SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K
              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1998
                         Commission file number 0-23044

                      AMERICAN MOBILE SATELLITE CORPORATION
             (Exact name of registrant as specified in its charter)

                        DELAWARE                    93-0976127   
             (State or other jurisdiction        (I.R.S.  Employer
            of incorporation or organization)    Identification No.)

               10802 Parkridge Boulevard
                       Reston, VA                     20191-5416
         (Address of principal executive offices)     (Zip Code)

       Registrant's telephone number, including area code: (703) 758-6000

        Securities registered pursuant to Section 12(b) of the Act: None
           Securities registered pursuant to Section 12(g) of the Act:
                     Common Stock, $0.01 per value per share
                                (Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  report(s),  and (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes X  No
                                      --- 

The aggregate market value of shares of Common Stock held by  non-affiliates  at
March 25, 1999 was approximately $117,879,802.

Number of shares of Common Stock outstanding at March 25, 1999:   32,237,078.


                       DOCUMENTS INCORPORATED BY REFERENCE
                       -----------------------------------

Certain  information in the Company's  definitive  Proxy  Statement for its 1999
Annual Meeting of  Stockholders is incorporated by reference in Part III of this
Form 10-K.

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  amendments  to
this Form 10-K.  X
                ---


<PAGE>







                      AMERICAN MOBILE SATELLITE CORPORATION
                      -------------------------------------


                         1998 Annual Report on Form 10-K
                         -------------------------------


                                     PART I
                                     ------

This Annual Report on Form 10-K includes "forward-looking statements" within the
meaning of Section  27A of the  Securities  Act of 1933 and  Section  21E of the
Securities  Exchange Act of 1934.  Such  statements are identified by the use of
forward-looking  words or phrases  including,  but not limited  to,  "believes,"
"intended,"   "will  be   positioned,"   "expects,"   "expected,"   "estimates,"
"anticipates" and "anticipated." These  forward-looking  statements are based on
the Company's  current  expectations.  All statements  other than  statements of
historical  facts included in this Annual Report,  including those regarding the
Company's financial position,  business strategy,  projected costs and financing
needs,  and plans and  objectives  of  management  for  future  operations,  are
forward-looking statements.  Although the Company believes that the expectations
reflected in such  forward-looking  statements are  reasonable,  there can be no
assurance  that  such  expectations  will  prove to have been  correct.  Because
forward-looking statements involve risks and uncertainties, the Company's actual
results  could  differ  materially.  Important  factors  that could cause actual
results  to  differ  materially  from the  Company's  expectations  ("Cautionary
Statements")  are disclosed under  "Business" and  "Management's  Discussion and
Analysis of Financial  Condition  and Results of  Operations,"  and elsewhere in
this Annual Report,  including,  without  limitation,  in  conjunction  with the
forward-looking statements included in this Annual Report. These forward-looking
statements  represent the  Company's  judgment as of the date hereof and readers
are cautioned not to place undue reliance on these forward- looking  statements.
All subsequent written and oral forward-looking  statements  attributable to the
Company or persons  acting on behalf of the Company are  expressly  qualified in
their entirety by the Cautionary Statements. Readers should carefully review the
risk factors  described in other  documents  the Company files from time to time
with  the  Securities  and  Exchange  Commission,   including  the  Registration
Statement  on Form S-3, No.  333-71423,  and Form 10-Q  Quarterly  Reports to be
filed by the  Company  subsequent  to this Annual Report on  Form 10-K  and  any
Current Reports on Form 8-K and registration statements filed by the Company.




                                      - 1 -

<PAGE>



Item 1.  Business.
-------  ---------

                                    Overview
                                    --------

American  Mobile  Satellite  Corporation  (the "Company" or "American  Mobile"),
through  its  subsidiaries,   is  a  leading  provider  of  nationwide  wireless
communications services, including data, dispatch, and voice services, primarily
to business  customers in the United  States.  The  Company's  combined  network
offers a broad  range of  end-to-end  wireless  solutions  utilizing  a seamless
network  consisting of the nation's  largest,  most  fully-deployed  terrestrial
wireless data network and a satellite in geosynchronous orbit.

American   Mobile   provides   data   service   through  a  number  of   network
configurations,    including   a    "terrestrial-only"    service   network,   a
"satellite-only"  service  network and a "multi-mode"  terrestrial and satellite
service network.

American  Mobile  operates  the  ARDIS  terrestrial  network  which is a leading
provider of nationwide wireless data services to markets consisting primarily of
business   customers   with  a  need  for   reliable,   two-way   wireless  data
communications in the field services and transportation markets.

