The following table sets forth, for the periods indicated, the range of high and low sales prices for the common stock for the past eight quarters, all as reported by the Nasdaq National Market (through August 29, 2002) and the Nasdaq Small Cap Market thereafter. The quotations represent interdealer quotations, without adjustments for retail mark ups, mark downs, or commissions, and may not necessarily represent actual transactions.

Lionbridge has not paid any cash dividends on its common stock and currently intends to retain any future earnings for use in its business. In addition, the terms of Lionbridge’s credit facility with Silicon Valley Bank prohibit the payment of cash dividends to Lionbridge by its European subsidiaries and the terms of the subordinated notes held by Capital Resource Lenders and two Morgan Stanley limited partnerships prohibit Lionbridge from paying any dividends to its stockholders. Accordingly, Lionbridge does not anticipate that any cash dividends will be declared or paid on the common stock in the foreseeable future.

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Recent Sales of Unregistered Securities

In January 2002, Lionbridge issued 124,000 unregistered shares of its common stock to certain key employees of the Company in the form of restricted stock as a bonus for services rendered. These shares are subject to restrictions on disposition that lapse ratably over the two-year period from the date of grant. None of these shares of restricted stock were issued to Executive Officers of the Company. The shares were issued pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended. There were no underwriters or placement agents involved in such private placement transaction. In May 2002, 4,000 of such shares were forfeited by the holder upon his termination of employment and such shares reverted to the Company.

In August 2001, Lionbridge sold an aggregate of 460,000 shares of its common stock to its Chairman and Chief Executive Officer for aggregate consideration of $253,000, the fair market value of the stock at the time. The shares were sold pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended. There were no underwriters or placement agents involved in such private placement transaction.

Item 6.    Selected Consolidated Financial Data

The following selected consolidated financial data reflects the combined results of operations and financial position of Lionbridge, INT’L.com, Inc. (“INT’L.com”), which was acquired by Lionbridge on May 22, 2000, and Harvard Translations, Inc. (“Harvard Translations”), which was acquired by Lionbridge on May 18, 2000, restated for all periods presented pursuant to the pooling-of-interests method of accounting. These mergers are more fully described in Note 4 to Lionbridge’s audited consolidated financial statements included as part of Item 15 of this Form 10-K.

The selected consolidated financial data as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002 have been derived from the audited consolidated financial statements of Lionbridge which appear as part of Item 15 of this Form 10-K. The selected consolidated financial data as of December 31, 2000, 1999, and 1998 and for the years ended December 31, 1999 and 1998 have been derived from the audited consolidated financial statements of Lionbridge that are not included in this Form 10-K.

The historical results presented are not necessarily indicative of future results. You should read the data set forth below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included in this Form 10-K.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion contains forward-looking statements which involve risks and uncertainties. Lionbridge makes such forward-looking statements under the provision of the “Safe Harbor” section of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements should be considered in light of the factors described below in this Item 7 under “Factors That May Affect Future Results.” Actual results may vary materially from those projected, anticipated or indicated in any forward-looking statements. In this Item 7, the words “anticipates,” “believes,” “expects,” “intends,” “future,” “could,” and similar words or expressions

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(as well as other words or expressions referencing future events, conditions, or circumstances) identify forward-looking statements. The following discussion and analysis should be read in conjunction with “Selected Consolidated Financial Data” and the accompanying consolidated financial statements and related notes included elsewhere in this Form 10-K.

Overview

Founded in 1996, Lionbridge is a leading provider of outsourced globalization and testing services that enable clients to develop, release, manage and maintain their technology applications and content globally. Lionbridge serves global businesses in the technology, consumer, retail, industrial financial services, manufacturing and life sciences industries. Lionbridge’s suite of solutions includes product and content globalization and multilingual application development and maintenance (collectively, “Globalization”); and a broad range of testing services relating to software, hardware and Web sites, as well as product certification and benchmarking programs (collectively, “Testing”). Lionbridge manages its Testing services under the VeriTest brand.

In 2002, Lionbridge’s operating profit was $451,000 with a net loss of $4.8 million. Prior to 2002, the Company experienced operating losses, as well as net losses, for each year of its operations and, as of December 31, 2002, had an accumulated deficit of $108.6 million.

