<PAGE>
 
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549
                            -----------------------
                                        
                                   FORM 10-K
                            -----------------------

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 
    ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
 
                                      OR
 
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM    TO
                                                                   ---   --- 

                        Commission file number 0-22409
                                        
                                 LHS GROUP INC.
             (Exact name of registrant as specified in its charter)

             Delaware                                            58-2224883
       (State or other                                        (I.R.S. Employer
jurisdiction of incorporation)                               Identification No.)
                                        
                             Six Concourse Parkway
                                   SUITE 2700
                            ATLANTA, GEORGIA  30328
                    (Address of principal executive offices)
                                 (770) 280-3000
                        (Registrant's telephone number)

          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

                                      NONE
                                        
          Securities registered pursuant to Section 12(g) of the Act:

                          COMMON STOCK, $.01 PAR VALUE
                                (Title of class)
                                        
     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 the 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.  [ ]

     The aggregate market value of the Common Stock held by non-affiliates of
the registrant (assuming, for purposes of this calculation, without conceding,
that all executive officers and directors are "affiliates") was $1,076,687,760
at March 13, 1998, based on the closing sales price of $89.75 per share for the
Common Stock on such date on the Nasdaq National Market.

     The number of shares of the registrant's Common Stock outstanding at March
13, 1998 was 25,756,010.

                      DOCUMENTS INCORPORATED BY REFERENCE
                                        
     Specifically identified portions of the 1998 Annual Report to Stockholders
are incorporated by reference in Part II.

     Specifically identified portions of the Proxy Statement for the 1998 Annual
Meeting of Stockholders to be held on May 26, 1998 are incorporated by reference
in Part III.

================================================================================
<PAGE>
 
                                 LHS GROUP INC.
                           ANNUAL REPORT ON FORM 10-K
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                               TABLE OF CONTENTS
                               -----------------
                                        
ITEM                                                        PAGE
NUMBER                                                     NUMBER
------                                                     ------

                             PART I
1.     BUSINESS                                               1
 
2.     PROPERTIES                                            10
 
3.     LEGAL PROCEEDINGS                                     10
 
4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY 
        HOLDERS                                              10
 
4(A)   EXECUTIVE OFFICERS OF THE REGISTRANT                  10

                            PART II
 
5.     MARKET FOR REGISTRANT'S COMMON EQUITY AND 
        RELATED STOCKHOLDER MATTERS                          11
 
6.     SELECTED FINANCIAL DATA                               11
 
7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
        FINANCIAL CONDITION AND RESULTS OF OPERATIONS        11
 
7(A)   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 
        MARKET RISK                                          18
 
8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA           18
 
9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 
         ON ACCOUNTING AND FINANCIAL DISCLOSURE              18

                             PART III
 
10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT    19
 
11.    EXECUTIVE COMPENSATION                                19
 
12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 
        AND MANAGEMENT                                       19
 
13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS        19

                             PART IV
                                        
14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS 
        ON FORM 8-K                                          20

SIGNATURES                                                   22
<PAGE>
 
                                     PART I

     SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

     Certain of the matters discussed in this document, in the 1997 LHS Group
Inc. Annual Report and in documents incorporated by reference herein may
constitute forward-looking statements for purposes of the Securities Act of
1933, as amended, and the Securities Exchange Act of 1934, as amended, and as
such may involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of LHS Group Inc.
("LHS" or the "Company") to be materially different from future results,
performance or achievements expressed or implied by such forward-looking
statements.  The words "expect," "anticipate," "intend," "plan," "believe,"
"seek," "estimate," and similar expressions are intended to identify such
forward-looking statements.  The Company's actual results may differ materially
from the results anticipated in these forward-looking statements due to a
variety of factors, including without limitation those discussed in "Factors
Affecting Future Performance" in Item 7 hereof.  All written or oral forward-
looking statements attributable to the Company are expressly qualified in their
entirety by these cautionary statements.

ITEM 1.  BUSINESS.

INTRODUCTION

     LHS provides client/server-based billing and customer care solutions to
providers of wireless and wireline telecommunications services ("carriers") in
the Americas, Europe and Asia.  The Company's products enable carriers to
compete more effectively in a rapidly growing telecommunications market.  The
Company's Business Support and Control System ("BSCS") software is a scaleable,
modular billing and customer care solution that can be implemented quickly and
can support innovative marketing and pricing of telecommunications services.
BSCS has been licensed to approximately 100 carriers in over 50 countries and
supports approximately 11.5 million subscribers.

     The Company completed its initial public offering of Common Stock on May
21, 1997, raising $70.6 million in net proceeds.

INDUSTRY BACKGROUND

     TELECOMMUNICATIONS INDUSTRY

     For most of this century, telecommunications carriers around the world
provided wireline services in heavily regulated environments.  Often
characterized by monopoly dominance, the telecommunications industry offered
basic telephony services and underwent little change.  More recently, however,
the deregulation of the telecommunications industry coupled with the development
and widespread adoption of new wireless communications services, such as paging
and analog and digital cellular telephony, has resulted in significant growth in
the number of new carriers and in the overall size of the telecommunications
services market.  As existing carriers attempt to maintain market share in their
traditional markets while simultaneously entering new markets, and as new
entrants seek to capture market share in wireline and wireless markets,
telecommunications markets worldwide have become increasingly competitive and
dynamic.

     Governments around the world are relaxing regulatory constraints on the
telecommunications industry.  Within the United States, deregulation commenced
in the long distance market with the breakup of AT&T in 1984 and the subsequent
entry of additional long distance carriers.  In 1994, the U.S. government
similarly allowed new competitors to enter the cellular industry, which
developed in the 1980's and was initially structured as a duopoly in each
service area, by auctioning significant radio spectrum for digital cellular, PCS
and other services to new carriers.  More recently, the 

                                      -1-
<PAGE>
 
Telecommunications Act of 1996 has increased competition across U.S. markets by
allowing new and existing local and long distance wireline, wireless and cable
TV companies to provide competing services. As a result of these trends, the
number of wireless and wireline carriers in the U.S. market has increased and is
expected to continue to increase.

     Outside the United States, deregulation and privatization are also
resulting in the emergence of new carriers, increased competition and the
broader availability of telecommunications services.  The general trend toward
deregulation and the adoption in 1996 of less stringent uniform regulatory
schemes within wireline markets of the European Community, along with continued
growth in European wireless markets, are expected to increase the number and
types of services offered and to intensify competition within wireless and
wireline markets across Europe.  In Asia, increased competition is expected in
both wireless and wireline markets as many nations deregulate and privatize
their national telecommunications carriers and allow new carriers to offer
services to meet the demands of a rapidly growing population.  Further
accelerating these trends in the telecommunications industry, more than 60
member nations of the World Trade Organization reached an agreement in February
1997 to substantially deregulate the majority of the world's telecommunications
markets beginning in 1998.  These trends are expected to result in established
and emerging carriers introducing service offerings in telecommunications
markets worldwide, thus increasing overall competition.

     In conjunction with deregulation, advances in telecommunications technology
have significantly stimulated the growth in the number of carriers as well as in
the types of services offered.  In the wireless sector, the trend in technology
has been to migrate from analog to digital, with digital technologies promising
carriers and consumers lower infrastructure costs, greater privacy, fraud
protection and new, enhanced features.  Most established carriers using older
analog cellular standards such as AMPS (Americas and Asia), NMT (Europe and
Asia) and TACS (Europe) are expanding their networks to include digital
standards.  Although the GSM digital standard and its derivatives have gained
widespread acceptance, particularly among carriers in Europe and Asia, other
digital cellular and PCS standards such as TDMA (U.S.) and CDMA (U.S., Canada
and Asia) are being deployed rapidly.  These rapid changes in telecommunications
technology have created significant market opportunities for new and existing
carriers, resulting in greater competition and a wider range of service
offerings for consumers.

     As competition intensifies, telecommunications carriers increasingly
differentiate their service offerings, not only on the basis of pricing and
reliability, but also by offering value added features, bundling multiple
services and marketing innovative, targeted rate and service plans.  Carriers
are utilizing technology advancements to compete by offering service features in
addition to basic telephony, including voice mail, call forwarding, caller
identification, fax and data transmission.  As carriers established in one
market attempt to enter other formerly distinct markets in wireline, wireless,
satellite and Internet services, many are bundling multiple services in order to
successfully retain existing customers and to attract new customers.
Increasingly, carriers are relying on innovative marketing of rate and service
plans to successfully segment and attract potential customers.

