<PAGE>   1

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

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

                                     NO. 2

(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, 1999

                                       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)

<TABLE>
<S>                           <C>
          DELAWARE                58-2224883
(State or other jurisdiction   (I.R.S. Employer
     of incorporation)        Identification No.)
</TABLE>

                       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.  Yes [ ]  No [X]


     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 $1,443,369,888
at June 16, 2000, based on the closing sales price of $32.00 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 June
16, 2000 was 69,737,587.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>   2

                                 LHS GROUP INC.

                          ANNUAL REPORT ON FORM 10-K/A
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
 ITEM
NUMBER                                                                 PAGE
------                                                                 ----
<S>      <C>                                                           <C>
                                  PART I
1.       Business....................................................    1
2.       Properties..................................................   16
3.       Legal Proceedings...........................................   16
4.       Submission of Matters to a Vote of Security Holders.........   16

                                  PART II
5.       Market for Registrant's Common Equity and Related
            Stockholder Matters......................................   17
6.       Selected Financial Data.....................................   18
7.       Management's Discussion and Analysis of Financial Condition
            and Results of Operations................................   19
7(a).    Quantitative and Qualitative Disclosures About Market
            Risk.....................................................   38
8.       Financial Statements and Supplementary Data.................   39
9.       Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure.................................   39

                                 PART III
10.      Directors and Executive Officers of the Registrant..........   40
11.      Executive Compensation......................................   43
12.      Security Ownership of Certain Beneficial Owners and
            Management...............................................   48
13.      Certain Relationships and Related Transactions..............   49

                                  PART IV
14.      Exhibits, Financial Statement Schedules and Reports on Form
            8-K......................................................   51
         Signatures..................................................   53
</TABLE>


                                        i
<PAGE>   3

                                     PART I

                      SPECIAL CAUTIONARY NOTICE REGARDING
                           FORWARD-LOOKING STATEMENTS

     Certain of the matters discussed in this document 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 below in "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
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 1.   BUSINESS

INTRODUCTION

     LHS Group Inc. ("LHS" or the "Company") provides billing and customer care,
enhanced messaging and call routing, and customer acquisition and management
software to communications services providers throughout the world. The Company
was organized as a corporation under the laws of the State of Delaware in 1995.

     A majority of the Company's revenues are generated by two distinct products
lines -- the Business Support and Control System ("BSCS") billing and customer
care software and the Oryx enhanced services system. The Company also generates
revenue from its InfoCell ConVerge customer acquisition software and various
BSCS add-on modules and complimentary third party products. The Company's BSCS
software can be used by communications service providers with small or large
subscriber bases ("scaleable"), can be implemented quickly, and can support
innovative marketing and pricing of communications services. The Company's Oryx
enhanced services system is comprised of off-the-shelf hardware and proprietary
software. Oryx is a scaleable system made of independent modules ("modular")
that enables service providers to offer a variety of value-added services, such
as enhanced messaging, pre and postpaid calling, one number and other enhanced
routing services. The Company's ConVerge customer acquisition software enables
service providers to establish new accounts and manage inventory, orders, cash,
and referrals. The Company is also a licensed distributor of Athene Software's
System Advanced Predictive Technology ("APT") customer management software. APT
enables service providers to predict customer turnover and recommends corrective
action. The Company's products are used throughout the world

                                        1
<PAGE>   4

by more than 300 service providers that together service more than 60 million
subscribers.

RECENT DEVELOPMENTS

     On March 15, 2000, LHS and Sema Group plc, an English public limited
company ("Sema"), announced that they had entered into a Plan and Agreement of
Merger, dated as of March 14, 2000 (the "Merger Agreement"). The Merger
Agreement sets forth the terms and conditions of the proposed merger of LHS and
a wholly owned subsidiary of Sema, pursuant to which LHS will become a
majority-owned subsidiary of Sema (the "Merger").

     In the Merger, each currently outstanding share of LHS common stock will be
exchanged for American Depositary Shares that represent 2.6 ordinary shares of
Sema (the "Sema ADSs"). LHS shareholders may at their option elect to receive
ordinary shares of Sema instead of Sema ADSs. Sema intends to have the Sema ADSs
quoted on the Nasdaq National Market. The ordinary shares will trade on the
London Stock Exchange and the Paris Bourse.

     LHS shares held by three German stockholders, including LHS's Chairman of
the Board, Hartmut Lademacher, will remain outstanding. Between January 1, 2002
and December 31, 2003, each of these German stockholders will have the right to
exchange all of his LHS shares for Sema ADSs or Sema ordinary shares on the same
terms as provided in the Merger. Between January 1, 2004 and June 30, 2004, Sema
will have the right to require each of the German stockholders to exchange all
of his LHS shares for a number of Sema ADSs or Sema ordinary shares equal to 95%
of the consideration which the stockholder would have received in the Merger.

     Completion of the Merger is subject to the satisfaction of various
conditions contained in the Merger Agreement, including: (1) the approval of the
Merger by the stockholders of both LHS and Sema; (2) the Securities and Exchange
Commission declaring effective a registration statement relating to the Sema
ADSs and ordinary shares that LHS stockholders will receive; (3) the
authorization of the listing of the Sema ADSs on the Nasdaq National Market; (4)
the authorization of the listing on the London Stock Exchange and the Paris
Bourse of any Sema ordinary shares issued to LHS stockholders in the Merger or
upon exchange of Sema ADSs; (5) the expiration of all applicable waiting periods
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976; and (6) the
receipt of any required approval under applicable English or European Union
competition laws.

     The Merger Agreement contains a $105 million termination fee, payable to
Sema upon certain circumstances described in the Merger Agreement. LHS has also
entered into an agreement granting Sema an option to purchase up to 17.5% of its
common stock (the "Stock Option Agreement"), which terminates at the termination
of the Merger Agreement. On June 12, 2000, Sema delivered to LHS a notice of
exercise under the Stock Option Agreement and closed the purchase of 10,386,091
shares on June 14, 2000 at an exercise price of $37.46 (L24.84) per share. In
accordance with the terms of the

                                        2
<PAGE>   5

Stock Option Agreement, Sema paid LHS $103,861 (L68,878) in cash, equal to the
par value of the shares purchased ($0.01 per share), and issued LHS a full
recourse promissory note in the approximate amount of $389 million (L258
million), equal to the purchase price of the shares in excess of the par value.
The promissory note matures in one year, bears interest at the prime rate as
reported in The Wall Street Journal payable quarterly and is secured by the
shares of LHS common stock with regard to which it is issued.

     Certain significant stockholders of both LHS and Sema, including LHS
Chairman of the Board, Hartmut Lademacher, General Atlantic Partners and France
Telecom, have entered into stockholder voting agreements under which they have
agreed to vote their shareholdings in favor of the Merger.

INDUSTRY BACKGROUND

   Communications Industry

     For most of this century, communications services providers around the
world provided basic voice telephone service in heavily regulated environments.
More recently, however, the deregulation of the telecommunications industry
coupled with the development and widespread adoption of new voice and data
technologies has resulted in significant growth in the number and type of new
service providers. As a result, communications markets worldwide have become
increasingly competitive and dynamic.

     Governments around the world continue to relax regulatory constraints on
the communications 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 service providers. 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 service providers. 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. New radio spectrums will be auctioned for emerging
technologies such as G3, UMDS and MMDS. Although the Telecommunications Act of
1996 and new radio spectrum used for various wireless technologies has not
increased competition to the extent anticipated when the Act was passed, the
number of communications service providers in the U.S. market has increased and
is expected to continue to increase.

     Outside the United States, deregulation, privatization, and new operating
licenses are also resulting in the emergence of new service providers, increased
competition and the broader availability of communications services. The general
trend toward deregulation and the adoption in 1996 of less stringent uniform
regulatory schemes within wireline markets of the European Union, Latin America
and Asia, along with continued growth in European, Latin American, and Asian
wireless markets, are expected to increase the number and types of services
offered and to intensify competition within wireless and wireline markets across
Europe. New licenses continue to be offered for various competitive offerings
throughout the world.

                                        3
<PAGE>   6

     In conjunction with deregulation, advances in telecommunications technology
have stimulated the growth in the number and types of telecommunications
companies. For instance, a recent trend in wireless technology has been to offer
wireless data transmission services. The rapid changes in telecommunications
technology have created significant market opportunities for new and existing
service providers, resulting in greater competition and a wider range of service
offerings for consumers.

     During 1999, the global communications market experienced increasing
consolidation on both a national and international basis with new and larger
multi-national service providers such as Vodafone Airtouch. Within the United
States, service providers offering common services have merged to form
nationwide wireless networks. These new, larger service providers present
opportunities to support very large subscriber bases and to implement
technologies that can enable the consolidated service providers to migrate from
several billing, customer care and enhanced services platforms to unified,
enterprise-wide technologies.

     As competition intensifies, communications service providers 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. They 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 telecommunications companies
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. They also are relying on innovative marketing of rate and service
plans to successfully segment and attract potential customers.

     To compete effectively, communications service providers require software
that enables innovative and flexible marketing and supports multiple service
offerings. Software that provides billing, customer care and management, and
enhanced services, has become critical to the business success of communications
service providers. Service providers today demand software that provides
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, such software is deployed by service
providers as a strategic business weapon.

   Business and Operations Support Software

     Billing and other business support software for telecommunications
companies were first developed to meet the needs of large monopoly telephone
companies that offered fixed line voice service, and offered a simple,
single-service billing function, including rate tariffing and invoicing. This
software lacked advanced customer care functionality, which typically provides
the initial establishment and management of customer accounts, assignment of
phone numbers, service selection and provisioning, issuance and reporting

                                        4
<PAGE>   7

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 service providers then operated, these early
billing systems typically were mainframe-based, were built around proprietary,
closed hardware and software and were inflexible and costly to maintain.

     The rapid advance of communications technologies and the introduction of
new wireless and data technologies, the deregulation of markets around the globe
and the increasing importance of reducing time-to-market have motivated
communications service providers to install, maintain and update advanced
business support software. This software is essential for both existing and
emerging service providers to compete effectively as they seek to introduce new
services, enter new markets and offer a high level of customer service. In some
cases, communications service providers may choose to outsource the fulfillment
of these activities to service bureaus for financial or other business reasons.
Regardless of whether service providers rely on purchased software operated
internally or on outsourced software from a service bureau provider, a strong
market opportunity exists for a billing, customer care and management, and
enhanced services software that provide the following benefits:

     Flexibility.   Communications service providers need billing and other
business support software that enables innovative, sophisticated and dynamic
marketing and pricing of multiple communications technologies and services. They
also need software that is based on open technology standards for easy
integration of third party software and different networks, including wireline,
wireless, satellite and data networks.

     Rapid Time-to-Market.   Service providers entering new markets for
telecommunications services place a significant premium on rapid launch of
services. Thus, they require software that can be implemented quickly.

     Proven Track Record.   With little margin for error in a very competitive
environment, communications service providers seek billing and other business
support software that is capable of uninterrupted operation to ensure the
availability of services.

     Scaleability.   Communications service providers seek software that will
scale with subscriber grow to avoid service disruption and to minimize recurring
staff training and support system investments.

     Multiple Service Support.   As established service providers enter new
markets, business support software must support multiple communications services
and standards. Software supporting wireline, wireless, data and satellite
offerings enables innovative marketing of multiple services with a single bill.

     International Support.   As communications service providers enter new
geographic markets, their business support software must increasingly support
multiple languages and currencies while providing consistent functionality
across diverse market environments.

                                        5
<PAGE>   8

     Access to Customer Information.   In the increasingly competitive market
for communications services, rapid access to customer information and effective
customer service is a top priority.

THE LHS PRODUCTS

     The Company believes that it currently meets, and will continue to meet,
the needs of a wide variety of communications service providers with BSCS, Oryx,
InfoCell ConVerge, and its other software products, and the Company's broad
range of customization, installation and maintenance services.

     The LHS software products offer the following features and benefits:

     - Flexibility.   LHS software can be tailored to each service provider's
       particular needs in order to keep pace with a highly competitive, dynamic
       market. For instance, BSCS enables service providers 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. BSCS also allows service providers
       to rate calls based upon events, duration, volume of usage, location,
       time of day, and quality of service. Oryx enables service providers to
       offer a variety of enhanced services such as pre-paid calling, one
       number, and advanced messaging services. Service providers can initially
       purchase small systems and selected enhanced services applications and
       later grow their systems into very large, fully redundant systems that
       include a broad range of enhanced services that work seamlessly with
       their existing networks and services.
     - Open Technologies.   LHS software products utilize open technologies that
       support multiple hardware and operating systems, enabling service
       providers to benefit from continued advances in technology. LHS software
       products also support multiple wireline, wireless and data technologies.
       As a packaged application customized to meet the needs of each particular
       customer, LHS software products offer service providers rapid
       installation relative to custom software and are more flexible than
       in-house legacy mainframe systems. LHS' open technologies enable
       efficient integration of LHS software products with leading financial,
       human resources, operational and other third party software applications.
     - Modular Configuration.   The LHS software products can be rapidly and
       efficiently customized and launched. The modular configuration of the
       Company's software products allow service providers to modify or add
       applications with little or no impact to the uneffected modules. This
       allows service providers to easily tailor LHS software products to meet
       their unique system requirements.
     - Multiple Services and Network Technology Support.   LHS software products
       support and interface with multiple telecommunications technology
       standards with minimal modification to the software. LHS software
       products currently support the GSM, CDMA, TDMA, iDEN, LDMS, MMDS, and
       AMPS wireless standards, as well as various satellite, wireline, paging,
       and data standards.

                                        6
<PAGE>   9

     - International Coverage.   LHS software products support multiple
       currencies and the requirements of different geographic markets. LHS
       software products currently are installed in more than 70 countries and
       support multiple languages, including Czech, Chinese, English, French,
       German, Hebrew, Indian, Italian, Japanese, Korean, Polish, Portuguese,
       Russian and Spanish.
     - More Reliable Replacement of Existing Systems.   For communications
       service providers with maturing legacy systems, the challenge is to
       upgrade to a new system without putting their existing investment at
       risk. LHS provides smooth and reliable replacement of existing systems
       with its new Targys software.
     - Higher Profits Per Subscriber.   As competition continues to put pressure
       on subscription revenues, communications service providers want to
       improve the average profit earned from each subscriber. They offer
       value-added services and service bundles to increase their profit per
       subscriber. With the Company's Oryx product, service providers can offer
       a broad range of features and applications such as prepaid calling,
       credit/debit-card calling, call routing and enhanced messaging available
       in a single platform. With BSCS, service providers can now rate and bill
       for data services based on events, usage locations, time of day and
       quality of service.
     - Getting Closer To The Customer.   Quality customer service requires
       detailed customer knowledge. The combination of LHS' BSCSAdvise decision
       support software and Athene Software, Inc.'s Advanced Predictive
       Technology ("APT") product suite provides a way to extract BSCS customer
       information into datamarts for fast and comprehensive analysis of
       customer behavior.
     - Complete Customer Services.   In addition to software, the Company
       provides service providers with complete information technology services,
       including initial customization and installation and ongoing maintenance,
       upgrades and customer support. The Company offers ongoing maintenance and
       customer support at varying levels of service and pricing designed to
       meet the needs of the service provider.

THE LHS STRATEGY

     The Company's vision is to be the leading billing and business support
software provider to the global communications industry. The Company's
strategies include:

     - Expand its Installed Base of Billing and Customer Care Software and
       Enhanced Services Systems.   The Company's BSCS and Oryx products are
       used by more than 300 wireless, wireline and satellite customers. The
       Company intends to use its experience and broad customer base to compete
       for new billing and customer care and enhanced services installations
       worldwide.
     - Become the Market Leader in Business Support Software for the Convergent
       Communications Industry.   The Company believes there is a significant
       market opportunity to use its position as a provider of billing and
       customer care software and enhanced services systems to offer
       comprehensive business support software for the growing number of service
       providers who offer multiple communications services.
                                        7
<PAGE>   10

     - Become the Leading Provider of Data and Internet Protocol ("IP") Business
       Support Software.   Version 5.3 of LHS' BSCS billing and customer care
       software supports data services GPRS, LMDS, MMDS and U-NNI Band, and
       Internet services (e-mail, web browsing, web hosting and newsgroups). In
       June 1999, the Company announced a strategic alliance with XACCT
       Technologies, Inc. to develop usage-based IP billing software for the
       global communications industry. In the first quarter of 2000, the Company
       announced a strategic alliance with Portal Software, Inc. to develop
       software to support wireless Internet services. Through a combination of
       continuing to develop functionality in its own software products and
       strategic alliances with companies that offer complementary technologies,
       the Company will pursue its strategy to become a leading provider of IP
       billing and business support software.
     - Expand Globally.   The Company will continue to deploy software
       development, sales, service and management resources to its regional
       offices in Frankfurt, Germany; Atlanta, Georgia, United States; and Kuala
       Lumpur, Malaysia, and various local sales and project offices within the
       three regions, and will continue to customize its products for use in new
       markets. In early 2000, the Company signed an agreement to jointly pursue
       the mainland China market with Alcatel.
     - Expand Product and Services Offerings.   Through a combination of
       in-house development, technology alliances such as the current XACCT,
       Athene and Portal agreements, and strategic acquisitions like the
       Priority Call transaction in 1999 and the InfoCellular transaction in
       1998, the Company intends to continue to expand its product and services
       offerings to meet the growing and changing needs of communications
       service providers.
     - Develop and Maintain Customer Relations.   The Company believes that the
       development of long-term customer relations will result in repeat
       business, a strong reputation for the Company within the global
       communications industry and opportunities for future product development.
       As a means to develop and maintain good customer relations, LHS holds
       management, consulting and sales staff accountable for the quality of
       relations with specific customers, each of which is assigned a dedicated
       contact person within the Company.
     - Maintain Third-Party Relationships.   The Company seeks to maintain its
       relationships with leading systems integrators such as Andersen
       Consulting, Electronic Data Systems Corporation ("EDS"), Cap Gemini, and
       Logica, leading vendors of telecommunications equipment, such as
       Ericsson, and international telecommunications service providers, such as
       Telecom Italia Mobile, Bell Atlantic Global Wireless, France Telecom, and
       Vodaphone Airtouch. Many of these systems integrators, equipment vendors
       and international 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. The Company also
       seeks to maintain its relationships with technology partners such as
       XACCT Technologies, Portal Software and Athene Software and expects these
       relationships to facilitate the Company's penetration of the data and
       Internet communications market and the growing customer management
       software market.

