UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13

OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-51027

USA MOBILITY, INC.

(Exact name of Registrant as specified in its Charter)

Registrant’s telephone number, including area code: (703) 660-6677

Securities registered pursuant to Section 12(b) of the

Securities Exchange Act of 1934: None

Securities registered pursuant to Section 12(g) of the

Securities Exchange Act of 1934:

Title of class

Common Stock Par Value $0.0001 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 o

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

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).  Yes x  No o

      The aggregate market value of the common stock held by non-affiliates of the Registrant’s predecessor was $501,535,000 based on the closing price of $28.49 per share on the NASDAQ National Market on June 30, 2004.

      The number of shares of Registrant’s common stock outstanding on March 1, 2005 was 26,828,571

      Portions of the Registrant’s Definitive Proxy Statement for the 2005 Annual Meeting of Stockholders of the Registrant, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A no later than April 29, 2005, are incorporated by reference into Part III of this Report.

TABLE OF CONTENTS

Forward-Looking Statements

      This annual report contains forward-looking statements and information relating to USA Mobility, Inc. and its subsidiaries that are based on management’s beliefs as well as assumptions made by and information currently available to management. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “anticipate”, “believe”, “estimate”, “expect”, “intend” and similar expressions, as they relate to USA Mobility, Inc. or its management, are forward-looking statements. Although these statements are based upon assumptions management considers reasonable, they are subject to certain risks, uncertainties and assumptions, including, but not limited to, those factors set forth below under the captions “Business”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors Affecting Future Operating Results”. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein as anticipated, believed, estimated, expected or intended. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their respective dates. We undertake no obligation to update or revise any forward-looking statements. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the discussion under “Risk Factors Affecting Future Operating Results”.

PART I

ITEM 1.     Business

General

      USA Mobility, Inc., a Delaware corporation (“USA Mobility” or “the Company”), is a leading provider of local, regional and nationwide one-way messaging and two-way messaging services. Through our nationwide wireless networks, we provide messaging services to over 1,000 U.S. cities, including the top 100 Standard Metropolitan Statistical Areas (“SMSAs”). At December 31, 2004, we had approximately 5.7 million and 0.5 million one and two-way messaging units in service, respectively.

      Our principal office is located at 6677 Richmond Highway, Alexandria, Virginia 22306, and our telephone number is (703) 660-6677. Our Internet address is www.usamobility.com. We make available free of charge through our web site our annual, quarterly and current reports, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after such reports are filed or furnished to the Securities and Exchange Commission. The information on our web site is not incorporated by reference into this Annual Report on Form 10-K and should not be considered a part of this report.

Merger of Arch Wireless, Inc. and Metrocall Holdings, Inc.

      We are a holding company formed on March 5, 2004 to effect the merger of Arch Wireless, Inc. (“Arch”) and Metrocall Holdings, Inc. (“Metrocall”) which occurred on November 16, 2004. Prior to the merger, we had not conducted any activities other than those incidental to our formation. The following describes the consideration issued in the merger:

      In order to consummate the transaction, we borrowed $140.0 million to fund a portion of the $150.0 million cash consideration paid to holders of Metrocall common stock.

      After the merger was completed, former holders of Arch common stock and options held approximately 72.5% of the fully diluted shares of our common stock and holders of former Metrocall common stock and options held 27.5% of our fully diluted common stock. The merger was accounted for under the purchase method of accounting pursuant to Statement of Financial Accounting Standards No. 141, “SFAS No. 141”, Business Combinations. Arch was deemed the acquiring entity due primarily to its former shareholders holding a majority of our common stock. Accordingly, the basis of the Arch assets and liabilities were reflected at their historical basis and amounts allocated to Metrocall’s assets and liabilities were based upon the purchase price and estimated fair values of such assets and liabilities as of the merger date. Since Arch was deemed the acquiring entity, Arch’s historical financial results prior to the merger are reflected throughout this Form 10-K.

Industry Overview

      The mobile wireless telecommunications industry consists of multiple voice and data providers which compete among one another, both directly and indirectly, for subscribers. Messaging carriers like us provide customers with services such as numeric and alphanumeric messaging. Customers receive these messaging services through a small, handheld device. The device, often referred to as a pager, signals a subscriber when a message is received through a tone and/or vibration and displays the incoming message on a small screen. With numeric messaging services, the device displays numeric messages, such as a telephone number. With alphanumeric messaging services, the device displays numeric and/or text messages.

      Some messaging carriers also provide two-way messaging services using devices that enable subscribers to respond to messages or create and send wireless email messages to other messaging devices, including pagers, PDAs and personal computers. These two-way messaging devices, often referred to as two-way pagers, are similar to one-way devices except that they have a small QWERTY keyboard that enables subscribers to type messages which are sent to other devices as noted above. We provide two-way messaging and other short messaging based services and applications using our narrowband PCS networks.

      Mobile telephone service, such as cellular and broadband personal communication services (“PCS”), carriers provide telephone voice services as well as services that are functionally identical to the one and two-way messaging services provided by wireless messaging carriers such as us. Customers subscribing to cellular, broadband PCS or other mobile phone services utilize a wireless handset through which they can make and receive voice telephone calls. These handsets are commonly referred to as cellular or PCS telephones. These handsets are also capable of receiving numeric, alphanumeric and e-mail messages as well as information services, such as stock quotes, news, weather and sports updates, voice mail, personalized greetings and message storage and retrieval.

      Technological improvements outside of one-way and two-way paging have generally contributed to the market for wireless messaging services and the provision of better quality services at lower prices to subscribers. These improvements have enhanced the capability and capacity of non-paging mobile wireless messaging networks and devices while lowering equipment and airtime costs. These technological improvements, and the degree of similarity in messaging devices, coverage and battery life, have resulted in competitive messaging services continuing to take market share from our paging subscriber base.

      Although the U.S. traditional paging industry has hundreds of licensed paging companies, the overall number of one and two-way messaging subscribers has been declining as the industry continues to face intense competition from “broadband”/voice wireless services and other forms of wireless message delivery. We believe demand for our one and two-way messaging services has declined over the past several years and that it will continue to decline for the foreseeable future. The decline in demand for our messaging services has largely been attributable to competition from cellular and broadband PCS carriers.

2005 Business Strategy

      We believe that one-way messaging is a cost-effective, reliable means of delivering messages and a variety of other information rapidly over a wide geographic area directly to a mobile person. One-way messaging is a method to communicate at lower cost than current two-way communication methods, such as cellular and PCS telephones. For example, our messaging equipment and airtime required to transmit an average message costs less than the equipment and airtime for cellular and PCS telephones. Furthermore, our one-way messaging devices operate for longer periods due to superior battery life, often exceeding one month on a single battery. Numeric and alphanumeric subscribers generally pay a flat monthly service fee. In addition, these messaging devices are unobtrusive and mobile.

      We believe the combination of Arch and Metrocall provides us with the potential to generate stronger operating and financial results than either company could have achieved separately. We anticipate the combination will result in substantial synergies and cost reductions compared to the costs that would have been incurred to operate the companies on a stand-alone basis due to the expected elimination of duplicative or redundant operations, functions and locations. We also anticipate the net cash flows from operating

activities should allow the combined company to repay the borrowings required to complete the merger within twelve months following November 16, 2004.