     To compete effectively, carriers require business systems which enable
innovative and flexible marketing and support multiple service offerings.  These
systems, which provide billing and customer handling, or "customer care," have
become critical to the business success of carriers.  Billing systems are no
longer a back-office operation focused simply on billing and invoicing.
Carriers today demand that billing and customer care systems provide innovative
and flexible marketing of services, robust customer management capabilities,
subscriber data and feedback and service plan flexibility in addition to the
rating, invoicing and collection features provided by yesterday's billing
systems.  Increasingly, billing and customer care systems are deployed by
carriers as a strategic business weapon.

     BILLING AND CUSTOMER CARE SYSTEMS

     Billing systems for telecommunications services were first developed to
meet the needs of large monopoly carriers, and offered a simple, single-service
billing function, including rate tariffing and 

                                      -2-
<PAGE>
 
invoicing. These systems lacked advanced customer care functionality, which
typically provides the initial establishment of customer accounts, assignment of
phone numbers, issuance and reporting of calling card usage, maintenance of
customer history, directory listings, and generation and management of marketing
feedback. While sufficient for the regulated environment in which carriers then
operated, these early billing systems typically were mainframe-based, were built
around proprietary, closed hardware and software platforms, and were inflexible
and costly to maintain.

     The rapid advance of telecommunications technology, the deregulation of
markets around the globe and the increasing importance of reducing time-to-
market have motivated carriers to install, maintain and update advanced billing
and customer care systems.  These systems are essential for both existing and
emerging carriers to compete effectively as they seek to introduce new services,
enter new markets and offer a high level of customer service.  In some cases,
carriers may choose to outsource the fulfillment of these billing and customer
care activities to service bureaus for financial or other business reasons.
Regardless of whether carriers rely on a purchased solution operated internally
or on an outsourced solution from a service bureau provider, a strong market
opportunity exists for a billing and customer care solution which provides the
following benefits:

     FLEXIBILITY.  Carriers need billing and customer care solutions which
enable innovative, sophisticated and dynamic marketing and pricing of
telecommunications services.

     RAPID TIME-TO-MARKET.  Carriers entering new markets for telecommunications
services place a significant premium on rapid launch of services and,
accordingly, require billing and customer care solutions which can be
implemented quickly.

     PROVEN TRACK RECORD.  With little margin for error in a very competitive
environment, carriers are seeking billing and customer care solutions with a
proven track record to minimize deployment risk during the critical launch of
new services.

     SCALEABILITY.  Carriers are seeking solutions that will scale with
subscriber growth to avoid service billing and collection disruption and to
minimize recurring staff training and billing and customer care system
investments.

     MULTIPLE SERVICE SUPPORT.  As established carriers enter new markets,
billing and customer care solutions must support multiple telecommunications
services and standards.  A common billing and customer care solution supporting
wireline, wireless, Internet and satellite offerings will enable innovative
marketing of multiple services with centralized customer billing.

     INTERNATIONAL SUPPORT.  As carriers are entering new geographic markets,
billing and customer care solutions must increasingly support multiple languages
and currencies while providing consistent functionality across diverse market
environments.

THE LHS SOLUTION

     The Company believes that it currently meets, and will continue to meet,
the needs of a wide variety of carriers with its BSCS software product and the
broad range of comprehensive customization, installation and maintenance
services offered by the Company.  BSCS offers the following features and
benefits:

        . FLEXIBLE SOLUTION.  The BSCS system can be tailored to each
          carrier's particular needs in order to keep pace with a highly
          competitive, dynamic market for telecommunications services.  BSCS
          enables carriers to dynamically update rate and pricing plans tailored
          to time of day, day of week, previous usage levels, call destinations,
          credit characteristics and numerous other marketing parameters.

                                      -3-
<PAGE>
 
        . OPEN, CLIENT/SERVER BASED ARCHITECTURE.  BSCS supports
          multiple hardware platforms and operating systems, enabling carriers
          to benefit from continued advances in technology.  As a packaged
          application customized to meet the needs of each particular carrier,
          BSCS offers carriers rapid installation relative to complete custom
          solutions and is more flexible than in-house legacy mainframe
          solutions.  BSCS's client/server architecture enables efficient
          integration with best-of-breed financial, human resources, operational
          and other software applications and provides scaleability as a
          carrier's subscriber base grows.

        . MODULAR CONFIGURATION. The BSCS architecture offers carriers
          efficient, rapid customization and cost effective implementation. The
          Company's modular architecture provides carriers with the flexibility
          to modify or add BSCS functions with little or no impact to unmodified
          portions of the product, allowing carriers to easily tailor BSCS to
          meet their unique system requirements.

        . MULTIPLE SERVICES AND NETWORK TECHNOLOGY SUPPORT. BSCS is architected
          to support multiple telecommunications technology standards with
          minimal modification to the software's core billing and customer care
          functionality. The Company's products support all wireline and
          wireless technologies. The Company's BSCS products currently support
          the GSM, CDMA, TDMA and AMPS wireless standards as well as satellite,
          wireline, Internet and additional paging standards.

        . COMPREHENSIVE INTERNATIONAL SOLUTION. BSCS is a global solution that
          supports multiple currencies and requirements of different geographic
          markets. The product currently supports billing and customer care in
          the English, French, German, Italian, Spanish, Indian, Russian,
          Polish, Czech, Chinese, Japanese, Korean and Portuguese languages.

        . COMPLETE CUSTOMER SERVICES. In addition to the BSCS software, the
          Company provides carriers with a complete customer solution, including
          initial customization and installation and ongoing maintenance,
          upgrades and customer support. LHS offers carriers the choice of
          initial installation directly from the Company or through leading
          systems integrators. Ongoing maintenance and customer support is
          offered at varying levels of service and priced to meet the needs of
          the carrier.

THE LHS STRATEGY

     To maintain its position among providers of client/server-based billing and
customer care solutions for the global telecommunications industry, the
Company's strategies include:

        . LEVERAGE WIRELESS POSITION TO PENETRATE OTHER MARKETS. LHS currently
          has a significant installed base of wireless customers utilizing the
          BSCS billing and customer care system and, as a result, the Company
          intends to compete for new wireless installations worldwide. The
          Company believes there is a significant market opportunity to become a
          leading provider of client/server-based billing and customer care
          solutions for the growing number of carriers which offer multiple
          telecommunications services. In 1997, LHS modified its BSCS product to
          support not only carriers that compete in GSM wireless markets, but
          also other digital wireless, analog wireless, wireline, satellite,
          paging and Internet service markets. To reach this goal, the Company
          recently introduced BSCS Version 5.0 initially focusing on wireline
          opportunities in Europe to take advantage of the Company's strong
          reputation and resources in that region and the impending deregulation
          of European wireline markets.

                                      -4-
<PAGE>
 
        . MAINTAIN A LEADING BILLING AND CUSTOMER CARE SOLUTION. The BSCS
          product is currently deployed on a client/server technology platform,
          providing significant billing and customer care functionality. The
          Company will continue to improve product functionality by offering
          prepayment, discounting, promotional and other marketing capabilities.
          To ensure that its products keep pace with information technology
          advances, the Company will develop support for Windows NT server
          software and will continue to adopt leading database and client
          technologies.

        . EXPAND GLOBALLY. Through its regional offices, LHS intends to expand
          its marketing focus to be well-positioned for global growth in demand
          for billing and customer care solutions. The Company will continue to
          deploy software development, sales, service and management resources
          to its regional offices in Frankfurt, Germany; Atlanta, United States;
          and Kuala Lumpur, Malaysia and will continue to customize its products
          to support additional languages and currencies.

        . DEVELOP AND MAINTAIN CUSTOMER RELATIONS. The Company believes that the
          development of long-term customer relations will result in continuing
          business, a strong reputation for LHS within the telecommunications
          industry and direction for future product development. LHS will hold
          management, consulting and sales staff accountable for the quality of
          relations with specific customers, each of which will be assigned a
          dedicated contact person within the Company.

        . LEVERAGE THIRD-PARTY RELATIONSHIPS. The Company seeks to maintain its
          relationships with leading systems integrators such as Andersen
          Consulting, Cap Gemini and Logica as well as with leading vendors of
          telecommunications equipment. Many of these systems integrators and
          equipment vendors operate on a global basis across wireless, wireline
          and other communications technology lines, and the Company expects
          these relationships to facilitate the Company's penetration of non-
          wireless and non-European markets.

