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Lionbridge Technologies Inc/DE – ‘10-K’ for 12/31/07

On:  Friday, 3/14/08, at 5:26pm ET   ·   For:  12/31/07   ·   Accession #:  1193125-8-57610   ·   File #:  0-26933

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

For the fiscal year ended: December 31, 2007

Commission File Number 000-26933

LIONBRIDGE TECHNOLOGIES, INC.

(Exact Name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (781) 434-6000

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

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

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Exchange Act Rule 12b-2 (Check one):

Large accelerated filer  ¨            Accelerated filer  x

Non-accelerated filer  ¨    (Do not check if small reporting company)  ¨    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The aggregate market value of the voting stock held by non-affiliates of the registrant, as of June 29, 2007, was approximately $148.2 million (based on the closing price of the registrant’s Common Stock on June 29, 2007, of $5.89 per share).

The number of shares outstanding of the registrant’s $.01 par value Common Stock as of February 29, 2008 was 58,344,357.

DOCUMENTS INCORPORATED BY REFERENCE

Lionbridge intends to file a proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 2007. Portions of such proxy statement are incorporated by reference into Part III of this Report.

Table of Contents

ANNUAL REPORT ON FORM 10-K

YEAR ENDED DECEMBER 31, 2007

TABLE OF CONTENTS

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PART I

Except for the historical information contained herein, the matters discussed in this Annual Report on Form 10-K are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements involve risks and uncertainties. Lionbridge makes such forward-looking statements under the provision of the “Safe Harbor” section of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements should be considered in light of the factors described below in Item 1A “Risk Factors.” Actual results may vary materially from those projected, anticipated or indicated in any forward-looking statements. In this Annual Report on Form 10-K, the words “anticipates,” “believes,” “expects,” “intends,” “future,” “could,” and similar words or expressions (as well as other words or expressions referencing future events, conditions or circumstances) identify forward-looking statements. Unless the context otherwise requires, all references to “Lionbridge,” “we,” “our,” “us” or “our company” in this Annual Report on Form 10-K refer to Lionbridge Technologies, Inc., a Delaware corporation, and its subsidiaries.

About Lionbridge

Lionbridge is a leading provider of globalization, development and testing services that enable clients to develop, release, manage and maintain their enterprise content and technology applications globally. Lionbridge Global Language and Content (“GLC”) solutions enable the globalization and worldwide multilingual release of clients’ products, content and related technical support, training materials, and sales and marketing information. Globalization is the process of translating, localizing and adapting content and products to meet the language and cultural requirements of users throughout the world. As part of its GLC solutions, Lionbridge also develops eLearning content and technical documentation. Lionbridge GLC solutions are based on the Company’s internet-architected language technology platform and global service delivery model which make the translation and localization processes more efficient for Lionbridge clients and translators.

Through its Global Development and Testing (“GDT”) solutions, Lionbridge develops, re-engineers and optimizes IT applications and performs testing to ensure the quality, interoperability, usability and performance of clients’ software, consumer technology products, web sites, search engines and content. Lionbridge’s testing services, which are offered under the VeriTest brand, also include product certification and competitive analysis. Lionbridge has deep domain experience developing, testing and maintaining applications in a cost-efficient, blended on-site and offshore model.

Lionbridge provides a full suite of globalization, testing and development outsourcing services to businesses in diverse end markets including technology, mobile and electronics, life sciences, consumer, publishing, manufacturing, automotive and government. Lionbridge’s solutions include product and content globalization; content and eLearning courseware development; interpretation services; application development and maintenance; software and hardware testing; global search relevancy and sourcing; product certification and competitive analysis. Lionbridge’s services enable global organizations to increase market penetration and speed adoption of global content and products, enhance return on enterprise application investments, increase workforce productivity and reduce costs.

Lionbridge provides the following core benefits to clients:

Global Scale.    With approximately 4,600 employees worldwide, Lionbridge operates globalization, testing and development solution centers in 26 countries. Lionbridge leverages its global resources and proven program management capabilities to provide client delivery teams that are designed to have the optimal technical, linguistic and industry expertise and skills to meet each client’s specific needs. Lionbridge’s global infrastructure enables Lionbridge to deliver high-value, cost-effective services and to meet its clients’ budgetary and geographic requirements.

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Hosted Internet-based Language Management Technology.    Lionbridge globalization services utilize an internet-architected language technology platform. This platform includes a suite of applications that streamline the translation process and increase linguistic quality and consistency. This increased efficiency lowers translation costs, thereby affording clients greater freedom to be creative when preparing their source materials. A core component of this platform is Lionbridge’s Logoport™ technology, an internet-architected, hosted translation memory application that manages previously translated words, phrases and glossaries in real time and simplifies translation management. This advanced, industry standard-compatible application makes it easier for translators around the world to collaborate, share knowledge, and deliver consistent, high-quality results while enabling clients to better manage their language assets through the Lionbridge-hosted managed service platform. Lionbridge is also adding workflow capabilities and integrating portal and machine translation technology into a comprehensive language management platform called Freeway™. This comprehensive hosted infrastructure is enabling Lionbridge to provide clients with high quality globalization services and highly efficient centralized language management processes.

Integrated Full-Service Offering.    Lionbridge is able to serve as an outsourcing partner throughout a client’s product and content lifecycle from development and globalization to testing through maintenance. Clients can rely on Lionbridge’s comprehensive globalization services to develop, release and maintain their global content, websites and technology applications for their customers, partners and employees throughout the world. Lionbridge’s testing services enable clients to improve product quality and reduce downstream support costs. This unified suite of solutions allows Lionbridge to serve as its clients’ single outsource provider for developing, releasing, testing and maintaining multilingual content and technology across global end markets. By outsourcing to a large-scale provider, organizations are able to focus on their core competencies, drive process improvements and speed the process of communicating large amounts of information to customers and employees throughout their global organization.

Lionbridge is a corporation, which was incorporated in Delaware in September 1996. Its principal executive offices are located at 1050 Winter Street, Waltham, Massachusetts 02451, its telephone number is (781) 434-6000, and its Web site is www.lionbridge.com. Lionbridge makes available, free of charge, on its Web site its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after the reports are electronically filed with or furnished to the SEC. Lionbridge’s filings with the Securities and Exchange Commission are also available on the Web at www.sec.gov.

Lionbridge Services

Lionbridge provides a full suite of language, content, development, testing and interpretation services. Our services include the following:

Global Language and Content Services (“GLC”)

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

As an example, Lionbridge provides localization services for a global mobile communications provider that releases dozens of new communication devices and related applications in more than 80 languages every year. Lionbridge localizes and tests software and related documentation, user interfaces and help screens. The Lionbridge process is integrated with and essential to the client’s worldwide product release cycle. As a result,

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Lionbridge believes that it is reducing the time required for its client’s new products to reach international markets and reducing the client’s global release costs while increasing its customer satisfaction worldwide.

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

For example, Lionbridge is managing frequently changing content for a client’s global online search website and its online advertising program. Lionbridge is automating the process of extracting English language content from the client, routing it through translation memory technology and workflow processes and publishing the translated content directly to the client in an automated manner. As a result of this streamlined process, Lionbridge estimates that it is saving this client significant time and cost associated with the ongoing management of its multilingual search website and advertising programs.

Content Development.    Content development is the creation, design and deployment of content and related assets including rich media, text, images, and animations. Lionbridge provides content development solutions, including eLearning courseware development, and production and integration of content within a technology platform. As part of this solution, Lionbridge creates content, develops and integrates applications for authoring and managing content, delivers courses, and tracks user interaction within an interactive content application.

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

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

Lionbridge maintains long-term, strategic relationships with an extensive network of third-party individual, local-country translators, including independent agencies and freelance professionals. Lionbridge also directly employs linguistic engineers, publishers, editors and translators. Lionbridge uses a combination of translation software as well as internal and external translators for its globalization services. This global network of employees and third-party translators allows Lionbridge to provide client delivery teams that have the appropriate combination of linguistic, technology and industry domain expertise, and local country presence, to meet each client’s specific needs. This flexible and scalable model also enables Lionbridge to manage large, complex client engagements while minimizing its fixed costs.

Lionbridge GLC services incorporate Freeway™, Lionbridge’s advanced internet-based language platform. Freeway supports efficient, high quality globalization and includes a collaboration portal for all project

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participants, a repository connector to select, extract and route content for localization, and process automation tools. Freeway also includes Logoport™ which is Lionbridge’s proprietary, internet-architected translation memory application that simplifies translation management. This hosted application makes it easier for translators to collaborate, share knowledge, and deliver consistent, high-quality results. Lionbridge believes that its Freeway and Logoport technologies enable clients to better manage their language assets on a real-time basis. As a result, Lionbridge increases the quality of multilingual content, enables the globalization process to be more efficient and minimizes translation costs as client programs grow in scope and duration. This technology-based approach to client programs allows Lionbridge to increase its opportunities for recurring clients and enhances its ability for margin growth.

Lionbridge’s delivery of its GLC services is based on its Lionbridge Excellence in Operations (“LEO”) methodology. LEO is a framework to assure quality and on-time deliverables to customers, internal teams and external partners. LEO is a proven, repeatable process designed to ensure consistency around the world. A roadmap for effective service delivery, LEO offers a unified, systematic approach to adapting products and content to a target locale’s technical, linguistic and cultural expectations. Lionbridge’s LEO incorporates regional best practices and consolidates them into a standardized set of global processes to ensure repeatability, predictability and common expectations across various operating centers. LEO standardizes processes throughout every Lionbridge solution center, defines key activities, and specifies goals for each project. Lionbridge’s process-oriented approach to production enables Lionbridge to deliver high-quality applications and content across multiple technology platforms, languages and cultures in a timely fashion, while continually improving process and service delivery for Lionbridge clients.

Global Development and Testing Services (“GDT”)

Application Development and Maintenance (“ADM”).    To support its clients’ global product releases, Lionbridge offers a scalable application development and maintenance solution that includes custom software development, application maintenance and code modernization. The core to this solution is Lionbridge’s global team approach that combines program managers either onsite at the client’s operation with application development and maintenance professionals located in service centers in India, Ireland and China. This global delivery model leverages Lionbridge’s worldwide infrastructure and enables Lionbridge to offer a high-quality, low-cost application development and maintenance solution that Lionbridge believes optimizes clients’ existing resources and reduces their cost of supporting business and IT applications.

For example, for a Fortune 500 provider of managed care and specialty healthcare insurance services, Lionbridge is modernizing several of the company’s back-end applications by migrating the applications to a newer more flexible technology platform. Concurrently, Lionbridge is enhancing and maintaining the client’s legacy systems with a combination of onsite program management and offshore code development, support and maintenance. Lionbridge believes that by using ADM services, the client will be able to better manage the deployment of new information technology systems and more cost-effectively manage its legacy claims processing, billing and other business-critical applications.

Testing.    Lionbridge provides a variety of testing and certification services which are offered to clients under the VeriTest^® brand. VeriTest services include performance testing, quality assurance, usability testing, globalization testing, certification and competitive analysis. Performance testing is the process of determining whether a website or application will perform and function appropriately when high usage levels occur, either through an increase in the number of users accessing the website or application, or through an increase in the complexity of activity conducted on the site or application at a given time. VeriTest quality assurance services verify that a client’s hardware, software, website, or internal application does not have bugs, glitches, or oversights that could impact the functionality, compatibility, interoperability or performance of that application. VeriTest usability testing is the process of determining the extent to which a client’s hardware, software, website, or internal application meets users’ expectations for ease of use. VeriTest globalization testing determines whether the product is ready for global release by ensuring that locale-dependent functions work as intended

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within the local hardware and software environment of the end user. VeriTest services include product certification programs for many leading software, hardware and telecommunications companies, including Microsoft, Cingular, Novell, HP and EMC. These sponsoring companies retain VeriTest to develop and administer test criteria that independent software vendors must satisfy before they may display the sponsor’s logo (such as Microsoft’s Certified for Windows^® Server) on their products. These certification tests confirm that software vendors’ applications properly interact with those of the platform vendor.

