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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

For the fiscal year ended: December 31, 2003

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

None

Securities to be 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 reports), 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 x    No ¨

The aggregate market value of the voting stock held by non-affiliates of the registrant, as of June 30, 2003, was approximately $138.2 million (based on the closing price of the registrant’s Common Stock on June 30, 2003, of $5.09 per share).

The number of shares outstanding of the registrant’s $.01 par value Common Stock as of March 5, 2004 was 46,444,358.

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, 2003. 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, 2003

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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 is a leading provider of globalization and testing services that enable clients to develop, release, manage and maintain their technology applications and enterprise content globally. Globalization is the process of adapting content and products to meet the language and cultural requirements of users throughout the world. Globalization also includes the development and maintenance of content and applications. Testing is the process of ensuring the quality, interoperability, usability and performance of clients’ software, hardware, Web sites and content. Testing also includes product certification and competitive analysis. Lionbridge offers its testing services under the VeriTest brand.

Lionbridge provides a suite of globalization and testing outsourcing services to businesses, particularly in the technology, consumer, retail, industrial, financial services, manufacturing, life sciences and publishing industries. Lionbridge’s solutions include content development; product and content globalization; software and hardware testing, product certification and competitive analysis; and application development and maintenance. Lionbridge’s services 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 provides the following core benefits to clients:

Integrated Full-Service Offering.    Lionbridge serves as an outsource partner throughout a client’s product and content lifecycle from development and globalization to testing through maintenance. Clients rely on Lionbridge’s globalization services to develop, release and maintain their global technology applications and content for their clients, 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 software and hardware vendors’ applications meet industry-defined standards for quality and compatibility, 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. By outsourcing to a large-scale provider, organizations can focus on their core competencies, drive process improvements and speed the process of communicating large amounts of data to customers and throughout their global organization.

Established Global Presence.    Lionbridge operates globalization and testing service centers in ten 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 global infrastructure enables Lionbridge to meet its clients’ budgetary and geographic needs and deliver high-value, cost-effective globalization and testing services.

Proven Program Management 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

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projects. This approach enables Lionbridge to establish accountability, communications and processes throughout a client project 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 believes that demand for its services will remain strong as companies continue to operate on a global basis, with the Internet playing a major role in the way businesses operate. By offering a one-stop solution to global technology and content needs, Lionbridge has become a key outsource provider to companies operating internationally. Lionbridge compliments its globalization offering by providing its clients with testing, content development and application development and maintenance, thereby providing a complete outsourcing solution for its clients’ globalization and testing needs.

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 1050 Winter Street, Waltham, Massachusetts 02451, its telephone number is (781) 434-6000, and its Web site is www.lionbridge.com. Lionbridge makes available, free of charge, on its Web site its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after the reports are electronically filed with or furnished to the SEC.

Lionbridge provides a full suite of globalization and testing services to businesses. Our services include the following:

Globalization Services

Lionbridge provides the following globalization solutions:

Content Globalization.    Content globalization is the adaptation of Internet, Intranet, interactive, or packaging content to meet a target locale’s cultural, linguistic and business requirements. By globalizing content organizations can more effectively communicate with their customers, partners and employees in international markets. Lionbridge provides multilingual content services which include translating and maintaining its clients’ Web-based content, technical support databases, training materials and sales and marketing information. By utilizing technology and integrating with its clients’ content management processes and systems, Lionbridge is able to manage the translation process in an automation-assisted manner for large volumes of content. Lionbridge combines technical writing and translation expertise, design and production capabilities, program management, standards-based automation technology and process optimization techniques to provide high-quality, client-specific solutions for multilingual content.

For example, Lionbridge is managing frequently changing content for a client’s multilingual technical support Web site. Lionbridge is automating the process of extracting English language content from the client’s content site, routing it through translation memory technology and workflow processes and publishing the translated content directly to the client’s multilingual support Web site. By working with Lionbridge, this client estimates that it is saving more than 30% of the time and cost associated with the ongoing management of this multilingual online support site.

Product Globalization.    Lionbridge creates foreign language versions of its clients’ products and software applications, including the user interface, online help systems and documentation. Through its internationalization, software localization and technical translation services, Lionbridge provides its clients with re-engineered and culturally adapted multilingual versions of their products and applications. Lionbridge’s product globalization services enable Lionbridge clients to release fully operable hardware and software products that are adapted to the cultural, linguistic and technical requirements of specific international markets.

As an example, Lionbridge provides localization for a global technology provider that releases dozens of new consumer hardware and software products in more than 20 countries every year. Lionbridge localizes

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software and related documentation, user interfaces and help screens. The Lionbridge process is integrated with and essential to the client’s worldwide product release cycle. As a result, this client estimates that it is reducing the time it takes for its new products to reach international markets by up to 30% and expects to reduce its costs by 25%, while increasing its customer satisfaction worldwide.