The ARDIS  wireless data network  provides the widest breadth of coverage of any
single  provider  of  terrestrial  wireless  service in the United  States.  The
network is comprised of  approximately  1,800 radio towers (base  stations) that
provide  service to 427 of the  largest  cities and towns in the United  States,
including  virtually all metropolitan  areas. The network was designed and built
using Motorola technology to provide reliable two-way data communications,  deep
in-building  penetration and efficient  frequency usage. The extensive  coverage
and deep in-building  penetration provided by the ARDIS network is attractive to
customers who desire a single service  provider whose  nationwide  scope extends
from large  metropolitan  areas to  smaller  cities  and  towns.  Customers  use
applications  such as service call dispatch,  asset tracking,  and  peer-to-peer
communications  to achieve critical business  objectives  resulting in increased
productivity, profitability and customer satisfaction.

American  Mobile's  satellite-only  data  communications  system  provides  data
services primarily to long-haul  trucking  customers.  The Company's  multi-mode
communications  system uses the Company's  integrated  terrestrial and satellite
network  to  provide   "least-cost   routing"   for   customers'   two-way  data
communications  by actively  seeking  connections to the lower cost  terrestrial
network before  automatically  using the Company's  satellite  network,  thereby
providing cost-effective nationwide coverage.

In addition to  providing  data  service,  American  Mobile  offers two forms of
mobile satellite voice communications  service:  nationwide dispatch service and
satellite  telephone service.  American Mobile is the only company that offers a
nationwide  dispatch  service which allows  multiple  users located  anywhere in
American  Mobile's  extensive  service  area to  share a single  connection  for
point-to-multipoint  communication using push-to-talk handsets.  American Mobile
markets its nationwide  dispatch service  primarily to field services users with
wide-area fleet  communications  needs.  American Mobile's  satellite  telephone
service  provides  traditional  voice,  fax and data service  through  satellite
terminals that are similar to cellular phones.


As of December 31, 1998, American Mobile had approximately  105,700 units on its
combined satellite and terrestrial network, of which 13,000 were satellite voice
units and 92,700 were terrestrial and satellite data units.




                                      - 2 -

<PAGE>



XM Radio
--------

XM Satellite  Radio Inc.,  a subsidiary  of XM  Satellite  Radio  Holdings  Inc.
(together  with XM Satellite  Radio Inc., "XM Radio") has been granted a license
from the Federal Communications Commission (the "FCC") to construct,  launch and
operate a domestic satellite system for the provision of satellite-based digital
audio radio  service  ("DARS").  XM Radio made a payment of $90 million to fully
pay for its DARS license in October 1997. The Company  currently owns 80% of the
capital  stock of XM Radio.  The  remainder  of XM Radio  currently  is owned by
WorldSpace,  Inc.  ("WorldSpace"),  a leading international DARS company that is
planning to provide DARS service to Latin America,  Africa and Asia. Through its
investment in XM Radio, WorldSpace has an option to increase its ownership in XM
Radio,  subject to pending FCC approval.  On January 15, 1999,  American  Mobile
provided  an  additional   $21.4  million  of  convertible   financing  for  its
subsidiary,  XM Radio.  This loan was funded  through  the  issuance  of a $21.5
million subordinated, non-recourse, note of American Mobile to Baron Asset Fund.
American  Mobile's  note  issued  to  Baron  Asset  Fund  is  exchangeable  into
approximately  half of the  additional  XM Radio  common stock to be received by
American Mobile as a result of the January 15 transaction.

Assuming  conversion  of  American  Mobile's  convertible  XM Radio  notes,  the
exchange by Baron Asset Fund of its  exchangeable  note and the  exercise of the
outstanding  WorldSpace options following FCC approval of the pending consent to
the transfer of control of XM Radio, as previously  reported,  American Mobile's
ownership in XM Radio would be 22.6%,  and the ownership  position of WorldSpace
upon exercise of its options, subject to FCC approval, would be 71.8%.


                                     History
                                     -------

The Company,  a Delaware  corporation,  was incorporated in May 1988 by eight of
the  initial  applicants  for  the  first  mobile  satellite  services  license,
following  a  determination  by the FCC that the public  interest  would best be
served by  granting  the  license to a  consortium  composed  of all willing and
qualified  applicants.  In  March  1991,  the  Company  transferred  the  mobile
satellite  services  license to its wholly  owned  subsidiary,  AMSC  Subsidiary
Corporation.