                                        8
<PAGE>   11

PRODUCTS

     The Company derives most of its revenues from sales of its BSCS software
product and its Oryx enhanced services system, and related services to implement
and support these products. Approximately 78% of the Company's revenues are
derived from BSCS sales, and approximately 19% of the Company's revenues are
derived from Oryx sales. The remainder of the Company's revenues are derived
from its other software products such as Infocell ConVerge and BSCS add-on
modules such as the BSCSAdvise decision support system, the VMD vendor mediation
device, and the Targys-based Web Service Center.

BSCS

     BSCS is comprised of kernel ("core") and non-kernel ("non-core") modules.
The kernel modules comprise the set of core software modules with functions that
are common to all BSCS configurations, while non-kernel modules primarily
provide BSCS the ability to interface with the service provider's other systems,
such as its telecommunications network and accounting systems. Non-kernel
modules typically are customized to meet individual carrier requirements, while
the kernel modules typically are not as highly customized.

     The core functions that are carried out by the kernel modules are:

     - establishment and ongoing management of customer accounts and services;
     - assignment and inventory of management for telephone numbers and
       handsets;
     - assignment of long distance carriers;
     - settlement of roaming charges;
     - development of billing plans for multiple services based upon usage, type
       of charge, discounts and comparisons to competitor's plans;
     - validation and determination of the rates applicable to subscriber
       calling records;
     - bill processing in multiple languages and currencies;
     - reconciliation of bills with financial records;
     - accounts receivable management; and
     - sales force administration and commission processing.

     The functionality for the establishment and ongoing management of customer
accounts and services (as well as additional functionality) is being introduced
in the Targys customer care client applications, such as the Targys Customer
Inquiry application introduced in 1999.

     The non-core functions carried out by the non-kernel modules are:

     - receipt, editing, authentication and re-formatting of calling records;
     - activation of handsets and services at the network switch;
     - authentication of subscribers to allow access to the network;
     - payment processing; and
     - bill formatting, printing and delivery.

                                        9
<PAGE>   12

ORYX

     LHS' enhanced services system is the Oryx product, which is comprised of
off-the-shelf hardware components and proprietary software. Enhanced services
are services, in addition to traditional telephone service, that improve the
efficiency and effectiveness of telecommunications, such as messaging, prepaid
calling and one number services.

     As a result of the features listed above, service providers can initially
purchase small systems and selected enhanced services software applications and
grow their systems into very large systems that include a broad range of
enhanced services that work seamlessly with their existing networks and
services.

     The Company offers a variety of software applications that run on the Oryx
system. The software applications allow service providers to offer the following
services:

     Enhanced Messaging.   Enhanced messaging services provide subscribers the
opportunity to manage their messages more efficiently. For example, subscribers
can:

     - Access and manage messages from any telephone;
     - Store and forward messages with urgent or confidential labels;
     - Utilize the services of an automated attendant;
     - Return messages from voice mail with one key call return;
     - Unify the numbers and accounts for faxes and voice mail; and
     - Receive short messages over digital handsets, including caller name,
       pages, emails and text messages.

     Enhanced messaging service provides an additional source of revenue for
service providers, helps service providers attract and retain subscribers and,
because it increases the number of completed calls, increases revenues from
existing usage.

     Prepaid and Debit Calling.   Prepaid calling and debit calling offer
subscribers an alternative payment method. By offering prepaid calling and debit
calling, service providers can expand their subscriber base to include
cost-conscious individuals, such as students and travelers, and subscribers who
previously did not meet minimum credit requirements.

     One Number Service.   One number service links subscribers' wired and
wireless telephones, pagers, and messaging devices to a single number. This
eliminates the need for callers to dial different numbers to reach subscribers
at various locations. One number service provides service providers with an
additional source of revenue, increases the percentage of calls that are
completed and helps service providers attract and retain subscribers.

     Internet Personal Communications Management.   Internet personal
communications management allows subscribers to manage calls and messages on
their personal computers. By using their mouse, subscribers can:

     - Listen to voice messages;
     - View and print faxes;

                                       10
<PAGE>   13

     - Place calls; and
     - Send voice or fax messages as email attachments.

     LHS also offers software applications that integrate voice recognition with
other enhanced services permitting subscribers to dial and manipulate other
enhanced services with voice commands.


INFOCELL CONVERGE


     InfoCell ConVerge is software used to manage the operations of the service
providers' retail outlets to remotely establish new customer accounts and manage
the inventory of handsets and telephone numbers assigned to each outlet.
InfoCell ConVerge includes functionality for the remote establishment and of new
customer accounts and ordering and assignment of services, management of handset
and telephone number inventories, and management of cash transactions.

SERVICES

     The Company derived 58.6%, 59.5%, and 63.2% of total revenues for the years
ended December 31, 1999, 1998 and 1997, respectively, from services provided for
implementation, consulting, production support services, training and
maintenance. For BSCS, LHS offers service providers the choice of initial
installation directly from the Company or through leading systems integrators,
including Andersen Consulting, Cap Gemini, EDS and Logica plc. During the three
year period ended December 31, 1999, approximately 70% to 80% of service
providers have elected to use systems integrators to install BSCS.

     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
systems interface modules to meet the resulting system specifications for that
customer. 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. The Company implements its Oryx enhanced services
platform and InfoCell ConVerge customer acquisition software without the
involvement of third party systems integrators. As of December 31, 1999, the
Company employed 631 projects and services personnel compared to 520 at December
31, 1998.

     After installation, the Company maintains close contact with the customer,
even in projects implemented through a systems integrator. LHS holds 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 upgrades and maintenance. As a result, the
Company is often positioned to earn substantial revenues from additional
customization of its solutions after installation. The Company also generates
additional revenues from maintenance agreements as a carrier's subscriber base
and service offerings continue to grow and expand.
                                       11
<PAGE>   14

     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
customer, the number of the subscribers serviced by the customer, the number and
type of telecommunications services supported by BSCS and the scope of
customization and installation requirements. The total value for an initial Oryx
installation typically ranges from $500,000 to $2 million, depending on the
number of systems purchased, the system configuration, and services to be
offered by the carrier. Maintenance pricing is based on the level of service
desired by the customer and is calculated as a percentage of the BSCS license
fee or total Oryx product cost paid as of the beginning of each annual
maintenance period.

PRODUCT DEVELOPMENT

     The Company directs its software development efforts toward refining and
enhancing BSCS and Oryx. Significant emphasis is placed on the Company's
compliance with world-wide software development standards and quality benchmarks
during product development. To this end, in 1998, the Company's technology group
received worldwide ISO 9001 certification and in 1999, the Company's LHS
Priority Call subsidiary received ISO 9001 certification.

     During 1999, the Company introduced BSCS Version 5.3 and the first software
applications that utilize its new Targys object-oriented software development
technology. BSCS 5.3 added functionality to support the GPRS, LMDS, MMDS and
U-NNI Band wireless data technologies, Internet services, such as e-mail, web
browsing, web hosting and newsgroups, and long distance. BSCS 5.3 also added
functionality to allow service providers to charge different rates based upon
events, duration and volume of usage, location, time of day and quality of
service. The Targys-based applications perform the same functions as the BSCS
customer administrator module.

     Some of the Company's short-term focus areas for development are IP and
wireless data technologies, unified messaging, local number portability,
dual-mode handsets, call analysis and customer management. The Company will
continue to utilize available technology to provide its clients and integrators
with software based on new technologies. In keeping with that philosophy the
Company adheres to an open interface strategy and continues to endorse object
oriented programming technologies which make its software more readily
adjustable and compatible with the existing systems of service providers. The
Company's development staff consisted of 637 employees as of December 31, 1999,
compared to 442 employees as of December 31, 1998. 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 service
providers in each geographical market through advertising in communications
industry publications,

                                       12
<PAGE>   15

participation in trade shows, presentations at technical conferences and other
initiatives. The Company relies on direct and indirect channels of distribution
for its products. Its direct sales approach develops relationships with service
providers through a consultative, problem-solving sales process and works
closely with service providers to define and determine how their needs can be
fulfilled by the Company's products. The Company had a sales organization of 156
employees as of December 31, 1999 compared to 92 employees as of December 31,
1998, and intends to expand its direct sales operations at various locations,
including Frankfurt, Germany; Milan and Rome, Italy; Stockholm, Sweden; Atlanta,
Miami and Boston, United States; Zurich, Switzerland; Kuala Lumpur, Malaysia;
Hong Kong, China; New Delhi, India, and Sao Paulo, Brazil. 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 service providers, the Company has developed a
number of indirect sales channels. These indirect channels, through systems
integrators, international service providers 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 and equipment manufactures, particularly for systems serving
larger service providers. 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."

CUSTOMERS

     The Company's products have been licensed to approximately 317 service
providers in more than 70 countries, and supports a total of approximately 60
million subscribers. Much of the Company's early growth was accomplished by
focusing on GSM-based wireless service providers in Europe. LHS plans to
continue expanding beyond the European wireless market and to serve wireless,
wireline and IP service providers around the world. LHS also plans to expand the
market for its Oryx and InfoCell ConVerge products in Europe, Asia and Latin
America.

     The Company had no customers that accounted for more than ten percent of
its total revenues in 1999.

COMPETITION

     The markets for billing and customer care and other business support
software and enhanced services systems are highly competitive, and the Company
expects this competition to increase. The Company competes with independent
providers of billing systems and services, such as AMDOCS, Inc. ("AMDOCS"),
Kenan Systems Corporation ("Kenan") (now a wholly-owned subsidiary of Lucent
Technologies Inc.), Convergys Corporation, Kingston-SCL and SEMA Group plc, with
systems integrators

                                       13
<PAGE>   16

and with internal billing departments of larger telecommunications service
providers. The Company's principal competitors in the enhanced services market
are Comverse Technology Inc., Brite Voices Systems, Inc., Glenayre Electronics,
Inc. and Logica plc. The Company expects to continue to encounter substantial
competition from its existing competitors and that additional competitors will
enter the market.

     The principal competitive factors in the Company's market include
responsiveness to service providers' 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 service providers 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."

PATENTS, INTELLECTUAL PROPERTY RIGHTS, AND LICENSES

     The Company currently holds a total of four United States patents which
expire between 2010 and 2018. Our patents relate to our Oryx product line and
address intelligent call routing technologies and real time call rating and
debiting. However, the

                                       14
<PAGE>   17

Company does not consider any of these patents to be material to its business.
While the Company files patent applications periodically, no assurance can be
given that patents will be issued on the basis of such applications or that, if
patents are issued, the claims allowed will be sufficiently broad to protect the
Company's technology. In addition, no assurance can be given that any patents
issued to the Company will not be challenged, invalidated or circumvented or
that the rights granted under the patents will provide significant benefits to
the Company.

     In order to safeguard its unpatented proprietary know-how, trade secrets
and technology, the Company relies primarily upon a combination of statutory and
common law copyright, trademark, trade secret protections and non-disclosure
provisions in agreements with employees and others having access to confidential
information.

     There can be no assurance that these measures will adequately protect the
Company from disclosure or misappropriations of its proprietary information.

     The Company and its customers from time to time receive communications from
third parties, including some of the Company's competitors, alleging
infringement by the Company of such parties' patent rights. While such
communications are common in the computer and telecommunications industries and
the Company has in the past been able to obtain any necessary licenses on
commercially reasonable terms, there can be no assurance that the Company would
prevail in any litigation to enjoin the Company from selling certain of its
products on the basis of such alleged infringement, or that the Company would be
able to license any valid patents on reasonable terms.

     The Company licenses certain technology, know-how and related rights for
use in the manufacture and marketing of its products, and pays royalties to
third parties under such licenses and under other agreements entered into in
connection with research and development financing. The Company believes that
its rights under such licenses and other agreements are sufficient for the
manufacturing and marketing of its products and, in the case of licenses, extend
for periods at least equal to the estimated useful lives of the related
technology and know-how.

     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. See "Part II, Item 7, Affecting
Future Performance -- We have only limited protection of our proprietary rights
and technology."

EMPLOYEES

     As of December 31, 1999, the Company employed a total of 1,589 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.

                                       15
<PAGE>   18

ITEM 2.   PROPERTIES

     LHS leases office space in Atlanta, Miami, Boston and San Francisco, United
States; Frankfurt, and Ulm, Germany; Paris, France; Milan, Italy; Kuala Lumpur,
Malaysia; Stockholm, Sweden; Zurich, Switzerland; New Delhi, India; Sao Paulo,
Brazil; and Hong Kong, China. The Atlanta, Boston, Miami, Zurich, Ulm, Milan,
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 from time to time is subject to claims in legal proceedings
arising in the ordinary course of business. There are currently no such claims
that individually or in the aggregate are believed by management to pose any
material risk to its business or financial condition.

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, 1999.

                                       16
<PAGE>   19

                                    PART II

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


     LHS' common stock began trading on the Nasdaq National Market on May 16,
1997 under the symbol "LHSG". The common stock began trading on the Frankfurt
Neuer Market Exchange on May 21, 1997 under the symbol "LHI." The following
table sets forth, for the fiscal quarters indicated, the high and low sales
prices of LHS' common stock and average daily share volume as reported by
Nasdaq. As of June 16, 2000, LHS had 69,737,587 shares outstanding. There were
58 holders of record of the Company's common stock on June 16, 2000.


<TABLE>
<CAPTION>
                                                                     AVERAGE DAILY
                                                    HIGH     LOW     SHARE VOLUME
                                                   ------   ------   -------------
<S>                                                <C>      <C>      <C>
2000
First Quarter....................................  $53.50   $24.25      348,979
1999
First Quarter....................................  $59.13   $28.63      186,346
Second Quarter...................................   37.50    25.50      185,829
Third Quarter....................................   39.75    29.19      122,059
Fourth Quarter...................................   36.38    21.00      209,416
1998
First Quarter....................................  $50.38   $25.50      226,164
Second Quarter...................................   73.75    44.50      259,103
Third Quarter....................................   76.50    43.94      339,675
Fourth Quarter...................................   57.38    36.75      279,313
</TABLE>

     The Company has not declared or paid any cash dividend on its common stock
since 1994. The Company currently intends to retain its future earnings, if any,
to fund the development and growth of its business and therefore does not intend
to pay any cash dividends in the foreseeable future.

                                       17
<PAGE>   20

ITEM 6.   SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                              YEARS ENDED DECEMBER 31,
                                 --------------------------------------------------
                                   1999       1998       1997      1996      1995
                                 --------   --------   --------   -------   -------
                                       (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                              <C>        <C>        <C>        <C>       <C>
Consolidated Statement of
   Income Data
Total revenues.................  $262,596   $194,118   $125,522   $67,899   $33,241
Earnings before interest and
   taxes.......................    56,778     31,099     15,350     4,025     1,246
Net earnings...................    38,443     18,685     10,451     2,039       360
Net earnings per share:
   Basic.......................      0.67       0.33       0.22      0.06      0.01
   Diluted.....................      0.65       0.32       0.20      0.05      0.01
Consolidated Balance Sheet Data
Total assets...................   280,562    210,324    141,930    56,069    29,851
Long-term obligations..........       985      2,772      1,245     1,693       420
Total stockholders' equity.....   208,018    155,755    100,948    21,481    13,886
</TABLE>

---------------

(1) See Note 2 of the Notes to Consolidated Financial Statements.
(2) The 1998 amount includes a one-time charge relating to the write off of
    in-process research and development of $8.2 million.
(3) The 1999 amount includes merger costs totaling $4.3 million relating to the
    Priority Call merger.
(4) Earnings before interest and taxes (EBIT) is commonly used by analysts and
    investors as a measure of financial performance in the software industry.
    LHS's management believes that the presentation of EBIT provides relevant
    information to investors. EBIT may not necessarily be comparable to
    similarly titled data of other software companies. EBIT should not be
    construed as alternatives to operating income or cash flows from operating
    activities as determined in accordance with GAAP or as a measure of
    liquidity. EBIT is not defined in generally accepted accounting principles
    and should not be considered in isolation or as a substitute for a measure
    of operating performance or liquidity in accordance with generally accepted
    accounting principles.

                                       18
<PAGE>   21

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

OVERVIEW

     On June 10, 1999, the Company completed its merger with Priority Call
Management, Inc. ("PCM"), in which PCM became a wholly owned subsidiary of LHS
Group Inc. The Company exchanged 4,105,116 shares of common stock for all the
outstanding common shares, preferred shares, and stock options or stock
appreciation rights in PCM. The merger was accounted for under the
pooling-of-interests method of accounting and, accordingly, the accompanying
financial statements and footnotes have been restated to include the operations
of PCM for all periods presented. The Company recorded a charge of $4.3 million
in the second quarter ended June 30, 1999 related to direct external costs
incurred as a result of the merger with PCM. The external costs consist of
investment banking fees, SEC registration fees, and legal and accounting fees.
PCM is a provider of network-based solutions that enable telecommunications
providers to offer subscribers a range of enhanced services, including prepaid
calling, credit/debit card calling, enhanced messaging and one-number
"follow-me" services.