Content Development:    Content development is the creation, design and deployment of content and related assets including text, images, and animations. Lionbridge provides content development solutions, including development, production and integration of content within a technology platform to address a range of its clients’ content needs such as eLearning and online training applications. As part of its content development solution, Lionbridge creates content, develops custom applications for authoring content, delivers courses, and tracks user interaction within an interactive content application.

For example, Lionbridge is working with a global publishing company to develop content and technology applications for the company’s full education curriculum. Lionbridge is creating and converting multimedia lessons to new technologies, maintaining and updating web-based instructions and ensuring that the content adheres to local, state and national standards for each of the client’s international end markets. This multi-year engagement involves a dedicated team of content development, engineering and delivery personnel that work both onsite at the client and offshore at Lionbridge’s solution center in Mumbai, India. This integrated solution is enabling the client to reduce their costs and speed time to market for their eLearning platforms.

Application Development and Maintenance.    To support clients’ global product releases, Lionbridge offers a scalable application development and maintenance solution which includes custom software enhancements and legacy application maintenance. Core to this solution is Lionbridge’s global team approach that combines program management either onsite at the client’s operation or near the client’s operation, and application development and maintenance activities executed at service centers in Ireland, China and India. This onshore, near shore, offshore model leverages Lionbridge’s global infrastructure and enables Lionbridge to offer a high-quality, low-cost application development and maintenance solution that optimizes clients’ existing resources and reduces their cost of supporting client applications in international markets.

For example, for a Fortune 250 company in the energy industry, Lionbridge is migrating several of the company’s back end applications to a new technology platform and maintaining its legacy systems with a combination of onsite program management and near-shore code development, support and maintenance. By working with Lionbridge, the client believes that it is able to better manage the deployment of new information technology systems and more cost-effectively manage its legacy applications.

Globalization Services Delivery.    By integrating language skills, global resources and application development and maintenance expertise, Lionbridge provides a unified approach to developing, releasing and maintaining multilingual technology products and offers a high-return solution for worldwide product support.

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). 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

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solution center, defines key activities, and specifies goals for each localization project. Lionbridge’s India operation has attained the Software Engineering Institute’s (SEI) Capability Maturity Model (CMM) Level 5 rating, the highest possible CMM rating from the SEI, a research and development center chartered to improve software engineering practices. Lionbridge’s high quality process oriented approach enables Lionbridge to deliver high quality applications and content across multiple technology platforms, languages and cultures in a timely fashion.

Lionbridge globalization services incorporate LionStream^™, a portal-based technology platform with a series of components that augment the methodology and expertise employed by Lionbridge’s globalization teams. LionStream combines Lionbridge proprietary technology with standard, off-the-shelf tools to provide clients with a flexible technology platform to support efficient, high-quality globalization. LionStream integrates with Lionbridge’s clients’ production environments and 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, enable the globalization process to be 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 clients and enhances its ability for margin growth.

Testing Services

Lionbridge provides a variety of testing, competitive analysis and certification services to its clients through its VeriTest division. VeriTest services include:

Performance Testing.    Performance testing is the process of determining whether a Web site or application will perform and function appropriately when high usage levels occur, either through an increase in the number of users accessing the Web site or application, or through an increase in the complexity of activity conducted on the site or application at a given time.

Quality Assurance.    VeriTest provides a range of services to verify that a client’s hardware, software, Web site, or internal application does not have bugs, glitches, or oversights that could impact the functionality, compatibility, interoperability or performance of that application.

Usability Testing.    Usability testing is the process of determining the extent to which a client’s hardware, software, Web site, or internal application meets users’ expectations for ease of use.

Globalization Testing.    VeriTest determines whether the product is ready for global release by ensuring that locale-dependent functions work as intended within the local hardware and software environment of the end user.

Competitive Analysis.    VeriTest measures the performance, functionality, or usability of a client’s hardware, software or Web application against competitive offerings. In addition to providing competitive analysis services to clients, VeriTest also designs, writes and tests benchmark tools for PC Magazine.

Product Certification.    VeriTest provides product certification programs for many leading software, hardware and telecommunications companies, including Microsoft, AT&T Wireless, BMC Software, Novell, HP and Alcatel. These sponsoring companies retain VeriTest to develop and administer test criteria that independent software vendors must satisfy before they may display the sponsor’s logo (such as Microsoft’s Certified for Windows^® Server 2003) on their products. These certification tests confirm that software vendors’ applications properly interact with those of the platform vendor.

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.

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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 12 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.