In August 1989, the FCC authorized the Company to construct,  launch and operate
a mobile satellite communications system. For the system's mobile links, the FCC
assigned  to the  Company the  exclusive  license to 30 MHz of L-band  spectrum,
subject to international frequency  coordination.  L-band spectrum is considered
advantageous for mobile  communications  services because it is less affected by
radio propagation difficulties than are higher frequencies. The FCC licensed the
Company  to  provide  a  full  range  of  mobile   voice,   data  and   dispatch
communications  services via satellite to land, air and sea-based customers in a
service area consisting of the continental United States, Alaska, Hawaii, Puerto
Rico, the U.S. Virgin Islands and U.S. coastal waters and airspace.

On March 31, 1998, the Company acquired ARDIS (the "Acquisition") for a purchase
price of $100  million  (the  "Purchase  Price"):  $50 million in cash,  and $50
million in shares of the Company's Common Stock, as approved by its stockholders
with respect to certain of the share consideration at the 1998 annual meeting of
the Company's stockholders.


                                      - 3 -

<PAGE>



In connection with the  Acquisition,  the Company and its  subsidiaries  entered
into  agreements  with respect to three  financings and  refinancings:  (1) $335
million of Units  consisting  of 12 1/4% Senior  Notes due 2008 and  Warrants to
purchase  shares of Common  Stock of the Company;  (2) a $100 million  Revolving
Credit  Facility and a $100 million Term Loan Facility  (collectively,  the "New
Bank  Financing");  and (3) a $10 million  commitment  with  respect to Motorola
vendor  financing.  See  "Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations - Liquidity and Capital Resources."

Upon completion of the  Acquisition,  ARDIS became a wholly-owned  subsidiary of
AMSC Acquisition Company, Inc. ("Acquisition  Company").  In connection with the
Acquisition,  the Company also transferred all of its rights, title and interest
in three additional  subsidiaries - American Mobile Satellite Sales Corporation,
AMSC Subsidiary  Corporation and AMSC Sales  Corporation,  Ltd. - to Acquisition
Company.  As a result,  each of these entities is a  wholly-owned  subsidiary of
Acquisition Company that, in turn, operates as a wholly-owned  subsidiary of the
Company.  The Company  continues to retain its direct  ownership  interest in XM
Radio.


                                   The Network
                                   -----------

Following the Acquisition,  the Company's  integrated  network consists of (i) a
satellite in geosychronous orbit with coverage of the continental United States,
Alaska, Hawaii, Puerto Rico, the U.S. Virgin Islands and U.S. coastal waters and
airspace,  and (ii) the largest two-way  terrestrial  data network in the United
States  with  coverage  of 427 of the  largest  cities  and towns in the  United
States,  including virtually all metropolitan areas. The network provides a wide
range  of  mobile  data  and  voice  services  in  multi-mode  and   single-mode
configurations.

Users of the  Company's  integrated  terrestrial  and  satellite  communications
network access the network through subscriber units that may be portable, mobile
or stationary devices.  Generally,  subscriber units enable either data or voice
communications and are designed to operate over either the terrestrial data-only
network  or  the   satellite   network,   which  provide  both  voice  and  data
communications.  In addition,  the Company's multi- mode subscriber equipment is
designed to provide  least-cost  routing of data  messages  over the  integrated
terrestrial and satellite network.

Subscriber  units  receive and transmit  wireless  data or voice  messages  from
either terrestrial base stations or the Company's satellite, MSAT-2. Terrestrial
messages are routed to their destination via Company-owned data switches,  which
connect to the  public  data  network.  Satellite  messages  are routed to their
destination  via  satellite  data and voice  switches,  located at the Company's
headquarters,  which connect to the public data and switched voice  networks.  A
data  switch  located  in  Lincolnshire,  Illinois  links  the  terrestrial  and
satellite networks for the delivery of the Company's multi-mode data service.

The Company's  terrestrial  network delivers superior  in-building  penetration,
completion  rates and response  times  compared to other  wireless data networks
through  the  use  of a  patented  single  frequency  reuse  ("SFR")  technology
developed by Motorola.  SFR technology enables multiple base stations in a given
area to use the same frequency.  As a result, a message sent by a subscriber can
be received by a number of base stations.  This  technology  contrasts with more
commonly used multiple  frequency  reuse ("MFR")  systems which provide for only
one  transmission  path  for a  given  message  at a  particular  frequency.  In
comparison  with  MFR  systems,   the  Company's  technology  provides  superior
in-building   penetration   and  response  times  and  enables  the  Company  to
incrementally  deploy  additional  capacity  as  required,  instead of in larger
increments as required by most wireless networks.

