CSG SYSTEMS INTERNATIONAL INC, 10-K/A, 1998-04-09

CSG SYSTEMS INTERNATIONAL INC
10-K/A, 1998-04-09
COMPUTER PROCESSING & DATA PREPARATION

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K/A AMENDMENT NO. 1

(Mark One)

[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-27512

CSG SYSTEMS INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 47-0783182
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

7887 EAST BELLEVIEW, SUITE 1000
ENGLEWOOD, COLORADO 80111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)

(303) 796-2850
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE

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

The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the last sales price of such stock, as of
the close of trading on February 28, 1998 was $757,002,330.

Shares of common stock outstanding at February 28, 1998: 25,543,284.

DOCUMENTS INCORPORATED BY REFERENCE

PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR ITS ANNUAL MEETING OF
STOCKHOLDERS TO BE FILED ON OR PRIOR TO APRIL 30, 1998, ARE INCORPORATED BY
REFERENCE INTO PART III OF THE FORM 10-K.

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CSG SYSTEMS INTERNATIONAL, INC.

1997 FORM 10-K

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
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PART I

<C> <S> <C>
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 9
Item 3. Legal Proceedings............................................. 9
Item 4. Submission of Matters to a Vote of Security Holders........... 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters...................................................... 11
Item 6. Selected Financial Data....................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 14
Item 8. Financial Statements and Supplementary Data................... 24
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure..................................... 50
PART III
Item 10. Directors and Executive Officers of the Registrant............ 50
Item 11. Executive Compensation........................................ 50
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 50
Item 13. Certain Relationships and Related Transactions................ 50
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K.......................................................... 50
Signatures............................................................. 52
</TABLE>

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ITEM 1. BUSINESS

GENERAL

CSG Systems International, Inc. (the "Company" or "CSG") was formed in
October 1994 and acquired all of the outstanding stock of CSG Systems, Inc.
(formerly Cable Services Group, Inc.) from First Data Corporation ("FDC") in
November 1994 (the "Acquisition"). CSG Systems, Inc. had been a subsidiary or
division of FDC from 1982 until the Acquisition.

The Company's principal executive offices are located at 7887 East
Belleview, Suite 1000, Englewood, Colorado 80111, and the telephone number at
that address is (303) 796-2850. The Company's common stock is listed on the
Nasdaq National Market under the symbol "CSGS".

COMPANY OVERVIEW

The Company is a leading provider of customer care and billing solutions for
cable television and direct broadcast satellite ("DBS") providers, and also
serves on-line services and telecommunications providers. The Company's
products and services enable its clients to focus on their core businesses,
improve customer service, and enter new markets and operate more efficiently.
The Company offers its clients a full suite of processing and related
services, and software and professional services which automate customer care
and billing functions. These functions include set-up and activation of
customer accounts, sales support, order processing, invoice calculation,
production and mailing, management reporting, and customer analysis for target
marketing. The Company's products and services combine the reliability and
high volume transaction processing capabilities of a mainframe platform with
the flexibility of client/server architecture. The Company generated revenue
of $171.8 million in 1997 compared to $132.3 million in 1996, an increase of
29.9%, and revenue grew at a compound annual growth rate of 27.0% over the
three year period ended December 31, 1997.

The Company has established a leading presence by developing strategic
relationships with major participants in the cable television and DBS
industries, and derived approximately three-quarters of its revenues in 1997
from the U.S. cable television industry. The Company's U.S. clients include
six of the ten largest cable television service providers, four Regional Bell
Operating Companies ("RBOCs") for video services, two DBS service providers,
and an on-line services company. During 1997, the Company derived
approximately 77% of its total revenues from processing and related services.
At December 31, 1997, the Company was servicing client sites having an
aggregate of 21.1 million customers in the U.S., compared to 19.2 million
customers serviced as of December 31, 1996. The Company has contracts to
convert a significant number of additional customers to its customer care and
billing systems. From January 1, 1998 through February 28, 1998, the Company
converted and processed approximately 1.6 million additional customers on its
systems.

The convergence of communications markets and growing competition are
increasing the complexity and cost of managing the interaction between
communications service providers and their customers. Customer care and
billing systems coordinate all aspects of the customer's interaction with a
service provider, from initial set-up and activation, to service activity
monitoring, through billing and accounts receivable management. The growing
complexity of communications services and the manner in which they are
packaged and priced, has created increased demand for customer care and
billing systems which deliver enhanced flexibility and functionality. Because
of the significant level of technological expertise and capital resources
required to develop and implement such systems successfully, the majority of
cable television, DBS, and wireless service providers have elected to
outsource customer care and billing.

The Company entered into a 15-year contract (the "TCI Contract") with a
Tele-Communications, Inc. ("TCI") affiliate during the third quarter of 1997.
Subject to performance of the Company's obligations, the contract provides
for: (i) the Company to be TCI's exclusive provider of customer care and
billing solutions for analog and digital cable television, on-line services,
wireline residential telephony, and print and mail services; and (ii) minimum
financial commitments by TCI based on a minimum of 13.0 million TCI cable
television customers, of which approximately 4 million were on the Company's
system prior to the execution of the TCI Contract.

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The Company expanded its operations internationally through the acquisition
of Bytel Limited ("Bytel") in June 1996. Bytel, established in 1992, is the
leading provider of customer care and billing solutions in the United Kingdom
to providers of combined cable television and telephony (business and
residential) services. Bytel serves a total of approximately 1 million
customers, approximately 48% of whom receive multiple services. During 1997,
the Company derived 9.6% of its total revenues from international sources.

GROWTH STRATEGY

The Company's growth strategy is designed to provide revenue and profit
growth. The key elements of the strategy include:

Expand Core Processing Business. The Company will continue to leverage its
investment and expertise in high-volume transaction processing to expand its
processing business. The processing business provides highly predictable
recurring revenues through multi-year contracts with a client base which
includes leading communications service providers in growing markets. The
Company increased the number of customers processed on its systems from 16.4
million as of December 31, 1994 to 21.1 million as of December 31, 1997, with
approximately 11 million additional customers under contract to be converted.
The Company's approach to customer care and billing provides a full suite of
products and services which combines the reliability and high volume
transaction processing capabilities of a mainframe platform with the
flexibility of client/server architecture.

Introduce New Products and Services. The Company has a significant installed
client base to which it can sell additional value-added products and services.
Through the introduction of new client/server software applications, including
Advanced Customer Service Representative(TM) ("ACSR"(TM)), Enhanced Statement
Presentation(TM) ("ESP"(TM)) and CSG VantagePoint(TM), the Company has
increased its annual revenue per customer from $5.30 in 1994 to $7.73 in 1997.
The Company will continue to develop software applications, which will enhance
and extend the functionality of its customer care and billing solution and
also provide additional revenue opportunities.

Enter New Markets. As communications markets converge, the Company's
products and services can facilitate efficient entry into new markets by
existing or new clients. For example, as the cable television providers expand
into on-line services and telephony, the Company will continue to offer the
customer care and billing solutions necessary to meet their needs. The Company
also seeks to identify other industries, such as utilities, that with
modifications to the Company's existing technology, could be served by the
Company's customer care and billing solutions.

Enhance Growth Through Focused Acquisitions. The Company follows a
disciplined approach to acquire assets and businesses which provide the
technology and technical personnel to expedite the Company's product
development efforts, provide complementary products or services, or provide
access to new markets or clients.

Continue Technology Leadership. The Company believes that its technology in
customer care and billing solutions gives communications service providers a
competitive advantage. The Company's continuing investment in research and
development is designed to position the Company to meet the growing and
evolving needs of existing and potential clients.

Pursue International Opportunities. The Company believes that privatization
and deregulation in international markets presents new opportunities for
customer care and billing providers. In the United Kingdom, Bytel is the
leading provider of customer care and billing solutions to providers of
combined cable television and telephony (business and residential) services.
The Company expects to complete major project enhancements to Bytel's customer
care and billing system in 1998, including UNIX/Oracle platform conversion and
internationalization to accommodate various currencies, postal codes, and tax
requirements. The Company intends to market the product in European and other
international markets.

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CSG SERVICES AND PRODUCTS

The Company serves the converging communications markets through processing
and related services (offered in a service bureau environment) and software
products and professional services.

Processing and Related Services

The Company's primary processing and related services products are as
follows:

Communications Control System and Related Products. Communications Control
System(TM) ("CCS"(TM)) is a customer care and billing system used primarily by
clients in the cable television and DBS industries. The primary purpose of CCS
is to provide the Company's clients with a complete set of customer management
and information services, including enrollment of new customers, event
ordering, scheduling of on-site installations and repairs, customer service
support, and billing. Designed for high volume transaction processing, CCS is
offered as a service bureau application, with clients accessing it through a
telecommunications network via terminals or personal computers at the clients'
location. The Company maintains all records and files for its clients and
performs statement processing and invoice mailing in conjunction with the
other services. The Company provides a wide variety of ancillary services to
its clients, such as service activation, pay-per-view, and archival of data.
The CCS system offers flexible reporting capabilities and interfaces with all
major vendors so clients can utilize pay-per-view, automated number
identification and audio response units. For the years ended December 31,
1995, 1996, and 1997, the Company generated 84.8%, 77.3%, and 76.7%,
respectively, of its total revenues from CCS and related services and software
products.

Financial Services. The Company offers a comprehensive set of processing-
related financial services (e.g., credit card processing, electronic funds
transfer, automated refund check processing, and electronic lockbox service)
designed to improve operational efficiencies by saving employee time and
improving a client's cash flow.

Statement Printing and Mailing. The Company provides statement printing and
mailing services for all of its CCS clients. The Company also provides
specialized printing and mailing for clients not on the Company's customer
care and billing systems. The Company's statement processing center handles
multiple billing cycles for all clients and, during the year ended December
31, 1997 printed and mailed in excess of 21 million pieces per month on
average. The Company offers its clients a number of marketing services based
on information contained in the client's CCS customer database, including
insert design and printing, direct mailing, and data downloads used to support
market research.

Enhanced Statement Presentation. ESP enables clients to customize all
aspects of their billing statements, create a unique identity, and build a
stronger relationship with the customer. ESP enables clients to send
specialized messages or coupons on monthly bills, depending on buying
patterns, payment histories, and other customer specific information.

Software Products and Professional Services

The Company's currently available software products include the following:

Advanced Customer Service Representative and related modules. ACSR is a
client/server, front end to the CCS product that employs a graphical user
interface. ACSR features include a customizable reference library, e-mail, a
news bulletin board, and pull-down items and an icon toolbar that makes
navigation easy. ACSR runs on a local area network at the client's service
center, which is connected to the CCS mainframe. Customer Interaction
Tracking(TM) ("CIT"(TM)) is an add-on module to ACSR which allows customer
service representatives, using a relational database management system, to
track and recall automatically all interaction and activity with customers.
ACSR provides clients with an integrated solution for billing and servicing
telephony and on-line services customers independently or in conjunction with
other business lines.

CSG Vantage. CSG Vantage(TM) is a software product used in conjunction with
CCS. Data is maintained by the Company in a specially designed database which
is updated daily from CCS. Clients are provided with an

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ad hoc query and reporting tool that runs on local personal computers to
access detailed information stored in the database allowing clients to analyze
operations, identify trends, and target markets.

CSG VantagePoint. CSG VantagePoint is the Company's data marketing and
management warehouse product which can be licensed for use at the client's own
facility. The database structure facilitates the analysis and identifications
of the demographic, psychographic and transactional parameters of the client
data. The product offers a modular approach, enabling a provider to select the
applications most appropriate for its individual situation.

CSG.web. CSG.web(TM) provides clients with a secure World Wide Web ("WWW")
interactive interface for their customers. CSG.web enables customers to
upgrade their services, order pay-per-view events, view information regarding
available services, and view and pay their statements on-line via the WWW.
CSG.web is incorporated into the client's web site, running on its web server,
which is connected to the CCS mainframe.

SMS. Bytel's SMS product provides a full range of business support software
solutions for the cable television and telecommunications industries,
primarily in the United Kingdom. The product's functionality includes customer
care, tariffing, provisioning and activation, cable service activation,
collections, equipment inventory, call record processing, rating, dispatch,
trouble tickets, call record mediation, billing, fault management, sales and
marketing, and management reporting. Bytel expects to complete major project
enhancements to its SMS system in 1998, including year 2000 compliance,
UNIX/Oracle platform conversion, internationalization to accommodate various
currencies, postal codes, and tax requirements.

Professional Services. The Company offers professional services to address
the needs of clients through specialized services such as technical
consulting, custom application development, business process definition,
project management, decision support systems, training, and software and
systems integration. The Company supports clients in implementing the
Company's solutions and enables clients to take advantage of the full range of
functionality offered by the Company's products and services.

Software Maintenance and Support

The Company provides maintenance services on all of its software products.
Maintenance fees are typically based upon a percentage of the software license
fee paid by the customer. Virtually all new software customers purchase
maintenance services. Maintenance services are typically sold for multi-year
periods in conjunction with the software license. Maintenance services
typically consist of enhancements and updates to the software products, as
well as telephone support concerning the operation of the programs.

Software Products in Development

The following software products are in development and not currently
available:

Acquisition of SUMMITrak Assets. In September 1997, and contemporaneously
with the effectiveness of the TCI Contract, the Company acquired certain
SUMMITrak(TM) assets, a client/server, open systems, in-house customer care
and billing system in development. The assets purchased consisted primarily of
software, hardware, assembled workforce and intellectual property. The total
purchase price was approximately $159 million, with approximately $105 million
allocated to purchased research and development ("R&D") and the remaining
amount allocated to long-lived assets. Purchased R&D represents R&D of
software technologies which had not reached technological feasibility as of
the acquisition date, and had no other alternative future use. Purchased R&D
was charged to operations in the fourth quarter of 1997.

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include CSG Dispatch(TM), CSG TechNet(TM), Interactive Voice Response Services
("IVR"(TM)), and Closed Loop Inventory. CSG Dispatch provides automated work
order routing and technician assignment and provides the dispatcher with a
geographic information system (GIS)-based method for monitoring and
reassigning work orders throughout the day. CSG TechNet is an optional add-on
component to CSG Dispatch that provides two-way data communications to the
technician in the field, allowing the technician to close work orders, send
and receive messages, and perform other functions. IVR Services allows
customers to make pay-per-view orders and perform other transactions over the
telephone by interacting with an IVR. Closed Loop Inventory provides a method
for tracking client equipment in the field, primarily the set top boxes that
are used in the field for communication services. The Company expects to
complete these products by the end of 1998 and early 1999.

Usage Handling System. The Usage Handling System ("UHS"(TM)) is a highly
scalable, highly configurable rating component that allows usage events such
as telephone calls and data connection events to be rated and billed via CCS.

CSG Phoenix. The Company is developing CSG Phoenix(TM), a customer care and
billing system which uses a three-tier client/server architecture, composed of
the graphical user interface, the business logic, and the database. CSG
Phoenix uses an open systems approach including a UNIX operating system, C and
C++ programming languages, APIs, and object-oriented design, analysis, and
implementation. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Non-Recurring Charges."

CLIENTS

The Company's business is concentrated in the U.S. within the cable
television, DBS and on-line services industries. Based on 1997 revenues, all
of the Company's largest clients are cable television providers except
Echostar (DBS) and Prodigy Services Company (on-line services), and all of
such clients are in the U.S. except Telewest and Bell Cable Media. The
Company's largest clients based on 1997 revenues are listed below in
alphabetical order:

<TABLE>
<S> <C>
Bell Cable Media Prodigy Services Company
Century Communications
Corporation TCI and TCI Satellite Entertainment, Inc.
Comcast Corporation Telewest
Echostar Time Warner
Falcon Cable TV US West Media Group
</TABLE>

During the years ended December 31, 1995, 1996, and 1997, revenues from TCI
represented approximately 25.2%, 25.9% and 32.9% of total revenues, and
revenues from Time Warner Cable and its affiliated companies ("Time Warner")
represented approximately 27.9%, 22.9% and 20.1% of total revenues,
respectively. The Company has separate processing agreements with multiple
affiliates of Time Warner and provides products and services to them under
separately negotiated and executed contracts.

CLIENT AND PRODUCT SUPPORT

The Company's clients typically rely on CSG for ongoing support and training
needs relating to the Company's products. The Company has a multi-level
support environment for its clients. The Company's Product Support Center
operates 24 hours a day, seven days a week. Clients call an 800 number and
through an automated voice response unit, direct their calls to the specific
product support representative who can answer their question. In addition,
each client has a dedicated account manager. This professional helps clients
resolve strategic and business issues. The Company has a full-time training
staff and conducts ongoing training sessions both in the field and at its
training facility located in Omaha, Nebraska.

SALES AND MARKETING

The Company has assembled a direct sales and sales support organization. The
market for the Company's products and services is concentrated, with each
existing and potential client representing multiple revenue

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opportunities. The Company has organized its sales efforts around senior level
account managers who are responsible for new revenues and renewal of existing
contracts within an account. Account managers are supported by direct sales
and sales support personnel who are experienced in the various products and
services that the Company provides.

FDC DATA PROCESSING FACILITY

The Company outsources to FDC data processing and related services required
for operation of the CCS system. The Company's proprietary software is run in
FDC's facility to obtain the necessary mainframe computer capacity and support
without making the substantial capital investment that would be necessary for
the Company to provide this service internally. The Company's clients are
connected to the FDC facility through a combination of private and
commercially provided networks. FDC provides the services to the Company
pursuant to a five year agreement which is scheduled to expire December 31,
2001. The Company believes it could obtain data processing services from
alternative sources, if necessary.

RESEARCH AND DEVELOPMENT

The Company's product development efforts are focused on developing new
products and improving existing products. The Company believes that the timely
development of new applications and enhancements is essential to maintaining
its competitive position in the marketplace.

The Company's total R & D expense, excluding purchased R & D, was $14.3
million, $20.2 million, and $22.6 million for the years ended December 31,
1995, 1996, and 1997, or 14.8%, 15.3%, and 13.2% of total revenues,
respectively. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

COMPETITION

The market for customer care and billing systems in the converging
communications industries is highly competitive. The Company competes with
both independent providers and in-house developers of customer management
systems. The Company believes its most significant competitors are USCS
International, Inc. ("USCS"), Cincinnati Bell Information Systems ("CBIS"),
and in-house systems. As the Company enters additional market segments, it
expects to encounter additional competitors. Some of the Company's actual and
potential competitors have substantially greater financial, marketing and
technological resources than the Company.

The Company believes that the principal competitive factors in its markets
include time to market, flexibility and architecture of the system, breadth of
product features, product quality, customer service and support, quality of R
& D effort, and price.