Global Sourcing and Search.    Lionbridge provides specialized search relevance quality assurance solutions for clients with global internet portals and search engines. Lionbridge’s global sourcing and search solutions enable clients to improve their search engine performance and deliver better quality and more relevant search results for queries generated in each of the client’s target global markets. To deliver this solution, Lionbridge identifies and recruits teams of independent, in-country contractors that test the relevancy of search results for each target locale as well as the usability of specific content within the client’s website. This solution builds on Lionbridge’s skills for managing on-demand resources across a wide range of global markets. The community is managed by Lionbridge program and project managers to ensure the search engine results and web content are consistent with user expectations. Ultimately clients use this information to drive increased revenue growth through relevant advertising.

Lionbridge conducts its GDT and GLC services at its India facilities in Mumbai and Chennai. Lionbridge’s Mumbai, India operation has again attained the Software Engineering Institute’s (“SEI”) Capability Maturity Model (“CMM”) Level 5 rating, the highest possible CMM rating from the SEI, a research and development center chartered to improve software engineering practices. Several of Lionbridge’s operations are also registered as ISO-9000 and ISO-9001 facilities.

Interpretation Services

Lionbridge provides interpretation services for government and business organizations that require experienced linguists to facilitate communication. Lionbridge provides interpretation communication services in more than 360 languages and dialects, including onsite interpretation, over-the-phone interpretation and interpreter testing, training, and assessment services.

For one government organization, Lionbridge provides telephonic interpretation services, onsite interpretation services and translation services during interviews of individuals seeking asylum or protection from removal to their home countries. As a result, Lionbridge believes that this government organization can promote greater reliability in understanding and evaluating claims. For a large healthcare information service provider, Lionbridge provides interpretation services that link patients with interpreters who translate the confidential communications between the patients and healthcare providers. Lionbridge believes that this enables the healthcare information provider to effectively and efficiently service its non-English speaking users which total approximately 500 per month.

See Note 12 of Notes to Consolidated Financial Statements included as part of Item 15 of this Form 10-K for financial information relating to Lionbridge’s operating segments and geographic areas of operation.

Sales and Marketing

Substantially all of Lionbridge’s revenue has been generated through its dedicated direct sales force based in the United States, Europe, Asia and India who sell the full range of Lionbridge services. The Lionbridge sales approach involves planning for an organization’s unique ongoing requirements, including future versions of products, and ongoing support, maintenance, and training, related to both technology products and content.

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Clients

Lionbridge clients are predominantly Global 2000 companies in the technology, consumer, retail, industrial, life sciences, financial services and manufacturing industries. Lionbridge provided services in excess of $50,000 to approximately 450 clients worldwide for the year ended December 31, 2007. The following companies are representative Lionbridge clients, each of whom purchased more than $2.0 million in services from Lionbridge in the year ended December 31, 2007:

In 2007, 2006 and 2005, Microsoft accounted for 21%, 22% and 20% of total revenue, respectively. No other client accounted for greater than 10% of total revenue in 2007, 2006 and 2005. Lionbridge’s ten largest clients accounted for 52%, 49% and 51% of revenue in 2007, 2006 and 2005, respectively.

Competition

Lionbridge provides a broad range of solutions for worldwide delivery of technology and content to its clients. The market for its services is highly fragmented, and Lionbridge has many competitors. Additionally, many potential customers address their globalization requirements through in-house capabilities, while others outsource their globalization needs, most often to regional vendors of translation services with specific subject matter or language expertise, or utilize technology-based translation solutions. Lionbridge’s current competitors include the following:

Lionbridge may also face competition from a number of other companies in the future, including some companies that currently seek localization services from it. Other potential entrants into Lionbridge’s market include India-based offshore development organizations that are providing a range of software development, testing and maintenance services for global technology companies that require localization of the products and applications they provide. As content management software is deployed internationally, these firms may be required to assist their customers with maintaining multilingual databases. While today these companies are often working with Lionbridge to assist in meeting their customers’ needs, it is possible that over time they will expand into offering competitive services.

From time to time, new companies may enter Lionbridge’s global language and content industry. Although Lionbridge builds unique applications on top of standard translation memory software licensed from third parties in its localization process, and to a lesser extent machine translation software also licensed from third parties, Lionbridge’s technology does not preclude or inhibit others from entering its market.

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Lionbridge believes the principal competitive factors in providing its services include its proprietary, web-based language technology platform; its ability to provide clients a comprehensive set of services that address multiple phases of a client’s content and technology application lifecycle; its global infrastructure that supports cost effective, high quality client delivery worldwide; project management expertise; quality and speed of service delivery; vertical industry expertise; expertise and presence in certain geographic areas and corporate reputation. Lionbridge believes it has competed favorably with respect to these factors and has a strong reputation in its industry.

Intellectual Property Rights

Lionbridge’s success is dependent, in part, upon its proprietary methodologies and practices, including its machine translation, Freeway and Logoport technologies, its proprietary testing linguistic practices and methodologies, its language assets and other intellectual property rights. Lionbridge has patents or patent applications pending relating to its language automation translation memory engine and Logoport technology and believes that the duration of these patents is adequate relative to the expected lives of their applications. Lionbridge relies on a combination of trade secret, license, nondisclosure and other contractual agreements, and copyright and trademark laws to protect its intellectual property rights. Existing trade secret and copyright laws afford Lionbridge only limited protection. Lionbridge enters into confidentiality agreements with its employees, contractors and clients, and limits access to and distribution of Lionbridge’s and Lionbridge’s clients’ proprietary information. Lionbridge cannot assure that these arrangements will be adequate to deter misappropriation of its proprietary information or that it will be able to detect unauthorized use and take appropriate steps to enforce its intellectual property rights.

Human Resources

As of December 31, 2007, Lionbridge had approximately 4,600 full-time equivalent employees. Of these, 3,900 were consulting and service delivery professionals and 700 were management and administrative personnel performing sales, operations, marketing, process and technology, research and development, finance, accounting, and administrative functions.

Lionbridge has employees in Norway and Poland who are represented by a labor union, and there are works councils in the Netherlands, France, Germany, Denmark, Finland, and Spain. Lionbridge has never experienced a work stoppage and believes that its employee relations are good.

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This Annual Report on Form 10-K contains forward-looking statements which involve risks and uncertainties. Lionbridge’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, without limitation, those set forth in the following risk factors and elsewhere in this Annual Report on Form 10-K. In addition to the other information included or incorporated by reference in this Annual Report on Form 10-K, the following risk factors should be considered carefully in evaluating Lionbridge and its business.

Lionbridge’s reliance on a small number of large clients and the delay or reduction of its clients’ product releases and production schedules or the loss of, or reduction in revenue from, a major client could negatively affect Lionbridge’s revenue and results of operations.

A significant portion of Lionbridge’s revenue is linked to the product release cycles and production schedules of its clients, and, in particular, to certain key clients. As a result, Lionbridge performs varying amounts of work for specific clients from year to year based on their product release cycles and production schedules. A major client in one year may not have use for a similar level of Lionbridge’s services in another year. In addition, Lionbridge derives a significant portion of its revenues from large projects and programs for a limited number of large clients. For the years ended December 31, 2007 and 2006, Lionbridge’s largest client accounted for 21% and 22% of its revenue, respectively, and its five largest clients accounted for approximately 40% of its revenue. As a result, the loss of any major client or a significant reduction in a large project’s scope could materially reduce Lionbridge’s revenue and cash flow, and adversely affect its ability to maintain profitability.

Pursuing and completing potential acquisitions could divert management attention and financial resources and may not produce the desired business results.

As part of its growth strategy, Lionbridge intends to continue pursuing and making selected acquisitions of complementary businesses. Lionbridge does not have specific personnel dedicated solely to pursuing and making acquisitions. As a result, if Lionbridge pursues any acquisition, its management, in addition to their operational responsibilities, could spend a significant amount of time and management and financial resources to pursue and integrate the acquired business with its existing business. To fund the purchase price of an acquisition, Lionbridge might use capital stock, cash or a combination of both. Alternatively, Lionbridge may borrow money from a bank or other lender. If it uses capital stock, Lionbridge’s stockholders will experience dilution. If it uses cash or debt financing, Lionbridge’s financial liquidity may be reduced. In addition, from an accounting perspective, an acquisition may involve amortization of significant amounts of other intangible assets that could adversely affect Lionbridge’s ability to maintain profitability.

Despite the investment of these management and financial resources, an acquisition may not produce the revenue, earnings or business synergies that Lionbridge anticipated or may produce such synergies less rapidly than anticipated for a variety of reasons, including:

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Lionbridge may not be able to successfully address these problems. Lionbridge’s future operating results may depend to a significant degree on Lionbridge’s ability to successfully integrate acquisitions and manage operations while controlling expenses and cash outflows.

Lionbridge may have difficulty in identifying and competing for acquisition opportunities.

Lionbridge’s business strategy includes the pursuit of strategic acquisitions. While Lionbridge currently does not have commitments or agreements with respect to any acquisitions, it regularly explores potential acquisitions of strategically complementary businesses or operations. Lionbridge may not be able to identify suitable acquisition candidates and it can expect to face competition from other companies for potential acquisition candidates, making it more difficult to acquire suitable companies on favorable terms.

Lionbridge’s results of operations could be negatively affected by potential fluctuations in foreign currency exchange rates.

Lionbridge conducts a large portion of its business in international markets. Although a majority of Lionbridge’s contracts with clients are denominated in U.S. dollars, 71% and 67% of its costs and expenses for the years ended December 31, 2007 and 2006, respectively, were denominated in foreign currencies. In addition, 15% and 23% of the Company’s consolidated tangible assets were subject to foreign currency exchange fluctuations as of December 31, 2007 and 2006, respectively, while 8% and 6% of its consolidated liabilities were exposed to foreign currency exchange fluctuations as of December 31, 2007 and 2006. In addition, net inter-company balances denominated in currencies other than the functional currency of the respective entity were approximately $100.0 million and $111.0 million as of December 31, 2007 and 2006, respectively. The principal foreign currency applicable to our business is the Euro. Management has a hedging program in place to partially hedge its exposure to assets or liabilities denominated in currencies other than the functional currency of the respective entity. Management regularly reviews the hedging program and will make adjustments as necessary. Lionbridge’s hedging activities may not prove favorable or effective against the adverse impact resulting from unfavorable movement in foreign currency exchange rates, which could adversely affect the Company’s financial condition or results of operations.

Lionbridge may not realize the anticipated benefits of past or future acquisitions and integration of these acquisitions may interrupt the Company’s business and management.

Lionbridge has made significant acquisitions in the past and expects to continue to make acquisitions as part of our long-term business strategy. Lionbridge may not realize the anticipated benefits of this or any other acquisition, or Lionbridge may not realize the anticipated benefits as quickly as originally anticipated. In particular, the process of integrating acquired companies into the Company’s existing business may result in unforeseen difficulties and delays. These risks include:

Mergers and acquisitions are inherently risky and if Lionbridge does not fully complete the integration of acquired businesses successfully and in a timely manner, the Company may not realize the anticipated benefits of the acquisitions to the extent anticipated, or as rapidly as anticipated, which could adversely affect Lionbridge’s business, financial condition or results of operations.

