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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2004

OR

For the transition period from              to            

Commission File Number 000-26933

LIONBRIDGE TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

1050 Winter Street, Waltham, MA 02451

(Address of Principal Executive Offices)

Registrant’s Telephone Number, Including Area Code: 781-434-6000

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

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of October 29, 2004 was 46,785,329.

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LIONBRIDGE TECHNOLOGIES, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004

TABLE OF CONTENTS

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PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

LIONBRIDGE TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

The accompanying notes are an integral part of the consolidated financial statements.

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LIONBRIDGE TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Amounts in thousands, except per share data)

The accompanying notes are an integral part of the consolidated financial statements.

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LIONBRIDGE TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands)

The accompanying notes are an integral part of the consolidated financial statements.

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LIONBRIDGE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of Lionbridge Technologies, Inc. and its wholly owned subsidiaries (collectively, “Lionbridge” or the “Company”). These financial statements are unaudited. However, in the opinion of management, the consolidated financial statements include all adjustments, consisting of only normal, recurring adjustments, necessary for their fair presentation. Interim results are not necessarily indicative of results expected for a full year. The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a complete presentation of the operations, financial position and cash flows of the Company in conformity with generally accepted accounting principles. These statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

The Company’s preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Estimates are used when accounting for collectibility of receivables, calculating service revenue using a percentage-of-completion assessment and valuing intangible assets, deferred tax assets and net assets of businesses acquired. Actual results could differ from these estimates.

Accounting for Stock-Based Compensation

The Company accounts for its stock-based compensation plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. The following table illustrates the effect on net income and net income per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards Statement No. 123 (“SFAS No. 123”), “Accounting for Stock-Based Compensation”, as amended, to stock-based employee compensation:

2. PROPERTY AND EQUIPMENT

Property and equipment, net consists of the following:

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LIONBRIDGE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

3. BUSINESS ACQUISITIONS

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 a cash payment 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.

4. DEBT

Line of Credit

Lionbridge has $15.0 million available for borrowing under a line of credit agreement with a commercial bank. Borrowings outstanding under the line of credit agreement are collateralized by the Company’s accounts receivable. The facility bears interest at the lender’s prime rate plus 0.5% (5.25% at September 30, 2004) and may be adjusted if the Company achieves certain operating results, down to the lender’s prime rate, but no less than 4.5%. As of September 30, 2004 and December 31, 2003, Lionbridge had no borrowings outstanding under this line of credit.

5. STOCKHOLDERS’ EQUITY

Stock-Based Compensation

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 vested after one and two years of continued employment with the Company. 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. In October 2003, the Company 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. During the nine months ended September 30, 2004, upon the separation of an employee, deferred compensation of $423,000, representing the fair market value of 37,500 shares of restricted common stock originally issued to the employee in October 2003, was reversed. The restricted common stock issued in 2003 vests over four years from the date of grant on each anniversary date.

In February 2004, Lionbridge recorded deferred compensation of $510,000, representing the fair market value of 69,761 shares of restricted common stock issued to certain employees at that time. Restrictions on disposition lapse over eighteen months from the date of grant on each nine month anniversary date. In March 2004, Lionbridge recorded deferred compensation of $28,000, representing the fair market value of 3,000 shares of restricted common stock issued to an employee at that time. Restrictions on disposition lapse over two years from the date of grant on each anniversary date. On August 19, 2004, Lionbridge recorded deferred compensation of $1.4 million, representing the fair market value of 171,887 restricted common stock units issued to the Company’s Chief Executive Officer. Restrictions on disposition lapse over five years from the date of grant on each anniversary date.

Total amortization of deferred compensation was $176,000 and $69,000 for the three-month periods ended September 30, 2004 and 2003, respectively and $419,000 and $295,000 for the nine-month periods ended September 30, 2004 and 2003, respectively. The amortization of deferred compensation for the nine month period ended September 30, 2004 is net of a reversal of $56,000 previously recorded in relation to the 37,500 shares of restricted common stock terminated during that period.