PROPRIETARY RIGHTS AND LICENSES

The Company relies on a combination of trade secrets and copyright laws,
patents, license agreements, non-disclosure and other contractual provisions,
and technical measures to protect its proprietary rights. The Company
distributes its products under service and software license agreements which
typically grant clients non-exclusive licenses to use the products. Use of the
software products is restricted and subject to terms and conditions
prohibiting unauthorized reproduction or transfer of the software products.
The Company also seeks to protect the source code of its software as a trade
secret and as a copyrighted work. Despite these precautions, there can be no
assurance that misappropriation of the Company's software products and
technology will not occur. The Company also incorporates via licenses or
reselling arrangements a variety of third party technology and software
products that provide specialized functionality within its own products and
services. Although the Company believes that its product and service offerings
conform with such arrangements and do not infringe upon the intellectual
property rights of the other parties to such arrangements or of other third
parties, there can be no assurance that any third parties will not assert
contractual or infringement claims against the Company.

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EMPLOYEES

As of December 31, 1997, the Company had a total of 1,141 employees, an
increase of 249 from December 31, 1996. The Company's success is dependent
upon its ability to attract and retain qualified employees. None of the
Company's employees are subject to a collective bargaining agreement. The
Company believes that its relations with its employees are good.

ITEM 2. PROPERTIES

The Company leases five facilities, totaling approximately 123,000 square
feet in Denver, Colorado and surrounding communities. The Company utilizes
these facilities primarily for (i) corporate headquarters, (ii) sales and
marketing activities, (iii) business offices for its professional consultants,
and (iv) certain R & D activities. The leases for these facilities expire in
the years 1998 through 2004.

The Company leases four facilities, totaling approximately 191,000 square
feet in Omaha, Nebraska, including a lease entered into subsequent to December
31, 1997. The Company utilizes these facilities primarily for (i) client
services and product support, (ii) systems and programming activities, (iii) R
& D activities, (iv) statement production and mailing, and (v) general and
administrative functions. The leases for these facilities expire in the years
1998 through 2007.

The Company leases office space totaling 12,800 square feet in Slough,
Berkshire, in the United Kingdom for its U. K. operations. The lease for this
facility expires in 2002.

The Company believes that its facilities are adequate for its current needs
and that additional suitable space will be available as required. The Company
also believes that it will be able to extend leases as they terminate. See
Note 9 to the Company's Consolidated Financial Statements for information
regarding the Company's obligations under its facilities leases.

ITEM 3. LEGAL PROCEEDINGS

In October 1996, a former senior vice president of CSG Systems filed a
lawsuit against the Company and certain of its officers in the District Court
of Arapahoe County, Colorado. The suit claims that certain amendments to stock
agreements between the plaintiff and the Company are unenforceable, and that
the plaintiff's rights were otherwise violated in connection with those
amendments. The plaintiff is seeking damages of approximately $2.0 million,
and in addition, seeks to have such damages trebled under certain Colorado
statutes that the plaintiff claims are applicable. The Company denies the
allegations and intends to vigorously defend the lawsuit at all stages. The
trial is currently scheduled to commence in July 1998.

From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. In the opinion
of the Company's management, after consultation with outside counsel, the
Company is not presently a party to any material pending or threatened legal
proceedings except as further described above.

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

A special meeting of the stockholders of the Company was held on December
16, 1997. At that meeting, the stockholders were asked to approve an amendment
to the Company's Stock Incentive Plan (the "1996 Plan"), as adopted by the
Board on September 3, 1997, which would increase the number of shares of
Common Stock available under the 1996 Plan from 2,400,000 shares to 4,000,000
shares. 17,950,626 votes were cast for the amendment, 3,291,713 were cast
against it, and there were 74,486 abstentions.

***

EXECUTIVE OFFICERS OF THE REGISTRANT

The present executive officers of the Company are Neal C. Hansen (Chairman
of the Board and Chief Executive Officer), John P. Pogge (President and Chief
Operating Officer), Greg A. Parker (Vice President and

<PAGE>

Chief Financial Officer) and Larry G. Fendley (Executive Vice President,
Product Delivery Services). Information concerning such executive officers
appears in the following paragraphs:

Mr. Hansen, 57, is a co-founder of the Company and has been the Chairman of
the Board and Chief Executive Officer and a director of the Company since its
inception in 1994. From 1991 until founding the Company, Mr. Hansen served as
a consultant to several software companies, including FDC. From 1989 to 1991,
Mr. Hansen was a General Partner of Hansen, Haddix and Associates, a
partnership which provided advisory management services to suppliers of
software products and services. From 1985 to 1989, Mr. Hansen was Chairman and
Chief Executive Officer of US WEST Applied Communications, Inc., and President
of US WEST Data Systems Group.

Mr. Pogge, 44, joined the Company in 1995 and has served as President, Chief
Operating Officer and a director of the Company since September 1997. Prior to
that time, Mr. Pogge was an Executive Vice President of the Company and
General Manager, Business Units. From 1992 to 1995, Mr. Pogge was Vice
President, Corporate Development for US WEST, Inc. From 1987 to 1991, Mr.
Pogge served as Vice President and General Counsel of Applied Communications,
Inc. Mr. Pogge holds a J.D. degree from Creighton University School of Law and
a BBA in Finance from the University of Houston. Mr. Pogge and Mr. Parker are
brothers-in-law.

Mr. Parker, 40, assumed his current position on April 1, 1997, upon the
retirement of David I. Brenner, the Company's former Executive Vice President
and Chief Financial Officer. Mr. Parker joined the Company in July 1995 as
Vice President, Finance. Previously, Mr. Parker was with Banc One for thirteen
years and was Chief Financial Officer for Banc One in Houston and San Antonio.
Mr. Parker received a BBA in Business Administration from the University of
Iowa in 1980. Mr. Pogge and Mr. Parker are brothers-in-law.

Mr. Fendley, 56, was named Executive Vice President of Product Delivery
Services in December 1996. Mr. Fendley joined the Company in April 1996 as
Executive Vice President of Systems Operations. From 1985 to 1996 Mr. Fendley
held various domestic and international executive positions with Citibank. Mr.
Fendley earned his Ph.D. and MSE degrees in Industrial Engineering at Arizona
State University, and his Bachelor of Science in Industrial Engineering at
Texas Technological University.

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PART II

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

The Company's Common Stock is listed on the Nasdaq National Market
("NASDAQ/NMS") under the symbol "CSGS". The following table sets forth, for
the fiscal quarters indicated, the high and low sale prices of the Company's
Common Stock as reported by NASDAQ/NMS since the Company's Initial Public
Offering on February 28, 1996.

<TABLE>
<CAPTION>
HIGH LOW
1996 ---- ----
<S> <C> <C>
First quarter............................................... $25 1/2 $20 1/2
Second quarter.............................................. 37 1/4 32 3/8
Third quarter............................................... 26 1/4 19 1/2
Fourth quarter.............................................. 21 3/8 14 3/8
<CAPTION>
HIGH LOW
1997 ---- ----
<S> <C> <C>
First quarter............................................... $20 1/4 $ 15
Second quarter.............................................. 31 14 3/4
Third quarter............................................... 40 1/4 22
Fourth quarter.............................................. 49 3/4 30 5/8
</TABLE>

On March 16, 1998, the last sale price of the Company's Common Stock as
reported by NASDAQ/NMS was $39.75 per share. On January 31, 1998, the number
of holders of record of Common Stock was 253.

See Note 4 to the Company's Consolidated Financial Statements in Item 8 and
the Form 8-K referred to in Item 14 for information on the warrants to
purchase Common Stock issued by the Company to TCI as part of the purchase
price for the assets acquired from TCI. The warrants are subject to transfer
restrictions and were issued pursuant to Section 4(2) of the Securities Act of
1933.

In October 1997, the Company issued 1,683 shares of Common Stock to the
owner of certain software assets as part of the purchase price for such
assets. The shares are subject to transfer restrictions and were issued
pursuant to Section 4(2) of the Securities Act of 1933.

DIVIDENDS

The Company has not declared or paid cash dividends on its Common Stock
since its incorporation. The Company's debt agreement contains restrictions on
the payment of dividends. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 6 to the Company's
Consolidated Financial Statements.

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data have been derived from the audited
financial statements of the Company and CSG Systems, Inc., formerly Cable
Services Group, Inc. (the "Predecessor"). The selected financial data
presented below should be read in conjunction with, and is qualified by
reference to "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Company's and the Predecessor's Consolidated
Financial Statements. The information below is not necessarily indicative of
the results of future operations.

11
<PAGE>

<TABLE>
<CAPTION>
PREDECESSOR(1) COMPANY(1)(2)
------------------------- ----------------------------------------------
11 MONTHS ONE MONTH
YEAR ENDED ENDED ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, NOVEMBER 30, DECEMBER 31, ---------------------------------
1993 1994 1994 1995 1996 1997
------------ ------------ ------------ --------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Processing and related services................. $75,578 $76,081 $ 7,757 $ 96,343 $ 113,422 $ 131,399
Software license and maintenance fees........... -- -- -- 57 14,736 26,880
Professional services........................... -- -- -- 4 4,139 13,525
------- ------- --------- --------- ---------- ----------
Total revenues................................ 75,578 76,081 7,757 96,404 132,297 171,804
------- ------- --------- --------- ---------- ----------
Expenses:
Cost of revenues:
Cost of processing and related services:
Direct costs................................... 34,503 34,977 3,647 46,670 52,027 58,259
Amortization of acquired software(1)........... 2 -- 917 11,000 11,003 10,596
Amortization of client contracts and related
intangibles(1)................................ 1,518 1,594 341 4,092 4,092 4,293
------- ------- --------- --------- ---------- ----------
Total cost of processing and related
services..................................... 36,023 36,571 4,905 61,762 67,122 73,148
Cost of software license and maintenance fees... -- -- -- -- 5,040 9,787
Cost of professional services................... -- -- -- -- 2,083 7,047
------- ------- --------- --------- ---------- ----------
Total cost of revenues........................ 36,023 36,571 4,905 61,762 74,245 89,982
------- ------- --------- --------- ---------- ----------
Gross margin..................................... 39,555 39,510 2,852 34,642 58,052 81,822
------- ------- --------- --------- ---------- ----------
Operating expenses:
Research and development:
Research and development........................ 5,591 7,680 1,044 14,278 20,206 22,586
Charge for purchased research and
development(1)(5).............................. -- -- 40,953 -- -- 105,484
Impairment of capitalized software development
costs(6)....................................... -- -- -- -- -- 11,737
Selling and marketing........................... 2,012 3,054 293 3,770 8,213 10,198
General and administrative:
General and administrative...................... 11,431 9,461 3,073 11,406 13,702 19,385
Amortization of goodwill and other
intangibles(1)................................. 1,052 826 547 5,680 6,392 6,927
Impairment of intangible assets(7).............. -- -- -- -- -- 4,707
Stock-based employee compensation(1)............ -- -- -- 841 3,570 449
Depreciation.................................... 3,847 3,520 433 5,687 5,121 6,884
------- ------- --------- --------- ---------- ----------
Total operating expenses...................... 23,933 24,541 46,343 41,662 57,204 188,357
------- ------- --------- --------- ---------- ----------
Operating income (loss).......................... 15,622 14,969 (43,491) (7,020) 848 (106,535)
------- ------- --------- --------- ---------- ----------
Other income (expense):
Interest expense................................ (1,941) (1,067) (769) (9,070) (4,168) (5,324)
Interest income................................. 205 227 39 663 844 1,294
Other........................................... -- -- -- -- -- 349
------- ------- --------- --------- ---------- ----------
Total other................................... (1,736) (840) (730) (8,407) (3,324) (3,681)
------- ------- --------- --------- ---------- ----------
Income (loss) before income taxes, extraordinary
item and discontinued operations................ 13,886 14,129 (44,221) (15,427) (2,476) (110,216)
Income tax (provision) benefit.................. (5,539) (5,519) 3,757 -- -- --
------- ------- --------- --------- ---------- ----------
Income (loss) before extraordinary item and
discontinued operations......................... 8,347 8,610 (40,464) (15,427) (2,476) (110,216)
Extraordinary loss from early extinguishment of
debt(3)(5)..................................... -- -- -- -- (1,260) (577)
------- ------- --------- --------- ---------- ----------
Income (loss) from continuing operations......... 8,347 8,610 (40,464) (15,427) (3,736) (110,793)
Discontinued operations(4):
Loss from operations............................ -- -- (239) (3,093) -- --
Gain (loss) from disposition.................... -- -- -- (660) -- 7,922
------- ------- --------- --------- ---------- ----------
Total gain (loss) from discontinued
operations................................... -- -- (239) (3,753) -- 7,922
------- ------- --------- --------- ---------- ----------
Net income (loss)................................ $ 8,347 $ 8,610 $ (40,703) $ (19,180) $ (3,736) $ (102,871)
======= ======= ========= ========= ========== ==========
Net loss per common share (basic and diluted)(8):
Loss attributable to common stockholders........ $ (15.75) $ (5.51) $ (.14) $ (4.32)
Extraordinary loss from early extinguishment of
debt........................................... -- -- (.06) (.02)
Gain (loss) from discontinued operations........ (.09) (1.09) -- .31
--------- --------- ---------- ----------
Net loss attributable to common stockholders.... $ (15.84) $ (6.60) $ (.20) $ (4.03)
- --------------------------------------------------
========= ========= ========== ==========
Weighted average common shares (basic and
diluted)(8)..................................... 2,587,500 3,450,415 21,872,860 25,497,033
</TABLE>

12
<PAGE>

<TABLE>
<CAPTION>
PREDECESSOR(1) COMPANY(1)(2)
------------------------- ----------------------------------------
11 MONTHS ONE MONTH
YEAR ENDED ENDED ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, NOVEMBER 30, DECEMBER 31, ---------------------------
1993 1994 1994 1995 1996 1997
------------ ------------ ------------ -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA (AT PERIOD END):
Number of clients' customers
processed.................... 15,410 16,347 16,435 17,975 19,212 21,146
BALANCE SHEET DATA (AT PERIOD
END):
Cash and cash equivalents..... $ 61 $ 22 $ 6,650 $ 3,603 $ 6,134 $ 20,417
Working capital............... 7,570 8,356 4,681 2,359 4,430 3,518
Total assets(5)............... 64,298 65,695 130,160 105,553 114,910 179,793
Total debt(3)(5).............. 16,375 10,438 95,000 85,068 32,500 135,000
Redeemable convertible pre-
ferred stock(3).............. -- -- 59,363 62,985 -- --
Stockholders' equity (defi-
cit)(1)(3)(5)(6)............. 35,980 43,031 (40,429) (61,988) 41,964 (33,086)
</TABLE>
- --------
(1) The Company was formed in October 1994 and acquired all of the outstanding
shares of CSG Systems, Inc., formerly Cable Services Group, Inc., from FDC
on November 30, 1994 (the "Acquisition"). The Company did not have any
substantive operations prior to the Acquisition. The Acquisition was
accounted for as a purchase and the Company's Consolidated Financial
Statements (the "Consolidated Financial Statements") since the date of the
Acquisition are presented on the new basis of accounting established for
the purchased assets and liabilities. The Company incurred certain
acquisition-related charges as a result of the Acquisition. These
acquisition-related charges included an immediate charge of $40.9 million
as of the Acquisition date for purchased research and development and
recurring, periodic amortization of acquired software, client contracts
and related intangibles, noncompete agreement and goodwill, and stock-
based employee compensation.
(2) On June 28, 1996, the Company acquired all of the outstanding shares of
Bytel. The acquisition was accounted for using the purchase method of
accounting.
(3) The Company completed an initial public offering ("IPO") of its Common
Stock in March 1996. The Company sold 3,335,000 shares of Common Stock
resulting in net proceeds to the Company of $44.8 million. Such proceeds
were used to repay long-term debt of $40.3 million and to pay accrued
dividends of $4.5 million on Redeemable Convertible Preferred Stock
("Preferred Stock"). As of the closing of the IPO, all of the Preferred
Stock was automatically converted into 17,999,998 shares of Common Stock.
The Company incurred an extraordinary loss of $1.3 million for the write-
off of deferred financing costs attributable to the portion of the long-
term debt repaid.
(4) Contemporaneously with the Acquisition, the Company purchased from FDC all
of the outstanding capital stock of Anasazi Inc. ("Anasazi"). On August
31, 1995, the Company completed a substantial divestiture of Anasazi,
resulting in the Company owning less than 20% of Anasazi. In September
1997, the Company sold its remaining ownership interest in Anasazi for
$8.6 million in cash. The Company accounted for its ownership in Anasazi
as discontinued operations after its acquisition in 1994.
(5) In September 1997, the Company purchased certain SUMMITrak assets from TCI
and entered into the TCI Contract. The total purchase price for the assets
was approximately $159 million, $106.0 million of which was paid in cash
at closing, with approximately $105 million allocated to purchased
research and development with the remaining amount allocated to long-lived
assets. See Note 4 to the Consolidated Financial Statements for a
description of the balance of the purchase price. The purchased research
and development was charged to operations in the fourth quarter of 1997.
The Company financed the asset acquisition with a $150.0 million term
credit facility (the "Term Credit Facility"), of which $27.5 million was
used to retire the Company's previously outstanding debt, resulting in an
extraordinary loss of $.6 million for the write-off of deferred financing
costs attributable to such debt.
(6) During the fourth quarter of 1997, the Company recorded a non-recurring
charge of $11.7 million to reduce certain CSG Phoenix assets to their net
realizable value as of December 31, 1997.
(7) During the fourth quarter of 1997, the Company recorded a non-recurring
charge of $4.7 million for the impairment of certain intangible assets
related to software systems which the Company decided to no longer market
and support.
(8) Net loss per common share and the shares used in the per share computation
have been computed on the basis described in Note 2 to the Consolidated
Financial Statements.

13
<PAGE>

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

GENERAL

Acquisition of CSG Systems, Inc. The Company was formed in October 1994 and
acquired all of the outstanding stock of CSG Systems, Inc. (formerly Cable
Services Group, Inc.) from FDC in November 1994 (the "Acquisition"). CSG
Systems, Inc. had been a subsidiary or division of FDC from 1982 until the
Acquisition. The Company acquired CSG Systems, Inc. for approximately $137
million in cash and accounted for the Acquisition using the purchase method of
accounting. See Note 3 to the Consolidated Financial Statements for additional
discussion.

Public Offering. The Company completed the IPO in March 1996. The Company
sold 3,335,000 shares of Common Stock at a price of $15 per share, resulting
in net proceeds to the Company, after deducting the underwriting discount and
offering expenses, of approximately $44.8 million. The net proceeds from the
IPO were used to repay long-term debt of $40.3 million and to pay accrued
dividends of $4.5 million on Preferred Stock. As of the closing of the IPO,
all of the 8,999,999 outstanding shares of Preferred Stock were automatically
converted into 17,999,998 shares of Common Stock and all accrued dividends
were paid. See Notes 5 and 6 to the Consolidated Financial Statements for
additional information regarding the Company's Preferred Stock and long-term
debt.

Acquisition of Bytel Limited. On June 28, 1996, the Company acquired all of
the outstanding shares of Bytel for $3.1 million in cash and assumption of
certain liabilities of $1.6 million. The acquisition was accounted for using
the purchase method of accounting. The cost in excess of the fair value of the
net tangible assets acquired of $4.2 million was allocated to goodwill and is
being amortized over seven years on a straight-line basis. The Consolidated
Financial Statements include Bytel's results of operations since the
acquisition date. Bytel, established in 1992, is the leading provider of
customer care and billing solutions in the United Kingdom to providers of
combined cable television and telephony (business and residential) services.