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Potential fluctuations in Lionbridge’s quarterly results make financial forecasting difficult and could affect its common stock trading price.

As a result of fluctuations in Lionbridge’s revenues tied to foreign currency fluctuations, its clients’ activities and release cycles, customer and vendor pricing pressures, the three-to nine-month length of its typical sales cycle, historical growth, acquisition activity, the emerging nature of the markets in which it competes, global economic conditions and other factors outside its control, Lionbridge believes that quarter-to-quarter comparisons of its results of operations are not necessarily meaningful. You should not rely on the results of any one quarter as an indication of Lionbridge’s future performance. Lionbridge may not experience revenue increases in future years comparable to the revenue increases in some prior years. There have been quarters in the past in which Lionbridge’s results of operations have fallen below the expectations of securities analysts and investors and this may occur in the future. If in a future quarter Lionbridge’s results of operations were to fall below the expectations of securities analysts and investors, the trading price of its common stock would likely decline.

Fluctuations in the mix of customer demand for the Company’s various types of service offerings could impact Lionbridge’s financial performance and impact Lionbridge’s ability to forecast performance.

Customer demand for the range of the Company’s service offerings varies from time to time and is not predictable, due to fluctuations in customer needs, changes in the customer industries and general economic conditions. As a result, the mix of services provided by Lionbridge to its customers varies at any given time, both within a quarter and from quarter to quarter. These variations in service mix impact gross margins and the predictability of gross margins for any period. Therefore, Lionbridge believes that quarter-to-quarter comparisons of its results of operations are not necessarily meaningful. You should not rely on the results of any one quarter as an indication of Lionbridge’s future performance. Lionbridge may not experience profitability or margin increases in future years comparable to those experienced in some prior years. There have been quarters in the past in which Lionbridge’s results of operations have fallen below the expectations of securities analysts and investors and this may occur in the future. If in a future quarter Lionbridge’s results of operations were to fall below the expectations of securities analysts and investors, the trading price of its common stock would likely decline.

Lionbridge’s financial performance may be impacted by its ability to transition service execution to its lower cost operational sites, the timing of such transition, and customer acceptance of such transition.

Lionbridge’s business strategy includes the transition of customer service execution to its Global Delivery Centers located in India, China, Poland and Slovakia. The rate at which such services may be transitioned and the timing of any transition is difficult to predict and is dependent on customer demand for such services and customer acceptance of such any such transition. Accordingly, changes in the location of service execution may not produce the anticipated financial benefit and the Company may not realize the anticipated benefits of service execution in its Global Delivery Centers to the extent anticipated, or as rapidly as anticipated, all of which could adversely affect Lionbridge’s business, financial condition or results of operations.

Goodwill and other intangible assets represent a significant portion of Lionbridge’s assets; any impairment of Lionbridge’s goodwill or other intangible assets will adversely impact its net income.

At December 31, 2007, Lionbridge had goodwill and other intangible assets of approximately $159.7 million, net of accumulated amortization, which represented approximately 47.9% of its total assets. Lionbridge’s goodwill is subject to an impairment test on an annual basis, and both goodwill and other intangible assets are also tested whenever events and circumstances indicate that they may be impaired. Such events or conditions could include an economic downturn in the industries to which Lionbridge provides services, increased competition, an increase in operating or other costs, additional volatility in international currencies, the pace of technological improvements; or other information regarding Lionbridge’s market value, such as a reduction in stock price. Any excess goodwill resulting from the impairment test must be written off in the period

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of determination. Intangible assets (other than goodwill) are generally amortized over a one to five-year period, with the exception of various customer relationships acquired in the “Bowne Global Solutions (“BGS”) transaction that are amortized over a twelve-year period. In addition, Lionbridge will continue to incur non-cash charges in connection with the amortization of its intangible assets other than goodwill over the remaining useful lives of such assets. Future determinations of significant write-offs of goodwill or other intangible assets as a result of an impairment test or any accelerated amortization of other intangible assets could have a significant impact on Lionbridge’s net income and affect its ability to achieve or maintain profitability. Although the Company does not believe that an impairment of Lionbridge’s goodwill or other intangible assets exists at this time, in the event that such a condition or event occurs, we may record additional charges which could have a material adverse effect on our results of operations.

If Lionbridge does not respond to future advances in technology and changes in customer demands, its business and results of operations may be adversely affected.

The demand for Lionbridge’s services will be substantially affected, in large part, by future advances in technology and changes in customer demands. Lionbridge’s success will also depend on its ability to address the increasingly sophisticated and varied needs of its existing and prospective clients. Lionbridge cannot assure you that there will be a demand for its services in the future. Lionbridge’s success in servicing its clients will be largely dependent on its development of strategic business solutions and methodologies in response to technological advances and client preferences. For example, Lionbridge’s services are based on a hosted internet-based language technology platform, a core component of which is Lionbridge’s Logoport technology.

Lionbridge may be unable to continue to grow at its historical growth rates or to manage its growth effectively.

Growth is a key component of increasing the value of Lionbridge. Since its inception, Lionbridge’s business has grown significantly and it anticipates additional future growth. Lionbridge has focused some of its expansion efforts on leveraging the solution centers in India, China, Poland and Slovakia while concurrently restructuring certain western European and U.S. operations. This realignment has placed and may continue to place significant demands on management and operational resources. In order to manage growth effectively, Lionbridge must continue to evolve its operational systems. Additional growth may further strain Lionbridge’s management and operational resources. As a result of these concerns, Lionbridge cannot be sure that it will continue to grow, or, if it does grow, that it will be able to maintain its overall historical growth rate.

Lionbridge’s business may be harmed by defects or errors in the services it provides to its clients.

Many of the services Lionbridge provides are critical to its clients’ businesses. While Lionbridge maintains general liability insurance, including coverage for errors and omissions, defects or errors in the services it provides could interrupt its clients’ abilities to provide services to their end users resulting in delayed or lost client revenue. This could damage Lionbridge’s reputation through negative publicity, make it difficult to attract new, and retain existing customers and cause customers to terminate their contracts and seek damages. Lionbridge may incur additional costs to correct errors or defects. Lionbridge cannot assure you that its general liability and errors and omissions insurance coverage will be available in amounts sufficient to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claims.

If Lionbridge fails to hire and retain professional staff, its ability to obtain and complete its projects could suffer.

Lionbridge’s potential failure to hire and retain qualified employees could impair its ability to complete existing projects and bid for or obtain new projects and, as a result, could have a material adverse effect on its business and revenue. Lionbridge’s ability to grow and increase its market share largely depends on its ability to hire, train, retain and manage highly skilled employees, including project managers and technical, sales and

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marketing personnel. In addition, Lionbridge must ensure that its employees maintain their technical expertise and business skills. Lionbridge cannot assure you that it will be able to attract a sufficient number of qualified employees or that it will successfully train and manage the employees it hires to allow Lionbridge to carry out its operating plan.

Difficulties presented by international economic, political, legal, health, accounting and business factors could negatively affect Lionbridge’s business in international markets.

A strategic advantage of Lionbridge’s operations is its ability to conduct business in international markets. Lionbridge conducts business and has operations and clients throughout the world. As a result, Lionbridge’s business is subject to political and economic fluctuations in various countries and to more cost-intensive social insurance and employment laws and regulations, particularly in Europe. In addition, as Lionbridge continues to employ and retain personnel throughout the world and to comply with various employment laws, it may face difficulties in integrating such personnel on a cost-efficient basis. As Lionbridge aligns its worldwide workforce, it may face difficulties and expense in reducing its workforce in certain high cost countries and regions, including Europe. To date, Lionbridge has been able to successfully staff its international operations, but if Lionbridge seeks to expand its operations, it may become more difficult to manage its international business. In addition, Lionbridge’s ability to engage individual interpreters and translators as contractors rather than employees may be impacted by changes in employment laws, regulations and interpretations in certain jurisdictions, which may expose Lionbridge to additional costs and expenses. Lionbridge’s and its clients’ abilities to conduct business may also be affected by wars, political unrest, terrorism, natural disasters or the impact of diseases such as avian influenza. Furthermore, as a result of operating in international markets, Lionbridge is subject to longer payment cycles from many of its customers and may experience greater difficulties in timely accounts receivable collections. If Lionbridge fails to manage these operations successfully, its ability to service its clients and grow its business will be seriously impeded.

Lionbridge competes in highly competitive markets.

The markets for Lionbridge’s services are very competitive. Lionbridge cannot assure you that it will compete successfully against its competitors in the future. If Lionbridge fails to be competitive with these companies in the future, it may lose market share and its revenue could decline.

There are relatively few barriers preventing companies from competing with Lionbridge. Although Lionbridge owns proprietary technology, Lionbridge does not own any patented or other technology that, by itself, precludes or inhibits others from entering its market. As a result, new market entrants also pose a threat to Lionbridge’s business. In addition to Lionbridge’s existing competitors, Lionbridge may face further competition in the future from companies that do not currently offer globalization or testing services. Lionbridge may also face competition from internal globalization and testing departments of its current and potential clients. Technology companies, information technology services companies, business process outsourcing companies, web consulting firms, technical support call centers, hosting companies and content management providers may choose to broaden their range of services to include globalization or testing as they expand their operations internationally. Lionbridge cannot assure you that it will be able to compete effectively with potential future competitors.

Lionbridge will continue to depend on intellectual property rights to protect its proprietary technologies, although it may not be able to successfully protect these rights.

Lionbridge relies on its proprietary technology to enhance some of its service offerings. Lionbridge’s policy is to enter into confidentiality agreements with its employees, outside consultants and independent contractors. Lionbridge also uses patent, trademark, trade secret and copyright law in addition to contractual restrictions to protect its technology. Notwithstanding these precautions, it may be possible for a third party to obtain and use Lionbridge’s proprietary technology without authorization. Although Lionbridge holds registered or pending

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United States patents and foreign patents covering certain aspects of its technology, it cannot be sure of the level of protection that these patents will provide. Lionbridge may have to resort to litigation to enforce its intellectual property rights, to protect trade secrets or know-how, or to determine their scope, validity or enforceability. Enforcing or defending its proprietary technology is expensive, could cause diversion of Lionbridge’s resources and may not prove successful. The laws of other countries may afford Lionbridge little or no effective protection of its intellectual property rights.

The intellectual property of Lionbridge’s customers may be damaged, misappropriated, stolen or lost while in Lionbridge’s possession, subjecting it to litigation and other adverse consequences.

In the course of providing globalization and testing services to Lionbridge’s customers, Lionbridge takes possession of or is granted access to certain intellectual property of such customers, including unreleased versions of software and source code. In the event such intellectual property is damaged, misappropriated, stolen or lost, Lionbridge could suffer:

Lionbridge has an accumulated deficit and may not be able to continue to achieve operating profit.

For the years ended December 31, 2007, 2006 and 2005, Lionbridge achieved operating profits of $9.0 million, $15.0 million, and $1.3 million, respectively. However, prior to 2005, since inception, Lionbridge incurred substantial losses and may incur losses in the future. Lionbridge has an accumulated deficit of $112.1 million as of December 31, 2007. Lionbridge intends to continue to invest in internal expansion, infrastructure, select acquisitions and its sales and marketing efforts. Lionbridge cannot assure you that it will continue to achieve operating profits in the future or will generate net income in the future.

