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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 September 30, 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 October 29, 2004 was 46,785,329.



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##### Table of Contents

LIONBRIDGE TECHNOLOGIES, INC.



FORM
10-Q



FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004



TABLE OF CONTENTS



|                              |  |                                                                                                                   |  |     
|----------------------------- |  | ----------------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                                   |  | Page
|PART I:
FINANCIAL INFORMATION |  |                                                                                                                  
|                              |  |                                                                                                                  
|ITEM 1.                       |  | Consolidated Financial Statements:                                                                                |  |     
|                              |  |                                                                                                                  
|                              |  | Consolidated Balance Sheets as of September 30, 2004 (unaudited) and December 31, 2003                            |  | 3   
|                              |  |                                                                                                                  
|                              |  | Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2004 and 2003 |  | 4   
|                              |  |                                                                                                                  
|                              |  | Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 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                             |  | 11  
|                              |  |                                                                                                                  
|ITEM 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                        |  | 18  
|                              |  |                                                                                                                  
|ITEM 4.                       |  | Controls and Procedures                                                                                           |  | 19  
|                              | 
|PART II:
OTHER INFORMATION    |  |                                                                                                                  
|                              |  |                                                                                                                  
|ITEM 1.                       |  | Legal Proceedings                                                                                                 |  | 20  
|                              |  |                                                                                                                  
|ITEM 6.                       |  | Exhibits                                                                                                          |  | 20  
|                              | 
|SIGNATURE                     |  | 21                                                                                                               
|                              | 
|EXHIBIT INDEX                 |  | 22                                                                                                               



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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)



|                                                                                                                                                                                |  |                   |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                                |  | September 30,2004 |          |   | December 31,2003 |  
|                                                                                                                                                                                |  | (unaudited)       |          |   |                  |  
|ASSETS                                                                                                                                                                          |  |                   |          |   |                  |   |          |  
|Current assets:                                                                                                                                                                 |  |                   |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                       |  | $                 | 38,829   |   |                  | $ | 29,496   |  
|Restricted cash                                                                                                                                                                 |  |                   |         |   |                  |   | 338      |  
|Accounts receivable, net of allowance of $404 and $591 at September 30, 2004 and December 31, 2003, respectively                                                                |  |                   | 19,850   |   |                  |   | 24,653   |  
|Work in process                                                                                                                                                                 |  |                   | 10,485   |   |                  |   | 8,609    |  
|Other current assets                                                                                                                                                            |  |                   | 2,160    |   |                  |   | 2,188    |  
|                                                                                                                                                                                |  |                   |          |   |                  |   |          |  
|Total current assets                                                                                                                                                            |  |                   | 71,324   |   |                  |   | 65,284   |  
|Property and equipment, net                                                                                                                                                     |  |                   | 2,551    |   |                  |   | 4,445    |  
|Goodwill                                                                                                                                                                        |  |                   | 34,916   |   |                  |   | 34,994   |  
|Other intangible assets, net                                                                                                                                                    |  |                   | 73       |   |                  |   | 191      |  
|Other assets                                                                                                                                                                    |  |                   | 830      |   |                  |   | 1,076    |  
|                                                                                                                                                                                |  |                   |          |   |                  |   |          |  
|Total assets                                                                                                                                                                    |  | $                 | 109,694  |   |                  | $ | 105,990  |  
|                                                                                                                                                                                |  |                   |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                            |  |                   |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                            |  |                   |          |   |                  |   |          |  
|Accounts payable                                                                                                                                                                |  | $                 | 5,121    |   |                  | $ | 8,318    |  
|Accrued compensation and benefits                                                                                                                                               |  |                   | 5,586    |   |                  |   | 5,956    |  
|Accrued outsourcing                                                                                                                                                             |  |                   | 4,069    |   |                  |   | 3,054    |  
|Accrued merger and restructuring                                                                                                                                                |  |                   | 472      |   |                  |   | 255      |  
|Other accrued expenses                                                                                                                                                          |  |                   | 5,343    |   |                  |   | 4,779    |  
|Deferred revenue                                                                                                                                                                |  |                   | 3,086    |   |                  |   | 3,850    |  
|Other current liabilities                                                                                                                                                       |  |                   | 195      |   |                  |   | 234      |  
|                                                                                                                                                                                |  |                   |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                       |  |                   | 23,872   |   |                  |   | 26,446   |  
|                                                                                                                                                                                |  |                   |          |   |                  |   |          |  
|Long-term liabilities                                                                                                                                                           |  |                   | 1,098    |   |                  |   | 1,914    |  
|Contingencies (Note 11)                                                                                                                                                         |  |                   |          |   |                  |   |          |  
|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; 46,769,017 and 46,340,587 shares issued and outstanding at September 30, 2004
and December 31, 2003, respectively |  |                   | 468      |   |                  |   | 464      |  
|Additional paid-in capital                                                                                                                                                      |  |                   | 184,119  |   |                  |   | 181,661  |  
|Accumulated deficit                                                                                                                                                             |  |                   | (100,179 | ) |                  |   | (106,029 | )
|Deferred compensation                                                                                                                                                           |  |                   | (2,302   | ) |                  |   | (1,251   | )
|Accumulated other comprehensive income                                                                                                                                          |  |                   | 2,618    |   |                  |   | 2,785    |  
|                                                                                                                                                                                |  |                   |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                                                      |  |                   | 84,724   |   |                  |   | 77,630   |  
|                                                                                                                                                                                |  |                   |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                                                                      |  | $                 | 109,694  |   |                  | $ | 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 EndedSeptember 30, |        |      | Nine Months Ended September 30,
|                                                                                              |  | 2004                            |        | 2003 |                                 |        | 2004 |  | 2003
|Revenue                                                                                       |  | $                               | 37,630 |      | $                               | 36,701 |      |  | $    | 118,457 |  | $ | 104,822
|Operating expenses:                                                                           |  |                                 |        |      |                                 |        |      |  |      |         |  |   |        
|Cost of revenue (exclusive of depreciation and amortization included below)                   |  |                                 | 24,292 |      |                                 | 21,931 |      |  |      | 73,422  |  |   | 63,407 
|Sales and marketing                                                                           |  |                                 | 3,443  |      |                                 | 3,411  |      |  |      | 10,700  |  |   | 9,500  
|General and administrative                                                                    |  |                                 | 7,466  |      |                                 | 7,112  |      |  |      | 23,276  |  |   | 21,978 
|Research and development                                                                      |  |                                 | 79     |      |                                 | 147    |      |  |      | 258     |  |   | 498    
|Depreciation and amortization                                                                 |  |                                 | 650    |      |                                 | 747    |      |  |      | 2,290   |  |   | 2,422  
|Amortization of acquisition-related intangible assets                                         |  |                                 | 10     |      |                                 | 115    |      |  |      | 118     |  |   | 346    
|Merger, restructuring and other charges                                                       |  |                                 |       |      |                                 | 379    |      |  |      | 1,854   |  |   | 379    
|Stock-based compensation                                                                      |  |                                 | 176    |      |                                 | 69     |      |  |      | 419     |  |   | 295    
|                                                                                              |  |                                 |        |      |                                 |        |      |  |      |         |  |   |        
|Total operating expenses                                                                      |  |                                 | 36,116 |      |                                 | 33,911 |      |  |      | 112,337 |  |   | 98,825 
|                                                                                              |  |                                 |        |      |                                 |        |      |  |      |         |  |   |        
|Income from operations                                                                        |  |                                 | 1,514  |      |                                 | 2,790  |      |  |      | 6,120   |  |   | 5,997  
|Interest expense:                                                                             |  |                                 |        |      |                                 |        |      |  |      |         |  |   |        
|Interest on outstanding debt                                                                  |  |                                 |       |      |                                 | 281    |      |  |      |        |  |   | 1,882  
|Accretion of discount on debt                                                                 |  |                                 |       |      |                                 | 51     |      |  |      |        |  |   | 356    
|Accelerated recognition of discount and deferred financing charges on early repayment of debt |  |                                 |       |      |                                 | 2,139  |      |  |      |        |  |   | 2,139  
|Interest income                                                                               |  |                                 | 109    |      |                                 | 26     |      |  |      | 268     |  |   | 26     
|Other (income) expense, net                                                                   |  |                                 | 41     |      |                                 | (6     | )    |  |      | 108     |  |   | 226    
|                                                                                              |  |                                 |        |      |                                 |        |      |  |      |         |  |   |        
|Income before income taxes                                                                    |  |                                 | 1,582  |      |                                 | 351    |      |  |      | 6,280   |  |   | 1,420  
|Provision for income taxes                                                                    |  |                                 | 136    |      |                                 | 237    |      |  |      | 430     |  |   | 22     
|                                                                                              |  |                                 |        |      |                                 |        |      |  |      |         |  |   |        
|Net income                                                                                    |  | $                               | 1,446  |      | $                               | 114    |      |  | $    | 5,850   |  | $ | 1,398  
|                                                                                              |  |                                 |        |      |                                 |        |      |  |      |         |  |   |        
|Net income per share of common stock:                                                         |  |                                 |        |      |                                 |        |      |  |      |         |  |   |        
|Basic                                                                                         |  | $                               | 0.03   |      | $                               | 0.00   |      |  | $    | 0.13    |  | $ | 0.04   
|Diluted                                                                                       |  | $                               | 0.03   |      | $                               | 0.00   |      |  | $    | 0.12    |  | $ | 0.04   
|Weighted average number of common shares outstanding:                                         |  |                                 |        |      |                                 |        |      |  |      |         |  |   |        
|Basic                                                                                         |  |                                 | 46,606 |      |                                 | 39,706 |      |  |      | 46,474  |  |   | 34,433 
|Diluted                                                                                       |  |                                 | 49,450 |      |                                 | 42,246 |      |  |      | 49,550  |  |   | 37,573 