During the second quarter of 2002, the Company decided to transform its Beijing, China, “ChinaConnect” subsidiary into a VeriTest testing operation. ChinaConnect was originally acquired as part of Lionbridge’s merger with INT’L.com, and accounted for about three percent of Lionbridge’s revenue in 2001. ChinaConnect had increasingly focused on developing middleware for the China wireless telecom sector. During the second quarter, the Company decided to exit this non-core business activity, and to utilize this existing infrastructure in Beijing for expansion of its VeriTest testing business.

Critical Accounting Policies and Estimates

Lionbridge’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires Lionbridge to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Lionbridge periodically evaluates its estimates. Lionbridge bases its estimates on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Lionbridge reviewed the development, selection, and disclosure of the following critical accounting policies and estimates with the audit committee and the Company’s board of directors. Lionbridge’s current critical accounting estimates relate to the following: revenue recognition, allowance for doubtful accounts, valuation of goodwill and other intangible assets and the provision for income taxes.

Revenue Recognition.    Lionbridge’s revenue is derived from project-by-project fees and, to a lesser extent, long-term service agreements. Projects are generally billed on a time and expense basis. Revenue is recognized using a percentage-of-completion method of accounting, based on costs incurred to date as a percentage of management’s estimate of total costs of individual projects. The use of a percentage-of-completion method of accounting requires significant judgment relative to estimating total contract costs, including assumptions relative to the length of time to complete the project, the nature and complexity of the work to be performed, anticipated increases in employee wages prices for subcontractor services, and the availability of subcontractor services. Lionbridge’s estimates are based upon the professional knowledge and experience of its program managers and other personnel, who review each project monthly to assess the project’s schedule, performance, technical matters and estimated cost at completion. When adjustments in estimated project costs are determined, such revisions may have the effect of adjusting in the current period the earnings applicable to performance in

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prior periods. Anticipated losses, if any, are recognized in the period in which determined. The agreements entered into in connection with projects are generally terminable by clients upon 30 days’ prior written notice. If a client terminates an agreement, it is required to pay Lionbridge for time and expenses incurred through the termination date.

Allowance for Doubtful Accounts.    Lionbridge establishes an allowance for doubtful accounts to cover accounts receivable that may not be collectible. In establishing the allowance for doubtful accounts, Lionbridge analyzes the collectibility of individual large or past due accounts. Additionally, Lionbridge considers its historical bad debt experience and current economic trends in evaluating the allowance for doubtful accounts. Accounts written off in subsequent periods can differ materially from the allowance provided.

Valuation of Goodwill and Other Intangible Assets.    Lionbridge assesses the impairment of goodwill and other intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that Lionbridge considers important which could trigger an impairment review include: significant underperformance relative to expected historical or projected future operating results; significant changes in the overall business strategy; and significant negative industry or economic trends. When Lionbridge determines that the carrying value of intangibles and goodwill may not be recoverable based upon one or more of these indicators of impairment, Lionbridge measures any impairment based on a projected discounted cash flow method. Effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). In accordance with SFAS No. 142, the Company discontinued the amortization of goodwill and, as a result, Lionbridge ceased amortization on approximately $13.6 million of goodwill; therefore, the results of operations for the twelve months ended December 31, 2002 exclude goodwill amortization expense. Lionbridge had recorded approximately $5.6 million of goodwill amortization during 2001. For years prior to January 1, 2002, goodwill was amortized on a straight-line basis over five years. In accordance with SFAS 142, goodwill is now reviewed for impairment on an annual basis, or more frequently if events or circumstances indicate that the carrying value may not be recoverable. The review is a two-step process beginning with an estimation of the fair value of each reporting unit. The first step is to review for impairment and the second step is to measure the amount of the impairment, if one is indicated by the first step. The fair value amounts are determined by discounting future cash flows of the related reporting unit as developed by management. During 2002, the Company completed goodwill impairment tests as of January 1, 2002 and December 31, 2002 and determined that as of both dates the fair value of each reporting unit exceeded the carrying value of the net assets of each respective reporting unit. Accordingly, no goodwill impairment was recognized. The impairment review is based upon estimated future discounted cash flows. Estimating future cash flows requires management to make projections that can differ materially from actual results.