6. COMPREHENSIVE INCOME

Total comprehensive income consists of net income and the net change in foreign currency translation adjustment, which is the only component of accumulated other comprehensive income. Total comprehensive income was approximately $1.5 million and $42,000 for the three-month periods ended September 30, 2004 and 2003, respectively, and $5.7 million and $1.3 million for the nine-month periods ended September 30, 2004 and 2003, respectively.

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LIONBRIDGE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

7. NET INCOME PER SHARE

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding. For purposes of calculating diluted earnings per share, the denominator includes both the weighted average number of shares of common stock outstanding and the number of dilutive common stock equivalents such as stock options, unvested restricted stock and warrants, as determined using the treasury stock method.

Shares used in calculating basic and diluted earnings per share for the three and nine-month periods ended September 30, 2004 and 2003, respectively, are as follows:

Options, unvested restricted stock and warrants to purchase 2,270,960 and 988,013 shares of common stock for the three-month periods ended September 30, 2004 and 2003, respectively, and 1,346,194 and 976,086 for the nine-month periods ended September 30, 2004 and 2003, respectively, were not included in the calculation of diluted net income per share, as their effect would be anti-dilutive.

8. MERGER, RESTRUCTURING AND OTHER CHARGES

During the nine months ended September 30, 2004, Lionbridge recorded restructuring and other charges of $1.9 million primarily related to the acquisition and integration of Mentorix. The $1.9 million of restructuring and other charges included $705,000 for anticipated losses recorded on vacated facilities, $146,000 for the impairment of long-lived assets, and $1.0 million for workforce reductions in the U.S., Brazil, France, Ireland, Germany, the Netherlands and China, consisting of fifty-nine technical, twelve administrative, and four sales staff. Of the $1.9 million of restructuring and other charges recorded during the nine months ended September 30, 2004, $1.1 million relates to the Company’s Globalization reporting segment, $511,000 to the Testing segment and $233,000 to Corporate and Other. As of June 30, 2004, Lionbridge had completed its restructuring plan, initiated in the third quarter of 2003, in conjunction with the acquisition and integration of Mentorix. Since inception of this restructuring plan, Lionbridge has recorded $2.8 million in related restructuring and other charges.

During the three and nine months ended September 30, 2003, Lionbridge recorded a restructuring charge of $379,000 reflecting workforce reductions in the U.S. and Paris, France, consisting of ten technical and ten administrative staff. All employees had been informed of their termination and related benefits in the period that the charge was recorded.

The following table summarizes the accrual activity for the nine months ended September 30, 2004 and 2003, respectively, by initiative:

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During the nine months ended September 30, 2004, Lionbridge recorded $27,000 in revisions of estimated liabilities which related to employee severance and related items, due to the reversal of excess accruals for employee termination costs previously estimated and recorded as part of its restructuring plan related to the acquisition and integration of Mentorix.

During the nine months ended September 30, 2003, Lionbridge recorded $14,000 in revisions of estimated liabilities which related to employee severance and related items, due to the reversal of excess accruals for employee termination costs previously estimated and recorded in connection with its May 2000 acquisition of INTL.com and July 2002 acquisition of eTesting Labs. These accruals had been initially recorded in accordance with Emerging Issues Task Force Abstract 95-3, Recognition of Liabilities in Connection With a Purchase Business Combination (“EITF 95-3”), and related literature.

During the nine months ended September 30, 2003, Lionbridge also recorded $284,000 in revisions of lease termination costs and other charges, resulting from the renegotiation and termination of leases for vacated facilities in the United States obtained in connection with the Data Dimensions and eTesting Labs acquisitions in June 2001 and July 2002, respectively. Lionbridge had originally established these reserves in accordance with EITF 95-3. The resulting credit from these revisions was recorded as a reduction to goodwill previously recognized. The reserves initially established in connection with the acquisition of Data Dimensions were based on the Company’s expectations of future lease costs on vacant facilities, adjusted for sub-lease income. In May 2003, after the premises had been vacant for twenty-three months, the Company was able to negotiate an early termination of one of the lease arrangements such that future lease costs were less than originally anticipated. The reserve initially established in connection with the acquisition of eTesting Labs was based on the Company’s expectations of future lease costs for a vacant facility, as well as other facility exit costs. The Company was able to exit and turn over the property sooner and under more favorable terms than initially anticipated. These favorable negotiations and events had not been anticipated by the Company at the time the original reserves were recorded, and resulted in the revisions of estimated liabilities recorded.

