<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, 1998

                                       OR

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                        FOR THE TRANSITION PERIOD FROM     TO
                                                       ----   ----

                        COMMISSION FILE NUMBER 000-22409


                                 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 $1,233,729,038 at
March 15, 1999, based on the closing sales price of $37.50 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 15,
                              1999 was 52,951,879.

                      DOCUMENTS INCORPORATED BY REFERENCE

    Specifically identified portions of the 1999 Annual Report to Stockholders
are incorporated by reference in Part II.

    Specifically identified portions of the Proxy Statement for the 1999 Annual
Meeting of Stockholders to be held on June 7, 1999 are incorporated by reference
in Part III.
<PAGE>
 
                                 LHS GROUP INC.
                           ANNUAL REPORT ON FORM 10-K
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                                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            19

8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                           20

9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
      AND FINANCIAL DISCLOSURE                                              20

                                    PART III

10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                    21

11.   EXECUTIVE COMPENSATION                                                21

12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT        21

13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                        21

                                     PART IV

14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K        22

SIGNATURES                                                                  27
<PAGE>
 
                                     PART I

ITEM 1. BUSINESS.

Introduction

    LHS Group Inc. ("LHS" or the "Company") 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. Approximately 134 BSCS installations
support a total of 24.9 million subscribers worldwide.

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,
analog cellular, digital telephony, and satellite communications 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 by auctioning
significant radio spectrum for digital telephony, PCS and other services to new
carriers. More recently, the 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. Although the Telecommunications Act of 1996 has not increased
competition to the extent anticipated when the Act was passed, as a result of
deregulation, 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.

                                      -1-
<PAGE>
 
    In conjunction with deregulation, advances in telecommunications technology
have 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 building new networks that utilize digital standards. Although
the GSM digital standard and its derivatives have gained widespread acceptance
and continue to expand, particularly among carriers in Europe and Asia, other
digital telephony 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 into
convergent offerings to 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 that 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 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:

                                      -2-
<PAGE>
 
    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 BSCS and its other software products
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.

    .   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

                                      -3-
<PAGE>
 
        software's core billing and customer care functionality. BSCS currently
        supports the GSM, CDMA, TDMA and AMPS wireless standards as well as
        satellite, wireline, and ERMES 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
        Czech, Chinese, English, French, German, Hebrew, Indian, Italian,
        Japanese, Korean, Polish, Portuguese, Russian, and Spanish 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. To reach this goal, during 1998, the Company introduced BSCS
        Version 5.2. BSCS 5.2 was first released in the Americas, where new
        features were added to support activation and maintenance of fleets and
        talkgroups to support Motorola's iDEN(R)technology, GSM closed user
        groups, and other broadcast/dispatch technologies. Additional
        enhancements include increased scaleability and performance improvements
        in the rating and billing and promotion and discount modules. BSCS 5.2E
        was also released for the European and Asian markets, where new features
        were added to support additional wireline voice and data services,
        advanced cross-product discount and promotion functionality, and
        increased scaleability. As discussed below, in the first quarter of
        1999, the Company released its first application utilizing its new
        object oriented Targys technology, which is based on a multi-tiered
        architecture.

    .   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 to meet demands from the
        market place. To ensure that its products keep pace with information
        technology advances, the Company will continue to leverage leading
        information technologies within our product offerings.

    .   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 various local sales and project offices
        within the three regions, and will continue to customize its products to
        support additional languages and currencies.

                                      -4-
<PAGE>
 
    .   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, Logica, CGI Group, and debis Systemhaus, leading
        vendors of telecommunications equipment, such as Ericsson, and
        international telecommunications service providers, such as Telecom
        Italia Mobile, Bell Atlantic Global Wireless, and France Telecom. Many
        of these systems integrators, equipment vendors and service providers
        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 new Targys technology is based on a multi-tiered,
component-based architecture employing Java as the implementation language.
Targys allows plug-and-play interoperability with other software that supports
CORBA 2, an industry standard introduced by the Object Management Group.

    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.

Products

    BSCS

    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 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

                                      -5-
<PAGE>
 
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 this module enables
general ledger posting activities. 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 as suspended, deactivated, or written-off. A sales administration
function maintains sales force data and enables sales tracking for commission
processing.