                                      - 4 -

<PAGE>



                                Business Strategy
                                -----------------

The Company's  objective is to maximize its revenues by  delivering  value-added
services to end users in specific market segments. To meet this objective and to
capitalize upon the competitive advantages resulting from the combination of its
satellite and terrestrial  networks,  the Company intends to: (i) offer business
customers a broad range of  nationwide  wireless  service  and  end-to-end  data
solutions;  (ii)  integrate  and  leverage  the  advantages  of  its  nationwide
terrestrial  and satellite  data networks;  (iii) enhance market  penetration by
lowering  customers'  "total  cost of  ownership";  and (iv)  expand  the use of
alternate distribution channels to accelerate network loading.

Offer Business  Customers a Broad Range of Nationwide  Wireless  Solutions.  The
Company believes its corporate customers prefer a single-source service provider
capable of delivering a broad range of efficient and cost effective solutions to
meet their need for mobile wireless communications. The Company believes that it
has and will  continue  to have a unique  strategic  advantage  in being able to
provide one-stop  shopping across a broad range of products,  including  two-way
paging and advanced  messaging,  packaged e-mail and LAN solutions,  custom data
applications,  dual mode  terrestrial/satellite  data,  and satellite  voice and
dispatch functions.

Integrate and Leverage Network  Advantages.  The Company has spent over a decade
developing and deploying its nationwide  terrestrial and satellite  networks and
now seeks to accelerate growth by leveraging its integrated network. Unlike many
competitors  with plans to build out limited  city-wide or regional  terrestrial
networks or to launch satellites,  the Company's technology infrastructure is in
place and operational today, with future network expansion  requirements arising
primarily  from  increased  customer  demand.  The  Company  believes  that this
integrated  terrestrial/satellite  network  provides key competitive  advantages
currently  unmatched by any  competitor:  virtually 100%  nationwide  geographic
coverage,  guaranteed  message delivery,  and, in the areas covered by the ARDIS
network,  deep  in-building  penetration.  By integrating  the operations of its
terrestrial and satellite  networks,  the Company  expects to achieve  operating
efficiencies  and  economies  of scale that it  believes  will lead to  improved
operating margins.

Enhance  Market  Penetration By Reducing  Customers'  "Total Cost of Ownership."
Historically,   the  most  significant   obstacle  to  the   implementation   of
enterprise-wide  wireless data  applications  has been the relatively high total
cost of  ownership.  The total cost of ownership  is comprised of three  primary
elements:  the cost of the subscriber unit, the required  investment in software
development,  and the monthly cost of network  access and usage.  In most of the
Company's  applications,  the monthly cost of network  access and usage has been
the least prohibitive of these elements.  Until recently,  subscriber unit costs
in excess of $3,000 and custom  software  investments  of up to several  million
dollars were common. By working with business  partners and vendors,  and making
strategic  software  investments,  the Company has  succeeded  in  significantly
lowering the total cost of ownership for its customers.  New  subscriber  units,
including  low-cost  two-way  messaging  units and laptop modem  cards,  are now
available  for $500 or less and  substantial  development  work is underway with
several of the  Company's  vendors to accelerate  reductions of equipment  cost,
unit weight and size.  In the future,  the Company  expects  that the  increased
subscriber  unit volumes  associated with recent large contract awards will lead



                                      - 5 -

<PAGE>


to  additional  unit  price  reductions.  In  addition,  customers  can  now use
off-the-shelf software applications that are relatively  inexpensive,  or in the
case of the Company's two-way messaging service, free. The Company believes that
these lower price points will accelerate the adoption of the Company's  services
in its historical  markets,  and will enable the Company to develop new markets,
such as wireless point-of-sale and telemetry.

Expand Alternate  Distribution  Channels. The Company sells it service primarily
through a direct  sales  force and  resellers.  In order to  accelerate  network
loading,  the  Company  expects  to  expand  its  use of  indirect  distribution
channels.  To date,  the Company has entered into  agreements  with resellers to
penetrate  markets where such resellers have a market presence and significantly
greater  resources than the Company,  including  dedicated sales  personnel.  In
addition,  the  Company is in the  process of  establishing  relationships  with
existing paging  companies,  paging resellers,  and other targeted  distribution
partners to market two-way guaranteed  messaging services.  The Company believes
that the resale of its  network is an  alternative  that paging  companies  will
consider either as an expansion of the current two-way  messaging  product or as
an alternative to investment in network  infrastructure  for two-way  messaging.
The Company intends to utilize paging  companies and other similar partners with
well  established  distribution  capabilities  to develop markets outside of the
Company's historical market segments.