At September 30, 2004, the consolidated balance sheet included accruals totaling $631,000 primarily related to the integration of the Company’s India operation. Lionbridge currently anticipates that $472,000 of this total will be fully utilized within twelve months. The remaining $159,000 relates to lease obligations on unused facilities expiring through 2007 and is included in long-term liabilities.

9. SEGMENT INFORMATION

Lionbridge has determined that its operating segments are those that are based on its method of internal reporting, which separately presents its business based on the services performed. Lionbridge has combined those segments, which meet the aggregation criteria of SFAS No. 131 in determining its reportable segments. The Company is organized into two reportable operating segments: Globalization and Testing.

The Globalization segment provides product and content globalization services that enable the development, worldwide multilingual release and ongoing maintenance of products, content and related technical support, training materials, and sales and marketing information. The Testing segment provides comprehensive testing of software, hardware and Web sites, as well as product certification programs. All other unallocated enterprise costs are reflected in the “Corporate and Other” category.

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LIONBRIDGE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The table below presents information about the reported net income of the Company for the three and nine-month periods ended September 30, 2004 and 2003. Asset information by reportable segment is not reported, since the Company does not produce such information internally.

10. OTHER INTANGIBLE ASSETS

The following table summarizes other intangible assets at September 30, 2004 and December 31, 2003, respectively:

Future amortization expense related to intangible assets held at September 30, 2004 is expected to be $9,000, $37,000 and $27,000 for the years ended December 31, 2004, 2005 and 2006, respectively.

11. CONTINGENCIES

Lionbridge is a party to a proposed settlement of purported securities class action litigation filed in the United States District Court for the Southern District of New York against Lionbridge and approximately 300 other public companies relating to their initial public offerings. If approved by the Court, the proposed settlement would result in the dismissal of the securities class action claims filed against the Company and certain of its officers and directors in that court on or about July 24, 2001 (an amended complaint was filed on April 19, 2002), as well as the securities class action claims filed in that court against the other public companies participating in the proposed settlement. With respect to this proposed settlement in principle, since the filing of Lionbridge’s Form 10-K for the year ended December 31, 2003, formal settlement documents have been executed by the parties and filed with the Court. The plaintiffs in the case against Lionbridge, along with the plaintiffs in the other related cases against the other issuer defendants who have agreed to the proposed settlement, have requested preliminary approval by the Court of the settlement, including the form of notice of the proposed settlement that will be sent to members of the proposed classes in each settling case. Certain underwriters who were named as defendants in the settling cases, and who are not parties to the proposed settlement, have filed an opposition to preliminary approval of the settlement of these cases. In mid-September 2004, the Court requested additional information concerning the adequacy of the settlement amount and how plaintiffs intend to allocate any consideration paid under the settlement among the more than 300 separate class actions that are included in the settlement, and counsel for the plaintiffs and for the issuer defendants are in the process of providing to the Court the information that it has requested. Consummation of the proposed settlement remains conditioned on, among other things, both preliminary and final Court approval of the proposed settlement. If the Court preliminarily approves the proposed settlement, it will direct that notice of the terms of the proposed settlement be published in the newspaper and mailed to all proposed class members and schedule a fairness hearing, at which objections to the proposed settlement will be heard. Thereafter, the Court will determine whether to grant final approval to the proposed settlement.

