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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

For the fiscal year ended: December 31, 2004

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, 2004, was approximately $262.1 million (based on the closing price of the registrant’s Common Stock on June 30, 2004, of $7.65 per share).

The number of shares outstanding of the registrant’s $.01 par value Common Stock as of February 16, 2005 was 47,407,227.

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, 2004. 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, 2004

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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 within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements 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 enterprise content and technology applications 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, consumer technology products, 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 products, life sciences, publishing, financial services, manufacturing and retail industries. Lionbridge’s solutions include product and content globalization; content and eLearning courseware development; 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 content and products, enhance return on enterprise application investments, increase workforce productivity and reduce costs. Lionbridge provides the following core benefits to clients:

Integrated Full-Service Offering.    Lionbridge serves as an outsourcing 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 content and technology applications for their customers, partners and employees throughout the world. Lionbridge’s testing services enable clients to achieve superior product quality and reduce downstream support costs, while its product certification and competitive analysis testing services confirm that 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 content and technology 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 information to customers and employees throughout their global organization.

Established Global Presence.    Lionbridge operates globalization and testing solution centers in nine countries. 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 requirements 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 across all Lionbridge production sites throughout a client project to ensure high quality, reliability and consistency. They also increase Lionbridge’s productivity and provide a baseline for continuous process improvement and the transfer of knowledge and expertise throughout 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 organizations conduct business and communicate. By offering a one-stop solution for global content and technology needs, Lionbridge has become a key outsource provider to companies operating internationally. Lionbridge compliments its globalization offering by providing its clients with content development, testing and application development and maintenance, thereby providing a complete outsourcing solution for its clients’ global content and technology requirements.

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 Services

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 marketing content to meet cultural, linguistic and business requirements of international markets. By globalizing content, organizations can more effectively communicate with their customers, partners and employees on a worldwide basis. Lionbridge provides multilingual content services which include translating and maintaining its clients’ Web-based content, eLearning courseware and training materials, technical support databases, 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 significant 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 documentation and packaging. 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 software applications, consumer devices and hardware products that are adapted to the cultural, linguistic and technical requirements of specific international markets.

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As an example, Lionbridge provides localization for a global technology provider that releases dozens of new consumer devices, hardware and software applications in more than 20 countries every year. Lionbridge localizes 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 and expects to reduce its global release costs while increasing its customer satisfaction worldwide.

Content Development.    Content development is the creation, design and deployment of content and related assets including rich media, text, images, and animations. Lionbridge provides content development solutions, including eLearning courseware development, and production and integration of content within a technology platform. As part of this solution, Lionbridge creates content, develops and integrates applications for authoring and managing 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 education curricula. Lionbridge is creating and converting multimedia courseware, 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, software engineering and program management 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 shorten 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 development, application maintenance and code modernization. Core to this solution is Lionbridge’s global team approach that combines program managers either onsite at the client’s operation with application development and maintenance professionals located in service centers in Ireland, China and India. This global delivery model leverages Lionbridge’s worldwide 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 business and IT applications.

For example, for a Fortune 500 provider of managed care and specialty healthcare insurance services, Lionbridge is modernizing several of the company’s back-end applications by migrating the applications to a newer, more flexible technology platform. Concurrently, Lionbridge is enhancing and maintaining the client’s legacy systems with a combination of onsite program management and offshore 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 claims processing, billing and other business-critical applications.

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

Lionbridge uses a combination of internal and external translators, as well as translation software, for its globalization services. Lionbridge directly employs translators, linguistic engineers, publishers and editors. Lionbridge also maintains long-term, strategic relationships with an extensive network of 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

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globalization, RGM offers a systematic approach to adapting products and content to a target locale’s technical, linguistic and cultural expectations. Lionbridge’s RGM also standardizes processes throughout every Lionbridge solution center, defines key activities, and specifies goals for each localization project. 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’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 India is also registered as an ISO-9001:2002 facility.

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 new-generation 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. VeriTest also conducts gap analysis against best practices and provides recommendations for improvement regarding a client’s quality assurance processes, tools and testing organization.

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.

Product Certification.    VeriTest provides product certification programs for many leading software, hardware and telecommunications companies, including Microsoft, AT&T Wireless, BMC Software, Novell, HP, Alcatel and EMC. 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.