Sales and Marketing

Substantially all of Lionbridge’s revenue has been generated through its dedicated direct sales force. Lionbridge currently has 52 direct sales professionals based in the United States, Europe, Asia and India 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, financial services and manufacturing industries. Lionbridge provided services in excess of $10,000 to approximately 385 clients worldwide for the year ended December 31, 2003. The following companies are representative Lionbridge clients, each of whom purchased more than $1.0 million in services from Lionbridge in the year ended December 31, 2003:

In 2003, HP and Microsoft accounted for approximately 19% and 17%, respectively, of total revenue. During the year, Lionbridge provided testing and globalization services for more than 20 operating sites within the HP organization. In 2002, HP accounted for 21% of total revenue. No other client individually accounted for more than 10% of revenue in 2003, 2002 or 2001. In 2003, 2002 and 2001, Lionbridge’s ten largest clients accounted for approximately 55%, 50% and 41% 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 LionStream 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 and believes that the duration of these patents is adequate relative to the expected lives of their applications. 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, 2003, Lionbridge had 1,909 employees. Of these, 1,645 were consulting and service delivery professionals and 264 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.

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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.

Item 2.    Properties

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

Lionbridge’s headquarters and principal administrative, finance, legal, marketing, investor relations and information technology operations are located in leased office space in Waltham, Massachusetts. Lionbridge’s 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

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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 under the antifraud provisions of the securities laws could proceed against the Company and a majority of the other issuer defendants.

In June 2003, Lionbridge elected to participate in a proposed settlement agreement with the plaintiffs in this litigation. If ultimately approved by the Court, this proposed settlement would result in a dismissal, with prejudice, of all claims in the litigation against Lionbridge and against any other of the issuer defendants who elect to participate in the proposed settlement, together with the current or former officers and directors of participating issuers who were named as individual defendants. The proposed settlement does not provide for the resolution of any claims against underwriter defendants, and the litigation as against those defendants is continuing. The proposed settlement provides that the class members in the class action cases brought against the participating issuer defendants will be guaranteed a recovery of $1 billion by insurers of the participating issuer defendants. If recoveries totaling $1 billion or more are obtained by the class members from the underwriter defendants, however, the monetary obligations to the class members under the proposed settlement will be satisfied. In addition, Lionbridge and any other participating issuer defendants will be required to assign to the class members certain claims that they may have against the underwriters of their IPOs.

The proposed settlement contemplates that any amounts necessary to fund the settlement or settlement-related expenses would come from participating issuers’ directors and officers liability insurance policy proceeds as opposed to funds of the participating issuer defendants themselves. A participating issuer defendant could be required to contribute to the costs of the settlement if that issuer’s insurance coverage were insufficient to pay that issuer’s allocable share of the settlement costs. Lionbridge expects that its insurance proceeds will be sufficient for these purposes and that it will not otherwise be required to contribute to the proposed settlement. Consummation of the proposed settlement is conditioned upon, among other things, negotiating, executing, and filing with the Court final settlement documents, and final approval by the Court. If the proposed settlement described above is not consummated, Lionbridge intends to continue to defend the litigation vigorously. Moreover, if the proposed settlement is not consummated, the Company believes that the underwriters may have an obligation to indemnify Lionbridge for the legal fees and other costs of defending this suit. While Lionbridge cannot guarantee the outcome of these proceedings, the Company believes that the final result of this lawsuit will have no material effect on its consolidated financial condition, results of operations or cash flows.

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 year ended December 31, 2003.

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 5, 2004, there were 428 holders of record of Lionbridge’s common stock. Lionbridge’s common stock is listed and traded on the Nasdaq National Market under the symbol “LIOX”. Lionbridge’s common stock was listed and traded on the Nasdaq National Market from August 20, 1999 until August 29, 2002, and Lionbridge’s common stock became listed on, and began trading on, the Nasdaq SmallCap Market under the same trading symbol on August 30, 2002. Lionbridge’s common stock was listed and traded on the Nasdaq SmallCap Market from August 30, 2002 until April 7, 2003, and Lionbridge’s common stock became re-listed on, and began trading again on, the Nasdaq National Market on April 8, 2003.

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 or the Nasdaq Small

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Cap Market. 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.

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. Between May 2002 and December 2003, an aggregate of 18,500 of such shares were forfeited by holders upon their 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.

The selected consolidated financial data as of December 31, 2003 and 2002 and for each of the three years in the period ended December 31, 2003 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, 2001, 2000, and 1999 and for the years ended December 31, 2000 and 1999 have been derived from the audited consolidated financial statements of Lionbridge that are not included in this Form 10-K.

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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 (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 Annual Report on Form 10-K.

Overview

Founded in 1996, Lionbridge is a leading provider of globalization and testing services that enable clients to develop, release, manage and maintain their technology applications and enterprise content globally. Globalization is the process of adapting content and products to meet the language and cultural requirements of users throughout the world. Globalization also includes the development and maintenance of content and applications. Testing is the process of ensuring the quality, interoperability, usability and performance of clients’ software, hardware, Web sites and content. Testing also includes product certification and competitive analysis. Lionbridge offers its testing services under the VeriTest brand.