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12. RECENT ACCOUNTING PRONOUNCEMENTS

In March 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue 03-6, “Participating Securities and the Two-Class Method under Financial Accounting Standards Board (“FASB”) Statement No. 128, “Earnings Per Share.” This issue involves the computation of earnings per share for companies that have multiple classes of common stock or have issued securities other than common stock that participate in dividends with common stock (participating securities). The EITF concluded that companies having participating securities are required to apply the two-class method to compute earnings per share. The two-class method is an earnings allocation method under which earnings per share is calculated for each class of common stock and participating security considering both dividends declared (or accumulated) and participation rights in undistributed earnings as if all such earnings had been distributed during the period. This issue is effective for fiscal periods beginning after March 31, 2004. Lionbridge does not have any participating securities, therefore EITF 03-6 has no effect on its earnings per share, for the three and nine months ended September 30, 2004.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The matters discussed in this Form 10-Q include forward-looking statements that involve risks or uncertainties. These statements are neither promises nor guarantees, but are based on various assumptions by management regarding future circumstances over many of which Lionbridge has little or no control. A number of important risks and uncertainties, including those identified under the captions “Factors That May Affect Future Results” in Lionbridge’s Annual Report on Form 10-K, filed March 11, 2004 (SEC File No. 000-26933) and “Risk Factors” in Lionbridge’s Registration Statements on Form S-3 (SEC File Nos. 333-106693 and 333-107753) as well as risks and uncertainties discussed elsewhere in this Form 10-Q could cause Lionbridge’s actual results to differ materially from those in the forward-looking statements. Those risks and uncertainties include the following: (i) the success of Lionbridge’s continued diversification of its customer base; (ii) termination of customer contracts prior to the end of their term; (iii) Lionbridge’s dependence on clients’ product releases to generate revenues, in particular with respect to technology clients; (iv) the loss of a major client or customer; (v) the size, timing and recognition of revenue from major clients; (vi) customer delays or postponements of services; (vii) the impact of foreign currency fluctuations on its operating results and revenue growth; (viii) risks associated with the management of growth; (ix) market acceptance of new service offerings; (x) the timing, impact and success of cost reduction initiatives; (xi) the timing, impact and success of efforts to optimize its scalable model; (xii) the failure to keep pace with the rapidly changing requirements of its customers; (xiii) benefits realized from the acquisition of Mentorix (“Lionbridge India”); (xiv) the ability to implement and realize cost efficiencies, the ability to recognize the benefits from offshore production capabilities and restructuring activities, and the timing and size of such restructuring activities; (xv) Lionbridge’s ability to attract and retain key personnel; (xvi) Lionbridge being held liable for defects or errors in its solutions or services; (xvii) political, economic and business fluctuations in international markets; as well as risks of additional downturns in conditions generally, and in the information technology and software industries specifically, and the risks associated with competition and competitive price pressures; and (xviii) Lionbridge’s ability to forecast revenue and operating results. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. The forward-looking statements in this 10-Q are made as of the date of this filing only, and Lionbridge does not undertake to update or supplement these statements due to changes in circumstances or otherwise.

Introduction

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.

As of September 30, 2004, there are no material changes in Lionbridge’s critical accounting policies and estimates as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

For the nine-month period ended September 30, 2004, Lionbridge’s income from operations was $6.1 million, with net income of $5.9 million. For the year ended December 31, 2003, the Company’s income from operations was $7.5 million, with net income of $2.5 million. Prior to 2002, the Company experienced operating losses, as well as net losses, for each year of its operations and, as of September 30, 2004, had an accumulated deficit of $100.2 million.

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Revenue Recognition

Lionbridge recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition”. Accordingly, we recognize revenue when: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectibility of those fees.

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. Amounts billed in excess of revenue are recorded as deferred revenue. Revenue is generated from the provision of services to its customers for content development; product and content globalization; software and hardware testing; product certification; and application development and maintenance.

Content development, software and hardware testing, and application development and maintenance projects are time and expense priced contacts, and revenue is recognized using a time and expense basis, primarily on labor costs incurred to date.