Changes in, or interpretations of, tax rules and regulations may adversely affect Lionbridge’s effective tax rates.

Lionbridge is subject to income taxes in both the U.S. and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Lionbridge is subject to the continual examination by tax authorities in certain jurisdictions and the Company regularly assesses the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. Although Lionbridge believes its tax estimates are reasonable, the final determination of tax audits could be materially different than what is reflected in historical income tax provisions and accruals, and could result in a material effect on the Company’s income tax provision, net income, or cash flows in the period or periods for which that determination is made could result. If additional taxes are assessed, the possibility exists for an adverse impact on Lionbridge’s financial results.

In addition, unanticipated changes in Lionbridge’s tax rates could affect its future results of operations. Lionbridge’s future effective tax rates could be unfavorably affected by changes in tax laws or the interpretation in tax laws, by unanticipated decreases in the amount of revenues in countries with low statutory tax rates, or by changes in the valuation of the Company’s deferred tax assets or liabilities.

The adoption in June 2006 by the Financial Accounting Standards Board (“FASB”) of FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109, prescribes a recognition threshold and measurement attribute for the financial statement recognition and

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measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The company began recognizing tax liabilities in accordance with FIN 48 beginning in the first quarter of 2007.

Changes in accounting policies may affect Lionbridge’s reported earnings and operating income.

Generally accepted accounting principles and accompanying accounting pronouncements, implementation guidelines and interpretations for many aspects of our business, including revenue recognition are highly complex and involve subjective judgments. Changes in these rules, their interpretation, or their application relative to changes in the Company’s services or business could significantly change Lionbridge’s reported earnings and could add significant volatility to these measures, without a comparable underlying change in cash flow from operations. Lionbridge’s application of applicable accounting guidance involves interpretation and judgment, and may, as a result, delay the timing of revenue recognition or accelerate the costs associated with deferred revenue.

Lionbridge may not realize the anticipated benefits of current or future cost reduction and restructuring initiatives.

Lionbridge has initiated and will continue to implement cost reduction actions to improve our operating cost structure, reduce overhead and better position ourselves competitively. These cost reduction initiatives include measures designed to better align operating expenses with expected revenue levels, resource reallocations, head count reductions and technology deployments. The timing and implementation of cost reduction initiatives is dependent upon a number of factors, including customer needs and transition requirements, local statutory and regulatory requirements, and economic conditions. Cost reduction initiatives could result in current period charges and expenses that could impact our operating results and anticipated benefits may be negatively impacted by foreign currency exchange rate fluctuations. Lionbridge cannot guarantee that these measures, or other expense reduction measures we take in the future, will result in the expected cost savings.

In connection with these cost reduction actions, Lionbridge may engage in restructuring actions and incur restructuring charges for actions undertaken in any particular quarter. In connection with determining the size and scope of any such restructuring charge, management will be required to make significant estimates related to expenses for severance and other employee separation costs, lease cancellation and other exit costs, and estimates of future rental income that may be generated through the subleasing of excess leased property. Should the actual amounts differ from our estimates, the amount of the restructuring charges could be materially impacted.

None.

Lionbridge maintains solution centers in North America, South America, Europe and Asia. Lionbridge’s headquarters and principal administrative, finance, legal, sales and marketing, investor relations and information technology operations are located in Waltham, Massachusetts. Its principal operational facilities are located as follows:

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On or about July 24, 2001, a purported securities class action lawsuit captioned “Samet v. Lionbridge Technologies, Inc. et al.” (01-CV-6770) was filed in the United States District Court for the Southern District of New York (the “Court”) against the Company, certain of its officers and directors, and certain underwriters involved in the Company’s initial public offering. The complaint in this action asserted, among other things, that omissions regarding the underwriters’ alleged conduct in allocating shares in Lionbridge’s initial public offering to the underwriters’ customers. In March 2002, the United States District Court for the Southern District of New York entered an order dismissing without prejudice the claims against Lionbridge and its officers and directors (the case remained pending against the underwriter defendants).

On April 19, 2002, the plaintiffs filed an amended complaint naming as defendants not only the underwriter defendants but also Lionbridge and certain of its officers and directors. The amended complaint asserts claims under both the registration and antifraud provisions of the federal securities laws relating to, among other allegations, the underwriters’ alleged conduct in allocating shares in the Company’s initial public offering and the disclosures contained in the Company’s registration statement. On July 15, 2002, the Company, together with the other issuers named as defendants in these coordinated proceedings, filed a collective motion to dismiss the complaint on various legal grounds common to all or most of the issuer defendants. In October 2002, the claims against officers and directors were dismissed without prejudice. In February 2003, the Court issued its ruling on the motion to dismiss, ruling that the claims under the antifraud provisions of the securities laws could proceed against the Company and a majority of the other issuer defendants.

In June 2003, Lionbridge elected to participate in a proposed settlement agreement with the plaintiffs in this litigation. If the proposed settlement had been approved by the Court, it would have resulted in the dismissal, with prejudice, of all claims in the litigation against Lionbridge and against any other of the issuer defendants who elected to participate in the proposed settlement, together with the current or former officers and directors of participating issuers who were named as individual defendants. This proposed settlement was conditioned on, among other things, a ruling by the District Court that the claims against Lionbridge and against the other issuers who had agreed to the settlement would be certified for class action treatment for purposes of the proposed settlement, such that all investors included in the proposed classes in these cases would be bound by the terms of the settlement unless an investor opted to be excluded from the settlement.

On December 5, 2006, the U.S. Court of Appeals for the Second Circuit issued a decision in In re Initial Public Offering Securities Litigation that six purported class action lawsuits containing allegations substantially similar to those asserted against the Company may not be certified as class actions due, in part, to the Appeals Court’s determination that individual issues of reliance and knowledge would predominate over issues common to the proposed classes. On January 8, 2007, the plaintiffs filed a petition seeking rehearing en banc of the Second Circuit Court of Appeals’ decision. On April 6, 2007 the Court of Appeals denied the plaintiffs’ petition for rehearing of the Court’s December 5, 2006 ruling but noted that the plaintiffs remained free to ask the District Court to certify classes different from the ones originally proposed which might meet the standards for class certification that the Court of Appeals articulated in its December 5, 2006 decision. The plaintiffs have since moved for certification of different classes in the District Court.

In light of the Court of Appeals’ December 5, 2006 decision regarding certification of the plaintiffs’ claims, the District Court entered an order on June 25, 2007 terminating the proposed settlement between the plaintiffs and the issuers, including Lionbridge. Because any possible future settlement with the plaintiffs, if such a settlement were ever to be agreed to, would involve the certification of a class action for settlement purposes, the impact of the Court of Appeals’ class certification-related rulings on the possible future settlement of the claims against Lionbridge cannot now be predicted.

On October 1, 2007, the plaintiffs submitted their briefing in support of their motions to certify different classes in the six focus cases. The issuer defendants and the underwriter defendants filed separate oppositions to those motions on December 21, 2007. The motions to certify classes in the six focus cases are not yet fully

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briefed and remain pending. In addition, on August 14, 2007, the plaintiffs filed amended complaints in the six focus cases. On November 13, 2007, the issuer defendants moved to dismiss the claims against them in the amended complaints in the six focus cases. The underwriter defendants have also moved to dismiss the claims against them in the amended complaints in the six focus cases. Those motions to dismiss are fully briefed and remain pending.

With the termination of the proposed settlement, we intend to continue to defend the litigation vigorously. The litigation process is inherently uncertain and unpredictable, however, and there can be no guarantee as to the ultimate outcome of this pending lawsuit. The Company believes that the underwriters may have an obligation to indemnify Lionbridge for the legal fees and other costs of defending this suit. While Lionbridge cannot guarantee the outcome of these proceedings, the Company believes that the final result of this lawsuit will have no material effect on its consolidated financial condition, results of operations, or cash flows.

None.

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PART II

As of February 29, 2008, there were 600 holders of record of Lionbridge’s common stock. Lionbridge’s common stock is listed and traded on the Nasdaq Global Market under the symbol “LIOX”.

The following table sets forth, for the periods indicated, the range of high and low sales prices for the common stock for the past eight quarters, all as reported by the Nasdaq Global Market of the Nasdaq Stock Market LLC. The quotations represent interdealer quotations, without adjustments for retail mark ups, mark downs, or commissions, and may not necessarily represent actual transactions.

During 2007, the Company purchased 83,662 restricted shares from employees to cover withholding taxes due from the employees at the time the shares vested. The following table provides information about Lionbridge’s purchases of restricted shares for the year ended December 31, 2007:

In addition, upon the termination of employees during the year ended December 31, 2007, 39,249 unvested restricted shares were forfeited. The following table provides information about Lionbridge’s forfeited restricted shares for the year ended December 31, 2007:

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In September 2007, the Company’s Board of Directors authorized a $12.0 million stock repurchase program and as of December 31, 2007, the Company had acquired 3.2 million shares of its common stock for $10.2 million and as of January 24, 2008, the Company acquired 3.7 million shares of its common stock for $12.0 million. These stock purchases were at a volume weighted average price of $3.25 per share. In February 2008, the Company’s Board of Directors authorized the repurchase of an additional $12.0 million shares of common stock of the Company. As of March 14, 2008, the Company acquired 146,468 shares of its common stock for $470,000 at a volume weighted average price of $3.21 per hare.

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

The following chart compares the total return on a cumulative basis of $100 invested in Lionbridge’s common stock on December 31, 2002 to the Nasdaq Composite Index and the Hemscott Business Software & Services Index.

The Stock Performance Graph furnished shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act.

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The selected consolidated financial data as of December 31, 2007 and 2006 and for each of the three years in the period ended December 31, 2007 have been derived from the audited consolidated financial statements of Lionbridge which appear as part of Item 15 of this Form 10-K. The selected consolidated financial data as of December 31, 2005, 2004 and 2003 and for the years ended December 31, 2004 and 2003 have been derived from audited consolidated financial statements of Lionbridge that are not included in this Form 10-K.

The historical results presented are not necessarily indicative of future results. Moreover, on September 1, 2005, Lionbridge acquired BGS. As a result, revenue and operating expenses for the years ended December 31, 2005, 2006 and 2007 increased substantially, as more fully discussed in Item 7. As a result of these increases, comparison of the years ended December 31, 2005, 2006 and 2007 to prior years is less useful. You should read the data set forth below in conjunction with the “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included in this Form 10-K.

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The following discussion contains forward-looking statements which involve risks and uncertainties. Lionbridge makes such forward-looking statements under the provision of the “Safe Harbor” section of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements should be considered in light of the factors described above in Item 1A “Risk Factors.” Actual results may vary materially from those projected, anticipated or indicated in any forward-looking statements. In this Item 7, the words “anticipates,” “believes,” “expects,” “intends,” “future,” “could,” and similar words or expressions (as well as other words or expressions referencing future events, conditions, or circumstances) identify forward-looking statements. The following discussion and analysis should be read in conjunction with “Risk factors,” “Selected Consolidated Financial Data” and the accompanying consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

Overview

Founded in 1996, Lionbridge is a leading provider of globalization, development and testing services that enable clients to develop, release, manage and maintain their enterprise content and technology applications globally. Lionbridge Global Language and Content (“GLC”) solutions enable the globalization and worldwide multilingual release of clients’ products, content and related technical support, training materials, and sales and marketing information. Globalization is the process of adapting content and products to meet the language and cultural requirements of users throughout the world. As part of its GLC solutions, Lionbridge also develops eLearning content and technical documentation. Lionbridge GLC solutions are based on the Company’s internet-architected language technology platform and global service delivery model which make the translation process more efficient for Lionbridge clients and translators.