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)



|                                                                                              |  |                                 |        |   |      |   |         |  
|--------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------- | -
|                                                                                              |  | Nine Months Ended September 30, |       
|                                                                                              |  | 2004                            |        |   | 2003 |  
|Cash flows from operating activities:                                                         |  |                                 |        |   |      |   |         |  
|Net income                                                                                    |  | $                               | 5,850  |   |      | $ | 1,398   |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities:   |  |                                 |        |   |      |   |         |  
|Amortization of acquisition-related intangible assets                                         |  |                                 | 118    |   |      |   | 346     |  
|Stock-based compensation and debt financing costs                                             |  |                                 | 419    |   |      |   | 483     |  
|Accretion of discount on debt                                                                 |  |                                 |       |   |      |   | 356     |  
|Non-cash merger, restructuring and other charges                                              |  |                                 | 146    |   |      |   |        |  
|Accelerated recognition of discount and deferred financing charges on early repayment of debt |  |                                 |       |   |      |   | 2,139   |  
|Depreciation and amortization                                                                 |  |                                 | 2,290  |   |      |   | 2,422   |  
|Other                                                                                         |  |                                 | 101    |   |      |   | 22      |  
|Changes in operating assets and liabilities, net of effects of acquisition:                   |  |                                 |        |   |      |   |         |  
|Accounts receivable                                                                           |  |                                 | 4,530  |   |      |   | (1,781  | )
|Work in process                                                                               |  |                                 | (1,949 | ) |      |   | (4,149  | )
|Other current assets                                                                          |  |                                 | 353    |   |      |   | (117    | )
|Other assets                                                                                  |  |                                 | 237    |   |      |   | 39      |  
|Accounts payable                                                                              |  |                                 | (3,143 | ) |      |   | (1,408  | )
|Accrued compensation and benefits                                                             |  |                                 | (737   | ) |      |   | 556     |  
|Accrued outsourcing                                                                           |  |                                 | 1,042  |   |      |   | 25      |  
|Accrued merger and restructuring                                                              |  |                                 | 348    |   |      |   | (66     | )
|Other accrued expenses                                                                        |  |                                 | 13     |   |      |   | (1,569  | )
|Deferred revenue                                                                              |  |                                 | (743   | ) |      |   | (1,071  | )
|                                                                                              |  |                                 |        |   |      |   |         |  
|Net cash provided by (used in) operating activities                                           |  |                                 | 8,875  |   |      |   | (2,375  | )
|                                                                                              |  |                                 |        |   |      |   |         |  
|Cash flows from investing activities:                                                         |  |                                 |        |   |      |   |         |  
|Purchases of property and equipment                                                           |  |                                 | (660   | ) |      |   | (828    | )
|Proceeds from sale of property and equipment                                                  |  |                                 | 48     |   |      |   |        |  
|Payments for businesses acquired, net of cash acquired                                        |  |                                 |       |   |      |   | (21,857 | )
|                                                                                              |  |                                 |        |   |      |   |         |  
|Net cash used in investing activities                                                         |  |                                 | (612   | ) |      |   | (22,685 | )
|                                                                                              |  |                                 |        |   |      |   |         |  
|Cash flows from financing activities:                                                         |  |                                 |        |   |      |   |         |  
|Net payments of short-term debt                                                               |  |                                 |       |   |      |   | (18,159 | )
|Payments of long-term debt                                                                    |  |                                 |       |   |      |   | (11,998 | )
|Proceeds from issuance of common stock, net                                                   |  |                                 |       |   |      |   | 70,413  |  
|Proceeds from issuance of common stock under option and employee stock purchase plans         |  |                                 | 1,279  |   |      |   | 1,695   |  
|Payments of capital lease obligations                                                         |  |                                 | (173   | ) |      |   | (131    | )
|                                                                                              |  |                                 |        |   |      |   |         |  
|Net cash provided by financing activities                                                     |  |                                 | 1,106  |   |      |   | 41,820  |  
|                                                                                              |  |                                 |        |   |      |   |         |  
|Net increase in cash and cash equivalents                                                     |  |                                 | 9,369  |   |      |   | 16,760  |  
|Effects of exchange rate changes on cash and cash equivalents                                 |  |                                 | (36    | ) |      |   | (55     | )
|Cash and cash equivalents at beginning of period                                              |  |                                 | 29,496 |   |      |   | 10,916  |  
|                                                                                              |  |                                 |        |   |      |   |         |  
|Cash and cash equivalents at end of period                                                    |  | $                               | 38,829 |   |      | $ | 27,621  |  
|                                                                                              |  |                                 |        |   |      |   |         |  
|Supplemental disclosure:                                                                      |  |                                 |        |   |      |   |         |  
|Non-cash investing activityadditions to capital lease obligations for fixed asset purchases  |  | $                               |       |   |      | $ | 265     |  
|                                                                                              |  |                                 |        |   |      |   |         |  