Product and content globalization and product certification projects are fixed price contracts and revenue is recognized as services are delivered using a percentage-of-completion assessment based primarily on labor costs incurred to date as a percentage of management’s estimate of total costs of individual projects.

The delivery of Lionbridge’s product and content globalization involves, and is dependent on, the translation of content by subcontractors and in-house employees. As the time to translate each word of content within a project is relatively uniform, labor input is truly reflective of the delivery of the contracted service and an appropriate metric for the measurement of progress in delivering such services.

The use of a percentage-of-completion assessment of service delivery 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 and prices for subcontractor services, and the availability of subcontractor services. When adjustments in estimated project costs are identified, anticipated losses, if any, are recognized in the period in which they are determined.

Lionbridge’s product and content globalization agreements with its customers may provide the customer with a fixed and limited time period following delivery during which Lionbridge will attempt to address any non-conformity to previously agreed upon objective specifications relating to the work, either in the form of a limited acceptance period or a post-delivery warranty period. Management believes recognition of revenue at the time the services are delivered is appropriate, because its obligations under such provisions are limited in time, limited in scope, and historically have not involved significant costs. In the future, if the post delivery acceptance or warranty provisions become more complex or include subjective acceptance criteria, Lionbridge may have to revise its revenue recognition policy appropriately, which could affect the timing of revenue recognition.

Merger, Restructuring and Other Charges

During the nine months ended September 30, 2004, Lionbridge recorded restructuring and other charges of $1.9 million primarily related to the acquisition and integration of Mentorix. The $1.9 million of restructuring and other charges included $705,000 for anticipated losses recorded on vacated facilities, $146,000 for the impairment of long-lived assets, and $1.0 million for workforce reductions in the U.S., Brazil, France, Ireland, Germany, the Netherlands and China, consisting of fifty-nine technical, twelve administrative, and four sales staff. Of the $1.9 million of restructuring and other charges recorded during the nine months ended September 30, 2004, $1.1 million relates to the Company’s Globalization reporting segment, $511,000 to the Testing segment and $233,000 to Corporate and Other. As of June 30, 2004, Lionbridge had completed its restructuring plan, initiated in the third quarter of 2003, in conjunction with the acquisition and integration of Mentorix. Since inception of this restructuring plan, Lionbridge has recorded $2.8 million in related restructuring and other charges.

Non-Cash Charges

Stock-Based Compensation. Lionbridge recorded deferred compensation of $3.8 million in 1999, representing the difference between the exercise price of stock options granted and the fair market value for accounting purposes of the underlying common stock at the date of the grant. As of September 30, 2004, the deferred compensation balance, adjusted for forfeitures, has been fully amortized. Of the total deferred compensation amount, $2.7 million had been amortized and $1.1 million had been reversed due to cancellation of the underlying options. The amortization of this deferred compensation was recorded as an operating expense and totaled $106,000 for the nine month period ended September 30, 2003.

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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. The deferred compensation has been amortized over the two-year period during which the restrictions on the common stock lapsed. The amortization of this deferred compensation was recorded as an operating expense and totaled $60,000 and $180,000, respectively, for the three and nine month periods ended September 30, 2003.

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 over four years from the date of grant on each anniversary date. The deferred compensation is being amortized over the four-year period during which the restrictions on the common stock lapse. The amortization of this deferred compensation is recorded as an operating expense and totaled $32,000 and $96,000, respectively, for the three and nine month periods ended September 30, 2004 and $9,000 for the three and nine month periods ended September 30, 2003.

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 over four years from the date of grant on each anniversary date. The deferred compensation is being amortized over the four-year period during which the restrictions on the common stock lapse. During the quarter ended June 30, 2004, unamortized deferred compensation of $423,000, representing the fair market value of 37,500 shares of restricted common stock issued to an employee at that time, was reversed upon the separation of the employee. The amortization of this deferred compensation is recorded as an operating expense and totaled $23,000 and $77,000, respectively, for the three and nine month periods ended September 30, 2004, net of a reversal of $56,000 of amortization previously recorded in relation to the 37,500 shares of restricted common stock terminated during the quarter ended June 30, 2004.