Through its Global Development and Testing (“GDT”) solutions, Lionbridge develops, re-engineers and optimizes IT applications and performs testing to ensure the quality, interoperability, usability and performance of clients’ software, consumer technology products, web sites and content. Lionbridge’s testing services, which are offered under the VeriTest brand, also include product certification and competitive analysis. Lionbridge has deep domain experience developing, testing and maintaining applications in a cost-efficient, blended on-site and offshore model.

Lionbridge provides a full suite of globalization, testing and development outsourcing services to businesses in diverse end markets including technology, mobile and electronics, life sciences, consumer, publishing, manufacturing, automotive and government. Lionbridge’s solutions include product and content globalization; content and eLearning courseware development; interpretation services; application development and maintenance; software and hardware testing; product certification and competitive analysis. Lionbridge’s services enable global organizations to increase market penetration and speed adoption of global content and products, enhance return on enterprise application investments, increase workforce productivity and reduce costs. In addition, as a result of Lionbridge’s acquisition of BGS, Lionbridge provides interpretation services to government organizations and businesses that require human interpreters for non-English speaking individuals.

In 2007, 2006 and 2005, Lionbridge’s operating profit was $9.0 million, $15.0 million and $1.3 million, respectively, with a net loss of $4.2 million, $4.9 million and $3.9 million, respectively. In 2004 and 2003, Lionbridge’s operating profit was $7.2 million and $7.5 million, respectively, and net income was $7.1 million and $2.5 million, respectively. In 2002, Lionbridge’s operating profit was $451,000 with a net loss of $4.8 million. Prior to 2002, the Company experienced operating losses, as well as net losses, for each year of its operations and, as of December 31, 2007 Lionbridge had an accumulated deficit of $112.1 million.

Critical Accounting Policies and Estimates

Lionbridge’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally

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accepted in the United States of America. The preparation of these financial statements requires Lionbridge to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Lionbridge periodically evaluates its estimates. Lionbridge bases its estimates on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Lionbridge reviewed the development, selection, and disclosure of the following critical accounting policies and estimates with its audit committee and the Company’s board of directors. Lionbridge’s critical accounting estimates relate to the following: revenue recognition, allowance for doubtful accounts, business combinations, valuation of goodwill and other intangible assets and the provision for income taxes.

Revenue Recognition.    Lionbridge recognizes revenue as services are performed and amounts are earned in accordance with the Securities and Exchange Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements,” as amended by SAB No. 104, “Revenue Recognition.” Lionbridge considers amounts to be earned when (1) persuasive evidence of an arrangement has been obtained; (2) services are delivered; (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 recorded from the provision of services to customers for GLC, GDT and Interpretation services which include content development, product and content globalization, interpretation, software and hardware testing, product certification and application development and maintenance.

Content development, software and hardware testing, interpretations and application development and maintenance projects are normally time and expense priced contracts, and revenue is recognized using a time and expense basis over the period of performance, primarily based 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. Depending on specific contractual provisions and nature of the deliverable, revenue is recognized on (1) a proportional performance model based on level of effort, (2) as milestones are achieved or (3) when final deliverables have been met. Amounts billed in excess of revenue recognized are recorded as deferred revenue.

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

Lionbridge provides integrated full-service offerings throughout a client’s product and content lifecycle, including GLC and GDT services. Such multiple-element service offerings are governed by the Emerging Issues

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Task Force Issue 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” For these arrangements where the GLC and GDT services have independent value to the customer, and there is evidence of fair value for each service, the combined service arrangement is bifurcated into separate units for accounting treatment. In instances where it is not possible to bifurcate a project, direct and incremental costs attributable to each component are deferred and recognized together with the service revenue upon delivery. The determination of fair value requires the use of significant judgment. Lionbridge determines the fair value of service revenues based upon its recent pricing for those services when sold separately and/or prevailing market rates for similar services.

Revenue includes reimbursement of travel and out-of-pocket expenses with equivalent amounts of expense recorded in cost of revenue.

Allowance for Doubtful Accounts.    Lionbridge establishes an allowance for doubtful accounts to cover accounts receivable that may not be collectible. In establishing the allowance for doubtful accounts, Lionbridge analyzes the collectibility of all accounts. Additionally, Lionbridge considers its historical bad debt experience and current economic trends in evaluating the allowance for doubtful accounts. Accounts written off in subsequent periods can differ materially from the allowance provided.

Business Combinations.     In the event that Lionbridge completes a business combination where the purchase method of accounting is used as required by Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” the Company allocates the purchase price paid to the assets of the business acquired, including intangible assets, and the liabilities assumed based on their estimated fair values, with any amount of excess purchase price recorded as goodwill. Significant management judgments and assumptions are required in determining the fair value of acquired assets and liabilities, particularly acquired intangible assets which typically comprise acquired customer contracts and relationships and acquired technology. The valuation of purchased intangible assets is principally based upon estimates of the future performance and cash flows from the acquired business. If different assumptions are used, it could materially impact the purchase price allocation and our financial position and results of operations.

Valuation of Goodwill and Other Intangible Assets.    Lionbridge assesses the impairment of goodwill and other intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Such events or conditions could include an economic downturn in the industries to which Lionbridge provides services; increased competition; an increase in operating or other costs; additional volatility in international currencies; the pace of technological improvements; or other information regarding Lionbridge’s market value, such as a reduction in stock price. When Lionbridge determines that the carrying value of intangibles or goodwill may not be recoverable based upon one or more of these indicators of impairment, the Company initially assesses any impairment using fair value measurements based on projected discounted cash flow valuation models. In addition, in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, goodwill is reviewed for impairment on an annual basis. At December 31, 2007 and 2006, the Company performed its annual test of goodwill to determine if an impairment existed. This test determined that each reporting unit’s fair value exceeded the carrying value of the net assets of each respective reporting unit, using projected discounted cash flow modeling. As a result, no impairment was required in either year. Estimating future cash flows requires management to make projections that can differ materially from actual results.

The Company evaluates whether there has been an impairment in the carrying value of its other intangibles assets in accordance with SFAS No. 144, “Accounting for Impairment of Long-Lived Assets,” if circumstances indicate that a possible impairment may exist. An impairment in the carrying value of an asset is assessed when the undiscounted expected future operating cash flows derived from the asset are less than its carrying value. If it is determined that the asset is impaired then it is written down to its estimated fair value. Factors that could lead to an impairment of acquired customer relationships (recorded with the BGS acquisition) include a worsening in customer attrition rates compared to historical attrition rates, or lower than initially anticipated cash flows associated with customer relationships.

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

In July 2006, the FASB issued FIN 48 which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS 109, “Accounting for Income Taxes.” FIN 48 provides that a tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.

Income tax position must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. This interpretation also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Lionbridge adopted FIN 48 effective January 1, 2007.

As of January 1, 2007, the Company had gross unrecognized tax benefits of $1.5 million. Of this total, $1.5 million represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. Lionbridge accrues interest and penalties related to unrecognized tax benefits as a component of its provision for income taxes. The total amount of accrued interest and penalties included in the Company’s unrecognized tax benefits of $1.5 million is $185,000. The Company does not reasonably estimate that the unrecognized tax benefit will change significantly within the next twelve months.

The Company recognizes tax reserves in accordance with FIN 48 and adjusts these reserves when our judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment, or loss of benefit, that is materially different from our current estimate of the tax exposure. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined. If the tax liabilities relate to tax uncertainties existing at the date of the acquisition of a business, the adjustment of such tax liabilities will result in an adjustment to the goodwill recorded at the date of acquisition.

The Company’s unrecognized tax benefits include exposures from not filing in certain jurisdictions and transfer pricing exposures from allocation of income between jurisdictions. Lionbridge believes that it is reasonably possible that approximately $116,000 of its unrecognized tax positions, each of which are individually insignificant, may be recognized by the end of 2008 as a result of a lapse of the statute of limitations.

Significant Acquisitions

Lionbridge has grown its business since inception through a combination of acquisitions and organic growth. Such acquisitions through December 31, 2007 have resulted in the cumulative recognition of approximately $204.3 million of goodwill and other intangible assets on its balance sheet. Other acquired intangible assets are amortized over periods ranging from one to twelve years.

Acquisitions in the three year period ended December 31, 2007 were as follows:

Bowne Global Solutions

On September 1, 2005, Lionbridge completed the acquisition of Bowne Global Solutions (“BGS”) pursuant to the terms of the Agreement and Plan of Merger dated as of June 27, 2005. After the acquisition, BGS became

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a wholly owned subsidiary of Lionbridge. At the closing, each share of common stock of BGS was automatically converted into the right to receive a portion of the acquisition consideration. To fund a portion of the purchase price for its acquisition of BGS, the Company entered into a Credit Agreement (“Credit Agreement”) dated as of September 1, 2005, together with certain of its U.S. and non-U.S. subsidiaries, the several banks and financial institutions as may become parties to the Credit Agreement (“Lenders”) and Wachovia Bank, National Association, as administrative agent for the Lenders. The Credit Agreement was replaced in December 2006 with a Credit Agreement dated as of December 21, 2006, by and among the Company, certain of its U.S. and non-U.S. subsidiaries, the several banks and financial institutions named therein, and HSBC Bank USA, National Association, which provided for a five-year revolving line of credit of up to $100.0 million.

The BGS acquisition was accounted for using the purchase method of accounting. The total purchase price was $188.4 million, consisting of a cash payment of $128.5 million made at the closing, 9.4 million shares of Lionbridge’s common stock with a fair market value of $56.5 million, and an additional $3.4 million of direct acquisition costs. The market price used to value the Lionbridge shares issued as partial consideration for BGS was $6.01, which represents the 5 day average closing price of the stock during the period beginning two days before and ending two days after June 28, 2005 the first trading day of the Company’s common stock following announcement of the acquisition on June 27, 2005. Lionbridge borrowed $2.5 million under the revolving credit facility component of the Credit Agreement and $97.7 million (net of $2.3 million of debt financing fees) under the term facility component of the Credit Agreement, which amounts were used to pay a portion of the cash consideration at the closing.

Additionally, in connection with the acquisition of BGS, Lionbridge recorded $48.3 million of amortizable intangible assets, including customer contracts, technology and customer relationships. The estimated useful life of acquired customer contracts ranges from 3.3 to 5.3 years and is being amortized on a straight-line basis. The estimated useful life of acquired technology ranges from 1 to 4 years and is being amortized on a straight-line basis. The estimated useful life of acquired customer relationships is 12 years and is being amortized using the economic consumption method to reflect diminishing cash flows from these relationships in the future. In determining the fair value of the acquired customer relationships, Lionbridge used a discounted cash flow model based upon the estimated future income streams associated with the customer relationships considering their estimated remaining period of benefit. As part of this model, Lionbridge relied on historical attrition rates combined with a premium factor related to the inherent risk of attrition in the newly acquired BGS customer base.

The final allocation of the purchase price, including direct acquisition costs, was based on the fair values of the assets and liabilities assumed as of December 31, 2005, as follows:

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At December 31, 2005, the Company reported goodwill of $96.1 million resulting from the purchase price allocation. The goodwill of $96.1 million resulting from the purchase price allocation reflects the value of the underlying enterprise, as well as the anticipated value of synergies that Lionbridge expects to realize as the business is integrated into existing Lionbridge operations. The total $96.1 million of goodwill has been assigned to the Company’s GLC segment. Goodwill allocated to domestic operations is expected to be deductible for tax purposes.