      Our business objectives and operating strategy for 2005 will focus on maximizing cash flows provided by our operating activities while integrating the operations of Arch and Metrocall. Key elements of this strategy are:

      Customer and Revenue Retention — Our customer and revenue retention efforts focus on customer service and sales efforts to existing and prospective business, medical and government customers. Retention efforts are supported through our national sales force and customer service model designed to provide support to customers based on their account size. Our customer service representatives assist customers in managing their account activity. In addition, they address customer inquiries from existing or potential customers. We continue to provide customer service at both the field and national level to address the demands and expectations of our customers. Despite our emphasis on customer and revenue retention, we expect that our customers and revenue will continue to decline for the foreseeable future, due to technological competition from the mobile phone/ PDA service providers as they continue to lower cost while adding functionality.

      Sales of New Products and Services — We sell wireless phones, through alliance and dealer agreements with several carriers including Nextel and Cingular, to subscribers that require wireless messaging beyond the capabilities of traditional paging. These offerings partially offset revenue losses associated with subscriber erosion and enable us to satisfy customer demands for a broader range of wireless products and services. However, this represents a very small percentage of our revenues.

      Cost Efficiencies and Integration Efforts — Given the redundant nature of the Arch and Metrocall messaging operations, we expect the combination of sales, customer service, technical and back-office functions will enable us to eliminate a significant amount of operating expenses. From the merger date, our integration efforts have focused and will continue to focus on five major areas including:

      Technical Infrastructure and Network Operations — Integration efforts in this area include, among other things, consolidation of our one-way networks; the deconstruction of one of our two-way networks, the combination of our satellite resources into one common transmission platform and the elimination of approximately one-third of the combined company’s switch locations. As of December 31, 2004, we had approximately 18,500 transmitters servicing the Arch and Metrocall networks, 14 percent of which we expect to eliminate during 2005 as a result of our integration efforts. As a result of fewer transmitters, we expect to incur lower telecommunications and other utility costs and payroll related expenses. The related reduction in transmitter lease expenses will result over time as the leases expire during 2005, 2006, 2007 and beyond.

      Selling and Marketing — Both Arch and Metrocall operate sales offices in most major cities in the United States. The merger will enable us to combine sales offices and service our subscriber base with fewer sales positions in markets where overlapping operations exist. As a result of the merger, we eliminated over 300 selling and marketing positions prior to December 31, 2004. In addition, we expect to close between 45 and 60 of our 141 field sales office locations in 2005. Although we plan to close certain offices, our ability to reduce rent expense will depend on our success negotiating buyout settlements or securing subtenants; otherwise, savings will not occur until the underlying leases expire.

      Billing System Consolidation — Both Arch and Metrocall have a separate, stand-alone billing system and related support staff utilized to monitor and prepare invoices, manage customer service and track subscriber equipment. Each company incurs payroll, license fees and other expenses to operate billing system. We expect to convert the Metrocall billing system into the Arch billing system by the close of the third quarter 2005. However, due to contractual agreements, much of the cost benefit from this consolidation will not occur until 2006.

      Inventory Fulfillment — As of the merger date, Arch and Metrocall operated four distribution centers. In late 2004, we consolidated one of these facilities and expect to consolidate an additional facility in 2005.

      Back-office Operations — These operations include accounting and finance; human resources; customer service, credit and collections; information technology and other overhead functions. We expect to administer the accounting and finance, human resources and other executive functions from our Alexandria, Virginia headquarters. We expect to further consolidate our customer service operations once we consolidate to a single billing system.

Paging and Messaging Services, Products and Operations

      We provide one and two-way messaging services and wireless information services throughout the United States, including the 100 largest markets and Puerto Rico. These services are offered on a local, regional and nationwide basis employing digital networks that cover more than 90% of the United States population.

      Our customers include businesses with employees who need to be accessible to their offices or customers, first responders who need to be accessible in emergencies, and third parties, such as other telecommunications carriers and resellers that pay us to use our networks. Our customers include businesses, professionals, management personnel, medical personnel, field sales personnel and service forces, members of the construction industry and construction trades, real estate brokers and developers, sales and service organizations, specialty trade organizations, manufacturing organizations and government agencies.

      We market and distribute our services through a direct sales force and a small indirect sales force.

      Direct. Our direct sales force leases or sells devices directly to customers ranging from small and medium-sized businesses to Fortune 1000 companies, health care and related businesses and government agencies. We intend to continue to market to commercial enterprises utilizing our direct sales force as these commercial enterprises have typically disconnected service at a lower rate than individual consumers. As of December 2004, our sales personnel were located in 141 offices in 35 states throughout the United States. In addition, we maintain several corporate sales groups focused on national business accounts; local, state and Federal government accounts; advanced wireless services; systems applications; telemetry and other product offerings.

      Indirect. Within our indirect channel we contract with and invoice an intermediary for airtime services. The intermediary or “reseller” in turn markets, sells and provides customer service to the end-user. There is no contractual relationship that exists between us and the end subscriber. Therefore, operating costs per unit to provide these services are significantly below that required in the direct distribution channel. Indirect units in service typically have lower average monthly revenue per unit than direct units in service. The rate at which subscribers disconnect service in our indirect distribution channel has been higher than the rate experienced with our direct customers and we expect this to continue in the foreseeable future.

      The following tables set forth units in service and revenue associated with our two channels of distribution:

          

 

          

 

     Our customers may subscribe to one or two-way messaging services for a monthly service fee which is generally based upon the type of service provided, the geographic area covered, the number of devices provided to the customer and the period of commitment. Voice mail, personalized greeting and equipment loss and/or maintenance protection may be added to either one or two-way messaging services, as applicable, for an additional monthly fee. Equipment loss protection allows subscribers who lease devices to limit their cost of replacement upon loss or destruction of a messaging device. Maintenance services are offered to subscribers who own their device.

      A subscriber to one-way messaging services may select coverage on a local, regional or nationwide basis to best meet his or her messaging needs. Local coverage generally allows the subscriber to receive messages within a small geographic area, such as a city. Regional coverage allows a subscriber to receive messages in a larger area, which may include a large portion of a state or sometimes groups of states. Nationwide coverage allows a subscriber to receive messages in major markets throughout the United States. The monthly fee generally increases with coverage area. Two-way messaging is generally offered on a nationwide basis.

      The following table summarizes the breakdown of our one and two-way units in service at specified dates:

          

 

     We provide wireless messaging services to subscribers for a monthly fee, as described above. In addition, subscribers either lease a messaging device from us for an additional fixed monthly fee or they own a device, having purchased it either from us or from another vendor. We also sell devices to resellers who lease or resell devices to their subscribers and then sell messaging services utilizing our networks.

      The following table summarizes the number of units in service owned by us, our subscribers and our indirect customers at specified dates:

          

 

Messaging Networks and Licenses

      We hold licenses to operate on various frequencies in the 150 MHz, 450 MHz and 900 MHz bands. We are licensed by the Federal Communications Commission (the “FCC”) to operate Commercial Mobile Radio Services (“CMRS”) messaging services. These licenses are utilized to provide one-way and two-way messaging services over our networks.

      We operate local, regional and nationwide one-way networks, which enable our subscribers to receive messages over a desired geographic area. The majority of the messaging traffic that is transmitted on our 150 MHz and 450 MHz frequency bands utilize the Post Office Code Standardization Advisory Group (“POCSAG”) messaging protocol. This technology is an older and less efficient air interface protocol due to slower transmission speeds and minimal error correction. One-way networks operating in 900 MHz frequency bands predominantly utilize the FLEX ^tm protocol developed by Motorola along with some legacy POCSAG traffic that is broadcast in this band as well. The FLEX^tm protocol is a newer technology having the advantage of functioning at higher network speeds which increases the volume of messages that can be transmitted over the network as well as having more robust error correction which facilitates message delivery to a device with fewer transmission errors.

      Our two-way messaging networks utilize the ReFLEX 25^tm protocol, also developed by Motorola. ReFLEX 25^tm promotes spectrum efficiency and high network capacity by dividing coverage areas into zones and sub-zones. Messages are directed to the zone or sub-zone where the subscriber is located allowing the same frequency to be reused to carry different traffic in other zones or sub-zones. As a result, the ReFLEX 25^tm protocol allows the two-way network to transmit substantially more messages than a one-way network using either the POCSAG or FLEX^tm protocols. The two-way network also provides for assured message delivery. The network stores messages that could not be delivered to a device that is out of coverage for any reason, and when the unit returns to service, those messages are delivered. The two-way messaging network operates under a set of licenses, called narrowband PCS, which as noted above, use 900 MHz frequencies. These licenses require certain minimum five and ten-year build-out commitments established by the FCC, which have been satisfied.

      Although the capacity of our networks vary by market, we have a significant amount of excess capacity. We have implemented a plan to manage network capacity and to improve overall network efficiency by consolidating subscribers onto fewer, higher capacity networks with increased transmission speeds. This plan is referred to as network rationalization. Network rationalization will result in fewer networks and therefore fewer transmitter locations which we believe will result in lower operating expenses.

Sources of Equipment

      We do not manufacture any of the messaging devices our customers need to take advantage of our services or any of the network equipment we utilize to provide messaging services. We historically purchased messaging devices primarily from Motorola, which discontinued production of messaging devices in 2002. Since then, we have developed relationships with several vendors for new equipment. Additionally, used equipment is available in the secondary market from various sources. We believe our existing inventory of Motorola devices, returns of devices from our lease customers that cancel service and purchases from other available sources of new and reconditioned devices will be sufficient to meet our expected device requirements for the foreseeable future.

      We currently have network equipment that we believe will be sufficient to meet our equipment requirements for the foreseeable future. In addition, we currently receive maintenance and support services for our network infrastructure components from GTES, LLC (“GTES”) through a support service contract, which will expire in May 2007. We expect that infrastructure and equipment components will continue to be readily available for the foreseeable future, consistent with normal manufacturing and delivery lead times; but

cannot provide any assurance that we will not experience unexpected delays in obtaining equipment in the future. In February 2004, GTES was formed as a venture between our wholly owned subsidiary, Metrocall Ventures, Inc., and the former management and employees of Glenayre Technologies, Inc. paging and infrastructure operations. This venture should provide USA Mobility with access to software and hardware support for critical messaging infrastructure for the foreseeable future.

Competition

      The wireless messaging industry is highly competitive. Companies compete on the basis of price, coverage area, services offered, transmission quality, network reliability and customer service.

      We compete by maintaining competitive pricing for our products and services, by providing broad coverage options through high-quality, reliable messaging networks and by providing quality customer service. Direct competitors for our messaging services include Verizon Wireless Messaging, LLC, Ameritech Mobile Services, Inc. (a subsidiary of SBC Communications, Inc.), Skytel, Inc. (a division of MCI, Inc.) and a variety of other regional and local providers. The products and services we offer also compete with a broad array of wireless messaging services provided by mobile telephone companies. This competition has intensified as prices for these services have declined, and these providers have incorporated messaging capability into their mobile phone devices. Many of these companies possess financial, technical and other resources greater than ours. Such providers currently competing with us in one or more markets include Cingular, Sprint PCS, Verizon Wireless, T-Mobile and Nextel.

      While cellular, PCS and other mobile telephone services are, on average, more expensive than the one and two-way messaging services we provide, such mobile telephone service providers typically provide one and two-way messaging service as an element of their basic service package. Most PCS and other mobile phone devices currently sold in the United States are capable of sending and receiving one and two-way messages. Subscribers that purchase these services no longer need to subscribe to a separate messaging service. As a result, one and two-way messaging subscribers can readily switch to cellular, PCS and other mobile telephone services. The decrease in prices and increase in capacity and functionality for cellular, PCS and other mobile telephone services has led many subscribers to select combined voice and messaging services as an alternative to stand alone messaging services.

Regulation

      The FCC issues licenses to use radio frequencies necessary to conduct our business and regulates many aspects of our operations. Licenses granted to us by the FCC have varying terms, generally of up to ten years, at which time the FCC must approve renewal applications. In the past, FCC renewal applications generally have been granted upon showing compliance with FCC regulations and adequate service to the public. Other than those still pending, the FCC has thus far granted each license renewal we have filed.

      The Communications Act of 1934, as amended (the “Act”), requires radio licensees such as us to obtain prior approval from the FCC for the assignment or transfer of control of any construction permit or station license or authorization of any rights there under. The FCC has thus far granted each assignment or transfer request we have made in connection with a change of control.

      The Act also places limitations on foreign ownership of CMRS licenses, which constitute the majority of licenses we hold. These foreign ownership restrictions limit the percentage of our stockholders’ equity that may be owned or voted, directly or indirectly, by aliens or their representatives, foreign governments or their representatives, or foreign corporations. Our Amended and Restated Certificate of Incorporation permits the redemption of our equity from stockholders where necessary to protect compliance with these requirements.

      Failure to follow the FCC’s rules and regulations can result in a variety of penalties, ranging from monetary fines to the loss of licenses. Additionally, the FCC has the authority to modify licenses or impose additional requirements through changes to its rules.

      As a result of various FCC decisions over the last few years, we no longer pay fees for the termination of traffic originating on the networks of local exchange carriers providing wire-line services interconnected with our services and in some instances we received refunds for prior payments to certain local exchange carriers. We have entered into a number of interconnection agreements with local exchange carriers in order to resolve various issues regarding charges imposed by local exchange carriers for interconnection. We may be liable to local exchange carriers for costs associated with delivering traffic that does not originate on that local exchange carrier’s network, referred to as transit traffic, resulting in some increased interconnection costs for us, depending on further FCC disposition of these issues and the agreements reached between us and the local exchange carriers. If these issues are not ultimately decided through settlement negotiations or via the FCC in our favor, we may be required to pay past due contested transit traffic charges not addressed by existing agreements or offset against payments due from local exchange carriers and may also be assessed interest and late charges for amounts withheld.

      Other legislative or regulatory requirements may impose additional costs on our business. For example, the FCC requires companies such as us to pay levies and fees, such as “Universal Service” fees, to cover the costs of certain regulatory programs and to promote various other societal goals. These requirements increase the cost of the services we provide. By law, we are permitted to pass through most of these regulatory costs to customers and typically do so. Additionally, the Communications Assistance to Law Enforcement Act, and certain rules implementing that Act, requires some telecommunications companies, including us, to design and/or modify their equipment in order to allow law enforcement personnel to “wiretap” or otherwise intercept messages on our networks. Other regulatory requirements restrict how we may use customer information and prohibit certain commercial electronic messages, even to our own customers. Although these requirements have not, to date, had a material adverse effect on our operating results, these or similar requirements could have a material adverse effect on our operating results in the future.

      As a result of the enactment by Congress of the Omnibus Budget Reconciliation Act of 1993 in August 1993, states are now generally preempted from exercising rate or entry regulation over any of our operations. States are not preempted, however, from regulating “other terms and conditions” of our operations, including consumer protection and similar rules of general applicability. Zoning requirements are also generally permissible; however, provisions of the Act prohibit local zoning authorities from unreasonably restricting wireless services. States that regulate our services also may require us to obtain prior approval of (1) the acquisition of controlling interests in other paging companies and (2) a change of control of USA Mobility. At this time, we are not aware of any proposed state legislation or regulations that would have a material adverse impact on our existing operations.

      Certain holders of 12³/4% senior notes of Arch Wireless Communications, Inc., a wholly-owned subsidiary of Arch Wireless, Inc., filed an involuntary petition against it on November 9, 2001 under Chapter 11 of the bankruptcy code in the United States Bankruptcy Court for the District of Massachusetts, Western Division. On December 6, 2001, Arch Wireless Communications, Inc. consented to the involuntary petition and the bankruptcy court entered an order for relief under Chapter 11. Also on December 6, 2001, Arch and 19 of its wholly-owned domestic subsidiaries filed voluntary petitions for relief under Chapter 11 with the bankruptcy court. These cases were jointly administered under the docket for Arch Wireless, Inc., et al., Case No. 01-47330-HJB. After the voluntary petition was filed, Arch and its domestic subsidiaries operated their businesses and managed their properties as debtors-in-possession under the bankruptcy code until May 29, 2002, when Arch emerged from bankruptcy. Arch and its domestic subsidiaries are now operating their businesses and properties as a group of reorganized entities pursuant to the terms of the plan of reorganization.

      We own the service marks “USA Mobility”, “Arch”, “Arch Paging”, and “Metrocall”, and we hold federal registrations for the service marks “Metrocall”, “Arch Wireless” and “PageNet” as well as various other trademarks.

      At March 1, 2005, we employed 2,234 persons. None of our employees is represented by a labor union. We believe our employee relations are good.

      At December 31, 2004, we owned four office buildings in the United States. In addition, we leased facility space, including our executive headquarters, sales, technical and storage facilities in approximately 320 locations in 44 states.

      We lease transmitter sites on commercial broadcast towers, buildings and other fixed structures in approximately 14,000 locations in all 50 states and Puerto Rico. These leases are for various terms and provide for monthly lease payments at various rates.

      USA Mobility was named as a defendant, along with Arch, Metrocall and Metrocall’s former board of directors, in two lawsuits filed in the Court of Chancery of the State of Delaware, New Castle County, on June 29, 2004 and July 28, 2004. Each action was brought by a Metrocall shareholder on his own behalf and purportedly on behalf of all public shareholders of Metrocall’s common stock, excluding the defendants and their affiliates and associates. Each complaint alleges, among other things, that the Metrocall directors violated their fiduciary duties to Metrocall shareholders in connection with the proposed merger between Arch and Metrocall and that USA Mobility and Arch aided and abetted the Metrocall directors’ alleged breach of their fiduciary duties. The complaints seek compensatory relief as well as an injunction to prevent consummation of the merger. USA Mobility believes the allegations made in the complaints are without merit. However, given the uncertainties and expense of litigation, we and the other defendants have entered into a memorandum of understanding with the plaintiffs to settle these actions. The proposed settlement, which must be approved by the court, required, among other things, Arch and Metrocall to issue a supplement to the joint proxy/prospectus (which was first mailed to Metrocall and Arch shareholders on October 22, 2004) and to announce their respective operating results for the three months ended September 30, 2004 in advance of the shareholder meeting that occurred on November 8, 2004. Plaintiffs’ counsel of record in the actions will apply to the Court for an award of attorneys’ fees and expenses not to exceed $275,000, and defendants have agreed to not oppose such application. Metrocall, Arch and USA Mobility have agreed to bear the costs of providing any notice to Metrocall stockholders regarding the proposed settlement.

      On November 10, 2004, former Arch senior executives (the “Former Executives”) filed a Notice of Claim before the JAMS/ Endispute in Boston, Massachusetts, asserting that they were terminated from their employment by the Company pursuant to a “Change in Control” as defined in their respective Executive Employment Agreements (the “Claim”). The Former Executives filed the Claim against Arch Wireless, Inc., Arch Wireless Holdings, Inc., Arch Wireless Operating Co., Inc., MobileMedia Communications, Inc. and Mobile Communications Corporation of America (collectively, the “Respondents”). The Former Executives asserted in their Claim, entitlement to additional compensation under the Arch Long-Term Incentive Plan and their respective Restricted Stock Agreements, attorneys fees and costs and unspecified other and further relief. In the event that the Former Executives were to prevail on their Claim they could be awarded additional compensation under the Arch Long-Term Incentive Plan and their respective Restricted Stock Agreements up to, approximately $8.5 million plus the costs of attorneys fees and other costs. We and the Former Executives mutually selected an arbitrator to preside over the case. Discovery is underway and the trial is scheduled to take place in May 2005. We are disputing the Claim vigorously. We do not believe that a

Change in Control as defined in the Former Executives Executive Employment Agreements has occurred and believe that we will ultimately prevail in the arbitration proceeding.

      Certain holders of 12³/4% senior notes of Arch Wireless Communications, Inc., a wholly-owned subsidiary of Arch Wireless, Inc., filed an involuntary petition against it on November 9, 2001 under Chapter 11 of the bankruptcy code in the United States Bankruptcy Court for the District of Massachusetts, Western Division. On December 6, 2001, Arch Wireless Communications, Inc. consented to the involuntary petition and the bankruptcy court entered an order for relief under Chapter 11. Also on December 6, 2001, Arch and 19 of its wholly owned domestic subsidiaries filed voluntary petitions for relief under Chapter 11 with the bankruptcy court. These cases were jointly administered under the docket for Arch Wireless, Inc., et al., Case No. 01-47330-HJB. After the voluntary petition was filed, Arch and its domestic subsidiaries operated their businesses and managed their properties as debtors-in-possession under the bankruptcy code until May 29, 2002, when Arch emerged from bankruptcy. Arch and its domestic subsidiaries are now operating their businesses and properties as a group of reorganized entities pursuant to the terms of the plan of reorganization.

      In the course of our operations we have become involved as a defendant and occasionally as a plaintiff in a number of commercial tort and employment related lawsuits and proceedings. We do not believe that any of the litigation in which we are currently involved or that has been overtly threatened against us will have individually or in the aggregate a material adverse effect on our financial condition, results of operations or cash flows.

      At the Special Meeting of Arch Stockholders held on November 8, 2004, the following proposal was adopted by the vote specified below:

PART II

      Our sole class of common equity is our $0.0001 par value common stock, which is listed on the NASDAQ National Market and is traded under the symbol “USMO.”

      The following table sets forth the high and low intraday sales prices per share of our common stock for the period indicated, which corresponds to our quarterly fiscal periods for financial reporting purposes. Prices for our common stock are as reported on the NASDAQ National Market from November 18, 2004 through December 31, 2004. Prior to November 18, 2004, our common stock was not publicly traded.

      We did not declare dividends on our common stock during 2004. Under the terms of our credit facility, we are prohibited from paying dividends. We sold no unregistered securities during 2004 and made no repurchases of our common stock during the fourth quarter of 2004.

      As of March 1, 2005, there were 6,950 holders of record of our common stock.

      Transfer Restrictions on Common Stock — In order to reduce the possibility that certain changes in ownership could impose limitations on the use of our tax attributes, our Amended and Restated Certificate of Incorporation contains provisions which generally restrict transfers by or to any 5% shareholder of our common stock or any transfer that would cause a person or group of persons to become a 5% shareholder of our common stock. After a cumulative indirect shift in ownership of Arch of more than 45% since its emergence from bankruptcy proceedings in May 2002 (as determined by taking into account all relevant transfers of the stock of Arch prior to our acquisition, including transfers pursuant to the merger) through a transfer of our common stock, any transfer of our common stock by or to a 5% shareholder of our common stock or any transfer that would cause a person or group of persons to become a 5% shareholder of our common stock, will be prohibited unless the transferee or transferor provides notice of the transfer to us and our board of directors determines in good faith that the transfer (1) would not result in a cumulative indirect shift in ownership of Arch of more than 47% or (2) would not increase the cumulative indirect shift in ownership of Arch.

      Prior to a cumulative indirect ownership change of Arch of more than 45%, transfers of our common stock will not be prohibited except to the extent that they result in a cumulative indirect shift in ownership of Arch of more than 47%, but any transfer by or to a 5% shareholder of our common stock or any transfer that would cause a person or group of persons to become a 5% shareholder of our common stock requires a notice to us. Similar restrictions apply to the issuance or transfer of an option to purchase our common stock if the exercise of the option would result in a transfer that would be prohibited pursuant to the restrictions described above. These restrictions will remain in effect until the earliest of (a) the repeal of Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), (or any comparable successor provision) and (b) the date on which the limitation amount imposed by Section 382 of the Code in the event of an ownership change of Arch would not be less than Arch’s net operating loss carry forward and net unrealized built-in loss. Transfers by or to us and any transfer pursuant to a merger approved by our board of directors or any tender offer to acquire all of our outstanding stock where a majority of the shares have been tendered will be exempt from these restrictions.

      We are a holding company formed to effect the merger of Arch and Metrocall, which occurred on November 16, 2004. Prior to these acquisitions, USA Mobility had conducted no operations other than those incidental to its formation. For financial reporting purposes, Arch was deemed the acquiring entity and is the predecessor registrant of USA Mobility. Accordingly, the consolidated historical information and operating data for the year ended December 31, 2004 reflects that of Arch for the twelve months ended December 31, 2004 and Metrocall for the period November 16, 2004 to December 31, 2004. Historical financial information and operating data as of December 31, 2000, 2001, 2002 and 2003, and for the four years ended December 31, 2003 reflect that of Arch. The table below sets forth the selected historical consolidated financial and operating data for each of the five years ended December 31, 2004.

      On May 29, 2002, Arch emerged from proceedings under Chapter 11 of the bankruptcy code. For financial statement purposes, Arch’s results of operations and cash flows have been separated as pre and post-May 31, 2002 due to a change in basis of accounting in the underlying assets and liabilities. See Note 2 of Notes to Consolidated Financial Statements. For purposes of the selected data below, we refer to Arch’s results prior to May 31, 2002 as results for Arch’s predecessor company and we refer to ours and Arch’s results after May 31, 2002 as results for the reorganized company. However, for the reasons described in Note 2, certain aspects of the predecessor company financial statements for the periods before we emerged from bankruptcy are not comparable to the reorganized company’s financial statements.

      The selected financial and operating data as of December 31, 2000, 2001, 2002, 2003 and 2004 and for each of the two years ended December 31, 2001, for the five months ended May 31, 2002, the seven months ended December 31, 2002 and the two years ended December 31, 2004 have been derived from the audited consolidated financial statements of USA Mobility or its predecessor, Arch. The consolidated financial statements of Arch for the two years ended 2001 were audited by Arthur Andersen LLP, which has ceased operations.

      The following consolidated financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes set forth below.

      The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes and the discussions under “Application of Critical Accounting Policies,” which describe key estimates and assumptions we make in the preparation of our financial statements and “Risk Factors Affecting Future Operating Results,” which describe key risks associated with our operations and industry.

Merger of Arch and Metrocall

      We are a holding company formed to effect the merger of Arch and Metrocall, which occurred on November 16, 2004. Prior to the merger, we had not conducted any activities other than those incidental to our formation. The following describes the consideration issued in the merger:

      In order to consummate the merger, we borrowed $140.0 million to fund a portion of the $150.0 million cash consideration paid to holders of Metrocall common stock.

      After the transactions were completed, former holders of Arch common stock and options held approximately 72.5% of the fully diluted shares of our common stock and holders of former Metrocall common stock and options held 27.5% of our fully diluted common stock. The merger was accounted for under the purchase method of accounting pursuant to SFAS No. 141, Business Combinations. Arch was deemed the acquiring entity due primarily to its former shareholders holding a majority of our common stock. Accordingly, the basis of the Arch assets and liabilities were reflected at their historical basis and amounts allocated to Metrocall’s assets and liabilities were based upon the purchase price and the estimated fair values of such assets and liabilities as of the merger date. Since Arch was deemed the acquiring entity, Arch’s historical financial results prior to the merger are reflected throughout this Form 10-K.

Overview

      We derive the majority of our revenues from fixed monthly or other periodic fees charged to subscribers for wireless messaging services. Such fees are not generally dependent on usage. As long as a subscriber maintains service, operating results benefit from recurring payment of these fees. Revenues are generally driven by the number of units in service and the monthly charge per unit. The number of units in service changes based on subscribers added, referred to as gross placements, less subscriber cancellations, or disconnects. The net of gross placements and disconnects is commonly referred to as net gains or losses of units in service. The absolute number of gross placements as well as the number of gross placements relative to average units in service in a period, referred to as the gross placement rate, is monitored on a monthly basis. Disconnects are also monitored on a monthly basis. The ratio of units disconnected in a period to average units in service for the same period, called the disconnect rate, is an indicator of our success retaining subscribers which is important in order to maintain recurring revenues and to control operating expenses.

      The following table sets forth our gross placements and disconnects for the periods stated.

      The demand for one-way messaging services declined during the three years ended December 31, 2004, and we believe demand will continue to decline for the foreseeable future. During 2002, units in service decreased by 2,860,000 units, of which 2,584,000 were due to subscriber cancellations and 276,000 were due to the partial divestiture of Arch’s interest in two Canadian subsidiaries, which resulted in the financial results of these subsidiaries no longer being consolidated into our financial statements commencing in December 2002. During 2003, units in service decreased by 1,452,000 units as a result of operations. This decrease does not include the addition of 249,000 units which resulted from the reversal of the remaining portion of the one-time, 1,000,000 unit reduction recorded in the fourth quarter of 2000 for definitional differences and potential unit reductions associated with the conversion and cleanup of accounts acquired in the PageNet acquisition. Since Arch completed the conversion and final review of these accounts, the remainder of this prior unit reduction was recorded as a one-time increase in the fourth quarter, which increased units in service at December 31, 2003.

      During 2004, units in service increased 1,765,000 units due to the addition of 2,744,000 units associated with the Metrocall merger partially offset by the decrease of 979,000 units as a result of operations.

      The other factor that contributes to revenue, in addition to the number of units in service, is the monthly charge per unit. As previously discussed, the monthly charge is dependent on the subscriber’s service, extent of geographic coverage, whether the subscriber leases or owns the messaging device and the number of units the customer has on his or her account. The ratio of revenues for a period to the average units in service for the same period, commonly referred to as average revenue per unit, is a key revenue measurement as it indicates whether monthly charges for similar services and distribution channels are increasing or decreasing. Average revenue per unit by distribution channel and messaging service are monitored regularly. The following table sets forth our average revenue per unit by distribution channel for the periods stated.

      While average revenue per unit for similar services and distribution channels is indicative of changes in monthly charges and the revenue rate applicable to new subscribers, this measurement on a consolidated basis is affected by several factors, most notably the mix of units in service. Consolidated average revenue per unit decreased $0.68 in 2004 from 2003. The 249,000 unit adjustment Arch made in the fourth quarter of 2003 contributed $0.45 of this decrease. The remainder of the decrease was due primarily to the change in

composition of our customer base as the percentage of units in service attributable to larger customers continues to increase. The decrease in average revenue per unit in our direct distribution channel is the most significant indicator of rate-related changes in our revenues. We anticipate that average revenue per unit for our direct units in service will decline in future periods and the decline will be primarily due to the mix of messaging services demanded by our customers, the percentage of customers with fewer units in service and, to a lesser extent, changes in monthly charges.

      As discussed earlier, customers with more units in service generally have lower monthly charges for similar services due to volume discounts and historically have had lower disconnect rates. Therefore, as the percentage of our direct units in service becomes more concentrated with customers that have more units in service, disconnect rates should decline and our average revenue per unit may also decline as new placements may generally have lower revenue per unit than units that disconnect.

      Our revenues were $818.7 million, $597.5 million and $490.2 million for the years ended December 31, 2002, 2003 and 2004, respectively. The 2004 revenue includes $38.5 million of Metrocall revenue for the period from November 16 to December 31, 2004. As noted above, the demand for our messaging services has declined over this three-year period and, as a result, operating expense management and control are important to our financial results. Certain of our operating expenses are especially important to overall expense control; these operating expenses are categorized as follows:

      We review the percentages of these operating expenses to revenues on a regular basis. Even though the operating expenses are classified as described above, expense controls are also performed on a functional expense basis. In 2004, we incurred approximately 74% of the three expense categories listed above, in three functional expense categories: payroll and related expenses, lease payments for transmitter locations and telephone expense.

      Payroll and related expenses include wages, commissions, incentives, employee benefits and related taxes. We review the number of employees in major functional categories such as direct sales, customer service, collections and inventory on a monthly basis. We also review the design and physical locations of functional groups to continuously improve efficiency, to simplify organizational structures and to minimize physical locations.

      Lease payments for transmitter locations are largely dependent on our messaging networks. As described in “Messaging Networks and Licenses,” we operate local, regional and nationwide one and two-way messaging networks. These networks each require locations on which to place transmitters, receivers and antennae. Generally, lease payments are incurred for each transmitter location. Therefore, lease payments for transmitter locations are highly dependent on the number of transmitters, which, in turn, is dependent on the number of networks. In addition, these expenses generally do not vary directly with the number of subscribers or units in service, which is detrimental to our operating margin as revenues decline. In order to reduce this expense, we have an active program to consolidate the number of networks and thus transmitter locations, which we refer to as network rationalization. In 2003 and 2004, we removed 4,520 and 1,040 transmitters from various networks, respectively. As previously discussed, we plan to remove approximately 14% of our 18,500 transmitters in 2005 in conjunction with our integration activities.

      Telephone expenses are incurred to interconnect our messaging networks and to provide telephone numbers for customer use, points of contact for customer service and connectivity among our offices. These expenses are dependent on the number of units in service and the number of office and network locations we

maintain. The dependence on units in service is related to the number of telephone numbers provided to customers and the number of telephone calls made to our call centers, though this is not always a direct dependency. For example, the number or duration of telephone calls to our call centers may vary from period to period based on factors other than the number of units in service, which could cause telephone expense to vary regardless of the number of units in service. In addition, certain phone numbers we provide to our customers may have a usage component based on the number and duration of calls to the subscriber’s messaging device. Therefore, based on the factors discussed above, absent efforts that are underway to review telephone circuit inventories and capacities and to reduce the number of transmitter and office locations at which we operate, telephone expenses do not necessarily vary in direct relationship to units in service.

      The total of our cost of products sold; service, rental and maintenance; selling and marketing and general and administrative expenses was $585.6 million, $409.5 million and $330.8 million for the years ended December 31, 2002, 2003 and 2004, respectively. Since it is anticipated that demand for one and two-way messaging will continue to decline, expense reductions will continue to be necessary in order for us to maintain operating margins at current levels.

Results of Operations

      As previously discussed, Arch and Metrocall merged on November 16, 2004. The results of operations and cash flows discussed below for 2004 include the operating results and cash flows of Arch for the twelve months ended December 31, 2004 and Metrocall for the period November 16, 2004 to December 31, 2004. For periods prior to 2004, the operating results and cash flows of Arch or its predecessor company are presented.

Comparison of the Results of Operations for the Years Ended December 31, 2004 and 2003

Revenues

      Service, rental and maintenance revenues consist primarily of recurring fees associated with the provision of messaging services and rental of leased units. Product sales consist largely of revenues associated with the sale of devices and charges for leased devices that are not returned. We do not differentiate between service and rental revenues. The decrease in revenues consisted of a $137.5 million decrease in recurring fees associated with the provision of messaging services and a $8.3 million decrease in revenues from device transactions related to the operations of Arch partially offset by recurring fees associated with the provision of messaging services of $36.3 million and revenues from device and other sales transactions of $2.2 million related to the operations of Metrocall from November 16, 2004 to December 31, 2004. The table below sets forth units in service and recurring fees, the changes in each between 2003 and 2004 and the change in

revenue associated with differences in the numbers of units in service and the average revenue per unit, known as ARPU.

      As previously discussed, demand for messaging services has declined over the past several years and we anticipate that it will continue to decline for the foreseeable future, which will result in reductions in recurring fees due to the lower volume of subscribers. Although we are focused on customer retention, we cannot provide assurance that we will be able to slow the rate of revenue erosion experienced by Arch or Metrocall in past periods.

Operating Expenses

      Cost of Products Sold. Cost of products sold consists primarily of the cost basis of devices sold to or lost by our customers. The $1.2 million decrease in 2004 was due primarily to lower numbers of device transactions due to lower units in service in 2004; partially offset by $938,000 of costs of products sold related to Metrocall operations.

      Service, Rental and Maintenance. Service, rental and maintenance expenses consist primarily of the following significant items:

      As illustrated in the table above, service, rental and maintenance expenses decreased $31.1 million or 16.2% from 2003, however the percentage of these costs to revenues increased as our revenue decreased 18.0%. Following is a discussion of each significant item listed above:

      Selling and Marketing. Selling and marketing expenses consist primarily of payroll and related expenses. Selling and marketing payroll and related expenses decreased $9.6 million or 20.9% over 2003. This decrease was due primarily to a decrease in the number of sales representatives and sales management which resulted from our continuing efforts to maintain or improve sales force productivity throughout the year, and staffing reductions completed after the merger closing.

      General and Administrative. General and administrative expenses consist of the following significant items:

      As illustrated in the table above, general and administrative expenses decreased $36.8 million from the year ended December 31, 2003 and the percentage of these costs to revenue also decreased, primarily due to lower payroll and related expenses and bad debt expense. Following is a discussion of each significant item listed above:

      Depreciation and Amortization. Depreciation and amortization expenses decreased to $114.4 million for the year ended December 31, 2004 from $118.9 million for the same period in 2003. This decrease was due primarily to lower depreciation expense on messaging devices of $15.9 million partially offset by higher depreciation expense associated with messaging infrastructure of $3.4 million and $10.2 million of depreciation and amortization expense related to Metrocall operations. The decrease in depreciation associated with messaging devices was due primarily to the final layer of devices recorded upon Arch’s emergence from Chapter 11 becoming fully depreciated. The increase in messaging infrastructure depreciation was due to changing the remaining estimated useful life of equipment associated with the Arch two-way messaging network to 16.5 months, effective November 16, 2004, the time period over which these assets will be removed from service in conjunction with network integration plans.

      Stock Based and Other Compensation. Stock based and other compensation expense consists primarily of severance payments to persons we previously employed, amortization of compensation expense associated with common stock and options to purchase common stock issued to certain members of management and the board of directors and compensation cost associated with a long-term management incentive plan. Stock-based and other compensation increased to $12.9 million for the year ended December 31, 2004 from $11.4 million for the same period in 2003. The increase in this expense for the year ended December 31, 2004 was due primarily to higher severance expenses of $2.7 million partially offset by lower costs associated with the long-term management incentive plan and compensation expense associated with common stock and options to purchase common stock previously issued to management and the board of directors of $1.2 million. The increase in severance was due largely to staff position reductions undertaken by Arch in conjunction with the merger. The decrease in compensation cost related to restricted stock was due largely to the repurchase of restricted stock previously issued to certain members of management in conjunction with their termination.

      Restructuring Charges. In the years ended December 31, 2003 and 2004, we recorded restructuring charges of $11.5 million and $3.0 million, respectively, related to certain lease agreements for transmitter locations. Under the terms of these agreements, we are required to pay minimum amounts for a designated number of transmitter locations. However, we determined the designated number of transmitter locations was in excess of our current and anticipated needs and we ceased to use the locations. The remaining balance of this reserve of $3.5 million will be paid over the next two quarters.

      Interest Expense. Interest expense decreased to $6.4 million for the year ended December 31, 2004 from $19.8 million for the same period in 2003. This decrease was due to the repayment of Arch’s 12% notes on May 28, 2004 partially offset by $1.2 million of expense associated with the $140.0 million of debt incurred to partially fund the cash election to former Metrocall shareholders in accordance with the terms of the merger agreement. On December 20, 2004, we repaid $45.0 million of the $140.0 million and have made additional principal payments subsequent to December 31, 2004 of $28.5 million through March 1, 2005.

      Income Tax Expense. For the year ended December 31, 2004, we recognized a $9.3 million deferred income tax provision based on an effective tax rate of approximately 41%. The provision for the year ended December 31, 2003 was $10.8 million recorded at an effective tax rate of approximately 40%. The decrease in the provision for the current year was primarily due to lower income before income tax expense due to the factors outlined above primarily lower revenues which were not completely offset with expense reductions. We anticipate recognition of provisions for income taxes to be required for the foreseeable future, but we do not anticipate these provisions to result in current tax liabilities.

Comparison of the Results of Operations for the Years Ended December 31, 2002 and 2003

      On May 29, 2002, Arch emerged from proceedings under Chapter 11 of the bankruptcy code. Pursuant to its plan of reorganization, all of Arch’s former equity securities were cancelled and the holders of approximately $1.8 billion of its former indebtedness received securities which represented substantially all of its consolidated capitalization, consisting of $200 million aggregate principal amount of 10% senior subordinated secured notes (which was fully repaid by Arch by September 30, 2003), $100 million aggregate principal amount of 12% subordinated secured compounding notes (which was fully repaid by Arch by May 28, 2004) and approximately 95% of new Arch common stock.

      For financial statement purposes, Arch’s results of operations and cash flows have been separated as pre and post-May 31, 2002 due to a change in basis of accounting in the underlying assets and liabilities. See Note 2 of Notes to Consolidated Financial Statements. For purposes of the following discussion we refer to Arch’s results prior to May 31, 2002 as results for Arch’s predecessor company and we refer to Arch’s results after May 31, 2002 as results for Arch’s reorganized company. The results of the reorganized company and the predecessor company for the two years ended December 31, 2003 are discussed below. However, for the reasons described in Note 2 and due to other non-recurring adjustments, certain aspects of the predecessor company’s financial statements for the periods before Arch emerged from bankruptcy are not comparable to the reorganized company’s financial statements. The following items are particularly noteworthy:

Revenues

      Service, rental and maintenance revenues consist primarily of recurring fees associated with the provision of messaging services and rental of leased units. Product sales consist largely of revenues associated with the sale of devices and charges for leased devices that are not returned. Device sales represented less than 10% of total revenues for the years ended December 31, 2002 and 2003. The decrease in revenues consisted of a $212.2 million decrease in recurring fees associated with the provision of messaging services and a $9.1 million decrease in revenues from device transactions. The table below sets forth units in service and recurring fees, the changes in each between 2002 and 2003 and the change in revenue associated with differences in the numbers of units in service and the average revenue per unit, known as ARPU.

Operating Expenses

      Cost of Products Sold. Cost of products sold consists of the cost basis of devices sold to or lost by our customers. The $12.6 million decrease in this expense in 2003 was due to the revaluation of device basis that occurred upon Arch’s emergence from Chapter 11 in May 2002 and to lower numbers of device transactions due to fewer units in service in 2003.

      Service, Rental and Maintenance. Service, rental and maintenance expenses consisted primarily of the following significant items:

      As illustrated in the table above, service, rental and maintenance expenses decreased $49.1 million from 2002, however the percentage of these costs to revenues increased, primarily due to lease payments for transmitter locations. As discussed earlier, Arch reduced the number of transmitters in service in conjunction with its network consolidation plans. Following is a discussion of each significant item listed above:

      Selling and Marketing. Selling and marketing consists primarily of payroll and related expenses. The decrease in selling and marketing payroll expenses was due primarily to a decrease in the number of sales representatives and sales management which resulted from Arch’s continuing efforts to maintain or improve sales force productivity.

      General and Administrative. General and administrative expenses consist of the following significant items:

      As illustrated in the table above, general and administrative expenses decreased $86.8 million from the year ended December 31, 2002 and the percentage of these costs to revenue also decreased, primarily due to lower payroll and related expenses and bad debt expense. Following is a discussion of each significant item listed above:

      Depreciation and Amortization. Depreciation and amortization expenses decreased to $118.9 million for the year ended December 31, 2003 from $186.6 million for the same period in 2002. This decrease was due primarily to the change in fixed asset values recorded in fresh-start accounting and certain assets becoming fully depreciated. At fresh-start messaging devices were recorded with various estimated useful lives and in November 2002 and May 2003, two of these layers became fully-depreciated resulting in a reduction in depreciation expense of approximately $21.3 million in 2003. In addition to this decrease, 2003 depreciation expense was $12.1 million lower than 2002 due to the effect of a change in estimated useful lives of certain one-way transmission equipment recorded in 2002 which did not recur in 2003. The remaining decrease was due to the reduction in gross depreciable bases, which occurred upon fresh-start accounting and lower amounts of capital expenditures in 2003.