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

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

See Note 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 59 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, 2004. 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, 2004:

In 2004, each of HP and Microsoft accounted for approximately 17% of total revenue. During the year, Lionbridge provided testing and globalization services for more than 20 operating sites within the HP organization. In 2003, HP and Microsoft accounted for approximately 19% and 17% of total revenue, respectively. In 2002, HP accounted for approximately 21% of total revenue. No other client individually accounted for more than 10% of revenue in 2004, 2003 or 2002. Lionbridge’s ten largest clients accounted for approximately 59%, 55% and 50% of revenue in 2004, 2003 and 2002, respectively.

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. Many companies address their globalization requirements through in-house capabilities. Others outsource their globalization needs, most often to regional vendors of translation services with specific subject matter or language expertise, or utilize technology-based translation solutions. 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. 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 content and technology application lifecycle; its global infrastructure that supports cost effective, high quality client delivery worldwide; 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, 2004, Lionbridge had 1,798 employees. Of these, 1,519 were consulting and service delivery professionals and 279 were management and administrative personnel performing sales, operations, marketing, process and technology, research and development, finance, accounting, and administrative functions.

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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. Key organizational development initiatives include ongoing technical and project management classes as well as career path management and guidance.

A large number of Lionbridge’s employees are eligible to participate in Lionbridge’s stock option program and in its employee stock purchase program.

Lionbridge’s employees in France are represented by a labor union, and there is a works councils in the Netherlands. 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, 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; Valbonne, France; Rendsburg, 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 principal 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 ( the “Court”) 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

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underwriting of their public offerings. On July 15, 2002, the Company together with the other issuers named as defendants in these coordinated proceedings, filed a collective motion to dismiss the complaint on various legal grounds common to all or most of the issuer defendants. In October 2002, the claims against officers and directors were dismissed without prejudice. In February 2003, the Court issued its ruling on the motion to dismiss, ruling that the claims 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 obtaining both preliminary and final approval by the Court. Formal settlement documents were submitted to the Court in June 2004, together with a motion asking the Court to preliminarily approve the form of settlement. 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 proposed settlement of those cases. On February 15, 2005, the court issued an order preliminarily approving the proposed settlement in all respects but one. The plaintiffs and the issuer defendants are in the process of assessing whether to proceed with the proposed settlement, as modified by the court. If the plaintiffs and the issuer defendants elect to proceed with the proposed settlement, as modified by the court, they will submit revised settlement documents to the court. The underwriter defendants may then have an opportunity to object to the revised settlement documents. If the Court approves the revised settlement documents, it will direct that notice of the terms of the proposed settlement be published in a 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.

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, 2004.

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PART II

Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

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 February 14, 2005, there were 416 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 Small Cap Market under the same trading symbol on August 30, 2002. 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 Cap Market. The quotations represent interdealer quotations, without adjustments for retail mark ups, mark downs, or commissions, and may not necessarily represent actual transactions.

During 2004, the Company purchased restricted shares from certain employees, to cover withholding taxes due from the employees at the time the shares vested – essentially a net issuance of restricted shares. In addition, upon the termination of an employee in June 2004, 37,500 unvested restricted shares were forfeited. The following table provides information about Lionbridge’s issuer purchases of equity securities for the year ended December 31, 2004.

Lionbridge has not paid any cash dividends on its common stock and currently intends to retain any future earnings for use in its business.

Item 6.    Selected Consolidated Financial Data

The selected consolidated financial data as of December 31, 2004 and 2003 and for each of the three years in the period ended December 31, 2004 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, 2002, 2001, and 2000 and for the years ended December 31, 2001 and 2000 have been derived from 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 enterprise content and technology applications 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, consumer technology products, 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 products, life sciences, publishing, financial services, manufacturing and retail industries. Lionbridge’s solutions include product and content globalization; content and eLearning courseware development; software and hardware testing, product certification and competitive analysis; and application development and maintenance.

In 2004, Lionbridge’s operating profit was $7.2 million with net income of $7.1 million. In 2003, the Company’s operating profit 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 December 31, 2004, had an accumulated deficit of $98.9 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 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.

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Lionbridge reviewed the development, selection, and disclosure of the following critical accounting policies and estimates with its 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 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 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.