    Customizable Interface Modules - 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
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.

                                      -6-
<PAGE>
 
    Infocell Converge

    On June 11, 1998, the Company acquired LHS InfoCell, Inc. (formerly known as
InfoCellular, Inc.). LHS InfoCell is a wholly owned subsidiary of the Company,
with its principal offices located near Boston in Marlborough, Massachussetts.
LHS InfoCell develops, markets and sells customer acquisition and point-of-sale
solutions to telecommunications service providers in North and Latin America. In
the future, the Company intends to expand the market for LHS InfoCell's products
and services to Europe and Asia as well.

    LHS InfoCell's primary software product is InfoCell Converge. InfoCell
Converge is a client/server based customer acquisition and point-of-sale
application that includes functionality for customer acquisition, inventory
management, order interfaces, cash management, reference management and
inventory management.

    Targys - The Millenium Series

    During the first quarter of 1999, the Company announced the release of its
new Targys object oriented technology. The Company's Targys technology is based
on a muti-tiered, component-based architecture employing Java as its
implementation language. Targys allows plug-and-play interoperability with other
software that supports CORBA 2, an industry standard introduced by the Object
Management Group. The Company expects the following six Targys applications to
be available during 1999 to replace existing on-line modules of BSCS in versions
5.2 and higher: Customer Inquiry; Order Management; Customer Care; Customer
Self-Care (Web Service Center); Corporate Account; and, Back Office. The
Customer Inquiry application is already in use at Swisscom AG Mobile, Bern,
Switzerland.

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, Electronic Data Systems
Corporation, Logica plc, CGI Group, and debis Systemhaus. 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, 1998, the Company employed 520 projects and services
personnel compared to 411 at December 31, 1997.

    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 

                                      -7-
<PAGE>
 
by the customer and is calculated as a percentage of
the applicable standard BSCS object code license fee in effect at the beginning
of each annual maintenance period.

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. In 1998, the Company's technology group received worldwide ISO 9001
certification.

    Development efforts in the past year resulted in new releases of BSCS that
added new features to support activation and maintenance of fleets and
talkgroups to support Motorola's iDEN(R) technology, GSM closed user groups,
increased scaleability, performance enhancements to the rating and billing and
promotion and discount modules, and support of additional wireline functionality
and data services in the European version of BSCS. Development efforts in the
past year also resulted in the release of the Company's new Targys technology in
early 1999, as described above.

    Some of the Company's short-term focus areas are local number portability,
dual-mode handsets, call analysis and data services. The Company will continue
to utilize available technology to provide its clients and integrators with the
best solutions. In keeping with that philosophy the Company adheres to an open
interface strategy and continues to endorse object oriented programming
technology. The Company's development staff consisted of 442 employees as of
December 31, 1998, compared to 216 employees as of December 31, 1997 See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Affecting Future Performance-We must adopt to changes in
technology, products, industry standards and customer needs."

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 92 employees as of December
31, 1998 compared to 41 employees at the end of 1997, and intends to expand its
direct sales operations at various locations, including Frankfurt, Germany;
Stockholm, Sweden; Atlanta, Miami and Boston, United States; Zurich,
Switzerland; Kuala Lumpur, Malaysia; Hong Kong, China; and New Delhi, India. 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."

    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- Our success is dependent on our relationships with consulting firms
and systems integration firms."

                                      -8-
<PAGE>
 
Customers

    BSCS has been licensed to approximately 134 carriers in more than 70
countries, and supports a total of approximately 24.8 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 no customers that accounted for more than 10% of its total
revenue in 1998.

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"), Kingston-SCL and SEMA Group, 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 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
-- The telecommunications billing and customer care systems industry is very
competitive."

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

                                      -9-
<PAGE>
 
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. 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 - We have only limited protection of our proprietary rights and
technology."

Employees

    As of December 31, 1998, the Company employed a total of 1,141 employees.
None of the Company's employees are 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, Miami, Boston and San Francisco, United
States; Frankfurt, Germany; Kuala Lumpur, Malaysia; Stockholm, Sweden; Zurich,
Switzerland; New Delhi, India; Sao Paulo, Brazil; 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, 1998.

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.