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



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LIONBRIDGE TECHNOLOGIES, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



1. BASIS OF PRESENTATION



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



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



Accounting for Stock-Based Compensation



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



|                                                                                                                                      |  |                                 |           |   |                                 |   |          |      |  |   |            |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | --------- | - | ------------------------------- | - | -------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                                                      |  | Three Months EndedSeptember 30, |           |   | Nine Months Ended September 30, |  
|                                                                                                                                      |  | 2004                            |           |   | 2003                            |   |          | 2004 |  |   | 2003       |  
|Net income, as reported                                                                                                               |  | $                               | 1,446,000 |   |                                 | $ | 114,000  |      |  | $ | 5,850,000  |   |  | $ | 1,398,000  |  
|Add: Stock-based employee compensation expense included in reported net income, net of related tax effects                            |  |                                 | 176,000   |   |                                 |   | 69,000   |      |  |   | 419,000    |   |  |   | 295,000    |  
|Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                 | (821,000  | ) |                                 |   | (777,000 | )    |  |   | (3,390,000 | ) |  |   | (2,420,000 | )
|                                                                                                                                      |  |                                 |           |   |                                 |   |          |      |  |   |            |   |  |   |            |  
|Pro forma net income (loss)                                                                                                           |  | $                               | 801,000   |   |                                 | $ | (594,000 | )    |  | $ | 2,879,000  |   |  | $ | (727,000   | )
|                                                                                                                                      |  |                                 |           |   |                                 |   |          |      |  |   |            |   |  |   |            |  
|Net income (loss) per share:                                                                                                          |  |                                 |           |   |                                 |   |          |      |  |   |            |   |  |   |            |  
|Basic, as reported                                                                                                                    |  | $                               | 0.03      |   |                                 | $ | 0.00     |      |  | $ | 0.13       |   |  | $ | 0.04       |  
|Basic, pro forma                                                                                                                      |  | $                               | 0.02      |   |                                 | $ | (0.01    | )    |  | $ | 0.06       |   |  | $ | (0.02      | )
|Net income (loss) per share:                                                                                                          |  |                                 |           |   |                                 |   |          |      |  |   |            |   |  |   |            |  
|Diluted, as reported                                                                                                                  |  | $                               | 0.03      |   |                                 | $ | 0.00     |      |  | $ | 0.12       |   |  | $ | 0.04       |  
|Diluted, pro forma                                                                                                                    |  | $                               | 0.02      |   |                                 | $ | (0.01    | )    |  | $ | 0.06       |   |  | $ | (0.02      | )



2. PROPERTY AND EQUIPMENT



Property and equipment, net consists of the following:



|                                                |  |                   |             |   |                  |   |             |  
|----------------------------------------------- |  | ----------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                |  | September 30,2004 |             |   | December 31,2003 |  
|Computer software and equipment                 |  | $                 | 18,662,000  |   |                  | $ | 18,638,000  |  
|Furniture and office equipment                  |  |                   | 3,477,000   |   |                  |   | 3,507,000   |  
|Leasehold improvements                          |  |                   | 2,041,000   |   |                  |   | 1,992,000   |  
|                                                |  |                   |             |   |                  |   |             |  
|                                                |  |                   | 24,180,000  |   |                  |   | 24,137,000  |  
|Less: Accumulated depreciation and amortization |  |                   | (21,629,000 | ) |                  |   | (19,692,000 | )
|                                                |  |                   |             |   |                  |   |             |  
|                                                |  | $                 | 2,551,000   |   |                  | $ | 4,445,000   |  
|                                                |  |                   |             |   |                  |   |             |  



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LIONBRIDGE TECHNOLOGIES, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



3.
BUSINESS ACQUISITIONS



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



4. DEBT



Line of Credit



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



5. STOCKHOLDERS EQUITY



Stock-Based Compensation



In January 2002, Lionbridge recorded deferred compensation of $537,000,
representing the fair market value of 298,500 shares of restricted common stock issued to certain employees at that time. These restricted shares vested after one and two years of continued employment with the Company. In September 2003, Lionbridge
recorded deferred compensation of $513,000, representing the fair market value of 66,000 shares of restricted common stock issued to certain employees at that time. In October 2003, the Company recorded deferred compensation of $812,000,
representing the fair market value of 90,000 shares of restricted common stock issued to certain employees at that time. During the nine months ended September 30, 2004, upon the separation of an employee, deferred compensation of $423,000,
representing the fair market value of 37,500 shares of restricted common stock originally issued to the employee in October 2003, was reversed. The restricted common stock issued in 2003 vests over four years from the date of grant on each
anniversary date.