BSCS ARCHITECTURE

     The Company's BSCS product is a client/server application that supports
industry standard technologies.  The product currently supports the UNIX
operating system and Oracle relational database software as well as hardware
from Hewlett-Packard, IBM, Sun and DEC on the server side, and supports
Microsoft Windows and Windows NT operating systems and standard PC hardware on
the client side.  BSCS leverages leading commercial database technology to
provide support for symmetric multiprocessing and large database capability.
Client applications are written in Centura and Visual C++ languages, while
server applications are developed in C, C++ and PL/SQL.  BSCS supports TCP/IP,
X.25, HTTP and other standard network communications protocols.

     The Company's development group maintains close contact with operators,
service providers, standards committees, integrators and technology suppliers to
keep abreast of industry and technology changes.  LHS's Web Service Center
employees a multi-tier architecture in supporting distributed applications
deployed via the Internet.  LHS is continuing its advanced technology by
employing component object technology within the BSCS product set.  BSCS is
currently implemented in a two-tier architecture for optimal performance,
scaleability and functionality.

PRODUCTS

     The Company derives a significant portion of its revenues from licensing
its BSCS software to telecommunications carriers. The BSCS software is
structured in a kernel/non-kernel hierarchy: the kernel comprises the set of
core software modules common to all BSCS configurations, while nonkernel modules
primarily provide interface functions. Kernel and non-kernel modules can be

                                      -5-
<PAGE>
 
customized to meet individual carrier requirements. Kernel and non-kernel
software modules are organized as follows:

     CUSTOMER CARE ADMINISTRATION - This module enables carrier customer service
representatives to establish and maintain subscriber contact by creating and
maintaining account information that tracks initial service requests through
service activation and service termination.  This module also supports
registration of the customer data, maintenance of subscriber service and feature
profiles, provisioning, sales of services and equipment, administration of
contracts, initiation of on-demand bills, complaint tracking, adjustment
processing and bill and payment inquiries.  The Company's BSCS products provide
a customer service feature that enables carrier service representatives to
quickly make a variety of changes to a customer's account with a few simple
keyboard strokes.  These include adding discount or promotion plans, credit or
debit adjustments to multiple accounts at once based on specific selection
criteria such as rate plans, service, and customer groups.

     NETWORK RESOURCE ADMINISTRATION - After a carrier customer service
representative has initiated a subscriber's account, this module is utilized to
assign subscribers a telephone number.  This module also maintains the inventory
of network resources applicable to the services supported by the system,
including telephone numbers and network devices.  Facilities are provided to
monitor the level of network resource inventory and to distribute the resources
to sales channels.

     CARRIER ADMINISTRATION - In order to assign a long distance carrier, the
customer service representative utilizes this Carrier Administration module.  In
addition, this module provides roaming agreement maintenance, generates roaming
bills, enables reconciliation of incoming roaming calls and supports long
distance interconnect traffic settlement.

     SERVICES AND TARIFFS ADMINISTRATION - This module allows a carrier to
develop innovative marketing and billing plans through use of tariff tables for
multiple services which can reflect usage-sensitive or flat rate charging.  This
module enables service-specific usage, one-time and recurring charges, volume
and free usage discounting, rate plan queries, processed calls monitoring,
tailored tariffing, roaming charges and competitor tariff analysis.

     EVENT PROCESSING - This module allows carriers to rate calls as subscriber
call records are received.  Validation and pricing of call detail records are
performed in this module, which also provides on-line monitoring of credit
limits and customer rate plan optimization.  The module has been designed to
provide near real-time rating over an entire subscriber base.

     BILL PROCESSING - In order for carriers to process bills, this module
calculates all bill charges and creates the services invoice on a periodic
basis.  Key functions include tax calculation, discounting, late fee
calculations, invoice scheduling, general ledger postings and revenue reporting.
The module supports multiple currencies and multiple languages.  The Company's
BSCS products provide a revenue assurance feature that permits the carrier to
track the processing of all data applicable to a bill to assure charges are
billed correctly.

     FINANCIAL ADMINISTRATION - This module reconciles billing with a carrier's
financial records and statements in addition to handling payments from
customers.  Payment processing, accounts receivable and general ledger posting
activities are enabled by this module.  Payments may be made via cash, credit
card transaction, direct debit transaction or lock-box bank transfer.  The
module also supports advance payments, deposits, bad debt write-offs,
adjustments, corrections and account query.  Delinquent accounts can be
automatically identified to be "hotlined" suspended, deactivated, or written-
off.  A sales administration function maintains sales force data and enables
sales tracking for commission processing.

     A number of customizable non-kernel interface modules are included within
BSCS to enable close integration with a carrier's network and business
infrastructure.  These non-kernel modules are 

                                      -6-
<PAGE>
 
organized as follows: Call Record Input, which receives, edits, authenticates
and formats call detail records into a standard event record that may be used in
downstream BSCS functions such as event and bill processing; Activation, which
activates, deactivates and modifies a subscriber's equipment and services at the
switch; Authentication, which provides an interface to a central repository of
subscriber authentication keys. used in a validation algorithm to determine
whether a subscriber should have network access; Payment Processing, which
encompasses the acceptance, validation, and automated entry of payments and Bill
Formatting, which provides carriers with the flexibility to define their own
bill format, printing and delivery mechanism.

SERVICES

     The Company derives significant revenues from project consulting undertaken
to customize BSCS for particular carriers.  LHS offers carriers the choice of
initial installation directly from the Company or through leading systems
integrators, including Andersen Consulting, Cap Gemini Sogeti S.A., Danet GmbH,
Digital Equipment Corporation, Electronic Data Systems Corporation, Hewlett-
Packard Company, IBM Corp. and Logica plc.  The first phase of a project
typically consists of an analysis to identify and specify BSCS system tailoring
requirements and to define the overall project and budget.  The second phase
involves customization to modify BSCS non-kernel modules to meet the resulting
system specifications for that carrier.  The resulting custom BSCS solution is
then tested and installed in the carrier's information and telecommunications
infrastructure.  Project duration, from initial analysis through implementation
and acceptance, typically ranges from six to twelve months.  As of December 31,
1997, the Company employed 411 projects and services personnel compared to 195
at December 31, 1996.

     After installation, LHS maintains close ongoing contact with the carrier,
even on projects developed through a systems integrator, by holding LHS
management, consulting and sales personnel accountable for the quality of
relations with specific customers, by assigning a consulting and sales contact
to each customer, and through control over BSCS upgrades and maintenance.  As a
result, the Company is often well-positioned to earn substantial revenues from
additional customization of the BSCS product after installation and additional
revenues from maintenance agreements as a carrier's subscriber base and service
offerings continue to grow and change,

     The total value of an initial contract for BSCS software and services
typically ranges from $1 million to $5 million, depending on the size of the
carrier, the number of subscribers in service with the carrier, the number and
type of telecommunications services supported by BSCS, and the scope of
customization and installation requirements.  Maintenance pricing is based on
the level of service desired by the customer and typically varies from 10% to
35% of the license fee per year.

PRODUCT DEVELOPMENT

     The Company directs its product development efforts toward refining and
enhancing BSCS.  Significant emphasis is placed on the Company's compliance with
world-wide development standards and quality benchmarks during product
development.  Processes used by the Company in product development have ISO 9001
certification.

     Development efforts in the past year have resulted in expanding BSCS to
support AMPS, CDMA, SMR (special mobile radio), satellite, Microsoft Commercial
Internet Solutions and wireline services.  In addition, development delivered a
Web Service Center product for deploying customer care targeted for dealers and
subscribers via an Internet connection.  One management structure has recently
been constituted to direct all development activities focusing on world-wide
product leadership in the customer care and billing arena.  Some of the short-
term focus areas are local number portability, dual-node handsets, call analysis
and data services.  The Company's longer-term objectives include working with
OOT (object oriented technology) to expand BSCS into a multi-tier architecture
to support distributed computing and open application interfaces.  The Company's
development staff consisted of 216 

                                      -7-
<PAGE>
 
employees as of December 31, 1997 and 182 employees as of December 31, 1996 See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Factors Affecting Future Performance-Unification of American
and European/Asian Product Lines" and "-Dependence on New Products;
Technological Change."