    Jon Limbird, age 46, has served as Executive Vice President of Corporate
Development since January 1, 1999, and recently was appointed to the newly 
created position of Executive Vice President, Customer Engineering. Mr Limbird
has been with the Company since 1996. During his three years with the Company,
he

                                     -10-
<PAGE>
 
has held the positions of Vice President of Operations, Vice President of
Research & Development, and Senior Vice President Product Management. Prior to
joining LHS, Mr. Limbird was employed at Data General Corporation from 1980
until 1996 where he served as General Manager and Director of the North America
Systems Integration business unit. Mr. Limbird oversees the Company's customer
engineering and custom software development activities.

    Stefan Sieber, age 39, has served as Executive Vice President and Chief
Divisional Officer since February 1999. Mr. Sieber joined LHS in 1995 as
Managing Director of LHS Projects. He was then promoted to Vice President and
General Manager of LHS Asia Pacific in May 1996, Senior Vice President in
October 1997, and served in such capacity until January 1999. Prior to joining
LHS, Mr. Sieber was Managing Director, Wireless Business Europe for EDS from
1994 to 1995, Managing Director of Unicom Germany from 1991 to 1994, and held
several positions in business development, marketing, and research and
development for RWE Germany. Mr. Seiber oversees the Company's worldwide sales,
marketing and project management activities.

                                     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 1999 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 1999 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 "Risk Factors Affecting Future Performance". Such information is incorporated
herein by reference.

                    RISK FACTORS AFFECTING FUTURE PERFORMANCE

    We must adapt to changes in technology, products, industry standards and
customer needs.

    The telecommunications industry is characterized by rapidly changing
technology and evolving industry standards. Also, customer needs frequently
change, and competitors constantly introduce new products and services. To be
successful, we must:

    .   use leading technologies effectively; 
    .   continue developing our technical expertise; 
    .   enhance our existing products and services;
    .   develop new products and services; and
    .   meet changing customer needs on a timely and cost-effective basis.

                                     -11-
<PAGE>
 
If we fail to do any of these things, our customers may choose to purchase
products and services from our competitors.

    We continually introduce our products and services into new markets. If our
products do not adequately meet the demands of these new markets, we could
experience decreased revenues. We could experience difficulties in the
development of products and services for new and existing markets that could
delay or prevent the successful development, introduction and marketing of these
products and services. Our failure to develop and introduce new products and
services in a timely manner, or the lack of success of a new release of a
product in the market, would likely result in a material adverse effect on our
business, operating results and financial condition.

    We cannot assure you that we will effectively manage our growth.

    Over the last three years, we have greatly expanded our operations, placing
considerable demand on our administrative, operational and financial personnel
and systems. Further expansion may place additional strains on our resources. To
address these expansion issues, we may have to make substantial expenditures and
devote further management time and resources to:

    .   improve or replace our management information, financial and other
        reporting systems;
    .   standardize BSCS installation methods;
    .   further develop our infrastructure;
    .   develop and coordinate strategies, operations and product development
        among our operations in the Americas, Europe and Asia;
    .   maintain customer satisfaction;
    .   manage changing business conditions; and
    .   recruit, train and retain qualified consulting, technical, sales,
        financial, marketing and management personnel.

    We cannot assure you that our existing resources, systems and space will be
able to adequately support our further expansion. Our failure to respond
appropriately to growth and change would likely result in a material adverse
effect on the quality of our services, our ability to retain key personnel and
our business.

    We depend on large contracts from a limited number of customers.

    We provide customized billing and customer handling systems to
telecommunications carriers in the wireline and wireless markets. Although no
single customer accounted for more than 10% of our revenues in 1998, we have
traditionally relied upon, and expect to continue to rely upon, large contracts
from a limited number of customers. This can cause our revenues and earnings to
fluctuate between quarters based on the timing of orders and realization of
revenues from these orders.

    Some of the telecommunications industry's established carriers are forming
alliances, while others are consolidating. If a consolidation or alliance
involves one of our customers, that customer may switch to another billing
system. In addition, none of our major customers has any obligation to purchase
additional products or services from us. The loss of one or more of our major
customers because of industry consolidation or otherwise would likely result in
a material adverse effect on our business, operating results and financial
condition.

    Our success depends on developing relationships with new customers in a very
competitive telecommunications market.