Acquisition of SUMMITrak Assets and TCI Contract. In September 1997, the
Company purchased certain SUMMITrak assets from TCI and entered into the TCI
Contract. The Company completed the accounting for these transactions in the
fourth quarter of 1997. The total purchase price was approximately $159
million, with approximately $105 million allocated to purchased research and
development ("R&D") and the remaining amount allocated to long-lived assets.
Purchased R&D represents R&D of software technologies which had not reached
technological feasibility as of the acquisition date, and had no other
alternative future use. Purchased R&D was charged to operations in the fourth
quarter of 1997. The Company financed the SUMMITrak asset acquisition with the
Term Credit Facility, of which $27.5 million was used to retire the Company's
previously outstanding debt. See Notes 4 and 6 to the Consolidated Financial
Statements for additional information regarding the SUMMITrak asset
acquisition and the related financing.

The Company intends to continue the development of certain software
technologies acquired from TCI and integrate such technologies into its
current products. The Company is currently developing several additional
products using the SUMMITrak next-generation, open system technologies to
increase the functionality of CCS. These products use a modern architecture
with relational databases, UNIX servers, object-oriented logic, and graphical
user interfaces, and are expected to be sold as optional add-on software
components to CCS, and include CSG Dispatch, CSG TechNet, IVR Services, and
Closed Loop Inventory. CSG Dispatch provides automated work order routing and
technician assignment and provides the dispatcher with a geographic
information system (GIS)-based method for monitoring and reassigning work
orders throughout the day. CSG TechNet is an optional add-on component to CSG
Dispatch that provides two-way data communications to the technician in the
field, allowing the technician to close work orders, send and receive
messages, and perform other functions. IVR Services allows customers to make
pay-per-view orders and perform other transactions over the telephone by
interacting with an IVR. Closed Loop Inventory provides a method for tracking
client equipment in the field, primarily the set top boxes that are used in
the field for communication services. The Company expects to complete these
products by the end of 1998 and early 1999.

14
<PAGE>

OVERVIEW

The Company. The Company is a leading provider of customer care and billing
solutions for cable television and direct broadcast satellite providers, and
also serves on-line services and telecommunications providers. The Company's
products and services enable its clients to focus on their core businesses,
improve customer service, and enter new markets and operate more efficiently.
The Company offers its clients a full suite of processing and related
services, and software and professional services which automate customer care
and billing functions. These functions include set-up and activation of
customer accounts, sales support, order processing, invoice calculation,
production and mailing, management reporting, and customer analysis for target
marketing. The Company's products and services combine the reliability and
high volume transaction processing capabilities of a mainframe platform with
the flexibility of client/server architecture.

Revenues. The Company's revenues are derived principally from processing and
related services, which represented 99.9%, 85.8% and 76.5% of the Company's
total revenues for the years ended December 31, 1995, 1996 and 1997,
respectively. As a result of the expected conversions in 1998 of TCI's and
other clients' customers onto the Company's customer care and billing system,
the Company expects processing and related services as a percentage of total
revenues in 1998 to increase when compared to 1997. Processing and related
services consist of processing fees, ancillary services and certain customized
print and mail services. Processing fees are typically billed based on the
number of a client's customers serviced, ancillary services are typically
billed on a per transaction basis, and customized print and mail services are
billed on a usage basis. Typically, the Company signs multi-year processing
contracts with its clients which include provisions for annual price
increases, and many of which include financial minimums. The Company's
processing and related services are derived principally from its CCS product
and services ancillary to CCS.

The Company passes through to its clients the cost of postage and the cost
of communication lines between client sites and the mainframe data processing
facility. Such reimbursements of cost are netted against the expense and are
not included in total revenues.

Although the Company believes that the majority of its revenues will
continue to come from processing and related services over the next several
years, the Company has developed new software products and professional
services. The software products include, among others, ACSR, ACSR Telephony,
CSG Vantage, and CSG VantagePoint. Revenue from these software products and
professional services, including revenue from the acquired software products
and related services of Bytel, were $.1 million, $18.9 million, and $40.4
million, or .1%, 14.2% and 23.5% of total revenues, for the years ended
December 31, 1995, 1996 and 1997, respectively. Software products and
professional services as a percentage of total revenues in 1998 are expected
to decrease when compared to 1997, due to the increased percentage of revenues
expected to be generated from processing and related services in 1998, as
discussed above. The Company licenses its software products under both
perpetual and multi-year term licenses. See "Business" for additional
discussion of the Company's products and services.

Cost of Revenues. Direct costs for processing and related services consist
primarily of: (i) the salaries and benefits of employees involved in certain
systems and programming, client and product support, and statement production;
(ii) the cost of data processing; and (iii) statement and envelope costs. The
Company's data processing services for CCS are provided by FDC under a five-
year agreement which expires December 31, 2001. The cost of such services
provided by FDC are based on usage and/or actual costs and were $16.9 million,
$19.6 million and $19.2 million for the years ended December 31, 1995, 1996
and 1997, respectively. The amortization of acquired software, client
contracts and related intangibles relates primarily to amortization of assets
acquired in the Acquisition. The acquired software was fully amortized in
November 1997.

The cost of software license and maintenance fees consists primarily of the
salaries and benefits of the systems and programming employees supporting the
Company's software products. The cost of professional services consists
primarily of the salaries and benefits of the employees performing such
services.

15
<PAGE>

Operating Expenses. R&D expense consists primarily of the salaries and
benefits of the employees involved in internal software and product
development. Software and product development costs have increased
significantly as resources have been added to develop new software products
and enhance existing products.

Selling and marketing expense consists primarily of the salaries,
commissions, and benefits of those employees involved in sales and marketing
activities, as well as travel, convention, and advertising expenses.

General and administrative expense consists primarily of the salaries and
benefits of management and administrative personnel and general office
administration expense. Amortization of noncompete agreements and goodwill
consists primarily of amortization of assets acquired in the Acquisition.
Stock-based employee compensation expense relates to purchases of the
Company's Common Stock by executive officers and key employees in 1994 and
1995, prior to the Company's IPO. See Notes 3 and 11 of the Consolidated
Financial Statements for additional discussion of these items.

Income Taxes. Although the Company has incurred net losses for the years
ended 1995, 1996, and 1997, the Company has paid U.S. income taxes for each of
these years and expects to pay United Kingdom income taxes for 1997, due
primarily to differences in the timing of recognition of the amortization of
intangible assets for financial reporting and tax purposes. For income tax
purposes, the amortization of the intangible assets related to the Acquisition
and the charge for purchased research and development related to the SUMMITrak
asset acquisition, are principally deductible over 15 years on a straight-line
basis. Based on its current projections, the Company expects to pay U.S.
income taxes for 1998.

At December 31, 1997, the Company concluded that it was more likely than not
that certain of the Company's deferred tax assets would be realized.
Accordingly, the Company has recognized a net deferred tax asset of $7.4
million. The Company has recorded a valuation allowance of approximately $61.3
million against the remaining net deferred tax assets since realization of
these future benefits is not sufficiently assured as of December 31, 1997. The
Company intends to analyze the realizability of the net deferred tax assets at
each future quarterly reporting period. The current quarterly results of
operations, as well as the Company's projected results of operations, will
determine the required valuation allowance at the end of each quarter. Based
on its current projections of operating results for 1998, the Company expects
to realize additional deferred tax assets in 1998. As a result, the Company
does not expect income tax expense for 1998 to be significant.

ACQUISITION CHARGES

Acquisition Charges. As a result of the Acquisition, the Company has
recorded recurring, periodic amortization of acquired software, client
contracts and related intangibles, noncompete agreement, goodwill and stock-
based employee compensation (collectively, the "Acquisition Charges"). The
Acquisition Charges totaled $21.6 million, $24.4 million, and $20.7 million,
for the years ended December 31, 1995, 1996 and 1997, respectively. See Notes
3 and 11 to the Consolidated Financial Statements for additional information
regarding the Acquisition and the Acquisition Charges.

Discontinued Operations. Contemporaneously with the Acquisition, the Company
purchased from FDC all of the outstanding shares of Anasazi for $6.0 million
cash. Anasazi provides central reservation systems and services for the
hospitality and travel industries. The Company accounted for its ownership in
Anasazi as discontinued operations after its acquisition in 1994. On August
31, 1995, the Company completed a substantial divestiture of Anasazi,
resulting in the Company owning less than 20% of Anasazi. As a result, the
$3.1 million loss from discontinued operations included in the Company's 1995
financial statements consists of the net losses of Anasazi from January 1 to
August 31, 1995. Anasazi's results of operations subsequent to August 31, 1995
are not included in the Company's results of operations as the Company
accounted for its investment in Anasazi under the cost method subsequent to
August 31, 1995. In September 1997, the Company sold its remaining interest in
Anasazi for $8.6 million in cash. The loss of $.7 million in August 1995 and
the gain of $7.9 million in September 1997 relate to the Company's substantial
and then final disposition of its ownership interest in Anasazi. See Note 10
to the Consolidated Financial Statements for additional information regarding
Anasazi.

16
<PAGE>

NON-RECURRING CHARGES

Charge for Purchased Research and Development. During the fourth quarter of
1997, the Company recorded a charge of $105.5 million related primarily to the
portion of the SUMMITrak asset acquisition purchase price allocated to
purchased research and development related to software technologies which had
not reached technological feasibility and had no other alternative future use
as of the acquisition date. See Note 4 to the Consolidated Financial
Statements for additional discussion.

Impairment of Capitalized Software Development Costs. During the fourth
quarter of 1997, the Company recorded a charge of $11.7 million related to
certain CSG Phoenix assets. After the consideration of multiple factors and
events, consisting primarily of an increase in demand for the Company's
outsourced processing services and previously announced delays in the delivery
of CSG Phoenix, such assets were reduced to their estimated net realizable
value as of December 31, 1997. The charge primarily includes previously
capitalized internal development costs and purchased software incorporated
into the product. The Company intends to continue its development of CSG
Phoenix. See Notes 2 and 13 to the Consolidated Financial Statements for
additional discussion.

Impairment of Intangible Assets. During the fourth quarter of 1997, the
Company recorded a charge of $4.7 million for the impairment of certain
intangible assets related to software systems which the Company has decided to
no longer market and support. This impairment charge relates principally to
the Company's CableMAX product. CableMAX is a personal computer-based customer
management system targeted at smaller cable systems of 2,500 customers or
less. During the fourth quarter of 1997, the Company decided not to invest the
resources necessary to make the software year 2000 compliant, resulting in the
impairment of the CableMAX intangible assets. See Note 2 to the Consolidated
Financial Statements for additional discussion.

Extraordinary Loss From Early Extinguishment Of Debt. In September 1997, the
Company retired its outstanding bank indebtedness of $27.5 million in
conjunction with obtaining financing for the SUMMITrak asset acquisition. Upon
repayment of the outstanding debt, the Company recorded an extraordinary loss
of $.6 million for the write-off of deferred financing costs. In March 1996,
the Company recorded an extraordinary charge of $1.3 million for the write-off
of deferred financing costs related to repayment of $40.3 million of long-term
debt with proceeds from the IPO. See Note 6 to the Consolidated Financial
Statements for additional discussion.

ADJUSTED RESULTS OF OPERATIONS

Impact of Acquisition Charges and Non-recurring Charges on Earnings. As
discussed above, the Company has incurred Acquisition Charges and non-
recurring charges in each of the last three years. The total of these charges
was $25.4 million, $25.7 million and $135.3 million for the years ended
December 31, 1995, 1996 and 1997, respectively. The Company's adjusted results
of operations excluding these items is shown in the following table. In
addition to the exclusion of these expenses from the calculation, the adjusted
results of operations were computed using an effective income tax rate of
38.0%, and outstanding shares on a diluted basis.

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
ADJUSTED RESULTS OF OPERATIONS:
Operating income.............................. $ 14,593 $ 25,194 $ 36,131
Income before income taxes.................... 6,186 21,870 32,450
Net income.................................... 3,835 13,559 20,119
Earnings per diluted common share............. .18 .54 .77
Weighted average diluted common shares........ 21,533 25,294 26,069
</TABLE>

17
<PAGE>

RESULTS OF OPERATIONS

The following table sets forth certain financial data and the percentage of
total revenues of the Company for the periods indicated. The results of Bytel's
operations since its acquisition on June 28, 1996 are included in the following
table and considered in the discussion of the Company's operations that
follows:

<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31,
---------------------------------------------------------
1995 1996 1997
------------------ ----------------- -------------------
% OF % OF % OF
AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
--------- ------- -------- ------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Processing and related
services.............. $ 96,343 99.9% $113,422 85.8% $ 131,399 76.5%
Software license and
maintenance fees...... 57 .1 14,736 11.1 26,880 15.6
Professional services.. 4 -- 4,139 3.1 13,525 7.9
--------- ------ -------- ----- ---------- ------
Total revenues........ 96,404 100.0 132,297 100.0 171,804 100.0
--------- ------ -------- ----- ---------- ------
Expenses:
Cost of revenues:
Cost of processing and
related services:
Direct costs........... 46,670 48.4 52,027 39.3 58,259 33.9
Amortization of ac-
quired software....... 11,000 11.4 11,003 8.3 10,596 6.2
Amortization of client
contracts and related
intangibles........... 4,092 4.2 4,092 3.1 4,293 2.5
--------- ------ -------- ----- ---------- ------
Total cost of
processing and
related services..... 61,762 64.0 67,122 50.7 73,148 42.6
Cost of software
license and
maintenance fees...... -- -- 5,040 3.8 9,787 5.7
Cost of professional
services.............. -- -- 2,083 1.6 7,047 4.1
--------- ------ -------- ----- ---------- ------
Total cost of
revenues............. 61,762 64.0 74,245 56.1 89,982 52.4
--------- ------ -------- ----- ---------- ------
Gross margin............ 34,642 36.0 58,052 43.9 81,822 47.6
--------- ------ -------- ----- ---------- ------
Operating expenses:
Research and
development:
Research and develop-
ment.................. 14,278 14.8 20,206 15.3 22,586 13.2
Charge for purchased
research and develop-
ment.................. -- -- -- -- 105,484 61.4
Impairment of capital-
ized software develop-
ment costs............ -- -- -- -- 11,737 6.8
Selling and marketing.. 3,770 3.9 8,213 6.2 10,198 5.9
General and
administrative:
General and administra-
tive.................. 11,406 11.8 13,702 10.4 19,385 11.3
Amortization of
noncompete agreements
and goodwill.......... 5,680 5.9 6,392 4.8 6,927 4.0
Impairment of intangi-
ble assets............ -- -- -- -- 4,707 2.7
Stock-based employee
compensation.......... 841 .9 3,570 2.7 449 .3
Depreciation........... 5,687 5.9 5,121 3.9 6,884 4.0
--------- ------ -------- ----- ---------- ------
Total operating
expenses............. 41,662 43.2 57,204 43.3 188,357 109.6
--------- ------ -------- ----- ---------- ------
Operating income
(loss)................. (7,020) (7.2) 848 .6 (106,535) (62.0)
--------- ------ -------- ----- ---------- ------
Other income (expense):
Interest expense....... (9,070) (9.4) (4,168) (3.1) (5,324) (3.1)
Interest income........ 663 .7 844 .6 1,294 .7
Other.................. -- -- -- -- 349 .2
--------- ------ -------- ----- ---------- ------
Total other........... (8,407) (8.7) (3,324) (2.5) (3,681) (2.2)
--------- ------ -------- ----- ---------- ------
Loss before income
taxes, extraordinary
item and discontinued
operations............. (15,427) (15.9) (2,476) (1.9) (110,216) (64.2)
Income tax provision... -- -- -- -- -- --
--------- ------ -------- ----- ---------- ------
Loss before
extraordinary item and
discontinued
operations............. (15,427) (15.9) (2,476) (1.9) (110,216) (64.2)
Extraordinary loss from
early extinguishment
of debt............... -- -- (1,260) (.9) (577) (.3)
--------- ------ -------- ----- ---------- ------
Loss from continuing
operations............. (15,427) (15.9) (3,736) (2.8) (110,793) (64.5)
--------- ------ -------- ----- ---------- ------
Discontinued operations:
Loss from operations... (3,093) (3.2) -- -- -- --
Gain (loss) from
disposition........... (660) (.7) -- -- 7,922 4.6
--------- ------ -------- ----- ---------- ------
Total gain (loss) from
discontinued
operations............ (3,753) (3.9) -- -- 7,922 4.6
--------- ------ -------- ----- ---------- ------
Net loss................ $(19,180) (19.8)% $ (3,736) (2.8)% $(102,871) (59.9)%
========= ====== ======== ===== ========== ======
</TABLE>

18
<PAGE>

TWELVE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THE TWELVE MONTHS ENDED
DECEMBER 31, 1996

Revenues. Total revenues increased $39.5 million, or 29.9%, to $171.8
million in 1997, from $132.3 million in 1996, due primarily to increased
revenues from the Company's processing and related services, as well as
increased revenues from software and related product sales and professional
consulting services.

Revenues from processing and related services increased $18.0 million, or
15.8%, to $131.4 million in 1997, from $113.4 million in 1996, due primarily
to an increase in the number of customers of the Company's clients which were
serviced by the Company and increased revenue per customer. Customers serviced
as of December 31, 1997 and 1996 were 21.1 million and 19.2 million,
respectively, an increase of 10.1%. The increase in the number of customers
serviced was due primarily to internal customer growth experienced by existing
clients and the addition of new clients. Revenue per customer increased due to
price increases included in client contracts and increased usage of ancillary
services by existing clients.

Revenues from software and related product sales and professional consulting
services increased $21.5 million, or 114.1%, to $40.4 million in 1997, from
$18.9 million in 1996. This increase relates to the introduction of the
Company's new software products, primarily ACSR and CSG VantagePoint, and
professional consulting services in early 1996 with continued expansion
throughout 1996 and 1997, and the inclusion of revenues from Bytel's
operations for all of 1997, whereas six months of revenues for Bytel were
included for 1996.

Amortization of Acquired Software. Amortization of acquired software
decreased $.4 million, or 3.7%, to $10.6 million in 1997, from $11.0 million
in 1996, due primarily to acquired software from the Acquisition becoming
fully amortized as of November 30, 1997. See Note 3 to the Consolidated
Financial Statements for additional discussion of the Acquisition and its
impact on operations.

Amortization of Client Contracts and Related Intangibles. Amortization of
client contracts and related intangibles increased $.2 million, or 4.9%, to
$4.3 million in 1997, from $4.1 million in 1996 due primarily to amortization
from the TCI Contract executed in September 1997.