     In June 1998, the Company acquired the stock of Infocellular, Inc.
("InfoCellular") for $8.5 million, paid by the issuance of 117,885 shares of
common stock and $1.3 million in cash. InfoCellular, which operates as a
wholly-owned subsidiary of the Company, is engaged in the business of providing
point of sale and customer acquisition software and related services to
telecommunication service providers.

     This acquisition was accounted for under the purchase method of accounting
and in accordance with Accounting Principles Board Opinion No. 16, "Accounting
for Business Combinations." The Company allocated the cost of the acquisition to
the assets acquired and the liabilities assumed based on their estimated fair
values using valuation methods that were appropriate at the time. The acquired
intangible assets included in-process technology projects, among other assets,
which were related to research and development that had not reached
technological feasibility and for which there was no alternative future use. The
Company recorded a one time charge relating to the write-off of in-process
research and development of $8.2 million for the year ended December 31, 1998,
in accordance with applicable accounting pronouncements.

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

   Revenues

     Total revenues increased 35.3% to $262.6 million in the year ended December
31, 1999 from $194.1 million in the year ended December 31, 1998. License
revenues increased 38.5% to $108.8 million in 1999 from $78.6 million, while
service revenues increased 33.1% to $153.8 million from $115.6 million for the
same period. Total revenues increased primarily due to the addition of new
customers and license revenue from subscriber growth of existing customers and
increased implementation and support revenue from existing customers.

                                       19
<PAGE>   22

     License revenues increased as a percentage of total revenues to 41.4% in
1999 from 40.5% in 1998, while service revenues decreased as a percentage of
total revenues to 58.6% from 59.5% for the same period. This change in mix of
revenues is primarily due to the timing of recurring license revenue from
subscriber growth experienced by existing customers, the completion of
implementation work for existing customers and the start of implementation work
for new customers.

     No individual customer accounted for more than 10% of total revenues in
1999.

   Cost of Services

     Cost of services decreased as a percentage of total revenues to 34.0% in
the year ended December 31, 1999 from 38.5% in the year ended December 31, 1998.
Costs of services increased 19.5% to $89.4 million in 1999 from $74.8 million in
1998, primarily due to compensation expense associated with increased staffing
for new projects in Europe, the Americas and Asia. This increase was partially
offset by moderate increases in the productivity and efficiency of the
implementation and services functions. Cost of services consists primarily of
salaries and benefits of those employees associated with the installation of
software products and other product support activities. It also includes
third-party costs associated with systems integrators, hardware costs and costs
related to providing software maintenance and end-user training to customers.

   Sales and Marketing

     Sales and marketing expenses increased as a percentage of total revenues to
11.6% in the year ended December 31, 1999 from 10.0% in the year ended December
31, 1998. Sales and marketing expenses increased 56.8% to $30.5 million in 1999
from $19.5 million in 1998. The increase in sales and marketing expenses was
principally due to the growth in the number of worldwide sales and marketing
personnel responsible for developing business, particularly in Europe, Asia and
Latin America and increased participation in trade shows and other worldwide
marketing activities. Sales and marketing expenses consist primarily of the
salaries, benefits and travel expenses of those employees responsible for
acquiring new business and maintaining existing customer relationships, as well
as marketing expenses related to trade publications, advertisements and trade
shows.

   Research and Development

     Research and development expenses increased as a percentage of total
revenues to 21.8% in the year ended December 31, 1999 from 20.5% in the year
ended December 31, 1998. These expenses increased 44% to $57.2 million in 1999
from $39 million in 1998. This increase is the result of growth in the number of
personnel associated with the development of new software releases in both the
Americas and Europe, including ongoing development of the Company's new Targys
technology. The Company has implemented its Targys Customer Server and Customer
Inquiry

                                       20
<PAGE>   23

Application for one customer in Europe and one customer in North America. The
Company will continue a phased rollout of additional Targys applications during
2000.

   General and Administrative

     General and administrative expenses decreased to 9.3% of total revenues in
the year ended December 31, 1999 from 10.7% in the year ended December 31, 1998.
These expenses increased 16.7% to $24.3 million in 1999 from $20.8 million in
1998. This increase was principally due to increases in the number of
administrative personnel and increases in office rent and other expenses
incurred as a result of the general growth of the Company's business. General
and administrative expenses consist primarily of salaries and benefits of
management and administrative personnel, general office administration expenses
such as rent and occupancy, telephone expenses and other supply costs, and fees
for legal, accounting and other professional services.

   Income Taxes

     The provision for income taxes was 37.6% and 47.7% of earnings before
income taxes for the years ended December 31, 1999 and 1998, respectively. The
effective tax rate was higher than the statutory tax rate of 34% primarily
because of the partial deduction for merger charges in 1999 and the
non-deductible write-off of in-process research and development in 1998, as well
as higher tax rates in foreign countries.

   Net Earnings

     Net earnings increased to 14.6% of total revenues in the year ended
December 31, 1999 from 9.6% in the year ended December 31, 1998. Net earnings
increased 105.7% to $38.4 million in 1999 from $18.9 million in 1998. The
increase is due to the increase in gross profit, partially offset by higher
operating expenses as described above. Diluted net earnings per share were $0.65
per share for the year ended December 31, 1999, compared to $0.32 for the year
ended December 31, 1998.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

   Revenues

     Total revenues increased 54.6% to $194.1 million in the year ended December
31, 1998 from $125.5 million in the year ended December 31, 1997. License
revenues increased 70.0% to $78.6 million in 1998 from $46.2 million, while
service revenues increased 45.7% to $115.6 million from $79.3 million for the
same period. Total revenues increased primarily due to the addition of new
customers and increased implementation and support revenue from existing
customers.

     License revenues increased as a percentage of total revenues to 40.5% in
1998 from 36.8% in 1997, while service revenues decreased as a percentage of
total revenues to 59.5% from 63.5% for the same period. This change in mix of
revenues is primarily due to the timing of recurring license revenue from
subscriber growth experienced by existing

                                       21
<PAGE>   24

customers, the completion of implementation work for existing customers and the
start of the implementation work for new customers.

     No individual customer accounted for more than 10% of total revenues in
1998. During 1997, o-tel-o, an LHS customer in Europe, accounted for 12% of
total revenues.

   Cost of Services

     Cost of services decreased as a percentage of total revenues to 38.5% in
the year ended December 31, 1998 from 45.1% in the year ended December 31, 1997.
Costs of services increased 32.0% to $74.8 million in 1998 from $56.6 million in
1997, primarily due to compensation expense associated with increased staffing
for new projects in Europe, the Americas and Asia. This increase was partially
offset by moderate but unquantifiable increases in the productivity and
efficiency of the implementation and services functions. Cost of services
consists primarily of salaries and benefits of those employees associated with
the installation of software products and other product support activities. It
also includes third-party costs associated with systems integrators, hardware
costs and costs related to providing software maintenance and end-user training
to customers.

   Sales and Marketing

     Sales and marketing expenses decreased as a percentage of total revenues to
10.0% in the year ended December 31, 1998 from 11.6% in the year ended December
31, 1997 although sales and marketing expenses actually increased to $19.5
million in 1998 from $14.6 million in 1997. The increase in sales and marketing
expenses was principally due to the growth in the number of worldwide sales and
marketing personnel responsible for developing business, particularly in Europe
and Asia, and increased participation in trade shows and other worldwide
marketing activities. Sales and marketing expenses consist primarily of the
salaries, benefits and travel expenses of those employees responsible for
acquiring new business and maintaining existing customer relationships, as well
as marketing expenses related to trade publications, advertisements and trade
shows.

   Research and Development

     Research and development expenses increased as a percentage of total
revenues to 20.5% in the year ended December 31, 1998 from 17.6% in the year
ended December 31, 1997. This increase in research and development costs as a
percentage of revenues was principally due to increases in the number of
personnel associated with the development of new releases of BSCS in both the
Americas and Europe. Research and development expenses are comprised of salaries
and benefits of the employees involved in product and enhancement development.
All development costs are expensed by the Company as incurred.

                                       22
<PAGE>   25

   General and Administrative

     General and administrative expenses decreased to 10.7% of total revenues in
the year ended December 31, 1998 from 13.2% in the year ended December 31, 1997.
These expenses increased 25.3% to $20.8 million in 1998 from $16.6 million in
1997. This increase was principally due to increases in the number of
administrative personnel and increases in office rent and other expenses
incurred as a result of the general growth of the Company's business. General
and administrative expenses consist primarily of salaries and benefits of
management and administrative personnel, general office administration expenses
such as rent and occupancy, telephone expenses and other supply costs, and fees
for legal, accounting and other professional services.

   Income Taxes

     The provision for income taxes was 47.7% and 41.7% of earnings before
income taxes for the years ended December 31, 1998 and 1997, respectively. The
effective tax rate was higher than the statutory tax rate of 34% primarily
because the non-deductible write-off of in-process research and development in
1998 and higher tax rates in foreign countries in 1998 and 1997.

   Net Earnings

     Net earnings increased to 9.6% of total revenue in the year ended December
31, 1998, from 8.3% in the year ended December 31, 1997. Net earnings increased
78.8% to $18.7 million in 1998 from $10.4 million in 1997. The increase is due
to the increase in gross profit, partially offset by higher operations expenses
as described above. Diluted net earnings per share were $0.32 per share for the
year ended December 31, 1998, compared to $0.18 for the year ended December 31,
1997.

   In-Process Research and Development

     During 1998, the Company completed the acquisition of InfoCellular and, in
conjunction with this acquisition, the Company allocated a portion of the
purchase price to in-process research and development. Since the date of
acquisition, the Company has used the acquired in-process technology to develop
new product offerings and enhancements, which will become part of the Company's
suite of products when completed. The Company completed the development of the
remaining research and development projects referred to as Brookfield and
Cohasset during 1999. The Company is currently offering products to its
customers, which incorporate the functionality developed in these research and
development projects.

     No assurance can be given that actual revenues and operating profit
attributable to acquired in-process research and development will not deviate
from the projections used to value such technology. Ongoing operations and
financial results for the acquired technology, and the Company as a whole, are
subject to a variety of factors which may not have been known or estimatable at
the date of such transaction, and the estimates

                                       23
<PAGE>   26

discussed below should not be considered the Company's current projections for
operating results for the acquired assets or licensed technology or the Company
as a whole.

     The fair value of the in-process technology was based on analyses of the
markets, projected cash flows and risks associated with achieving such projected
cash flows. In developing these cash flow projections, revenues were estimated
based on relevant factors, including aggregate revenue growth rates for the
business as a whole, individual service offering revenues, characteristics of
the potential market for the service offerings and the anticipated life of the
underlying technology. Operating expenses and resulting profit margins were
estimated based on the characteristics and cash flow generating potential of the
acquired in-process research and development. The Company assumed material net
cash inflows would commence in 1999. Appropriate adjustments were made to
operating income to derive net cash flow, and the estimated net cash flows of
the in-process technologies were then discounted to present value using a rate
of return that the Company believes reflects the specific risk/return
characteristics of the research and development projects. The selection of
discount rates for application was based on the consideration of: (i) the
weighted average cost of capital, which measures a company's cost of debt and
equity financing weighted by the percentage of debt and percentage of equity in
its target capital structure; (ii) the corresponding weighted average return on
assets which measures the after-tax return required on the assets employed in
the business weighted by each asset group's percentage of the total asset
portfolio; and (iii) venture capital required rates of return which typically
relate to equity financing for relatively high-risk business projects. The risk
adjusted discount rate utilized in the valuation analysis of the acquired
in-process technology was 20%.

     Revenues attributable to the acquired in-process technology were assumed to
increase between the first three years of the six-year projection period at
annual rates of 46% to 569% before decreasing over the remaining years at rates
of 3% to 40% as other products are released into the marketplace. Projected
annual revenue attributable to the product ranged from $1.6 million to $15.7
million over the term of the projection. This projection was based on the
aggregate revenue growth rate for the business as a whole, individual product
revenues, anticipated growth rates for the billing software market, anticipated
product development and product introduction cycles, and the estimated life of
the underlying technology. Projected revenues from the in-process research and
development were assumed to peak during 2000, and decline from 2001 to 2003 as
other new products are expected to enter the market.

     Gross profit was assumed to increase in the first three years of the
projection period at annual rates of 46% to 569% before decreasing over the
remaining years at rates of 3% to 40%, resulting in annual gross profits that
ranged from $1.0 million to $10.2 million over the term of the projection.

     Operating profit was assumed to increase in the first three years of the
projection from $0.01 million to $5.6 million before decreasing over the
remaining years at rates of

                                       24
<PAGE>   27

3% to 40%, resulting in annual operating profits that ranged from $0.01 million
to $5.6 million over the term of the projection.

     As of December 31, 1999, the Company estimates that financial results are
in line with the projections detailed above.

     The Company used a discount rate of 20% for valuing the in-process research
and development acquired in these transactions, which the Company believes
reflected the risk associated with the completion of the individual research and
development projects acquired and the estimated future economic benefits to be
generated subsequent to the projects' completion.

     The in-process research and development acquired from InfoCellular
consisted of the Brookfield and Cohasset technology. These new releases of the
Converge software product include new features that provide the ability to
recognize/accommodate multi-language and multi-currency operations and
functionality that extends beyond the basic level of POS functionality. The
Company estimated that this project was approximately 80% complete at the date
of acquisition. At the date of valuation, the expected cost to complete these
projects was approximately $1.1 million. The Company completed the projects
during the third quarter of 1999 within the estimated cost of completion.

     There can be no assurance that the Company will not incur additional
charges in subsequent periods to reflect costs associated with these
transactions or that the Company will be successful in its efforts to integrate
and further develop these technologies.

LIQUIDITY AND CAPITAL RESOURCES

     Net cash provided by operating activities totaled $42.3 million in 1999
compared to $21.5 million in 1998 and $15.0 million 1997. The increase in cash
provided by operations in 1999, 1998 and 1997 was primarily the result of
increased earnings coupled with strengthened cost controls and cash management
practices.

     Net cash used in investing activities totaled $10.3 million, $28.5 million
and $56.6 million during 1999, 1998 and 1997, respectively. The Company invested
$10.8 million, $11.3 million and $6.8 million in furniture, fixtures and
equipment during 1999, 1998 and 1997, respectively. These investments were
primarily for computer hardware and software and improvements to new leased
office space required to accommodate the growth in the number of employees.

     Net cash from financing activities totaled $11.5 million, $14.0 million and
$66.5 million during 1999, 1998 and 1997, respectively. During 1999, 1998 and
1997, the Company received proceeds from the exercise of employee stock options
totaling $13.3 million, $14.0 million and $1.9 million, respectively. In May
1997, the Company sold 4,865,000 shares of its Common Stock in an Initial Public
Offering ("IPO") in which it received approximately $70.6 million, net of $7.2
million in costs of the offering.

                                       25
<PAGE>   28

     The Company has a short-term overdraft facility with a bank, which provides
for borrowings of up to $2.5 million and bears interest at 7.5% per annum.

     The Company's Priority Call subsidiary has a security agreement with a
bank, which allows the Company to borrow the lesser of (i) $2 million or (ii)
80% of eligible accounts receivable (working capital line) and up to $1 million
for equipment purchases (equipment line). Borrowings under the working capital
line accrue interest at the bank's prime rate (7.75% at December 31, 1999) and
borrowings under the equipment line accrue interest at the bank's prime rate
plus 1/2%. At December 31, 1998, the Company had a $1 million advance against
the equipment line and no borrowings against the working capital line. The
Company made net payments on the security agreement totaling $1.5 million and
$1.2 million during 1999 and 1998, respectively. The Company made net borrowings
on the security agreement during 1997 totaling $0.7 million.

     At December 31, 1999 no borrowings were outstanding under the short-term
overdraft facility or the security agreement.

     At December 31, 1999 the Company did not have any material commitments for
capital expenditures. The Company believes that its existing cash balances,
available credit facilities, and funds generated by operations, will be
sufficient to meet its anticipated working capital and capital expenditure
requirements for the foreseeable future.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

     On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). The Company
reported comprehensive income in its statement of stockholders' equity. The
adoption of SFAS 130 resulted in revised and additional disclosures but had no
effect on the financial position, results of operations, or liquidity of the
Company.

     In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"), which establishes standards for the way public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders.
Operating segments are components of an enterprise about which separate
financial information is available which is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company
adopted SFAS 131 in 1998, and the effect of the adoption was not material to the
consolidated financial statements. (see Note 12).

     In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
requires the recognition of all derivatives as either assets or liabilities in
the balance

                                       26
<PAGE>   29

sheet and the measurement of those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the planned use of the
derivative and the resulting designation. The Company is required to implement
the statement in the first quarter of the year 2001. The Company has not used
derivative instruments and believes the impact of adoption of this statement
will not have significant effect on the financial statements.

     The American Institute of Certified Public Accountants issued SOP 97-2, SOP
98-4 and SOP 98-9 to clarify guidance on applying generally accepted accounting
principles to software transactions and to provide guidance on when revenue
should be recognized and in what amounts for licensing, selling, leasing, or
otherwise marketing computer software. The Company adopted this guidance during
1997. Such adoption had no effect on the Company's methods of recognizing
revenue.

     On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"). SAB 101 summarizes certain areas of the
Staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company believes that its current
revenue recognition principles comply with SAB 101.

                                       27
<PAGE>   30

                   RISK FACTORS AFFECTING FUTURE PERFORMANCE

A FAILURE TO COMPLETE OUR MERGER WITH SEMA GROUP PLC MAY RESULT IN A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.