    The wireline and wireless markets have grown significantly and become much
more competitive in recent years. This growth may not continue, and we may not
be able to successfully market and sell our

                                     -12-
<PAGE>
 
products in these competitive markets. It is critical to our continued success
that we develop relationships with new customers. Our failure to develop
relationships with new customers, or the failure of our customers to compete
effectively in the telecommunications market, would likely result in a material
adverse effect on our business, operating results and financial condition.

    Many of our potential customers are new entrants in the telecommunications
market and lack significant financial and other resources. We may be required to
offer them alternative pricing arrangements, including deferred payments, if we
want these new market entrants to be our customers. We may not be able to
develop customer relationships with these new entrants, but even if we do, there
is no guarantee that these customers will be successful. If they are not
successful, they may reduce or discontinue their purchases from us. If we have
permitted customers to pay us on a deferred basis, we may be unable to collect
payments from these customers. Any one of these factors could have a material
adverse effect on our business, operating results and financial condition.

    We cannot assure you that expansion of our products and services into new
geographic markets and applications will be successful.

    We plan to continue expanding our products and services into new geographic
markets and to carriers offering new applications of their telecommunications
services. Our failure to successfully establish ourselves in new markets would
likely result in a material adverse effect on our business.

    Our success is dependent on our relationships with consulting firms and
systems integration firms.

    Consulting firms and systems integration firms help us with marketing,
sales, lead generation, customer support and installation of our products. In
order to grow successfully, we must maintain our relationships with these firms
and generate new business opportunities through joint marketing and sales with
them.

    We also serve as subcontractor to consulting firms and systems integration
firms where those firms provide information technology to end-user customers. In
these cases we depend heavily on these firms to install our products and to
train end-users to use our products. Incorrect product installation, failure to
properly train the end-user, or general failure of the firm to satisfy the
customer could have a negative effect on our relationships with the contracting
firm and the customer. Such problems could damage our reputation and the
reputation of our products and services.

    Obstacles we may encounter to forging long-term relationships with
consulting and systems integration firms include:

    .   we have no exclusive agreements with any consulting and systems
        integration firms;

    .   many consulting and systems integration firms have more established
        relationships with our principal competitors; and
   
    .   many consulting and systems integration firms have the resources to
        compete with us by developing their own products and services.

    These firms may discontinue their relationships with us and/or develop
relationships with our competitors. Our inability to establish and maintain
effective, long-term relationships with these firms, and their failure to meet
the needs of our customers, would likely adversely affect our business.

    Prior to 1996, we had contracts pursuant to which we gave certain systems
integration firms our kernel source code and the right to market and sell
versions of our products that these firms independently modified. A few U.S.
carriers had problems with our products as modified and installed by these
firms. This damaged our reputation and credibility and that of our products, and
we may have lost the confidence 

                                      -13-
<PAGE>
 
of the affected carriers. Although we have terminated all of these types of
contracts, we cannot assure you that there will not be further damage to our
reputation and credibility in the U.S. that could have a material adverse effect
on our business.

    The telecommunications billing and customer care systems industry is very
competitive.

    The telecommunications billing and customer care systems industry is very
competitive. We expect competition to increase in the future.

    Some of the independent providers we compete with are:

    .   Alltel
    .   AMDOCS
    .   CBIS
    .   ITDS
    .   Kenan
    .   Kingston-SCL
    .   SEMA Group

    We also compete with systems integrators and internal billing departments of
larger telecommunications carriers.

    Many of our competitors have advantages over us, including:

    .   longer operating histories;
    .   larger customer bases;
    .   substantially greater financial, technical, sales, marketing and other
        resources; and
    .   greater name recognition.

    Our current and potential competitors have established, and may continue to
establish in the future, cooperative relationships among themselves or with
third parties to increase their ability to compete with us. In addition,
competitors may be able to adapt more quickly than us to new or emerging
technologies and changes in customer needs, or to devote more resources to
promoting and selling their products. New competitors or alliances among
competitors could also result in these competitors quickly gaining significant
market share.

    We believe that our ability to compete successfully in our markets is
affected by these principal factors:

    .   development of competing software and services;
    .   price of competing software and services;
    .   responsiveness to customer needs; and
    .   hiring, retaining and motivating key personnel.