Lionbridge provides a suite of globalization and testing outsourcing services to businesses, particularly in the technology, consumer, retail, industrial, financial services, manufacturing, life sciences and publishing industries. Lionbridge’s solutions include content development; product and content globalization; software and hardware testing, product certification and competitive analysis; and application development and maintenance.

In 2003, Lionbridge’s operating profit was $7.5 million with net income of $2.5 million. In 2002, the Company’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, 2003, had an accumulated deficit of $106.0 million.

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

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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 primarily on labor 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 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 all 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 of goodwill; therefore, the results of operations for the years ended December 31, 2003 and 2002 exclude goodwill amortization expense. 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. Lionbridge completed goodwill impairment tests as of December 31, 2003 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.

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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, 2003 have resulted in the recognition of approximately $59.7 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.

Acquisitions in the three year period ended December 31, 2003 were as follows:

In September 2003, Lionbridge acquired all of the capital stock of Mentorix Technologies, Inc., a California corporation, and its Mumbai-India based subsidiary, Mentorix Learning Technologies Pvt. Ltd. (collectively, “Mentorix”), an application code developer and eLearning content provider. The acquisition was accounted for using the purchase method of accounting. Total purchase consideration was $28.7 million, consisting of cash payments of $28.2 million made at closing ($21.5 million, net of cash acquired with the business) and an additional $520,000 of direct acquisition costs. In connection with the acquisition, Lionbridge recorded $20.4 million of goodwill. Additionally, the Company recorded $110,000 in intangible assets associated with internally developed software.

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 purchase method of accounting. Total purchase consideration was $2.2 million, consisting of an initial cash payment of $1.0 million made at the closing date. Subsequent to the closing date, Lionbridge paid an additional $1.2 million 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. During 2003, goodwill recorded in connection with the acquisition of eTesting was reduced by $90,000 due to the reversal of excess acquisition date accruals on vacant premises.

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. During 2003, goodwill recorded in connection with the acquisition of Data Dimensions was reduced by $244,000 due to the reversal of excess acquisition date accruals on vacant premises.

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

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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, as final consideration, made under the terms of the original agreement.

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 additional acquisitions. The success of this plan depends upon, among other things, Lionbridge’s 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. 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:

Restructuring charges of $943,000 were recorded in the year ended December 31, 2003. These charges relate to costs associated with workforce reductions in the United States, France, Ireland, Japan and China, consisting of 25 technical staff, 1 sales and marketing staff member and 8 administrative staff.

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.

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.

At December 31, 2003, the consolidated balance sheet included accruals and accounts payable totaling $255,000 and $106,000, respectively, related to reserves for reorganization and integration activities in connection with its business combinations. Lionbridge currently anticipates that all restructuring, reorganization and integration accrual balances will be fully utilized by December 31, 2004.

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The following table summarizes the reserve activity for the years ended December 31, 2003, 2002 and 2001, respectively:

Non-Cash Charges

Stock-Based 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. This deferred compensation has been amortized over the four-year vesting period of the applicable options. Of the total deferred compensation amount, $2.7 million had been amortized and $1.1 million had been reversed due to forfeitures of the underlying options at December 31, 2003. The amortization of deferred compensation is recorded as an operating expense and totaled $106,000, $488,000 and $565,000 for the years ended December 31, 2003, 2002 and 2001, respectively. In June 2002, additional stock-based compensation expense of $98,000 was recorded relating to modifications of stock options previously granted to employees.

In January 2002, Lionbridge recorded deferred compensation of $537,000, representing the fair market value of 298,500 shares of restricted common stock issued to certain employees at that time. These restricted shares vest ratably after one and two years of continued employment with the Company. Unvested restricted shares may not be sold, transferred or assigned and are subject to forfeiture in the event that an employee ceases to be employed by the Company. The deferred compensation is being amortized over the two-year period during which the transfer and sale restrictions on the common stock lapse. The amortization of deferred compensation is recorded as an operating expense and totaled $240,000 and $265,000 for the years ended December 31, 2003 and 2002, respectively.

In September 2003, Lionbridge recorded deferred compensation of $513,000, representing the fair market value of 66,000 shares of restricted common stock issued to certain employees at that time. Restrictions on disposition lapse ratably over four years from the date of grant on each anniversary date. Unvested restricted shares may not be sold, transferred or assigned and are subject to forfeiture in the event that an employee ceases to be employed by the Company. The deferred compensation is being amortized over the four-year period during which the transfer and sale restrictions on the common stock lapse. The amortization of deferred compensation is recorded as an operating expense and totaled $41,000 for the year ended December 31, 2003.

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In October 2003, Lionbridge recorded deferred compensation of $812,000, representing the fair market value of 90,000 shares of restricted common stock issued to certain employees at that time. Restrictions on disposition lapse ratably over four years from the date of grant on each anniversary date. Unvested restricted shares may not be sold, transferred or assigned and are subject to forfeiture in the event that an employee ceases to be employed by the Company. The deferred compensation is being amortized over the four-year period during which the transfer and sale restrictions on the common stock lapse. The amortization of deferred compensation is recorded as an operating expense and totaled $34,000 for the year ended December 31, 2003.