MARKETING AND SALES

     The Company's marketing efforts are focused on targeting key carriers in
each geographical market through advertising in telecommunications industry
publications, participation in trade shows, presentations at technical
conferences and other initiatives.  The Company's sales strategy relies on
direct and indirect channels of distribution for its products.  Under its direct
sales approach, the Company develops relationships with carriers through a
consultative, problem-solving sales process and works closely with those parties
to define and determine how their needs can be fulfilled by the Company's
products.  The Company had a sales organization of 41 employees as of December
31, 1997 compared to 32 employees at the end of 1996 and intends to expand its
direct sales operations based in Frankfurt, Germany; Atlanta, United States;
Zurich, Switzerland; and Kuala Lumpur, Malaysia.  Due to the sophisticated
nature of the Company's products and services, the duration of a sales cycle can
range from as short as thirty days to as long as one year or more.  See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Affecting Future Performance-Fluctuations in Quarterly
Operating Results."

     Because third parties play an important role in the general deployment of
information technology with carriers, the Company has developed a number of
indirect sales channels.  These indirect channels, through systems integrators
and telecommunications equipment vendors, are built on relationships and
references developed through cross-selling and problem-solving.  LHS markets its
products through a number of systems integrators, particularly for systems
serving larger carriers. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Factors Affecting Future
Performance-Reliance on Third Party Relationships."

     The Company announced during 1997 the implementation of a service bureau
offering whereby LHS would provide billing and customer care services to
interested customers in exchange for a transaction based fee rather than
requiring the customer to purchase a license to BSCS.

CUSTOMERS

     BSCS has been licensed to approximately 100 carriers in more than 50
countries supporting a total of approximately 11.5 million subscribers.  Much of
the Company's early growth was accomplished by focusing on GSM-based wireless
carriers in Europe. LHS plans to continue its recent expansion beyond the
European wireless market and to serve wireless and wireline carriers around the
world.

     The Company had only one customer that accounted for more than 10% of its
total revenue in 1997.  o.tel.o communications GmbH ("o.tel.o") represented
approximately 12% of total revenue in 1997.  o.tel.o purchased BSCS 5.0/5.1 to
support their wireline business.  The revenue recognized from o.tel.o represents
license fees, implementation and customization services.

COMPETITION

     The market for telecommunications billing and customer care systems is
highly competitive, and the Company expects this competition to increase.  The
Company competes with independent providers of billing systems and services,
such as Alltel Information Systems, Inc. ("Alltel"), AMDOCS, Inc. ("AMDOCS"),
Kenan Systems Corporation ("Kenan") and Cincinnati Bell Information Systems,
Inc. ("CBIS") in the Americas and Kingston-SCL and SEMA Group internationally,
with systems integrators and with internal billing departments of larger
telecommunications carriers.  The Company anticipates 

                                      -8-
<PAGE>
 
continued growth and competition in the telecommunications industry and the
entrance of new competitors into the billing and customer care systems market in
the future.

     The principal competitive factors in the Company's market include
responsiveness to carrier needs, timeliness of implementation, quality and
reliability of products, price, project management capability and technical
expertise.  The Company believes that its ability to compete depends in part on
a number of competitive factors, including the development by others of software
that is competitive with the Company's products and services, the price at which
others offer competitive software and services, the extent of competitors'
responsiveness to customer needs and the ability of the Company's competitors to
hire, retain and motivate key personnel.  The Company competes with a number of
companies that have longer operating histories, larger customer bases,
substantially greater financial, technical, sales, marketing and other
resources, and greater name recognition than the Company.  Current and potential
competitors have established, and may establish in the future, cooperative
relationships among themselves or with third parties to increase their ability
to address the needs of the Company's prospective customers.  Accordingly, new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share.  As a result, the Company's competitors may be able to
adapt more quickly than the Company to new or emerging technologies and changes
in customer requirements, or to devote greater resources to the promotion and
sale of their products.  There can be no assurance that the Company will be able
to compete successfully with existing or new competitors.  Failure by the
Company to adapt to emerging market demands and to compete successfully with
existing and new competitors could have a material adverse effect on the
Company's business, results of operations and financial condition.

     In addition, as the Company expands, it will market its products and
services to carriers in markets not currently served by the Company.  Upon its
entrance into these markets, the Company may encounter new competitors, many of
which have significantly greater financial, technical, personnel and marketing
resources than the Company.  There can be no assurance that the Company will be
able to properly identify and address the demands for these new markets or that
the Company can continue to be competitive in its current markets  Failure by
the Company to maintain its competitiveness in current or new markets could have
a material adverse effect on the Company's business, results of operations and
financial condition.  See "Part II, Item 7, Factors Affecting Future
Performance-Highly Competitive Market; Competition."

PROPRIETARY RIGHTS AND LICENSES

     LHS does not currently hold any patents and relies upon a combination of
statutory and common law copyright, trademark and trade secret laws, customer
licensing agreements, employee and third party non-disclosure agreements and
other methods to establish and maintain its proprietary rights to its products.
The Company believes that because of the rapid pace of technological change in
the communication and software industries, the legal protections for its
products are less significant factors in the Company's success than the
knowledge, ability and experience of the Company's employees and the timeliness
and quality of support services provided by LHS.

     LHS generally enters into confidentiality agreements with its employees,
consultants, and current and potential clients and limits access to, and
distribution of, its proprietary information.  Use of the Company's software
products is usually restricted to specified locations and is subject to terms
and conditions prohibiting unauthorized reproduction or transfer of the software
products.  The Company also seeks to protect the source code of its software as
a trade secret and as a copyrighted work.  See "Part II, Item 7, Affecting
Future Performance-Risks Associated with Intellectual Property."

                                      -9-
<PAGE>
 
EMPLOYEES

     As of December 31, 1997, the Company employed a total of 742 employees.
None of the Company's employees is represented by a labor union.  The Company
has experienced no work stoppages and believes that its employee relations are
good.

ITEM 2.  PROPERTIES

     LHS leases office space in Atlanta, United States; Frankfurt, Germany;
Kuala Lumpur, Malaysia; Stockholm, Sweden; Zurich, Switzerland and Hong Kong for
customer support and sales operations.  The Atlanta and Frankfurt offices are
also used for software development, and the Atlanta office is the Company's
corporate headquarters.  The Company believes that its facilities are adequate
for its current needs and that suitable additional space will be available as
required.

ITEM 3.  LEGAL PROCEEDINGS

     The Company is not party to any legal proceedings that the Company believes
will have a material adverse effect on its financial condition or results of
operations.

ITEM 4.  SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS.

     No matters were submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended December 31, 1997.

ITEM 4(A).  EXECUTIVE OFFICERS OF THE REGISTRANT

     Information regarding executive officers of the Company who are not
directors of the Company is set forth below.

     Dr. Hansjorg Beha, age 48, has served as Executive Vice President of
Technology since joining LHS in December 1997.  Dr. Beha has held several senior
technology positions in the United States and Europe.  During 1995 and 1996, Dr.
Beha was the Chairman of the Board of Directors of Ibcom, H.E., a Swiss company
which filed for bankruptcy in 1996.  He was senior vice president and corporate
information officer of the Sandoz Group, a software company, in Switzerland from
1992 to 1995. Before joining Sandoz, he was director and head of information
systems of the Daimler Benz Group in Stuttgart from 1989 to 1992. Dr. Beha
oversees the Company's worldwide research/product development, testing, custom
development, and product management activities.

     Dr. Joachim Hertel, age 45, is one of the founders of the Company and
served as Executive Vice President-Technology of the Company from October 1990
to February 28, 1998 when he resigned and became a technology consultant to the
Company.  Prior to joining the Company, Dr. Hertel worked as an Architect and
Designer with IBM from 1985 to 1990 and as an Architect and Designer with SAP, a
software provider, from 1982 to 1985.

     Erik Froberg, age 40, has served as Executive Vice President of the Company
and President and Chief Executive Officer of LHS Holding Germany GmbH, a
subsidiary of the Company, since August 1996.  Prior to joining LHS, Mr. Froberg
was employed by Cap Gemini Sweden AB, a systems integrator, from 1985 to 1996
and last served as Executive Vice President and Division Manager for Utilities
and Telecom.

     Bruce T. Leonard, age 47, has served as Chief Operating Officer of the
Company since August 1997 and as President since February 1998. Prior to joining
LHS, Mr. Leonard was president of the EDS Personal Communications strategic
business unit in Boston from 1992 to 1997 and was chief executive officer and
president of China Management Systems, EDS Taiwan, from 1988 to 1992. 

                                      -10-
<PAGE>
 
Mr. Leonard began his career with the General Motors Truck and Bus Division in
1971 and has also served as head of GM's Commercial Vehicles and Engineering
unit in the United Kingdom.

                                    PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

     Information relating to the market for the Company's Common Stock and
related stockholder matters will be set forth under the caption "Corporate
Information -- Common Stock" in the Company's 1998 Annual Report to
Stockholders.  Such information is incorporated herein by reference.