During 2006, the Company adjusted certain estimates recorded as part of the fair value purchase accounting. The acquired incentive compensation liability was reduced by $521,000 and deferred tax assets were reduced by $247,000. In addition, the Company received a $2.5 million purchase price reimbursement from Bowne & Co., Inc. (“Bowne”) for pre-acquisition tax liabilities and recorded a $164,000 tax receivable for recovery of pre-acquisition value added taxes. These purchase accounting adjustments resulted in a net decrease in goodwill of $3.0 million during 2006. Additionally, the Company continued to exit certain activities of BGS as a part of the merger plan, resulting in restructuring and other charges of $2.7 million for severance and $256,000 for vacated facilities costs.

During 2007, the Company adjusted certain estimates recorded as part of the fair value purchase accounting. The acquired disability benefit obligation was reduced by $169,000 resulting in an increase to goodwill.

In connection with the acquisition of BGS, Bowne agreed to indemnify the Company for any tax liabilities accruing on or prior to the acquisition date of September 1, 2005. Accordingly, the Company has not recorded any net amounts as pre-acquisition tax contingencies in connection with the BGS acquisition.

Lionbridge believes its acquisitions have contributed to its growth by rapidly expanding its employee base, geographic coverage, client base, industry expertise, and technical skills. Lionbridge anticipates that a portion of its future growth will be accomplished by additional acquisitions. The success of this plan depends upon, among other things, Lionbridge’s ability to integrate acquired personnel, operations, products and technologies into its organization effectively; to retain and motivate key personnel of acquired businesses; and to retain customers of acquired firms. Lionbridge cannot guarantee that it will be able to identify suitable acquisition opportunities, obtain any necessary financing on acceptable terms to finance any acquisitions, consummate any acquisitions, or successfully integrate acquired personnel and operations.

Merger, Restructuring and Other Charges

In 2007, Lionbridge recorded $4.0 million of restructuring and other charges. The $4.0 million included $2.1 million for workforce reductions in Europe, Asia, South America and the U.S. consisting of forty-six technical and twenty administrative staff, $639,000 recorded for vacated facilities and $164,000 of additional costs recorded for a previously vacated facility in order to reflect a new sublease arrangement, all recorded pursuant to the guidance in FASB Statement of Financial Accounting Standards No. 146, “Accounting for Costs associated with Exit or Disposal Activities” (“SFAS No. 146”), and related literature, $768,000 for the impairment of long-lived assets in connection with vacated facilities and $328,000 of other charges, principally expenses related to integrating financial systems used by the acquired BGS sites to a common general ledger financial system. Of these charges, $3.6 million related to the Company’s GLC segment, $92,000 related to the GDT segment and $328,000 related to Corporate and Other. Of the $2.9 million of cash payments related to restructuring in 2007, $2.5 million and $402,000 related to the GLC and GDT segments, respectively.

Lionbridge recorded $4.2 million of restructuring and other charges in the year ended December 31, 2006. The $4.2 million included $2.0 million for workforce reductions in Europe and the U.S. consisting of forty-five technical, four sales and two administrative staff and $421,000 for anticipated losses on vacated facilities, net of sub-lease income, both recorded pursuant to the guidance in SFAS No. 146 and $1.8 million of other charges, principally professional services fees, related to the integration of BGS. Of these charges, $1.6 million related to the Company’s GLC segment, $1.2 million related to the GDT segment and $1.4 million related to Corporate and Other. Of the $7.4 million of cash payments related to restructuring in 2006, $6.1 million and $1.3 million related to the GLC and GDT segments, respectively, and $30,000 related to Corporate and Other.

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Lionbridge recorded $5.4 million of restructuring and other charges in the year ended December 31, 2005. Of this amount, $5.0 million was primarily related to the acquisition of BGS and was recorded in the six month period ended December 31, 2005 and $449,000 was recorded during the six months ended June 30, 2005. The $5.4 million recorded in the year ended December 31, 2005 included $1.2 million for anticipated losses on vacated facilities, $1.3 million for workforce reductions in Europe and the U.S., consisting of fifty technical, thirteen administrative and three sales staff and $35,000 for the impairment of long-lived assets recorded pursuant to the guidance in SFAS No. 146 and $2.8 million of other charges, principally professional services fees, related to the integration of BGS recorded pursuant to the guidance in Emerging Issues Task Force Abstract 95-3, “Recognition of Liabilities in Connection With a Purchase Business Combination” (“EITF 95-3”), and related literature. Of these charges, $2.5 million related to the Company’s GLC segment, $72,000 to the GDT segment and $2.8 million related to Corporate and Other. Of the $3.6 million of cash payments related to restructuring in 2005, $3.2 million and $277,000 related to the GLC and GDT segments, respectively, and $83,000 related to Corporate and Other.

The following table summarizes the merger and restructuring reserve activity (excluding the $768,000 long-lived asset impairments in 2007 and the $328,000, $1.8 million and $2.8 million of other charges related to the integration of BGS recorded in 2007, 2006 and 2005, respectively) for the years ended December 31, 2007, 2006 and 2005, respectively:

At December 31, 2007, the consolidated balance sheet includes accruals totaling $2.4 million primarily related to employee terminations costs and vacated facilities. Lionbridge currently anticipates that $1.9 million of this will be fully utilized in 2008. The remaining $488,000 relates to lease obligations on unused facilities expiring through 2010 and is included in long-term liabilities.

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Non-Cash Charges

Stock-Based Compensation

Lionbridge recorded stock-based compensation of approximately $7.2 million, $6.1 million and $1.6 million in 2007, 2006 and 2005, respectively, in connection with stock options and restricted stock awards.

Lionbridge issued 716,100 and 432,500 shares of restricted common stock and restricted stock units with a fair market value of $3.7 million and $3.0 million in 2007 and 2006, respectively. Restrictions on disposition lapse over four years from the date of grant on each anniversary date.

On September 19, 2006, Lionbridge issued 200,000 shares of restricted common stock with a fair market value of $1.2 million to its Chief Executive Officer. This restricted stock award is subject to the following market-based vesting criteria: 33% of the market-based award vests on the date that the Company’s average closing stock price in a consecutive thirty calendar day period is greater than or equal to $10.00; an additional 33% of the market-based award vests on the date that the Company’s average closing stock price in a consecutive thirty calendar day period is greater than or equal to $13.50; and the remaining 34% of the market-based award vests on the date the Company’s average closing stock price in a consecutive thirty calendar day period is greater than or equal to $17.00. The Company uses the lattice model to value market condition awards. For awards with market conditions with a cliff vesting feature, as described above, the Company recognizes stock-based compensation on a straight-line basis over the requisite service period.

Lionbridge currently expects to amortize the following unamortized compensation in connection with restricted stock awards outstanding as of December 31, 2007 in the years ending:

For the years ended December 31, 2007, 2006 and 2005, 1,251,000, 1,337,500 and 959,000 stock options were granted, respectively.

Lionbridge currently expects to amortize the following amounts of stock-based compensation related to stock options outstanding as of December 31, 2007 in the years ending:

Executive Summary

Over the past several years, Lionbridge implemented key elements of its strategy for market expansion and long-term growth. The Company has developed and deployed the industry’s first web-based language technology, expanded its offshore capabilities, built upon its code and content service offerings, and developed

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an integrated services offering through its global infrastructure. In doing so, the Company has increased revenue from its existing customers and broadened its customer base across diverse industries.

In September 2005, Lionbridge acquired BGS, the globalization division of Bowne & Co., Inc. This acquisition created the largest-scale globalization company in the world with approximately 4,600 employees in 26 countries worldwide. BGS’s worldwide presence, language expertise and broadly diversified customer base complement Lionbridge’s advanced language technology and its comprehensive development and testing services and allowed the Company to expand its growth opportunities. As a result of the integration of this acquisition in 2006 and 2007, Lionbridge was able to apply its infrastructure of people, technology and expertise across a larger volume of activity.

During 2007, Lionbridge finalized the integration of BGS into its existing operations, expanded the deployment of its web-based language management system, and grew its employee base throughout its cost-efficient solution centers in India, China, Poland and Slovakia. The Company also enhanced its vertical market solution delivery by developing and hiring subject matter experts in life sciences and marketing/web content for certain solution centers. These initiatives are enabling Lionbridge to address its clients’ growing requirements for specialized global-scale, integrated code and content services that are based on an internet-architected, cost-efficient delivery model.

Deploying Web-Based Language Technology

Lionbridge is the only company in its industry that has a global internet-based platform to manage each client’s worldwide language assets in a free hosted environment. The linguistic engine of this platform is Logoport, Lionbridge’s Web-architected, on-demand, translation memory technology. Following initial pilot programs, Lionbridge deployed Logoport throughout its operations. The platform supports more than 500 million words, 700 client programs and 14,000 users worldwide. To further enhance its linguistic technology platform, Lionbridge developed and deployed Freeway, a free, web-based client portal. As a complimentary technology that is integrated with the Logoport linguistic engine, Freeway provides a client portal for submitting, tracking and managing translation activities in a web-based environment. Since its early deployment in 2006 and its expansion in 2007, more than 300 Lionbridge clients have adopted Freeway as their preferred management platform. As the backbone for the Company’s managed service model, Freeway provides one centralized Internet platform for managing translation, and allows Lionbridge to offer its clients the benefits of technology, without the cost or complexity.

In 2008, Lionbridge plans to accelerate the deployment of Freeway and Logoport across all programs, customers and translators worldwide and implement new technology enhancements to increase efficiency. In addition, building upon the Company’s existing scalable, Web-architected solutions, Lionbridge plans to expand the development of its machine translation and workflow technologies to simplify and automate processes while increasing productivity. By combining real-time, hosted language management with cost-efficient execution, Lionbridge believes it has a distinct competitive advantage in what it can offer its clients: accelerated time to market, greater efficiency and seamless global delivery.

Accelerating Global Scale

Over the past ten years, Lionbridge has built a global infrastructure that optimizes its core service offerings. During this time, the Company has also expanded the scale and breadth of client solutions. Through the expansion of its operational infrastructure, through the deployment of technology and through its establishment of offshore delivery capabilities, Lionbridge has responded to its customers’ needs for a complete service offering that unifies content and application development, multilingual delivery, vertical market expertise and testing services as one integrated outsourced program offering.

As the Company increases the size and scope of its client relationships and serves clients across a broader set of industry sectors, the Company plans to align its business to link sales opportunities with delivery

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initiatives. In 2008, the Company expects to strengthen its globalization business by enhancing its operations and market strategy to grow business in specific vertical markets such as life sciences, financial services, and technology. At the same time, the Company’s plans to facilitate the growth of Lionbridge’s emerging service offerings by enhancing its dedicated sales and delivery teams for its development, testing, content creation, interpretations, and global search and sourcing solutions.

By leveraging its global scale to provide the capability, capacity, and subject-matter expertise its clients require, and by further deploying and enhancing its technology, Lionbridge expects to increase its operational efficiency, improve quality and productivity for its clients, which may in turn, accelerate its revenue and growth opportunities.

Financial Highlights

During 2007, the Company’s revenues and results of operations reflect the significant fluctuations in foreign currency exchange rates and the significant decline in the exchange rate of the U.S. dollar against most foreign currencies, the Euro in particular. During this period, the U.S. dollar declined 9.4% percent against the Euro. As a result, during 2007 and as identified below, a portion of the Company’s revenue growth was attributable to the positive impact of the decline in the exchange rate of the U.S. dollar against non-U.S. currencies and correspondingly, nearly all of the Company’s operating growth was offset by the negative impact of the decline in the exchange rate of the U.S. dollar against non-U.S. currencies.