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:

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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, the Company measures any impairment using projected discounted cash flow models. With the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”, on January 1, 2002, the Company discontinued the amortization of goodwill. 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, as noted above. During 2004 and 2003, the Company performed its annual test of goodwill to determine if there was impairment. These tests determined that each reporting unit’s fair value exceeded the carrying value of the net assets of each respective reporting unit, using projected discounted cash flow modeling. No impairment was required to be recorded related to the Company’s annual impairment testing in either year. The impairment review is based upon estimated future discounted cash flows. Estimating future cash flows requires management to make projections that can differ materially from actual results.

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

Acquisitions

Lionbridge has grown its business since inception through a combination of acquisitions and organic growth. Such acquisitions through December 31, 2004 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, 2004 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. During 2004, goodwill recorded in connection with the acquisition of Mentorix was reduced by $78,000 due to the reversal of excess acquisition date accruals primarily for employee benefits. Through its acquisition of Mentorix, the Company expanded its application code development services and added eLearning content development capabilities.

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

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excess acquisition date accruals on vacant premises. Through its acquisition of eTesting, the Company expanded its VeriTest test offerings with new services such as competitive analysis, usability and load and stress testing.

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

Lionbridge recorded restructuring and other charges of $2.3 million in the year ended December 31, 2004. Of the $2.3 million, $1.9 million related primarily to a restructuring plan initiated in the third quarter of 2003, in conjunction with the acquisition and integration of Mentorix and included $726,000 for anticipated losses recorded on vacated facilities, $146,000 for the impairment of long-lived assets, and $982,000 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. This restructuring plan was completed during the second quarter of 2004. Since inception of this plan, and including charges recorded in 2003, Lionbridge has recorded $2.8 million in the aggregate of related restructuring and other charges.

During the fourth quarter of 2004, the Company recorded $459,000 of restructuring and other charges for workforce reductions in Ireland, France and the U.S., consisting of five technical and four administrative staff.

Of the $2.3 million of restructuring and other charges recorded in the year ended December 31, 2004, $1.5 million relates to the Company’s Globalization reporting segment, $574,000 to the Testing segment and $240,000 to Corporate and Other. Of the $1.7 million of cash payments in 2004, $1.2 million and $375,000 related to the Globalization and Testing Segments, respectively, and $121,000 was incurred in Corporate and Other.

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 twenty-five technical staff, one sales and marketing staff member and eight administrative staff. Of the $943,000 of restructuring and other charges recorded in the year ended December 31, 2003, $906,000 relates to the Company’s Globalization reporting segment and $37,000 to the Testing segment.

The following table summarizes the reserve activity, excluding long-lived asset impairments, for the years ended December 31, 2004, 2003 and 2002, respectively:

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Lionbridge recorded $45,000 in revisions of estimated liabilities in the year ended December 31, 2004 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.

Lionbridge recorded $14,000 in revisions of estimated liabilities in the year ended December 31, 2003 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.

Lionbridge also recorded $284,000 in revisions of lease termination costs and other charges in the year ended December 31, 2003, 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 December 31, 2004, the consolidated balance sheet includes accruals totaling $784,000 primarily related to employee terminations costs and vacated facilities. Lionbridge currently anticipates that $655,000 of this will be fully utilized in 2005. The remaining $129,000 relates to lease obligations on unused facilities expiring through 2007 and is included in long-term liabilities.

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, 2004. The amortization of deferred compensation was recorded as an operating expense and totaled $106,000 and $488,000 for the years ended December 31, 2003 and 2002, respectively.

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 has been amortized over the two-year period during which the transfer and sale restrictions on the common stock lapsed. The amortization of deferred compensation was 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

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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 $129,000 and $41,000 for the years ended December 31, 2004 and 2003, respectively.

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 $156,000 and $34,000 for the years ended December 31, 2004 and 2003, respectively, 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 $291,000 for the year ended December 31, 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 $12,000 for the year ended December 31, 2004.

In August 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 the third, fourth and fifth anniversary of grant 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 $100,000 for the year ended December 31, 2004.

Lionbridge currently expects to amortize the following remaining amounts of deferred compensation as of December 31, 2004 in the years ending:

Discount on Debt

In June 2001, Lionbridge issued $5.0 million of subordinated debt with an original issue discount of $738,000 for 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

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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 and 2002 included $356,000 and $610,000, 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, were 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 August 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.