ITEM 6.  SELECTED FINANCIAL DATA

     Information relating to selected financial data of the Company will be set
forth under the caption "Selected Financial Data" in the 1998 Annual Report to
Stockholders.  Such information is incorporated herein by reference.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

     Information relating to Management's Discussion and Analysis of Financial
Condition and Results of Operations shall be set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the 1998 Annual Report to Stockholders, except for the discussion
of "Factors Affecting Future Performance" set forth herein.

FACTORS AFFECTING FUTURE PERFORMANCE

     DEPENDENCE ON NEW PRODUCTS; TECHNOLOGICAL CHANGE

     The market for the Company's products is characterized by rapid
technological change, frequent new product introductions, evolving industry
standards and changing customer needs.  The introduction of products embodying
new technologies and the emergence of new industry and technology standards can
render existing products obsolete and unmarketable in short periods of time.
The Company expects other vendors to continually introduce new products and
services, as well as enhancements to their existing products and services, which
will compete with the products and services offered by the Company.  As a
result, the life cycles of the Company's products are difficult to estimate.
The Company believes that its future success will depend in large part on its
ability to maintain and enhance its current product and service offerings and to
continually develop and introduce new products and services that will keep pace
with technological advances and satisfy evolving customer requirements.  In
addition, the Company plans to introduce billing and customer care solutions for
carriers providing services in telecommunications markets different from those
the Company has traditionally supported.  There can be no assurance that the
Company will be successful in developing and marketing these new products and
services or that its current or new products and services will adequately meet
the demands of its current or new markets.  Because it is generally not possible
to predict the time required and costs involved in reaching certain research,
development and engineering objectives, actual development costs could exceed
budgeted amounts and estimated product development schedules could require
extensions.  Further, there can be no assurance that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of these products and services.  If the Company is
unable to develop and introduce new products and services in a timely manner, or
if a new release of a product does not achieve market acceptance, the Company's
business, operating results and financial condition will be materially adversely
affected.

                                      -11-
<PAGE>
 
     MANAGEMENT OF GROWTH

     The Company has expanded its operations rapidly over the past two years,
placing significant demands on its administrative, operational and financial
personnel and systems.  Additional expansion by the Company may further strain
its management, operational, financial, reporting and other systems and
resources.  There can be no assurance that the Company's systems, resources,
procedures, controls and existing space will be adequate to support such
expansion of the Company's operations.  The Company's future operating results
will substantially depend on the ability of its officers and key employees to
manage changing business conditions and to implement and improve its management,
operational, financial control and other reporting systems.  In addition, the
Company's future operating results are dependent on its ability to attract,
train and retain qualified consulting, technical, sales, financial, marketing
and management personnel.  Failure to hire, train or retain qualified personnel
necessary to keep pace with the Company's development of products and services
could have a material adverse effect on the Company's business, results of
operations and financial condition.  Continued expansion will require the
Company's management to: enhance management information and reporting systems;
standardize BSCS installation methodologies; further develop its infrastructure;
jointly develop and coordinate strategies, functions and product development
among its Americas, European and Asian operations and continue to maintain
customer satisfaction.  If the Company is unable to respond to and manage
changing business conditions, the quality of the Company's products and
services, its ability to retain key personnel and its business, results of
operations and financial condition could be materially adversely affected.

     DEVELOPING TELECOMMUNICATIONS MARKET AND NEW CARRIERS

     The Company provides customized billing and customer care solutions to
telecommunications carriers in the wireline and wireless markets.  Although
these markets have experienced significant growth and have been characterized by
increased deregulation and competition in recent years, there can be no
assurance that such trends will continue at similar rates or that the Company
will be able to effectively market and sell its products and services in such
markets.  In addition, many of the new entrants in the telecommunications market
are companies that lack significant financial and other resources.  To cultivate
relationships with such new market entrants, the Company may be required to
offer alternative pricing arrangements, which may provide for deferred payments.
However, there can be no assurance that the Company will be able to develop such
relationships or that new carriers that become customers of the Company will
gain market acceptance for their telecommunications services.  If the Company
permits customers that may not have adequate financial resources to pay the
Company for its services on a deferred basis, the Company may ultimately be
unable to collect payments for such services.  Because the Company has been
dependent historically on a limited number of long-term customer relationships,
the failure of the Company to develop relationships with, make sales to, or
collect payments from, new telecommunications carriers and failure of the
Company's customers to compete effectively in the telecommunications market
could have a material adverse effect on the Company's business, results of
operations and financial condition.  In addition, the telecommunications market
is experiencing some consolidations and formations of alliances among
established carriers.  A consolidation or alliance affecting one of the
Company's customers may result in such customer shifting to another billing
system, which may have a material adverse effect on the Company's business,
results of operations and financial condition.

     RELIANCE ON SIGNIFICANT NEW CUSTOMERS

     Historically, the Company has relied on a limited number of customers for a
substantial portion of its revenues.  o.tel.o accounted for 12% of the Company's
total revenues in 1997.  In addition, the Company had two customers that
accounted for 12% and 10% of the Company's total revenues in 1996.  The Company
does not believe that any of the foregoing customers, which were significant in
previous years, will account for more than 10% of the Company's total revenues
in any future year.  The Company has historically depended on, and expects to
continue to depend on, large contracts from significant 

                                      -12-
<PAGE>
 
customers, which can cause its revenues and earnings to fluctuate between
quarters based on the timing of orders and installation of the Company's BSCS
product by these customers. Although the Company believes that it has good
relationships with its established customers and has in the past received
revenues from repeat business with established customers, these customers
generally have acquired fully-paid licenses for their installed systems and none
of the Company's major customers has any obligation to purchase additional
products or services. The Company expects that its current customers will not
enter into further agreements with the Company which will account for 10% or
more of the Company's total revenues in any future year. Consequently, failure
by the Company to develop relationships with significant new customers would
have a material adverse effect on the Company's business, results of operations
and financial condition. Additionally, the acquisition by a third party of one
of the Company's major customers could result in the loss of that customer,
which could have a material adverse effect on the Company's business, results of
operations and financial condition.

     INITIAL MARKET ENTRY RISKS; CUSTOMER EXPECTATIONS

     The Company intends to pursue an aggressive expansion strategy for its
product and service offerings to carriers in new geographic markets and to
carriers providing telecommunications services in markets different from those
the Company has traditionally supported.  This strategy has certain inherent
risks which the Company believes are unique to the industry in which the Company
competes and which arise from, among other things, the characteristics of the
Company's targeted customer base in these markets.  When the Company enters a
new market and begins to develop a relationship with a new customer, the
Company's initial performance and initial market perception are critical to the
Company's future prospects in that new market.  Although the Company believes
that its strategy for new market entry and its preparations for such entry will
enable it to perform to the satisfaction of customers in a new market, there can
be no assurance that a new customer will be satisfied with the Company's
products or services or that the Company will be able to successfully establish
itself in any such new market.

     RELIANCE ON THIRD-PARTY RELATIONSHIPS

     The Company currently relies on a number of consulting and systems
integration firms to enhance its marketing, sales and customer support efforts,
particularly with respect to installation and support of its product, lead
generation and assistance in the sales process.  An integral factor in the
Company's growth strategy is the continuing development of relationships with
such firms and the Company's ability to successfully leverage such relationships
through joint marketing and sales efforts in order to generate new business
opportunities.  There can be no assurance that the Company will be able to
continue to successfully leverage these relationships in the future.  The
failure by the Company to maintain joint marketing and sales efforts with
consulting and systems integration firms in the future would have a material
adverse effect on the Company's business, results of operations and financial
condition.

     The Company currently derives revenues from projects in which it serves as
subcontractor to a consulting or systems integration firm that products a
variety of information technology products and services to end-user customers.
In such instances, the Company is highly dependent upon such firms for product
installation and BSCS end-user training.  Although the Company seeks to maintain
close relationships with consulting and systems integration firms, many such
firms have similar, and often more established, relationships with the Company's
principal competitors.  The Company has no exclusive agreements with any of
these firms, and there can be no assurance that such firms, many of which have
significantly greater financial, technical, personnel and marketing resources
than the Company, will not discontinue or reduce their relationships with the
Company, develop their own products and services in competition with the
Company, or develop relationships with companies that offer products that
compete with the Company's solutions.  If the Company is unable to develop and
maintain effective, long-term relationships with these firms or if these firms
fail to meet the needs of the Company's customers, the Company's business will
be adversely affected.  In addition, the failure of the consulting or systems
integration firm or another subcontractor to perform to the satisfaction of the
customer may adversely 

                                      -13-
<PAGE>
 
affect the Company's relationship with the customer and could adversely affect
the perception of the Company in the market.