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



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



6. COMPREHENSIVE INCOME



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



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LIONBRIDGE TECHNOLOGIES, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



7.
NET INCOME PER SHARE



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



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



|                                                                                     |  |                                 |  |                                 |  |            |  |           
|------------------------------------------------------------------------------------ |  | ------------------------------- |  | ------------------------------- |  | ---------- |  | ----------
|                                                                                     |  | Three Months EndedSeptember 30, |  | Nine Months Ended September 30,
|                                                                                     |  | 2004                            |  | 2003                            |  | 2004       |  | 2003      
|Weighted average number of shares of common stock outstandingbasic                  |  | 46,606,000                      |  | 39,706,000                      |  | 46,474,000 |  | 34,433,000
|Dilutive common stock equivalents relating to options, restricted stock and warrants |  | 2,844,000                       |  | 2,540,000                       |  | 3,076,000  |  | 3,140,000 
|                                                                                     |  |                                 |  |                                 |  |            |  |           
|Weighted average number of shares of common stock outstandingdiluted                |  | 49,450,000                      |  | 42,246,000                      |  | 49,550,000 |  | 37,573,000
|                                                                                     |  |                                 |  |                                 |  |            |  |           



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



8. MERGER, RESTRUCTURING AND OTHER CHARGES



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



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



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



|                                         |  |      |            |   |      |   |          |  
|---------------------------------------- |  | ---- | ---------- | - | ---- | - | -------- | -
|                                         |  | 2004 |            |   | 2003 |  
|Beginning balance, January 1             |  | $    | 255,000    |   |      | $ | 871,000  |  
|Employee severance and related items:    |  |      |            |   |      |   |          |  
|Charges recorded                         |  |      | 1,003,000  |   |      |   | 379,000  |  
|Revisions of estimated liabilities       |  |      | (27,000    | ) |      |   | (14,000  | )
|Reclassification of accrual balance      |  |      |           |   |      |   | (68,000  | )
|Cash payments                            |  |      | (1,018,000 | ) |      |   | (43,000  | )
|                                         |  |      |            |   |      |   |          |  
|                                         |  |      | (42,000    | ) |      |   | 254,000  |  
|                                         |  |      |            |   |      |   |          |  
|Lease termination costs and other items: |  |      |            |   |      |   |          |  
|Charges recorded                         |  |      | 705,000    |   |      |   |         |  
|Revisions of estimated liabilities       |  |      |           |   |      |   | (284,000 | )
|Cash payments                            |  |      | (287,000   | ) |      |   | (477,000 | )
|                                         |  |      |            |   |      |   |          |  
|                                         |  |      | 418,000    |   |      |   | (761,000 | )
|                                         |  |      |            |   |      |   |          |  
|Ending balance, September 30             |  | $    | 631,000    |   |      | $ | 364,000  |  
|                                         |  |      |            |   |      |   |          |  



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



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



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



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



9. SEGMENT INFORMATION



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



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



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LIONBRIDGE TECHNOLOGIES, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



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



|                                   |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|---------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------- | - | ---------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                   |  | Three Months EndedSeptember 30, |            |   | Nine Months Ended September 30, |  
|                                   |  | 2004                            |            |   | 2003                            |   |            | 2004 |  |   | 2003        |  
|External revenue:                  |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Globalization                      |  | $                               | 29,169,000 |   |                                 | $ | 26,238,000 |      |  | $ | 90,721,000  |   |  | $ | 74,563,000  |  
|Testing                            |  |                                 | 8,461,000  |   |                                 |   | 10,463,000 |      |  |   | 27,736,000  |   |  |   | 30,259,000  |  
|                                   |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|                                   |  | $                               | 37,630,000 |   |                                 | $ | 36,701,000 |      |  | $ | 118,457,000 |   |  | $ | 104,822,000 |  
|                                   |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Net income:                        |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Globalization                      |  | $                               | 4,160,000  |   |                                 | $ | 3,602,000  |      |  | $ | 15,218,000  |   |  | $ | 9,554,000   |  
|Testing                            |  |                                 | 717,000    |   |                                 |   | 3,351,000  |      |  |   | 3,478,000   |   |  |   | 8,893,000   |  
|Less: corporate and other expenses |  |                                 | (3,431,000 | ) |                                 |   | (6,839,000 | )    |  |   | (12,846,000 | ) |  |   | (17,049,000 | )
|                                   |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|                                   |  | $                               | 1,446,000  |   |                                 | $ | 114,000    |      |  | $ | 5,850,000   |   |  | $ | 1,398,000   |  
|                                   |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  



10. OTHER INTANGIBLE ASSETS



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



|                                       |  |                    |           |                         |   |           |  |                    |        |                         |   |           |  |   |           |  |   |        
|-------------------------------------- |  | ------------------ | --------- | ----------------------- | - | --------- |  | ------------------ | ------ | ----------------------- | - | --------- |  | - | --------- |  | - | -------
|                                       |  | September 30, 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   |                         |   | 37,000    |  |                    | 73,000 |                         |   | 110,000   |  |   | 9,000     |  |   | 101,000
|                                       |  |                    |           |                         |   |           |  |                    |        |                         |   |           |  |   |           |  |   |        
|                                       |  | $                  | 1,910,000 |                         | $ | 1,837,000 |  | $                  | 73,000 |                         | $ | 1,910,000 |  | $ | 1,719,000 |  | $ | 191,000
|                                       |  |                    |           |                         |   |           |  |                    |        |                         |   |           |  |   |           |  |   |        



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



11. CONTINGENCIES



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



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12. RECENT ACCOUNTING PRONOUNCEMENTS



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



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



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



Introduction



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



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



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



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



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Revenue Recognition



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



Lionbridges revenue is derived from project-by-project fees and, to a lesser extent, long-term service agreements.
Projects are generally billed on a time and expense basis. Amounts billed in excess of revenue are recorded as deferred revenue. Revenue is generated from the provision of services to its customers for content development; product and content
globalization; software and hardware testing; product certification; and application development and maintenance.



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



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



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



The use of a
percentage-of-completion assessment of service delivery requires significant judgment relative to estimating total contract costs, including assumptions relative to the length of time to complete the project, the nature and complexity of the work to
be performed, anticipated increases in employee wages and prices for subcontractor services, and the availability of subcontractor services. When adjustments in estimated project costs are identified, anticipated losses, if any, are recognized in
the period in which they are determined.