Gross Margin. Gross margin increased $23.7 million, or 40.9%, to $81.8
million in 1997, from $58.1 million in 1996, due primarily to revenue growth.
The gross margin as a percentage of total revenues increased to 47.6% in 1997,
compared to 43.9% in 1996. The increase in the gross margin as a percentage of
total revenues is due primarily to: (i) a favorable change in revenue mix
which included more higher-margined software products; (ii) the increase in
revenues while the overall amount of amortization of acquired software and the
amortization of client contracts and related intangibles remained relatively
constant; and (iii) the increase in processing and related services revenue
per customer while controlling the cost of delivering such services.

Research and Development Expense. Research and development expense increased
$2.4 million, or 11.8%, to $22.6 million in 1997, from $20.2 million in 1996.
As a percentage of total revenues, R&D expense decreased to 13.2% in 1997 from
15.3% in 1996. The Company capitalized software development costs, related
primarily to CSG Phoenix, of approximately $9.7 million during 1997, which
consisted of $8.4 million of internal development costs and $1.3 million of
purchased software. The Company capitalized software development costs,
related primarily to CSG Phoenix, ACSR Telephony and CSG VantagePoint, of
approximately $3.1 million in 1996, which consisted of $2.5 million of
internal development costs and $.6 million of purchased software. As a result,
total R&D expenditures (i.e., the total R&D costs expensed, plus the
capitalized internal development costs) for 1997 and 1996 were $31.0 million,
or 18.0% of total revenues, and $22.7 million, or 17.2% of total revenues,
respectively. The overall increase in R&D expenditures is due primarily to
continued efforts on several products which are in development and
enhancements of the Company's existing products. The increased R&D
expenditures consist primarily of increases in salaries, benefits and other
programming-related expenses.

Selling and Marketing Expense. Selling and marketing expense increased $2.0
million, or 24.2%, to $10.2 million in 1997, from $8.2 million in 1996. As a
percentage of total revenues, selling and marketing expense decreased to 5.9%
in 1997, compared to 6.2% in 1996. The increase in expense is due primarily to
continued

19
<PAGE>

growth of the Company's direct sales force throughout 1996 and most of 1997.
The Company began building a new direct sales force in mid-1995 and continued
to expand its sales force until reaching its present level as of the end of
1997.

General and Administrative Expense. General and administrative ("G&A")
expense increased $5.7 million, or 41.5%, to $19.4 million in 1997, from $13.7
million in 1996. As a percentage of total revenues, G&A expense increased to
11.3% in 1997, from 10.4% in 1996. The increase in expense relates primarily
to: (i) the continued expansion of the Company's management team and related
administrative staff, added throughout 1996 and 1997, to support the Company's
overall growth; (ii) an increase in facility costs to support employee growth,
including the cost of relocating the Company's corporate headquarters; (iii)
expenses of $.7 million related to the closing of the TCI Contract and the
SUMMITrak asset purchase agreement; and (iv) the inclusion of G&A expenses
from Bytel's operations for all of 1997, whereas six months of G&A expenses
for Bytel were included for 1996.

Amortization of Noncompete Agreements and Goodwill. Amortization of
noncompete agreements and goodwill increased $.5 million, or 8.4%, to $6.9
million in 1997, from $6.4 million in 1996. The increase in expense relates to
amortization of goodwill from the Bytel acquisition and amortization of an
additional noncompete agreement executed in April 1996.

Stock-Based Employee Compensation. During 1995 and 1994, the Company sold
Common Stock to executive officers and key employees pursuant to performance
stock agreements and recorded deferred compensation of $5.8 million related to
these purchases. Prior to the completion of the IPO, the deferred compensation
was being recognized as stock-based employee compensation expense on a
straight-line basis from the time the shares were purchased through November
30, 2001, as the shares became vested as of this date. Upon completion of the
IPO, shares owned by certain executive officers of the Company became fully
vested. In addition, the vesting for the remaining performance stock shares
decreased to 20.0% annually over a five-year period. As a result,
approximately $3.2 million of stock-based employee compensation expense was
recorded when the IPO was completed in March 1996. Amortization of the stock-
based deferred compensation subsequent to 1997 will be approximately $.3
million per year. See Note 11 to the Consolidated Financial Statements for
additional discussion.

Depreciation Expense. Depreciation expense increased $1.8 million, or 34.4%,
to $6.9 million in 1997, from $5.1 million in 1996, with the increase
attributed to capital expenditures throughout 1996 and 1997 in support of the
overall growth of the Company.

Operating income (loss). Operating loss was $106.5 million for 1997,
compared to operating income of $.8 million for 1996. The change between years
relates primarily to the non-recurring charges recorded in the fourth quarter
of 1997, as discussed above.

Interest Expense. Interest expense increased $1.1 million, or 27.7%, to $5.3
million in 1997, from $4.2 million in 1996, with the increase attributable
primarily to new debt incurred under the Term Credit Facility. This increase
was partially offset by the effects of: (i) scheduled principal payments on
the Company's long-term debt; (ii) the retirement of $40.3 million of long-
term debt with the proceeds from the IPO in March 1996; and (iii) a decrease
in the Company's interest rate spread on LIBOR, as a result of the Company
favorably amending its long-term credit facility in April 1996.

TWELVE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THE TWELVE MONTHS ENDED
DECEMBER 31, 1995

Revenues. Total revenues increased $35.9 million, or 37.2%, to $132.3
million in 1996, from $96.4 million in 1995, due primarily to increased
revenues from the Company's processing and related services, as well as
increased revenues from software and related product sales and professional
consulting services.

Revenues from processing and related services increased $17.1 million, or
17.7%, to $113.4 million in 1996, from $96.3 million in 1995, due primarily to
an increase in the number of customers of the Company's clients

20
<PAGE>

which were serviced by the Company and increased revenue per customer.
Customers serviced as of December 31, 1996 and 1995 were 19.2 million and 18.0
million, respectively, an increase of 6.9%. The increase in the number of
customers serviced was due primarily to internal customer growth experienced
by existing clients and the addition of new clients. Revenue per customer
increased due to annual price increases included in client contracts and
increased usage of ancillary services by existing clients.

Revenue from the Company's new software products introduced in early 1996,
primarily ACSR and CSG VantagePoint, and professional services, as well as
revenue from the software products and related services of Bytel for six
months in 1996, were $18.9 million in 1996 compared to $.1 million in 1995.

Gross Margin. Gross margin increased $23.5 million, or 67.6%, to $58.1
million in 1996, from $34.6 million in 1995, due primarily to revenue growth.
The gross margin as a percentage of total revenues increased to 43.9% in 1996,
compared to 36.0% in 1995. The increase in the gross margin as a percentage of
total revenues is due primarily to: (i) a favorable change in revenue mix
which included more higher-margined software products; (ii) the increase in
revenues while the overall amount of amortization of acquired software and the
amortization of client contracts and related intangibles remained relatively
constant; and (iii) the increase in processing and related services revenue
per customer while controlling the cost of delivering such services.

Research and Development Expense. Research and development expense increased
$5.9 million, or 41.5%, to $20.2 million in 1996, from $14.3 million in 1995.
As a percentage of total revenues, R&D expense increased to 15.3% in 1996 from
14.8% in 1995. The Company capitalized software development costs, related
primarily to CSG Phoenix, ACSR Telephony and CSG VantagePoint, of
approximately $3.1 million in 1996, which consisted of $2.5 million of
internal development costs and $.6 million of purchased software. No software
development costs were capitalized during 1995. As a result, total R&D
expenditures (i.e., the total R&D costs expensed, plus the capitalized
internal development costs) for 1996 were $22.7 million, or 17.2% of total
revenues. The overall increase in R&D expenditures is due primarily to
continued efforts on several products which are in development and
enhancements of the Company's existing products. The increased R&D
expenditures consist primarily of increases in salaries, benefits, and other
programming-related expenses.

Selling and Marketing Expense. Selling and marketing expense increased $4.4
million, or 117.9%, to $8.2 million in 1996, from $3.8 million in 1995. As a
percentage of total revenues, selling and marketing expense increased to 6.2%
in 1996, from 3.9% in 1995. The increase in expense is due primarily to a
realignment of the Company's sales force. Subsequent to the Acquisition, a
substantial portion of the previous sales force was terminated during the
three months ended March 31, 1995, and senior management focused on sales
responsibilities in 1995. The Company began building a new direct sales force
in mid-1995 and continued to expand its sales force throughout 1996.

General and Administrative Expense. G&A expense increased $2.3 million, or
20.1%, to $13.7 million in 1996, from $11.4 million in 1995. The increase in
expense relates primarily to the development of the Company's management team
and to related administrative staff added during 1996 and 1995 to support the
Company's growth. As a percentage of total revenues, G&A expense decreased to
10.4% in 1996, from 11.8% in 1995.

Amortization of Noncompete Agreements and Goodwill. Amortization of
noncompete agreements and goodwill increased $.7 million, or 12.5%, to $6.4
million in 1996, from $5.7 million in 1995. The increase in expense relates to
amortization of goodwill from the Bytel acquisition and amortization of an
additional noncompete agreement executed in April 1996.

Stock-Based Employee Compensation. Stock-based employee compensation expense
for the years ended December 31, 1996 and 1995, of $3.6 million and $.8
million, respectively, relates to purchases of the Company's Common Stock by
executive officers and key employees. The increase between years relates to
the accelerated vesting for certain employees effective as of the closing of
the IPO in March 1996, as discussed above.

<PAGE>

Depreciation Expense. Depreciation expense decreased $.6 million, or 10.0%,
to $5.1 million in 1996, from $5.7 million in 1995, with the decrease
attributed to certain fixed assets becoming fully depreciated in 1995.

Operating income (loss). Operating income was $.8 million for 1996, compared
to an operating loss of $7.0 million for 1995. The change between years
relates to the factors discussed above.

Interest Expense. Interest expense decreased $4.9 million, or 54.0%, to $4.2
million in 1996, from $9.1 million in 1995. The decrease was attributable to:
(i) scheduled principal payments on the Company's long-term debt; (ii) the
retirement of $40.3 million of long-term debt with proceeds from the IPO in
March 1996; and (iii) a decrease in the Company's interest rate spread on
LIBOR, as a result of the Company favorably amending its long-term credit
facility in April 1996.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 1997, the Company's principal sources of liquidity
included cash and cash equivalents of $20.4 million. The Company's working
capital as of December 31, 1996 and 1997 was $4.4 million and $3.5 million,
respectively. The Company also has a revolving credit facility with a bank in
the amount of $40.0 million, of which there were no borrowings outstanding as
of December 31, 1997. The Company's ability to borrow under the revolving
credit facility is subject to maintenance of certain levels of eligible
receivables. At December 31, 1997, $30.6 million of the $40.0 million
revolving credit facility was available to the Company based on the current
level of eligible receivables. The revolving credit facility expires in
September 2002.

The Company's net cash flows from operating activities for the years ended
December 31, 1995, 1996 and 1997 were $11.8 million, $29.1 million and $31.4
million, respectively. The increase of $2.3 million, or 7.8%, in 1997 over
1996 relates to a $9.2 million increase in net cash flows from operations,
offset by an increase in the net change in operating assets and liabilities of
$6.9 million. The increase of $17.3 million, or 147.3%, in 1996 over 1995
relates to a $14.4 million increase in net cash flows from operations and a
decrease in the net change in operating assets and liabilities of $2.9
million.

The Company's net cash flows used in investing activities totaled $117.4
million in 1997, compared to $14.7 million in 1996, an increase in $102.7
million. The increase between years relates primarily to the cash payments of
$106.5 million for the SUMMITrak assets acquired in September 1997 and an
increase of $6.6 million in capitalized software development costs between
years, with these increases offset by proceeds of $8.6 million from the final
disposition of Anasazi. The Company's net cash flow used in investing
activities totaled $5.3 million in 1995. The increase of $9.4 million between
1995 and 1996 relates primarily to: (i) an increase of $3.0 million in 1996
for capital expenditures to support Company growth; (ii) acquisitions of
businesses in 1996 of $4.9 million, which relates primarily to Bytel; and
(iii) $3.5 million in capitalized software development costs in 1996. These
increases were offset by $2.0 million of cash received from Anasazi for a note
receivable in January 1996.

The Company's net cash flows from financing activities was $100.7 million in
1997, compared to a use of net cash flows of $12.1 million in 1996, an
increase of $112.8 million. The significant increase between years relates
primarily to the net change in the Company's long-term debt between years. In
1997, the Company generated $150.0 million from a new debt agreement entered
into primarily to fund the SUMMITrak asset acquisition, and repaid long-term
debt of $47.5 million, which included: (i) $5.0 million of scheduled payments
on the previous debt agreement; (ii) $27.5 million of existing debt which was
refinanced as part of the new debt agreement; and (iii) an optional prepayment
of $15.0 million on the new debt, which was made in December 1997. The net
cash flows used in financing activities totaled $9.5 million for 1995. The
increase of $2.6 million between 1995 and 1996 relates primarily to an
increase in scheduled debt payments in 1995 over 1996. In addition, the
Company sold 3,335,000 shares of Common Stock at an initial public offering
price of $15 per share, resulting in net proceeds to the Company, after
deducting underwriting discounts and offering expenses, of approximately $44.8
million. The net proceeds from the IPO were used to repay long-term debt of
$40.3 million and to pay accrued dividends of $4.5 million on Preferred Stock.
As of the closing of the IPO in March 1996, all of the 8,999,999 outstanding
shares of the Preferred Stock were automatically converted into 17,999,998
shares of Common Stock, at which time the accrued dividends became payable.

<PAGE>

The Company financed the SUMMITrak asset acquisition in September 1997 with
the $150.0 million Term Credit Facility, of which $27.5 million was used to
retire the Company's previously outstanding debt. Interest rates under the new
agreement are chosen at the option of the Company and are based on the LIBOR
rate or the prime rate, plus an additional percentage spread, with the spread
dependent upon the Company's leverage ratio. For the period from September
1997 through December 31, 1997, the spread on the LIBOR rate and prime rate
was 1.75% and .5%, respectively. Based on the Company's leverage ratio as of
December 31, 1997, the spread on the LIBOR rate and prime rate was reduced to
1.0% and 0%, respectively, effective January 1, 1998. As a result of this
additional debt, the Company expects interest expense to increase in 1998 when
compared to 1997. See Note 6 to the Consolidated Financial Statements for
additional discussion of the Term Credit Facility.

The Term Credit Facility requires maintenance of certain financial ratios
and contains other restrictive covenants, including restrictions on payment of
dividends, a fixed charge coverage ratio, a leverage ratio and restrictions on
capital expenditures. As of December 31, 1997, the Company was in compliance
with all covenants. The payment of dividends or other types of distributions
on any class of the Company's stock is restricted unless the Company's
leverage ratio, as defined in the Term Credit Facility, is less than 1.50. As
of December 31, 1997, the leverage ratio was 2.80.

The purchase price for the SUMMITrak assets acquired in September 1997
includes up to $26.0 million in conversion incentive payments. The timing of
the conversion incentive payments is based upon the achievement of certain
milestones by TCI and the Company, as specified in the SUMMITrak asset
acquisition agreement. The milestones are based principally upon the number of
TCI's customers converted to, and the total number of TCI customers processed
on, the Company's customer care and billing system. Based on the conversions
scheduled as of December 31, 1997, the Company expects to pay $17.8 million to
TCI in 1998 and $8.2 million in 1999.

The Company believes that cash generated from operations, together with the
current cash and cash equivalents and the amount available under the revolving
credit facility, will be sufficient to meet its anticipated cash requirements
for operations (including research and development expenditures), income
taxes, debt service, conversion incentive payments and capital expenditures
for both its short and long-term purposes.

YEAR 2000

In 1995, the Company began efforts to identify and assess any issues
associated with its software's ability to properly utilize dates and process
data beyond the year 2000. The Company recognizes that the failure to properly
and timely address issues surrounding the year 2000 could have a material
impact on its operations, and as a result it appointed a project team to
undertake a Company-wide study to determine the full scope and related costs
to the Company of ensuring that its systems can continue to meet the Company's
internal needs, as well as those of its customers. The Company's year 2000
project team is communicating with vendors and customers to coordinate year
2000 conversion and will provide the Company's management with a report that
includes an estimate of costs to be incurred by the Company in properly
addressing this issue. The Company currently believes that it will be able to
effectively mitigate risks associated with the year 2000 and that its
Company-wide year 2000 project will be substantially complete by the end of
the fourth quarter of 1998. The Company does not expect the costs to make its
systems year 2000 compliant to be material to its financial condition or
results of operations.

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CSG SYSTEMS INTERNATIONAL, INC.

CONSOLIDATED FINANCIAL STATEMENTS

INDEX

<TABLE>
<S> <C>
Report of Independent Public Accountants.................................. 25
Consolidated Balance Sheets as of December 31, 1996 and 1997.............. 26
Consolidated Statements of Operations for the Years Ended December 31,
1995, 1996 and 1997...................................................... 27
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997......................................... 28
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997...................................................... 29
Notes to Consolidated Financial Statements................................ 30
</TABLE>

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
CSG Systems International, Inc.:

We have audited the accompanying consolidated balance sheets of CSG Systems
International, Inc. (a Delaware corporation) and Subsidiaries as of December
31, 1996 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. 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 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 financial statements referred to above present fairly,
in all material respects, the financial position of CSG Systems International,
Inc. and Subsidiaries as of December 31, 1996 and 1997, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.