In 2007, Lionbridge revenue was $452.0 million, an increase of $33.1 million or 7.9% from $418.9 million in 2006. Revenue growth during 2007 in each of the GLC, GDT and Interpretation segments was $18.9 million, $13.1million and $1.1 million, respectively. As compared to 2006, approximately half of the Company’s year on year revenue growth, or $16.5 million, was the result of organic growth and approximately half, or $16.6 million, was due to the decline in the exchange rate of the U.S. dollar against most foreign currencies. This increase in revenue was partially offset by a $2.0 million increase in deferred revenue which negatively impacted comparative recognized revenue in the GLC business.

Revenue growth in 2007 resulted in $9.0 million of operating income, cash flow from operations of $20.7 million and strengthened the Company’s working capital position year-over-year.

The growth in operating income and cash flow from operations in 2007 was attained despite the negative impact of the decline in the exchange rate of the U.S. dollar against most foreign currencies. The Company estimates that the decline of the U.S. dollar impacted operating income adversely by $7.0 million, year over year, essentially offsetting the benefits realized in the GLC business from the deployment and use of Lionbridge’s language management technology platform, the implementation of operational and technology efficiencies, cost reduction initiatives and restructuring activities initiated over the past few years.

During the fourth quarter of 2007, Lionbridge began treating its foreign subsidiaries as service providers that earn a profit based on a cost plus model, which it believes more appropriately reflects the contributions of these subsidiaries. This treatment changed our statutory tax filing positions at year-end. Lionbridge expects that treating our foreign subsidiaries as service providers will result in a more normalized tax provision in 2007 and future years. Additionally, pursuant to a $12.0 million stock repurchase program authorized by the Company’s Board of Directors in September 2007, as of December 31, 2007, the Company had acquired 3.2 million shares of its common stock for $10.2 million and as of January 24, 2008, the Company had acquired 3.7 million shares of its common stock for $12.0 million. These stock purchases were at a volume weighted average price of $3.25 per share. In February 2008, the Company’s Board of Directors authorized the repurchase of an additional $12.0 million shares of common stock of the Company. As of March 14, 2008, the Company had acquired 146,468 shares of its common stock for $470,000 million at a volume weighted average price of $3.21 per share.

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Results of Operations

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

Revenue.    The following table shows Global Language and Content (“GLC”), Global Development and Testing (“GDT”), and Interpretation revenues in dollars and as a percentage of total revenue for the years ended December 31, 2007, 2006 and 2005, respectively:

In 2007, total revenue was $452.0 million, an increase of $33.1 million, or 7.9% from $418.9 million in 2006. Revenue growth during 2007 in each of the GLC, GDT and Interpretation segments was $18.9 million, $13.1 million and $1.1 million, respectively. As compared to 2006, approximately 49.8% of the Company’s year-on-year revenue growth, or $16.5 million, was the result of organic growth and approximately 50.2% or $16.6 million of the Company’s growth was due to the decline in the exchange rate of the U.S. dollar against most foreign currencies. This increase in revenue was partially offset by a $2.0 million increase in deferred revenue which negatively impacted comparative recognized revenue in the GLC business.

In 2006, total revenue was $418.9 million, an increase of $182.6 million, or 77.3% from $236.3 million in 2005. Revenue for 2006 and 2005 included twelve months and four months of consolidated revenue from the legacy BGS operations, respectively. Due to the completion of the integration of the legacy Lionbridge and BGS

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GLC service and sales operations during the year ended December 31, 2006, it was no longer possible to separately attribute revenue increases to legacy Lionbridge and BGS sales and operations. The Company has concluded that the revenue increase during 2006 is attributable to both the additional eight months of BGS revenue and the synergies of the combined, integrated sales and operational model. The increase consists of $162.7 million, $4.1 million and $15.9 million of revenue growth in GLC, GDT and Interpretation, respectively.

Revenue from the Company’s GLC business for the year ended December 31, 2007 increased $18.9 million, or 5.6%, to $354.1 million from $335.2 million for the year ended December 31, 2006. Revenue increased approximately $5.0 million as the result of organic growth and approximately $15.9 million due to the impact of the decline in the U.S. dollar’s exchange rates, in particular the Euro, during the twelve months ended December 31, 2007. This increase was partially offset by the $2.0 million increase in deferred revenue in the GLC business.

Revenue from the Company’s GDT business for the year ended December 31, 2007 was $73.8 million, an increase of $13.1 million, or 21.7%, from $60.7 million for the year ended December 31, 2006. The year-on-year increase in GDT was primarily due to increased revenue from two customer engagements. Revenue in the GDT business is not materially impacted by fluctuations in foreign currency exchange rates. In 2006, revenue from the Company’s GDT business was $60.7 million, an increase of $4.1 million, or 7.2%, from $56.6 million for the year ended December 31, 2005. The year-on-year increase in GDT revenue was primarily due to increased revenue from existing large customer programs, new projects within existing customers, as well as growth in the life sciences sector.

Revenue from the Company’s Interpretation business for the year ended December 31, 2007 increased $1.1 million as compared to the year ended December 31, 2006. The Interpretation business is not materially impacted by fluctuations in foreign currency exchange rates. In 2006, revenue from the Company’s Interpretation business increased $15.9 million, or 224.2%, to $23.0 million from $7.1 million for the year ended December 31, 2005. This increase in revenue is attributable to the inclusion of eight additional months of revenue from Lionbridge’s acquisition of BGS, as compared to 2005.

Lionbridge’s ten largest customers accounted for 52% of revenue in 2007 as compared to 49% of revenue in 2006 and 51% of revenue in 2005.

Cost of Revenue.    Cost of revenue, excluding depreciation and amortization, 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 GLC, GDT and Interpretation cost of revenues, the percentage change from the prior year and as a percentage of revenue for the years ended December 31, 2007, 2006 and 2005, respectively:

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During 2007, as a percentage of revenue, cost of revenue increased to 66.8% as compared to 66.3% for the same period of the prior year, primarily due to the negative impact of the decline in the exchange rate of the U.S. dollar against most foreign currencies, and changes in the revenue and service mix as discussed below. The Company estimates that the decline of the U.S. dollar impacted cost of revenue by over 150 basis points, year-over-year, essentially offsetting the benefits realized from the deployment and use of Lionbridge’s language management technology platform, and lower internal operating costs resulting from certain restructuring and cost reduction actions initiated over the past few years.

Each segment provides distinctive services, with different gross margins. For the year ended December 31, 2007 GLC, GDT and Interpretation accounted for approximately 78.0%, 16.5% and 5.5% of the total revenue, as compared to the year ended December 31, 2006 when GLC, GDT and Interpretation accounted for approximately 80.0%, 14.5% and 5.5% of the total revenue.

For the year ended December 31, 2007, cost of revenue increased $24.2 million, or 8.7%, to $302.1 million as compared to $277.8 million for the prior year. The increase was primarily in support of $33.1 million of incremental revenue as compared to the prior year, and includes approximately $18.0 million due to the depreciation of the U.S. dollar against foreign currencies as noted above, with the balance due to changes in the revenue and service mix year over year. The cost of revenue increase during 2006 compared to 2005 is substantially attributable to the additional eight months of cost of revenue related to the legacy BGS operations; however, this increase was partially offset by the cost savings from the combined, integrated sales and operational model.

Cost of revenue as a percentage of revenue in the Company’s GLC business increased to 66.8% for the year ended December 31, 2007, as compared to 66.1% for the same period of the prior year. This increase reflects higher costs for translation services, mainly due to variation in work mix and the negative impact of the decline in the exchange rate of the U.S. dollar against most foreign currencies. As noted above, the negative impact of the decline in the exchange rate of the U.S. dollar against most foreign currencies significantly impacted the cost of revenue ratios in the GLC business. The Company estimates that the decline of the U.S. dollar impacted cost of revenue by over 140 basis points, year over year, essentially offsetting the benefits realized from the deployment and use of Lionbridge’s language management technology platform, and lower internal operating costs resulting from certain restructuring and cost reduction actions initiated over the past few years. For the year ended December 31, 2007 cost of revenue increased $15.2 million to $236.7 million compared to $221.5 million for the prior year. The increase was primarily in support of $18.9 million incremental revenue as compared to the prior year, and includes approximately $15.5 million due to the depreciation of the U.S. dollar against foreign currencies as noted above, with the balance due to changes in the revenue and service mix year-over-year.

In 2006, cost of revenue as a percentage of revenue in the Company’s GLC business increased to 66.1% as compared to 65.9% for the same period of the prior year. This increase reflects higher costs for translation services, mainly due to variation in work mix and the impact of the implementation of a new contract management system during the second half of 2006. These increases were partially offset by benefits realized from the deployment and use of Lionbridge’s language management technology platform, and lower internal operating costs resulting from certain restructuring and cost reduction actions initiated in 2005. Due to the completion of the integration of the legacy Lionbridge and BGS GLC service and sales operations during 2006, it was no longer possible to separately attribute increases in the cost of revenue to legacy Lionbridge and BGS operations. The Company concluded that the cost of revenue increase during 2006 is substantially attributable to the additional eight months of cost of revenue related to the legacy BGS operations and that this increased expense was partially offset by the cost savings from the combined, integrated sales and operational model.

GDT cost of revenue as a percentage of revenue increased to 63.4% for the year ended December 31, 2007 as compared to 63.0% for the year ended December 31, 2006. This increase was primarily due to the changes in the revenue and service mix and the U.S. dollar’s decline against the Indian Rupee and the Euro in the year ended

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December 31, 2007, as compared to the prior year. The Company estimates that the decline of the U.S. dollar impacted GDT cost of revenue by over 250 basis points, year-over-year. Cost of revenue in the Company’s GDT business was $46.8 million for the year ended December 31, 2007, an increase of $8.6 million, or 22.6%, as compared to $38.2 million for the prior year. This increase was primarily associated with the $13.1 million increase in revenue year-over-year, and to a lesser degree work mix variation in services as compared to the prior year. The increase includes approximately $2.3 million due to the depreciation of the U.S. dollar against foreign currencies as noted above

In 2006, GDT cost of revenue increased to 63.0% as compared to 61.3% for 2005. The Company accelerated the transition of several customer projects from execution in the United States and Western Europe to execution in India and China throughout 2006. In connection with these transitions, the Company closed its Galway, Ireland delivery center. To carry-out this transition, the Company invested in facility upgrades and capacity expansions primarily in India and China, and incurred start-up and transition costs to transfer project deliveries from Western Europe to India and China. In addition, work mix variations in testing services as compared to the prior year resulted in higher cost of revenue during 2006. GDT cost of revenue was $38.2 million for 2006, an increase of $3.5 million, or 10.0%, from $34.7 million in 2005, primarily reflecting increased revenue levels and the impact of the start-up and transition costs as noted above.

Cost of revenue as a percentage of revenue in the Company’s Interpretation business decreased to 77.0% for the year ended December 31, 2007 as compared to 78.9% for the year ended December 31, 2006. This decrease reflects the favorable impact of pricing and work mix variations in services as compared to the prior year. The Company’s Interpretation business is not materially impacted by foreign currency exchange rate fluctuations. Cost of revenue was $18.5 million for the year ended December 31, 2007, an increase of $413,000, or 2.3%, as compared to $18.1 million for the same period of 2006, primarily due to pricing and work mix variations in services as compared to the prior year.