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



Merger, Restructuring and Other Charges



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



Non-Cash Charges



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



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In January 2002, Lionbridge recorded deferred compensation of $537,000, representing the fair market
value of 298,500 shares of restricted common stock issued to certain employees at that time. The deferred compensation has been amortized over the two-year period during which the restrictions on the common stock lapsed. The amortization of this
deferred compensation was recorded as an operating expense and totaled $60,000 and $180,000, respectively, for the three and nine month periods ended September 30, 2003.



In September 2003, Lionbridge recorded deferred compensation of $513,000, representing the fair market value of 66,000
shares of restricted common stock issued to certain employees at that time. Restrictions on disposition lapse over four years from the date of grant on each anniversary date. The deferred compensation is being amortized over the four-year period
during which the restrictions on the common stock lapse. The amortization of this deferred compensation is recorded as an operating expense and totaled $32,000 and $96,000, respectively, for the three and nine month periods ended September 30, 2004
and $9,000 for the three and nine month periods ended September 30, 2003.



In October 2003, Lionbridge recorded deferred compensation of $812,000, representing the fair market value of 90,000 shares of restricted common stock issued to certain employees at that time. Restrictions on
disposition lapse over four years from the date of grant on each anniversary date. The deferred compensation is being amortized over the four-year period during which the restrictions on the common stock lapse. During the quarter ended June 30,
2004, unamortized deferred compensation of $423,000, representing the fair market value of 37,500 shares of restricted common stock issued to an employee at that time, was reversed upon the separation of the employee. The amortization of this
deferred compensation is recorded as an operating expense and totaled $23,000 and $77,000, respectively, for the three and nine month periods ended September 30, 2004, net of a reversal of $56,000 of amortization previously recorded in relation to
the 37,500 shares of restricted common stock terminated during the quarter ended June 30, 2004.



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



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



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



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



|                  |  |   |          
|----------------- |  | - | ---------
|December 31, 2004 |  |   | 213,000  
|December 31, 2005 |  |   | 722,000  
|December 31, 2006 |  |   | 492,000  
|December 31, 2007 |  |   | 433,000  
|December 31, 2008 |  |   | 271,000  
|December 31, 2009 |  |   | 171,000  
|                  |  |   |          
|                  |  | $ | 2,302,000
|                  |  |   |          



Accretion of
Discount on Debt. Interest expense for the three and nine month periods ended September 30, 2003 includes $51,000 and $356,000, respectively, for the accretion of a $3.0 million discount on subordinated debt with a principal amount of $8.0
million. The $3.0 million discount on the note was accreted as interest expense on a straight-line basis over the period from November 1, 2001 to July 31, 2003. In August 2003, the Company repaid the principal balance of $8.0 million outstanding on
this note. Due to the early extinguishment of this debt, the unamortized balance of the $3.0 million discount of $1.9 million was recorded as interest expense at the time of repayment.



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



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$1.69 per share. One quarter of the shares issuable under the warrants were vested at the time of issuance and the
remaining shares vested ratably each three-month period thereafter through the maturity date of the notes based upon the then-current principal amount outstanding. The warrants, valued at $551,000 in the aggregate, had been recorded as a deferred
financing cost and were being amortized as interest expense over the remaining term of the notes, resulting in interest expense of $230,000 and $367,000, respectively, for the three and nine months ended September 30, 2003. An incremental $207,000
was recognized as accelerated deferred financing costs in July 2003 upon early repayment of this debt.



In August 2002, Lionbridge issued two seven-year warrants related to certain subordinated debt agreements for the purchase of up to 50,612 shares, in the
aggregate, of common stock at an exercise price of $1.69 per share. One quarter of the shares issuable under the warrants were vested at the time of issuance and the remaining shares vested ratably each three-month period thereafter through the
maturity date of the notes based upon the then-current principal amount outstanding. The warrants, valued at $47,000 in the aggregate, had been recorded as a deferred financing cost and were being amortized as interest expense over the remaining
term of the notes, resulting in interest expense of $3,000 and $27,000, respectively, for the three and nine months ended September 30, 2003. In August 2003, the Company paid the balance outstanding on these notes.



Results of Operations



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



|                                                                                              |  |                                 |   |  |                                 |   |  |       |   |  |       |  
|--------------------------------------------------------------------------------------------- |  | ------------------------------- | - |  | ------------------------------- | - |  | ----- | - |  | ----- | -
|                                                                                              |  | Three Months EndedSeptember 30, |   |  | Nine Months Ended September 30, |  
|                                                                                              |  | 2004                            |   |  | 2003                            |   |  | 2004  |   |  | 2003  |  
|Revenue                                                                                       |  | 100.0                           | % |  | 100.0                           | % |  | 100.0 | % |  | 100.0 | %
|Operating expenses:                                                                           |  |                                 |   |  |                                 |   |  |       |   |  |       |  
|Cost of revenue (exclusive of depreciation and amortization included below)                   |  | 64.6                            |   |  | 59.8                            |   |  | 62.0  |   |  | 60.5  |  
|Sales and marketing                                                                           |  | 9.2                             |   |  | 9.3                             |   |  | 9.0   |   |  | 9.1   |  
|General and administrative                                                                    |  | 19.8                            |   |  | 19.4                            |   |  | 19.6  |   |  | 21.0  |  
|Research and development                                                                      |  | 0.2                             |   |  | 0.4                             |   |  | 0.2   |   |  | 0.5   |  
|Depreciation and amortization                                                                 |  | 1.7                             |   |  | 2.0                             |   |  | 1.9   |   |  | 2.3   |  
|Amortization of acquisition-related intangible assets                                         |  |                                |   |  | 0.3                             |   |  | 0.1   |   |  | 0.3   |  
|Merger, restructuring and other charges                                                       |  |                                |   |  | 1.0                             |   |  | 1.6   |   |  | 0.4   |  
|Stock-based compensation                                                                      |  | 0.5                             |   |  | 0.2                             |   |  | 0.4   |   |  | 0.3   |  
|                                                                                              |  |                                 |   |  |                                 |   |  |       |   |  |       |  
|Total operating expenses                                                                      |  | 96.0                            |   |  | 92.4                            |   |  | 94.8  |   |  | 94.4  |  
|                                                                                              |  |                                 |   |  |                                 |   |  |       |   |  |       |  
|Income from operations                                                                        |  | 4.0                             |   |  | 7.6                             |   |  | 5.2   |   |  | 5.6   |  
|Interest expense:                                                                             |  |                                 |   |  |                                 |   |  |       |   |  |       |  
|Interest on outstanding debt                                                                  |  |                                |   |  | 0.7                             |   |  |      |   |  | 1.8   |  
|Accretion of discount on debt                                                                 |  |                                |   |  | 0.1                             |   |  |      |   |  | 0.3   |  
|Accelerated recognition of discount and deferred financing charges on early repayment of debt |  |                                |   |  | 5.8                             |   |  |      |   |  | 2.0   |  
|Interest income                                                                               |  | 0.3                             |   |  |                                |   |  | 0.2   |   |  |      |  
|Other expense                                                                                 |  | 0.1                             |   |  |                                |   |  | 0.1   |   |  | 0.2   |  
|                                                                                              |  |                                 |   |  |                                 |   |  |       |   |  |       |  
|Income before income taxes                                                                    |  | 4.2                             |   |  | 1.0                             |   |  | 5.3   |   |  | 1.3   |  
|Provision for income taxes                                                                    |  | 0.4                             |   |  | 0.6                             |   |  | 0.4   |   |  |      |  
|                                                                                              |  |                                 |   |  |                                 |   |  |       |   |  |       |  
|Net income                                                                                    |  | 3.8                             | % |  | 0.4                             | % |  | 4.9   | % |  | 1.3   | %
|                                                                                              |  |                                 |   |  |                                 |   |  |       |   |  |       |  