Arthur Andersen LLP

Omaha, Nebraska
January 26, 1998

<PAGE>

CSG SYSTEMS INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
-------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 6,134 $ 20,417
Accounts receivable--
Trade--
Billed, net of allowance of $819 and $1,394............. 33,141 45,122
Unbilled................................................ 5,220 2,080
Other.................................................... 1,342 1,400
Deferred income taxes.................................... 45 443
Other current assets..................................... 2,574 2,664
-------- ---------
Total current assets..................................... 48,456 72,126
-------- ---------
Property and equipment, net............................... 13,093 17,157
Investment in discontinued operations..................... 732 --
Software, net............................................. 13,629 1,959
Noncompete agreements and goodwill, net................... 25,730 13,938
Client contracts and related intangibles, net............. 9,752 64,640
Deferred income taxes..................................... 1,356 6,909
Other assets.............................................. 2,162 3,064
-------- ---------
Total assets............................................. $114,910 $ 179,793
======== =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current maturities of long-term debt..................... $ 10,000 $ 6,750
Customer deposits........................................ 6,450 7,002
Trade accounts payable................................... 12,620 11,795
Accrued liabilities...................................... 8,627 11,023
Deferred revenue......................................... 5,384 11,063
Conversion incentive payments............................ -- 17,768
Accrued income taxes..................................... 945 3,207
-------- ---------
Total current liabilities................................ 44,026 68,608
-------- ---------
Non-current liabilities:
Long-term debt, net of current maturities................ 22,500 128,250
Deferred revenue......................................... 6,420 7,789
Conversion incentive payments............................ -- 8,232
-------- ---------
Total non-current liabilities............................ 28,920 144,271
-------- ---------
Commitments and contingencies (Note 9)
Stockholders' equity (deficit):
Preferred stock, par value $.01 per share; 10,000,000
shares authorized; zero shares issued and outstanding... -- --
Common stock, par value $.01 per share; 100,000,000
shares authorized; 2,890,522 and 5,996,563 shares
reserved for common stock warrants, employee stock
purchase plan and stock incentive plans; 25,488,876
shares and 25,479,968 shares issued and outstanding..... 255 255
Common stock warrants; zero and 1,500,000 warrants issued
and outstanding......................................... -- 26,145
Additional paid-in capital............................... 111,367 112,870
Deferred employee compensation........................... (1,207) (636)
Notes receivable from employee stockholders.............. (861) (685)
Cumulative translation adjustments....................... 573 (1)
Accumulated deficit...................................... (68,163) (171,034)
-------- ---------
Total stockholders' equity (deficit)..................... 41,964 (33,086)
-------- ---------
Total liabilities and stockholders' equity............... $114,910 $ 179,793
======== =========
</TABLE>

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

<PAGE>

CSG SYSTEMS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Processing and related services........... $ 96,343 $ 113,422 $ 131,399
Software license and maintenance fees..... 57 14,736 26,880
Professional services..................... 4 4,139 13,525
--------- ---------- ----------
Total revenues.......................... 96,404 132,297 171,804
--------- ---------- ----------
Expenses:
Cost of revenues:
Cost of processing and related services:
Direct costs............................. 46,670 52,027 58,259
Amortization of acquired software........ 11,000 11,003 10,596
Amortization of client contracts and
related intangibles..................... 4,092 4,092 4,293
--------- ---------- ----------
Total cost of processing and related
services............................... 61,762 67,122 73,148
Cost of software license and maintenance
fees..................................... -- 5,040 9,787
Cost of professional services............. -- 2,083 7,047
--------- ---------- ----------
Total cost of revenues.................. 61,762 74,245 89,982
--------- ---------- ----------
Gross margin.............................. 34,642 58,052 81,822
--------- ---------- ----------
Operating expenses:
Research and development:
Research and development................. 14,278 20,206 22,586
Charge for purchased research and
development............................. -- -- 105,484
Impairment of capitalized software
development costs....................... -- -- 11,737
Selling and marketing..................... 3,770 8,213 10,198
General and administrative:
General and administrative............... 11,406 13,702 19,385
Amortization of noncompete agreements
and goodwill............................ 5,680 6,392 6,927
Impairment of intangible assets.......... -- -- 4,707
Stock-based employee compensation........ 841 3,570 449
Depreciation.............................. 5,687 5,121 6,884
--------- ---------- ----------
Total operating expenses................ 41,662 57,204 188,357
--------- ---------- ----------
Operating income (loss).................... (7,020) 848 (106,535)
--------- ---------- ----------
Other income (expense):
Interest expense.......................... (9,070) (4,168) (5,324)
Interest income........................... 663 844 1,294
Other..................................... -- -- 349
--------- ---------- ----------
Total other............................. (8,407) (3,324) (3,681)
--------- ---------- ----------
Loss before income taxes, extraordinary
item and discontinued operations.......... (15,427) (2,476) (110,216)
Income tax provision...................... -- -- --
--------- ---------- ----------
Loss before extraordinary item and
discontinued operations................... (15,427) (2,476) (110,216)
Extraordinary loss from early
extinguishment of debt................... -- (1,260) (577)
--------- ---------- ----------
Loss from continuing operations............ (15,427) (3,736) (110,793)
--------- ---------- ----------
Discontinued operations:
Loss from operations...................... (3,093) -- --
Gain (loss) from disposition.............. (660) -- 7,922
--------- ---------- ----------
Total gain (loss) from discontinued
operations............................. (3,753) -- 7,922
--------- ---------- ----------
Net loss................................... $ (19,180) $ (3,736) $ (102,871)
========= ========== ==========
Net loss per common share (basic and
diluted):
Loss attributable to common stockholders.. $ (5.51) $ (.14) $ (4.32)
Extraordinary loss from early
extinguishment of debt................... -- (.06) (.02)
Gain (loss) from discontinued operations.. (1.09) -- .31
--------- ---------- ----------
Net loss attributable to common
stockholders............................. $ (6.60) $ (.20) $ (4.03)
========= ========== ==========
Weighted average common shares (basic and
diluted).................................. 3,450,415 21,872,860 25,497,033
========= ========== ==========
</TABLE>

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

<PAGE>

CSG SYSTEMS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
NOTES
RECEIVABLE TOTAL
COMMON ADDITIONAL DEFERRED FROM CUMULATIVE STOCKHOLDERS'
PREFERRED COMMON STOCK PAID-IN EMPLOYEE EMPLOYEE TRANSLATION ACCUMULATED EQUITY
STOCK STOCK WARRANTS CAPITAL COMPENSATION STOCKHOLDERS ADJUSTMENTS DEFICIT (DEFICIT)
--------- ------ -------- ---------- ------------ ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1994......... $-- $ 26 $ -- $ 549 $ -- $ -- $-- $ (41,004) $(40,429)
Issuance of
1,655,500 shares
of common stock
under employee
stock purchase
plan (ranging
from $.22 to
$4.25 per
share)........... -- 16 -- 7,171 (5,809) (976) -- -- 402
Amortization of
deferred stock-
based employee
compensation
expense.......... -- -- -- -- 841 -- -- -- 841
Accretion of
redeemable
convertible
preferred stock.. -- -- -- -- -- -- -- (36) (36)
Accrued dividends
on redeemable
convertible
preferred stock.. -- -- -- -- -- -- -- (3,586) (3,586)
Net loss.......... -- -- -- -- -- -- -- (19,180) (19,180)
---- ---- ------- -------- ------ ----- ---- --------- --------
Balance, December
31, 1995......... -- 42 -- 7,720 (4,968) (976) -- (63,806) (61,988)
Issuance of
3,335,000 shares
of common stock
for cash pursuant
to initial public
offering, net of
issuance costs
($13.43 per
share)........... -- 33 -- 44,761 -- -- -- -- 44,794
Accrued dividends
on redeemable
convertible
preferred stock.. -- -- -- -- -- -- -- (614) (614)
Conversion of
8,999,999 shares
of redeemable
convertible
preferred stock
into 17,999,998
shares of common
stock............ -- 180 -- 58,929 -- -- -- -- 59,109
Amortization of
deferred stock-
based employee
compensation
expense.......... -- -- -- -- 3,570 -- -- -- 3,570
Purchase and
cancellation of
105,600 shares of
common stock
(ranging from
$.22 per share to
$.45 per share).. -- -- -- (221) 191 5 -- -- (25)
Issuance of 5,925
shares of common
stock as
compensation ($15
per share)....... -- -- -- 89 -- -- -- -- 89
Exercise of stock
options for 4,800
shares of common
stock (ranging
from $1.25 per
share to $3.25
per share)....... -- -- -- 6 -- -- -- -- 6
Purchase of 5,753
shares of common
stock pursuant to
employee stock
purchase plan
(ranging from
$13.07 per share
to $17.21 per
share)........... -- -- -- 83 -- -- -- -- 83
Accretion of
redeemable
convertible
preferred stock.. -- -- -- -- -- -- -- (7) (7)
Payment of note
receivable from
employee
stockholder...... -- -- -- -- -- 110 -- -- 110
Translation
adjustments...... -- -- -- -- -- -- 573 -- 573
Net loss.......... -- -- -- -- -- -- -- (3,736) (3,736)
---- ---- ------- -------- ------ ----- ---- --------- --------
Balance, December
31, 1996......... -- 255 -- 111,367 (1,207) (861) 573 (68,163) 41,964
Issuance of 1,683
shares of common
stock for
purchase of
assets ($44.56
per share)....... -- -- -- 75 -- -- -- -- 75
Issuance of
1,500,000 common
stock warrants,
granted as part
of the SUMMITrak
asset acquisition
(exercise price
of $24 per
share)........... -- -- 26,145 -- -- -- -- -- 26,145
Amortization of
deferred stock-
based employee
compensation
expense.......... -- -- -- -- 449 -- -- -- 449
Purchase and
cancellation of
104,550 shares of
common stock
(ranging from
$.22 per share to
$4.25 per
share)........... -- -- -- (344) 122 176 -- -- (46)
Exercise of stock
options for
74,300 shares of
common stock
(ranging from
$1.25 per share
to $29.75 per
share)........... -- -- -- 1,018 -- -- -- -- 1,018
Purchase of 19,659
shares of common
stock pursuant to
employee stock
purchase plan
(ranging from
$14.34 per share
to $34.00 per
share)........... -- -- -- 439 -- -- -- -- 439
Translation
adjustments...... -- -- -- -- -- -- (574) -- (574)
Tax benefit of
stock options
exercised........ -- -- -- 315 -- -- -- -- 315
Net loss.......... -- -- -- -- -- -- -- (102,871) (102,871)
---- ---- ------- -------- ------ ----- ---- --------- --------
Balance, December
31, 1997......... $-- $255 $26,145 $112,870 $ (636) $(685) $ (1) $(171,034) $(33,086)
==== ==== ======= ======== ====== ===== ==== ========= ========
</TABLE>

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

<PAGE>

CSG SYSTEMS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(19,180) $ (3,736) $(102,871)
Adjustments to reconcile net loss to net cash
provided by operating activities--
Depreciation................................... 5,687 5,121 6,884
Amortization................................... 21,686 22,180 23,035
Deferred income taxes.......................... (296) (1,455) (5,891)
Charge for purchased research and development.. -- -- 105,484
Impairment of capitalized software development
costs......................................... -- -- 11,737
Impairment of intangible assets................ -- -- 4,707
Stock-based employee compensation.............. 841 3,570 449
Extraordinary loss from early extinguishment of
debt.......................................... -- 1,260 577
Loss (gain) from discontinued operations....... 3,753 -- (7,922)
Changes in operating assets and liabilities:
Trade accounts and other receivables, net..... (3,108) (12,090) (9,511)
Other current and noncurrent assets........... 179 (2,914) 11
Trade accounts payable and other liabilities.. 2,215 17,194 4,723
-------- -------- ---------
Net cash provided by operating activities.... 11,777 29,130 31,412
-------- -------- ---------
Cash flows from investing activities:
Purchases of property and equipment, net....... (5,202) (8,181) (9,389)
Acquisition of TCI related assets.............. -- -- (106,500)
Acquisition of businesses, net of cash
acquired...................................... -- (4,918) --
Additions to software.......................... -- (3,553) (10,185)
Proceeds from disposition of discontinued
operations.................................... (92) 2,000 8,654
-------- -------- ---------
Net cash used in investing activities........ (5,294) (14,652) (117,420)
-------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock......... 402 44,883 1,457
Payment of note receivable from employee
stockholder................................... -- 110 --
Purchase and cancellation of common stock...... -- (25) (46)
Payment of dividends for redeemable convertible
preferred stock............................... -- (4,497) --
Proceeds from long-term debt................... -- -- 150,000
Payments on long-term debt..................... (9,932) (52,568) (47,500)
Payment of deferred financing costs............ -- -- (3,181)
-------- -------- ---------
Net cash provided by (used in) financing
activities.................................... (9,530) (12,097) 100,730
-------- -------- ---------
Effect of exchange rate fluctuations on cash.... -- 150 (439)
-------- -------- ---------
Net increase (decrease) in cash and cash
equivalents.................................... (3,047) 2,531 14,283
Cash and cash equivalents, beginning of period.. 6,650 3,603 6,134
-------- -------- ---------
Cash and cash equivalents, end of period........ $ 3,603 $ 6,134 $ 20,417
======== ======== =========
Supplemental disclosures of cash flow
information:
Cash paid (received) during the period for--
Interest....................................... $ 8,463 $ 4,000 $ 4,767
Income taxes................................... $ 1,176 $ (655) $ 3,357
</TABLE>

Supplemental disclosure of noncash investing and financing activities:
During 1995, the Company issued common stock in connection with an employee
stock purchase plan and received full recourse promissory notes from
employees totaling $1.0 million.

During 1996, the Company converted 8,999,999 shares of redeemable convertible
preferred stock into 17,999,998 shares of common stock.

During 1997, the Company granted 1.5 million common stock warrants, valued at
$26.1 million, and recorded a liability for $26.0 million for conversion
incentive payments as part of the purchase price for the SUMMITrak asset
acquisition.

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

29
<PAGE>

CSG SYSTEMS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

CSG Systems International, Inc. (the "Company" or "CSG"), a Delaware
corporation, was formed on October 17, 1994, for the purpose of acquiring all
of the outstanding shares of Cable Services Group, Inc. from First Data
Corporation ("FDC"). The Company acquired all of the outstanding shares of
Cable Services Group, Inc. on November 30, 1994 (the "Acquisition") (Note 3).
Subsequent to the Acquisition, Cable Services Group, Inc.'s name was changed
to CSG Systems, Inc. ("CSG Systems"). The Company did not have any substantive
operations prior to the acquisition of Cable Services Group, Inc.
Contemporaneously with the Acquisition, the Company purchased all of the
outstanding shares of Anasazi Inc. ("Anasazi") (Note 10). On June 28, 1996,
the Company purchased all of the outstanding shares of Bytel Limited ("Bytel")
(Note 3).

The Company is a leading provider of customer care and billing solutions for
cable television and direct broadcast satellite providers, and also serves on-
line services and telecommunications providers. The Company's products and
services enable its clients to focus on their core businesses, improve
customer service, and enter new markets and operate more efficiently. The
Company offers its clients a full suite of processing and related services,
and software and professional services which automate customer care and
billing functions. These functions include set-up and activation of customer
accounts, sales support, order processing, invoice calculation, production and
mailing, management reporting, and customer analysis for target marketing. The
Company's products and services combine the reliability and high volume
transaction processing capabilities of a mainframe platform with the
flexibility of client/server architecture.

The Company operates in one business segment, generating 88.8 percent, 76.6
percent, and 73.1 percent of its total revenues from U.S. cable television
providers during the years ended December 31, 1995, 1996 and 1997,
respectively. The Company generated zero percent, 8.1 percent, and 9.6 percent
of its total revenues from sources outside the U.S., primarily in Europe,
during the years ended December 31, 1995, 1996 and 1997, respectively.

The Company derived approximately 84.8 percent, 77.3 percent and 76.7
percent of its total revenues in the years ended December 31, 1995, 1996 and
1997, respectively, from its core product, Communications Control System
("CCS") and related products and ancillary services.

The Company has two significant clients which, in the aggregate, represented
approximately 53.1 percent, 48.8 percent, and 53.0 percent of total revenues
for the years ended December 31, 1995, 1996 and 1997, respectively. The
largest single client contributed approximately 27.9 percent, 25.9 percent and
32.9 percent of total revenues for the years ended December 31, 1995, 1996 and
1997, respectively.

The Company completed an initial public offering ("IPO") of its Common Stock
in March 1996. The Company sold 3,335,000 shares of Common Stock at an initial
public offering price of $15 per share, resulting in net proceeds to the
Company, after deducting underwriting discounts and offering expenses, of
approximately $44.8 million. As of the closing of the IPO, all of the
8,999,999 outstanding shares of Redeemable Convertible Series A Preferred
Stock ("Preferred Stock") were automatically converted into 17,999,998 shares
of Common Stock. The Company used IPO proceeds to repay $40.3 million of
outstanding bank indebtedness (Note 6) and to pay $4.5 million of accrued
dividends on the Preferred Stock (Note 5).

In September 1997, the Company acquired certain SUMMITrak assets from Tele-
Communications, Inc. ("TCI") and entered into a 15-year processing contract
with TCI (Note 4).

<PAGE>

CSG SYSTEMS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
the Company and CSG Systems for all periods presented and the accounts of
Bytel since June 28, 1996. All material intercompany accounts and transactions
have been eliminated.

Use of Estimates in Preparation of Consolidated Financial Statements

The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.

Revenue Recognition

Processing and related services are recognized as the services are
performed. Processing fees are typically billed based on the number of
client's customers serviced, ancillary services are typically billed on a per
transaction basis, and certain customized print and mail services are billed
on a usage basis. Software license fees consist of both one-time perpetual
licenses and term licenses. Perpetual license fees are typically recognized
upon delivery, depending upon the nature and extent of the installation and/or
customization services, if any, to be provided by the Company. Term license
fees and maintenance fees are recognized ratably over the contract term.
Professional services are recognized as the related services are performed.

In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 97-2, "Software Revenue Recognition" ("SOP 97-2"). SOP 97-2 provides
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions. SOP 97-2 is effective for software
transactions entered into by the Company beginning in fiscal year 1998. The
Company believes that its current revenue recognition accounting policies are
in compliance with SOP 97-2.

Payments received for revenues not yet recognized are reflected as deferred
revenue in the accompanying consolidated balance sheets.

Property and Equipment

Property and equipment are recorded at cost and are depreciated over their
estimated useful lives ranging from two to ten years. Depreciation is computed
using the straight-line method for financial reporting purposes. Depreciation
for income tax purposes is computed using accelerated methods.

<PAGE>

CSG SYSTEMS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Property and equipment at December 31 consists of the following (in
thousands):

<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Computer equipment....................................... $ 15,546 $ 21,734
Leasehold improvements................................... 1,205 2,347
Operating equipment...................................... 4,156 5,205
Furniture and equipment.................................. 1,971 3,834
Construction in process.................................. 857 358
Other.................................................... 22 22
-------- --------
23,757 33,500
Less--accumulated depreciation........................... (10,664) (16,343)
-------- --------
Property and equipment, net............................ $ 13,093 $ 17,157
======== ========
</TABLE>

Realizability of Long-Lived and Intangible Assets

The Company continually evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful life of long-lived and
intangible assets may warrant revision or that the remaining balance of these
assets may not be recoverable. The Company evaluates the recoverability of its
long-lived and intangible assets by measuring the carrying amount of the
assets against the estimated undiscounted future cash flows associated with
them. At the time such evaluations indicate that the future undiscounted cash
flows of certain long-lived and intangibles assets are not sufficient to
recover the carrying value of such assets, the assets are adjusted to their
estimated fair values.

Software

Software at December 31 consists of the following (in thousands):

<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Acquired software........................................ $ 33,422 $ 33,516
Internally developed software............................ 3,131 2,547
-------- --------
36,553 36,063
Less--accumulated amortization........................... (22,924) (34,104)
-------- --------
Software, net.......................................... $ 13,629 $ 1,959
======== ========
</TABLE>

Acquired software resulted from the Acquisition and is stated at cost.
Amortization expense related to acquired software for the years ended December
31, 1995, 1996 and 1997 was $11.0 million, $11.0 million and $10.6 million,
respectively.

The Company capitalizes certain software development costs when the
resulting products reach technological feasibility and begins amortization of
such costs upon the general availability of the products for licensing. The
Company capitalized costs of $3.1 million and $9.7 million for 1996 and 1997,
which included $2.5 million and $8.4 million of internal development costs and
$0.6 million and $1.3 million of purchased software, respectively.