     The Company had historically entered into contracts with a limited number
of third parties that provided such third parties with the Company's kernel
source code and the right to market and sell independently modified versions of
the Company's products.  As a result, certain carriers in the United States
experienced difficulties with the Company's software due primarily to the
inability of these third parties to properly install the Company's software and
adapt it for use by such carriers.  In those instances, the reputation and
credibility of the Company and its products were damaged and the Company may
have lost the confidence of the affected carriers.  The Company has since
terminated all third-party rights that allowed access to the Company's kernel
source code and permitted the subsequent modification and resale of that source
code.  However, there can be no assurance that there will be no further damage
to the Company's reputation and credibility in the United States.  Any further
damage could have a material adverse effect on the Company's business, results
of operations and financial condition.

     HIGHLY COMPETITIVE MARKET; COMPETITION

     The market for telecommunications billing and customer care systems is
highly competitive, and the Company expects this competition to increase.  The
Company competes with independent providers of billing systems and services,
such as Alltel, AMDOCS, Kenan, CBIS in the Americas and Kingston-SCL and SEMA
Group internationally, with systems integrators and with internal billing
departments of larger telecommunications carriers.  The Company anticipates
continued growth and competition in the telecommunications industry and the
entrance of new competitors into the billing and customer care systems market in
the future.

     The Company believes that its ability to compete depends in part on a
number of competitive factors, including the development by others of software
that is competitive with the Company's products and services, the price at which
others offer competitive software and services, the extent of competitors'
responsiveness to customer needs and the ability of the Company's competitors to
hire, retain and motivate key personnel.  The Company competes with a number of
companies that have longer operating histories, larger customer bases,
substantially greater financial, technical, sales, marketing and other
resources, and greater name recognition than the Company.  Current and potential
competitors have established, and may establish in the future, cooperative
relationships among themselves or with third parties to increase their ability
to address the needs of the Company's prospective customers.  Accordingly, new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share.  As a result, the Company's competitors may be able to
adapt more quickly than the Company to new or emerging technologies and changes
in customer requirements, or to devote greater resources to the promotion and
sale of their products.  There can be no assurance that the Company will be able
to compete successfully with existing or new competitors.  Failure by the
Company to adapt to emerging market demands and to compete successfully with
existing and new competitors would have a material adverse effect on the
Company's business, results of operations and financial condition.

     In addition, as the Company expands, it will market its products and
services to carriers in markets not currently served by the Company.  Upon its
entrance into these markets, the Company may encounter new competitors, many of
which have significantly greater financial, technical, personnel and marketing
resources than the Company.  There can be no assurance that the Company will be
able to properly identify and address the demands for these new markets or that
the Company can continue to be competitive in its current markets.  Failure by
the Company to maintain its competitiveness in current or new markets would have
a material adverse effect on the Company's business, results of operations and
financial condition.

                                      -14-
<PAGE>
 
     DEPENDENCE ON KEY PERSONNEL

     The Company's future success depends in large part on the continued service
of its key management, sales, product development and operational personnel,
including Hartmut Lademacher, Chairman of the Board and Chief Executive Officer,
and on the Company's ability to continue to attract, motivate and retain highly
qualified employees, including technical, managerial and sales and marketing
personnel.  Additionally, the Company expects to continue to expand the number
of employees engaged in sales, marketing and product development.  However,
competition in the recruitment of highly qualified personnel in the software and
telecommunications services industry is intense.  The inability to hire and
retain qualified personnel or the loss of the services of key personnel could
have a material adverse effect upon the Company's current business, new product
development efforts and future business prospects.  If such personnel do not
remain active in the Company's business, the Company's operations could be
materially adversely affected.  The Company does not currently maintain key
person insurance coverage for any of its employees.

     INTERNATIONAL RISKS

     The Company began its operations in Germany in 1990 and continues to
conduct a substantial portion of its business outside of the Americas.  In 1996
and 1997, the Company's sales outside the Americas represented 68% and 58% of
the Company's total revenues, respectively.  Although the Company intends to
continue to expand its operations within the Americas, European and Asian
operations are expected to continue to account for a majority of its revenues
for the foreseeable future.  The Company's business outside the United States
may be subject to unexpected changes in regulatory requirements, tariffs and
other trade barriers, costs of localizing products for foreign countries, lack
of acceptance of localized products in foreign countries, longer accounts
receivable payment cycles, difficulties in managing international operations,
availability of trained personnel to install and implement the Company's
systems, political instability, potentially adverse tax obligations,
restrictions on the repatriation of earnings and the burdens of complying with a
wide variety of foreign laws and regulations.  In addition, the laws of some
foreign countries do not protect the Company's intellectual property rights to
as great an extent as do the laws of the United States.  There can be no
assurance that such factors will not have a material adverse effect on the
Company's revenues outside the Americas or its overall financial performance.

     RISKS ASSOCIATED WITH CUSTOMER DEMAND FOR FINANCING

     Certain of the Company's potential customers may require financing to fund
purchases of the Company's products.  The Company's ability to increase its
sales to start-up telecommunications carriers with limited financial resources
in the future will depend significantly upon its ability to obtain orders from,
maintain relationships with, provide support to, and arrange financing for these
customers.  As a result, the inability of any customer to finance its purchases
of the Company's products may materially adversely affect the Company's
business, operating results and financial condition.  Some of the Company's
competitors have the capital resources to provide vendor financing.
Historically, the Company has not had the capital resources to make arrangements
for financing its customers' purchases.  There can be no assurance that the
Company can successfully implement a vendor financing program.

     POTENTIAL YEAR 2000 PROBLEMS

     It is possible that LHS's currently installed computer systems, software
products or other business systems, or those of LHS's suppliers or customers,
will not always accept input of, store, manipulate and output dates in the years
1999, 2000 or thereafter without error or interruption.  LHS has conducted a
review of its business systems, including its computer systems, to attempt to
identify ways in which its systems could be affected by problems in correctly
processing date information.  In addition, LHS is querying its customers and
suppliers as to their progress in identifying and addressing problems that their
computer systems will face in correctly processing date information as the year
2000 approaches and is reached.  However, there can be no assurance that LHS
will identify all date-handling problems in its business systems or those of its
customers and suppliers in advance of their occurrence or that LHS will be 

                                      -15-
<PAGE>
 
able to successfully remedy problems that are discovered. The expenses of LHS's
efforts to identify and address such problems, or the expenses or liabilities to
which LHS may become subject as a result of such problems, could have a material
adverse effect on LHS's results of operations and financial condition.

     CURRENCY FLUCTUATIONS

     A significant portion of the Company's revenues are denominated in the
German Deutsche Mark and, to a lesser extent, the Swiss Franc and the Malaysian
Ringgit.  Fluctuations in exchange rates between the U.S. Dollar and the German
Deutsche Mark may have a material adverse effect on the Company's business,
results of operations and financial condition, particularly its operating
margins, and could also result in exchange losses.  Foreign currency transaction
gains and losses are a result of the Company transacting business in certain
foreign locations in currencies other than the functional currency of the
location.  The Company attempts to balance revenues and expenses in each
currency to minimize net foreign currency risk.  To the extent that the Company
is unable to balance revenues and expenses in each currency, fluctuations in the
value of the currencies in which the Company conducts its business relative to
the functional currency have caused and will continue to cause currency
transaction gains and losses.  The impact of future exchange rate fluctuations
on the Company's results of operations cannot be accurately predicted.  To date,
the Company has not sought to hedge the risks associated with fluctuations in
exchange rates but may undertake such transactions in the future.  There can be
no assurance that any hedging techniques implemented by the Company in the
future would be successful or that the Company's business, results of operations
and financial condition will not be materially adversely affected by exchange
rate fluctuations.

     RISKS ASSOCIATED WITH INTELLECTUAL PROPERTY

     The Company regards its software products as proprietary and relies
primarily on a combination of statutory and common law copyright, trademark and
trade secret laws, customer licensing agreements, employee and third-party
nondisclosure agreements and other methods to protect its proprietary rights.
These laws and contractual provisions provide only limited protection of the
Company's proprietary rights.  The Company has no patents or patent applications
pending and has no registered trademarks or copyrights.  Despite the Company's
efforts to protect its proprietary rights, it may be possible for a third party
to copy or otherwise obtain and use the Company's technology without
authorization or to develop similar technology independently.  Furthermore, the
laws of certain countries in which the Company sells its products do not protect
the Company's software and intellectual property rights to the same extent as do
the laws of the United States.  If unauthorized copying or misuse of the
Company's products were to occur to any substantial degree, the Company's
business, results of operations and financial condition could be materially
adversely affected.  There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology.