    Our failure to adapt to market demands and to compete successfully with
existing and new competitors would have a material adverse effect on our
business.

    As we expand, we will market our products and services to carriers in
markets that we do not currently serve. We may encounter new competitors upon
entry into these markets that may have greater financial, technical, personnel
and marketing resources than we do. We cannot assure you that we will be able to
successfully identify and address the demands for these new markets or that we
can continue to 

                                      -14-
<PAGE>
 
compete effectively in our current markets. Our failure to maintain our
competitiveness in current or new markets would have a material adverse effect
on our business, operating results and financial condition.

    Our success depends upon our ability to attract and retain key personnel.

    Our future success depends in large part on the continued service of our key
management, sales, product development and operational personnel, including
Hartmut Lademacher, Chairman of the Board and Chief Executive Officer. Since it
is our goal to continue our expansion, our success also depends on our ability
to attract and retain highly qualified technical, managerial, sales and
marketing personnel. Competition is intense for the recruitment of highly
qualified personnel in the software and telecommunications services industry. We
may not be able to successfully retain or integrate existing personnel or
identify and hire additional personnel. Our inability to hire and retain
qualified personnel would likely have a material adverse effect upon our current
business, new product development efforts and future business prospects. We do
not currently maintain key person insurance coverage for any of our employees.

    The success of our international business operations is subject to many
uncertainties.

    We conduct a substantial portion of our business outside of the Americas. In
each of 1997 and 1998, our sales outside the Americas represented approximately
60% of our total revenues. We expect a majority of our revenues to continue to
be provided from our European and Asian operations. Our international business
may be adversely affected by the following:

    .   unexpected changes in regulatory requirements;
    .   tariffs and other trade barriers;
    .   difficulties in customizing our products for use in foreign countries;
    .   longer accounts receivable payment cycles;
    .   difficulties in managing international operations;
    .   availability of trained personnel to install and implement our 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 our
intellectual property rights to as great an extent as the laws of the United
States. There can be no assurance that such factors will not have a material
adverse effect on our international revenues and earnings or our overall
financial performance.

    If we cannot provide financing for potential customers, we may not get their
business.

    Certain of our potential customers may require financing to fund purchases
of our products. In particular, our ability to increase sales to start-up
telecommunications carriers with limited financial resources in the future will
depend significantly upon our ability to arrange financing for these customers.
We may not be able to successfully implement a vendor financing program for
these customers or to assist them in obtaining alternative financing for our
products. In such event, we will have decreased revenues.

    Failure to obtain year 2000 compliance may negatively affect our business.

    The term "Year 2000 issue" is used to describe the various problems that may
result from the improper processing of dates and date-sensitive calculations by
computers and other machinery as the year 2000 is approached and reached. These
problems could result in a system failure or miscalculations

                                     -15-
<PAGE>
 
causing disruptions of our operations, including an inability to process
transactions, send invoices, or engage in similar normal business activities.

    Although we believe that our internal systems and software products are Year
2000 compliant, we are vulnerable to the risk that our customers, government
agencies, significant suppliers and other third parties will not be able to
remedy their own Year 2000 issues. We rely, both domestically and
internationally, upon government agencies, utility companies, telecommunication
service companies and other service providers outside of our control. Such
suppliers, governmental agencies, or other third parties or our customers may
suffer a Year 2000 business disruption. Such failures could have a material
adverse effect on our business, operating results and financial condition.

    We have not developed a contingency plan to address the results of our
analysis of the most reasonably likely worst case Year 2000 scenarios.
Consequently, we are not able to determine at this time whether the consequences
of Year 2000 failures will have a material impact on our operations, but they
may.

    Exchange rate fluctuations between the u.s. dollar and other currencies in
which we do business may result in currency translation losses.