     On March 14, 2000, we entered into a plan and agreement of merger with Sema
Group plc pursuant to which LHS would become a majority-owned subsidiary of
Sema. We expect for this merger to be completed in the second half of 2000. The
announcement of the pending transaction may have adverse effects on our business
and operations. Employees that are key to our continuing successful operation
may leave LHS as a result of the pending transaction. Customers who do not
believe that the transaction will be favorable to their relationship with LHS in
terms of the future quality of the products and services we provide to them or
otherwise may decide to diminish in some way their relationship with LHS.
Potential customers of LHS may delay entering into, or decide not to enter into,
a business relationship with LHS because of the pending transaction with Sema.
Any of the factors discussed above may result in a material adverse effect on
our business and results of operations. In addition, if the transaction is not
consummated on schedule or at all, for any reason, including, without
limitation, reasons that could result in our paying a $105 million termination
fee to Sema (which generally involve the termination of the merger agreement
when a competing offer to acquire LHS exists), or reimbursing Sema for up to $10
million in expenses, or if the transaction is not completed on schedule, our
business, financial condition and results of operations would be materially
adversely affected. See "Item 1 -- Business."

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;
     - meet changing customer needs on a timely and cost-effective basis; and,
     - introduce scaleable solutions that support our customers' growing
       subscriber bases

     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

                                       28
<PAGE>   31

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 MAY NOT EFFECTIVELY MANAGE OUR GROWTH.

     Over the last three years, we have greatly expanded our operations by
opening ten new offices, hiring approximately 1,000 employees, and making
approximately $29 million in additional capital expenditures for management
information system computers and other equipment, 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 currently intend to make substantial expenditures and
devote further management time and resources to:

     - improve or replace our management information, financial and other
       reporting systems;
     - standardize installation methods across regions and product lines;
     - develop and coordinate strategies, operations and product development
       processes among our operations in the Americas, Europe and Asia;
     - recruit, train and retain qualified consulting, technical, sales,
       financial, marketing and management personnel; and
     - integrate acquired businesses.

     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
communications service providers. Although no single customer accounted for more
than 10% of our revenues in 1999, we have traditionally relied upon, and expect
to continue to rely upon, large contracts from a limited number of customers.
The top 15 of our more than 300 customers represented approximately 31%, 36% and
58% of total revenue for the years ended December 31, 1999, 1998 and 1997,
respectively. This can cause our revenues and earnings to fluctuate between
periods based on the timing of orders and realization of revenues from these
orders.

     Some of the communications industry's established players 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.

                                       29
<PAGE>   32

OUR SUCCESS DEPENDS ON DEVELOPING RELATIONSHIPS WITH NEW CUSTOMERS IN A VERY
COMPETITIVE COMMUNICATIONS MARKET.

     The global communications services 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 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 communications
services markets and lack significant financial and other resources. We may be
required to offer them alternative pricing arrangements, including exceptions
from our standard pricing or extended payment terms within twelve months, if we
want these new market entrants to be our customers. Historically, we have not
had any material alternative pricing arrangements. 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 and 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.

EXPANSION OF OUR PRODUCTS AND SERVICES INTO NEW GEOGRAPHIC MARKETS MAY BE
UNSUCCESSFUL.

     We plan to continue expanding our products and services into new geographic
markets, with a particular focus on the mainland China and Japanese markets,
where we intend to open sales and customer support offices. The business
practices and customs in mainland China and Japan are very different from those
in markets where we already conduct business, and we may not be successful in
the mainland China and Japanese markets if we are unable to adapt our current
methods of doing business to meet the unique business customs in these markets.
The expansion of the market for our products and services to include mainland
China, Japan and other new markets that we may decide to enter in the future is
also subject to risks discussed below at page 25 in the section entitled "The
success of our international business operations is subject to many
uncertainties". Our failure to successfully establish ourselves in these new
markets would likely result in a material adverse effect on our business.
Likewise, delays in the introduction of new communications technologies in new
markets may result in decreased demand for our products and services for use in
connection with new communications services.

     Our strategy of expanding our business through acquisitions of and mergers
with other businesses and technologies presents special risks.

                                       30
<PAGE>   33

     LHS expects that it will continue to expand through the acquisition of and
mergers with businesses, technologies, products, and services from other
businesses. Acquisitions involve a number of special problems, including:

     - difficulty integrating acquired technologies, operations and personnel
       with the existing business;
     - diversion of management attention in connection with both negotiating the
       acquisitions and integrating the assets;
     - strain on managerial and operational resources as management tries to
       oversee larger operations;
     - exposure to unforeseen liabilities of acquired companies;
     - potential issuance of securities in connection with the acquisition which
       securities lessen the rights of holders of our currently outstanding
       securities;
     - the need to incur additional debt; and
     - the requirement to record additional future operating costs for the
       amortization of goodwill and other intangible assets, which amounts could
       be significant.

     We may not be able to successfully address these problems. Moreover, our
future operating results will depend to a significant degree on its ability to
successfully manage growth and integrate acquisitions. In addition, companies
whom we may acquire or with which we may merge may be early-stage companies with
limited operating histories and limited or no revenues. We may not be able to
successfully develop these young companies into profitable units of LHS.

OUR SUCCESS IS PARTIALLY 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

                                       31
<PAGE>   34

     - 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.
service providers 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 of the affected service providers.
Although we have terminated all of these types of contracts, there may be
further damage to our reputation and credibility in the U.S. that could have a
material adverse effect on our business.

     The communications billing and customer care and enhanced services systems
industries are very competitive. We expect competition to increase in the
future.

     Some of the independent providers we compete with are:

     - Alltel
     - AMDOCS
     - Convergys
     - Kenan
     - Kingston-SCL
     - Portal Software
     - SEMA Group
     - Comverse Technology
     - Brite Voice
     - Glenayre
     - Logica

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

     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

                                       32
<PAGE>   35

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 service providers
in markets that we do not currently serve, such as the IP and data
communications billing and business support software market, and the network
management and support software market. 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 compete effectively in our current markets. We may not be able
to develop or acquire new software applications that will be marketable in these
new and immature markets and we may not be able to adapt to the rapid
technological changes in these markets quickly enough to effectively compete
with competitors who are already present. Our failure to maintain our
competitiveness or to become competitive in 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, although
our success does not depend on the continued service of any one individual.
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 1998 and 1999, 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

                                       33
<PAGE>   36

European, Latin American 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 in some regions, such as Asia, Latin America and
Eastern Europe, 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.

     The Company is exposed to foreign exchange rate fluctuations as the
financial results of foreign subsidiaries are translated into U.S. dollars in
consolidation. A significant portion of our revenues are denominated in the
German Deutsche Mark, Swiss Franc and the Malaysian Ringgit as shown in the
table below:

<TABLE>
<CAPTION>
                                                                  PERCENTAGE OF
                                                              CONSOLIDATED REVENUE
                                                             -----------------------
                                                             1999     1998     1997
                                                             -----    -----    -----
<S>                                                          <C>      <C>      <C>
German Deutsche Mark.....................................     38%      30%      28%
Swiss Franc..............................................      9%      10%      11%
Malaysian Ringgit........................................      4%       9%      10%
</TABLE>

     As exchange rates vary, the results of these foreign subsidiaries, when
translated, may vary from expectations and adversely impact overall expected
profitability.


     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. During the years ended December 31, 1999, 1998 and 1997 the Company
experienced net foreign exchange gains/(losses) totaling $.3 million, $.1
million and ($.2) million. The nature and extent of the foreign currency risk
faced by the Company depends on many factors that cannot be accurately
predicted. These factors include significant changes in foreign currency market
conditions, the Company's inability to match foreign currency denominated
revenues with costs denominated in the same currency, and changes in the amount
or mix of revenues denominated in various foreign currencies. As a result of
material unforeseen changes in these factors, the


                                       34
<PAGE>   37

Company's foreign currency risk could have a significant impact on the Company's
results of operations in the future.

     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.

     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 registered patents, and 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 only a limited number of
registered copyrights, trademarks and patents. Our patents relate to our Oryx
product line and address intelligent call routing technologies and real time
call rating and debiting. Our trademarks relate to our trade names and product
brands, such as "LHS", "Priority Call", "BSCS", and "Oryx". 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 in
certain regions of the world in which we sell our products, such as a Africa,
America and Eastern Europe do not offer as much protection of our proprietary
rights as the laws of North America and Western Europe. Unauthorized copying or
misuse of our products or proprietary rights could have a material adverse
effect on our business, operating results and financial condition.

                                       35
<PAGE>   38

     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 communications. 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
     - cause us to discontinue the use of the challenged trade name, service
       mark or technology; or
     - pay money damages.

     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 some 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.

CERTAIN MEASURES THAT WE HAVE ADOPTED MAY HAVE ANTI-TAKEOVER EFFECTS.

     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. Under the Certificate of
Incorporation, 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.

                                       36
<PAGE>   39

     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. Under our
By-Laws, only the Board of Directors, the President and the Secretary have the
authority to call special meetings of the stockholders, so stockholders who
desire to take action with regard to any change of control transaction involving
the Company would be unable to call a special meeting of stockholders for this
purpose. 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.

     We have experienced significant volatility in the market price of our
common stock in the past, and the market price of the common stock is likely to
experience continued significant volatility in the future. For example, between
January 12, 1998 and April 22, 1998, the market price of our common stock on the
Nasdaq National Market increased from $26.44 per share to $69.56 per share but
then fell to $42.25 per share on August 31, 1998. Stock price fluctuations will
be impacted by operating performance of the Company or non operating related
issues such as general stock market prices and trading volumes. Factors, which
vary from time to time, influencing the stock price include:

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

     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.

ADDITIONAL SHARES WILL BECOME ELIGIBLE FOR SALE IN THE FUTURE, WHICH COULD
ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.

     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 stockholders hold a significant portion of the outstanding
common stock.
                                       37
<PAGE>   40

     We have approximately 59 million shares of common stock outstanding. All of
these shares are freely transferable without restriction or registration under
the Securities Act of 1933, except for shares held by our "affiliates," as
defined in Rule 144 under the Securities Act. Affiliates hold approximately 14
million, or 24%, of the shares of common stock outstanding as of March 31, 2000.
All of these shares are eligible for immediate sale, subject to compliance by
the affiliate sellers with the volume and other applicable conditions of Rule
144. 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.

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 generated through our international subsidiaries, primarily in Europe
(including Eastern Europe), Asia and Latin America. The Company's operating
results are affected by changes in exchange rates between the U.S. Dollar and
the Euro, 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. Since much of our
international operating expenses are also incurred in local currencies, which is
the foreign subsidiaries functional currency, the impact of exchange rates on
net income or loss is relatively less than the impact on revenue. Although our
operating and pricing strategies take into account changes in exchange rates
over time, our results of operations may be affected significantly in the short
term by fluctuations in foreign currency exchange rates. During 1999, the
Company recorded a net foreign exchange gain of $.3 million. The nature and
extent of the foreign currency risk faced by the Company depends on many factors
that cannot be accurately predicted. These factors include significant changes
in foreign currency market conditions, the Company's inability to match foreign
currency denominated revenues with costs denominated in the same currency, and
changes in the amount or mix of revenues denominated in various foreign
currencies. As a result of material unforeseen changes in these factors, the
Company's foreign currency risk could have a significant impact on the Company's
results of operations in the future.


     The Company does not engage in trading of 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 price risk. The Company has issued no debt instruments, entered into
no forward or futures contracts, purchased no options and entered into no swaps.

                                       38
<PAGE>   41

     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 outstanding balances in its
loans or credit facilities, it is not exposed to interest rate risk in
connection with its operating expenses.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements and financial statement schedules in Part IV, Item
14 of this annual report are incorporated by reference into this Item 8.

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

     Not applicable.

                                       39
<PAGE>   42

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

     Hartmut Lademacher, age 51, is one of the founders of LHS Group Inc. He has
served as Chairman of the Board since the Company's inception in October 1990.
He served as Chief Executive Officer from October 1990 to October 1999. From
1973 to October 1990, Mr. Lademacher was employed by IBM in Germany where he
last served as Manager of Project Marketing.

     Gary D. Cuccio, age 54, has been a director of the Company since January
2000, and has served as the Company's President and Chief Executive Officer
since November 1999. Prior to joining the Company, Mr. Cuccio served as
President of AirTouch Paging since 1998. He served as Chief Operating Officer of
Omnipoint Communications from 1996 to 1998. Before joining Omnipoint in 1996,
Mr. Cuccio held senior operations positions with AirTouch International in
Europe and Asia from 1994 to 1996. He previously worked at Pacific Bell, now a
subsidiary of SBC Communications, where he held various positions in sales,
marketing, operations, and engineering during his 28 years with the company. Mr.
Cuccio is also a director of Objective Systems Integrators, Inc. and
Saraide.com, a privately held company.

     William O. Grabe, age 61, has been a director of the Company since December
1995. Mr. Grabe is a managing member of General Atlantic Partners, LLC ("GAP
LLC") and has been with GAP LLC since April 1992. Prior to April 1992, Mr. Grabe
was Corporate Vice President and General Manager, Marketing and Services for IBM
US. Mr. Grabe is a director of Compuware Corporation, Marcam Solutions, Inc.,
Baan Company N.V., Coda Group Plc., and TDS Informationstechnologie AG, all of
which are software companies, and is also a director of Gartner Group, an
information technology consulting company. He is also a director of a number of
privately held companies.

     George Schmitt, age 56, has been a director of the Company since October
1996. He has served as President and as a member of the Board of Directors of
Omnipoint Communications, Inc., a PCS carrier, since October 1995. From November
1994 to September 1995, Mr. Schmitt was President and Chief Executive Officer of
PCS PrimeCo L.P., a PCS services provider formed by AirTouch Communications,
Bell Atlantic, NYNEX and U.S. West. From November 1993 to November 1994, Mr.
Schmitt was Executive Vice President of International Operations of AirTouch
Communications. From January 1990 to March 1994, he served as Vice President of
Pacific Telesis Group, a predecessor of AirTouch Communications. Mr. Schmitt is
also a director of Objective Systems Integrators, Inc. and Telesoft partners.

     Ulf Bohla, age 56, has been a director of the Company since December 1995.
He was Chairman of the Board of Vebacom GmbH, a telecommunications service
provider, from July 1994 through July 1998. Mr. Bohla was General Manager of
Telecommunica-

                                       40
<PAGE>   43

tions and Vice President of International Marketing Operations for IBM Germany
from 1970 to 1994. While with IBM, Mr. Bohla also acted as Director of the North
German Region.

     William E. Ford, age 38, has been a director of the Company since December
1995. Mr. Ford is a managing member of GAP LLC and has been with GAP LLC since
July 1991. From August 1987 to July 1991, Mr. Ford was an associate with Morgan
Stanley & Co. Incorporated. Mr. Ford is also a director of E* Trade Group, an
electronic discount brokerage company, Priceline.com Incorporated and
Tickets.com, Inc., which both provide e-commerce purchasing services for, among
other things, tickets for travel and special events, and Quintiles Transactional
Corp. and Eclipsys Corporation, which are both software companies.

     Vincenzo Damiani, age 60, has been a director of the Company since July
1999. Mr. Damiani has been Corporate Vice President, EDS Corporation, a global
information technology services company, and a member of the EDS EMEA Executive
Board since 1997. From 1993 to 1996, he was Corporate Vice President, Digital
Equipment, a global computer hardware and services company, and President of
Digital Equipment Europe. Prior to joining Digital in 1993, Mr. Damiani held
various positions with IBM Europe since 1964, when he joined IBM as an attorney
in Milan, Italy. During his career with IBM, Mr. Damiani held senior management
positions in Europe and the United States. He also is a director of Banca di
Roma.

     Dr. Wolf J. Gaede, age 43, has been a director of the Company since
September 1996 and served as the Company's Executive Vice President and General
Counsel from January 1997 through March 1999, and as Secretary through November
1998. From 1991 to January 1997, Dr. Gaede was a partner with the German law
firm of Oppenhoff & Radler. From 1989 to 1991, Dr. Gaede served with the law
firm of Fischotter & Luther in Hamburg, Germany and the law firm of Fulbright,
Jaworski, Reavis & McGrath in New York, New York. From 1986 to 1989, Dr. Gaede
acted as Adjunct Professor at the University of Hamburg, Germany.

NON-DIRECTOR EXECUTIVE OFFICERS

     Stefan Sieber, age 40, has served as the Company's 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. Sieber oversees the Company's worldwide sales,
marketing and project management activities.

     Jon Limbird, age 47, has served as the Company's Chief Technology Officer
since April 1999, and as Executive Vice President of Corporate Development since
January

                                       41
<PAGE>   44

1999. He has been with the Company since 1996. During his four years with the
Company, he has held the positions of Vice President of Operations, Vice
President of Research and Development, and Senior Vice President of 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 mergers and acquisitions and product strategy.

     Peter Chambers, 44, has served as the Company's Executive Vice President,
Chief Financial Officer and Treasurer since September 1999. From 1997 to August
1999 Mr. Chambers was Vice President, Finance and a director of PT Excelcomindo,
an Indonesian wireless service provider owned in part by Bell Atlantic. From
1991 to 1997, Mr. Chambers was employed by Coopers & Lybrand Consulting. His
last position with Coopers & Lybrand Consulting was Executive Director in charge
of the Telecommunications Practice -- East Asia. From 1988 through 1991, he was
employed by KPMG Consulting as a management consultant in the telecommunications
practice. Mr. Chambers is a Chartered Accountant (Australia). He is responsible
for the Company's accounting, finance, IT, human resources and administration
functions.

     Ruediger Hellmich, age 55, has served as the Company's Executive Vice
President and Chief Business Units Officer since October 1999. From 1997 to
1999, Mr. Hellmich was employed by o.tel.o Communications GmbH & Co., a German
wireless service provider, as Chief Information Officer and a member of the
management board. From 1993 to 1997, he was Managing Director of several joint
venture companies of IBM and its customers. From 1968 to 1993, Mr. Hellmich held
various positions with IBM in Germany and the United States. Mr. Hellmich
oversees the Company's product-based business units and is responsible for
product development and marketing.

            SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Based solely on its review of the copies of Forms 3 and 4, and amendments
thereto, received by it and written representations that no other reports were
required of those persons, the Company believes that during the fiscal year
ended December 31, 1999, all of its directors, executive officers and beneficial
owners of more than 10% of the common stock compiled with applicable Section
16(a) filing requirements.

                                       42
<PAGE>   45

ITEM 11.   EXECUTIVE COMPENSATION

                            SUMMARY OF COMPENSATION

     The following table sets forth the compensation for 1999 earned by each
person who served as the Chief Executive Officer of the Company during 1999, the
four other most highly compensated (in terms of salary and bonus) executive
officers of the Company, and two additional individuals for whom disclosures
would have been provided pursuant to paragraph (a)(3)(ii) of Item 402 of
Regulation S-K but for the fact that such individuals were not serving as
executive officers of the registrant as of December 31, 1999.

<TABLE>
<CAPTION>
                                                                                LONG-TERM
                                               ANNUAL COMPENSATION            COMPENSATION
                                        ---------------------------------        AWARDS
                                                                OTHER       -----------------
       NAME AND PRINCIPAL                                       ANNUAL      SHARES UNDERLYING
            POSITION                     SALARY     BONUS    COMPENSATION      OPTIONS(#)
       ------------------               --------   -------   ------------   -----------------
<S>                               <C>   <C>        <C>       <C>            <C>
Hartmut Lademacher(1)...........  1999  $337,500        --     $ 30,341(2)             --
  Chairman of the Board and       1998   540,000        --       60,118(2)             --
  former Chief Executive          1997   519,233        --      108,168(2)             --
  Officer
Gary D. Cuccio(3)...............  1999    65,758        --        1,910(4)      1,000,000
  President, Chief Executive
  Officer and Director
Stefan Sieber(5)................  1999   311,728   $28,005      114,213(6)        375,000
  Executive Vice President        1998   170,425    36,926       17,043                --
  and Chief Divisional Officer    1997   173,080    16,647       17,308                --
Jon Limbird.....................  1999   278,672        --        1,000(7)        100,000
  Executive Vice President        1998   178,333    30,000           --            50,000
  and Chief Technology            1997   150,000        --           --                --
  Officer
Peter Chambers(8)...............  1999   103,577        --       46,292(9)        250,000
  Chief Financial Officer,
  Executive Vice President
  and Treasurer
Ruediger Hellmich(10)...........  1999    75,524(11)      --         --           300,000
  Executive Vice President
  and Chief Business Lines
  Officer
Jerry W. Braxton(12)............  1999   250,000        --       10,250                --
                                  1998   250,000        --       12,300(13)            --
                                  1997   250,000        --           --                --
Dr. Hansjorg Beha(14)...........  1999   300,000                 12,000(15)            --
                                  1998   215,000        --       31,486(16)            --
</TABLE>

---------------

 (1) Mr. Lademacher's employment as Chief Executive Officer terminated on
     October 31, 1999.

                                       43
<PAGE>   46

 (2) Consists of allowances for personal use of a Company-provided automobile in
     both the United States and Europe of $30,341 in 1999, $58,387 in 1998 and
     $56,177 in 1997, respectively, and for personal transportation of $21,062
     in 1997, tuition reimbursement for Mr. Lademacher's children of $17,702 in
     1997, deferred compensation of $11,496 in 1997, and premiums for life
     insurance of $1,731 and $1,731 in 1998 and 1997, respectively.
 (3) Mr. Cuccio's employment with the Company commenced on November 1, 1999. His
     annualized salary for 1999 was $400,000.
 (4) Consists of car allowance of $1,000 and reimbursed moving expenses of $910
     in 1999.
 (5) Mr. Sieber was appointed an executive officer of the Company in February
     1999.
 (6) Consists of tuition reimbursement of $13,100 for Mr. Sieber's children,
     foreign service allowances of $12,980, relocation allowance of $70,660, and
     car allowance of $17,473.
 (7) Consists of car allowance of $1,000.
 (8) Mr. Chambers' employment with the Company commenced on September 7, 1999.
     His annualized salary for 1999 was $300,000.
 (9) Consists of relocation allowance of $44,292 and car allowance of $2,000.
(10) Mr. Hellmich's employment with the Company commenced on October 1, 1999.
     His annualized salary for 1999 was $300,000.
(11) Consists of compensation deferred at the election of Mr. Hellmich.
(12) Mr. Braxton resigned from his position as Chief Financial Officer,
     Executive Vice President and Treasurer effective September 7, 1999.
(13) Consists of car allowance.
(14) Dr. Beha resigned from his position as Executive Vice
     President -- Technology effective March 29, 1999.
(15) Consists of car allowance.
(16) Consists of allowances for expenses of $22,486 incurred in connection with
     Dr. Beha's relocation from Germany to the United States and $9,000 for
     personal use of a Company-provided automobile.

                                       44
<PAGE>   47

                       OPTION GRANTS IN LAST FISCAL YEAR

     The Company granted the following stock options to the Named Executive
Officers during the fiscal year ended December 31, 1999.

<TABLE>
<CAPTION>
                                                  INDIVIDUAL GRANTS
                               --------------------------------------------------------
                                NUMBER OF          % OF
                                SECURITIES        TOTAL
                                UNDERLYING     OPTIONS/SARS
                               OPTIONS/SARS      GRANTED       EXERCISE OR
                                 GRANTED       TO EMPLOYEES    BASE PRICE    EXPIRATION
NAME                               (#)        IN FISCAL YEAR    ($/SHARE)       DATE
----                           ------------   --------------   -----------   ----------
<S>                            <C>            <C>              <C>           <C>
Gary D. Cuccio...............   1,000,000          19.13%       $28.6250     11/01/2009
Stefan Sieber................      50,000           0.96%        51.8700      1/01/2009
                                  300,000           5.74%        37.6250      3/19/2009
                                   25,000           0.48%        26.9375      6/16/2009
Jon Limbird..................      50,000           0.96%        51.8750      1/01/2009
                                   50,000           0.96%        26.9375      6/16/2009
Peter Chambers...............     250,000           4.78%        32.6200      9/07/2009
Ruediger Hellmich............     300,000           5.74%        29.1250     10/01/2009
</TABLE>

<TABLE>
<CAPTION>
                                        POTENTIAL REALIZABLE VALUE AT ASSUMED
                                      ANNUAL RATES OF STOCK PRICE APPRECIATION
                                             FOR OPTION TERM (10 YEARS)*
                                  -------------------------------------------------
                                            5%                        10%
                                  -----------------------   -----------------------
                                                              PRICE
                                  PRICE PER    AGGREGATE       PER       AGGREGATE
NAME                                SHARE        VALUE        SHARE        VALUE
----                              ---------   -----------   ---------   -----------
<S>                               <C>         <C>           <C>         <C>
Gary D. Cuccio..................  $46.6271    $18,002,100   $ 74.2459   $45,620,900
Stefan Sieber...................   84.4907      1,631,035    134.5374     4,133,370
                                   61.2872      7,098,660     97.5896    17,989,380
                                   43.8783        423,520     69.8689     1,073,285
Jon Limbird.....................   84.4989      1,631,195    134.5504     4,133,770
                                   43.8783        847,040     69.8689     2,146,570
Peter Chambers..................   53.1345      5,128,625     84.6079    12,996,975
Ruediger Hellmich...............   47.4416      5,494,980     75.5427    13,925,310
</TABLE>

---------------

* The dollar gains under these columns result from calculations assuming 5% and
  10% growth rates as set by the Securities and Exchange Commission and are not
  intended to forecast future price appreciation of Company common stock. The
  gains reflect a future value based upon growth at these prescribed rates. The
  Company did not use an alternative formula for a grant date valuation, an
  approach which would state gains at present, and therefore lower, value.

                  OPTION EXERCISES AND FISCAL YEAR-END VALUES

     The following table sets forth information regarding (a) the number of
shares of common stock received upon exercise of options by the Company's
executive officers in

                                       45
<PAGE>   48

the fiscal year ended December 31, 1999, (b) the net value realized upon such
exercise, (c) the number of unexercised options held as of December 31, 1999 and
(d) the aggregate dollar value of unexercised options held at December 31, 1999.

              AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR
                       AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                        NUMBER OF SECURITIES
                                                             UNDERLYING            VALUE OF UNEXERCISED IN
                                                       UNEXERCISED OPTIONS AT       THE MONEY OPTIONS AT
                           SHARES                       DECEMBER 31, 1999(#)       DECEMBER 31, 1999($)(1)
                          ACQUIRED         VALUE      -------------------------   -------------------------
NAME                   ON EXERCISE(#)   REALIZED($)   EXERCISABLE/UNEXERCISABLE   EXERCISABLE/UNEXERCISABLE
----                   --------------   -----------   -------------------------   -------------------------
<S>                    <C>              <C>           <C>                         <C>
Hartmut Lademacher...     106,251        2,673,541            3,125/28,125                68,477/616,289
Jerry W. Braxton.....     170,000        4,308,325               60,000/--                    1,314,750/
Dr. Hansjorg Beha....      20,000          271,000         122,500/337,500               267,969/738,281
Stefan Sieber........      10,000          251,000          20,481/424,219             448,790/1,078,511
Jon Limbird..........          --               --          63,843/186,157           1,073,713/1,117,538
Gary D. Cuccio.......          --               --            --/1,000,000                         --/--
Peter Chambers.......          --               --              --/250,000                         --/--
Ruediger Hellmich....          --               --              --/300,000                         --/--
</TABLE>

---------------

(1) Value is based on the difference between the option exercise price and the
    fair market value of $24.5625 per share at December 31, 1999 multiplied by
    the number of shares underlying the option.

                             DIRECTOR COMPENSATION

     Directors do not receive cash retainers or fees for attendance at meetings
of the Board of Directors or committees of the Board but are reimbursed for
reasonable expenses incurred by them in connection with their attendance at
Board and committee meetings.

     In lieu of cash compensation, the Company in 1996 granted non-qualified
options to purchase 100,000 shares of common stock to each of the seven
directors of the Company who were serving as directors at that time. The
exercise price of all options held by those seven directors is $2.65 per share,
and these options expire in 2006. The Company granted to Vincenzo Damiani, upon
his appointment as a director in 1999, non-qualified options to purchase 100,000
shares of common stock at an exercise price of $31.8125. Gary D. Cuccio, who
also is the Company's President and Chief Executive Officer, did not receive any
additional option grants or other compensation in connection with his
appointment as a director in January 2000. All options granted to directors are
immediately exercisable into non-vested restricted shares of common stock, or
vest at the rate of 25% one year from the date of the option grant and 1.56% on
the monthly anniversary of the grant date in each of the succeeding 48 months.
The restrictions on 25% of the restricted shares lapse one year from the date of
the option grant, and the restrictions on 1.56% of the shares lapse on the
monthly anniversary of the grant date in each of the succeeding 48 months.

                                       46
<PAGE>   49

                             EMPLOYMENT AGREEMENTS

     Gary D. Cuccio, President and Chief Executive Officer, entered into an
employment agreement with the Company on September 5, 1999. The agreement
provides for base compensation of $400,000 per year. The agreement also provides
for an incentive bonus of up to $400,000 per year, options to purchase 1,000,000
shares of common stock in accordance with the terms and conditions of the LHS
Group Inc. 1996 Stock Incentive Plan and the Company's standard non-qualified
option agreement, and reimbursement of up to $70,000 in relocation expenses. The
agreement may be terminated by the Company at any time without notice, and by
Mr. Cuccio upon six months notice to the Company. In the event the Company
terminates Mr. Cuccio's employment without cause, he is entitled to receive a
lump sum severance payment equal to his then-current base annual salary.

     Peter Chambers, Chief Financial Officer, Executive Vice President and
Treasurer, entered into an employment agreement with the Company on June 23,
1999. The agreement provides for an annual salary of $300,000 per year, a car
allowance of $1,000 per month and a one time payment of $50,000 to cover
relocation expenses. The agreement also provides for options to purchase 250,000
shares of common stock in accordance with the terms and conditions of the LHS
Group Inc. 1996 Stock Incentive Plan and the Company's standard non-qualified
option agreement. The agreement is for no specific period of time and may be
terminated by either party upon 180 days notice, and by the Company at any time
without notice for cause.

     Ruediger Hellmich, Executive Vice President and Chief Business Lines
Officer, entered into an employment agreement with the Company on June 23, 1999.
The agreement provides for an annual salary of $300,000 per year, a car
allowance of $1,000 per month and a one time payment of $70,000 to cover
relocation expenses. The agreement also provides for options to purchase 300,000
shares of common stock in accordance with the terms and conditions of the LHS
Group Inc. 1996 Stock Incentive Plan and the Company's standard non-qualified
option agreement. The agreement is for no specific period of time and may be
terminated by either party upon 180 days notice, and by the Company at any time
without notice for cause.

     Stefan Sieber, Executive Vice President and Chief Divisional Officer,
entered into an employment agreement with the Company on March 19, 1999. The
agreement provides for an annual salary of $300,000 per year, and a one time
payment of $70,000 to cover relocation expenses. The agreement also provides for
options to purchase 300,000 shares of common stock in accordance with the terms
and conditions of the LHS Group Inc. 1996 Stock Incentive Plan and the Company's
standard non-qualified option agreement. The agreement is for no specific period
of time and may be terminated by either party upon 180 days notice, and by the
Company at any time without notice for cause.

                                       47
<PAGE>   50

                       COMPENSATION COMMITTEE INTERLOCKS
                           AND INSIDER PARTICIPATION

     The Board's Compensation Committee is comprised of William O. Grabe, who
serves as the Chairman of the Committee, and Ulf Bohla. There were no
compensation committee interlocks during 1999.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information regarding the beneficial
ownership of the Company's common stock as of March 31, 2000, by (a) each person
who is known by the Company to own more than 5% of the Company's common stock,
(b) each director, (c) each executive officer named in the Summary Compensation
Table herein and (d) all directors and executives officers as a group.

<TABLE>
<CAPTION>
                                                           SHARES        PERCENT
NAME AND ADDRESS                                        BENEFICIALLY    OF CLASS
OF BENEFICIAL OWNER                                       OWNED(1)     OWNED(1)(2)
-------------------                                     ------------   -----------
<S>                                                     <C>            <C>
5% Stockholders
General Atlantic Partners, LLC(3).....................    8,161,343       13.8%
Sema Group plc(4).....................................   10,141,250       14.7%
Directors
Hartmut Lademacher(5).................................    5,487,501        9.2%
William O. Grabe(3)...................................    8,314,578       13.8%
William E. Ford(3)....................................    8,271,343       13.8%
Ulf Bohla(6)..........................................       60,000          *
Gary D. Cuccio........................................        1,000          *
Dr. Wolf Gaede(7).....................................      347,985          *
George F. Schmitt(6)..................................       67,280          *
Vincenzo Damiani......................................      100,000          *
Named Executive Officers
Stefan Sieber(6)......................................      132,199          *
Jon Limbird(6)........................................       99,311          *
Peter Chambers........................................            0          *
Ruediger Hellmich.....................................            0          *
Jerry Braxton.........................................        4,000          *
Hansjorg Beha.........................................            0          *
All executive officers and directors as a group (12
   persons)(8)........................................   14,509,854       24.3%
</TABLE>

---------------

 *   Less than one percent (1%).
(1) The persons and entities named in the table have sole voting and investment
    power with regard to all shares shown as beneficially owned by them, except
    as noted below. Information is as of March 31, 2000 unless otherwise
    indicated. Pursuant to the rules of the Securities and Exchange Commission,
    the number of shares of Common Stock beneficially owned by a specified
    person or group includes shares

                                       48
<PAGE>   51

    issuable pursuant to convertible securities, warrants and options held by
    such person or group which may be converted or exercised within 60 days
    after March 31, 1999. Such shares are deemed to be outstanding for the
    purpose of computing the percentage of the class beneficially owned by such
    person or group but are not deemed to be outstanding for the purpose of
    computing the percentage of the class owned by any other person or group.
(2) Based on 59,062,017 shares of Common Stock outstanding as of March 31, 2000.
(3) Includes (a) 4,941,006 shares of common stock held by General Atlantic
    Partners 23, L.P. ("GAP 23"), (b) 2,040,931 shares of common stock held by
    General Atlantic Partners 31, L.P. ("GAP 31"), (c) 1,179,406 shares of
    common stock owned by GAP Coinvestment Partners, L.P. ("GAP Coinvestment"),
    (d) 10,000 shares of common stock and options to purchase an additional
    100,000 shares of common stock held by Mr. Ford, and (e) 91,235 shares of
    common stock held by Mr. Grabe and 6,000 shares of common stock held by each
    of Mr. Grabe's two minor children. We refer to GAP 23, GAP 31 and GAP
    Coinvestment as the "General Atlantic Stockholders." The general partner of
    GAP 31 and GAP 23 is General Atlantic Partners, LLC ("GAP LLC"). The
    managing members of GAP LLC are Steven A. Denning, David C. Hodgson, J.
    Michael Cline, William O. Grabe, Peter L. Bloom, William E. Ford and
    Franchon M. Smithson. The managing member of GAP LLC are the general
    partners of GAP Coinvestment. Messrs. Ford and Grabe, directors of the
    Company, are managing members of GAP LLC and general partners of GAP
    Coinvestment. Mr. Ford and Mr. Grabe disclaim beneficial ownership of shares
    owned by the General Atlantic Stockholders, except to the extent of their
    respective pecuniary interests therein. The General Atlantic Stockholders
    disclaim beneficial ownership of the shares of common stock and options to
    purchase common stock held by Mr. Ford and the shares of common stock held
    by Mr. Grabe and his minor children. The address for the General Atlantic
    Stockholders, GAP LLC, Mr. Ford and Mr. Grabe is c/o of General Atlantic
    Service Corporation, 3 Pickwick Plaza, Greenwich, Connecticut 06830.
(4) Pursuant to a stock option agreement entered into by Sema Group plc ("Sema")
    and the Company on March 14, 2000, Sema has the right to purchase 17.5% of
    the Company's common stock outstanding on the date the option is exercised.
    Sema's address is 233 High Holborn, London, WC1V 7D5 England.
(5) Includes options to purchase 7,813 shares. The address of Mr. Lademacher is
    LHS Group Inc., Six Concourse Parkway, Suite 2700, Atlanta, Georgia 30328.
(6) Consists of options to purchase shares of common stock.
(7) Consists of options to purchase 54,972 shares of common stock.
(8) Includes options to purchase 590,040 shares of common stock.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     A subsidiary of the Company leases office space in Frankfurt, Germany from
a corporation controlled by the Company's Chairman of the Board, Hartmut
Lademacher. During the fiscal year ended December 31, 1999, the Company made
lease payments totaling $317,000 to this corporation.