                           Marketing and Distribution
                           --------------------------

The Company  markets its services  through four primary  distribution  channels:
direct sales, vertical resellers, horizontal resellers and dealers.


Direct Sales
------------

The  Company  has a direct  sales  force  that  focuses on the  requirements  of
business customers.  This sales organization is comprised of a national accounts
group that profiles and targets specific Fortune 500 accounts,  and a network of
regionally based  representatives  who specialize in specific industry segments.
Sales to national account targets generally require a sustained marketing effort
lasting several  months.  Prior to making a buying  decision,  a majority of the
accounts  exercise a due diligence  process where  competitive  alternatives are
evaluated.  The Company's  employees  often assist in  developing  justification
studies, application design support, hardware testing, planning and training.


Vertical Resellers
------------------

In  order  to  penetrate  quickly  certain  market  segments   characterized  by
specialized  technical  requirements  and/or unique business  applications,  the
Company leverages the capabilities of specialized  distribution partners.  These
relationships  enable the  Company to  penetrate  new  market  segments  without
investing  in the  product,  training  and  development  requirements  typically
associated with entry into a new market segment.

The Company's resale arrangements are specifically  designed to accelerate entry
into the  wireless  telemetry  (utility  and alarm  monitoring),  point-of-sale,
maritime and government market segments. These business partners are responsible
for  development  of  the  end-user  solutions,  and  purchase  capacity  on the
Company's data network.

                                      - 6 -

<PAGE>



Value  added  service  providers   ("VASPs")  represent  the  Company's  primary
distribution  channel for maritime  satellite  telephony.  VASPs  purchase  bulk
minutes,  resell at a margin, set the price, take risk of collection and perform
all service and billing functions.

The Company currently utilizes three specialized  government  resellers,  one of
which has included the Company's products on the General Services Administration
schedule.  The Company intends to expand the distribution  opportunities for its
terrestrial data products by also including them in these programs.

The Company also has various  private network  customers  ("PNCs") that purchase
bulk  satellite  capacity  from the  Company in the form of  dedicated  capacity
increments or channels.  PNCs use this capacity to support their own proprietary
networks  and  products,   and  maintain  all  associated   business  risks  and
responsibilities.


Horizontal Resellers
--------------------

The Company utilizes a series of resale relationships  designed to reach a large
segment  of  the  mobile  workforce  that  does  not  require  integration  with
centralized  systems,  but  still has a broad  need for  two-way  messaging  and
wireless e-mail access.  Because these  applications are generic across numerous
industries, the segment is horizontally addressable,  and requires some level of
retail  presence.  To achieve  this  presence,  the Company is in the process of
establishing relationships with existing paging companies,  paging resellers and
other  targeted  distribution  partners to market two-way  guaranteed  messaging
services.  The  Company  also  maintains  relationships  with  manufacturers  of
personal  handheld  computing  devices,  that  include the  Company's  marketing
material  with the device  packaging  to  provide  the  purchaser  the option of
wirelessly enabling a handheld computing device.

Dealer Channels
---------------

The Company also uses dealers who distribute the Company's  nationwide  dispatch
and satellite telephony  products.  These dealers typically have strong business
relationships  with  regional  public safety  entities,  as well as with smaller
field  service  fleets.  The  Company  believes  that  opportunities   exist  to
capitalize  on  the  strengths  of  this  channel  by  introducing  a  low  cost
terrestrial data device with minimum integration  requirements.  Typically these
dealers  serve as agents for sales and service and do not set pricing or provide
billing and collection services.  These dealers are generally compensated with a
modest percentage of the service revenue for which they are responsible.

Customer Concentration
----------------------

After  giving  pro forma  effect to the  Acquisition,  five  existing  customers
(including IBM) accounted for 40% of the Company's recurring service revenue for
the twelve  months  ended  December  31,  1998.  The loss of one or more of such
customers,  or any event,  occurrence or development which adversely affects the
relationship between the Company and such customer could have a material adverse
effect upon the Company.




                                      - 7 -

<PAGE>



                        Equipment; Supplier Relationships
                        ---------------------------------

The  Company  has   contracts   with  multiple   vendors  to  supply   equipment
configurations  designed to operate on each of its  networks.  These devices are
designed to meet the requirements of specific end-user applications. The Company
continues to pursue enhancements to these devices that will result in additional
desirable  features  and  reduced  cost  of  ownership.  Although  many  of  the
components  of the Company's  products are available  from a number of different
suppliers, the Company does rely upon a few key suppliers.