Revenue. The
following table shows Globalization and Testing revenues in dollars and as a percentage of total revenue for the three and nine months ended September 30, 2004 and 2003, respectively:



|              |  |                                  |            |  |                                 |   |  |      |            |  |      |   |  |   |             |  |     |   |  |   |             |  |     |  
|------------- |  | -------------------------------- | ---------- |  | ------------------------------- | - |  | ---- | ---------- |  | ---- | - |  | - | ----------- |  | --- | - |  | - | ----------- |  | --- | -
|              |  | Three Months Ended September 30, |            |  | Nine Months Ended September 30, |  
|              |  | 2004                             |            |  | 2003                            |   |  | 2004 |            |  | 2003 |  
|Globalization |  | $                                | 29,169,000 |  | 78                              | % |  | $    | 26,238,000 |  | 71   | % |  | $ | 90,721,000  |  | 77  | % |  | $ | 74,563,000  |  | 71  | %
|Testing       |  |                                  | 8,461,000  |  | 22                              | % |  |      | 10,463,000 |  | 29   | % |  |   | 27,736,000  |  | 23  | % |  |   | 30,259,000  |  | 29  | %
|              |  |                                  |            |  |                                 |   |  |      |            |  |      |   |  |   |             |  |     |   |  |   |             |  |     |  
|Total revenue |  | $                                | 37,630,000 |  | 100                             | % |  | $    | 36,701,000 |  | 100  | % |  | $ | 118,457,000 |  | 100 | % |  | $ | 104,822,000 |  | 100 | %
|              |  |                                  |            |  |                                 |   |  |      |            |  |      |   |  |   |             |  |     |   |  |   |             |  |     |  



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



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



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



Cost
of Revenue. Cost of revenue consists primarily of expenses incurred for translation services provided by third parties as well as salaries and associated employee benefits for personnel related to client projects. The following table shows
Globalization and Testing cost of revenues, the percentage variance from the prior year three and nine month periods and as a percentage of revenue for the three and nine months ended September 30, 2004 and 2003, respectively:



|                      |  |                                    |            |   |                       |      |   |                                    |   |            |                                   |  |   |                                        |   |  |                                   |   |  |   |            |  
|--------------------- |  | ---------------------------------- | ---------- | - | --------------------- | ---- | - | ---------------------------------- | - | ---------- | --------------------------------- |  | - | -------------------------------------- | - |  | --------------------------------- | - |  | - | ---------- | -
|                      |  | Three MonthsEndedSeptember 30,2004 |            |   | % ChangeQ3 03to Q3 04 |      |   | Three MonthsEndedSeptember 30,2003 |   |            | Nine MonthsEndedSeptember 30,2004 |  |   | % ChangeNine Months03 to NineMonths 04 |   |  | Nine MonthsEndedSeptember 30,2003 |  
|Globalization:        |  |                                    |            |   |                       |      |   |                                    |   |            |                                   |  |   |                                        |   |  |                                   |   |  |   |            |  
|Cost of revenue       |  | $                                  | 18,960,000 |   |                       | 11.7 | % |                                    | $ | 16,979,000 |                                   |  | $ | 57,140,000                             |   |  | 17.5                              | % |  | $ | 48,611,000 |  
|Percentage of revenue |  |                                    | 65.0       | % |                       |      |   |                                    |   | 64.7       | %                                 |  |   | 63.0                                   | % |  |                                   |   |  |   | 65.2       | %
|Testing:              |  |                                    |            |   |                       |      |   |                                    |   |            |                                   |  |   |                                        |   |  |                                   |   |  |   |            |  
|Cost of revenue       |  |                                    | 5,332,000  |   |                       | 7.7  | % |                                    |   | 4,952,000  |                                   |  |   | 16,282,000                             |   |  | 10.0                              | % |  |   | 14,796,000 |  
|Percentage of revenue |  |                                    | 63.0       | % |                       |      |   |                                    |   | 47.3       | %                                 |  |   | 58.7                                   | % |  |                                   |   |  |   | 48.9       | %
|                      |  |                                    |            |   |                       |      |   |                                    |   |            |                                   |  |   |                                        |   |  |                                   |   |  |   |            |  
|Total cost of revenue |  | $                                  | 24,292,000 |   |                       |      |   |                                    | $ | 21,931,000 |                                   |  | $ | 73,422,000                             |   |  |                                   |   |  | $ | 63,407,000 |  
|                      |  |                                    |            |   |                       |      |   |                                    |   |            |                                   |  |   |                                        |   |  |                                   |   |  |   |            |  
|Percentage of revenue |  |                                    | 64.6       | % |                       |      |   |                                    |   | 59.8       | %                                 |  |   | 62.0                                   | % |  |                                   |   |  |   | 60.5       | %