Provision for Income Taxes.    Lionbridge is required to estimate its income taxes in each of the jurisdictions in which it operates as part of preparing its consolidated financial statements. This involves estimating the actual current tax in addition to assessing temporary differences resulting from differing treatments for tax and financial accounting purposes. These differences together with net operating loss carryforwards and tax credits may be recorded as deferred tax assets or liabilities on the balance sheet. A judgment must then be made of the likelihood that any deferred tax assets will be recovered from future taxable income. To the extent that Lionbridge determines that it is more likely than not that deferred tax assets will not be utilized, a valuation allowance is established. Taxable income in future periods significantly different from that projected may cause adjustments to the valuation allowance that could materially increase or decrease future income tax expense.

Acquisitions.    Lionbridge has grown its business since inception through a combination of acquisitions and organic growth. Such acquisitions through December 31, 2002 have resulted in the recognition of approximately $39.8 million of goodwill and other intangible assets on its balance sheet. Goodwill was amortized using a five-year life prior to the Company’s adoption of SFAS No. 142, on January 1, 2002. Other acquired intangible assets are generally amortized over three to five years.

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Acquisitions in the three-year period ended December 31, 2002 were as follows:

In January 2000, Lionbridge acquired certain assets and operations of the language services operation of Nortel Networks Corporation (“Nortel”) in Montreal and Ottawa, Canada; Beijing, China; Sao Paulo, Brazil; Sunrise, Florida; and Bogota, Colombia for total initial consideration of $2.5 million in cash. Lionbridge recorded $323,000 of goodwill related to this acquisition, which prior to January 1, 2002 was being amortized ratably over a five-year life. The transaction was accounted for using the purchase method of accounting.

In May 2000, Lionbridge acquired Harvard Translations by means of a merger. Upon the effective date of the merger, each outstanding share of Harvard Translations common stock was converted into the right to receive 3.8864 shares of Lionbridge common stock. In addition, long-term debt of Harvard Translations payable to its former sole stockholder in the amount of approximately $203,000, and all accrued interest thereon, was paid in full by the issuance of 13,820 shares of Lionbridge common stock. As a result of the merger, Lionbridge issued an aggregate of 285,865 shares of Lionbridge common stock. Upon the completion of the acquisition, all outstanding options to purchase common stock of Harvard Translations were assumed by Lionbridge and converted into options to purchase common stock of Lionbridge under similar terms. The transaction was accounted for using the pooling-of-interests method of accounting.

In May 2000, Lionbridge acquired INT’L.com by means of a merger. Upon the effective date of the merger, (i) each outstanding share of INT’L.com Series A common stock, Series B common stock, Series A preferred stock and Series B preferred stock was converted into the right to receive 0.7567 shares of Lionbridge common stock, (ii) each outstanding share of INT’L.com Series C preferred stock was converted into the right to receive 5.4590 shares of Lionbridge common stock, (iii) each outstanding share of INT’L.com Series D preferred stock was converted into the right to receive 0.5472 shares of Lionbridge common stock, (iv) the $2.0 million of INT’L.com convertible debt, and all accrued interest thereon, was paid in full and cancelled in exchange for 109,158 shares of Lionbridge common stock, and (v) $5.0 million of INT’L.com subordinated debt, and all accrued interest thereon, was paid in full and cancelled in exchange for 258,360 shares of Lionbridge common stock. As a result of the merger, Lionbridge issued an aggregate of 8,302,960 shares of common stock. Upon the completion of the acquisition, all outstanding options to purchase common stock of INT’L.com were assumed by Lionbridge and converted into options to purchase common stock of Lionbridge under similar terms. The transaction was accounted for using the pooling-of-interests method of accounting.

In January 2001, Lionbridge acquired Quality Group Labs, Inc. (“Quality Group Labs”), a provider of testing services based in Massachusetts, for total initial consideration of $483,000, comprised of $250,000 in cash and 74,488 shares of Lionbridge common stock valued at $233,000. The acquisition was accounted for using the purchase method of accounting. In connection with this acquisition, Lionbridge recognized $433,000 of goodwill, which prior to January 1, 2002 was being amortized ratably over a five-year life. Additional goodwill of approximately $161,000 was subsequently recorded in 2002 in connection with an incremental stock issuance of 60,000 shares of Lionbridge common stock made under the terms of the original agreement. The agreement does not provide for any further consideration.