    A significant portion of our revenues are denominated in the German Deutsche
Mark. We also have revenues denominated in the Swiss Franc and the Malaysian
Ringgit. The value of the German Deutsche Mark against the Euro was fixed upon
the introduction of the Euro in January 1, 1999. Consequently, fluctuations in
exchange rates between the U.S. Dollar and the Euro may have a material adverse
effect our business, operating results and financial condition and could also
result in significant exchange losses. Foreign currency transaction gains and
losses are a result of transacting business in certain foreign locations in
currencies other than the functional currency of the location. We attempt to
balance our revenues and expenses in each currency to minimize net foreign
currency risk. To the extent that we are unable to balance revenues and expenses
in a currency, fluctuations in the value of the currency in which we conduct our
business relative to the functional currency have caused and will continue to
cause currency transaction gains and losses. We cannot accurately predict the
impact of future exchange rate fluctuations on our results of operations.

    We have not sought to hedge the risks associated with fluctuations in
exchange rates but may undertake such transactions in the future. Any hedging
techniques which we implement in the future may not be successful, and exchange
rate losses could be exacerbated by hedging techniques that we use.

    Our European operations expose us to heightened euro conversion risks.

    Because of our significant operations in Europe, we are particularly exposed
to risks resulting from the conversion by certain European Union member states
of their respective currencies to the Euro as legal currency on January 1, 1999.
The conversion rates between such European Union member states' currencies and
the Euro have been fixed by the European Union's council; however, the mandatory
switch to the Euro will not occur until June 30, 2002. We will be modifying our
software during the period of conversion to the Euro and intend to complete such
work and have our products Euro compliant by such time. Risks to us related to
the conversion of the Euro include:

    .   effects on pricing due to increased cross-border price transparency;
    .   costs of modifying information systems, including both software and
        hardware;
    .   costs of modifying our software products to accommodate Euro conversion;
    .   costs of relying upon third parties whose systems also require
        modification;
    .   changes in the conduct of business; and 
    .   changes in the currency exchange rate.

                                     -16-
<PAGE>
 
    The actual effects of the Euro conversion could have a material adverse
effect on our business, operating results and financial condition.

    We have only limited protection of our proprietary rights and technology.

    We rely 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 our
proprietary rights and technology. These laws and contractual provisions provide
only limited protection. We have no patents or patent applications pending, no
copyrights and only a limited number of registered trademarks. It may be
possible for a third party to copy or otherwise obtain and use our technology
without authorization or to develop similar technology independently. Also, the
laws of certain countries in which we sell our products do not offer as much
protection of our proprietary rights as the laws of the United States.
Unauthorized copying or misuse of our products or proprietary rights could have
a material adverse effect on our business, operating results and financial
condition.

    We may not be successful in avoiding claims that we infringe others'
proprietary rights.

    Many patents, copyrights and trademarks have been issued in the general
areas of information and telecommunications. We expect that software developers
will be increasingly subject to infringement claims as the number of products
and competitors providing products and services to the telecommunications
industry grows. Third parties may claim that our current or future products
infringe their proprietary rights. Infringement claims, with or without merit,
could

    .   result in costly litigation;
    .   require significant management resources;
    .   cause product shipment delays;
    .   require us to enter into unfavorable royalty or licensing agreements; or
    .   cause us to discontinue the use of the challenged trade name, service
        mark or technology.

Consequently, infringement claims could have a material adverse effect on our
business, operating results and financial condition.

    Our software may contain undetected errors.

    The software that we have developed and licensed to our customers may
contain undetected errors. Although we test our software prior to installing it
in a customer's network, we may discover errors after the installation. The cost
to fix the errors or to develop the software further could be high. These errors
may subject us to product liability claims. We have not experienced any product
liability claims to date, but we may be subject to such claims in the future. We
have insurance that would cover certain of these claims; however, a successful
product liability claim brought against us could have a material adverse effect
on our business, operating results and financial condition.

    Our stock ownership is highly concentrated.

    Our executive officers, directors and their affiliates beneficially own
approximately 23.1 million shares (approximately 44%) of the outstanding common
stock. Also, our executive officers and directors and their affiliates hold
options to acquire an additional 1.3 million shares of common stock. If
exercised, these options, taken with the shares owned, would give the directors,
officers and their affiliates beneficial ownership of approximately 46% of our
common stock.

                                     -17-
<PAGE>
 
    Substantially all such persons and certain other significant stockholders
have granted Hartmut Lademacher the right to vote, through December 31, 1999,
all shares of common stock owned by them. As a result, Mr. Lademacher may be
able to exert significant influence over the election of directors and the
outcome of certain corporate actions requiring stockholder approval. This
concentration of ownership may have the effect of delaying or preventing a
change in control.