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



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



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



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



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



Sales and Marketing.Sales and marketing expenses consist primarily of salaries, commissions and associated employee
benefits, travel expenses of sales and marketing personnel, promotional expenses and the costs of programs aimed at increasing revenue, such as advertising, trade shows, public relations and other market development programs. The following table
shows sales and marketing expenses in dollars, the dollar variance as compared to the prior year and as a percentage of revenue for the three and nine months ended September 30, 2004 and 2003, respectively:



|                                   |  |                                  |           |   |                                 |   |           |      |  |   |            |   |  |   |           |  
|---------------------------------- |  | -------------------------------- | --------- | - | ------------------------------- | - | --------- | ---- |  | - | ---------- | - |  | - | --------- | -
|                                   |  | Three Months Ended September 30, |           |   | Nine Months Ended September 30, |  
|                                   |  | 2004                             |           |   | 2003                            |   |           | 2004 |  |   | 2003       |  
|Total sales and marketing expenses |  | $                                | 3,443,000 |   |                                 | $ | 3,411,000 |      |  | $ | 10,700,000 |   |  | $ | 9,500,000 |  
|Increase from prior year           |  |                                  | 32,000    |   |                                 |   |           |      |  |   | 1,200,000  |   |  |   |           |  
|Percentage of revenue              |  |                                  | 9.2       | % |                                 |   | 9.3       | %    |  |   | 9.0        | % |  |   | 9.1       | %



Sales and marketing
expenses of $3.4 million for the quarter ended September 30, 2004 increased $32,000 from the corresponding quarter of 2003. The increase was primarily the result of higher employee-related expenses and travel costs in the sales organization to
support of the 2.5% increase in revenue.



For the nine months
ended September 30, 2004, sales and marketing expenses increased 12.6% to $10.7 million from $9.5 million in the comparable period of 2003. The increase was primarily the result of increased employee-related expenses and travel costs incurred in
support of the 13.0% increase in revenue during the period. As a percentage of revenue, sales and marketing expenses decreased slightly to 9.2% in the third quarter of 2004 from 9.3% in the corresponding period in 2003, and decreased slightly to
9.0% during the first nine months of 2004, from 9.1% during the nine months ended September 30, 2003, primarily as a result of the increased revenue levels from period to period.



General and Administrative. General and administrative expenses consist of salaries of the management, purchasing,
process and technology, finance and administrative groups, and associated employee benefits and travel; facilities costs; information systems costs; professional fees; business reconfiguration costs and all other site and corporate costs. The
following table shows general and administrative expenses in dollars, the dollar variance as compared to the prior year and as a percentage of revenue for the three and nine months ended September 30, 2004 and 2003, respectively:



|                                          |  |                                  |           |   |                                 |   |           |      |  |   |            |   |  |   |            |  
|----------------------------------------- |  | -------------------------------- | --------- | - | ------------------------------- | - | --------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                          |  | Three Months Ended September 30, |           |   | Nine Months Ended September 30, |  
|                                          |  | 2004                             |           |   | 2003                            |   |           | 2004 |  |   | 2003       |  
|Total general and administrative expenses |  | $                                | 7,466,000 |   |                                 | $ | 7,112,000 |      |  | $ | 23,276,000 |   |  | $ | 21,978,000 |  
|Increase from prior year                  |  |                                  | 354,000   |   |                                 |   |           |      |  |   | 1,298,000  |   |  |   |            |  
|Percentage of revenue                     |  |                                  | 19.8      | % |                                 |   | 19.4      | %    |  |   | 19.6       | % |  |   | 21.0       | %



General and
administrative expenses increased $354,000 or 5.0%, to $7.5 million for the quarter ended September 30, 2004 as compared to $7.1 million for the quarter ended September 30, 2003. This increase is primarily due to $486,000 of incremental costs
related to the addition of Mentorix and approximately $120,000 of fees incurred in relation to compliance with the Sarbanes-Oxley Act of 2002, partially offset by lower compensation expense for the quarter ended September 30, 2004 as compared to the
corresponding period of the prior year.



For the nine months
ended September 30, 2004, general and administrative expenses increased $1.3 million to $23.3 million from $22.0 million during the corresponding period of 2003. The increase is primarily due to $1.6 million of incremental costs related to the
addition of Mentorix and approximately $180,000 of fees incurred in relation to compliance with the Sarbanes-Oxley Act of 2002, partially reduced by lower consulting fees and insurance costs for the nine-months ended September 30, 2004 as compared
to the corresponding period of the prior year, and by the impact of approximately $534,000 of business reconfiguration expenses associated with the resizing of the Paris, France operations recorded during the second quarter of 2003. As a percentage
of revenue, general and administrative expenses increased to 19.8% in the quarter ended September 30, 2004, as compared to 19.4% for the quarter ended September 30, 2003, and decreased to 19.6% from 21.0% for the nine months ended September 30, 2004
and 2003, respectively, due primarily to the items noted above as well as the impact of the increase in revenue from period to period.



Research and Development.Research and development expenses relate to LionStream, an array of configurable technologies used in the globalization process, and include
salaries and associated employee benefits and third-party contractor expenses. Research and development expense decreased 46.3% to $79,000 for the quarter ended September 30, 2004 as compared to $147,000 for the



16



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quarter ended September 30, 2003. For the nine months ended September 30, 2004, research and development expenses
decreased 48.2% to $258,000 from $498,000 for the nine months ended September 30, 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 and the nine months ended September 30, 2004, as compared to
the corresponding periods 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, the dollar variance as compared to the prior year and as a percentage of revenue for the three and nine months ended September 30, 2004 and 2003, respectively:



|                                            |  |                                  |         |   |                                 |   |         |      |  |   |           |   |  |   |           |  
|------------------------------------------- |  | -------------------------------- | ------- | - | ------------------------------- | - | ------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                            |  | Three Months Ended September 30, |         |   | Nine Months Ended September 30, |  
|                                            |  | 2004                             |         |   | 2003                            |   |         | 2004 |  |   | 2003      |  
|Total depreciation and amortization expense |  | $                                | 650,000 |   |                                 | $ | 747,000 |      |  | $ | 2,290,000 |   |  | $ | 2,422,000 |  
|Decrease from prior year                    |  |                                  | 97,000  |   |                                 |   |         |      |  |   | 132,000   |   |  |   |           |  
|Percentage of revenue                       |  |                                  | 1.7     | % |                                 |   | 2.0     | %    |  |   | 1.9       | % |  |   | 2.3       | %



Depreciation and
amortization expense decreased 13.0% to $650,000 for the quarter ended September 30, 2004 as compared to $747,000 for the quarter ended September 30, 2003. For the nine months ended September 30, 2004, depreciation and amortization expense decreased
5.5% to $2.3 million from $2.4 million for the nine months ended September 30, 2003. The culmination of depreciable lives of certain assets acquired in prior years resulted in decreased depreciation and amortization expense for the quarter and the
nine months ended September 30, 2004, as compared to the corresponding periods of the prior year.