Lionbridge currently expects to amortize the following remaining amounts of deferred compensation as of December 31, 2003 in the years ending:

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 a warrant to purchase 900,000 shares of common stock at a price of $0.80 per share, granted in connection with the debt financing. In June 2003, the holder exercised this warrant in full to purchase a total of 900,000 shares of common stock at an exercise price of $0.80 per share. The net issuance right was elected as the method of exercise resulting in the issuance of 762,857 shares at a fair market value of $5.25 per share. The principal amount of $5.0 million under the original 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 $8.0 million due on September 30, 2006. The $3.0 million discount on the new note was accreted as interest expense on a straight-line basis over the period from November 1, 2001 to July 31, 2003. Interest expense for the years ended December 31, 2003, 2002 and 2001 includes $356,000, $610,000 and $101,000, respectively, of accretion of this debt discount. In August 2003, the Company repaid the principal balance of $8.0 million outstanding on this note. Due to the early extinguishment of this debt, the unamortized balance of the $3.0 million discount of $1.9 million was recorded as interest expense at the time of repayment.

Issuance of Warrants for Common Stock

In May 2002, terms of certain subordinated debt agreements with the holder of subordinated notes in the principal amount of $5.0 million were amended to extend the maturity date of the notes to April 30, 2004. In conjunction with the amendment, Lionbridge issued two seven-year 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. One-quarter of the shares issuable under the warrants were vested at the time of issuance and the remaining shares vested ratably each three-month period thereafter through the maturity date of the notes based upon the then-current principal amount outstanding. The warrants, valued at $551,000 in the aggregate, had been recorded as a deferred financing cost and were amortized as interest expense over the remaining term of the notes, resulting in interest expense of $161,000 and $184,000, respectively for the years ended December 31, 2003 and 2002. An incremental $207,000 was recognized as accelerated deferred financing costs in July 2003 upon early repayment of this debt. In June 2003, the holders exercised these warrants to purchase a total of 249,427 shares of common stock at an exercise price of $1.69 per share. The net issuance right was elected as the method of exercise resulting in the issuance of 169,135 shares at a fair market value price of $5.25 per share. In August 2003, the holders exercised the remaining amount of shares issuable under these warrants to purchase an additional 37,355 shares of common stock at an exercise price of $1.69 per share. The net issuance right was elected as the method of exercise resulting in the issuance of 29,004 shares at a fair market value of $7.56 per share.

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In August 2002, terms of the subordinated debt agreements with holders of subordinated notes in the aggregate principal amount of $1.0 million were amended to extend the maturity date of the notes to July 31, 2003. In conjunction with the amendment, Lionbridge issued two seven-year 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. One-quarter of the shares issuable under the warrants were vested at the time of issuance and the remaining shares vested ratably each three-month period thereafter through the maturity date of the notes based upon the then-current principal amount outstanding. The warrants, valued at $47,000 in the aggregate, had been recorded as a deferred financing cost and were amortized as interest expense over the remaining term of the notes, resulting in interest expense of $27,000 and $20,000 for the years ended December 31, 2003 and 2002, respectively. The notes were repaid in full in August 2003. In September 2003, the holders exercised these warrants in full to purchase a total of 50,612 shares of common stock at an exercise price of $1.69 per share. The net issuance right was elected as the method of exercise resulting in the issuance of 40,489 shares at a fair market value of $8.45 per share.

Executive Summary

During 2001 and 2002, Lionbridge diversified its customer base from technology and telecommunications clients to include customers in the pharmaceutical, industrial and manufacturing sectors, and broadened its service offerings to include applications, development and maintenance services, a wider range of testing services and content development. During this period, the Company also increased revenue from its existing customers. The Company’s expansion of its service offerings in included the development of code and content related services such as multilingual content management, usability testing, application development and maintenance and competitive analysis. These new services complemented Lionbridge’s existing offerings and allowed the Company to expand its growth opportunities.

In 2003, led by record revenue and profitability, Lionbridge implemented key elements of its strategy for market expansion and long-term growth. The Company built upon its code and content service offerings and accomplished its three strategic objectives for the year:

Sales Expansion

In 2003, Lionbridge won new customers in the manufacturing, oil and gas and consumer industries. At the same time, the Company expanded relationships with many of its existing customers – such as HP, Microsoft, Merck and Nestle. Revenue from Lionbridge’s top 25 customers grew 29% in 2003 as compared to 2002.