In connection with its mobile data communications service, the Company presently
has an agreement with Conexant Systems,  Inc. (formerly  Rockwell  Semiconductor
Systems)  to  provide  multi-mode  data  communications   equipment  and  Vistar
Telecommunications Inc., a Canadian company, to provide multi-mode data terminal
equipment.  The Company also has contracted with Vistar  Telecommunications  for
the development and manufacture of a new multi-mode terminal.  The new terminal,
scheduled to begin delivery in the second half of 1999, will incorporate  design
changes that lower the total cost of  ownership.  The Company  believes that the
price of multi-mode terminals will continue to decline in the coming years.

There are currently over 30 different  types of subscriber  units available from
15  manufacturers  that can  operate on the  terrestrial  network.  Examples  of
portable  subscriber units include  ruggedized laptop computers,  small external
modems,  handheld  or palmtop  "assistants,"  pen based  "tablets,"  and two-way
messaging  devices,  such as the Research in Motion (RIM)  Inter@ctive  PagerTM.
Significant  developers of devices that are compatible  with the network include
RIM and Itronix. RIM manufactures modems designed to be integrated into handheld
field service  terminals,  telemetry  devices,  utility  monitoring and security
systems  as  well  as  other  computing  systems.  RIM has  also  developed  the
Inter@ctive  PagerTM that operates on the Company's two-way  messaging  service.
RIM has developed a new generation Inter@active PagerTM that will begin delivery
in the second half of 1999. Itronix manufactures the XC-6000, a fully ruggedized
laptop computer with a standard keyboard and an integrated wireless modem.

Mobile  satellite  voice  telephones  are  offered  in  a  number  of  different
configurations  that deliver a variety of features and options to meet  specific
market needs. Mobile satellite telephones are currently available in land mobile
vehicle installed, fixed site, maritime,  aeronautical,  and fully transportable
(i.e., battery powered and packaged in a briefcase)  configurations.  Subscriber
equipment  for  satellite  telephone  service and  nationwide  dispatch  service
includes data interface ports to allow connection to communications  accessories
such as personal  computers,  and global positioning  satellite ("GPS") tracking
devices.  Recent  enhancements  allow users to use the dispatch product remotely
from the vehicle,  via a wireless  tether.  The primary  suppliers for the voice
terminal equipment are Westinghouse  Wireless Solutions,  Inc.  ("Westinghouse")
and  Mitsubishi  Electronics  America  ("Mitsubishi").   The  Company  currently
believes it has sufficient inventory of voice terminal equipment on hand to meet
its  customers'  needs  for the  next  two  years  and  continues  working  with
Westinghouse  and  Mitsubishi  to  provide  support  and  service  to its  voice
customers.

Tandem  computer  provides  the  ARDIS  network  switching   computers  under  a
multi-year lease that extends through the year 2000, while AT&T provides network
services  including a nationwide  wireline data network,  and leased sites which
house regional ARDIS switching equipment.


                                      - 8 -

<PAGE>



The Company also has a relationship with AT&T as its vendor for switched inbound
and outbound public switched  telephone network  services.  The satellite system
terminates  calls  from its  telephone  product  via  both  the AT&T and  Sprint
networks.

ARDIS has executed  multiple  agreements  with Motorola that provide for certain
continued  support from  Motorola  with  respect to:  supply and support for the
ARDIS DataTAC  network  infrastructure;  ongoing  maintenance and service of the
ARDIS base stations; and lease administration  services for approximately 37% of
ARDIS' base station site leases.

Hughes Network Systems Ltd, of the United Kingdom, manufactures and supports the
key component to the Company's  multi-mode  and  satellite  messaging  products,
which  is the Land  Earth  Station  ("LES").  There  are  currently  four  LES's
operational.  The platform for the Company's voice products,  the communications
ground segment  ("CGS"),  depends upon products from multiple  vendors,  most of
which are generally  commercially  available.  Northern Telecom manufactures and
supports  the core voice  switch.  Digital  Equipment  Corporation  supplies the
computing platform that runs the CGS.

American  Mobile owns certain  patents,  technical  data and other  intellectual
property,  developed in connection  with its  communications  network.  American
Mobile has joint ownership with the Canadian mobile satellite  service provider,
TMI Communications  and Company,  Limited  Partnership  ("TMI") of certain other
intellectual property, and licenses intellectual property from other vendors for
operation of its network.  The Company  believes its  ownership of and rights to
intellectual property for its system is sufficient for its business purposes.