                                       49
<PAGE>   52

     During 1999, the Company paid approximately $172,000 to H.L. Aircraft
Leasing Company for the use of its aircraft. Hartmut Lademacher is the sole
proprietor of H.L. Aircraft Leasing Company.

     The Company believes that each of the above transactions was on terms no
less favorable to the Company than could have been obtained from unaffiliated
third parties on an arm's-length basis. The Company has adopted a policy
requiring that all transactions between the Company and its officers, directors
or other affiliates, or entities in which such person has an interest, must be
on terms no less favorable to the Company than could be obtained from
unaffiliated third parties on an arm's-length basis and must be approved in
advance by a majority of the Company's directors who have no interest in the
transaction.

                                       50
<PAGE>   53

                                    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. are filed
herewith, beginning on page F-1 through page F-23.

     - Report of Independent Accountants
     - Consolidated Balance Sheets as of December 31, 1999, and 1998
     - Consolidated Statements of Income for the years ended December 31, 1999,
       1998, and 1997
     - Consolidated Statements of Stockholders' Equity for the years ended
       December 31, 1999, 1998, and 1997
     - Consolidated Statements of Cash Flows for the years ended December 31,
       1999, 1998, and 1997
     - Notes to Consolidated Financial Statements

2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES

     All 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.

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                         DESCRIPTION OF EXHIBITS
    -------                        -----------------------
<C> <C>     <C>  <S>
      2.1   --   Agreement and Plan of Merger by and between LHS Group Inc.,
                 Priority Call Management, Inc. and Patriot Acquisition Corp.
                 dated as of April 20, 1999 (Incorporated by reference from
                 Exhibit 2.1 to the Registrant's Registration Statement on
                 Form S-4 (File No. 333-77557)).
      2.2   --   Plan and Agreement of Merger, dated as of March 14, 2000,
                 among LHS Group Inc., Sema Group plc and SG Acquisition
                 Corporation (Incorporated by reference to Exhibit 2.1 to the
                 Company's Current Report on Form 8-K).
      2.3   --   Stock Option Agreement, dated as of March 14, 2000, among
                 LHS Group Inc. and Sema Group plc (Incorporated by reference
                 to Exhibit 2.2 to the Company's Current Report on Form 8-K
                 filed on March 14, 2000).
      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)).
</TABLE>

                                       51
<PAGE>   54

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                         DESCRIPTION OF EXHIBITS
    -------                        -----------------------
<C> <C>     <C>  <S>
      3.2   --   By-Laws, as amended (Incorporated by reference to Exhibit
                 3.2 to the Company's Form 10-Q for the quarterly period
                 ended June 30, 1999).
      4     --   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)).
     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)).
  *  10.5   --   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)).
  *  10.7   --   Employment Agreement dated March 19,1999, between Stefan
                 Sieber and LHS Group Inc. (Incorporated by reference to
                 Exhibit 10.7 the Company's Form 10-Q for the quarterly
                 period ended June 30, 1999).
  *  10.8   --   Employment Agreement dated June 23, 1999 between Peter J.
                 Chambers and LHS Group Inc. (Incorporated by reference to
                 Exhibit 10.8 to the Company's Form 10-Q for the quarterly
                 period ended September 30, 1999).
  *  10.9   --   Employment Agreement dated July 16, 1999 between Ruediger
                 Hellmich and LHS Group Inc., and amended on October 6, 1999
                 (Incorporated by reference to Exhibit 10.9 to the Company's
                 Form 10-Q for the quarterly period ended September 30,
                 1999).
  *  10.10  --   Employment Agreement dated September 5, 1999 between Gary D.
                 Cuccio and LHS Group Inc., and amended on October 6, 1999
                 (Incorporated by reference to Exhibit 10.10 to the Company's
                 Form 10-Q for the quarterly period ended September 30,
                 1999).
     21.1   --   List of Subsidiaries -- previously filed on the Form 10-K of
                 which this filing is an amendment.
     23.1   --   Consent of Ernst & Young LLP -- filed herewith.
     23.2   --   Consent of Arthur Andersen LLP -- filed herewith.
     27     --   Financial Data Schedule -- previously filed on the Form 10-K
                 of which this filing is an amendment. (for SEC use only)
</TABLE>

---------------

* Management contract or compensatory plan.

(B) REPORTS ON FORM 8-K

     The Company filed on Current Report on Form 8-K on October 21, 1999 to
announce certain consolidated financial information for the quarter and nine
month period ended September 30, 1999.

                                       52
<PAGE>   55

                                   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 June 18, 2000 by the undersigned, thereunto duly organized.


                                          LHS GROUP INC.

                                          By:     /s/ SCOTT A. WHARTON
                                            ------------------------------------
                                                      Scott A. Wharton
                                               Senior Vice President, General
                                                    Counsel and Secretary

                                       53
<PAGE>   56

                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors
LHS Group Inc.

     We have audited the accompanying consolidated balance sheets of LHS Group
Inc. (the "Company") as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Priority Call
Management, Inc., which statements reflect total assets constituting 10.3% at
December 31, 1998 and revenues constituting approximately 15.9% and 16.0%, for
the years ended December 31, 1998 and 1997. Those statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to data included for Priority Call Management, Inc., is based
solely on the report of the other auditors.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.

     In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of LHS Group Inc. at December 31, 1999 and
1998 and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.

                                          (ERNST & YOUNG SIG)

February 17, 2000
Atlanta, Georgia

                                       F-1
<PAGE>   57

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Priority Call Management, Inc.:

     We have audited the accompanying consolidated balance sheets of Priority
Call Management, Inc. (a Massachusetts corporation) and subsidiary as of
December 31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Priority
Call Management, Inc. and subsidiary as of December 31, 1997 and 1998, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.

                                          (ARTHUR ANDERSEN SIG)

Boston, Massachusetts
February 4, 1999

                                       F-2
<PAGE>   58

                                 LHS GROUP INC.

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                  DECEMBER 31
                                                              -------------------
                                                                1999       1998
                                                              --------   --------
                                                                 (IN THOUSANDS
                                                               OF U.S. DOLLARS,
                                                              EXCEPT SHARE DATA)
<S>                                                           <C>        <C>
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.................................  $ 86,888   $ 46,794
  Short-term marketable debt securities.....................    49,009     62,218
  Trade accounts receivable, net of allowance for doubtful
     accounts of $4,988 and $3,716..........................    91,910     68,189
  Prepaid expenses and other current assets.................    10,482      8,251
  Deferred income taxes.....................................     3,658         --
                                                              --------   --------
           Total current assets.............................   241,947    185,452
Furniture, fixtures and equipment:
  Computer equipment........................................    11,316     15,076
  Purchased computer software...............................     9,822      7,267
  Furniture and fixtures....................................    16,390      8,005
  Other.....................................................     3,834      2,835
                                                              --------   --------
                                                                41,362     33,183
Allowance for depreciation and amortization.................   (20,413)   (14,050)
                                                              --------   --------
                                                                20,949     19,133
Deferred income taxes.......................................        --        914
Long-term investments.......................................    11,800         --
Intangible assets net of accumulated amortization of $1,256
  and $495..................................................     2,962      3,949
Other.......................................................     2,904        876
                                                              --------   --------
           Total assets.....................................  $280,562   $210,324
                                                              ========   ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable..........................................  $  9,255   $ 10,253
  Accrued expenses and other liabilities....................    21,211     20,798
  Deferred revenues.........................................    15,929      7,712
  Income taxes payable......................................    25,164      8,907
  Deferred income taxes.....................................        --      4,127
                                                              --------   --------
           Total current liabilities........................    71,559     51,797
Other long-term obligations.................................       985      2,772
Stockholders' equity:
  Common stock ($.01 par value) 200,000,000 shares
     authorized; 58,363,175 and 56,726,234 shares issued and
     outstanding............................................       583        567
  Additional paid-in capital................................   150,922    125,628
  Retained earnings.........................................    68,626     30,193
  Note Receivable...........................................        --       (525)
  Accumulated other comprehensive income....................   (12,113)      (108)
                                                              --------   --------
           Total stockholders' equity.......................   208,018    155,755
                                                              --------   --------
           Total liabilities and stockholders' equity.......  $280,562   $210,324
                                                              ========   ========
</TABLE>

See accompanying notes.

                                       F-3
<PAGE>   59

                                 LHS GROUP INC.

                       CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31
                                                  ------------------------------
                                                    1999       1998       1997
                                                  --------   --------   --------
                                                  (IN THOUSANDS OF U.S. DOLLARS,
                                                      EXCEPT PER SHARE DATA)
<S>                                               <C>        <C>        <C>
Revenues:
   License......................................  $108,774   $ 78,560   $ 46,215
   Service......................................   153,822    115,558     79,307
                                                  --------   --------   --------
            Total...............................   262,596    194,118    125,522
Cost of services................................    89,383     74,793     56,643
                                                  --------   --------   --------
Gross margin....................................   173,213    119,325     68,879
Operating expenses:
   Sales and marketing..........................    30,531     19,477     14,611
   Research and development.....................    57,270     39,721     22,116
   General and administrative...................    24,314     20,828     16,622
   Cost of purchased in-process research and
      development related to computer software
      technology................................        --      8,200         --
   Merger charges...............................     4,320         --         --
                                                  --------   --------   --------
                                                   116,435     88,226     53,349
                                                  --------   --------   --------
Earnings before interest and taxes..............    56,778     31,099     15,530
Interest (income) expense, net..................    (4,844)    (4,619)    (2,391)
                                                  --------   --------   --------
Earnings before income taxes....................    61,622     35,718     17,921
Income taxes....................................    23,189     17,033      7,470
                                                  --------   --------   --------
Net earnings....................................  $ 38,433   $ 18,685   $ 10,451
                                                  ========   ========   ========
Net earnings per share:
   Basic........................................  $   0.67   $   0.33   $   0.22
                                                  ========   ========   ========
   Diluted......................................  $   0.65   $   0.32   $   0.20
                                                  ========   ========   ========
Shares used in per share calculation (Note 2)
   Basic........................................    57,359     55,838     46,913
                                                  ========   ========   ========
   Diluted......................................    59,206     59,159     53,376
                                                  ========   ========   ========
</TABLE>

See accompanying notes.

                                       F-4
<PAGE>   60

                                 LHS GROUP INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                PREFERRED STOCK       COMMON STOCK       ADDITIONAL
                               -----------------   -------------------    PAID-IN
                                SHARES    AMOUNT     SHARES     AMOUNT    CAPITAL
                               --------   ------   ----------   ------   ----------
                                (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE DATA)
<S>                            <C>        <C>      <C>          <C>      <C>
BALANCE DECEMBER 31,
  1996(1)....................   225,000    $ 2     35,106,684    $351     $ 20,579
  Comprehensive income:
    Net earnings.............        --     --             --      --           --
    Translation adjustment...        --     --             --      --           --
  Issuance of common stock,
    net of costs of
    issuance.................        --     --      9,730,000      97       70,533
  Conversion of preferred
    stock into common........  (225,000)    (2)     9,000,000      90          (88)
  Exercise of stock
    options..................        --     --        700,710       7        1,850
  Tax benefit relating to
    stock options............        --     --             --      --          931
                               --------    ---     ----------    ----     --------
BALANCE DECEMBER 31,
  1997(1)....................        --     --     54,537,394     545       93,805
  Comprehensive income:
    Net earnings.............        --     --             --      --           --
    Translation adjustment...        --     --             --      --           --
  Issuance of common stock in
    connection with business
    acquisition..............        --     --        117,885       1        7,022
  Exercise of stock
    options..................        --     --      2,070,955      21       14,544
  Tax benefit relating to
    stock options............        --     --             --      --       10,161
  Compensation expense
    related to stock
    options..................        --     --             --      --           96
                               --------    ---     ----------    ----     --------
BALANCE DECEMBER 31,
  1998(1)....................                      56,726,234     567      125,628
  Comprehensive income:
    Net earnings.............        --     --             --      --           --
    Translation adjustment...        --     --             --      --           --
  Repayment of Note
    Receivable...............        --     --             --      --           --
  Exercise of stock
    options..................        --     --      1,636,941      16       13,294
  Tax benefit relating to
    stock options............        --     --             --      --       12,000
                               --------    ---     ----------    ----     --------
BALANCE DECEMBER 31, 1999....        --    $--     58,363,175    $583     $150,922
                               ========    ===     ==========    ====     ========

<CAPTION>
                                                        ACCUMULATED
                                                           OTHER
                                  NOTE      RETAINED   COMPREHENSIVE    TOTAL
                               RECEIVABLE   EARNINGS      INCOME        EQUITY
                               ----------   --------   -------------   --------
                               (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE DATA)
<S>                            <C>          <C>        <C>             <C>
BALANCE DECEMBER 31,
  1996(1)....................    $  --      $ 1,057      $   (508)     $ 21,481
  Comprehensive income:
    Net earnings.............       --       10,451            --        10,451
    Translation adjustment...       --           --        (4,402)       (4,402)
                                                                       --------
                                                                          6,049
  Issuance of common stock,
    net of costs of
    issuance.................       --           --            --        70,630
  Conversion of preferred
    stock into common........       --           --            --            --
  Exercise of stock
    options..................       --           --            --         1,857
  Tax benefit relating to
    stock options............       --           --            --           931
                                 -----      -------      --------      --------
BALANCE DECEMBER 31,
  1997(1)....................       --       11,508        (4,910)      100,948
  Comprehensive income:
    Net earnings.............       --       18,685            --        18,685
    Translation adjustment...       --           --         4,802         4,802
                                                                       --------
                                                                         23,407
  Issuance of common stock in
    connection with business
    acquisition..............       --           --            --         7,023
  Exercise of stock
    options..................     (525)          --            --        14,040
  Tax benefit relating to
    stock options............       --           --            --        10,161
  Compensation expense
    related to stock
    options..................       --           --            --            96
                                 -----      -------      --------      --------
BALANCE DECEMBER 31,
  1998(1)....................     (525)      30,193          (108)      155,755
  Comprehensive income:
    Net earnings.............       --       38,433            --        38,433
    Translation adjustment...       --           --       (12,005)      (12,005)
                                                                       --------
                                                                         26,428
  Repayment of Note
    Receivable...............      525           --            --           525
  Exercise of stock
    options..................       --           --            --        13,310
  Tax benefit relating to
    stock options............       --           --            --        12,000
                                 -----      -------      --------      --------
BALANCE DECEMBER 31, 1999....    $  --      $68,626       (12,113)     $208,018
                                 =====      =======      ========      ========
</TABLE>

See accompanying notes.

                                       F-5
<PAGE>   61

                                 LHS GROUP INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31
                                                         ------------------------------
                                                           1999       1998       1997
                                                         --------   --------   --------
                                                         (IN THOUSANDS OF U.S. DOLLARS)
<S>                                                      <C>        <C>        <C>
OPERATING ACTIVITIES:
  Net earnings.........................................  $ 38,433   $ 18,685   $ 10,451
  Adjustments to reconcile net earnings to net cash
     provided by (used in) operating activities:
     Depreciation and amortization.....................     9,597      5,625      2,955
     Provision for deferred income taxes...............    (6,871)     1,229      3,754
     Write-off of in-process research and development
        related to computer software technology........        --      8,200         --
     Changes in operating assets and liabilities:
        Trade accounts receivable......................   (28,025)   (26,404)   (11,313)
        Prepaid expenses and other current assets......    (8,671)      (654)    (1,600)
        Accounts payable...............................      (714)     1,093      5,085
        Accrued expenses and other liabilities.........     6,627        243      7,621
        Deferred revenues..............................     8,746      1,933     (3,644)
        Income taxes payable...........................    23,170     11,548      1,666
                                                         --------   --------   --------
           Net cash provided by operating activities...    42,292     21,498     14,975
INVESTING ACTIVITIES:
  Additions of furniture, fixtures and equipment.......   (10,829)   (11,258)    (6,844)
  Purchase of investments..............................     2,631    (13,879)   (49,560)
  Acquisition of business, net of cash acquired........        --     (2,955)        --
  Other................................................    (2,092)      (395)      (240)
                                                         --------   --------   --------
           Net cash used in investing activities.......   (10,290)   (28,487)   (56,644)
FINANCING ACTIVITIES:
  Proceeds from issuance of common stock...............    13,325     14,039     72,487
  Proceeds from bank borrowings........................        --      1,000        500
  Repayment of bank borrowings.........................    (1,520)      (327)    (1,661)
  Repayment to former shareholder......................        --         --     (4,153)
  Other................................................      (251)      (670)      (629)
                                                         --------   --------   --------
           Net cash provided by financing activities...    11,554     14,042     66,544
Effect of exchange rate differences on cash............    (3,462)     5,580       (211)
                                                         --------   --------   --------
Increase in cash and cash equivalents..................    40,094     12,633     24,664
Cash and cash equivalents at beginning of period.......    46,794     34,161      9,497
                                                         --------   --------   --------
Cash and cash equivalents at end of period.............  $ 86,888   $ 46,794   $ 34,161
                                                         ========   ========   ========
ADDITIONAL CASH FLOW INFORMATION:
  Cash paid for interest...............................  $    348   $    325   $    198
                                                         ========   ========   ========
  Cash paid for income taxes...........................  $  3,024   $  1,386   $    260
                                                         ========   ========   ========
</TABLE>

See accompanying notes.