Amortization of internally developed software and acquired software costs
begins when the products are available for general release to clients and is
computed separately for each product as the greater of a) the ratio of current
gross revenue for a product to the total of current and anticipated gross
revenue for the product or

<PAGE>

CSG SYSTEMS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

b) the straight-line method over the remaining estimated economic life of the
product. Currently, estimated lives of two to five years are used in the
calculation of amortization. Amortization expense related to capitalized
software development costs for the years ended December 31, 1995, 1996 and
1997 was zero, $0.01 million and $0.6 million, respectively.

The Company continually evaluates the carrying value of its unamortized
capitalized software development costs. The amount by which the unamortized
capitalized costs exceed the net realizable value of the asset is expensed.
During the fourth quarter of 1997, the Company recorded a charge of $11.7
million related to certain CSG Phoenix(TM) assets. After the consideration of
multiple factors and events, consisting primarily of an increase in demand for
the Company's outsourced processing services and previously announced delays
on the delivery of CSG Phoenix, such assets were reduced to their estimated
net realizable value as of December 31, 1997. The charge primarily includes
previously capitalized internal development costs and purchased software
incorporated into the product.

Noncompete Agreements and Goodwill

Noncompete agreements and goodwill as of December 31 are as follows (in
thousands):

<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Noncompete agreements.................................... $ 26,812 $ 25,340
Goodwill................................................. 11,490 8,088
-------- --------
38,302 33,428
Less--accumulated amortization........................... (12,572) (19,490)
-------- --------
Noncompete agreements and goodwill, net................ $ 25,730 $ 13,938
======== ========
</TABLE>

The noncompete agreements resulted from acquisitions and are being amortized
on a straight-line basis over the terms of the agreements, ranging from three
to five years. Goodwill resulted from acquisitions and is being amortized over
seven to ten years on a straight-line basis (Note 3).

During the fourth quarter of 1997, the Company recorded a charge of $4.7
million for the impairment of certain intangible assets related to software
systems which the Company has decided to no longer market and support. This
impairment charge relates principally to the Company's CableMAX product.
CableMAX is a personal computer based customer management system that is
targeted at smaller cable systems of 2,500 customers or less. During the
fourth quarter of 1997, the Company decided not to invest the resources
necessary to make the software year 2000 compliant, resulting in the
impairment to the CableMAX intangible assets. The estimated fair value of the
CableMAX intangible assets was based upon an analysis of expected future cash
flows and a quoted purchase price from an independent buyer.

Client Contracts and Related Intangibles

Client contracts and client conversion methodologies from the Acquisition
are being amortized over their estimated lives of five and three years,
respectively. The value assigned to the TCI processing contract (Note 4) is
being amortized over the 15-year life of the contract in proportion to the
guaranteed processing revenues under the contract. As of December 31, 1996 and
1997, accumulated amortization for client contracts and related intangibles
was $8.5 million and $12.8 million, respectively.

Customer Deposits

The Company requires postage and communications deposits from its clients
based on contractual arrangements. These amounts are reflected as current
liabilities regardless of the contract period.

<PAGE>

CSG SYSTEMS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Financial Instruments with Market Risk and Concentrations of Credit Risk

In the normal course of business, the Company is exposed to credit risk
resulting from the possibility that a loss may occur from the failure of
another party to perform according to the terms of a contract. The Company
regularly monitors credit risk exposures and takes steps to mitigate the
likelihood of these exposures resulting in a loss. The primary counterparties
to the Company's accounts receivable and sources of the Company's revenues
consist of cable television providers throughout the United States. The
Company generally does not require collateral or other security to support
accounts receivable.

Financial Instruments

The Company's balance sheet financial instruments as of December 31, 1996
and 1997 include cash and cash equivalents, accounts receivable, accounts
payable, conversion incentive payments, and long-term debt.

Because of their short maturities, the carrying amounts of cash equivalents,
accounts receivable, accounts payable, and conversion incentive payments
approximate fair value. The carrying amount of the Company's long-term debt
(including current maturities) approximates fair value due to its variable
interest rates.

In December 1997, the Company entered into a three-year interest rate collar
with a major bank to manage its risk from its variable rate long-term debt.
The underlying notional amount covered by the collar agreement is $75.0
million as of December 31, 1997, and decreases over the three-year term in
relation to the scheduled principal payments on the long-term debt. Any
payment on the 4.9 percent (LIBOR) interest rate floor, or receipt on the 7.5
percent (LIBOR) interest rate cap component of the collar, would be recognized
as additional interest expense or as a reduction to interest expense,
respectively, in the period incurred. There are no amounts due or receivable
under this agreement as of December 31, 1997, and the agreement had no effect
on the Company's interest expense for 1997. The fair value of the collar
agreement at December 31, 1997, based on a quoted market price, was not
significant.

Translation of Foreign Currency

The Company's foreign subsidiary, Bytel, uses the British pound as its
functional currency. Bytel's assets and liabilities are translated into U.S.
dollars at the exchange rates in effect at the balance sheet date. Revenues
and expenses are translated at the average rates of exchange prevailing during
the period. Translation gains and losses are included as a component of
stockholders' equity. Transaction gains and losses related to intercompany
accounts are not material and are included in the determination of net loss.

Net Loss Per Common Share

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"),
which specifies the computation, presentation and disclosure requirements for
earnings per share ("EPS"). SFAS 128 is effective for periods ending after
December 15, 1997, and requires retroactive restatement of EPS for all prior
periods presented. The statement replaces the previous "primary earnings per
share" computation with a "basic earnings per share" and redefines the
"diluted earnings per share" computation. Basic EPS is computed by dividing
income attributable to common stockholders by the weighted average number of
common shares outstanding during the period. Diluted EPS is consistent with
the calculation of basic EPS while giving effect to any dilutive potential
common shares outstanding during the period.

<PAGE>

CSG SYSTEMS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

A reconciliation of the net loss attributable to common stockholders in
total dollars (in thousands) and on a per share basis is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
Loss before extraordinary item and
discontinued operations............... $ (15,427) $ (2,476) $ (110,216)
Preferred stock dividends.............. (3,586) (614) --
--------- ---------- ----------
Loss attributable to common
stockholders.......................... (19,013) (3,090) (110,216)
Extraordinary item..................... -- (1,260) (577)
Gain (loss) from discontinued
operations............................ (3,753) -- 7,922
--------- ---------- ----------
Net loss attributable to common
stockholders........................ $ (22,766) $ (4,350) $ (102,871)
========= ========== ==========
Loss before extraordinary item and
discontinued operations............... $ (4.47) $ (.11) $ (4.32)
Preferred stock dividends.............. (1.04) (.03) --
--------- ---------- ----------
Loss attributable to common
stockholders.......................... (5.51) (.14) (4.32)
Extraordinary item..................... -- (.06) (.02)
Gain (loss) from discontinued
operations............................ (1.09) -- .31
--------- ---------- ----------
Net loss attributable to common
stockholders........................ $ (6.60) $ (.20) $ (4.03)
========= ========== ==========
Weighted average common shares......... 3,450,415 21,872,860 25,497,033
========= ========== ==========
</TABLE>

The following weighted average dilutive potential common shares are excluded
from the diluted EPS calculation as their effect was antidilutive.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1995 1996 1997
---------- --------- -------
<S> <C> <C> <C>
Redeemable convertible preferred stock......... 17,999,998 3,115,384 --
Common stock options........................... 82,465 305,818 571,967
Common stock warrants.......................... -- -- 152,718
---------- --------- -------
Total dilutive potential common shares....... 18,082,463 3,421,202 724,685
========== ========= =======
</TABLE>

In previously reported periods, the Company followed Staff Accounting
Bulletin ("SAB") No. 83 in calculating EPS for the periods prior to the
Company's IPO. Pursuant to SAB No. 83, all preferred and common stock and
options outstanding for periods prior to the IPO had been treated as if they
were outstanding for all periods presented, including periods in which the
effect was antidilutive. SAB No. 98, released in February 1998, requires that
SFAS 128 now be followed in determining the outstanding shares for purposes of
calculating EPS for all periods. As a result, the Company has restated its EPS
(and all other per share computations) for the periods prior to and including
the IPO following the guidelines of SFAS 128. The changes in the weighted
average common shares and the EPS are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Previously reported weighted average common
shares.......................................... 22,494,748 24,988,244
Restated weighted average common shares.......... 3,450,415 21,872,860
Previously reported net loss per share
attributable to common stockholders............. $ (.86) $ (.15)
Restated net loss per share attributable to
common stockholders............................. $ (6.60) $ (.20)
</TABLE>

<PAGE>

CSG SYSTEMS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Stock-Based Compensation

The Company accounts for its stock-based compensation plans under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations, and follows the disclosure provisions
of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). See Note 12 for the required
disclosures under SFAS 123.

Increase in Authorized Shares and Stock Split

In January 1996, the Company completed a two-for-one stock split of its
Common Stock effected as a stock dividend. Accordingly, all share and per
share amounts have been retroactively adjusted. In March 1996, the Company
amended its Certificate of Incorporation to increase the number of authorized
shares of Common Stock to 100,000,000 and to authorize 10,000,000 shares of
preferred stock.

Reclassification

Certain December 31, 1995 and 1996 amounts have been reclassified to conform
to the December 31, 1997 presentation.

3. BUSINESS ACQUISITIONS

CSG Systems

On November 30, 1994, the Company acquired all of the outstanding shares of
CSG Systems for approximately $137 million in cash. The Acquisition was funded
primarily from proceeds from the issuance of common and Preferred Stock (Note
5) and long-term debt (Note 6).

The Acquisition was recorded using the purchase method of accounting. Of the
$137 million purchase price, $13 million was allocated to net tangible assets,
with property and equipment of $10.2 million being the primary component. The
cost in excess of the fair value of the net tangible assets was allocated to
the following intangible assets (in thousands):

<TABLE>
<CAPTION>
ASSET LIFE
AMOUNT (YEARS)
-------- ----------
<S> <C> <C>
Purchased research and development....................... $ 40,953 --
Acquired software........................................ 33,000 3
Noncompete agreement and goodwill:
Noncompete agreement................................... 25,000 5
Goodwill............................................... 6,812 10
Client contracts and related intangibles:
Client contracts....................................... 15,000 5
Client conversion methodologies........................ 3,280 3
--------
$124,045
========
</TABLE>

Purchased research and development represents research and development of
software technologies which had not reached technological feasibility as of
the Acquisition date, and had no other alternative future use. Purchased
research and development was charged to operations as of the Acquisition date.

Acquired software represents the value assigned to existing software
products, the noncompete agreement is with FDC and has a five-year term,
client contracts represent the value assigned to existing client contracts as
of the Acquisition date, and client conversion methodologies represent the
value assigned to documented conversion methods, systems, materials and
procedures that enable the Company to efficiently convert clients to the
Company's systems.

<PAGE>

CSG SYSTEMS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Bytel Limited

On June 28, 1996, the Company acquired all of the outstanding shares of
Bytel for approximately $3.1 million in cash and assumption of certain
liabilities of $1.6 million (the "Bytel Acquisition"). The Bytel Acquisition
was recorded using the purchase method of accounting. The cost in excess of
the fair value of the net tangible assets acquired of $4.2 million was
allocated to goodwill. Bytel is a United Kingdom company which provides
customer management software to the cable and telecommunications industries in
the United Kingdom.

The following represents the unaudited pro forma results of operations as if
the Bytel Acquisition had occurred on January 1 (in thousands, except per
share amounts):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Total revenues................................. $ 105,275 $ 136,536
Loss attributable to common stockholders....... (21,246) (4,464)
Pro forma loss per share attributable to common
stockholders (basic and diluted).............. (6.16) (.20)
</TABLE>

The pro forma financial information shown above does not purport to be
indicative of results of operations that would have occurred had the
acquisition taken place at the beginning of the periods presented or of the
future results of operations.

4. SUMMITRAK ASSET ACQUISITION

On August 10, 1997, the Company signed a 15-year exclusive contract with a
TCI affiliate to consolidate 13.0 million TCI customers onto the Company's
customer care and billing system (the "TCI Contract"). On August 10, 1997, the
Company also entered into an agreement with TCI affiliates to acquire certain
SUMMITrak assets, a client/server, open systems, in-house customer care and
billing system in development (the "SUMMITrak Acquisition"). The SUMMITrak
assets purchased consisted primarily of software, hardware, assembled
workforce and intellectual property. Both the SUMMITrak Acquisition and the
TCI Contract closed and became effective September 19, 1997. The purchase
price for the SUMMITrak Acquisition was determined as follows (in thousands):

<TABLE>
<S> <C>
Cash paid at closing............................................... $106,000
Transaction-related costs.......................................... 500
Common Stock warrants granted...................................... 26,145
Conversion incentive payments...................................... 26,000
--------
Total purchase price............................................. $158,645
========
</TABLE>

The conversion incentive payments represent payments to TCI to i) incent TCI
to timely convert its customers to the Company's system, and ii) reimburse TCI
for the cost of converting to the Company's system. TCI will receive a monthly
payment of $0.15 per customer for the first 24 months after the customer is
converted to the Company's system (total of $3.60 per customer), up to a total
of $14.0 million. A total of 3.89 million TCI customers converted to the
Company's systems equates to the $14.0 million. TCI will be paid an additional
$12.0 million when the Company processes a total of 13.0 million TCI customers
on its system. Based on the conversions scheduled as of December 31, 1997, the
Company expects to pay TCI $17.8 million and $8.2 million in 1998 and 1999,
respectively.

The Company granted 1.5 million warrants to TCI as part of the overall
purchase price. The warrants have a five-year life with a $24 per share
exercise price. The fair value of the warrants included in the purchase price

<PAGE>

CSG SYSTEMS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

was estimated as of the date of the grant using the Black-Scholes pricing
model. TCI will be able to exercise 1.0 million of the warrants when the
Company processes a total of 13.0 million TCI customers on its customer care
and billing system. The remaining 0.5 million warrants are exercisable at
various increments as additional TCI customers are converted to the Company's
systems. The total 1.5 million warrants are exercisable when the total number
of TCI customers processed on the Company's systems reaches 14.25 million.

The Company has included the conversion incentive payments and the estimated
fair value of the warrants in the overall purchase price as the Company
believes that such consideration is assured beyond a reasonable doubt as i)
TCI currently has the necessary customers under its control to meet the
milestones described above, ii) the Company believes it has the means to
timely convert the necessary customers to its systems to meet the milestones
described above, iii) both the Company and TCI are financially incented to
timely convert the necessary customers to the Company's system to meet the
milestones described above, and iv) TCI's minimum financial commitments are
based on a minimum of 13.0 million customers.

The Company engaged an independent party to assist in the allocation of the
purchase price to the assets acquired. The Company allocated the purchase
price as follows (in thousands):

<TABLE>
<S> <C>
Purchased research and development............................... $105,000
15-Year Contract................................................. 51,575
Other assets..................................................... 2,070
--------
Total allocated purchase price................................. $158,645
========
</TABLE>

Purchased research and development represents research and development of
software technologies which had not reached technological feasibility as of
the acquisition date, and had no other alternative future use. Purchased
research and development was charged to operations in the fourth quarter of
1997. The value assigned to the 15-Year Contract will be amortized over the
life of the contract in proportion to the guaranteed processing revenues under
the contract. The other assets will be depreciated over their estimated useful
lives of three years.

5. REDEEMABLE CONVERTIBLE PREFERRED STOCK

The following table represents the Preferred Stock activity (in thousands,
except share and per share amounts):

<TABLE>
<S> <C>
Balance, at inception (October 17, 1994)......................... $ --
Issuance of 8,999,999 shares for cash ($6.56 per share)........ 59,062
Accretion...................................................... 4
Accrued dividends.............................................. 297
--------
Balance, December 31, 1994....................................... 59,363
Accretion...................................................... 36
Accrued dividends.............................................. 3,586
--------
Balance, December 31, 1995....................................... 62,985
Accretion...................................................... 7
Accrued dividends.............................................. 614
Payment of accrued dividends................................... (4,497)
Conversion into 17,999,998 shares of Common Stock.............. (59,109)
--------
Balance, December 31, 1996....................................... $ --
========
</TABLE>

In conjunction with the Acquisition (Note 3), the Company sold for cash
8,999,999 shares of Preferred Stock with a par value of $.01 per share. Total
proceeds, net of issuance costs of $0.4 million, were $59.1 million

<PAGE>

CSG SYSTEMS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

($6.56 per share). The holders of Preferred Stock were entitled to vote on all
matters and were entitled to the number of votes equivalent to the number of
shares of Common Stock into which such shares of Preferred Stock were
converted. All Preferred Stock converted into 17,999,998 shares of the
Company's Common Stock upon completion of the IPO in March 1996.

Prior to completion of the IPO, the holders of the outstanding shares of
Preferred Stock were entitled to receive cumulative annual dividends of $.3967
per share, prior to any dividends being paid on the Company's Common Stock.
Upon completion of the IPO and the resulting conversion into Common Stock, the
Company paid dividends on the Preferred Stock of $4.5 million.

Prior to completion of the IPO, the Company was required to redeem Preferred
Stock on November 30, 2005. The redemption price was payable in cash and was
equal to $6.61 per share plus any accrued and unpaid dividends. The excess of
the redemption value over the carrying value was being accreted through
periodic charges to accumulated deficit over the life of the issue.

6. DEBT

The Acquisition discussed in Note 3 was partially funded with debt placed
through a $100.0 million debt agreement with a bank (the "1994 Debt"). The
1994 Debt consisted of term loans of $95.0 million, and a revolving credit
facility in the amount of $5.0 million. The Company made early payments on the
1994 Debt of $2.4 million and $2.0 million in 1995 and 1996, respectively. In
conjunction with the IPO, the Company refinanced its 1994 Debt with its bank
in April 1996. The Company repaid approximately $40.6 million of the
outstanding 1994 Debt, principally with IPO proceeds. The remaining balance of
the 1994 Debt was refinanced with a single $40.0 million term note with the
bank (the "1996 Debt"). In conjunction with this refinancing, the Company
recorded an extraordinary loss of $1.3 million for the write-off of deferred
financing costs. The Company did not recognize any income tax benefit related
to the extraordinary loss. Under the 1996 Debt agreement, the Company retained
its $5.0 million revolving credit facility. The Company paid an annual
commitment fee of .375 percent on its unused portion of the revolving credit
facility. Interest rates for the 1994 and 1996 Debt were based on an adjusted
LIBOR rate or the bank's prime rate and were chosen at the option of the
Company.

In conjunction with the SUMMITrak Acquisition, the Company entered into a
$190.0 million debt agreement with a bank in September 1997 (the "1997 Debt"),
which consists of a $150.0 million term facility (the "Term Credit Facility")
and a $40.0 million revolving credit facility. The proceeds from the Term
Credit Facility were used to pay the $106.0 million cash purchase price for
the SUMMITrak assets, retire the Company's existing 1996 Debt of $27.5
million, and pay transaction costs of $3.4 million. The remaining proceeds
were used for general corporate purposes. In conjunction with this
refinancing, the Company recorded an extraordinary loss of $0.6 million for
the write-off of deferred financing costs. The Company did not recognize any
income tax benefit related to the extraordinary loss. In December 1997, the
Company made an optional principal payment on the Term Credit Facility of
$15.0 million.

Interest rates for the 1997 Debt, including the term and revolving credit
facilities, are chosen at the option of the Company and are based on the LIBOR
rate or the prime rate, plus an additional percentage spread, with the spread
dependent upon the Company's leverage ratio. For the period from September
1997 through December 31, 1997, the spread on the LIBOR rate and prime rate
was 1.75 percent and 0.5 percent, respectively. Based on the Company's
leverage ratio as of December 31, 1997, the spread on the LIBOR rate and prime
rate was reduced to 1.0 percent and 0 percent, respectively, effective January
1, 1998. As required by the 1997 Debt agreement, the Company entered into an
interest rate collar agreement in December 1997 to manage its risk from the
variable rate features of the 1997 Debt agreement (Note 2).

<PAGE>

CSG SYSTEMS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The 1997 Debt agreement is collateralized by all of the Company's assets and
the stock of its subsidiaries. The 1997 Debt agreement requires maintenance of
certain financial ratios and contains other restrictive covenants, including
restrictions on payment of dividends, a fixed charge coverage ratio, a
leverage ratio, and restrictions on capital expenditures. As of December 31,
1997, the Company was in compliance with all covenants. The payment of
dividends or other types of distributions on any class of the Company's stock
is restricted unless the Company's leverage ratio, as defined in the 1997 Debt
agreement, is under 1.50. As of December 31, 1997, the leverage ratio was
2.80.

Long-term debt as of December 31 consists of the following (in thousands):

<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Term Credit Facility, due September 2002, quarterly
payments beginning June 30, 1998, ranging from $2.3
million to $18.0 million, interest at adjusted LIBOR
plus 1.75 percent (7.4375 percent at December 31,
1997)................................................ $ -- $135,000
1996 Debt, due December 2000, quarterly principal
payments ranging from $1.6 million to $2.5 million,
interest at adjusted LIBOR plus 1.0 percent (6.375
percent at December 31, 1996)........................ 32,500 --
Revolving credit facilities, due September 2002,
interest at adjusted LIBOR plus 1.75 percent (7.4375
percent at December 31, 1997)........................ -- --
-------- --------
32,500 135,000
Less-current portion.................................. (10,000) (6,750)
-------- --------
Long-term debt, net of current maturities............. $ 22,500 $128,250
======== ========
</TABLE>

There were no borrowings made on the revolving credit facilities during the
years ended December 31, 1995, 1996 and 1997. Under the 1997 Debt agreement,
the Company pays an annual commitment fee on the unused portion of the
revolving credit facility, based upon the Company's leverage ratio. For the
period from September 1997 through December 31, 1997, the fee was .375
percent. The Company's ability to borrow under the current revolving credit
facility is subject to maintenance of certain levels of eligible receivables.
At December 31, 1997, $30.6 million of the $40.0 million revolving credit
facility was available to the Company based on the level of eligible
receivables.

As of December 31, 1996 and 1997, unamortized deferred financing costs were
$0.9 million and $2.9 million, respectively. Deferred financing costs are
amortized to interest expense over the related term of the debt agreement
using a method which approximates the effective interest rate method. Interest
expense for the years ended December 31, 1995, 1996 and 1997, includes
amortization of deferred financing costs of approximately $0.9 million, $0.6
million, and $0.5 million, respectively.

As of December 31, 1997, scheduled maturities of the Company's long-term
debt for each of the years ending December 31 are (in thousands):

<PAGE>

CSG SYSTEMS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

7. INCOME TAXES

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." SFAS 109 is an asset and liability approach which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events which have been recognized in the Company's
Consolidated Financial Statements or tax returns. In estimating future tax
consequences, SFAS 109 generally considers all expected future events other
than enactment of or changes in the tax law or rates.

Income tax provision (benefit) consists of the following (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Current:
Federal........................................ $ 249 $ 1,225 $ 4,466
State.......................................... 47 230 615
Foreign........................................ -- -- 810
------- ------- --------
296 1,455 5,891
------- ------- --------
Deferred:
Federal........................................ (6,329) (2,305) (38,298)
State.......................................... (1,188) (433) (5,276)
Foreign........................................ -- 503 393
------- ------- --------
(7,517) (2,235) (43,181)
------- ------- --------
Change in valuation allowance.................... 7,221 780 37,290
------- ------- --------
Net income tax provision (benefit)............... $ -- $ -- $ --
======= ======= ========
</TABLE>

The difference between the income tax benefit computed at the statutory
federal income tax rate and the financial statement provision (benefit) for
income taxes is summarized as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Benefit at federal rate of 34 percent in 1995
and 1996, and 35 percent in 1997............. $(6,521) $(1,270) $(36,005)
Change in valuation allowance................. 6,656 1,283 37,290
Effective state income taxes.................. (694) (134) (3,030)
Basis differences from acquisition............ -- (1,346) --
Amortization of nondeductible goodwill........ 227 231 1,582
Stock-based employee compensation............. 286 1,214 157
Other......................................... 46 22 6
------- ------- --------
$ -- $ -- $ --
======= ======= ========
</TABLE>

41
<PAGE>

CSG SYSTEMS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The deferred tax assets and liabilities result from differences in the
timing of the recognition of certain income and expense items for tax and
financial reporting purposes. The sources of these differences at December 31
are as follows (in thousands):

<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Current deferred tax assets (liabilities):
Accrued expenses and reserves.......................... $ 744 $ 1,325
Deferred revenue....................................... -- 3,033
-------- --------
744 4,358
Valuation allowance.................................... (699) (3,915)
-------- --------
$ 45 $ 443
======== ========
Noncurrent deferred tax assets (liabilities):
Purchased research and development..................... $ 13,040 $ 51,224
Software............................................... 4,743 8,345
Investment in discontinued operations.................. 2,053 --
Client contracts and related intangibles............... 1,766 1,508
Noncompete agreements.................................. 2,467 3,965
Property and equipment................................. (262) 443
Other.................................................. 883 (1,168)
-------- --------
24,690 64,317
Valuation allowance.................................... (23,334) (57,408)
-------- --------
$ 1,356 $ 6,909
======== ========
</TABLE>

As part of the Bytel Acquisition, the Company acquired certain net deferred
tax assets and established a valuation allowance of approximately $1.0 million
against those net deferred tax assets as of the acquisition date.

At December 31, 1997, management evaluated its recent operating results, as
well as projections for 1998 and concluded that it was more likely than not
that certain of the deferred tax assets would be realized. Accordingly, the
Company has recognized a deferred tax asset of $7.4 million. The Company has
recorded a valuation allowance against the remaining deferred tax assets since
realization of these future benefits is not sufficiently assured as of
December 31, 1997.

8. EMPLOYEE RETIREMENT BENEFIT PLANS

Defined Benefit Retirement Plan

Effective December 1, 1994, as part of the Acquisition, the Company
established a replacement plan for certain former employees of FDC which
transferred their service credit to CSG. No new participants were allowed to
enter this plan after December 1, 1994. Benefits under the plan are based on
years of service and the employees' compensation during employment.
Contributions to the plan are determined by an independent actuary on the
basis of periodic valuations using the projected unit cost method. The
Company's general funding policy is to contribute annually the maximum amount
that can be deducted for income tax purposes. The periodic pension expense for
the years ended December 31, 1995, 1996 and 1997, was $0.2 million each year.
The net pension liability recognized in the accompanying consolidated balance
sheets as of December 31, 1996 and 1997 is $0.2 million and $0.3 million,
respectively.

Incentive Savings Plan

The Company sponsors a defined contribution plan covering substantially all
employees of the Company. Participants may contribute up to 15 percent of
their annual wages, subject to certain limitations, as pretax, salary

42
<PAGE>

CSG SYSTEMS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

deferral contributions. The Company makes certain matching and service related
contributions to the plan. The Company's matching and service related
contributions for the years ended December 31, 1995, 1996 and 1997, were
approximately $1.3 million, $1.5 million and $2.0 million, respectively.

Deferred Compensation Plan

The Company established a non-qualified deferred compensation plan during
1996 for certain Company executives which allows the participants to defer a
portion of their annual compensation. The Company provides a 25 percent
matching contribution of the participant's deferral, up to a maximum of $6,250
per year. The Company also credits the participant's deferred account with a
specified rate of return on an annual basis. The Company records the
actuarially-determined present value of the obligations expected to be paid
under the plan. As of December 31, 1996 and 1997, the Company has recorded a
liability for this obligation of $0.1 million and $0.6 million, respectively.
The Company's expense for this plan for the years ended December 31, 1996 and
1997, which includes Company contributions and interest expense, was $0.02
million and $0.1 million, respectively. The plan is unfunded.

9. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases certain office and production facilities under operating
leases which run through 2007. Future aggregate minimum lease payments under
these agreements for the years ending December 31, including a lease entered
into subsequent to December 31, 1997, are as follows (in thousands):

<TABLE>
<S> <C>
1998............................................................... $ 3,949
1999............................................................... 3,884
2000............................................................... 3,191
2001............................................................... 2,653
2002............................................................... 2,320
Thereafter......................................................... 6,516
-------
$22,513
=======
</TABLE>

Total rent expense for the years ended December 31, 1995, 1996 and 1997, was
approximately $1.8 million, $1.9 million and $3.4 million, respectively.

Service Agreements

The Company has service agreements with FDC and subsidiaries for data
processing services, communication charges and other related services. FDC
provides data processing and related services required for the operation of
the Company's CCS system.

Prior to 1997, the Company was charged a usage-base fee per customer for
data processing and related services. The other services were charged based on
usage and/or actual costs. Effective January 1, 1997, the Company renegotiated
its services agreement with FDC and its subsidiaries. The new agreement
expires December 31, 2001, and is cancelable at the Company's option with a)
notice of six months any time after January 1, 2000, and b) payment of a
termination fee equal to 20 percent of the fees paid in the twelve months
preceding the notification of termination. Under the new agreement, the
Company is charged based on usage and/or actual costs, and is subject to
certain limitations as to the amount of increases or decreases in usage
between years. The total amount paid under the service agreements for the
years ended December 31, 1995, 1996 and 1997, was approximately $16.9 million,
$19.6 million and $19.2 million, respectively. The Company believes it could
obtain data processing services from alternative sources, if necessary.

43
<PAGE>

CSG SYSTEMS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Legal Proceedings

In December 1996, CSG settled claims for indemnification against FDC arising
from CSG's acquisition from FDC of CSG Systems. The claims related to certain
patents held by Ronald A. Katz Technology Licensing Partnership L.P. ("RAKTL")
which allegedly were infringed by the use of certain CSG products. The terms
of the settlement were not material to CSG. In connection with the settlement,
CSG entered into a non-exclusive patent license agreement with RAKTL, the
terms of which are not expected by CSG to have a material effect on its
business or future results of operations.

In addition, from time to time, the Company is involved in other litigation
relating to claims arising out of its operations in the normal course of
business. In the opinion of the Company's management, after consultation with
outside legal counsel, the ultimate dispositions of such matters will not have
a materially adverse effect on the Company's consolidated financial position
or results of operations.

10. DISCONTINUED OPERATIONS

Contemporaneously with the Acquisition, the Company purchased all of the
outstanding shares of Anasazi on November 30, 1994, for $6 million in cash.
Anasazi provides central reservation systems and services for the hospitality
and travel industry. On August 31, 1995, the Company completed a tax-free
reorganization of Anasazi. Stockholders of the Company purchased a controlling
interest in Anasazi as part of the reorganization. As part of the
reorganization, the Company received $2.0 million cash, surrendered all of its
ownership rights in Anasazi's Common Stock and forgave a portion of a note
receivable from Anasazi. In return for suchconsideration, the Company received
a $2.7 million note receivable and shares of convertible preferred stock
representing less than a 20 percent ownership interest in Anasazi. In January
1996, the Company received a $2.0 million principal payment on this note,
reducing the principal balance of the note to $0.7 million. In June 1996, the
Company converted the remaining $0.7 million note balance into convertible
preferred stock and stock warrants of Anasazi. In September 1997, the Company
sold its remaining interest in Anasazi for $8.6 million cash.

The Company accounted for its ownership in Anasazi as discontinued
operations after its acquisition in 1994. As a result, the loss from
discontinued operations included in the Company's Consolidated Financial
Statements consists of the net losses of Anasazi prior to September 1, 1995.
The loss of $0.7 million in August 1995, and the gain of $7.9 million in
September 1997 relates to the Company's partial and then final disposition of
its ownership interest in Anasazi. Revenues from Anasazi's operations for the
eight months ended August 31, 1995 were $5.8 million. The Company did not
recognize any income tax benefit or provision related to the loss or gain from
discontinued operations.

11. COMMON STOCK

In connection with its formation, the Company reserved 4,500,000 shares of
Common Stock for sale to executive officers and other employees of the
Company. At the time of the Acquisition, the Company sold 2,587,500 shares of
Common Stock to executive officers for $575,000 in cash ($.22 per share):
1,150,000 shares under stock purchase agreements and 1,437,500 shares under
performance stock purchase agreements. Of the

44
<PAGE>

CSG SYSTEMS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

remaining reserved shares, 1,655,500 shares were reserved for sale under the
Company's Employee Stock Purchase Plan, and 257,000 shares were reserved for
issuance under the Company's 1995 Incentive Stock Plan (Note 12).

The following table represents the activity for Common Stock of the Company
acquired under employee stock purchase agreements since inception (October 17,
1994) through December 31, 1997:

<TABLE>
<CAPTION>
STOCK
PURCHASE RESTRICTED
AGREEMENT STOCK PERFORMANCE TOTAL
SHARES SHARES STOCK SHARES SHARES
--------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
Shares outstanding, inception
(October 17, 1994)............... -- -- -- --
Shares issued during the
period......................... 1,150,000 -- 1,437,500 2,587,500
--------- ------- --------- ---------
Shares outstanding, December 31,
1994............................. 1,150,000 -- 1,437,500 2,587,500
Shares issued during the year... -- 593,000 1,062,500 1,655,500
--------- ------- --------- ---------
Shares outstanding, December 31,
1995............................. 1,150,000 593,000 2,500,000 4,243,000
Shares repurchased and canceled
in 1996........................ -- (25,600) (80,000) (105,600)
--------- ------- --------- ---------
Shares outstanding, December 31,
1996............................. 1,150,000 567,400 2,420,000 4,137,400
Shares repurchased and canceled
in 1997........................ -- (44,400) (60,150) (104,550)
--------- ------- --------- ---------
Shares outstanding, December 31,
1997............................. 1,150,000 523,000 2,359,850 4,032,850
========= ======= ========= =========
Shares subject to repurchase,
December 31, 1997.............. -- 165,640 369,360 535,000
========= ======= ========= =========
</TABLE>

The 1,437,500 shares purchased under the performance stock purchase
agreements for the period from inception (October 17, 1994) through December
31, 1994, were subject to a repurchase option of the Company at $.005 per
share, exercisable upon termination of employment with the Company. These
shares were originally scheduled to be released from the repurchase option not
later than November 30, 2001. Upon completion of the IPO, these shares were no
longer subject to the repurchase option.

Employee Stock Purchase Plan

The Company reserved 1,655,500 shares of Common Stock for sale to certain
employees pursuant to the Employee Stock Purchase Plan (the "Plan"). During
the year ended December 31, 1995, the Company sold 1,655,500 shares of Common
Stock under the Plan for $1,378,000 (ranging from $.22 to $4.25 per share),
consisting of $402,000 cash and $976,000 in full recourse promissory notes. Of
the shares sold, 593,000 shares were sold under restricted stock agreements
("Restricted Stock") and 1,062,500 shares were sold under performance stock
agreements.

Restricted Stock. The Restricted Stock shares are subject to certain
conditions and restrictions as prescribed by the Restricted Stock agreements.
The Company has the option to repurchase the shares upon termination of
employment, for the greater of the original purchase price or book value, as
defined, depending upon the termination circumstances. These shares were
originally scheduled to be released from the repurchase option not later than
November 30, 2001. Upon completion of the IPO, 160,000 shares owned by certain
executive officers were no longer subject to the repurchase option. In
addition, the repurchase option for the remaining number of shares decreased
to 20 percent annually over a five-year period, commencing on the later of an
employee's hire date or November 30, 1994. During 1996 and 1997, the Company
repurchased 25,600 unvested shares and 44,400 unvested shares, respectively,
from terminated employees.

Performance Stock. The shares sold under performance stock agreements are
subject to certain conditions and restrictions as prescribed by the
agreements. The Company has the option to repurchase the shares for the

45
<PAGE>

CSG SYSTEMS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

original purchase price upon termination of employment. These shares were
originally scheduled to be released from the repurchase option not later than
November 30, 2001. Upon completion of the IPO, the repurchase option for these
shares decreased to 20 percent annually over a five-year period, commencing on
the later of an employee's hire date or November 30, 1994. During 1996 and
1997, the Company repurchased 80,000 unvested shares and 60,150 unvested
shares, respectively, from terminated employees.

Certain Company employees financed a portion of their Common Stock purchases
under the Plan with full recourse promissory notes. The notes accrue interest
at seven percent annually and have terms of approximately five years. As of
December 31, 1996 and 1997, the outstanding balance of the promissory notes is
approximately $861,000 and $685,000, respectively, and is reflected as a
component of stockholders' equity.

Stock-Based Employee Compensation Expense

The structure of the performance stock agreements required "variable"
accounting for the related shares until the performance conditions were
removed on October 19, 1995, thereby establishing a measurement date. At that
date, the Company recognized total deferred compensation of $5.8 million which
represents the difference between the price paid by the employees and the
estimated fair value of the stock at October 19, 1995. The fair value of the
stock was estimated by the Company to be $2.75 per share at that date. Prior
to the completion of the IPO, the deferred compensation was being recognized
as stock-based employee compensation expense on a straight-line basis from the
time the shares were purchased through November 30, 2001. Upon completion of
the IPO, 1,437,500 of performance stock shares owned by certain executive
officers of the Company were no longer subject to the repurchase option. In
addition, the repurchase option for the remaining performance stock shares
decreased to 20 percent annually over a five-year period, commencing on the
later of an employee's hire date or November 30, 1994. As a result,
approximately $3.2 million of stock-based employee compensation expense was
recorded in the month the IPO was completed. Stock-based employee compensation
expense for the years ended December 31, 1995, 1996 and 1997, was $0.8
million, $3.6 million and $0.4 million, respectively. Deferred compensation of
$1.2 million and $0.6 million, respectively, as of December 31, 1996 and 1997,
is reflected as a component of stockholders' equity. Amortization of the
stock-based deferred compensation subsequent to 1997 will be approximately
$0.3 million per year.

For discussion of outstanding rights to acquire additional Common Stock, see
Notes 4 and 12.

12. STOCK-BASED COMPENSATION PLANS

Stock Incentive Plans

During 1995, the Company adopted the Incentive Stock Plan (the "1995 Plan")
whereby 257,000 shares of the Company's Common Stock have been reserved for
issuance to eligible employees of the Company in the form of stock options.
The stock options are granted at prices set by the Board of Directors or a
Committee of the Board (the "Board"), provided the minimum exercise price is
no less than the fair market value of the Company's Common Stock at the date
of the grant. The term of the outstanding options is 10 years. The 170,400
options outstanding under the 1995 Plan at December 31, 1997, vest annually
over 5 years.