Interest Expense.During the three and nine months ended September 30, 2004, Lionbridge had no outstanding debt, and as a result, no 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 $281,000 and $51,000, respectively, for the three months ended September 30, 2003 and $1.9 million and $356,000, respectively for the nine months ended September 30, 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. The early repayment of debt accelerated recognition of $2.1 million
in discount and deferred financing charges during the three and nine months ended September 30, 2003.



Liquidity and Capital Resources



The following table shows cash and cash equivalents and working capital at September 30, 2004 and at December 31, 2003:



|                          |  |                    |            |                   |   |           
|------------------------- |  | ------------------ | ---------- | ----------------- | - | ----------
|                          |  | September 30, 2004 |            | December 31, 2003
|Cash and cash equivalents |  | $                  | 38,829,000 |                   | $ | 29,496,000
|Working capital           |  |                    | 47,452,000 |                   |   | 38,838,000



Lionbridges
working capital increased $8.6 million to $47.5 million at September 30, 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 nine months ended September
30, 2004. As of September 30, 2004, cash and cash equivalents totaled $38.8 million, an increase of $9.3 million from $29.5 million at December 31, 2003; accounts receivable and work in process totaled $30.3 million, a decrease of $3.0 million
compared to December 31, 2003; and other current assets decreased by $28,000 as compared to December 31, 2003. Current liabilities totaled $23.9 million, a decrease of $2.6 million 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 financing activities for the nine months ended September 30, 2004 and 2003, respectively:



|                                                    |  |                                 |           |      |   |            |  
|--------------------------------------------------- |  | ------------------------------- | --------- | ---- | - | ---------- | -
|                                                    |  | Nine Months Ended September 30, |          
|                                                    |  | 2004                            |           | 2003 |  
|Net cash provided by (used in) operating activities |  | $                               | 8,875,000 |      | $ | (2,375,000 | )
|Net cash used in investing activities               |  |                                 | 612,000   |      |   | 22,685,000 |  
|Net cash provided by financing activities           |  |                                 | 1,106,000 |      |   | 41,820,000 |  



Net cash provided by
operating activities was $8.9 million for the nine month period ended September 30, 2004, as compared to net cash used in operating activities of $2.4 million for the corresponding period of the prior year. The primary source of cash in the nine
months ended September 30, 2004 was the growth and profitability of the business, including net income of $5.9 million



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(reflecting $3.1 million in depreciation, amortization and other non-cash expenses), and a $5.1 million reduction in
accounts receivable and certain other operating assets, partially offset by other changes including a net $2.5 million decrease in accounts payable and accrued expenses, a $1.9 million increase in work-in-process and a $743,000 decrease in deferred
revenue. The primary uses of cash for the nine months ended September 30, 2003 included a $1.8 million increase in accounts receivable and a $4.1 million increase in work-in-process, largely the result of increased revenue during the nine-month
period ended September 30, 2003, partially offset by other changes, including a $1.1 million decrease in deferred revenue. This use of cash was reduced in part by $5.8 million in net adjustments for depreciation, amortization and other non-cash
expenses, including $2.1 million of accelerated recognition of discount on debt and deferred financing charges on early retirement of debt.



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 $22.1 million to $612,000 for
the nine month period ended September 30, 2004, from $22.7 million for the corresponding period of 2003. The primary investing activity for the nine month period ended September 30, 2004 was the purchase of equipment, partially offset by $48,000 in
proceeds from the sale of property and equipment. The primary investing activity for the nine-month period ended September 30, 2003 was $21.9 million for the acquisition of Mentorix, net of cash acquired and to a lesser extent, purchases of
equipment.



Net cash provided by financing activities decreased
$40.7 million to $1.1 million in the nine-month period ended September 30, 2004 as compared to net cash provided by financing activities of $41.8 million for the corresponding period of 2003. The primary financing source of funds in the nine-month
period ended September 30, 2004 was $1.3 million in proceeds from the issuance of common stock under option and employee stock purchase plans. The primary use of funds from financing activities in the nine-month period ended September 30, 2004 was
the payment of $173,000 in capital lease obligations. The primary financing source of funds during the nine-month period ended September 30, 2003, was the $70.4 million in net proceeds from the Companys issuance of 12,340,000 common shares in
a public offering. The primary use of funds from financing activities during the nine-month period ended September 30, 2003, was the repayment of $31.7 million of debt during the third quarter of 2003.



As of September 30, 2004, Lionbridge had $15.0 million available for
borrowing under its bank line of credit which represented the total available under the line. 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 next twelve months and foreseeable
future.



Contractual Obligations



As of September 30, 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.



Off-Balance Sheet Arrangements



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



Recent Accounting Pronouncements



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



Item 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.



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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 September 30, 2004 under this credit facility. Lionbridge is exposed to market risk through its investing activities. Lionbridges investment
portfolio consists primarily 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, 43% and 49% of its costs and expenses for the nine months ended September 30, 2004 and 2003,
respectively, were denominated in foreign currencies. Thirty-one percent and 28% of its assets were recorded in foreign currencies as of September 30, 2004 and December 31, 2003, respectively. Twenty-seven percent and 30% of its liabilities were
recorded in foreign currencies as of September 30, 2004 and December 31, 2003, respectively. The principal foreign currencies applicable to Lionbridges business are the Euro, the Yen, and the Rupee. Lionbridge is exposed to foreign currency
exchange risks as it relates to the volatility in the Euro, Yen and Rupee exchange rates. Lionbridge has not historically tried to reduce its exposure to exchange rate fluctuations by using formal 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 September 30, 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 September 30, 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 three months ended September 30, 2004.



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LIONBRIDGE TECHNOLOGIES, INC.



PART IIOTHER INFORMATION



Item 1.Legal Proceedings



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



Item 6. Exhibits



|(a) | Exhibits.
|--- | ---------



|     |   |  |                                                                                                                                                                                                                                                          
|---- | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 | * |  | Form of Restricted Stock Units Agreement.                                                                                                                                                                                                                
|     |  
|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 Stephen 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 Stephen 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.
|- | ------------------------------------------------------------------------------

|
|



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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: November 5, 2004



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Exhibit Index



|              |  |                                                                                                                                                                                                                                                          
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                              
|10.1*         |  | Form of Restricted Stock Units Agreement.                                                                                                                                                                                                                
|              | 
|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 Stephen 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 Stephen 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.
|- | ------------------------------------------------------------------------------



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