The Company also expanded its globalization and testing solutions. In 2003 Lionbridge expanded alliances with content management providers, which enabled the Company to grow its multilingual content management offering, and as described below, expanded its offshore production and service capabilities through the acquisition of Mentorix located in Mumbai, India. Lionbridge also added new services within its VeriTest testing division by adding a Storage Area Networking test center in Oakdale, Minnesota. Through these expanded offerings, Lionbridge can now offer services that help organizations assess, develop and manage their content and storage needs. The Company believes these new capabilities may enhance Lionbridge’s ability to secure new customers and expand the breadth and depth of services it provides to existing clients.

Offshore Expansion

In 2003, Lionbridge established its twentieth solution center worldwide with the addition of an operation in Mumbai, India, which the Company gained through its acquisition of Mentorix, a development company with code and content development expertise and a large customer in the eLearning market.

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The Company believes its India operations will contribute significantly to its global execution capacity, as it will allow Lionbridge to more efficiently use its technologies, global resources and program management processes to execute client activities. Lionbridge refers to this global execution capability as “networked production.” The Company will use its India based solution center to complement this global networked production model with scalable engineering and development resources. This gives Lionbridge the capability and capacity to expand programs with existing customers, gain new efficiencies throughout the Company, and to secure continued competitive advantage.

Integrated Service Offerings and Global Infrastructure

Over the past seven years, Lionbridge has built a global infrastructure that supports its core globalization and testing service offerings and that expands its breadth of capabilities. The Company’s goal is to secure larger-scale customer programs that integrate more than one service within the spectrum of capabilities offered by Lionbridge. Through the expansion of its operational infrastructure and through its establishment of its networked production capabilities, Lionbridge has begun to respond to its customers needs for an integrated service offering involving a combination of globalization, including content development, and testing.

In 2004, Lionbridge plans to further expand and enhance its operations and sales strategies to facilitate this integrated model and to secure additional large scale customer programs for its integrated services offerings.

Financial Highlights

In 2003, Lionbridge attained revenue of $141.7 million, representing a 19.8% increase over 2002. Revenue increased primarily due to organic growth attributable to strong recurring revenue from major customers and the expansion and diversification of Lionbridge’s customer base into new industries. Additionally, in 2003, approximately $4.7 million of the increase resulted from Lionbridge’s acquisition of Mentorix in September 2003, and approximately $2.3 million of incremental revenue was derived from the inclusion of a full year of operations of its acquisition of eTesting Labs in July 2002.

The Company’s strong revenue growth, combined with its ability to further leverage Lionbridge’s global infrastructure, resulted in net income of $2.5 million or $0.06 per share, as compared to a net loss of $4.8 million or ($0.15) per share in 2002.

Lionbridge’s results for 2003 included $2.1 million of accelerated recognition of discount and deferred financing charges, as a result of the early repayment of debt, and $943,000 in restructuring charges. The Company’s 2003 results were also negatively impacted by volatile currency rates, particularly between the U.S dollar and the Euro in 2003. Lionbridge estimates that the Euro-U.S. dollar volatility negatively impacted Lionbridge’s cost of revenue by approximately 1.2%, year over year. Despite these activities, Lionbridge delivered a $7.3 million, or $0.21 per share, year over year improvement in net income, demonstrating the powerful leverage of its global infrastructure and the ongoing scalability of the Company’s business model.

In August 2003, Lionbridge issued 12,340,000 shares of its common stock in a follow-on public offering and received proceeds of $70.4 million (net of underwriting costs and other direct expenses). During the third quarter, the Company used $30.2 million of the net proceeds from this sale to repay the entirety of its subordinated debt obligations and bank line of credit. In September 2003, Lionbridge acquired Mentorix Technologies, Inc., an application code developer and eLearning content provider. The total purchase consideration was $28.7 million, consisting of cash payments of $28.2 million made at closing ($21.5 million, net of cash acquired with the business) and an additional $520,000 of direct acquisition costs. In connection with the acquisition, Lionbridge recorded $20.4 million of goodwill.

The Company’s strengthened balance sheet and the strategic benefits of its India-based acquisition, position Lionbridge for continued revenue and earnings expansion in 2004.

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See Results of Operations for 2003, 2002 and 2001 below for a more detailed discussion of our results of operations.

Results of Operations

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

Revenue.    The following table shows Globalization and Testing revenues in dollars and as a percentage of total revenue for the years ended December 31, 2003, 2002 and 2001, respectively:

In 2003, revenue was $141.7 million, an increase of 19.8% from $118.3 million in 2002. In 2002, revenue was $118.3 million, an increase of 16.9% from $101.2 million in 2001. Revenue increased each of the last two years primarily due to organic growth attributable to strong recurring revenue from major customers and the expansion and diversification of customer base into new industries. Additionally, in 2003, approximately $4.7 million of the increase results from Lionbridge’s acquisition of Mentorix in September 2003, and approximately $2.3 million of incremental revenue was derived from the inclusion of a full year of operations of its acquisition of eTesting Labs in July 2002. In 2002, approximately $3.6 million of the increase from 2001 resulted from Lionbridge’s acquisition of eTesting Labs.