      Stock Based and Other Compensation. Stock based and other compensation consists primarily of severance payments to persons Arch previously employed, amortization of compensation expense associated with common stock and options to purchase common stock issued to certain members of management and the board of directors and compensation cost associated with a long-term management incentive plan. The

increase in this expense in the year ended December 31, 2003 was due primarily to the recognition of approximately $1.3 million of compensation expense associated with the issuance of options to purchase 249,996 shares of common stock to certain members of Arch’s board of directors and the recognition of approximately $3.1 million related to the Arch’s adoption of a long-term management incentive plan.

      Interest Expense. Interest expense decreased to $19.8 million for the year ended December 31, 2003 from $20.9 million for the same period in 2002. Due to Arch’s filing for protection under Chapter 11, it did not record interest expense on its debt from December 6, 2001 through May 31, 2002. Contractual interest that was neither accrued nor recorded on debt incurred by Arch before its emergence from bankruptcy was $76.0 million for the five months ended May 31, 2002. During the year ended December 31, 2003, Arch completed the redemption of its 10% notes and entered into several transactions to reduce the balance of its 12% notes, including:

      The completion of the repayment of its 10% notes and the transactions described above resulted in lower average debt during 2003.

      Reorganization Items. Reorganization items were $25.3 million and $425,000 for the years ended December 31, 2002 and 2003, respectively. These expenses consisted of professional and other fees associated with Arch’s bankruptcy proceedings. Arch did not incur significant reorganization items in the year ended December 31, 2003 due to its emergence from Chapter 11 in May 2002.

      Income Tax Expense. For the year ended December 31, 2003, Arch recognized a $10.8 million deferred income tax provision based on an effective tax rate of approximately 40%. The provision for the seven months ended December 31, 2002 was recorded an effective tax rate of approximately 70% due to the timing difference of certain reorganization items expensed during that period. The increase in the provision for 2003 was primarily due to the current year having five additional months of operations.

Liquidity and Capital Resources

     Overview

      Based on current and anticipated levels of operations, we anticipate net cash provided by operating activities, together with $47.0 million of cash on hand at December 31, 2004, will be adequate to meet our anticipated cash requirements for the foreseeable future.

      In the event that net cash provided by operating activities and cash on hand is not sufficient to meet future cash requirements, we may be required to reduce planned capital expenditures, sell assets or seek additional financing. We can provide no assurance that reductions in planned capital expenditures or proceeds from asset sales would be sufficient to cover shortfalls in available cash or that additional financing would be available on acceptable terms.

     Sources of Funds

      Our principal sources of cash are net cash provided by operating activities plus cash on hand.

Cash Flows

      Our net cash flows from operating, investing and financing activities for the periods indicated in the table below were as follows:

      Net Cash Provided by Operating Activities. As discussed above, we are dependent on cash flows from operating activities to meet our cash requirements. Cash from operating activities varies depending on changes in various working capital items including deferred revenues, accounts payable, accounts receivable, prepaid expenses and various accrued expenses. The following table includes the significant cash receipt and expenditure components of our cash flows from operating activities for the periods indicated and sets forth the change between the indicated periods (in thousands):

      Net cash provided by operating activities for the twelve months ended December 31, 2004 decreased $66.9 million from the same period in 2003 due primarily to the following:

      We believe net cash provided by operating activities will increase in 2005 as our results will reflect the results of Metrocall for the full period. However, cash provided by operating activities is significantly impacted by cash received from customers and the level of payments of our various operating expenses. As previously discussed, we believe demand for our messaging services will continue to decline for the foreseeable future and therefore our ability to reduce operating expenses through our various cost reduction and integration activities will be a significant determinant in the level of our future cash provided by operating activities.

      Net Cash (Used In) Provided by Investing Activities. Net cash (used in) provided by investing activities in 2004 increased $111.7 million from the same period in 2003 due primarily to recording the Metrocall merger as previously discussed. Our business requires funds to finance capital expenditures which primarily include the purchase and repair of paging and messaging devices, system and transmission equipment and information systems. Capital expenditures for 2004 $19.2 million consisted primarily of the purchase of messaging devices and expenditures related to transmission and information systems equipment offset by $3.0 million of net proceeds from the sale of buildings and other assets. Capital expenditures decreased $6.2 million from 2003 due primarily to fewer purchases of messaging devices and a decrease in the average cost per unit. The amount of capital we will require in the future will depend on a number of factors, including the number of existing subscriber devices to be replaced, the number of gross placements, technological developments, competitive conditions and the nature and timing of our strategy to integrate and consolidate our networks. In 2005, we expect capital expenditures of $25.0 to $30.0 million and expect to fund such requirements from net cash provided by operating activities. Investing activities in 2003 consisted primarily of capital expenditures of $25.4 million net of proceeds from the sale of buildings and other assets of approximately $3.2 million.

      Net Cash Provided By (Used In) Financing Activities. Net cash provided by (used in) financing activities in 2004 increased $193.8 million from the same period in 2003. In November 2004, as discussed below, we borrowed $140.0 million to fund the cash consideration related to the Metrocall merger. Also in 2004, Arch used $60.0 million of net cash provided by operating activities to redeem its 12% notes and $3.1 million for the purchase of treasury shares. In December, we repaid $45 million of the amount borrowed in conjunction with the merger. Arch’s financing activities in 2003 consisted solely of repayment of debt of $161.9 million.

      Borrowings. In connection with the merger, we borrowed $140.0 million under a credit agreement that matures in November 2006. These proceeds along with cash that Arch and Metrocall generated from operating activities prior to the effective date of the merger was used to fund the $150.0 million cash consideration distributed to purchase Metrocall common stock. We repaid $45.0 million of the aggregate principal amount outstanding on December 20, 2004 and as of December 31, 2004, we had $95.0 million outstanding. Subsequent to December 31, 2004 and through March 1, 2005, we made additional optional principal prepayments of $18.5 million and a mandatory principal prepayment of $10.0 million reducing the outstanding principal amount to $66.5 million as of March 1, 2005. The following table describes our principal borrowings at December 31, 2004 and associated debt service requirements.

      We are required to make mandatory prepayments of principal amounts outstanding at least once a quarter and under certain circumstances. Mandatory prepayments are required:

      We are also permitted to make optional prepayments, without prepayment penalty, provided that each optional prepayment exceeds $1.0 million.

      The credit agreement includes certain provisions which impose restrictions or requirements on us, including the following:

      We were in compliance with our financial and other covenants at December 31, 2004.

     Commitments

      Contractual Obligations. As of December 31, 2004, our contractual payment obligations under our long-term debt agreements and operating leases for office and transmitter locations are indicated in the table below. For purposes of the table below, purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable pricing provisions; and the approximate timing of transactions. These obligations primarily relate to devices and certain telephone expenses. The amounts are based on our contractual commitments; however, it is possible we may be able to negotiate lower payments if we choose to exit these contracts before their expiration date.