    Certain measures that we have adopted may have anti-takeover effects.

    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 stockholder
action. 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 could discourage or
make difficult the acquisition of a majority of our outstanding voting stock by
a third party.

    Certain provisions of our 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 us. In addition, our 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 more of all
classes of voting stock. Also, pursuant to our Stock Incentive Plan, all stock
options granted to employees automatically vest and become exercisable upon
certain triggering events leading up to a change of control. These factors may
have the effect of delaying or preventing a change of control.

    The market price of our common stock may be volatile.

    There may be significant volatility in the market price of our common stock.
The stock market has from time to time experienced significant price and volume
fluctuations that may be unrelated to the operating performance of particular
companies. Factors such as the following will vary from period to period:

    .   actual or anticipated operating results;
    .   growth rates;
    .   changes in estimates by analysts;
    .   industry conditions;
    .   competitors' announcements;
    .   regulatory actions; and
    .   general economic conditions.

As a result of these and other factors, our 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 of our customers could negatively affect us.

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

                                     -18-
<PAGE>
 
    Additional shares will become eligible for sale in the future.

    The market price of our common stock could drop as a result of sales of
large numbers of shares in the market, or the perception that such sales could
occur. Several of our principal stockholders hold a significant portion of the
outstanding common stock.

    We have approximately 52.9 million shares of common stock outstanding.
Approximately 38.9 million of these shares are freely transferable without
restriction or further registration under the Securities Act of 1933, except for
any shares purchased by our "affiliates," as defined in Rule 144 under the
Securities Act. Approximately 14 million of the shares of common stock
outstanding are "restricted securities" as defined in Rule 144. These shares may
be sold in the future without registration under the Securities Act to the
extent permitted by Rule 144 or an exemption under the Securities Act. In
addition, we have registered under the Securities Act 16 million shares of
common stock issuable under our Long-Term Incentive Plan.

    Certain of our stockholders are entitled to demand and piggyback
registration rights with respect to the shares that they own. Once registered,
such shares generally will be eligible for immediate sale in the public market.

    SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

    Certain of the matters discussed in this document, in the 1998 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 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. Our 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 above in "Factors Affecting Future Performance". All written or oral
forward-looking statements attributable to us are expressly qualified in their
entirety by these cautionary statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    A significant portion of the Company's operations consist of software
license sales and software implementation, support and project consulting
services in foreign countries, primarily in Europe (including Eastern Europe),
Asia and Latin America. As a result, the Company's financial results could be
significantly affected by factors such as changes in foreign currency exchange
rates when the Company is paid in foreign currencies and weak economic
conditions in the foreign markets in which the Company licenses and implements
its software products. The Company's operating results are affected by changes
in exchange rates between the U.S. Dollar and the German Deutsche Mark, Swiss
Franc, and Malaysian Ringitt. When the U.S. Dollar strengthens against these
foreign currencies, the value of our non-functional currency revenues decreases.
When the U.S. Dollar weakens, the value of our functional currency revenues
increases. Overall, the Company is a net receiver of currencies other than the
U.S. Dollar and, as such, the Company benefits from a weaker U.S. Dollar and is
adversely affected by a stronger U.S. Dollar relative to major currencies
worldwide. However, the Company believes that its exposure to foreign currency
exchange rate risk at December 31, 1998 was not material.

    The Company does not engage in trading market risk sensitive instruments.
The Company also does not purchase for investment, hedging or for purposes
"other than trading", instruments that are likely to expose it to market risk,
whether interest rate, foreign currency exchange, commodity price or equity

                                     -19-
<PAGE>
 
price risk. The Company has issued no debt instruments, entered into no forward
or futures contracts, purchased no options and entered into no swaps.

    The Company's interest income and expense are most sensitive to changes in
the general level of U.S. interest rates. In this regard, changes in the U.S.
interest rates affect the interest earned on the Company's cash equivalents and
short-term investments. To mitigate the impact of fluctuations in U.S. interest
rates, the Company generally maintains the majority of its investments in fixed
rate debt instruments. Because the Company has no loans or credit facilities
outstanding, it is not exposed to interest rate risk in connection with its
operating expenses.