In February 2004, Lionbridge recorded deferred compensation of $510,000, representing the fair market value of 69,761 shares of restricted common stock issued to certain employees at that time. Restrictions on disposition lapse over eighteen months from the date of grant on each nine month anniversary date. The deferred compensation is being amortized over the eighteen month period during which the restrictions on the common stock lapse. The amortization of this deferred compensation is recorded as an operating expense and totaled $86,000 and $206,000, respectively, for the three and nine month periods ended September 30, 2004.

In March 2004, Lionbridge recorded deferred compensation of $28,000, representing the fair market value of 3,000 shares of restricted common stock issued to an employee at that time. Restrictions on disposition lapse over two years from the date of grant on each anniversary date. The deferred compensation is being amortized over the two-year period during which the restrictions on the common stock lapse. The amortization of this deferred compensation is recorded as an operating expense and totaled $3,000 and $8,000, respectively, for the three and nine month periods ended September 30, 2004.

On August 19, 2004, Lionbridge recorded deferred compensation of $1.4 million, representing the fair market value of 171,887 shares of restricted common stock units issued to the Company’s Chief Executive Officer. Restrictions on disposition lapse over five years from the date of grant on each anniversary date. The deferred compensation is being amortized over the five-year period during which the restrictions on the common stock lapse. The amortization of this deferred compensation is recorded as an operating expense and totaled $32,000 for the three and nine month periods ended September 30, 2004.

Lionbridge currently expects to amortize the following remaining amounts of deferred compensation existing as of September 30, 2004 in the fiscal periods as follows:

Accretion of Discount on Debt. Interest expense for the three and nine month periods ended September 30, 2003 includes $51,000 and $356,000, respectively, for the accretion of a $3.0 million discount on subordinated debt with a principal amount of $8.0 million. The $3.0 million discount on the note was accreted as interest expense on a straight-line basis over the period from November 1, 2001 to July 31, 2003. 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.

Accretion of Warrants Issued for Common Stock. In May 2002, Lionbridge issued two seven-year warrants, related to certain subordinated debt agreements for the purchase of up to 400,000 shares, in the aggregate, of common stock at an exercise price of

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$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 being amortized as interest expense over the remaining term of the notes, resulting in interest expense of $230,000 and $367,000, respectively, for the three and nine months ended September 30, 2003. An incremental $207,000 was recognized as accelerated deferred financing costs in July 2003 upon early repayment of this debt.

In August 2002, Lionbridge issued two seven-year warrants related to certain subordinated debt agreements 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 being amortized as interest expense over the remaining term of the notes, resulting in interest expense of $3,000 and $27,000, respectively, for the three and nine months ended September 30, 2003. In August 2003, the Company paid the balance outstanding on these notes.

Results of Operations

The following table sets forth for the periods indicated certain unaudited 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 three and nine months ended September 30, 2004 and 2003, respectively:

Revenue for the quarter ended September 30, 2004 was $37.6 million, an increase of $929,000, or 2.5%, from $36.7 million for the quarter ended September 30, 2003. The increase was due to $2.9 million of revenue growth in Globalization, partially offset by a decrease of $2.0 million in Testing revenue as compared to the corresponding period of 2003. The $2.9 million, or 11.2%, increase in

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Globalization revenue from $26.2 million in the quarter ended September 30, 2003 to $29.2 million in the quarter ended September 30, 2004 was due to approximately $2.5 million of revenue attributable to Lionbridge’s acquisition of Mentorix in September 2003 and the remainder due to revenue growth from new customer engagements. The decrease of $2.0 million, or 19.1%, in Testing revenue from $10.5 million in the quarter ended September 30, 2003 to $8.5 million in the quarter ended September 30, 2004 was primarily due to a general slow down in market demand for technology applications products and certification testing, and corresponding customer delays and cancellations of testing engagements. Testing revenues, and to a lesser extent Globalization revenues, were also negatively impacted by project delays, and by a decline in the number and scope of short term, project-based engagements from the Company’s technology clients that occurred principally in the latter part of the quarter ended September 30, 2004.