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 2002 and 2003, Lionbridge implemented key elements of its strategy for market expansion and long-term growth. The Company built upon its code and content service offerings, expanded its offshore capabilities and developed an integrated services offering through its global infrastructure. During this period, the Company also increased revenue from its existing customers. In 2003, the Company acquired its India-based operation. This provided Lionbridge with a cost effective, highly-skilled delivery center to meet client needs for cost efficient and high quality offshore delivery. The new India solution center also provided Lionbridge with skilled professionals with deep expertise in content-rich application development and eLearning capabilities that augment the Company’s globalization and testing solutions and allow the Company to expand its growth opportunities.

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In 2004, Lionbridge expanded its track record of end market expansion and laid a foundation for accelerated growth by executing three strategic objectives for the year:

Integration of Offshore Operations

In 2004, Lionbridge transformed many of its traditional U.S. and European-based projects to an offshore model in order to meet client demand for larger-scale programs at lower prices. While this migration may have reduced the Company’s overall revenue expansion in 2004, it drove significant year on year revenue growth within its India operation. The Company also implemented training and skill development programs in India, enabling the professionals offshore to become better equipped to manage language-rich applications. As a result, the Company is increasing productivity of its offshore solution centers and delivering high quality services for clients.

The Company is using its India based solution center to complement its global delivery model with scalable engineering and development resources. In 2005, Lionbridge plans to expand its offshore solution centers in India and China. This will give Lionbridge the capability and capacity to expand programs with existing customers, gain new efficiencies throughout the Company, and to secure continued competitive advantage.

Optimization of a Global Delivery Infrastructure

Over the past nine years, Lionbridge has built a global infrastructure that optimizes its core globalization and testing service offerings. During this time, the Company has also expanded the scale and breadth of client solutions. Through the expansion of its operational infrastructure and through its establishment of offshore delivery capabilities, Lionbridge has responded to its customers needs for a complete service offering that unifies content and application development, multilingual delivery, and testing services as one outsourcing program. In 2004, the Company began to successfully secure new, larger-scale customer programs and expand the scale and scope of its relationships with existing clients.

In 2004, the Company also enhanced its global delivery infrastructure by initiating the deployment of new generation advanced language technology. In 2005, Lionbridge plans to apply these recent advancements in web-architected translation memory and workflow technologies to traditional business processes, in order to enhance the Company’s scalability, flexibility, and quality.

By further expanding and enhancing its operations, sales strategies and technology platforms, Lionbridge expects to secure new large scale customer programs, drive additional operational efficiencies and improve quality and productivity for its clients.

Expansion of its Client Base across Diverse Industries

As a result of the Company’s enhanced capabilities and new development skills, Lionbridge established new, large-scale client relationships in 2004, such as Pearson, Google, Thomson NETg, and Beverly Enterprises. Despite weaker than expected demand from a few of the Company’s major technology customers during 2004, Lionbridge complemented new client growth with increased revenue from many of its existing clients, including Microsoft, Nokia, Nestle and Oracle.

By broadening its suite of outsourcing services, Lionbridge has established a track record of successfully delivering services such as Application Development and eLearning. These services integrate well with the Company’s core globalization business and facilitate the continued diversification of Lionbridge’s client base.

The Company believes these new capabilities will continue to enhance its ability to secure new customers in broad end markets and expand the breadth and depth of services it provides to existing clients.

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Financial Highlights

In 2004, Lionbridge grew its revenue and increased its profitability for the third consecutive year. The growth and profitability of the business during 2004 drove an increase in cash flow from operations to $11.3 million and strengthened the Company’s working capital position and balance sheet, year-over-year. Lionbridge remains debt-free.

In 2004, Lionbridge attained revenue of $154.1 million, representing an 8.7% increase over 2003. Revenue from the Company’s globalization business grew by approximately 15.9% over the prior year, primarily due to approximately $9.8 million of revenue attributable to Lionbridge’s acquisition of Mentorix in 2003, and approximately $6.5 million attributable to organic growth. This increase was partially offset by a decrease of $3.9 million in Testing revenue, primarily as a result of a general slow down in market demand for technology applications products and certification testing, and corresponding customer delays and cancellations of testing engagements during the second half of 2004.

Lionbridge’s results for 2004 included restructuring and other charges of $2.3 million mostly related to the restructuring plan initiated in the third quarter of 2003 and completed in 2004 in conjunction with the acquisition and integration of Mentorix.

Despite the impact of the decline in the Company’s Testing business, the restructuring and other charges, and the cost of worldwide-compliance with Sarbanes-Oxley legislation, Lionbridge delivered $7.1 million of net income in 2004. This is a year over year improvement of $0.08 per share, and demonstrates the leverage of the Company’s global infrastructure and the ongoing scalability of its business model.

These accomplishments and the Company’s strengthened balance sheet position Lionbridge for continued revenue and earnings expansion in 2005.

Results of Operations

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

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Revenue.    The following table shows Globalization and Testing revenues in dollars and as a percentage of total revenue for the years ended December 31, 2004, 2003 and 2002, respectively:

In 2004, total revenue was $154.1 million, an increase of $12.4 million, or 8.7% from $141.7 million in 2003. The $12.4 million increase includes a Globalization revenue increase of $16.3 million partially offset by a decrease of $3.9 million in Testing revenue. In 2003, total revenue was $141.7 million, an increase of $23.4 million, or 19.8% from $118.3 million in 2002. The $23.4 million increase includes a Globalization revenue increase of $11.1 million and an increase in Testing revenue of $12.3 million.

Globalization revenue in 2004 increased $16.3 million, or 15.9% to $118.6 million from $102.4 million in 2003, primarily due to approximately $9.8 million attributable to Lionbridge’s acquisition of Mentorix in 2003, and approximately $6.5 million to organic growth. In 2003, Globalization revenue increased $11.1 million or 12.2% to $102.4 million from $91.3 million in 2002, primarily due to growth in the Company’s globalization service offerings related to multilingual content management and maintenance of global technology applications. Additionally, the acquisition of Mentorix contributed revenue of $4.7 million in 2003.

Testing revenue in 2004 decreased to $35.5 million from $39.3 million in 2003, a decrease of $3.9 million, or 9.8%. This decrease was due primarily to a general slow down in market demand for technology applications products and certification testing, and corresponding customer delays and cancellations of testing engagements. In 2003, Testing revenue increased to $39.3 million from $27.1 million in 2002, an increase of $12.3 million, or 45.4%. This growth was 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.

Lionbridge’s ten largest customers accounted for approximately 59% of the revenue in 2004. For 2003, the Company’s ten largest customers accounted for approximately 55% as compared to 50% in 2002.

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, excluding depreciation and amortization, the percentage variance from the prior year and as a percentage of revenue for the years ended December 31, 2004, 2003 and 2002, respectively:

In 2004, cost of revenue, as a percentage of revenue, increased to 62.2% from 60.6% in 2003. Globalization cost of revenue decreased to 63.1% in 2004, as compared to 64.7% for 2003, primarily due to the benefit of lower labor costs in India and restructuring activities focused in Europe. This decrease was partially offset by

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increased outsourcing costs resulting from variations in mix of localization services provided as compared to the prior year. Testing cost of revenue increased to 59.0% in 2004, as compared to 49.8% for 2003. 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 development of a testing consulting practice and the establishment in late 2003 of a storage solutions lab.

Cost of revenue was $95.8 million in 2004, an increase of $9.9 million, or 11.6%, as compared to $85.9 million for 2003. The $9.9 million increase includes an increase in Globalization cost of revenue of $8.6 million and a $1.3 million increase in Testing cost of revenue.

Globalization cost of revenue increased $8.6 million, or 13.0%, in 2004 to $74.9 million from $66.3 million in 2003. Approximately $4.0 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 $1.3 million, or 6.8%, to $20.9 million in 2004, from $19.6 million in 2003. This increase is primarily attributable to certain costs incurred in the development of a testing consulting practice and an on-site enterprise solution operation, as well as the establishment of a storage solutions lab.

In 2003, as a percentage of revenue, cost of revenue increased slightly to 60.6% in 2003 from 60.2% in 2002. Globalization cost of revenue increased to 64.7% in 2003, as compared to 61.8% 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% in 2003, as compared to 2002. 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. The increase in Globalization cost of revenue was partially offset by a decrease in Testing cost of revenue, to 49.8% in 2003 from 55.1% in 2002. This improvement in Testing cost of revenue was attributable to progress attained in integrating acquisitions, and the result of better utilization of internal resources during the year as compared to 2002, as well as the leverage of a 45.4% increase in revenue from period to period.

Cost of revenue increased $14.6 million to $85.9 million in 2003 from $71.3 million in 2002. The $14.6 million increase includes an increase in Globalization cost of revenue of $9.9 million and a $4.7 million increase in Testing cost of revenue. This increase includes $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.

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, 2004, 2003 and 2002, respectively:

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Sales and marketing costs increased $1.3 million, or 10.0%, to $14.3 million in 2004, as compared to $13.0 million in 2003. The increase was primarily the result of increased employee-related expenses and travel costs incurred in support of the 8.7% increase in revenue during the period.

In 2003, 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.

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; business reconfiguration costs 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, 2004, 2003 and 2002, respectively:

General and administrative expenses increased $812,000, or 2.7%, to $30.5 million, from $29.7 million in 2003. The increase is primarily due to $1.6 million of incremental costs related to the acquisition of Mentorix and approximately $525,000 of fees and travel expenses incurred in relation to compliance with the Sarbanes-Oxley Act of 2002. These increases were partially offset by lower consulting fees and insurance costs as compared to 2003, combined with approximately $534,000 incurred in 2003 for business reconfiguration expenses associated with the resizing of the Paris, France operations. As a percentage of revenue, general and administrative expenses decreased to 19.8% in 2004, as compared to 20.9% in 2003, due primarily to the items noted above as well as the impact of the increase in revenue from period to period.

In 2003, general and administrative costs of $29.7 million 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.

Research and Development.    Research and development expenses relate to LionStream an array of configurable technologies used in the globalization process and the research and development of a Globalization Management System. The cost consists primarily of 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, 2004, 2003 and 2002, respectively:

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Research and development expense decreased 36.1% to $392,000 in 2004 from $613,000 in 2003. In 2003, research and development expense decreased 48.7% to $613,000 from $1.2 million in 2002. In 2004, the Company established a research and development center in India and began moving certain research and development activities to this center, providing a lower research and development cost in 2004, as compared to 2003. This cost savings was partially offset by an increase in the research and development of a Globalization Management System. In 2003, certain project personnel were redeployed to custom implementations of LionStream^™ for customers, and their cost being charged to cost of revenue, resulting in decreased research and development headcount-related expenses in 2004 and 2003, respectively, as compared to prior years.

Depreciation and Amortization.    Depreciation and amortization consist primarily 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, 2004, 2003 and 2002, respectively:

Depreciation and amortization expense decreased $370,000, or 11.2%, to $2.9 million, as compared to $3.3 million in 2003 due to the culmination of depreciable lives in 2004 of certain assets acquired in prior years. In 2003, 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 acquisitions of Mentorix in September 2003, and eTesting in July 2002.

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. In 2004, Lionbridge had no outstanding debt, and as a result, no interest expense. 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 (excluding the accelerated recognition of discount and deferred financing costs) in dollars, dollar variances as compared to the prior year, and as a percentage of revenue for the years ended December 31, 2004, 2003 and 2002, respectively:

In 2003, the debt repayment resulted in a decrease of $1.3 million in interest expense on outstanding debt to $1.9 million, as compared to $3.2 million in 2002, and a decrease in the accretion of discount on debt to $356,000, 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.

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 $100,000 in other income, net in 2004, as compared to $288,000 in other expense, net for the corresponding period of 2003. In 2003, other expense, net decreased to $288,000 from $1.5 million in 2002. The improvement, in both years, was primarily attributable to the Company’s ability to implement a number of appropriate financial and operational measures that minimize Lionbridge’s exposure to currency volatility combined with lower currency volatility in 2004, as compared to 2003.

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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, 2004, 2003 and 2002, respectively:

The provision for (benefit from) income taxes represents taxes resulting from profits in foreign jurisdictions and certain minimum taxes. The 2002 benefit includes an income tax refund in the U.S. of $392,000 as a result of a change in the tax law and $99,000 in non-cash expenses resulting from the utilization 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, 2004 and 2003, 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.