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, 1998 and 1997

    Consolidated Statements of Income for the years ended December 31, 1998,
    1997, and 1996

    Consolidated Statements of Stockholders' Equity for the years ended 
    December 31, 1998, 1997, and 1996

    Consolidated Statements of Cash Flows for the years ended December 31, 1998,
    1997, and 1996

    Notes to Consolidated Financial Statements

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

    Not applicable.

                                     -20-
<PAGE>
 
                                   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 1999
Annual Meeting of Stockholders (the "1999 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 1999
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 1999 Proxy Statement. Such
information is incorporated herein by reference. The 1999 Proxy Statement will
be filed with the Securities and Exchange Commission within 120 days after
December 31, 1998.

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" and "--Compensation Committee Interlocks and Insider
Participation" in the 1999 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 1999 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 1999 Proxy Statement. Such information is incorporated
herein by reference.

                                     -21-
<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 1999 Annual Report to Stockholders, are incorporated by reference in
    Part II, Item 8:

    Report of Independent Accountants

    Consolidated Balance Sheets as of December 31, 1998, and 1997

    Consolidated Statements of Income for the years ended December 31, 1998,
    1997, and 1996

    Consolidated Statements of Stockholders' Equity for the years ended 
    December 31, 1998, 1997, and 1996

    Consolidated Statements of Cash Flows for the years ended December 31, 1998,
    1997, and 1996

    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 24 hereof:

               Schedule II -- Valuation and Qualifying Accounts

    All other schedules to the consolidated 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 Scott A.
Wharton, Corporate Secretary, 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 4.1 to the Company's Registration Statement
               on Form S-8 (File No. 333-57269)).
   
     3.2       By-Laws, as amended - filed herewith.
   
     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)).

                                     -22-
<PAGE>
 
    10.1       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)).

   *10.2       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)).

   *10.3       Employment Agreement dated August 28, 1996, between Jerry
               W. Braxton and LHS Group Inc. (Incorporated by reference to
               Exhibit 10.8 to the Company's 1998 Annual Report on Form 10-K).

   *10.4       Revised Employment Agreement dated January 6, 1999 between Dr.
               Wolf J. Gaede and LHS Group Inc. filed herewith.

   *10.5       LHS Group Inc. 1998 Employee Stock Purchase Plan (Incorporated by
               reference to Exhibit 99.1 to the Company's Registration Statement
               on Form S-8 (File No. 333-57269)).

   *10.6       LHS Group Inc. Amended and Restated Stock Incentive Plan
               (Incorporated by reference to Exhibit 99.2 to the Company's 
               Registration Statement on Form S-8 (File No. 333-57269)).

    13.1       Portions of the Company's 1998 Annual Report to Stockholders
               expressly incorporated by reference herein from the following
               sections of the Annual Report: Corporate Information -- Common
               Stock; Selected Financial Data; Management's Discussion and
               Analysis of Financial Condition and Results of Operations; and
               Consolidated Financial Statements of LHS Group Inc.

    21.1       List of Subsidiaries - filed herewith.

    23.1       Consent of Ernst & Young LLP.

    27.1       Financial Data Schedule.

* Management contract or 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, 1998.

                                     -23-
<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, 1998:
  Allowance for Doubtful Accounts           $1,236       $3,427      $     -      $(1,347)(1)  $ 3,316
  Valuation Allowance for Deferred Taxes         -           -             -            -            -

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)(2)        -


</TABLE> 
(1) Uncollectible accounts written off, net of recoveries.
(2) Elimination of valuation reserve due to the realization of the tax benefit
    of the associated net operating loss

                                      24
<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 30, 1999 by the undersigned, thereunto duly organized.

                                  LHS GROUP INC.

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

        KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Hartmut Lademacher, Jerry W. Braxton and Scott A.
Wharton, and each of them, with the power to act without the other, as his true
and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Report, and to file any of
the same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or his or their substitutes, may lawfully do or cause to
be done by virtue hereof.

    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 30, 1999.

           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 Director
    Jerry W. Braxton            (Principal Financial and Accounting Officer)

                                      25
<PAGE>
 
    /s/ Dr. Wolf J. Gaede       Executive Vice President, 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

                                      26