                                       F-6
<PAGE>   62

                                 LHS GROUP INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1999
                         (IN THOUSANDS OF U.S. DOLLARS)

1. SIGNIFICANT ACCOUNTING POLICIES

   Basis of Presentation

     The consolidated financial statements include the accounts of LHS Group
Inc. and its wholly-owned subsidiaries ("LHS Group" or the "Company").
Significant intercompany accounts and transactions have been eliminated in
preparing the accompanying financial statements.

     In June 1999, the Company acquired Priority Call Management, Inc.
("Priority Call") in a transaction accounted for as a pooling of interests (see
note 4 where discussed). The Company's consolidated financial statements and the
notes to the consolidated financial statements have been restated to include the
results of Priority Call for all periods presented.

   Business Activity and Basis of Revenue Recognition

     The Company provides scaleable client/server-based billing and customer
care solutions to carriers in the telecommunications industry. Solutions based
on the Company's software products enable carriers to offer flexible,
customer-tailored, cost-effective billing and customer care services in the
wireless and wireline telecommunications markets. LHS configures its proprietary
software tools to give each carrier a flexible and cost-effective billing
solution tailored to specific network technology and marketing needs.

     The Company derives revenue from software licenses and customer support and
other services. License revenues consist of license fees for the Company's
client/server-based software. The typical BSCS license is perpetual and
non-refundable by the Company. Service revenue includes contracts for
implementation, consulting, production and technical support, training, and
software maintenance. Maintenance fees are paid in advance and recorded as
deferred revenue.

     Where software arrangements include rights to multiple software products
and/or services, the Company allocates the total arrangement fee among each of
the deliverables based on the relative fair value of each of the deliverables,
determined based on vendor-specific objective evidence of fair value. The
Company's customers often require significant customization of the software
products and, therefore, the license and implementation and consulting service
fees are recognized as long term contracts in conformity with Accounting
Research Bulletin ("ARB") No. 45 "Long Term Construction Type Contracts",
Statement of Position ("SOP") 81-1 "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts" and SOP 97-2 "Software
Revenue Recognition". For long-term contracts, revenue is recognized

                                       F-7
<PAGE>   63
                                 LHS GROUP INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

using the percentage of completion method of accounting based on hours worked on
the project compared to the total hours expected to be worked through
completion.

     Revenue from consulting services which are not considered essential to the
functionality of the other elements of a software service arrangement are
recognized on a straight-line basis over the period that the services are
provided. Revenue related to ongoing production and technical support services
following the completion of the initial production launch of the software is
recognized as the work is performed. Revenue from training services is
recognized as the work is performed. Revenue from maintenance services is
recognized ratably over the term of the maintenance contract. Deferred revenue
represents cash collections from customers in advance of the performance of the
work.

     License revenues for one-time licenses without significant customization
are recognized upon delivery of the software to the customer unless the Company
has significant related obligations remaining or the collectibility of the
receivable is doubtful. When significant obligations remain after the software
product has been delivered or the collectibility of the receivable is doubtful,
revenue is not recognized until such obligations have been completed and the
collectibility of the software is no longer doubtful.

     Additional license revenues relating to customer subscriber growth are
recognized and realized only when the Company is notified that the number of
customer subscribers supported by the software exceeds the number of subscribers
for which the customer is currently licensed and the collectibility of the
receivable is probable. Losses on long-term contracts are recognized in the
period that the anticipated loss is identified.

     In accordance with the provisions of ARB No. 45, SOP 81 and SOP 97-2 trade
accounts receivable includes amounts earned by the Company but not yet billed to
the customer as stipulated based on milestones defined in certain contracts. At
December 31, 1999 and 1998, trade accounts receivable includes $13,540 and
$10,823 of unbilled receivables.

   Cash Equivalents

     The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.

   Marketable Securities

     Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. Debt securities are classified as held-to-maturity when the Company has
the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at

                                       F-8
<PAGE>   64
                                 LHS GROUP INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

amortized cost, adjusted for amortization of premiums and accretion of discounts
to maturity. Such amortization is included in interest income from investments.
Interest on securities classified as held-to-maturity is included in interest
income from investments.

     Marketable equity securities and debt securities not classified as
held-to-maturity are classified as available-for-sale. Available-for-sale
securities are carried at fair value, with the unrealized gains and losses, net
of tax, reported in a separate component of shareholder's equity. The amortized
cost of debt securities in this category is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income from investments. Realized gains and losses and declines in
value judged to be other-than-temporary on available-for-sale securities are
included in interest income from investments. The cost of securities sold is
based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in interest income from
investments.

   Furniture, Fixtures, and Equipment

     Furniture, fixtures and equipment are stated at cost. Depreciation and
amortization is provided over the estimated useful lives of the assets or the
term of the lease on a straight-line basis.

     The Company does not develop software for internal use. Software purchased
for internal use is capitalized.

     Depreciation and amortization expense for the years ended December 31,
1999, 1998, and 1997 was $8,836, $5,130 and $2,955 respectively.

   Research and Development Costs

     Research and development expenses consist primarily of salaries, benefits,
equipment and allocable overhead for software engineers, pre-production quality
assurance personnel, program managers and technical writers associated with the
development of software to be sold. Research and development expenses relate to
activities performed prior to commercial production of a product. To date we
have not capitalized any development costs because our short development cycle
has historically resulted in only immaterial amounts of development costs that
were eligible for capitalization.

   Translation of Foreign Currencies

     All assets and liabilities are translated into U.S. Dollars using the
exchange rate in effect at the balance sheet date. All revenue, costs and
expenses are translated using an average exchange rate. The gains and losses of
foreign subsidiaries resulting from the change in exchange rates from year to
year have been reported separately as a

                                       F-9
<PAGE>   65
                                 LHS GROUP INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

component of stockholders' equity. The effect on the statements of income of
transaction gains and losses is insignificant for all years presented.

   Income Taxes

     The Company accounts for income taxes under the liability method. Under the
liability method, deferred income taxes are recorded to reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting and the amounts used for income tax
purposes.

   Intangible Assets

     Intangible assets result from acquisitions accounted for under the purchase
method. (See Note 4.) Amortization of intangible assets is provided on the
straight-line basis over the respective estimated useful lives of the assets.
The Company periodically evaluates whether changes have occurred that would
require revision of the remaining estimated useful life of the assigned
intangible assets or render the intangible assets not recoverable. If such
circumstances arise, the Company would use an estimate of the undiscounted value
of expected future operating cash flows to determine whether the goodwill or
intangibles are impaired. The impairment loss would be measured as the amount by
which the carrying amount of the asset exceeds the fair value of the asset. To
date, no such impairment losses have been recorded.

   Concentration of Credit Risk

     Financial instruments that potentially subject the Company to concentrated
credit risks consists primarily of cash and cash equivalents, short-term
marketable debt securities and trade receivables. The Company maintains cash and
cash equivalents with various financial institutions. The Company policy is
designed to limit exposure to any one institution. Due to the size and terms of
certain customer contracts and the industry in which the Company competes, trade
accounts receivable include amounts due from certain customers that are
considered significant in relation to total trade accounts receivable.

   Fair Value of Financial Instruments

     The carrying value of financial instruments such as cash, accounts
receivable and accounts payable approximate their fair value based on the
short-term maturities of these instruments. The carrying value of bank debt
approximates fair value based on quoted market prices for the same or similar
issues as well as the current rates offered to the Company. (See Note 3 for fair
value disclosures regarding marketable securities)

                                      F-10
<PAGE>   66
                                 LHS GROUP INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

   Use of Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

2. CAPITALIZATION

   Initial Public Offering

     In May, 1997, the Company sold 9,730,000 shares of its Common Stock in an
Initial Public Offering ("IPO") in which it received approximately $70,630 in
net proceeds. At the completion of the offering, 225,000 shares of the Company's
Series A Convertible Preferred Stock were converted into 9,000,000 shares of
Common Stock.

   Common Stock

     Effective May of 1998, the Company amended its certificate of incorporation
to increase the authorized Common Stock to 200,000,000 shares, and effected a
2-for-1 Common Stock split. All common share and per common share amounts have
been adjusted for all periods to reflect the stock split.

   Preferred Stock

     The board of directors of the Company is authorized to issue up to 225,000
shares of preferred stock, par value $.01 per share, in one or more series and
to fix the powers, voting rights, designations and preferences of each series.
During 1995, the board of directors authorized for issuance 225,000 shares of
Preferred Stock ranking senior to common stock. The Preferred Stock ranked
senior to common stock and was entitled to dividends, if declared by the board
of directors, in an amount equal to the pro rata share that would have been
received had the Preferred Stock been converted to common stock. Upon
liquidation, holders of Preferred Stock, on an equal basis, are entitled to
receive the preference value of $88.89, plus accumulated and unpaid dividends,
if any, before any distribution or payment is made to the holders of common
stock. No dividends have been declared or paid on Preferred Stock.

     The holders of Preferred Stock had the right to vote at special or annual
meetings of stockholders on all matters entitled to be voted on by holders of
common stock voting together as a single class with other shares entitled to
vote thereon. With respect to such vote, each share of Preferred Stock shall
entitle the holder to cast that number of votes per share as would be cast had
the Preferred Stock been converted to common stock at the Conversion Ratio.

                                      F-11
<PAGE>   67
                                 LHS GROUP INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     At the time of the initial public offering in 1997, the holders of
Preferred Stock converted each share of Preferred Stock into 40 shares of common
stock.

   Per Share Data

     Earnings per share was computed by dividing net earnings by the weighted
average number of shares of Common Stock outstanding. Retroactive effect has
been given to share and per share amounts for the stock split as noted above.

     In February 1998, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 98 ("SAB 98"), which revised the guidance for earnings
per share calculations in an IPO. As a result of SAB 98, the Company restated
its 1997 earnings per share calculation by excluding the effect of cheap stock,
which was included in the calculation of weighted shares outstanding for the
period prior to the public offering.

     Diluted EPS for the years ended December 31, 1999, 1998 and 1997 includes
the effect of options to purchase 1,809,487, 3,195,622 and 3,070,616 shares of
common stock, respectively and 37,019, 56,235 and 65,626 shares of restricted
common stock, respectively. Diluted EPS in 1997 also includes the weighted
average effect of the conversion of Preferred Stock into Common Stock prior to
the IPO. The effect was to increase diluted weighted average shares outstanding
by 3,328,768 in 1997. Options to purchase 4,160,210 shares of common stock at
prices ranging from $31.28 to $65.37 were outstanding during 1999 and options to
purchase 627,000 shares of common stock at prices ranging from $51.00 to $66.12
were outstanding during 1998 and options to purchase 1,824,000 shares of common
stock at prices ranging from $20 to $30 per share were outstanding during 1997,
but were not included in the computations of diluted earnings per share because
the options' exercise price was greater than the average market price of the
common shares and, therefore, the effect would be antidilutive.

3. MARKETABLE SECURITIES

     The following is a summary of investments in marketable debt securities
that the Company has classified as held-to-maturity securities:

<TABLE>
<CAPTION>
                                              GROSS        GROSS
                                AMORTIZED   UNREALIZED   UNREALIZED   ESTIMATED
                                  COST        GAINS        LOSSES     FAIR VALUE
                                ---------   ----------   ----------   ----------
<S>                             <C>         <C>          <C>          <C>
DECEMBER 31, 1999
Obligations of U.S. Government
   agencies...................   $ 1,499       $--         $  (1)      $ 1,498
U.S. Corporate Securities.....    49,310        26          (324)       49,012
                                 -------       ---         -----       -------
                                 $50,809       $26         $(325)      $50,510
                                 =======       ===         =====       =======
</TABLE>

                                      F-12
<PAGE>   68
                                 LHS GROUP INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                              GROSS        GROSS
                                AMORTIZED   UNREALIZED   UNREALIZED   ESTIMATED
                                  COST        GAINS        LOSSES     FAIR VALUE
                                ---------   ----------   ----------   ----------
<S>                             <C>         <C>          <C>          <C>
DECEMBER 31, 1998
Obligations of U.S. Government
   agencies...................   $20,739       $28         $  (2)      $20,765
U.S. Corporate Securities.....    41,479        26           (26)       41,479
                                 -------       ---         -----       -------
                                 $62,218       $54         $ (28)      $62,244
                                 =======       ===         =====       =======
</TABLE>

     The amortized cost and estimated fair value of debt securities held to
maturity at December 31, 1999 by contractual maturity are shown below. All debt
securities held-to-maturity at December 31, 1998 were due in one year or less.

<TABLE>
<CAPTION>
                                                   AMORTIZED   ESTIMATED
                                                     COST      FAIR VALUE
                                                   ---------   ----------
<S>                                                <C>         <C>
DECEMBER 31, 1999
Due in one year or less..........................   $49,009     $48,749
Due after one year...............................     1,800       1,761
                                                    -------     -------
                                                    $50,809     $50,510
                                                    =======     =======
</TABLE>

     There was no difference in the cost and estimated fair value of investments
in marketable equity securities that the Company has classified as
available-for-sale securities.

4. ACQUISITIONS

     In June 1999, the Company completed its merger with Priority Call, in which
Priority Call became a wholly owned subsidiary of LHS Group Inc. The Company
exchanged 4,105,120 shares of Common Stock for all the outstanding common
shares, preferred shares, and stock options or stock appreciation rights in
Priority Call. The Company recorded a charge of $4,320 in the second quarter
ended June 30, 1999 related to direct external costs incurred as a result of the
merger with Priority Call. Priority Call is a provider of network-based
solutions that enable telecommunications providers to offer subscribers a range
of enhanced services, including prepaid calling, credit/debit card calling,
enhanced messaging and one-number "follow-me" services.

     The Priority Call acquisition was accounted for as a pooling of interests,
and accordingly, the Company's consolidated financial statements and notes
thereto have been restated to include the financial position and results of
these mergers for all periods

                                      F-13
<PAGE>   69
                                 LHS GROUP INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

presented. The following information shows revenue and net income (loss) of the
separate companies for the periods preceding the combination (in thousands):

<TABLE>
<CAPTION>
                                                       YEAR ENDED
                                                      DECEMBER 31,
                                                   -------------------
                                                     1998       1997
                                                   --------   --------
<S>                                                <C>        <C>
Revenues:
   LHS...........................................  $163,182   $105,411
   Priority Call.................................    30,936     20,111
                                                   --------   --------
   Combined......................................  $194,118   $125,522
                                                   ========   ========
Net income (loss):
   LHS...........................................  $ 17,349   $ 11,208
   Priority Call.................................     1,336       (757)
                                                   --------   --------
   Combined......................................  $ 18,685   $ 10,451
                                                   ========   ========
</TABLE>

     In June 1998, the Company acquired the stock of Infocellular, Inc.
("Infocellular") for $8,484, paid by the issuance of 117,885 shares of Common
Stock and $1,327 in cash. Infocellular, which operates as a wholly-owned
subsidiary of the Company, is engaged in the business of providing point of sale
and customer acquisition software and related services to telecommunication
service providers. The purchase price was allocated as follows:

<TABLE>
<S>                                                           <C>
Purchased in-process research and development related to
   computer software technology.............................  $ 8,200
Fully developed computer software technology................      500
Current assets..............................................    1,327
Furniture and fixtures......................................      716
Other assets................................................      127
Other intangible assets.....................................      500
Current liabilities.........................................   (4,348)
Goodwill....................................................    1,462
                                                              -------
            Total purchase price............................  $ 8,484
                                                              =======
</TABLE>

     The acquisition was accounted for as a purchase and the results of
Infocellular's operations have been included in the consolidated financial
statements of LHS Group Inc. effective June 11, 1998. Goodwill recorded in
connection with this acquisition is being amortized over five years.

     The valuations of core and developed technologies and in-process research
and development were based on the present value of estimated future cash flows
over the lesser of: (i) five years or (ii) the period in which the product is
expected to be integrated into an existing LHS product. The resulting values
were reviewed for

                                      F-14
<PAGE>   70
                                 LHS GROUP INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

reasonableness based on the time and cost spent on the effort, the complexity of
the development effort and, in the case of in-process development projects, the
stage to which it had progressed. For in-process research and development, the
valuation was reduced for the core technology component of such product and the
percentage of product development remaining at the acquisition date. The
resulting in-process research and development amount of $8,200 is reflected as a
charge in the 1998 statement of operations. No income tax benefit was recognized
on the write-off of the purchased in-process research and development related to
computer software technology because the merger was structured as tax free to
the selling shareholders and the write-off of this asset and the amortization of
the other intangibles will not be deductible for federal income tax purposes.

     The following table summarizes pro forma unaudited results of operations as
if the acquisition was concluded on January 1, 1997. The adjustments to the
historical data reflects the amortization of goodwill and intangibles. This
unaudited pro forma financial information is not necessarily indicative of what
the combined operations would have been if LHS had control of Infocellular for
the periods presented.

<TABLE>
<CAPTION>
                                                     1998       1997
                                                   --------   --------
<S>                                                <C>        <C>
Revenues.........................................  $195,832   $130,472
Earnings before interest and taxes...............    37,571      4,590
Net Earnings.....................................    25,564        259
Per share:
   Basic net earnings............................  $   0.46   $   0.01
   Diluted net earnings..........................  $   0.43   $   0.00
</TABLE>

5. DEBT

     The Company has a short-term credit facility with a bank under which it can
borrow up to $2,500 at 7.5% per annum. At December 31, 1998, the Company had
$2,300 of outstanding letters of credit. Outstanding letters of credit incur a
fee of 1.5% of the amount outstanding. No other borrowings were outstanding
under the facility at December 31, 1999 or 1998.