In June 2001, Lionbridge acquired Data Dimensions, Inc. (“Data Dimensions”), a company based in Washington with operations in the United States, Ireland and the United Kingdom, by means of a merger. Upon the effective date of the merger, each outstanding share of Data Dimensions common stock was converted into the right to receive 0.190884 shares of Lionbridge common stock. As a result of the merger, Lionbridge issued an aggregate of 2,588,316 shares of Lionbridge common stock valued at $12.7 million. Upon the completion of the merger, all outstanding options and warrants to purchase common stock of Data Dimensions, with a fair value at that time of $1.2 million, were assumed by Lionbridge and converted into options and warrants to purchase 451,860 shares of common stock of Lionbridge under similar terms. The transaction was accounted for using the purchase method of accounting. In connection with this acquisition, Lionbridge recognized $7.2 million of goodwill, which prior to January 1, 2002, was being amortized ratably over a five-year life.

In July 2002, Lionbridge acquired eTesting Labs Inc. (“eTesting”), a subsidiary of Ziff Davis Media Inc. based in North Carolina, with additional operations in California. The acquisition was accounted for using the

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purchase method of accounting. Total purchase consideration was $2,232,000, consisting of an initial cash payment of $1,000,000 made at the closing date. Subsequent to the closing date, Lionbridge paid an additional $1,215,000 in cash in connection with the purchase. Other acquisition costs totaling $17,000 are also included as part of the total purchase price. In connection with the acquisition, Lionbridge recorded $992,000 of goodwill.

Lionbridge believes its acquisitions have contributed to its growth by rapidly expanding its employee base, geographic coverage, client base, industry expertise, and technical skills. Lionbridge anticipates that a portion of its future growth will be accomplished by acquiring existing businesses. The success of this plan depends upon, among other things, its ability to integrate acquired personnel, operations, products, and technologies into its organization effectively; to retain and motivate key personnel of acquired businesses; and to retain customers of acquired firms. The Company is presently exploring opportunities to outsource a portion of its testing, application development and maintenance work to India through a joint venture with, or by acquisition of, an entity in India. Lionbridge cannot guarantee that it will be able to identify suitable acquisition opportunities, obtain any necessary financing on acceptable terms to finance any acquisitions, consummate any acquisitions, or successfully integrate acquired personnel and operations.

Merger, Restructuring and Other Charges

The following table summarizes activity with respect to merger, restructuring and other charges:

During the year ended December 31, 2001, Lionbridge recorded a net merger credit of $20,000. This amount consists primarily of fees for professional services incurred in connection with Lionbridge’s attempted acquisition of Mendez S.A., offset by the receipt of a $1.0 million fee from the successful bidder for Mendez S.A.

Restructuring charges of $2.5 million were recorded in the year ended December 31, 2001. These charges relate to: (i) the costs of consolidating Lionbridge facilities in the United States as a result of the acquisition of Data Dimensions, consisting primarily of accruals for lease payments on vacant office space, and (ii) costs associated with workforce reductions in the United States, Canada, Brazil, Japan, China, Korea, Germany, Ireland, The Netherlands, the United Kingdom and France, consisting of 154 technical staff, 26 sales and marketing staff and 50 administrative staff. All employees had been informed of their termination and related benefits in the period that the charge was recorded.

Impairment charges for long-lived assets for the year ended December 31, 2001 of $336,000 relate primarily to the write-off of acquired workforce and software licenses as a result of the closure of Lionbridge’s office in Montreal, Canada during the second quarter of 2001.

Merger costs for the year ended December 31, 2000 of $2.5 million consist of fees for investment banking, legal and accounting services and other direct costs incurred in connection with Lionbridge’s mergers with Harvard Translations and INT’L.com.

Restructuring charges for the year ended December 31, 2000 of $915,000 relate to: (i) the costs of closing facilities in the United States, France and The Netherlands as a result of the merger with INT’L.com, consisting primarily of accruals for lease payments on vacant office space, and (ii) costs associated with workforce

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reductions in Canada, the United States and France, consisting of six technical staff and three administrative staff. All employees had been informed of their termination and related benefits in the period that the charge was recorded.

Impairment charges for long-lived assets for the year ended December 31, 2000 of $886,000 relate to the write-off of property and equipment, primarily consisting of previously capitalized licenses for software, that was abandoned as a result of Lionbridge’s merger with INT’L.com.

At December 31, 2002, the consolidated balance sheet included accruals totaling $12,000 related to restructuring charges, which were assumed upon the acquisition of INTL.com. In addition, Lionbridge has recorded reserves for reorganization and integration activities in connection with its business combinations. At December 31, 2002, the consolidated balance sheet included accruals totaling $859,000 recorded in connection with the Company’s acquisitions of Data Dimensions and eTesting. Lionbridge currently anticipates that all restructuring, reorganization and integration accrual balances will be fully utilized by December 31, 2003, except for certain long-term contractual obligations relating to leases for facilities, $52,000 of which related to long-term obligations on unused facilities and is included in Other long-term liabilities.

The following table summarizes the reserve activity for the years ended December 31, 2002, 2001 and 2000, respectively:

Non-Cash Charges

Deferred Compensation

Lionbridge recorded deferred compensation of approximately $3.8 million in 1999, representing the difference between the exercise price of stock options granted to employees and the fair market value for accounting purposes of the underlying common stock at the date of the grant. The deferred compensation is being amortized over the four-year vesting period of the applicable options. Of the total deferred compensation amount, $2.5 million had been amortized and $1.1 million had been reversed due to forfeitures of the underlying options at December 31, 2002.

In January 2002, Lionbridge recorded deferred compensation of approximately $537,000, representing the fair market value of 298,500 shares of restricted common stock issued to certain employees at that time. The deferred compensation is being amortized over the two-year period that the restrictions on the common stock lapse.

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The amortization of deferred compensation is recorded as an operating expense and totaled $753,000, $565,000 and $799,000 for the years ended December 31, 2002, 2001 and 2000, respectively. In June 2002, additional stock-based compensation expense of $98,000 was recorded relating to modifications of stock options previously granted to employees. Lionbridge currently expects to amortize all of the $373,000 remaining deferred compensation to employees at December 31, 2002 in the year ending December 31, 2003.

Original Issue Discount on Debt

Interest expense for the year ended December 31, 2001 included $738,000 for the accretion of the original issue discount on $5.0 million of subordinated debt issued in June 2001 by Lionbridge. This discount represents the value attributable to warrants to purchase 900,000 shares of common stock at a price of $0.80 per share, granted in connection with the debt financing. The principal under the note was due on October 31, 2001. However, as a result of terms included in the original subordinated debt agreement, on October 31, 2001, the note automatically converted into a new note with essentially identical terms but with a principal amount of $8,000,000 due on September 30, 2006. The $3.0 million discount on the new note is being accreted through interest expense over the period from November 1, 2001 to September 30, 2006. Interest expense for the years ended December 31, 2002 and 2001 includes $610,000 and $101,000, respectively, of accretion of this debt discount.

Issuance of Warrants for Common Stock.    In May 2002, the terms of the subordinated debt agreements with the holder of subordinated notes in the principal amount of $4,981,000 were amended to extend the maturity date of the notes to April 30, 2004. In conjunction with the amendment, Lionbridge issued warrants for the purchase of up to 400,000 shares, in the aggregate, of common stock at an exercise price of $1.69 per share. The shares issuable under the warrants were 25% vested at the time of issuance and the remaining shares vest each three-month period thereafter through the maturity date of the notes based upon the then-current principal amount outstanding. The warrants expire as of May 15, 2009. The warrants, valued at $551,000, were recorded as a deferred financing cost and are being amortized as interest expense over the term of the notes. Amortization of $184,000 was recorded as part of interest expense for the year ended December 31, 2002.

In August 2002, the terms of the subordinated debt agreements with holders of subordinated notes in the aggregate principal amount of $1,000,000 were amended to extend the maturity date of the notes to July 31, 2003. In conjunction with the amendment, Lionbridge issued warrants for the purchase of up to 50,612 shares, in the aggregate, of common stock at an exercise price of $1.69 per share. The shares issuable under the warrants were 25% vested at the time of issuance and the remaining shares vest each three-month period thereafter through the maturity date of the notes based upon the then-current principal amount outstanding. The warrants expire as of May 15, 2009. The warrants, valued at $47,000, were recorded as a deferred financing cost and are being amortized as interest expense over the term of the notes. Amortization of $20,000 was recorded as part of interest expense for the year ended December 31, 2002.

Interest expense for the year ended December 31, 2000 includes approximately $212,000 for the accretion of the original issue discount on $2.0 million of convertible promissory notes issued in August 1999 by INTL.com. This discount represented the value attributable to warrants to purchase 56,753 shares of common stock, at an exercise of $1.45 per share, granted in connection with these notes.

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Results of Operations

The following table sets forth certain consolidated financial data as a percentage of total revenues.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Revenue.    In 2002, revenue was $118.3 million, an increase of 16.9% from $101.2 million in 2001. The increase was attributable to Lionbridge’s ability to maintain strong recurring revenue from its major customers in the technology industries, expand and diversify its customer base into new industries and the acquisition of eTesting. Lionbridge increased revenue during the year despite the continuing effect of the global economic slowdown.

Lionbridge’s ten largest customers accounted for approximately 48% of the revenue in 2002. While continuing to strengthen its traditional product localization services, Lionbridge expanded its content globalization, testing and application, development and maintenance (ADM) services. As a result of Lionbridge’s efforts to broaden its service offerings and diversify its customer base, approximately 40% of Lionbridge’s client programs in 2002 were related to multilingual content services rather than to traditional product localization.

Globalization revenue in 2002 increased to $91.3 million from $84.0 million in 2001, primarily due to growth in the Company’s globalization service offerings related to multilingual content management and maintenance of global technology applications. The Company recorded charges against Globalization revenue of approximately $610,000 during the year ended December 31, 2002 due to the expected inability to realize work-in-process associated with certain customers of its ChinaConnect business. In July 2002, the Company exited this business, as it was a non-core activity.

Testing revenue increased to $27.1 million from $17.3 million in 2001. Growth in Testing revenue resulted primarily from the addition of the Data Dimensions operations, which the Company acquired in June 2001, and approximately $3.6 million incremental revenue derived from the operations of eTesting, which Lionbridge acquired in July 2002. Through its acquisition of eTesting, the Company expanded its VeriTest testing offerings with new services such as competitive analysis, usability and load and stress testing.

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Cost of Revenue.    Cost of revenue consists primarily of expenses incurred for translation services provided by third parties as well as salaries and associated employee benefits for personnel related to client projects. As a percentage of revenue, cost of revenue was 60.2% in 2002 as compared to 62.4% for the prior year. The decrease is primarily attributable to the favorable impact of the cost savings and restructuring actions started in 2001, particularly the consolidation of Lionbridge facilities in the United States, and lower labor costs associated with workforce reductions. The decrease is also attributable to progress attained in integrating acquisitions, as well as the impact of the increase in revenue from period to period. Cost of revenue increased $8.1 million to $71.3 million in 2002 from $63.1 million in 2001. Of the $8.1 million increase, $1.9 million of incremental costs relates to the operations of eTesting since its acquisition by Lionbridge in July 2002. The remainder of the increase was primarily to support the growth in related revenue.

Cost of revenue as a percentage of revenues improved in the Globalization operations to 61.8% in 2002, as compared to 64.3% in the prior year. Globalization cost ratios improved, year over year, despite the impact of increased costs of translation services provided by third parties, and the strengthening of the Euro against the U.S. dollar during 2002. The Company’s cost of revenue is impacted by foreign currency fluctuations since certain translation costs are denominated in foreign currencies, while a significant portion of its revenue is denominated in U.S. dollars. This foreign currency impact as partially offset by an increase in the gross margin in Testing, to 55.5% in 2002 from 53.1% in the prior year. The Testing margin was impacted by the merger and integration of the eTesting operations during the second half of 2002.

Sales and Marketing.    Sales and marketing expenses consist primarily of salaries, commissions and associated employee benefits, travel expenses of sales and marketing personnel, and promotional expenses. Sales and marketing costs of $11.6 million in 2002 increased slightly as compared to the previous year, reflecting the continuing favorable impact of the cost savings resulting from restructuring activities initiated in 2001, and progress attained in integrating acquisitions. As a percentage of revenue, sales and marketing expenses decreased to 9.8% in 2002, from 11.2% in the prior year, as a result of the declining cost structure and increased revenue levels from period to period. This decrease occurred despite a 16.9% growth in revenue in 2002, and despite $627,000 of additional sales and marketing expenses related to the addition of eTesting, as well as increased commissions on the higher revenue.

General and Administrative.    General and administrative expenses consist of salaries of the management, purchasing, process and technology, finance and administrative groups, and associated employee benefits and travel; facilities costs, including related depreciation and amortization; information systems costs; professional fees; and all other site and corporate costs. General and administrative costs decreased $2.0 million or 5.7% to $32.4 million in 2002 from $34.4 million in 2001. The decrease reflects the favorable impact of cost savings resulting from restructuring activities initiated in 2001, and the progress attained in integrating acquisitions, as noted above, offset by $1.4 million in incremental costs related to the acquisition of eTesting in July 2002, as well as a one-time charge of approximately $498,000 related to the Company’s inability to recover certain amounts due from customers as a result of its decision to exit the ChinaConnect business. As a percentage of revenue, general and administrative expenses were 27.4% in 2002 compared to 34.0% in 2001 due to the reasons noted above, as well as the increased revenue levels period to period.

Research and Development.    Research and development expenses relate to the Lionbridge Globalization Platform, an array of configurable technologies used in the globalization process, and include salaries and associated employee benefits and third-party contractor expenses. Research and development expense decreased 48% to $1.2 million in 2002 from $2.3 million in 2001. As the Company deployed the Lionbridge Globalization Platform for customers, certain project personnel were reassigned to other operations, resulting in decreased headcount-related expenses for 2002 as compared to 2001.

Amortization of Acquisition-related Intangible Assets.    Amortization of acquisition-related intangible assets consists of the amortization of identifiable intangible assets resulting from acquired businesses and, in 2001, amortization of goodwill arising from business acquisitions. In 2002, Lionbridge ceased amortization of

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goodwill in accordance with SFAS No. 142. Amortization expense of $528,000 in 2002 relates solely to the amortization of acquired intangible assets other than goodwill. Amortization expense of $6.7 million in 2001 related to the amortization of goodwill and acquired intangible assets.

Interest Expense.    Interest expense represents interest paid or payable on debt, the amortization of deferred financing costs and the accretion of discounts on subordinated notes. Interest expense increased $599,000 to $3.8 million in 2002 from $3.2 million in 2001. This increase was principally due to increased interest expense resulting from the higher level of borrowing during the year as well as the amortization of deferred financing costs related to warrants partially offset by a reduction in the amount of accretion of discount on notes.

Other Expense, Net.    Other expense, net reflects the foreign currency transaction gains or losses arising from exchange rate fluctuations on transactions denominated in currencies other than the local currencies of the countries in which the transactions are recorded, and increased 83% to $1.5 million in 2002 from $838,000 in 2001. The increase was primarily attributable to the impact of an approximate 17.5% deterioration in the value of the U.S. dollar relative to the Euro over the twelve months ended December 31, 2002. As a percentage of revenue, other expense, net, increased to 1.3% from 0.8% for the years ended December 31, 2002 and 2001, respectively.

Provision for Income Taxes.    The provision for (benefit from) income taxes for the years ended December 31, 2002 and 2001 represents taxes resulting from operations in foreign jurisdictions, offset in 2002 by an income tax refund in the U.S. of $392,000 as a result of a change in the tax law. Of the provision amounts booked for 2002 and 2001, $99,000 and $15,000, respectively, represent noncash expenses resulting from utilizations of net operating loss carryforwards from business combinations. The benefit from Lionbridge’s utilization of net operating loss carryforwards in certain European countries during these periods was recorded as a reduction of goodwill, rather than a tax benefit, since the deferred tax assets associated with these carryforwards had been fully reserved at the time Lionbridge acquired the localization businesses of Stream International Holdings, Inc. Lionbridge recorded no tax benefit for losses generated in other jurisdictions during these periods due to the uncertainty of realizing any benefit.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Revenue.    In 2001, revenue decreased 12.1% to $101.2 million from $115.1 million in 2000. The decrease was attributable to a lower volume of projects received from recurring customers as well as a decrease in the number of customers, reflecting the effect of the global economic slowdown in the technology sector during the year. Specifically, revenue from customers in the telecommunications industry decreased by 47.5% from the revenue recognized from the same customers during the previous year. Partially offsetting the decrease was incremental revenue derived from the operations of Data Dimensions of $9.7 million which was acquired in June 2001. Revenue for 2000 included incremental revenue of approximately $2.0 million derived from work in process acquired as part of Lionbridge’s acquisition of the language services operation of Nortel during the first quarter of that year.