The  ARDIS  network,  and  certain  of its  competitive  strengths  such as deep
in-building penetration, is based upon SFR technology. Motorola holds the patent
for SFR technology.  ARDIS has entered into support  agreements with Motorola to
provide for certain  support of the  operations of the ARDIS  network.  However,
there can be no assurance  that Motorola will not enter into  arrangements  with
the Company's competitors,  or that if it does, such arrangements would not have
a material adverse effect on the Company.


                     Satellite Lease and Purchase Agreements
                     ---------------------------------------

As  previously  reported,   on  December  4,  1997,  the  Company  entered  into
simultaneous   agreements  with  African  Continental   Telecommunications  Ltd.
("ACTEL") to lease the Company's MSAT-2 satellite for redeployment by ACTEL over
subsaharan  Africa and with TMI to acquire a one-half  interest in TMI's  MSAT-1
satellite.  As  previously  reported,  closing of each of the lease and purchase
were  subject  to the  satisfaction  of a number of  conditions,  including  the
completion  of  financing  by ACTEL.  As ACTEL has not  obtained  the  requisite
financing, the agreements were terminated on March 24, 1999.

Following the termination of the ACTEL-related  agreements,  the Company and TMI
each maintain  operations on their two satellites,  and continue to provide each
other emergency back-up and restoral  services in accordance with  long-standing
arrangements. See "Business-Satellite Back-up and Technology".




                                      - 9 -

<PAGE>



                        Satellite Back-up and Technology
                        --------------------------------

The Company has an agreement with TMI, the Canadian  mobile  satellite owner and
operator of MSAT-1, for back-up,  restoral and additional  capacity usage if the
Company's satellite fails or the Company needs additional  capacity.  In return,
the  Company  has  agreed to provide  TMI with  similar  back-up  service on the
Company's MSAT-2 satellite.  Each of the MSAT-1 and MSAT-2 satellites has in the
past  experienced   some   technological   malfunctions.   While  recent  MSAT-2
malfunctions  have involved either spare  components or ones that did not have a
material  impact on  current  operations,  it is  possible  that  either or both
satellites could experience future malfunctions at any time.

MSAT-2  has an  expected  end of  service  life of  2006  subject  to  potential
technological  failures  and other  factors.  For  example,  random  failure  of
satellite  components  could  result in damage to or loss of MSAT-2.  It is also
possible  that the  satellite  could be  damaged  by  electromagnetic  storms or
collisions with other objects,  although such occurrences are rare. Although the
actual  service life of the satellite may exceed its expected  service life, the
Company  cannot  guarantee  that the  expected  service life will be achieved or
exceeded.  Although the Company has in-orbit  insurance for a failure of MSAT-2,
it is unlikely that any recovery  under such  insurance  would fully  compensate
American Mobile for losses it would sustain for such a failure. In addition, the
in-orbit insurance policy is subject to annual or biannual renewal, and American
Mobile cannot  guarantee that insurance on favorable  terms and at  commercially
reasonable rates will remain available for coverage of MSAT-2.


                                   Competition
                                   -----------

The wireless  communications industry is highly competitive and is characterized
by  constant  technological  innovation.   The  Company  competes  by  providing
comprehensive,  end-to-end  solutions  and a  premium  level of  service  in the
markets it serves.  End-to-end  solutions  have been  assembled  working  with a
select  group  of  business  partners  who  develop  and  manufacture  software,
middleware and hardware components.  The Company  differentiates itself with its
unmatched  geographic  coverage,  in-building  penetration,  guaranteed  message
delivery, and guaranteed reliability.

The Company  competes  with a full array of  companies,  from small  startups to
Fortune  500  companies.  Many of  these  competitors  have  greater  financial,
technical  and  marketing  resources  than the  Company's.  Because  the Company
competes in several market segments with a broad range of services,  competitors
and competing  technologies may address one or more of the market segments.  The
Company has  identified  seven major  classes of  technologies  or services that
offer  capabilities   competitive  with  the  Company's  services:   Terrestrial
Packetized  Data;   Cellular/PCS;   Specialized  Mobile  Radio  ("SMR")/Enhanced
Specialized    Mobile   Radio    ("ESMR");    Private   Land   Mobile   Systems;
Paging/Narrowband PCS; Two-Way Messaging and Mobile Satellite Services.