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Lionbridge’s ten largest customers accounted for approximately 55% of the revenue in 2003. For 2002, the Company’s ten largest customers accounted for approximately 48% as compared to 41% in 2001.

Globalization revenue in 2003 increased to $102.4 million from $91.3 million in 2002, an increase of $11.1 million, or 12.2%. In 2002, Globalization revenue increased to $91.3 million from $84.0 million in 2001, an increase of $7.3 million, or 8.7%. Revenue increased each of the last two years primarily due to growth in the Company’s globalization service offerings, related to multilingual content management and maintenance of global technology applications. Additionally, in 2003, the acquisition of Mentorix contributed revenue of $4.7 million in the period following acquisition. Through its acquisition of Mentorix, the Company expanded its application code development services and added eLearning content development capabilities. 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 non-core business activity, and utilized the existing infrastructure in Beijing for an expansion of its VeriTest testing business.

Testing revenue increased to $39.3 million from $27.1 million in 2002, an increase of $12.2 million, or 45.4%. This growth in Testing revenue is primarily attributable to organic growth in product functional testing and certification services business, and incremental revenue growth of approximately $2.3 million from the acquisition of eTesting during the third quarter of 2002. In 2002, Testing revenue increased to $27.1 million from $17.3 million in 2001, an increase of $9.8 million, or 56.6%. The growth in Testing revenue in 2002 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. 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.

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. The following table shows Globalization and Testing cost of revenues, the percentage variance from the prior year and as a percentage of revenue for the years ended December 31, 2003, 2002 and 2001, respectively:

Cost of revenue increased slightly to 60.6% in 2003 from 60.2% in 2002. This increase was primarily due to the unfavorable impact of the strengthening of the Euro against the U.S. dollar during 2003, since certain translation costs are denominated in Euro and other foreign currencies, while a significant portion of revenue is denominated in U.S. dollars. The net impact of the currency fluctuation on the cost of revenue percentage was approximately 1.2%, year over year. This foreign currency impact was partially offset by favorable cost savings attributable to progress attained in integrating acquisitions, and the result of better utilization of internal resources during the year, as compared to 2002.

In 2002, cost of revenue decreased to 60.2% from 62.4% in 2001. This decrease was 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.

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Cost of revenue increased $14.6 million to $85.9 million in 2003 from $71.3 million in 2002. Of the $14.6 million increase, $2.2 million and $1.1 million of incremental costs relate to the operations of Mentorix, acquired in September 2003, and eTesting acquired in July 2002, respectively. The remainder of the increase was primarily to support the growth in related revenue and the impact of foreign currency fluctuations on certain translation and project costs denominated in foreign currencies, predominantly the Euro.

In 2002, 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.

Globalization cost of revenue increased to 64.7% in 2003, as compared to. 61.8% in 2002. Globalization cost ratios increased, year over year, primarily due to the impact of increased costs for certain translation services provided by third parties and project costs denominated in foreign currencies, as a result of the strengthening of the Euro against the U.S. dollar during 2003 combined with competitive price pressures. The increase in Globalization cost ratios was partially offset by a decrease in Testing cost ratios, to 49.8% in 2003 from 55.1% in 2002. This improvement in Testing cost ratios was attributable to progress attained in integrating acquisitions, and the result of better utilization of internal resources during the year as compared to 2001, as well as the leverage of a 45.4% increase in revenue from period to period.

In 2002, Globalization cost of revenue decreased to 61.8%, as compared to 64.3% in 2001. Globalization costs ratios decreased, 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 decrease in Globalization cost ratios was partially offset by an increase in Testing operations cost ratios to 55.1%, in 2002, from 52.8% in 2001. The Testing cost of revenue percentage 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, promotional expenses and the costs of programs aimed at increasing revenue, such as advertising, trade shows, public relations and other market development programs. The following table shows sales and marketing expenses in dollars, dollar variances as compared to the prior year and as a percentage of revenue for the years ended December 31, 2003, 2002 and 2001, respectively:

Sales and marketing costs increased $1.4 million, or 11.9%, to $13.0 million in 2003, as compared to $11.6 million in 2002. The increase was primarily the result of higher employee related expenses in the sales organization as a result of additional headcount and commissions associated with the 19.8% increase in revenue and increased marketing and advertising costs in Testing. These increases were partially offset by the continuing favorable impact of the cost savings and progress attained in integrating acquisitions. As a percentage of revenue, sales and marketing expenses decreased to 9.2% in 2003 from 9.8% in 2002 as a result of the declining cost structure and increased revenue levels from period to period. This percentage decrease occurred despite a 19.8% growth in revenue in 2003 and additional sales and marketing expenses related to the addition of eTesting and Mentorix, coupled with increased commissions on the higher revenue.