For the nine months ended September 30, 2004, revenue was $118.5 million, an increase of $13.6 million, or 13.0%, as compared to $104.8 million for the same period of the prior year. Globalization revenue increased $16.2 million, or 21.7%, to $90.7 million from $74.6 million. This increase was primarily due to approximately $9.8 million of Globalization revenue attributable to Lionbridge’s acquisition of Mentorix with the remainder attributable to organic revenue growth. This increase was partially offset by a decrease in Testing revenue of $2.5 million, or 8.3%, to $27.7 million from $30.3 million in the comparable period of 2003 for reasons noted above.

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 three and nine month periods and as a percentage of revenue for the three and nine months ended September 30, 2004 and 2003, respectively:

For the quarter ended September 30, 2004, as a percentage of revenue, cost of revenue increased to 64.6% as compared to 59.8% for the corresponding quarter of the prior year. Globalization cost of revenue increased slightly to 65.0% as compared to 64.7% for the corresponding period of the prior year. Testing cost of revenue increased to 63.0% for the quarter ended September 30, 2004 as compared to 47.3% for the corresponding quarter of the prior year. The increase was primarily the result of the unfavorable impact of under-utilized capacity in the VeriTest testing laboratories due to lower than anticipated Testing revenue during the quarter, and certain costs incurred in the establishment of a testing consulting practice and the integration of the Storage Solutions Lab.

For the quarter ended September 30, 2004, cost of revenue increased $2.4 million to $24.3 million as compared to $21.9 million for the corresponding period of the prior year. This increase was primarily due to the incremental expense required to support the growth in related revenue, approximately $1.0 million of additional costs related to the acquisition of Mentorix and $735,000 of costs incurred in the establishment of a testing consulting practice and the integration of the Storage Solutions Lab. These increases were partially offset by the favorable impact of cost savings resulting from restructuring activities initiated in 2003.

For the nine months ended September 30, 2004, as a percentage of revenue, cost of revenue increased to 62.0% as compared to 60.5% for the corresponding period of the prior year. Globalization cost of revenue decreased to 63.0% as compared to 65.2% for the corresponding period of the prior year, primarily due to the benefit of lower labor costs in India and restructuring activities primarily in Europe. These decreases were partially offset by increased outsourcing costs resulting from variations in mix of localization services provided as compared to the corresponding period of the prior year. Testing cost of revenue increased to 58.7% for the nine months ended September 30, 2004 as compared to 48.9% for the corresponding period of the prior year. The increase was primarily the result of the unfavorable impact of under-utilized capacity caused by lower than anticipated Testing revenue during the period and certain costs incurred in the establishment of a testing consulting practice and the integration of the Storage Solutions Lab.

For the nine months ended September 30, 2004, cost of revenue was $73.4 million, an increase of $10.0 million, or 15.8%, as compared to $63.4 million for the same period of 2003. Of this $10.0 million increase, approximately $4.0 million represents incremental costs related to the acquisition of Mentorix and $1.5 million is attributable to certain costs incurred in the establishment of a testing consulting practice and the integration of the Storage Solutions Lab. The remainder of the increase relates primarily to incremental expense required to support the growth in related revenue. Globalization cost of revenue increased $8.5 million to $57.1 million for the nine months ended September 30, 2004 from $48.6 million in the comparable period of 2003. Approximately $4.0

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million of the increase represents incremental costs related to the acquisition of Mentorix. The remainder relates primarily to increased labor and outsourcing costs required to support the growth in related revenue. Testing cost of revenue increased $1.5 million to $16.3 million for the nine months ended September 30, 2004, from $14.8 million in the comparable period of 2003. This increase is primarily attributable to certain costs incurred in the establishment of a testing consulting practice and the integration of the Storage Solutions Lab.

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, the dollar variance as compared to the prior year and as a percentage of revenue for the three and nine months ended September 30, 2004 and 2003, respectively: