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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended March 31, 2004



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from  to



Commission File Number 000-26933



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LIONBRIDGE TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)



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|                         |  |                                     
|------------------------ |  | ------------------------------------
|Delaware                 |  | 04-3398462                          
|(State of Incorporation) |  | (I.R.S. Employer Identification No.)



1050 Winter Street,
Waltham, MA 02451

(Address of Principal Executive Offices)



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



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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 April 30, 2004 was 46,578,845.



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##### Table of Contents

LIONBRIDGE TECHNOLOGIES, INC.



FORM
10-Q



FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004



TABLE OF CONTENTS



|              |  |                                                                                                      |  |     
|------------- |  | ---------------------------------------------------------------------------------------------------- |  | ----
|              |  |                                                                                                      |  | Page
|PART I:       |  | FINANCIAL INFORMATION                                                                                |  |     
|              |  |                                                                                                     
|ITEM 1.       |  | Consolidated Financial Statements:                                                                   |  |     
|              |  |                                                                                                     
|              |  | Consolidated Balance Sheets as of March 31, 2004 (unaudited) and December 31, 2003                   |  | 3   
|              |  |                                                                                                     
|              |  | Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2004 and 2003 |  | 4   
|              |  |                                                                                                     
|              |  | Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2004 and 2003 |  | 5   
|              |  |                                                                                                     
|              |  | Notes to Consolidated Financial Statements (unaudited)                                               |  | 6   
|              |  |                                                                                                     
|ITEM 2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                |  | 9   
|              |  |                                                                                                     
|ITEM 3.       |  | Quantitative and Qualitative Disclosures About Market Risk                                           |  | 16  
|              |  |                                                                                                     
|ITEM 4.       |  | Controls and Procedures                                                                              |  | 16  
|              |  |                                                                                                     
|PART II:      |  | OTHER INFORMATION                                                                                    |  |     
|              |  |                                                                                                     
|ITEM 1.       |  | Legal Proceedings                                                                                    |  | 17  
|              |  |                                                                                                     
|ITEM 2.       |  | Changes in Securities and Use of Proceeds                                                            |  | 17  
|              |  |                                                                                                     
|ITEM 3.       |  | Defaults Upon Senior Securities                                                                      |  | 17  
|              |  |                                                                                                     
|ITEM 4.       |  | Submission of Matters to a Vote of Security Holders                                                  |  | 17  
|              |  |                                                                                                     
|ITEM 5.       |  | Other Information                                                                                    |  | 18  
|              |  |                                                                                                     
|ITEM 6.       |  | Exhibits and Reports on Form 8-K                                                                     |  | 18  
|              | 
|SIGNATURE     |  | 19                                                                                                  
|              | 
|EXHIBIT INDEX |  | 20                                                                                                  



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. Consolidated Financial Statements



LIONBRIDGE TECHNOLOGIES, INC.



CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)



|                                                                                                                                                                            |  |                |          |   |                   |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                                                                                                            |  | March 31, 2004 |          |   | December 31, 2003 |  
|                                                                                                                                                                            |  | (unaudited)    |          |   |                   |  
|ASSETS                                                                                                                                                                      |  |                |          |   |                   |   |          |  
|Current assets:                                                                                                                                                             |  |                |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                                                                   |  | $              | 30,808   |   |                   | $ | 29,496   |  
|Restricted cash                                                                                                                                                             |  |                |         |   |                   |   | 338      |  
|Accounts receivable, net of allowance of $587 and $591 at March 31, 2004 and December 31, 2003, respectively                                                                |  |                | 22,202   |   |                   |   | 24,653   |  
|Work in process                                                                                                                                                             |  |                | 11,390   |   |                   |   | 8,609    |  
|Other current assets                                                                                                                                                        |  |                | 2,388    |   |                   |   | 2,188    |  
|                                                                                                                                                                            |  |                |          |   |                   |   |          |  
|Total current assets                                                                                                                                                        |  |                | 66,788   |   |                   |   | 65,284   |  
|Property and equipment, net                                                                                                                                                 |  |                | 3,600    |   |                   |   | 4,445    |  
|Goodwill                                                                                                                                                                    |  |                | 35,007   |   |                   |   | 34,994   |  
|Other intangible assets, net                                                                                                                                                |  |                | 92       |   |                   |   | 191      |  
|Other assets                                                                                                                                                                |  |                | 885      |   |                   |   | 1,076    |  
|                                                                                                                                                                            |  |                |          |   |                   |   |          |  
|Total assets                                                                                                                                                                |  | $              | 106,372  |   |                   | $ | 105,990  |  
|                                                                                                                                                                            |  |                |          |   |                   |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                        |  |                |          |   |                   |   |          |  
|Current liabilities:                                                                                                                                                        |  |                |          |   |                   |   |          |  
|Accounts payable                                                                                                                                                            |  | $              | 6,938    |   |                   | $ | 8,318    |  
|Accrued compensation and benefits                                                                                                                                           |  |                | 7,588    |   |                   |   | 5,956    |  
|Accrued outsourcing                                                                                                                                                         |  |                | 3,937    |   |                   |   | 3,054    |  
|Accrued merger and restructuring                                                                                                                                            |  |                | 936      |   |                   |   | 255      |  
|Other accrued expenses                                                                                                                                                      |  |                | 3,774    |   |                   |   | 4,779    |  
|Deferred revenue                                                                                                                                                            |  |                | 2,663    |   |                   |   | 3,850    |  
|Other current liabilities                                                                                                                                                   |  |                | 232      |   |                   |   | 234      |  
|                                                                                                                                                                            |  |                |          |   |                   |   |          |  
|Total current liabilities                                                                                                                                                   |  |                | 26,068   |   |                   |   | 26,446   |  
|Long-term liabilities                                                                                                                                                       |  |                | 2,042    |   |                   |   | 1,914    |  
|Contingencies (Note 10)                                                                                                                                                     |  |                |          |   |                   |   |          |  
|Stockholders equity:                                                                                                                                                       |  |                |          |   |                   |   |          |  
|Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares issued and outstanding                                                                             |  |                |         |   |                   |   |         |  
|Common stock, $0.01 par value; 100,000,000 shares authorized; 46,543,826 and 46,340,587 shares issued and outstanding at March 31, 2004 and
December 31, 2003, respectively |  |                | 466      |   |                   |   | 464      |  
|Additional paid-in capital                                                                                                                                                  |  |                | 182,389  |   |                   |   | 181,661  |  
|Accumulated deficit                                                                                                                                                         |  |                | (105,336 | ) |                   |   | (106,029 | )
|Deferred compensation                                                                                                                                                       |  |                | (1,670   | ) |                   |   | (1,251   | )
|Accumulated other comprehensive income                                                                                                                                      |  |                | 2,413    |   |                   |   | 2,785    |  
|                                                                                                                                                                            |  |                |          |   |                   |   |          |  
|Total stockholders equity                                                                                                                                                  |  |                | 78,262   |   |                   |   | 77,630   |  
|                                                                                                                                                                            |  |                |          |   |                   |   |          |  
|Total liabilities and stockholders equity                                                                                                                                  |  | $              | 106,372  |   |                   | $ | 105,990  |  
|                                                                                                                                                                            |  |                |          |   |                   |   |          |  



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)



|                                                                                    |  |                             |        |   |      |   |        |  
|----------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                    |  | Three Months EndedMarch 31, |       
|                                                                                    |  | 2004                        |        |   | 2003 |  
|Revenue                                                                             |  | $                           | 39,865 |   |      | $ | 30,851 |  
|Operating expenses:                                                                 |  |                             |        |   |      |   |        |  
|Cost of revenue (exclusive of depreciation and amortization shown separately below) |  |                             | 24,571 |   |      |   | 18,959 |  
|Sales and marketing                                                                 |  |                             | 3,584  |   |      |   | 2,816  |  
|General and administrative                                                          |  |                             | 8,150  |   |      |   | 6,933  |  
|Research and development                                                            |  |                             | 125    |   |      |   | 202    |  
|Depreciation and amortization                                                       |  |                             | 865    |   |      |   | 840    |  
|Amortization of acquisition-related intangible assets                               |  |                             | 99     |   |      |   | 115    |  
|Merger, restructuring and other charges                                             |  |                             | 1,613  |   |      |   |       |  
|Stock-based compensation                                                            |  |                             | 119    |   |      |   | 156    |  
|                                                                                    |  |                             |        |   |      |   |        |  
|Total operating expenses                                                            |  |                             | 39,126 |   |      |   | 30,021 |  
|                                                                                    |  |                             |        |   |      |   |        |  
|Income from operations                                                              |  |                             | 739    |   |      |   | 830    |  
|Interest expense:                                                                   |  |                             |        |   |      |   |        |  
|Interest on outstanding debt                                                        |  |                             |       |   |      |   | 764    |  
|Accretion of discount on debt                                                       |  |                             |       |   |      |   | 153    |  
|Interest income                                                                     |  |                             | (85    | ) |      |   | (3     | )
|Other expense                                                                       |  |                             | 38     |   |      |   | 42     |  
|                                                                                    |  |                             |        |   |      |   |        |  
|Income (loss) before income taxes                                                   |  |                             | 786    |   |      |   | (126   | )
|Provision for income taxes                                                          |  |                             | 93     |   |      |   | 103    |  
|                                                                                    |  |                             |        |   |      |   |        |  
|Net income (loss)                                                                   |  | $                           | 693    |   |      | $ | (229   | )
|                                                                                    |  |                             |        |   |      |   |        |  
|Net income (loss) per share of common stock:                                        |  |                             |        |   |      |   |        |  
|Basic                                                                               |  | $                           | 0.01   |   |      | $ | (0.01  | )
|Diluted                                                                             |  | $                           | 0.01   |   |      | $ | (0.01  | )
|Weighted average number of common shares outstanding:                               |  |                             |        |   |      |   |        |  
|Basic                                                                               |  |                             | 46,365 |   |      |   | 31,715 |  
|Diluted                                                                             |  |                             | 48,714 |   |      |   | 31,715 |  



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)



|                                                                                                   |  |                             |        |   |      |   |        |  
|-------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                   |  | Three Months EndedMarch 31, |       
|                                                                                                   |  | 2004                        |        |   | 2003 |  
|Cash flows from operating activities:                                                              |  |                             |        |   |      |   |        |  
|Net income (loss)                                                                                  |  | $                           | 693    |   |      | $ | (229   | )
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                             |        |   |      |   |        |  
|Amortization of acquisition-related intangible assets                                              |  |                             | 99     |   |      |   | 115    |  
|Stock-based compensation and debt financing costs                                                  |  |                             | 119    |   |      |   | 237    |  
|Accretion of discount on debt                                                                      |  |                             |       |   |      |   | 153    |  
|Non-cash merger, restructuring and other charges                                                   |  |                             | 119    |   |      |   |       |  
|Depreciation and amortization                                                                      |  |                             | 865    |   |      |   | 840    |  
|Other                                                                                              |  |                             | 13     |   |      |   | (145   | )
|Changes in operating assets and liabilities, net of effects of acquisitions:                       |  |                             |        |   |      |   |        |  
|Accounts receivable                                                                                |  |                             | 2,204  |   |      |   | 561    |  
|Work in process                                                                                    |  |                             | (2,883 | ) |      |   | (2,015 | )
|Other current assets                                                                               |  |                             | 111    |   |      |   | (128   | )
|Other assets                                                                                       |  |                             | 192    |   |      |   | (163   | )
|Accounts payable                                                                                   |  |                             | (1,312 | ) |      |   | (963   | )
|Accrued compensation and benefits                                                                  |  |                             | 1,364  |   |      |   | 507    |  
|Accrued outsourcing                                                                                |  |                             | 932    |   |      |   | 525    |  
|Accrued merger and restructuring                                                                   |  |                             | 895    |   |      |   | (107   | )
|Other accrued expenses                                                                             |  |                             | (879   | ) |      |   | 272    |  
|Deferred revenue                                                                                   |  |                             | (1,173 | ) |      |   | (863   | )
|                                                                                                   |  |                             |        |   |      |   |        |  
|Net cash provided by (used in) operating activities                                                |  |                             | 1,359  |   |      |   | (1,403 | )
|                                                                                                   |  |                             |        |   |      |   |        |  
|Cash flows from investing activities:                                                              |  |                             |        |   |      |   |        |  
|Purchases of property and equipment                                                                |  |                             | (248   | ) |      |   | (399   | )
|Proceeds from sale of property and equipment                                                       |  |                             | 46     |   |      |   |       |  
|                                                                                                   |  |                             |        |   |      |   |        |  
|Net cash used in investing activities                                                              |  |                             | (202   | ) |      |   | (399   | )
|                                                                                                   |  |                             |        |   |      |   |        |  
|Cash flows from financing activities:                                                              |  |                             |        |   |      |   |        |  
|Proceeds from issuance of short-term debt                                                          |  |                             |       |   |      |   | 93     |  
|Net payments of short-term debt                                                                    |  |                             |       |   |      |   | (1,000 | )
|Proceeds from issuance of common stock under option and employee stock purchase plans              |  |                             | 402    |   |      |   | 34     |  
|Payments of capital lease obligations                                                              |  |                             | (52    | ) |      |   | (31    | )
|                                                                                                   |  |                             |        |   |      |   |        |  
|Net cash provided by (used in) financing activities                                                |  |                             | 350    |   |      |   | (904   | )
|                                                                                                   |  |                             |        |   |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                                               |  |                             | 1,507  |   |      |   | (2,706 | )
|Effects of exchange rate changes on cash and cash equivalents                                      |  |                             | (195   | ) |      |   | 15     |  
|Cash and cash equivalents at beginning of period                                                   |  |                             | 29,496 |   |      |   | 10,916 |  
|                                                                                                   |  |                             |        |   |      |   |        |  
|Cash and cash equivalents at end of period                                                         |  | $                           | 30,808 |   |      | $ | 8,225  |  
|                                                                                                   |  |                             |        |   |      |   |        |  
|Supplemental disclosure:                                                                           |  |                             |        |   |      |   |        |  
|Non-cash investing activityadditions to capital lease obligations for fixed asset purchases       |  | $                           |       |   |      | $ | 142    |  
|                                                                                                   |  |                             |        |   |      |   |        |  



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



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##### Table of Contents

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 collectability of receivables, calculating revenue using the percentage-of-completion method, 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 (loss) and net
income (loss) 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, to stock-based
employee compensation:



|                                                                                                                                      |  |                              |            |   |      |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | -------- | -
|                                                                                                                                      |  | Three Months Ended March 31, |           
|                                                                                                                                      |  | 2004                         |            |   | 2003 |  
|Net income (loss), as reported                                                                                                        |  | $                            | 693,000    |   |      | $ | (229,000 | )
|Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects                     |  |                              | 119,000    |   |      |   | 156,000  |  
|Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                              | (1,498,000 | ) |      |   | (868,000 | )
|                                                                                                                                      |  |                              |            |   |      |   |          |  
|Pro forma net loss                                                                                                                    |  | $                            | (686,000   | ) |      | $ | (941,000 | )
|                                                                                                                                      |  |                              |            |   |      |   |          |  
|Net income (loss) per share:                                                                                                          |  |                              |            |   |      |   |          |  
|Basic, as reported                                                                                                                    |  | $                            | 0.01       |   |      | $ | (0.01    | )
|Basic, pro forma                                                                                                                      |  | $                            | (0.01      | ) |      | $ | (0.03    | )
|Net income (loss) per share:                                                                                                          |  |                              |            |   |      |   |          |  
|Diluted, as reported                                                                                                                  |  | $                            | 0.01       |   |      | $ | (0.01    | )
|Diluted, pro forma                                                                                                                    |  | $                            | (0.01      | ) |      | $ | (0.03    | )



2. PROPERTY AND EQUIPMENT



Property and equipment, net consists of the following:



|                                                |  |                |             |   |                  |   |             |  
|----------------------------------------------- |  | -------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                |  | March 31, 2004 |             |   | December 31,2003 |  
|Computer software and equipment                 |  | $              | 18,609,000  |   |                  | $ | 18,638,000  |  
|Furniture and office equipment                  |  |                | 3,485,000   |   |                  |   | 3,507,000   |  
|Leasehold improvements                          |  |                | 2,021,000   |   |                  |   | 1,992,000   |  
|                                                |  |                |             |   |                  |   |             |  
|                                                |  |                | 24,115,000  |   |                  |   | 24,137,000  |  
|Less: Accumulated depreciation and amortization |  |                | (20,515,000 | ) |                  |   | (19,692,000 | )
|                                                |  |                |             |   |                  |   |             |  
|                                                |  | $              | 3,600,000   |   |                  | $ | 4,445,000   |  
|                                                |  |                |             |   |                  |   |             |  



3. DEBT



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##### Table of Contents

Lines of Credit



In June 2001, Lionbridge entered into a line of credit agreement with a commercial bank. Under the terms of the agreement,
Lionbridge was able to borrow up to $13.0 million, based on the value of certain current assets worldwide. Borrowings outstanding under the line of credit agreement are collateralized by the Companys accounts receivable. In April 2002, the
line of credit agreement was amended to extend the maturity date to April 1, 2003, and was subsequently amended in March 2003 to extend the maturity date to April 1, 2005. In conjunction with the 2002 amendment, Lionbridge paid a commitment fee of
$206,000, which was recorded as a deferred financing cost and amortized as interest expense through April 1, 2003. In connection with its 2003 amendment of this line of credit, the Company increased the facility by $2.0 million to $15.0 million and
modified certain financial covenants thereunder. As amended in March 2003, the facility bears interest at the lenders prime rate plus 1% (5.0% at March 31, 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%. Loan commitment fees associated with this extension term totaled $230,000, and are being amortized ratably as other expense through April 1, 2005. In May 2003, the commercial bank exercised its
warrant, issued in June 2001, to purchase a total of 75,000 shares of common stock at an exercise price of $1.81 per share. The net exercise right was elected as the method of exercise resulting in the issuance of 35,652 shares of common stock at a
fair market value of $3.45 per share. As of March 31, 2004, Lionbridge had no borrowings outstanding, and $15.0 million was available for borrowing under its bank line of credit.



4. 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 vest ratably 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. The restricted shares issued in 2003 vest ratably over four years from the date of grant on each anniversary date.



On February 23, 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 ratably over eighteen months from the date of grant on each nine month anniversary date. On March 3, 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 ratably over two 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. Total amortization of deferred compensation was $119,000 and $156,000 for the three-month periods ended March
31, 2004 and 2003, respectively.



5. COMPREHENSIVE INCOME (LOSS)



Total comprehensive income (loss) consists of net income
(loss) and the net change in foreign currency translation adjustment, which is the only component of accumulated other comprehensive income. Total comprehensive income was approximately $321,000 for the three-month period ended March 31, 2004, while
total comprehensive loss was $273,000 for the three-month period ended March 31, 2003.



6. NET INCOME (LOSS) PER SHARE



Basic earnings
per share is computed by dividing net income (loss) 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 and warrants, as determined using the treasury stock method.



Shares used in calculating basic and diluted earnings per share for the three-month periods ended March 31, 2004 and 2003, respectively, are as
follows:



|                                                                                     |  |                              |  |           
|------------------------------------------------------------------------------------ |  | ---------------------------- |  | ----------
|                                                                                     |  | Three Months Ended March 31,
|                                                                                     |  | 2004                         |  | 2003      
|Weighted average number of shares of common stock outstandingbasic                  |  | 46,365,000                   |  | 31,715,000
|Dilutive common stock equivalents relating to options, restricted stock and warrants |  | 2,349,000                    |  |          
|                                                                                     |  |                              |  |           
|Weighted average number of shares of common stock outstandingdiluted                |  | 48,714,000                   |  | 31,715,000
|                                                                                     |  |                              |  |           



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##### Table of Contents

Options, unvested restricted stock and warrants outstanding to purchase 1,375,234 and 7,237,610 shares of
common stock for the three-month periods ended March 31, 2004 and 2003, respectively, were not included in the calculations of diluted net loss per share, as their effect would be anti-dilutive.



7. MERGER, RESTRUCTURING AND OTHER CHARGES



During the three months ended March 31, 2004, Lionbridge recorded
restructuring and other charges of $1.6 million primarily related to the integration of its India operation. The $1.6 million of restructuring and other charges included $708,000 for losses recorded on vacated facilities, $119,000 impairment of
long-lived assets, and $786,000 for workforce reductions in the U.S., France, Ireland, Germany and China, consisting of forty-one technical, five administrative, and four sales staff. Lionbridge expects to complete its restructuring plan during the
second quarter of 2004, resulting in additional restructuring charges.



The following table summarizes the accrual activity for the three months ended March 31, 2004 and 2003, respectively, by initiative:



|                                         |  |      |           |   |      |   |          |  
|---------------------------------------- |  | ---- | --------- | - | ---- | - | -------- | -
|                                         |  | 2004 |           |   | 2003 |  
|Beginning balance, January 1             |  | $    | 255,000   |   |      | $ | 871,000  |  
|Employee severance and related items:    |  |      |           |   |      |   |          |  
|Charges recorded                         |  |      | 808,000   |   |      |   |         |  
|Revisions of estimated liabilities       |  |      | (22,000   | ) |      |   | (8,000   | )
|Reclassification of accrual balance      |  |      |          |   |      |   | (68,000  | )
|Cash payments                            |  |      | (633,000  | ) |      |   | (15,000  | )
|                                         |  |      |           |   |      |   |          |  
|                                         |  |      | 153,000   |   |      |   | (91,000  | )
|                                         |  |      |           |   |      |   |          |  
|Lease termination costs and other items: |  |      |           |   |      |   |          |  
|Charges recorded                         |  |      | 708,000   |   |      |   |         |  
|Revisions of estimated liabilities       |  |      |          |   |      |   | (128,000 | )
|Cash payments                            |  |      |          |   |      |   | (144,000 | )
|                                         |  |      |           |   |      |   |          |  
|                                         |  |      | 708,000   |   |      |   | (272,000 | )
|                                         |  |      |           |   |      |   |          |  
|Ending balance, March 31                 |  | $    | 1,116,000 |   |      | $ | 508,000  |  
|                                         |  |      |           |   |      |   |          |  



At March 31, 2004, the
consolidated balance sheet included accruals totaling $1.1 million primarily related to the integration of the Companys India operation. Lionbridge currently anticipates that $936,000 of this total will be fully utilized within twelve months.
The remaining $180,000 relates to lease obligations on unused facilities expiring through 2007 and is included in long-term liabilities.



8. 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
by the geographic site in which services are 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 localization and content globalization services that enable simultaneous worldwide release and ongoing maintenance of multilingual products 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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The table below presents information about the reported net income (loss) of the Company for the
three-month periods ended March 31, 2004 and 2003. Asset information by reportable segment is not reported, since the Company does not produce such information internally.



|                                   |  |                              |            |   |      |   |            |  
|---------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                   |  | Three Months Ended March 31, |           
|                                   |  | 2004                         |            |   | 2003 |  
|External revenue:                  |  |                              |            |   |      |   |            |  
|Globalization                      |  | $                            | 30,457,000 |   |      | $ | 22,251,000 |  
|Testing                            |  |                              | 9,408,000  |   |      |   | 8,600,000  |  
|                                   |  |                              |            |   |      |   |            |  
|                                   |  | $                            | 39,865,000 |   |      | $ | 30,851,000 |  
|                                   |  |                              |            |   |      |   |            |  
|Net income (loss):                 |  |                              |            |   |      |   |            |  
|Globalization                      |  | $                            | 4,695,000  |   |      | $ | 2,682,000  |  
|Testing                            |  |                              | 1,322,000  |   |      |   | 2,012,000  |  
|Less: corporate and other expenses |  |                              | (5,324,000 | ) |      |   | (4,923,000 | )
|                                   |  |                              |            |   |      |   |            |  
|                                   |  | $                            | 693,000    |   |      | $ | (229,000   | )
|                                   |  |                              |            |   |      |   |            |  



9. OTHER INTANGIBLE ASSETS



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



|                                       |  |                    |           |                         |   |           |  |                    |        |                         |   |           |  |   |           |  |   |        
|-------------------------------------- |  | ------------------ | --------- | ----------------------- | - | --------- |  | ------------------ | ------ | ----------------------- | - | --------- |  | - | --------- |  | - | -------
|                                       |  | March 31, 2004     |           | December 31, 2003      
|                                       |  | GrossCarryingValue |           | AccumulatedAmortization |   | Balance   |  | GrossCarryingValue |        | AccumulatedAmortization |   | Balance  
|ILE installed customer base            |  | $                  | 1,800,000 |                         | $ | 1,800,000 |  | $                  |       |                         | $ | 1,800,000 |  | $ | 1,710,000 |  | $ | 90,000 
|Mentorix internally developed software |  |                    | 110,000   |                         |   | 18,000    |  |                    | 92,000 |                         |   | 110,000   |  |   | 9,000     |  |   | 101,000
|                                       |  |                    |           |                         |   |           |  |                    |        |                         |   |           |  |   |           |  |   |        
|                                       |  | $                  | 1,910,000 |                         | $ | 1,818,000 |  | $                  | 92,000 |                         | $ | 1,910,000 |  | $ | 1,719,000 |  | $ | 191,000
|                                       |  |                    |           |                         |   |           |  |                    |        |                         |   |           |  |   |           |  |   |        



Amortization expense
related to the intangible assets as of March 31, 2004 is expected to be $28,000, $37,000 and $27,000 for the years ended December 31, 2004, 2005 and 2006, respectively.



10. CONTINGENCIES



Lionbridge is a party to a proposed settlement of a purported securities class action lawsuit that was filed on or about July 24, 2001 (an amended
complaint was filed on April 19, 2002) in the United States District Court for the Southern District of New York against the Company, certain of its officers and directors, and certain underwriters involved in the Companys initial public
offering. With respect to this proposed settlement in principle, since the filing of Lionbridges Form 10-K for the year ended December 31, 2003, settlement documents have continued to be negotiated and there have been no material developments
in this proceeding as to the Company.



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, including the Companys expectations
regarding its future liquidity needs. These statements are based on various assumptions by management regarding future circumstances over many of which Lionbridge has little or no control. A number of important factors, 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 factors discussed elsewhere in this Form 10-Q could cause Lionbridges actual results to differ materially from those in the forward-looking statements. Actual results may differ from
forward-looking results for a number of reasons, including the following: (i) financial and economic uncertainties among the Companys customer base in general and in the technology sector in particular; (ii) the delay of one of
Lionbridges clients product releases and production schedules or the loss of a major client; (iii) delays in the commencement or continuation of services by Lionbridge clients; (iv) Lionbridges ability to attract and retain key
personnel; (v) Lionbridges potential liability for defects or errors in the solutions it provides; (vi) Lionbridges potential failure to keep pace with the rapidly changing requirements of its customers; (vii) the entry of additional
competitors into the marketplace; (viii) foreign currency exchange rate fluctuations; (ix) political, economic and business fluctuations in domestic and

international markets; (x) costs associated with and consequential to the acquisition and integration of Mentorix and benefits realized from the acquisition; (xi) costs associated with restructuring of certain European operations; (xii)
future acquisitions (including the potential diversion of management attention and financial resources and the ability of acquired businesses to achieve satisfactory operating results); (xiii) difficulties in raising additional capital or other
financing if needed; (xiv) difficulties presented by international economic, political, legal, health, accounting and business factors; (xv) difficulties in identifying and competing for acquisition opportunities; and (xvi) continued or worsening of
the slowdown in worldwide economies and other downturns in economic conditions generally. 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.



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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 March 31,
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.



Lionbridges revenue is derived from project-by-project fees and, to a
lesser extent, long-term service agreements. Projects are generally billed on a time and expense basis. Revenue is recognized using a percentage-of-completion method of accounting, based primarily on labor costs incurred to date as a percentage of
managements estimate of total costs of individual projects. The use of a percentage-of-completion method of accounting requires significant judgment relative to estimating total contract costs, including assumptions relative to the length of
time to complete the project, the nature and complexity of the work to be performed, anticipated increases in employee wages prices for subcontractor services and the availability of subcontractor services. Lionbridges estimates are based upon
the professional knowledge and experience of its program managers and other personnel, who review each project monthly to assess the projects schedule, performance, technical matters and estimated cost at completion. When adjustments in
estimated project costs are determined, such revisions may have the effect of adjusting in the current period the earnings applicable to performance in prior periods. Anticipated losses, if any, are recognized in the period in which determined. The
agreements entered into in connection with projects are generally terminable by clients upon 30 days prior written notice. If a client terminates an agreement, it is required to pay Lionbridge for time and expenses incurred through the termination
date.



For the three-month period ended March 31, 2004,
Lionbridges income from operations was $739,000, with net income of $693,000. 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 March 31, 2004, had an accumulated deficit of $105.3 million.



Acquisitions



Lionbridge has grown its business since inception through a combination of acquisitions and organic growth. Such acquisitions through March 31, 2004 have
resulted in the recognition of approximately $59.7 million of goodwill and other intangible assets ($35.1 million at March 31, 2004) on its balance sheet. Other acquired intangible assets are generally amortized over three to five years.



Merger, Restructuring and Other Charges



Merger, restructuring and other charges consist of costs associated with
employee severance and exiting activities. During the three months ended March 31, 2004, Lionbridge recorded restructuring and other charges of $1.6 million primarily related to the integration of its India operation. The $1.6 million of
restructuring and other charges included $708,000 for losses recorded on vacated facilities, $119,000 impairment of long-lived assets, and $786,000 for workforce reductions in the U.S., France, Ireland, Germany and China, consisting of forty-one
technical, five administrative, and four sales staff. Lionbridge expects to complete its restructuring plan during the second quarter of 2004, resulting in additional restructuring 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 March 31, 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 $95,000 for the three-month period ended March 31, 2003.



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##### Table of Contents

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 on which the restrictions on the common stock lapsed. The amortization of this
deferred compensation was recorded as an operating expense and totaled $61,000 for the three-month period ended March 31, 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 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 this deferred
compensation is recorded as an operating expense and totaled $32,000 for the three-month period ended March 31, 2004.



In October 2003, Lionbridge recorded deferred compensation of $812,000, representing the fair market value of 90,000 shares of restricted common stock
issued to certain employees at that time. Restrictions on disposition lapse ratably over four years from the date of grant on each anniversary date. Unvested restricted shares may not be sold, transferred or assigned and are subject to forfeiture in
the event that an employee ceases to be employed by the Company. The deferred compensation is being amortized over the four-year period during which the transfer and sale restrictions on the common stock lapse. The amortization of this deferred
compensation is recorded as an operating expense and totaled $51,000 for the three-month period ended March 31, 2004.



On February 23, 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 ratably over eighteen months from the date of grant on each nine month 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 eighteen month period during which the transfer and sale restrictions on the common stock lapse. The
amortization of this deferred compensation is recorded as an operating expense and totaled $35,000 for the three-month period ended March 31, 2004.



On March 3, 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 ratably over two 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 such employee ceases to be employed by the Company. The deferred compensation is being amortized over the two-year period during which the transfer and sale restrictions on the common stock lapse. The amortization of this deferred
compensation is recorded as an operating expense and totaled $1,000 for the three-month period ended March 31, 2004.



Lionbridge currently expects to amortize the following remaining amounts of deferred compensation existing as of March 31, 2004 in the fiscal periods as
follows:



|                  |  |   |          
|----------------- |  | - | ---------
|December 31, 2004 |  |   | 516,000  
|December 31, 2005 |  |   | 564,000  
|December 31, 2006 |  |   | 334,000  
|December 31, 2007 |  |   | 256,000  
|                  |  |   |          
|                  |  | $ | 1,670,000
|                  |  |   |          



Original Issue
Discount on Debt. Interest expense for the three-month period ended March 31, 2003 includes $153,000 for the accretion of a $.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 paid the balance outstanding on this note.



Issuance of Warrants 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 $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 $69,000 for the three months ended March 31, 2003.



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 $12,000 for the three months ended March 31, 2003.



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Results of Operations



The following table sets forth for the periods indicated certain unaudited consolidated financial data as a percentage of
total revenue.



|                                                                                    |  |                             |   |  |       |   
|----------------------------------------------------------------------------------- |  | --------------------------- | - |  | ----- | --
|                                                                                    |  | Three MonthsEnded March 31, |  
|                                                                                    |  | 2004                        |   |  | 2003  |   
|Revenue                                                                             |  | 100.0                       | % |  | 100.0 | % 
|Operating expenses:                                                                 |  |                             |   |  |       |   
|Cost of revenue (exclusive of depreciation and amortization shown separately below) |  | 61.6                        |   |  | 61.5  |   
|Sales and marketing                                                                 |  | 9.0                         |   |  | 9.1   |   
|General and administrative                                                          |  | 20.4                        |   |  | 22.5  |   
|Research and development                                                            |  | 0.3                         |   |  | 0.7   |   
|Depreciation and amortization                                                       |  | 2.2                         |   |  | 2.7   |   
|Amortization of acquisition-related intangible assets                               |  | 0.2                         |   |  | 0.4   |   
|Merger, restructuring and other charges                                             |  | 4.0                         |   |  |      |   
|Stock-based compensation                                                            |  | 0.3                         |   |  | 0.5   |   
|                                                                                    |  |                             |   |  |       |   
|Total operating expenses                                                            |  | 98.0                        |   |  | 97.4  |   
|                                                                                    |  |                             |   |  |       |   
|Income from operations                                                              |  | 2.0                         |   |  | 2.6   |   
|Interest expense:                                                                   |  |                             |   |  |       |   
|Interest on outstanding debt                                                        |  |                            |   |  | 2.4   |   
|Accretion of discount on notes payable                                              |  |                            |   |  | 0.5   |   
|Interest income                                                                     |  | (0.2                        | ) |  |      |   
|Other expense                                                                       |  | 0.1                         |   |  | 0.1   |   
|                                                                                    |  |                             |   |  |       |   
|Income (loss) before income taxes                                                   |  | 1.9                         |   |  | (0.4  | ) 
|Provision for income taxes                                                          |  | 0.2                         |   |  | 0.3   |   
|                                                                                    |  |                             |   |  |       |   
|Net income (loss)                                                                   |  | 1.7                         | % |  | (0.7  | )%
|                                                                                    |  |                             |   |  |       |   



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



|              |  |                                  |            |  |     |   |                                  |   |            |  |     |  
|------------- |  | -------------------------------- | ---------- |  | --- | - | -------------------------------- | - | ---------- |  | --- | -
|              |  | Three Months EndedMarch 31, 2004 |            |  |     |   | Three Months EndedMarch 31, 2003 |   |            | 
|Globalization |  | $                                | 30,457,000 |  | 76  | % |                                  | $ | 22,251,000 |  | 72  | %
|Testing       |  |                                  | 9,408,000  |  | 24  | % |                                  |   | 8,600,000  |  | 28  | %
|              |  |                                  |            |  |     |   |                                  |   |            |  |     |  
|Total revenue |  | $                                | 39,865,000 |  | 100 | % |                                  | $ | 30,851,000 |  | 100 | %
|              |  |                                  |            |  |     |   |                                  |   |            |  |     |  



Revenue for the
quarter ended March 31, 2004 was $39.9 million, an increase of $9.0 million, or 29.2%, from $30.9 million for the quarter ended March 31, 2003. The increase was primarily due to organic growth and $4.0 million of revenue was attributable to
Lionbridge acquisition of Mentorix in September 2003.



Globalization revenue for the quarter ended March 31, 2004 increased to $30.5 million, an increase of $8.2 million or 36.9% from $22.3 million in the comparable period of 2004, primarily due to growth in the Companys globalization
service offerings, related to multilingual content management and maintenance of global technology applications. Additionally, as noted above the acquisition of Mentorix contributed globalization revenue of $4.0 million in the first quarter of 2004.
Testing revenue for the quarter ended March 31, 2004 was $9.4 million, an increase of $800,000, or 9.4%, from $8.6 million in the comparable period of 2003,

primarily attributable to organic growth in product functional testing.



Cost of Revenue. Cost of revenue consists primarily of expenses incurred for translation services provided by third parties as well as salaries and associated employee benefits for personnel related to client
projects. The following table shows Globalization and



12



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##### Table of Contents

Testing cost of revenues, the percentage variance from the prior year three month period and as a percentage of revenue
for the three months ended March 31, 2004 and 2003, respectively:



|                      |  |                                  |            |   |                        |      |   |                                  |   |            |  
|--------------------- |  | -------------------------------- | ---------- | - | ---------------------- | ---- | - | -------------------------------- | - | ---------- | -
|                      |  | Three Months EndedMarch 31, 2004 |            |   | % ChangeQ1 03 to Q1 04 |      |   | Three Months EndedMarch 31, 2003 |  
|Globalization:        |  |                                  |            |   |                        |      |   |                                  |   |            |  
|Cost of revenue       |  | $                                | 19,282,000 |   |                        | 32.9 | % |                                  | $ | 14,510,000 |  
|Percentage of revenue |  |                                  | 63.1       | % |                        |      |   |                                  |   | 65.2       | %
|Testing:              |  |                                  |            |   |                        |      |   |                                  |   |            |  
|Cost of revenue       |  |                                  | 5,289,000  |   |                        | 18.9 | % |                                  |   | 4,449,000  |  
|Percentage of revenue |  |                                  | 56.2       | % |                        |      |   |                                  |   | 51.7       | %
|                      |  |                                  |            |   |                        |      |   |                                  |   |            |  
|Total cost of revenue |  | $                                | 24,571,000 |   |                        |      |   |                                  | $ | 18,959,000 |  
|                      |  |                                  |            |   |                        |      |   |                                  |   |            |  
|Percentage of revenue |  |                                  | 61.6       | % |                        |      |   |                                  |   | 61.5       | %



Cost of revenue
increased $5.6 million to $24.6 million or 61.6% of revenue for the quarter ended March 31, 2004 as compared to $19.0 million or 61.5% of revenue for the corresponding quarter of the prior year. This increase was primarily to support the growth
in related revenue, including $1.9 million of costs related to the operations of Mentorix, and the slower than anticipated ramp up of revenue at the beginning of the quarter in the Testing operations, resulting in under utilized capacity, as well as
certain costs incurred in the establishment of the VeriTest Enterprise Consulting practice and the integration of the Storage Solutions Lab.



Globalization cost of revenue decreased to 63.1% for the quarter ended March 31, 2004 as compared to 65.2% for the corresponding quarter of the prior
year. This decrease was primarily the result of more optimal utilization of internal resources and the leverage of a 36.9% increase in Globalization revenue, including $4.0 million of revenue related to the Mentorix operations, partially offset by
higher Euro based outsourcing costs, from period to period.



Cost of revenue for Testing operations increased to 56.2% for the quarter ended March 31, 2004 as compared to 51.7% for the quarter ended March 31, 2003. This increase in Testing cost of revenue was primarily attributable to the slower than
anticipated ramp up of revenue at the beginning of the quarter, resulting in under utilized capacity in the Testing operations, as well as certain costs incurred in the establishment of the VeriTest Enterprise Consulting practice and the integration
of the Storage Solutions Lab, as noted above.



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 variance as compared to the prior year and as a percentage of revenue for
the three months ended March 31, 2004 and 2003, respectively:



|                                   |  |                              |           |   |      |   |           |  
|---------------------------------- |  | ---------------------------- | --------- | - | ---- | - | --------- | -
|                                   |  | Three Months Ended March 31, |          
|                                   |  | 2004                         |           |   | 2003 |  
|Total sales and marketing expenses |  | $                            | 3,584,000 |   |      | $ | 2,816,000 |  
|Increase from prior year           |  |                              | 768,000   |   |      |   |           |  
|Percentage of revenue              |  |                              | 9.0       | % |      |   | 9.1       | %



Sales and marketing
costs of $3.6 million for the quarter ended March 31, 2004 increased $768,000 from the corresponding quarter of 2003. The increase was primarily the result of higher employee-related expenses in the sales organization due to additional headcount and
commissions associated with the 29.2% increase in revenue. This increase was partially offset by the continuing cost savings and progress attained in integrating acquisitions. As a percentage of revenue, sales and marketing expenses decreased to
9.0% in the quarter ended March 31, 2004, as compared to 9.1% for the quarter ended March 31, 2003 due primarily to the items noted above.



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##### Table of Contents

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 variance as compared to the prior year and as a percentage of revenue for the three months ended March 31, 2004 and 2003, respectively:



|                                          |  |                              |           |   |      |   |           |  
|----------------------------------------- |  | ---------------------------- | --------- | - | ---- | - | --------- | -
|                                          |  | Three Months Ended March 31, |          
|                                          |  | 2004                         |           |   | 2003 |  
|Total general and administrative expenses |  | $                            | 8,150,000 |   |      | $ | 6,933,000 |  
|Increase from prior year                  |  |                              | 1,217,000 |   |      |   |           |  
|Percentage of revenue                     |  |                              | 20.4      | % |      |   | 22.5      | %



General and
administrative costs increased $1.2 million, or 17.6%, to $8.2 million for the quarter ended March 31, 2004 as compared to $6.9 million for the quarter ended March 31, 2003. The increase reflects the increased cost structure required to support the
higher revenue levels from period to period, higher audit fees, and the expenses related to the addition of Mentorix. These increases were partially offset by the favorable impact of cost savings realized during the first quarter attributable to the
reconfiguration of the Companys European and U.S. operations and efficiencies realized through integrating acquisitions. As a percentage of revenue, general and administrative expenses decreased to 20.4% in the quarter ended March 31, 2004, as
compared to 22.5% for the quarter ended March 31, 2003 due primarily to the impact of the increase in revenue from period to period, as well as the items noted above.



Research and Development.Research and development expenses relate to LionStream an array of configurable technologies used in the
globalization process, and include salaries and associated employee benefits and third-party contractor expenses. Research and development expense decreased 38.1% to $125,000 for the quarter ended March 31, 2004 as compared to $202,000 for the
quarter ended March 31, 2003. The Company has been deploying LionStreamfor customers during the past two years, resulting in certain project personnel being redeployed to custom implementations of the technology for customers, and their cost
being charged to cost of revenue, resulting in decreased research and development headcount-related expenses for the quarter ended March 31, 2004, as compared to the corresponding quarter of the prior year.



Depreciation and Amortization.Depreciation and amortization consist
of the expense related to property and equipment that is being depreciated over the estimated useful lives of the assets using the straight-line method. The following table shows depreciation and amortization expense in dollars, dollar variance as
compared to the prior year, and as a percentage of revenue for the quarters ended March 31, 2004 and 2003, respectively:



|                                            |  |                              |         |   |      |   |         |  
|------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                            |  | Three Months Ended March 31, |        
|                                            |  | 2004                         |         |   | 2003 |  
|Total depreciation and amortization expense |  | $                            | 865,000 |   |      | $ | 840,000 |  
|Increase from prior year                    |  |                              | 25,000  |   |      |   |         |  
|Percentage of revenue                       |  |                              | 2.2     | % |      |   | 2.7     | %



Depreciation and
amortization expense increased 3.0% to $865,000 for the quarter ended March 31, 2004 as compared to $840,000 for the quarter ended March 31, 2003. This increase was primarily the result of the assets acquired in the acquisition of Mentorix in
September 2003, partially offset by the culmination of the depreciable lives of certain assets acquired in prior years.



Amortization of Acquisition-related Intangible Assets.Amortization of acquisition-related intangible assets consists of the amortization of
identifiable intangible assets resulting from acquired businesses. Amortization expense of $99,000 and $115,000 for the quarters ended March 31, 2004 and 2003, respectively, relates solely to the amortization of acquired intangible assets other than
goodwill.



Merger, Restructuring and Other Charges.Merger, restructuring and other charges consist of costs associated with employee severance and exiting activities. During the three months ended March 31, 2004, Lionbridge recorded restructuring and other charges of $1.6 million primarily
related to the integration of its India operation. The $1.6 million of restructuring and other charges included $708,000 for losses recorded on vacated facilities, $119,000 impairment of long-lived assets, and $786,000 for workforce reductions in
the U.S., France, Ireland, Germany and China, consisting of forty-one technical, five administrative, and four sales staff. Lionbridge expects to complete its restructuring plan during the second quarter of 2004, resulting in additional
restructuring charges.



Interest Expense.In 2003,
interest expense represented interest paid or payable on debt, the amortization of deferred financing costs and the accretion of discounts on subordinated notes. Interest on outstanding debt and the accretion of discount on debt were $764,000 and
$153,000, respectively for the quarter ended March 31, 2003. During the third quarter of 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. At March 31, 2004, the Company had no outstanding debt.



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##### Table of Contents

Liquidity and Capital Resources



The following table show cash and cash equivalents and working capital at March 31, 2004 and at December 31, 2003.



|                          |  |                |            |                   |   |           
|------------------------- |  | -------------- | ---------- | ----------------- | - | ----------
|                          |  | March 31, 2004 |            | December 31, 2003
|Cash and cash equivalents |  | $              | 30,808,000 |                   | $ | 29,496,000
|Working capital           |  |                | 40,720,000 |                   |   | 38,838,000



Lionbridges
working capital increased $1.9 million to $40.7 million at March 31, 2004 as compared to $38.8 million at December 31, 2003. The increase was primarily due to the growth and profitability of the business during the first quarter of 2004. As of March
31, 2004, cash and cash equivalents totaled $30.8 million, an increase of $1.3 million from $29.5 million at December 31, 2003; accounts receivable and work in process totaled $33.6 million, an increase of $330,000 from $33.3 million at December 31,
2003; and other current assets increased by $200,000 as compared to December 31, 2003. Current liabilities totaled $26.2 million, a decrease of $198,000 from $26.4 million at December 31, 2003.



The following table shows the net cash provided by (used in) operating
activities, net cash used in investing activities, and net cash provided by (used in) financing activities for the three months ended March 31, 2004 and 2003, respectively:



|                                                    |  |                              |           |   |      |   |            |  
|--------------------------------------------------- |  | ---------------------------- | --------- | - | ---- | - | ---------- | -
|                                                    |  | Three Months Ended March 31, |          
|                                                    |  | 2004                         |           |   | 2003 |  
|Net cash provided by (used in) operating activities |  | $                            | 1,358,000 |   |      | $ | (1,403,000 | )
|Net cash used in investing activities               |  |                              | (202,000  | ) |      |   | (399,000   | )
|Net cash provided by (used in) financing activities |  |                              | 350,000   |   |      |   | (904,000   | )



Net cash provided by
operating activities was $1.4 million for the three month period ended March 31, 2004 as compared to net cash used in operating activities of $1.4 million for the corresponding period of the prior year. The primary source of cash in the quarter
ended March 31, 2004 was the growth and profitability of the business, including net income of $693,000 (reflecting $1.2 million in depreciation, amortization and other non-cash expenses), a $2.2 million reduction in accounts receivable, partially
offset by other changes including a $2.9 million increase in work-in-process and a $1.2 million decrease in deferred revenue.



In the three month period ended March 31, 2003, net cash used in operations was $1.4 million, largely the result of Lionbridges operations during
the quarter, and to a lesser extent to fund the net loss of $229,000. This use of cash was reduced in part by $1.2 million in net adjustments for depreciation, amortization and other non-cash expenses. The primary use of cash for operating
activities during the quarter included a $2.0 million increase in work-in-process and an $863,000 decrease in deferred revenue, largely the result of increased revenue during the quarter, partially offset by other changes including a $561,000
decrease in accounts receivable.



Lionbridge has not
experienced any significant trends in accounts receivable and work in process other than changes relative to the increase in revenue, as previously noted. Fluctuations in accounts receivable from period to period relative to changes in revenue are a
result of timing of customer invoicing and receipt of payments from customers.



Net cash used in investing activities decreased $197,000 to $202,000 for the quarter ended March 31, 2004 as compared to $399,000 for the corresponding period of the prior year. The only investing activity for both
three-month periods was the purchase of equipment, partially offset, in the three-month period ended March 31, 2004, by $46,000 in proceeds from the sale of property and equipment.



Net cash provided by financing activities increased $1.3 million to $350,000 in the three-month period ended March 31, 2004
as compared to net cash used in financing activities of $904,000 in the three-month period ended March 31, 2003. The primary financing source of funds in the quarter ended March 31, 2004 was $402,000 in net proceeds from the issuance of common stock
under option and employee stock purchase plans. The primary use of funds from financing activities in the quarter ended March 31, 2003 was the repayment of $1.0 million of debt.



As of March 31, 2004, Lionbridge had $15.0 million available for borrowing under its bank line of credit. Lionbridges
future financing requirements will depend upon a number of factors, including its operating performance and increases in operating expenses associated with growth in its business. Lionbridge anticipates that its present cash position and available
financing should provide adequate cash to fund its currently anticipated cash needs for the foreseeable future.



Contractual Obligations



As of March 31, 2004, there are no material changes in Lionbridges contractual obligations as disclosed in the Companys Annual Report on Form
10-K for the year ended December 31, 2003.



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##### Table of Contents

Off-Balance Sheet Arrangements



The Company does not have any special purpose entities or off-balance sheet financing arrangements.



Item 3.Quantitative and Qualitative Disclosures about Market Risk



Lionbridge is exposed to market risk related to changes in interest rates and foreign currency exchange rates. Lionbridge does not currently use
derivative financial instruments for speculative or trading purposes.



Interest Rate Risk. Lionbridge is exposed to market risk from changes in interest rates solely with respect to its line of credit with a commercial bank. There was no outstanding balance at March 31, 2004 under this credit facility.
Lionbridge is exposed to market risk through its investing activities. Lionbridges investment portfolio consists solely of investments in high-grade, commercial bank money market accounts. A hypothetical 10% increase or decrease in interest
rates would not have a material impact on the carrying value of Lionbridges investments due to their immediately available liquidity or their short maturity.



Foreign Currency Exchange Rate Risk. The majority of Lionbridges contracts with clients are denominated in U.S.
dollars. However, 37% and 47% of its costs and expenses for the three months ended March 31, 2004 and 2003, respectively, were denominated in foreign currencies. Twenty-six percent and 28% of its assets were recorded in foreign currencies as of
March 31, 2004 and December 31, 2003, respectively. Twenty-two percent and 30% of its liabilities were recorded in foreign currencies as of March 31, 2004 and December 31, 2003, respectively. The principal foreign currencies applicable to
Lionbridges business are the Euro and the Yen. Lionbridge is exposed to foreign currency exchange risks as it relates to the volatility in the Euro and Yen exchange rates. Lionbridge has not historically tried to reduce its exposure to
exchange rate fluctuations by using hedging transactions. However, it may choose to do so in the future. Lionbridge may not be able to do this successfully. Accordingly, Lionbridge may experience economic loss and a negative impact on earnings and
equity as a result of foreign currency exchange rate fluctuations.



Item 4.Controls and Procedures



Evaluation of disclosure controls and procedures.As of March 31, 2004, Lionbridge, under the supervision and with the participation of the Companys management, including the Companys Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as
amended (the Exchange Act). Based upon that evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2004, the Companys disclosure controls and procedures were effective in
ensuring that material information relating to the Company (including its consolidated subsidiaries) required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions rules and forms, including ensuring that such material information is accumulated and communicated to the Companys management, including the
Companys Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.



Changes in internal controls.There were no significant changes in the Companys internal controls or in other factors that could
significantly affect the Companys internal controls over financial reporting during the quarter ended March 31, 2004.



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##### Table of Contents

LIONBRIDGE TECHNOLOGIES, INC.



PART IIOTHER INFORMATION



Item 1.Legal Proceedings



Lionbridge is a party to a proposed settlement of a purported securities class action lawsuit that was filed on or about July 24, 2001 (an amended complaint was filed on April 19, 2002) in the United States District
Court for the Southern District of New York against the Company, certain of its officers and directors, and certain underwriters involved in the Companys initial public offering. With respect to this proposed settlement in principle, since the
filing of Lionbridges Form 10-K for the year ended December 31, 2003, settlement documents have continued to be negotiated and there have been no material developments in this proceeding as to the Company.



Item 2.Changes in Securities and Use of Proceeds



None.



Item 3.Defaults Upon Senior Securities



None.



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



None.



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##### Table of Contents

Item 5.Other Information.



Accompanying this Report on Form 10-Q are the certificates of the Chief Executive Officer and the Chief Financial Officer required by 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, a copy of which is furnished as Exhibit 32.1 to this report.



Item 6. Exhibits and Reports on Form 8-K





|              |   |  |                                                                                                                                                                                                                                                          
|------------- | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) Exhibits.
|              |  
|10.1          | * |  | Non-competition Agreement between the Company and Henri Broekmate dated March 24, 2004.                                                                                                                                                                  
|              |  
|10.2          |   |  | Sublease agreement dated as of January 31, 2004 between Lionbridge Technologies, Inc. and IDS Scheer Process Implementation Consulting, Inc.                                                                                                             
|              |  
|10.3          |   |  | Amendment to Lease Agreement dated as of March 9, 2004 between Lionbridge Technologies, Inc. and Bay Colony Corporate Center LLC.                                                                                                                        
|              |  
|31.1          |   |  | Certification of Rory J. Cowan, the Companys principal executive officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.                  
|              |  
|31.2          |   |  | Certification of Stephan J. Lifshatz, the Companys principal financial officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.            
|              |  
|32.1          |   |  | Certifications of Rory J. Cowan, the Companys principal executive officer, and Stephan J. Lifshatz, the Companys principal financial officer, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

---

|* | Indicates a management contract or compensatory plan, contract or arrangement required to be filed as an Exhibit pursuant to Item 14(c).
|- | ----------------------------------------------------------------------------------------------------------------------------------------



(b) Reports on Form 8-K.



On January 16, 2004, the Company filed a Current Report on Form 8-K
containing preliminary financial information for the year ended December 31, 2003 and forward-looking statements, all as presented in a press release of January 16, 2004.



On February 2, 2004, the Company filed a Current Report on Form 8-K containing preliminary financial information for the
year ended December 31, 2003.



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##### Table of Contents

LIONBRIDGE TECHNOLOGIES, INC.



SIGNATURE



Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



LIONBRIDGE TECHNOLOGIES, INC.By:

/s/ STEPHEN J. LIFSHATZStephen J. Lifshatz Senior Vice President, Chief Financial Officer (Duly Authorized Officer and Principal Financial
Officer)




Dated: May 7, 2004



19



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##### Table of Contents

Exhibit Index



|              |   |  |                                                                                                                                                                                                                                                          
|------------- | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |   |  | Description                                                                                                                                                                                                                                              
|10.1          | * |  | Non-competition Agreement between the Company and Henri Broekmate dated March 24, 2004.                                                                                                                                                                  
|              |  
|10.2          |   |  | Sublease agreement dated as of January 31, 2004 between Lionbridge Technologies, Inc. and IDS Scheer Process Implementation Consulting, Inc.                                                                                                             
|              |  
|10.3          |   |  | Amendment to Lease Agreement dated as of March 9, 2004 between Lionbridge Technologies, Inc. and Bay Colony Corporate Center LLC.                                                                                                                        
|              |  
|31.1          |   |  | Certification of Rory J. Cowan, the Companys principal executive officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.                  
|              |  
|31.2          |   |  | Certification of Stephan J. Lifshatz, the Companys principal financial officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.            
|              |  
|32.1          |   |  | Certifications of Rory J. Cowan, the companys principal executive officer, and Stephan J. Lifshatz, the companys principal financial officer, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

---

|* | Indicates a management contract or compensatory plan, contract or arrangement required to be filed as an Exhibit pursuant to Item14(c).
|- | ---------------------------------------------------------------------------------------------------------------------------------------



20