Cost of Revenue.    As a percentage of revenue, cost of revenue was 62.4% in 2001 as compared to 63.2% for the prior year. Of the total $9.6 million decrease from 2000 to 2001, $1.5 million was attributable to the cost recorded in the first quarter of 2000 upon the completion of the work in process acquired as part of the acquisition of the language services operation of Nortel in that quarter. The remaining amount of the decrease was largely attributable to reduced headcount and lowered reliance on external consultants and translators, partially offset by $5.2 million of incremental costs relating to the operations of Data Dimensions since its acquisition by Lionbridge in June 2001.

Sales and Marketing.    Sales and marketing costs of $11.3 million in 2001 were essentially flat with the previous year. Sales and marketing expenses associated with the operations of Data Dimensions were $871,000 for 2001 which were offset by headcount reductions and curtailed marketing expenditures in other parts of the

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business. As a percentage of revenue, sales and marketing expenses increased during 2001 to 11.2% from 9.9% in the prior year as a result of the declining revenue levels period to period.

General and Administrative.    General and administrative costs increased 3.7% to $34.4 million in 2001 from $33.1 million in 2000. The acquisition of Data Dimensions in June 2001 accounted for approximately $4.5 million of the increase, which was partially offset by the positive effects of restructuring activities undertaken throughout 2001. As a percentage of revenue, general and administrative expenses were 34.0% in 2001 compared to 28.8% in 2000 due to the reasons noted above as well as the declining revenue levels period to period.

Research and Development.    Research and development expense decreased 8.8% to $2.3 million in 2001 from $2.5 million in 2000. Lower usage of external consultants and lower headcount-related expenses accounted for a decrease of $425,000, which was partially offset by increased equipment-related expenses.

Amortization of Acquisition-related Intangible Assets.    Amortization increased 2.3% to $6.7 million in 2001 from $6.5 million in 2000. This increase was primarily attributable to $847,000 of goodwill amortization associated with the acquisitions of Quality Group Labs in January 2001 and Data Dimensions in June 2001, offset by a reduction in amortization expense related to fully amortized intangible assets in 2001 and a reduction in goodwill resulting from the utilization of net operating loss carryforwards.

Interest Expense.    Interest expense increased to $3.2 million in 2001 from $2.7 million in 2000. This increase was principally due to accretion of the discount on debt issued in June 2001, partially offset by the cessation of accretion of the original issue discount on notes issued in 1999. Interest expense for the years ended December 31, 2001 and 2000 includes $839,000 and $0, respectively, for the accretion of the discount on a note issued in June 2001 and $0 and $212,000, respectively, for the accretion of the original issue discount on notes issued in August 1999.

Other Expense, Net.    As a percentage of revenue, other expense, net, increased to 0.8% from 0.6% for the years ended December 31, 2001 and 2000, respectively. Other expense, net increased 17.4% to $838,000 in 2001 from $714,000 in 2000.

Provision for Income Taxes.    The provision for income taxes for the years ended December 31, 2001 and 2000 represents taxes resulting from operations in foreign jurisdictions. Of the provision amounts booked for 2001 and 2000, $15,000 and $243,000, respectively, represent noncash expenses resulting from utilizations of net operating loss carryforwards. The benefit from Lionbridge’s utilization of net operating loss carryforwards in certain European countries during these periods was recorded as a reduction of goodwill, rather than a tax provision benefit, since the deferred tax assets associated with these carryforwards had been fully reserved at the time Lionbridge acquired the localization businesses of Stream International Holdings, Inc. (“Stream”). Lionbridge recorded no tax benefit for losses generated in other jurisdictions during these periods due to the uncertainty of realizing any benefit.

Quarterly Results of Operations

The following tables set forth unaudited consolidated quarterly financial data for the periods indicated. Lionbridge derived this data from its unaudited consolidated financial statements, and, in the opinion of management, they have been prepared on the same basis as Lionbridge’s audited consolidated financial statements for the years ended December 31, 2002 and 2001, and include all adjustments, which consist only of normal recurring adjustments, necessary to present fairly the financial results for the periods. Certain quarterly amounts have been reclassified to conform with current year presentation. The operating results for any quarter are not necessarily indicative of results for any future period.

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