In 2006, cost of revenue as a percentage of revenue in the Company’s Interpretation business increased to 78.9% in 2006, as compared to 77.6% for the year ended December 31, 2005. This increase reflects the impact of changes in the work mix, including the addition of “rare languages” interpretation services and certain one-time start-up expenses related to a new contract, as compared to the prior year. Cost of revenue was $18.1 million for the year ended December 31, 2006, an increase of $12.6 million, or 229.7%, as compared to $5.5 million for the same period of 2005. The increase primarily reflects the cost required to support twelve months of revenue from the legacy BGS operations in 2006, as compared to four months of revenue from the legacy BGS operations in 2005.

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, sales force automation/CRM system expense, training, 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, the dollar change from the prior year and as a percentage of revenue for the years ended December 31, 2007, 2006 and 2005, respectively:

For the year ended December 31, 2007, sales and marketing expenses increased $2.4 million, as compared with the prior year. This increase is primarily attributable to increased compensation and travel expense, to support the $33.1 million increase in revenue, year-over-year, as well as projected revenue growth in the future. Additionally the increase reflects increased spending on marketing initiatives as compared to the prior year.

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Approximately $900,000 of the $2.4 million increase is due to the depreciation of the U.S. dollar against foreign currencies. As a percentage of revenue, sales and marketing expense was flat at 7.3%, as compared to 2006, despite the negative impact of the decline in the exchange rate of the U.S. dollar against most foreign currencies.

In 2006, sales and marketing expenses increased 47.1% to $30.5 million from $20.7 million in 2005. This increase was primarily due to higher employee-related expenses and travel costs in the sales organization to support part of the $182.6 million increase in revenue, year-over-year. Additionally, sales and marketing expense includes approximately $727,000 of additional stock-based compensation expense associated with the adoption of SFAS 123R on January 1, 2006 for the year ended December 31, 2006 as compared to the prior year. As a percentage of revenue, sales and marketing expenses decreased to 7.3% in 2006 from 8.8% in 2005. This improvement is primarily as a result of the increased revenue levels year-on-year, partially offset by higher employee-related expenses and travel costs in the sales organization.

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, the dollar change from the prior year and as a percentage of revenue for the years ended December 31, 2007, 2006 and 2005, respectively:

For the year ended December 31, 2007, general and administrative expenses increased $12.8 million, or 17.2%, to $87.0 million as compared to $74.3 million for the year ended December 31, 2006. Approximately $3.9 million of the increase is attributable to the decline in the U.S. dollar’s exchange rates against certain foreign currencies, in particular the Euro and Indian Rupee. The remainder is in support of the overall growth of the Company, and is primarily due to $5.3 million increased compensation expense, including $1.0 million increased stock-based compensation, $1.6 million in tax and systems consulting, and $1.4 million in rent expense, year-over-year. As a percentage of revenue, general and administrative expenses increased to 19.3% for the year ended December 31, 2007 as compared to 17.7%, for the same period of the prior year. The Company estimates that the decline in the U.S. dollar impacted this percentage of revenue by almost 20 basis points, and the remainder is due primarily to the items noted above, as well as the impact of supporting the increase in revenue from period to period.

In 2006, general and administrative expenses increased $27.4 million to $74.3 million from $46.9 million in 2005. This increase is primarily due to the expenses attributable to Lionbridge’s integration of BGS, with the remainder of the increase resulting from higher employee costs, professional fees and certain other costs incurred in connection with the consolidation of BGS, as compared to the corresponding period of the prior year. Additionally, general and administrative expense includes approximately $2.6 million of additional stock-based compensation expense associated with the adoption of SFAS 123R on January 1, 2006 for the year ended December 31, 2006 as compared to the prior year. General and administrative expenses, as a percentage of revenue, decreased to 17.7% in 2006 as compared to 19.8% in 2005. The percentage of revenue improved year over year, as the increased expenses noted above were more than offset by the growth in revenue and the benefit of restructuring activities primarily related to the integration of the BGS acquisition.

Research and Development.    Research and development expenses relate primarily to the Company’s web-based hosted language management technology platform used in the globalization process and the research and development of a globalization management system. The cost consists primarily of salaries and associated

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employee benefits and third-party contractor expenses. The following table shows research and development expenses, the dollar change from the prior year and as a percentage of revenue for the years ended December 31, 2007, 2006 and 2005, respectively:

For the year ended December 31, 2007, research and development expense increased $564,000 to $3.4 million as compared to $2.8 million for the prior year. Approximately $200,000 of the increase for the year ended December 31, 2007, is due to the depreciation of the U.S. dollar against foreign currencies. In 2006, research and development expense increased 70.8% to $2.8 million from $1.6 million in 2005. These increases were primarily attributable to research and development costs incurred in development of a web-based hosted language management technology platform and, to a lesser degree, attributable to additional research and development activities acquired from BGS. The Company expects research and development expense to increase during 2008 as the Company invests in the further development of its web-based hosted language management technology platform.

Depreciation and Amortization.    Depreciation and amortization expense related to property and equipment that is being recognized over the estimated useful lives of the assets using the straight-line method. The following table shows depreciation and amortization expense, the dollar change from the prior year and as a percentage of revenue for the years ended December 31, 2007, 2006 and 2005, respectively:

For the year ended December 31, 2007, depreciation and amortization expense decreased by $350,000 to $5.2 million, as compared to $5.5 million for the year ended December 31, 2006. The decrease is primarily due to the culmination of depreciable lives of certain assets acquired in prior years. These decreases were partially offset by increases attributable to a decline in foreign currency exchange rates of approximately $300,000 for the year ended December 31, 2007 as compared to the prior year. In 2006, depreciation and amortization expense increased $2.0 million, or 57.0%, to $5.5 million, as compared to $3.5 million in 2005. The increase was primarily the result of the incremental depreciation and amortization expense attributable to Lionbridge’s consolidation of BGS, and reflects the impact of the additional eight months of combined operations in 2006, as compared to four months during 2005, partially offset by lower depreciation expense due to the culmination of depreciable lives of certain assets acquired in prior years.

Amortization of Acquisition-related Intangible Assets.    Amortization of acquisition-related intangible assets consists of the amortization of identifiable intangible assets from acquired businesses. Amortization expense for 2007, 2006 and 2005 of $8.5 million, $8.7 million and $2.8 million, respectively, relates primarily to the amortization of identifiable intangible assets acquired from BGS.

Interest Expense.    Interest expense represents interest paid or payable on debt, the amortization of deferred financing costs, the accretion of discount on debt, and accelerated deferred financing charges upon early repayment of debt. The following table shows interest expense, dollar changes from the prior year and as a percentage of revenue for the years ended December 31, 2007, 2006 and 2005, respectively:

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For the year ended December 31, 2007, interest expense of $5.6 million decreased $5.1 million from $10.7 million, as compared to the year ended December 31, 2006. The decrease reflects the one-time charge of $2.1 million in 2006 from the accelerated recognition of deferred financing costs on early debt repayment coupled with $12.0 million lower average borrowings and lower interest rates in 2007 as compared to 2006. In addition, interest expense for 2007 includes the effect of the interest rate swap. On July 20, 2007, the Company entered into a three-year amortizing interest rate swap with a notional amount of $20.0 million that corresponds to a portion of the Company’s floating rate credit facility. The $20.0 million notional amount effectively converted that portion of the Company’s total floating rate credit facility to fixed rate debt.

In 2006, interest expense of $10.7 million primarily represents interest paid or payable on debt and the amortization of deferred financing costs on the original $100.0 million term facility entered into by the Company in the third quarter of 2005 to fund a portion of the purchase price for its acquisition of BGS. On December 21, 2006, the Company entered into a Credit Agreement which replaced the Company’s Term Loan B and Revolving Credit Facility with Wachovia Bank, National Association that had been in place since September 1, 2005. An incremental $2.1 million of interest expense was recognized as accelerated deferred financing costs in December 2006 upon early repayment of this debt. The Credit Agreement provides for a five-year $100.0 million revolving credit facility. At December 31, 2007, $71.7 million was outstanding with an interest rate of 6.3%.

Other Expense, Net.    The Company recognized $3.3 million in other expense, net, for the year ended December 31, 2007 as compared to $3.8 million in other expense, net, for the year ended December 31, 2006. This decrease includes $5.9 million of foreign currency transaction losses, due to the decline in the U.S. dollar’s exchange rates against other currencies, in particular the Euro, as compared to the net position and variance during the corresponding periods of prior year, reduced by net realized and unrealized foreign currency gains of $2.0 million recorded in 2007 on forward contracts. Additionally, the decrease includes a benefit of pre-BGS acquisition accounts receivable bad debt recoveries of approximately $395,000 and other miscellaneous income recorded during 2007.

In 2006, the Company recognized $3.8 million in other expense, net, as compared to $587,000 in the prior year. This increase was primarily attributable to the larger net position of U.S. dollar and Euro denominated assets and liabilities, due to the BGS acquisition, combined with the variances among the Euro and other currencies against the U.S. dollar in 2006, as compared to the net position and variance during the prior year, partially offset by net realized and unrealized foreign currency gains of $247,000 recorded in 2006 on forward contracts. Additionally, the increase includes a reserve of approximately $800,000 recorded in connection with employment litigation matters.

Provision for Income Taxes.    The following table shows the provision for income taxes and the effective income tax rate for the years ended December 31, 2007, 2006 and 2005, respectively:

The income tax provision decreased $886,000 to $5.0 million in 2007 from $5.9 million in 2006. The 2007 provision for income taxes is primarily attributable to $4.1 million of current income tax expense resulting from profits in various foreign jurisdictions; a $959,000 increase in the FIN 48 tax reserve; and a $476,000 increase in the deferred tax liability associated with tax deductible goodwill acquired in the BGS acquisition during 2005.

The tax deductible goodwill acquired in the BGS acquisition during calendar year 2005 has resulted in an increase to the U.S. net operating loss carryover. This U.S. net operating loss carryover gives rise to a deferred tax asset, which is fully offset by a valuation allowance. Therefore, the Company does not obtain any current cash tax savings for this deductible tax amortization; nor is there any financial statement benefit recorded for the

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current year deduction attributable with the tax amortization associated with this purchased goodwill. Since the Company is not allowed to amortize the purchased goodwill for GAAP purposes, but is allowed to deduct amortization for tax purposes, the tax basis in purchased goodwill decreases over time. This results in a book basis in an asset that is greater than the tax basis in the asset, and gives rise to a future taxable difference.

The tax provision increased $3.6 million, from 2005 to 2006. Approximately $6.0 million of tax expense resulted from profits in various foreign jurisdictions; a $1.5 million decrease in the deferred tax benefit associated with the amortization of the foreign deferred tax assets and liabilities; a $722,000 increase in the worldwide FIN 48 tax reserves; and a $527,000 increase in the deferred tax liability associated with tax deductible goodwill acquired in the BGS acquisition during 2005.

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Quarterly Results of Operations

The following tables set forth unaudited consolidated quarterly financial data for the periods indicated. Lionbridge derived this data from its unaudited consolidated financial statements, and, in the opinion of management, they have been prepared on the same basis as Lionbridge’s audited consolidated financial statements for the years ended December 31, 2007 and 2006, and include all adjustments, which consist only of normal recurring adjustments, necessary to present fairly the financial results for the periods. The operating results for any quarter are not necessarily indicative of results for any future period.