During 1996, the Company adopted the 1996 Stock Incentive Plan (the "1996
Plan") whereby 2,400,000 shares of the Company's Common Stock have been
reserved for issuance to eligible employees of the Company in the form of
stock options, stock appreciation rights, performance unit awards, restricted
stock awards, or stock bonus awards. In December 1997, upon shareholder
approval, the number of shares authorized for issuance under the 1996 Plan was
increased to 4,000,000. As of December 31, 1997, 100,000, 947,150 and 810,560
options outstanding under the 1996 Plan vest annually over 3, 4 and 5 years,
respectively.

46
<PAGE>

CSG SYSTEMS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

During 1997, the Company adopted the Stock Option Plan for Non-Employee
Directors (the "Director Plan") whereby 100,000 shares of the Company's Common
Stock have been reserved for issuance to non-employee Directors of the Company
in the form of stock options. Stock options under the Director Plan are
granted at prices set by the Board, provided the minimum exercise price is no
less than the fair market value of the Company's Common Stock at the date of
the grant. The term of the outstanding options is 10 years. The vesting
periods of the options are determined under the discretion of the Board. The
48,000 options outstanding under the Director Plan at December 31, 1997, vest
annually over 3 years.

A summary of the stock options issued under the 1996 Plan, the Director
Plan, and 1995 Plan and changes during the years ending December 31 are as
follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1995 1996 1997
---------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of year................ -- $ -- 251,750 $ 1.35 1,434,730 $18.62
Granted............... 251,750 1.35 1,223,380 21.78 1,111,700 23.21
Exercised............. -- -- (4,800) 1.33 (74,300) 13.59
Forfeited............. -- -- (35,600) 7.36 (396,020) 20.70
------- ----- --------- ------ --------- ------
Outstanding, end of
year................... 251,750 $1.35 1,434,730 $18.62 2,076,110 $20.86
======= ===== ========= ====== ========= ======
Options exercisable at
year-end............... -- 42,150 265,076
======= ========= =========
Weighted average fair
value of options
granted during the
year................... $ .30 $ 9.77 $ 9.20
======= ========= =========
Options available for
grant.................. 5,250 1,211,545 2,195,865
======= ========= =========
</TABLE>

The following table summarizes information about the Company's stock options
as of December 31, 1997:

<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>
$1.25--$ 3.75........... 170,400 7.65 $ 1.37 58,350 $ 1.40
$15.00--$22.125......... 1,254,450 8.83 18.17 111,500 17.33
$23.50--$29.875......... 514,760 8.81 29.17 95,226 29.27
$33.56--$46.75.......... 136,500 9.82 38.62 -- --
--------- ---- ------ ------- ------
$1.25--$46.75........... 2,076,110 8.79 $20.86 265,076 $18.11
========= ==== ====== ======= ======
</TABLE>

In January 1998, the Company granted 489,300 options at a weighted average
price per share of $42.22 under the 1996 Plan, with 468,000 shares and 21,300
shares vesting over four and two years, respectively. These options are not
reflected in the above tables as they were granted subsequent to December 31,
1997.

1996 Employee Stock Purchase Plan

During 1996, the Company adopted the 1996 Employee Stock Purchase Plan
whereby 250,000 shares of the Company's Common Stock have been reserved for
sale to employees of the Company and its subsidiaries

<PAGE>

CSG SYSTEMS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

through payroll deductions. The price for shares purchased under the plan is
85% of market value on the last day of the purchase period. Purchases are made
at the end of each month. During 1996 and 1997, respectively, 5,753 shares and
19,659 shares have been purchased under the plan for $83,000 ($13.07 to $17.21
per share) and $439,000 ($14.34 to $34.00 per share).

Stock-Based Compensation Plans

At December 31, 1997, the Company had four stock-based compensation plans,
as described above. The Company accounts for these plans under APB Opinion No.
25, under which no compensation expense has been recognized in 1995, 1996 or
1997, except for $89,000 recognized in 1996 for 5,925 shares granted as stock
bonus awards under the 1996 Plan.

Had compensation expense for the Company's four stock-based compensation
plans been based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS 123, the Company's net loss and net
loss per share attributable to common stockholders for 1995, 1996 and 1997
would approximate the pro forma amounts as follows (in thousands, except per
share amounts):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- ------- ---------
<S> <C> <C> <C>
Net loss:
As reported................................ $(22,766) $(4,350) $(102,871)
Pro forma.................................. (22,770) (5,263) (104,776)
Net loss per common share (basic and
diluted):
As reported................................ (6.60) (.20) (4.03)
Pro forma.................................. (6.60) (.24) (4.11)
</TABLE>

The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions for options granted in 1995, 1996 and 1997, respectively: risk-
free interest rates of 6.3 percent, 6.1 percent and 6.3 percent; dividend
yield of zero percent for all years; expected lives of 4.0, 5.0, and 3.9
years; and volatility of zero percent, 40.0 percent, and 40.0 percent.
Consistent with SFAS 123, the Company assumed zero volatility for all options
granted prior to the date the Company qualified as a public entity.

The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 applies only to 1995, 1996 and 1997,
and additional awards in future years are anticipated.

48
<PAGE>

CSG SYSTEMS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

13. UNAUDITED QUARTERLY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA):

<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1996:
Total revenues.................... $26,757 $30,431 $35,320 $ 39,789
Gross margin...................... 10,153 12,288 15,722 19,889
Operating income (loss)(1)(2)..... (4,992) (82) 1,541 4,381
Income (loss) attributable to
common stockholders.............. (7,117) (696) 948 3,775
Extraordinary item(1)............. (1,260) -- -- --
Net income (loss) attributable to
common stockholders.............. (8,377) (696) 948 3,775
Net income (loss) per share (basic
and diluted):
Income (loss) attributable to
common stockholders............ (.65) (.03) .04 .15
Extraordinary item.............. (.11) -- -- --
Net income (loss) attributable
to common stockholders......... (.76) (.03) .04 .15

1997:
Total revenues.................... $38,582 $41,030 $43,278 $ 48,914
Gross margin...................... 16,094 18,862 21,235 25,631
Operating income (loss)(4)........ 1,327 2,117 3,740 (113,719)
Income (loss) attributable to
common stockholders.............. 1,164 1,731 3,113 (116,224)
Extraordinary item(3)............. -- -- (577) --
Discontinued operations(3)........ -- -- 7,922 --
Net income (loss) attributable to
common stockholders.............. 1,164 1,731 10,458 (116,224)
Net income (loss) per share (basic
and diluted):
Income (loss) attributable to
common stockholders............ .05 .07 .12 (4.56)
Extraordinary item.............. -- -- (.02) --
Discontinued operations......... -- -- .30 --
Net income (loss) attributable
to common stockholders......... .05 .07 .40 (4.56)
</TABLE>

- --------
(1) The first quarter of 1996 includes a $3.2 million non-recurring charge, or
$0.29 per share, to record stock-based compensation expense for certain
employees vesting in their performance stock purchase agreements effective
with the closing of the IPO (Note 11). In addition, the first quarter of
1996 includes a $1.3 million extraordinary charge for early extinguishment
of debt (Note 6).
(2) During the fourth quarter of 1996, the Company recorded a reduction in
operating expenses of approximately $1.4 million, or $0.05 per share,
related to favorable pricing adjustments for processing services
previously recorded as expense ratably over the first three quarters of
1996.
(3) The third quarter of 1997 includes a $0.6 million extraordinary charge for
early extinguishment of debt (Note 6). In addition, the third quarter of
1997 includes a $7.9 million gain on disposition of discontinued
operations (Note 10).
(4) The fourth quarter of 1997 includes the following non-recurring items:
(a) The Company recorded a $105.5 million charge, or $4.14 per share, for
purchased research and development related primarily to the SUMMITrak
asset acquisition (Note 4).
(b) The Company recorded a $11.7 million charge, or $0.46 per share, for
impairment of certain capitalized software development costs (Note 2).
This charge includes internal software development costs of $8.4 million
which were previously capitalized over the first three quarters of 1997
at $2.8 million per quarter.
(c) The Company recorded a $4.7 million charge, or $0.18 per share, for
impairment of certain intangible assets (Note 2).

<PAGE>

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

None.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

See the Proxy Statement for the Company's Annual Meeting of Stockholders,
which information regarding directors is incorporated herein by reference.
Information regarding the Company's executive officers will be omitted from
such proxy statement and is furnished in a separate item captioned "Executive
Officers of the Registrant" included in Part I of this Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

See the Proxy Statement for the Company's Annual Meeting of Stockholders,
which information is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

See the Proxy Statement for the Company's Annual Meeting of Stockholders,
which information is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

See the Proxy Statement for the Company's Annual Meeting of Stockholders,
which information is incorporated herein by reference.

PART IV

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

(a) Financial Statements, Financial Statement Schedules, and Exhibits:

(1) Financial Statements

The financial statements filed as part of this report are listed on
the Index to Consolidated Financial Statements on page 24.

(2) Financial Statement Schedules:

Index to Consolidated Financial Statement Schedules:

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants............................ 53
Schedule II--Valuation and Qualifying Accounts ..................... 54
</TABLE>

(3) Exhibits

Exhibits are listed in the Exhibit Index on page 55.

The Exhibits include management contracts, compensatory plans and
arrangements required to be filed as exhibits to the Form 10-K by
Item 601(10)(iii) of Regulation S-K.

(b) Reports on Form 8-K

Form 8-K dated October 6, 1997, as amended by Form 8-K(A) filed on
December 5, 1997, under Item 2, Acquisition or Disposition of Assets,
was filed with the Securities and Exchange Commission reporting (i) the
execution of a 15-year processing contract with a Tele-Communications,
Inc. (TCI)

50
<PAGE>

affiliate and (ii) the acquisition of certain SUMMITrak assets from TCI
affiliates. The pro forma financial information included in the Form 8-
K(A) was as follows:

Pro forma condensed consolidated balance sheet as of September 30,
1997

Pro forma condensed consolidated statements of operations for the
year and nine months ended December 31, 1996, and September 30, 1997,
respectively.

51
<PAGE>

SIGNATURES

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

CSG Systems International, Inc.

By: /s/ Randy R. Wiese
-------------------
Randy R. Wiese
Controller and Principal
Accounting Officer

Date: April 9, 1998

52
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE OF
CSG SYSTEMS INTERNATIONAL, INC.

To the Board of Directors of
CSG Systems International, Inc.:

We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of CSG Systems International, Inc. and
Subsidiaries included in this Form 10-K and have issued our report thereon
dated January 26, 1998. Our audits were made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule of
CSG Systems International, Inc. listed in Item 14(a)(2) of Part IV of this
Form 10-K is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.

Arthur Andersen LLP

Omaha, Nebraska
January 26, 1998

53
<PAGE>

CSG SYSTEMS INTERNATIONAL, INC.

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------
1995 1996 1997
----- ----- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of period.............................. $ 457 $ 521 $ 819
Acquisition of businesses................................. -- 101 --
Additions charged to expense.............................. 310 319 875
Reductions................................................ (246) (122) (300)
----- ----- ------
Balance, end of period.................................... $ 521 $ 819 $1,394
===== ===== ======
</TABLE>

54
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.01(1) Agreement of Merger among CSG Holdings, Inc., CSG Acquisition
Corporation, Cable Services Group, Inc. and First Data Resources
Inc., dated October 26, 1994
(2.02 intentionally omitted)
2.03(1) Amendment Agreement between First Data Corporation, First Data
Resources Inc., CSG Holdings, Inc., CSG Systems, Inc. and Anasazi
Inc., dated April 27, 1995
(2.04-2.06 intentionally omitted)
2.07(1) Founder Stock Purchase Agreement between CSG Holdings, Inc. and Neal
C. Hansen, dated November 30, 1994
2.08(1) Founder Stock Purchase Agreement between CSG Holdings, Inc. and
George Haddix, dated November 30, 1994
2.09(1) Founder Performance Stock Purchase Agreement between CSG Holdings,
Inc. and Neal C. Hansen, dated November 30, 1994, and first and
second amendments thereto
2.10(1) Founder Performance Stock Purchase Agreement between CSG Holdings,
Inc. and George Haddix, dated November 30, 1994, and first and
second amendments thereto
2.11(1) Series A Preferred Stock Purchase Agreement among CSG Holdings, Inc.
and the purchasers listed on the Schedule of Purchasers attached
thereto, dated November 30, 1994
2.12(1) Stockholders Agreement among CSG Holdings, Inc. and each of the
investors listed on the Schedule of Investors attached thereto,
dated November 30, 1994
(2.13-2.15 intentionally omitted)
2.16(2) Share Purchase Agreement among Cray Systems Ltd., Digital Equipment
Company Ltd. and CSG Systems International, Inc. dated June 28, 1996
2.17(2) Administration and Development Services Agreement between Cray
Systems Ltd. and Bytel Limited dated June 28, 1996
(2.18 intentionally omitted)
2.19(5)* Restated and Amended CSG Master Subscriber Management System
Agreement between CSG Systems, Inc. and TCI Cable Management
Corporation dated August 10, 1997
2.20(5) Asset Purchase Agreement between CSG Systems International, Inc. and
TCI SUMMITrak of Texas, Inc., TCI SUMMITrak, L.L.C., and TCI
Technology Ventures, Inc., dated August 10, 1997
2.21(5) Contingent Warrant to Purchase Common Stock between CSG Systems
International, Inc. and TCI Technology Ventures, Inc., dated
September 19, 1997
2.22(5) Royalty Warrant to Purchase Common Stock between CSG Systems
International, Inc. and TCI Technology Ventures, Inc., dated
September 19, 1997
2.23(5) Registration Rights Agreement between CSG Systems International, Inc.
and TCI Technology Ventures, Inc., dated September 19, 1997
2.24(5) Loan Agreement among CSG Systems, Inc. and CSG Systems International,
Inc. as co-borrowers, and certain lenders and Banque Paribas, as
Agent, dated September 18, 1997
2.25(6) First Amendment to Loan Agreement among CSG Systems, Inc. and CSG
Systems International, Inc. as co-borrowers, and certain lenders and
Banque Paribas, as Agent, dated November 21, 1997
3.01(1) Restated Certificate of Incorporation of the Company
</TABLE>

55
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.02(4) Restated Bylaws of CSG Systems International, Inc.
3.03(4) Certificate of Amendment of Restated Certificate of Incorporation of
CSG Systems International, Inc.
4.01(1) Form of Common Stock Certificate
10.01(1) CSG Systems International, Inc. 1995 Incentive Stock Plan
10.02(1) CSG Employee Stock Purchase Plan
10.03(1) CSG Systems International, Inc. 1996 Stock Incentive Plan
10.04(1) Employee Performance Stock Purchase Agreement between CSG Systems
International, Inc. and George Haddix, dated August 17, 1995, and
first amendment thereto
10.05(1) Employee Restricted Stock Purchase Agreement between CSG Systems
International, Inc. and John P. Pogge, dated March 6, 1995
10.06(1) Employee Performance Stock Purchase Agreement between CSG Systems
International, Inc. and John P. Pogge, dated March 6, 1995, and
first and second amendments thereto
10.07(1) Employee Performance Stock Purchase Agreement between CSG Systems
International, Inc. and John P. Pogge, dated May 16, 1995, and
first and second amendments thereto
(10.08-10.10 intentionally omitted)
10.11(1) Registration Rights Agreement among CSG Systems International, Inc.
and the purchasers listed on the Schedule of Purchasers attached
thereto, dated November 30, 1994
10.12(6) Separation Agreement and Releases with George F. Haddix
10.13(6) Independent Consulting Agreement with George F. Haddix, dated
December 23, 1997
10.14(1) Employment Agreement with Neal C. Hansen
10.15(6) Indemnification Agreements between CSG Systems International, Inc.
and certain directors
10.16(1) Indemnification Agreements between CSG Systems International, Inc.
and its directors and certain officers
10.17(1) Lease, Assignment and Acceptance of Lease, Assignment and Assumption
of Lease, and First Amendment to Lease respecting facility at 2525
North 117th Avenue, Omaha, Nebraska
10.18(1) Lease, Assignment and Assumption of Leases, and Lease Amendment
respecting facility at 14301 Chandler Road, Omaha, Nebraska
10.19(1) Lease and Sublease respecting facility at 4949 Pearl East Circle,
Boulder, Colorado
(10.20-10.36 intentionally omitted)
10.37(1)* Printing and Mailing Services Agreement between CSG Systems, Inc.
and PageMart, Inc., dated August 29, 1995
(10.38 intentionally omitted)
10.39 CSG Systems, Inc. Wealth Accumulation Plan, as amended November 14,
1996 (previously filed as and incorporated by reference to Exhibit
10.38 Registrant's Quarterly Report on Form 10-Q for the period to
the ended September 30, 1996)
10.40(3)* Amended and Restated Services Agreement between First Data
Technologies, Inc. and CSG Systems, Inc., formerly known as Cable
Services Group, Inc., dated December 31, 1996
10.40A(3) Schedules 2.11, 2.14, 5.3 and 6.4 and Exhibit 9(a) to Schedule 5.6
to Amended and Restated Services Agreement between First Data
Technologies, Inc. and CSG Systems, Inc., formerly known as Cable
Services Group, Inc., dated December 31, 1996
</TABLE>

56
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.40B(P)(3) Schedules 1.21 and 1.47 and Exhibit A to Schedule 5.6 to Amended
and Restated Services Agreement between First Data Technologies,
Inc. and CSG Systems, Inc., formerly known as Cable Services
Group, Inc., dated December 31, 1996
(10.41-10.43 intentionally omitted)
10.44(4) CSG Systems International, Inc. Stock Option Plan for Non-
Employee Directors
21.01(6) Subsidiaries of the Company
23.01(6) Consent of Arthur Andersen LLP
27.01(6) Financial Data Schedule (EDGAR Version Only)
99.01(6) Safe Harbor for Forward-Looking Statements Under the Private
Securities Litigation Reform Act of 1995--Certain Cautionary
Statements and Risk Factors
</TABLE>
- --------
(1) Incorporated by reference to the exhibit of the same number to the
Registration Statement No. 333-244 on Form S-1.
(2) Incorporated by reference to the exhibit of the same number to the
Registrant's Current Report on Form 8-K dated July 9, 1996.
(3) Incorporated by reference to the exhibit of the same number to the
Registrant's Annual Report on Form 10-K, as amended, for the year ended
December 31, 1996.
(4) Incorporated by reference to the exhibit of the same number to the
Registrant's Quarterly Report on Form 10-Q for the period ended June 30,
1997.
(5) Incorporated by reference to the exhibit of the same number to the
Registrant's Current Report on Form 8-K dated October 6, 1997.
(6) Previously filed.
* Portions of the exhibit have been omitted pursuant to an application for
confidential treatment, and the omitted portions have been filed separately
with the Commission.