     Although the Company has not received any notices from third parties
alleging infringement claims, there can be no assurance that third parties will
not claim that the Company's current or future products infringe the proprietary
rights of others.  The Company expects that software developers will
increasingly be subject to such claims as the number of products and competitors
providing products and services to the telecommunications industry grows.  Any
such claim, with or without merit, could result in costly litigation, require
significant management resources, cause product shipment delays, require the
Company to enter into royalty or licensing agreements or cause the Company to
discontinue the use of the challenged trades name, service mark or technology,
any of which could have a material adverse effect on the Company's business,
results of operations and financial condition.  Furthermore, such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company or at all.

                                      -16-
<PAGE>
 
     PRODUCT LIABILITY

     The software developed and utilized by the Company in providing its
products and services may contain undetected errors.  Although the Company
engages in extensive testing of its software prior to introducing the software
onto a customer's network, there can be no assurance that errors will not be
found in software after the commencement of its use.  The Company's license
agreements with its customers generally contain provisions designed to limit the
Company's exposure to potential product liability claims, such as disclaimers of
warranties and limitations on liability for special, consequential and
incidental damages.  In addition, the Company's license agreements generally
limit the amounts recoverable for damages to the amounts paid by the licensee to
the Company for the product or service giving rise to the damages claimed.
Although the Company has not experienced any product liability claims to date,
the sale and support of products by the Company may result in the Company being
subject to such claims.  The Company has product liability insurance which it
believes is satisfactory to cover potential product liability claims; however, a
successful product liability claim brought against the Company could have a
material adverse effect upon the Company's business, operating results and
financial condition.

     CONCENTRATION OF STOCK OWNERSHIP

     As of March 1, 1997, the Company's executive officers and directors and
their affiliates together owned approximately 14,092,781 shares (approximately
54%) of the outstanding Common Stock (as determined in accordance with rules of
the Securities and Exchange Commission).  Further, the Company's executive
officers and directors and their affiliates held options to acquire an
additional 1,295,458 shares of Common Stock at exercise prices ranging from
$5.30 to $47.50 per share.  These additional shares, together with the
outstanding shares currently owned, would represent beneficial ownership of
approximately 56% of the Common Stock, after giving effect to the exercise of
those options.  Additionally, substantially all such persons have granted
Hartmut Lademacher the right to vote, through as late as December 31, 1999, all
shares of Common Stock owned by them.  As a result, Mr. Lademacher, voting in
any election of directors through December 31, 1999, may be able to elect all
directors nominated for election and may be able to determine the outcome of
certain corporate actions requiring stockholder approval regardless of how the
other stockholders of the Company may vote.  This concentration of ownership may
have the effect of delaying or preventing a change in control of the Company.

     ANTI-TAKEOVER CONSIDERATIONS

     The Board of Directors  has the authority to issue up to 225,000 shares of
preferred stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares, without any further vote
or action by the stockholders.  The rights of the holders of Common Stock will
be subject to, and may be adversely affected by, the rights of the holders of
any preferred stock that may be issued in the future.  The issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company.  The Company has no current plans to issue shares of
preferred stock.  Certain provisions of the Company's Certificate of
Incorporation and By-Laws and the Delaware General Corporation Law could delay
or make more difficult a merger, tender offer or proxy contest involving the
Company.  Furthermore, the Company's Board of Directors is divided into three
classes with only one class being elected each year, and directors may only be
removed by the affirmative vote of 80% or greater of all classes of voting
stock, which factors may also have the effect of delaying, deterring or
preventing a change of control of the Company.  In addition, pursuant to the LHS
Group Inc.  Stock Incentive Plan, all stock options granted to employees become
automatically vested and exercisable upon certain triggering events leading up
to a change of control.  This vesting and the dilutive effect that the exercise
of a large number of options would have on the Company's Common Stock may have
the effect of delaying or preventing a change of control of the Company.

                                      -17-
<PAGE>
 
     POSSIBLE VOLATILITY OF MARKET PRICE

     There may be significant volatility in the market price of the Common
Stock.  The stock market has from time to time experienced significant price and
volume fluctuations, which have particularly affected the market prices of the
stocks of high technology and telecommunications companies and which may be
unrelated to the operating performance of such companies.  Factors such as
actual or anticipated operating results, growth rates, changes in estimates by
analysts, market conditions in the industry, announcements by competitors,
regulatory actions and general economic conditions will vary from period to
period.  As a result of these factors, the Company's operating results from time
to time may be below the expectations of public market analysts and investors.
Any such event would likely have a material adverse effect on the market price
of the Common Stock.

     GOVERNMENT REGULATION

     Currently, the Company's business is not subject to direct government
regulation; however, the Company's existing and potential customers are subject
to extensive regulation in many jurisdictions.  Regulatory changes which affect
the Company's existing and potential customers could have a material adverse
effect on the business, results of operations and financial condition of the
Company.

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS

     Future sales of Common Stock could adversely affect the market price of the
Common Stock.  Several of the Company's principal stockholders hold a
significant portion of the outstanding Common Stock, and a decision by one or
more of these stockholders to sell their shares could adversely affect the
market price of the Common Stock.  Additionally, the Company filed a
Registration Statement on Form S-8 on June 11, 1997 to register 4,686,000 shares
of Common Stock that are issuable upon the exercise of outstanding stock options
or that are available for issuance pursuant to the Company's Stock Incentive
Plan.
 
     Certain stockholders of the Company are entitled to certain demand and
piggyback registration rights with respect to the shares which they own.  Once
registered such shares will be generally eligible for immediate sale in the
public market.  Public sales of a significant number of such shares could have a
material adverse effect on the market price of the Common Stock.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The following consolidated financial statements of the Company are
incorporated herein by reference from the 1998 Annual Report to Stockholders:

     Report of Independent Accountants

     Consolidated Balance Sheets as of December 31, 1997 and 1996

     Consolidated Statements of Income for the years ended December 31, 1997,
     1996, and 1995

     Consolidated Statements of Stockholders' Equity for the years ended
     December 31, 1997, 1996, and 1995

     Consolidated Statements of Cash Flows for the years ended December 31,
     1997, 1996, and 1995

                                      -18-
<PAGE>
 
     Notes to Consolidated Financial Statements

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

     Not applicable.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     Information relating to the directors of the Company will be set forth
under the captions "Proposal 1 -- Election of Directors--Information Regarding
Nominees and Continuing Directors" in the Company's Proxy Statement for the 1998
Annual Meeting of Stockholders (the "1998 Proxy Statement").  Such information
is incorporated herein by reference.  Pursuant to Instruction 3 to Item 401(b)
of Regulation S-K and General Instruction G(3) to Form 10-K, information
relating to the executive officers of the Company who are not directors of the
Company is set forth in Part I. Item 4(a) of this report under the caption
"Executive Officers of the Registrant," and information relating to the
executive officers of the Company who are also directors of the Company is
included in the 1998 Proxy Statement under the caption "Proposal 1 -- Election
of Directors--Information Regarding Nominees and Continuing Directors".  Such
information is incorporated herein by reference. Information regarding
compliance with Section 16(a) of the Securities Exchange Act of 1934, as
amended, by directors and executive officers of the Company and beneficial
owners of more than 10% of the Company's Common Stock will be set forth under
the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the
1998 Proxy Statement.  Such information is incorporated herein by reference.
The 1998 Proxy Statement will be filed with the Securities and Exchange
Commission within 120 days after December 31, 1997.

ITEM 11.  EXECUTIVE COMPENSATION.

     Information relating to executive compensation will be set forth under the
captions "Proposal 1 -- Election of Directors -- Director Compensation,"
"Executive Compensation, Report of the Compensation Committee of the Board of
Directors; Stock Performance Graph"; and "Compensation Committee Interlocks and
Insider Participation" in the 1998 Proxy Statement. Such information is
incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     Information regarding ownership of the Company's Common Stock by certain
persons will be set forth under the caption "Stock Ownership" in the 1998 Proxy
Statement.  Such information is incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information regarding certain relationships and transactions between the
Company and certain non-employee directors of the Company will be set forth
under the captions "Proposal 1--Election of Directors--Director Compensation and
"--Compensation Committee Interlocks and Insider Participation" and "Certain
Transactions" in the 1998 Proxy Statement.  Such information is incorporated
herein by reference.