     The Company's Priority Call subsidiary has a security agreement with a
bank, which allows the Company to borrow the lesser of (i) $2,000 or (ii) 80% of
eligible accounts receivable (working capital line) and up to $1,000 for
equipment purchases (equipment line). Borrowings under the working capital line
accrue interest at the bank's prime rate (8.5% at December 31, 1999) and
borrowings under the equipment line accrue interest at the bank's prime rate
plus 1/2%. Accounts receivable and inventory collateralize borrowings against
the working capital line. The equipment purchased collateralizes borrowings
against the equipment line. At December 31, 1998, the Company had a $1,000
advance against the equipment line and no borrowings against

                                      F-15
<PAGE>   71
                                 LHS GROUP INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the working capital line. Advances against the equipment note converted to a
term note payable as of December 31, 1998. The term note was repayable in 36
monthly installments of principal and accrued interest. In addition, the Company
had $520 outstanding under prior agreements with the bank that is being repaid
in monthly installments through January 2001. No borrowings were outstanding
under the security agreement, term note or other agreements at December 31,
1999.

6. LEASES

     LHS Group leases certain of its office buildings from a Company related
through common ownership under an operating lease agreement which expires in
2005. The lease agreement requires monthly rental payments of $26 adjusted
annually for inflation. Rental expenses under all operating leases totaled
$9,526, $6,034, and $4,158 for the years ended December 31, 1999, 1998 and 1997,
respectively. Telecommunications equipment in the amount of $598 was acquired
under capital lease arrangements. Future minimum lease payments are as follows:

<TABLE>
<CAPTION>
                                                      CAPITAL   OPERATING
                                                      LEASES     LEASES      TOTAL
                                                      -------   ---------   -------
<S>                                                   <C>       <C>         <C>
2000................................................   $192      $ 9,293    $ 9,485
2001................................................    174        7,973      8,147
2002................................................               3,664      3,664
2003................................................               1,324      1,324
2004................................................               1,086      1,086
                                                       ----      -------    -------
Total future minimum lease payments.................    366      $23,340    $23,706
                                                                 =======    =======
Less amounts representing interest..................    (34)
                                                       ----
Present value of net minimum lease payments.........   $332
                                                       ====
</TABLE>

7. INCOME TAXES

     The Company and each of its consolidated subsidiaries file separate tax
returns. For financial reporting, the Company and consolidated subsidiaries
calculate their respective tax liabilities on a separate return basis which are
combined in the accompanying consolidated financial statements.

                                      F-16
<PAGE>   72
                                 LHS GROUP INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                               YEAR ENDED DECEMBER 31,
                                              --------------------------
                                               1999      1998      1997
                                              -------   -------   ------
<S>                                           <C>       <C>       <C>
Currently payable income taxes:
   U.S. federal.............................  $ 7,233   $ 3,061   $  931
   Foreign..................................   15,054    12,729    3,620
Deferred income taxes (credit):
   U.S. federal.............................   (1,248)     (360)    (390)
   Foreign..................................    2,150     1,601    3,309
                                              -------   -------   ------
                                              $23,189   $17,031   $7,470
                                              =======   =======   ======
</TABLE>

     The net deferred income tax asset (liability) consists of the following:

<TABLE>
<CAPTION>
                                                       DECEMBER 31,
                                                     -----------------
                                                      1999      1998
                                                     -------   -------
<S>                                                  <C>       <C>
Deferred tax assets:
   Net operating loss carryforwards................  $    --   $   119
   Research and development tax credit.............    1,715     1,616
   Inventory Reserve...............................      344       602
   Depreciation Expense............................      389        --
   Accrued vacation and bonuses....................      547       916
   Tax on foreign differences......................    3,443        86
   Warranty expense................................      377       322
   Allowance for doubtful accounts.................      752       419
   Allowance for current unbilled..................      424        --
   Accrued commission and contractor...............      317        --
   Other...........................................      729     1,647
   Valuation allowance.............................       --    (2,423)
                                                     -------   -------
                                                       9,037     3,304
Deferred tax liabilities:
   Unbilled receivables............................   (2,101)   (1,075)
   Depreciation expense............................       (7)      (83)
   Other...........................................   (1,353)       --
   Tax on foreign differences......................   (1,918)   (5,359)
                                                     -------   -------
                                                      (5,379)   (6,517)
                                                     -------   -------
                                                     $ 3,658   $(3,213)
                                                     =======   =======
</TABLE>

                                      F-17
<PAGE>   73
                                 LHS GROUP INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The reconciliation of income tax expense computed using the statutory tax
rates in the United States to the income tax expense recognized in the financial
statements is as follows:

<TABLE>
<CAPTION>
                                               YEAR ENDED DECEMBER 31,
                                              --------------------------
                                               1999      1998      1997
                                              -------   -------   ------
<S>                                           <C>       <C>       <C>
Tax at statutory rates......................  $21,315   $12,144   $6,094
Differences resulting from higher tax rates
   in foreign countries.....................      976     2,564    1,119
Non-deductible write off of in-process
   research and development.................       --     2,778       --
Non-deductible write off of merger costs....      898        --       --
Other.......................................       --      (455)     257
                                              -------   -------   ------
                                              $23,189   $17,031   $7,470
                                              =======   =======   ======
</TABLE>

     During 1999, 1998 and 1997 the Company received $33,111, $66,500 and
$10,387, respectively, in tax deductions from the exercise of nonqualified
employee stock options of which $12,000, $10,161 and $931, respectively, was
realized and recognized as a reduction to taxes currently payable and an
increase to equity. At December 31, 1999 and 1998, the Company had tax net
operating loss carryforwards of $64,973 and $58,908 which is primarily the
result of the tax deductions from the exercises of the nonqualified stock
options. The benefit of the tax net operating loss carryforwards will be
credited to additional paid-in-capital when realized and is not reflected in
deferred tax assets at December 31, 1999.

8. RELATED PARTY TRANSACTIONS

     The Company leases office space and housing space for certain of its
employees from partnerships consisting in part of one of the Company's
directors. During the years ended December, 31, 1999, 1998, and 1997, the
Company made lease payments totaling $314, $382, and $387, respectively, to the
partnerships. The Company periodically charters the use of an aircraft owned by
a director of the Company. During the years ended December 31, 1999 and 1998,
the Company paid approximately $172 and $103 for its use of the aircraft.

9. MAJOR CUSTOMERS

     No customer accounted for more than 10% of revenues in 1999 and 1998 while
in 1997, one customer accounted for 12% of revenues.

                                      F-18
<PAGE>   74
                                 LHS GROUP INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10.   RETIREMENT PLANS

     The Company maintains the LHS Communications Systems, Inc. 401(k) Plan
("LHS Plan") and the Priority Call Management, Inc. 401(k) Profit Sharing Plan
("PCM Plan"). Employees age 21 or older are eligible to participate in the
quarter following their date of hire and to elect to defer a percentage of
his/her salary. The Company has the discretion to make contributions to the
401(k) plans. During 1999 and 1998, the Company made matching contributions to
the LHS Plan of $1,129 and $520, respectively. During 1999 and 1998, the Company
made no matching contributions to the PCM Plan.

11. EMPLOYEE STOCK PLANS

     The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, when the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.

     The Company has a nonqualified Stock Incentive Plan (the "Plan") under
which stock options, restricted stock and other stock-based awards may be
granted to certain officers, directors, key employees and non-employee
directors. Awards may be granted under the Plan for up to 16,000,000 shares of
common stock. All options are exercisable over a five year period with 25%
vesting on the first anniversary of the grant date and the remaining 75% vesting
ratable over 48 months. The terms of the options are 10 years from the date of
the grant at which time all unexercised options expire and are again available
for future grant.

     The Company has an Employee Stock Purchase Plan ("ESPP"), established in
1998, under which employees may subscribe to purchase shares of Common Stock
through payroll deductions of up to 15% of eligible compensation. The purchase
price is the lower of 85% of market value at the beginning or the end of the
participation period. The aggregate number of shares purchased by an employee
may not exceed 1000 shares and $25 of fair market value annually. A total of
500,000 shares are available for purchase under the plan. During the years ended
December 31, 1999 and 1998, options for 52,164 and 24,134 were exercised at a
weighted average price per share of $27.85 and $51.62, respectively.

                                      F-19
<PAGE>   75
                                 LHS GROUP INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Pro forma information regarding net earnings and earnings per share is
required by SFAS 123, which also requires that the information be determined as
if the Company has accounted for its employee stock options granted subsequent
to December 31, 1994 under the fair value method of that Statement. In 1997, the
fair value for options granted was estimated at the date of grant using the
Black Scholes option pricing models with the following assumptions: volatility
of .778; average risk-free interest rate of 6.2%; no anticipated dividends; and
a weighted-average expected life of the option of 5.3 years. In 1998, the fair
value for options granted was estimated at the date of grant using the Black
Scholes option pricing models with the following assumptions: volatility of
 .713; average risk-free interest rate of 5.50%; no anticipated dividends; and a
weighted-average expected life of the option of 5.2 years. In 1999, the fair
value for options granted was estimated at the date of grant using the Black
Scholes option pricing models with the following assumptions: volatility of
 .644; average risk-free interest rate of 5.56%; no anticipated dividends; and a
weighted-average expected life of the option of 5.1 years.

     Option valuation models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. The weighted average
grant date fair value of options granted during the year 1997 using the minimum
value option pricing model was $28.65. The weighted average grant date fair
value of options granted during 1998 and 1999 using the Black-Scholes option
pricing model was $25.65 and $20.09, respectively.

     For purposes of SFAS 123 pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period as follows:

<TABLE>
<CAPTION>
                                                        1999      1998     1997
                                                       -------   ------   ------
<S>                                                    <C>       <C>      <C>
Pro forma net earnings...............................  $21,160   $7,520   $7,792
Basic earnings per share.............................  $  0.37   $ 0.13   $ 0.17
Diluted earnings per share...........................  $  0.36   $ 0.12   $ 0.15
</TABLE>

                                      F-20
<PAGE>   76
                                 LHS GROUP INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A summary of the Company's stock option activity, and related follows:

<TABLE>
<CAPTION>
                                                                 WEIGHTED
                                                NUMBER OF     AVERAGE PRICE
                                              SHARES ISSUED     PER SHARE
                                              -------------   --------------
<S>                                           <C>             <C>
Outstanding as of January 1, 1997...........    6,682,149         $ 3.01
   Granted..................................    2,412,776          19.67
   Exercised................................     (700,710)          2.65
   Cancelled................................     (673,053)          3.26
                                               ----------         ------
Outstanding as of December 31, 1997.........    7,721,162           8.22
   Granted..................................    2,670,320          37.87
   Exercised................................   (2,070,955)          7.03
   Cancelled................................     (640,579)          8.76
                                               ----------         ------
Outstanding as of December 31, 1998.........    7,679,948          18.71
   Granted..................................    5,228,218          33.52
   Exercised................................   (1,636,941)          6.86
   Cancelled................................   (2,435,875)         28.06
                                               ----------         ------
Outstanding as of December 31, 1999.........    8,835,350         $27.35
                                               ==========         ======
Exercisable as of December 31, 1999.........    1,899,559         $17.83
                                               ==========         ======
Exercisable as of December 31, 1998.........    1,483,019         $ 5.06
                                               ==========         ======
</TABLE>

     Information regarding stock options outstanding as of December 31, 1999 is
as follows:

<TABLE>
<CAPTION>
                      OPTIONS OUTSTANDING
----------------------------------------------------------------       OPTIONS EXERCISABLE
                                  WEIGHTED-                        ----------------------------
                                   AVERAGE          WEIGHTED-                      WEIGHTED-
   RANGE OF        NUMBER         REMAINING          AVERAGE         NUMBER         AVERAGE
EXERCISE PRICES  OUTSTANDING   CONTRACTUAL LIFE   EXERCISE PRICE   EXERCISABLE   EXERCISE PRICE
---------------  -----------   ----------------   --------------   -----------   --------------
<S>              <C>           <C>                <C>              <C>           <C>
$ 2.65            1,485,515          6.4              $ 2.65          739,788        $ 2.65
$ 4.25 -  5.84      275,688          5.9                5.56          220,970          5.49
$ 7.12 -  8.92      251,526          7.7                7.65           90,877          7.55
$11.04 - 14.87       76,390          8.2               14.01           24,418         14.21
$16.99 - 25.00      809,364          8.1               21.83          174,763         22.67
$25.63 - 38.31    4,151,166          9.2               30.80          436,512         34.02
$41.87 - 58.62    1,780,701          8.9               47.99          210,591         50.96
$65.37 - 65.37        5,000          8.5               65.37            1,640         65.37
                  ---------          ---              ------        ---------        ------
$ 2.65 - 65.37    8,835,350          8.5              $27.35        1,899,559        $17.83
                  =========          ===              ======        =========        ======
</TABLE>

                                      F-21
<PAGE>   77
                                 LHS GROUP INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. SEGMENT INFORMATION

     In accordance with the requirements of SFAS 131, the following disclosure
represents the information used by management when evaluating the operating
performance of its operating segments. The information reviewed by management
includes the operating revenue from external customers and identifiable assets
for the Company's three geographic areas, the Americas, Europe and Asia-Pacific:

<TABLE>
<CAPTION>
                                            1999       1998       1997
                                          --------   --------   --------
<S>                                       <C>        <C>        <C>
Revenues:
   Americas.............................  $113,814   $ 85,816   $ 58,569
   Europe...............................   118,425     86,099     50,462
   Asia-Pacific.........................    30,357     22,203     16,491
                                          --------   --------   --------
            Total in financial
               statements...............  $262,596   $194,118   $125,522
                                          ========   ========   ========
Long-lived assets:
   Americas.............................  $ 27,990   $ 16,688
   Europe...............................     9,789      6,589
   Asia-Pacific.........................       836        681
                                          --------   --------
            Total in financial
               statements...............  $ 38,615   $ 23,958
                                          ========   ========
</TABLE>

13. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

     On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). The Company
reported comprehensive income in its statement of stockholders' equity. The
adoption of SFAS 130 resulted in revised and additional disclosures but had no
effect on the financial position, results of operations, or liquidity of the
Company.

     In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which establishes standards for the way public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders.
Operating segments are components of an enterprise about which separate
financial information is available which is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company
adopted SFAS 131 in 1998, and the effect of the adoption was not material to the
consolidated financial statements. (see Note 12).

                                      F-22
<PAGE>   78
                                 LHS GROUP INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
requires the recognition of all derivatives as either assets or liabilities in
the balance sheet and the measurement of those instruments at fair value. The
accounting for changes in the fair value of a derivative depends on the planned
use of the derivative and the resulting designation. The Company is required to
implement the statement in the first quarter of the year 2001. The Company has
not used derivative instruments and believes the impact of adoption of this
statement will not have significant effect on the financial statements.

     The American Institute of Certified Public Accountants issued SOP 97-2, SOP
98-4 and SOP 98-9 to clarify guidance on applying generally accepted accounting
principles to software transactions and to provide guidance on when revenue
should be recognized and in what amounts for licensing, selling, leasing, or
otherwise marketing computer software. The Company adopted this guidance during
1997. Such adoption had no effect on the Company's methods of recognizing
revenue.

     On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"). SAB 101 summarizes certain areas of the
Staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company believes that its current
revenue recognition principles comply with SAB 101.

14. UNAUDITED QUARTERLY INFORMATION

<TABLE>
<CAPTION>
                                                           QUARTER ENDED
                                            -------------------------------------------
                                            MARCH 31,   JUNE 30,   SEPT. 30,   DEC. 31,
                                              1999        1999       1999        1999
                                            ---------   --------   ---------   --------
<S>                                         <C>         <C>        <C>         <C>
Revenues..................................   $58,878    $66,021     $67,985    $69,711
Gross margin..............................    37,242     42,298      45,499     48,174
Net earnings (loss).......................     8,249      6,154      11,738     12,292
Net earnings (loss) per share (diluted)
   Basic..................................   $   .15    $   .11     $   .20    $   .21
   Diluted................................   $   .14    $   .10     $   .20    $   .21
</TABLE>

                                      F-23
<PAGE>   79
                                 LHS GROUP INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                           QUARTER ENDED
                                            -------------------------------------------
                                            MARCH 31,   JUNE 30,   SEPT. 30,   DEC. 31,
                                              1999        1999       1999        1999
                                            ---------   --------   ---------   --------
<S>                                         <C>         <C>        <C>         <C>
Revenues..................................   $39,281    $44,087     $52,119    $58,631
Gross margin..............................    23,461     26,854      32,191     36,819
Net earnings (loss).......................     4,500     (2,062)      7,293      8,954
Net earnings (loss) per share (diluted)
   Basic..................................   $   .08    $ (0.04)    $   .13    $   .16
   Diluted................................   $   .08    $ (0.04)    $   .13    $   .15
</TABLE>

15. SUBSEQUENT EVENT -- UNAUDITED

     On March 15, 2000, Sema Group plc ("Sema") entered into a definitive
agreement with the Company to acquire all of the outstanding shares of LHS Group
Inc. The Company's stockholders will receive American Depository Shares
representing 2.6 new Sema ordinary shares for each LHS share. The transaction is
subject to stockholder votes, regulatory approvals and other customary closing
conditions. In conjunction with the merger agreement LHS has granted Sema an
option to purchase approximately 10.3 million shares of LHS common stock from
LHS. The option is exercisable at any time until the termination of the
agreement or the completion of the merger. The exercise price of the option will
be the amount equal to the Market Value of 2.6 Sema ordinary shares on the day
the option is exercised.

                                      F-24