In 2002, sales and marketing costs increased $258,000, or 2.3%, to $11.6 million, as compared to $11.3 million in 2001, 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

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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; information systems costs; professional fees; and all other site and corporate costs. The following table shows general and administrative expenses in dollars, dollar variances as compared to the prior year and as a percentage of revenue for the years ended December 31, 2003, 2002 and 2001, respectively:

General and administrative costs of $29.7 million in 2003 increased slightly as compared to 2002. This increase includes approximately $1.0 million in incremental costs related to the acquisition and integration of Mentorix, acquired in September 2003, largely offset by the favorable impact of cost savings realized during 2003 attributable to the reconfiguration of the Company’s U.S. operations and efficiencies realized through integrating acquisitions. As a percentage of revenue, general and administrative expenses were 20.9% in 2003 as compared to 24.8% in 2002 due to the reasons noted above, as well as the increased revenue levels period to period.

In 2002, general and administrative costs decreased $1.1 million, or 3.6%, to $29.4 million as compared to $30.5 million in 2001. This 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, partially 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 24.8% in 2002 compared to 30.2% 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 LionStream an array of configurable technologies used in the globalization process, and include salaries and associated employee benefits and third-party contractor expenses. The following table shows research and development expenses in dollars, dollar variances as compared to the prior year, and as a percentage of revenue for the years ended December 31, 2003, 2002 and 2001, respectively:

Research and development expense decreased 48.7% to $613,000 in 2003 from $1.2 million in 2002. In 2002, research and development expense decreased 48.0% to $1.2 million from $2.3 million in 2001. The Company has been deploying LionStream for customers during the past two years, resulting in certain project personnel being redeployed to custom implementations of the technology for customers, and their cost being charged to cost of revenue, resulting in decreased research and development headcount-related expenses in 2003 and 2002, respectively, as compared to prior years.

Depreciation and Amortization.    Depreciation and amortization consist of the expense related to property and equipment that is being depreciated over the estimated useful lives of the assets using the straight-line method. The following table shows depreciation and amortization expense in dollars, dollar variances as compared to the prior year, and as a percentage of revenue for the years ended December 31, 2003, 2002 and 2001, respectively:

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Depreciation and amortization expense increased $271,000, or 9.0%, to $3.3 million, as compared to $3.0 million in 2002. This increase was primarily the result of the assets acquired in the acquisition of Mentorix in September 2003, and eTesting in July 2002. In 2002, depreciation and amortization expense decreased $834,000 or 21.6% to $3.0 million, as compared to $3.9 million in 2001. This decrease was primarily the result of the culmination of the depreciable lives of certain assets acquired in prior years.

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 goodwill in accordance with SFAS No. 142. The following table shows amortization expense in dollars, dollar variances as compared to the prior year, and as a percentage of revenue for the years ended December 31, 2003, 2002 and 2001, respectively:

Amortization expense of $470,000 in 2003 and $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. During 2003, the Company used a portion of the net proceeds from its follow-on public offering of common stock to repay all amounts due under its senior subordinated notes, subordinated promissory notes, and line of credit facility. The following table shows interest expense (including the accelerated recognition of $2.1 million in discount and deferred financing charges in 2003 as a result of the early repayment of debt) in dollars, dollar variances as compared to the prior year, and as a percentage of revenue for the years ended December 31, 2003, 2002 and 2001, respectively:

The debt repayment resulted in a decrease of $1.3 million in interest expense on outstanding debt to $1.9 million in 2003, as compared to $3.2 million in 2002, and a decrease in the accretion of discount on debt to $356,000 in 2003, as compared to $610,000 in 2002. Additionally, the early repayment of debt accelerated recognition of $2.1 million in discount and deferred financing charges in 2003.

In 2002, interest expense increased $507,000 to $3.8 million from $3.3 million in 2001. This increase was principally due to 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 primarily reflects the foreign currency transaction gains or losses arising from exchange rate fluctuations on transactions or balances denominated in currencies other than the functional currencies of the countries in which the transactions are recorded. The Company recognized $288,000 in other expense in 2003, as compared to $1.5 million for the corresponding period of 2002. The decrease was primarily attributable to the Company’s ability to implement a number of appropriate financial and operational

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measures that minimize Lionbridge’s exposure to currency volatility. In 2002, other expense, net increased to $1.5 million 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 year ended December 31, 2002.

Provision for Income Taxes.    The following table shows the provision for (benefit from) income taxes and the effective income tax rate for the years ended December 31, 2003, 2002 and 2001, respectively:

The provision for (benefit from) income taxes represents taxes resulting from profits in foreign jurisdictions and certain minimum taxes. The 2002 provision was offset in-part 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 (benefit) amounts recorded for 2002 and 2001, $99,000 and $15,000, respectively, represents non-cash 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 future benefit.

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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, 2003 and 2002, 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.