                                      -19-
<PAGE>
 
                                    PART IV.

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(A)  1. CONSOLIDATED FINANCIAL STATEMENTS

     The following consolidated financial statements of LHS Group Inc., included
in the 1998 Annual Report to Stockholders, are incorporated by reference in Part
II, Item 8:

     Report of Independent Accountants
 
     Consolidated Balance Sheets as of December 31, 1997, and 1996

     Consolidated Statements of Income for the years ended December 31, 1997,
1996, and 1995

     Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996, and 1995

     Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996, and 1995

     Notes to Consolidated Financial Statements

     2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES

     The following consolidated financial statement schedule of LHS Group Inc.
is set forth on page 23 hereof:

               Schedule II --  Valuation and Qualifying Accounts

     All other schedules to the combined financial statements are omitted as
they are not required under the related instructions or are inapplicable, or
because the required information is included in the consolidated financial
statements or related notes thereto.

     3. EXHIBITS

     The following exhibits either (i) are filed herewith or (ii) have
previously been filed with the Securities and Exchange Commission and are
incorporated herein by reference to such prior filings.  Previously filed
registration statements or reports which are incorporated herein by reference
are so identified.  The Company will furnish any exhibit upon request to Dr.
Wolf J. Gaede, Six Concourse Parkway, Suite 2700, Atlanta, Georgia 30328.  There
is a charge of $.50 per page to cover expenses of copying and mailing.

EXHIBIT
NUMBER      DESCRIPTION OF EXHIBITS
-------     -----------------------
  3.1       Certificate of Incorporation, as amended. (Incorporated by reference
            to Exhibit 3.1 to the Company's Registration Statement on Form S-1
            (File No. 333-22195)).

  3.2       By-Laws. (Incorporated by reference to Exhibit 3.2 to the Company's
            Registration Statement on Form S-1 (File No. 333-22195)).

  4.1       Specimen Common Stock Certificate. (Incorporated by reference to
            Exhibit 4.1 to the Company's Registration Statement on Form S-1
            (File No. 333-22195)).

                                      -20-
<PAGE>
 
  10.1      Preferred Stock Purchase Agreement dated December 22, 1995 among the
            Company, General Atlantic Partners 23, L.P. and GAP Coinvestment
            Partners, L.P. (Incorporated by reference to Exhibit 10.1 to the
            Company's Registration Statement on Form S-1 (File No. 333-22195)).

  10.2      Common Stock Purchase Agreement dated July 15, 1996 among the
            Company, General Atlantic Partners 31, L.P. and GAP Coinvestment
            Partners, L.P. (Incorporated by reference to Exhibit 10.2 to the
            Company's Registration Statement on Form S-1 (File No. 333-22195)).

  10.3      Registration Rights Agreement dated July 15, 1996 among the Company,
            General Atlantic Partners 23, L.P., General Atlantic partners 31,
            L.P., GAP Coinvestment Partners, L.P. and the other stockholders
            named therein. (Incorporated by reference to Exhibit 10.4 to the
            Company's Registration Statement on Form S-1 (File No. 333-22195)).

  10.4      Credit line of DM5,000,000 from BHF-Bank to LHS Holding Germany GmbH
            dated March 19, 1996. (Incorporated by reference to Exhibit 10.5 to
            the Company's Registration Statement on Form S-1 (File No. 333-
            22195)).

  10.5*     Employment Agreement dated as of April 14, 1997, between Hartmut
            Lademacher and LHS Group Inc. (Incorporated by reference to Exhibit
            10.6 to the Company's Registration Statement on Form S-1 (File No.
            333-22195)).

  10.6*     Employment Agreement dated as of April 14, 1997, between Dr. Joachim
            Hertel and LHS Group Inc. (Incorporated by reference to Exhibit 10.7
            to the Company's Registration Statement on Form S-1 (File No. 333-
            22195)).

  10.7*     Contract for Employment dated May 21, 1996, between Erik Froberg and
            LHS Holding Germany GmbH. (Incorporated by reference to Exhibit 10.8
            to the Company's Registration Statement on Form S-1 (File No. 333-
            22195)).

  10.8*     Employment Agreement dated August 28, 1996, between Jerry W. Braxton
            and LHS Group Inc. -filed herewith.

  10.9*     Employment Agreement dated September 26, 1996, between Dr. Wolf J.
            Gaede and LHS Group Inc. -filed herewith.

  10.10*    Employment Agreement dated January 1, 1998, between Dr. Hansjorg
            Beha and LHS Group, Inc. -filed herewith.

  10.11*    Employment Agreement dated July 22, 1997, between Bruce T. Leonard
            and LHS Group Inc. - filed herewith.

  10.12*    LHS Group Inc.'s 1996 Stock Incentive Plan (Incorporated by
            reference to Exhibit 4(c) to the Company's Registration Statement on
            Form S-8/File No. 333-28985)

  13.1      Portions of the Company's 1988 Annual Report to Stockholders
            expressly incorporated by reference herein from the following
            sections of the Annual Report: Selected Financial Data; Management's
            Discussion and Analysis of Financial Condition and Results of
            Operations; Consolidated Financial Statements of LHS Group Inc.
            and Corporate Information --Common Stock.

  21.1      List of Subsidiaries. (Incorporated by reference to Exhibit 21.1 to
            the Company's Registration Statement on Form S-1 (File No. 333-
            22195)).

  23.1      Consent of Ernst & Young LLP.

  27.1      Financial Data Schedule.
--------
* Management contract of compensatory plan.

(b) REPORTS ON FORM 8-K

       No Current Reports on Form 8-K were filed by the Company in the quarter
ended December 31, 1997.

                                      -21-
<PAGE>
 
                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf on March 20, 1998 by the undersigned, thereunto duly organized.

                              LHS GROUP INC

                              BY:  /s/ Hartmut Lademacher
                                  -----------------------
                                   Hartmut Lademacher
                                   Chairman of the Board of Directors and
                                   Chief Executive Officer

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant in the capacities indicated on March 20, 1998.

           SIGNATURE                        TITLE
           ---------                        -----
 
        /s/ Hartmut Lademacher      Chairman of the Board and
        -------------------------   Chief Executive Officer
        Hartmut Lademacher          (Principal Executive Officer)
         
         
        /s/ Jerry W. Braxton        Executive Vice President,
        -------------------------   Chief Financial Officer, Treasurer and 
        Jerry W. Braxton            Director (Principal Financial and 
                                    Accounting Officer)
         
         
        /s/ Dr. Wolf J. Gaede       Executive Vice President, General Counsel,
        -------------------------   Secretary and Director
        Dr. Wolf J. Gaede
         
        /s/ Ulf Bohla               Director
        -------------------------
        Ulf Bohla
         
        /s/ William E. Ford         Director
        -------------------------
        William E. Ford
         
        /s/ William O. Grabe        Director
        -------------------------
        William O. Grabe
         
        /s/ George F. Schmitt       Director
        -------------------------
        George F. Schmitt

                                      -22-
<PAGE>
 
                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                                LHS GROUP INC.

                                (IN THOUSANDS)
<TABLE> 
<CAPTION> 

COL. A                                         COL. B              COL. C                COL. D      COL. E
--------------------------                  ------------   ----------   ----------     ----------  ----------

                                                                  ADDITIONS
                                                           -----------------------
                                            BALANCE AT     CHARGED TO   CHARGED TO                 BALANCE AT
                                            BEGINNING OF    COSTS AND     OTHER                      END OF
        DESCRIPTION                           PERIOD        EXPENSES     ACCOUNTS      DEDUCTIONS    PERIOD
--------------------------                  ------------   -----------------------     ----------  ----------
<S>                                         <C>            <C>          <C>            <C>         <C> 
Year ended December 31, 1997:
  Allowance for Doubtful Accounts            $  200          $   1,036    $     -        $     -     $ 1,236
  Valuation Allowance for Deferred Taxes         -                  -           -              -          -

Year ended December 31, 1996:
  Allowance for Doubtful Accounts                -                 200          -              -         200
  Valuation Allowance for Deferred Taxes        139                 -           -            (139)(1)     -

Year ended December 31, 1995:
  Allowance for Doubtful Accounts                -                  -           -              -          -
  Valuation Allowance for Deferred Taxes         -                 139          -              -         139
</TABLE> 

(1) Elimination of valuation reserve due to the realization of the tax benefit
    of the associated net operating loss

                                      -23-