Terrestrial  Packetized  Data.  Companies  using  packetized  data  technologies
provide  wireless  data  services  that  compete  directly  with a number of the
Company's data products.  Packetized data technology relies on radio frequencies
to transmit short-burst data messages. Primary competitors using this technology
include  BellSouth  Wireless  Data  Limited  Partnership  ("BS  Wireless  Data")
(formerly RAM Mobile Data), Metricom,  Teletrac and Cellnet. BS Wireless Data, a
wholly-owned  subsidiary of BellSouth  Corporation,  operates a terrestrial-only
network that provides data services to customers primarily in the field service,


                                     - 10 -

<PAGE>


transportation  and utility  industries.  The Company  believes that its network
provides broader coverage,  and superior in- building penetration compared to BS
Wireless  Data's network.  In addition,  the Company is upgrading its network in
major cities so that it will operate at faster  speeds than the BS Wireless Data
network.  Metricom's  Ricochet service provides  wireless,  mobile access to the
Internet,  private intranets, local area networks and e-mail. Metricom currently
offers its  service in limited  regions  comprised  of San  Francisco,  Seattle,
Houston and Washington,  D.C. Teletrac provides  primarily  location and vehicle
monitoring and two-way data transfer  services in major  metropolitan  areas and
Cellnet provides wireless meter reading services.

Cellular and PCS. Cellular and PCS services compete with the Company's satellite
and  terrestrial  voice and data services,  and presently  serve the majority of
mobile  communications  users in the United States,  with over 61,000,000 units.
Approximately  2,300  cellular  and PCS  systems  collectively  provide  service
throughout most of the United States,  with no single  competitor  providing the
breadth of coverage that is available  through the Company's  network.  Cellular
Digital  Packet Data  ("CDPD"),  the cellular  industry's  standard  packet data
service, is available principally in metropolitan areas containing approximately
44% of the  nation's  population  at the  end of  1998.  Some  cellular  and PCS
carriers offer short message  capabilities,  depending on the protocol they use,
and expect to offer larger capacity packet data services in the near future.

Most cellular and PCS providers have structured  their services and distribution
principally to meet switched voice service  requirements of broad-market  users.
There is minimal  direct  competition  between the Company's  voice products and
most other cellular  carriers' voice products owing to differences in equipment,
service pricing and product characteristics. HighwayMaster Communications, Inc.,
however, offers data and voice communications to the long-haul trucking industry
using its proprietary  messaging and billing  technologies and  circuit-switched
cellular capacity which it purchases in bulk from cellular carriers.

Specialized  Mobile  Radio (SMR) and  Enhanced  Specialized  Mobile Radio (ESMR)
Services.  SMR is a  terrestrial  trunked  dispatch  voice and mobile  telephone
service  in the 800 and 900 MHz  bands.  ESMR is a  wide-area  form of SMR.  SMR
services have been expanding rapidly over the past ten years and converting from
analog to digital  technology.  Within the limitations of available spectrum and
coverage,  SMR operators  compete with the Company's voice dispatch  services by
providing mobile communications services, including mobile telephone,  dispatch,
paging and  limited  data  services.  For certain  applications,  such as mobile
telephone  interconnect,  SMR  systems  are less  expensive  than the  Company's
services,  although the shared channel  configuration and the economics of these
systems have  traditionally  caused SMR systems to be less  frequently  used for
voice telephone services.

ESMR systems  compete with the  Company's  voice and data  dispatch  services in
metropolitan  areas.  NEXTEL  Communications,   Inc.  ("Nextel")  provides  ESMR
services in numerous large  metropolitan  service areas in the United States and
is the leading  provider of SMR using digital  technology,  frequency  reuse and
lower power transmitters to transform its current SMR service into cellular-like
services,  including voice telephone services. Nextel, however, does not provide
nationwide  voice  dispatch or data services  comparable to those offered by the
Company.

Private Land Mobile  Systems.  Individual  companies that have chosen to develop
their own private  wireless  data network  constitute a large  percentage of the
wireless  marketplace  for  corporate  fleets.  An example of such a customer is
Federal Express. While these companies already have made significant investments
in their systems,  in some cases  recurring  maintenance,  upgrade and expansion


                                     - 11 -

<PAGE>


costs,  coupled with recent steps by the FCC to charge private system owners for
the use of the radio  frequencies,  have caused these  organizations  to turn to
commercial providers such as the Company.

Narrowband  PCS/Enhanced  Paging.  A large  number  of  paging  companies  offer
messaging  services on a regional or nationwide  basis.  Despite the low cost of
one-way paging,  most traditional  paging services do not provide  full-function
two-way communications. Although some paging companies, such as MTel, have begun
to offer limited two-way  messaging  services,  initial  challenges in coverage,
responsiveness  and throughput  currently  limit their adoption by the Company's
targeted business customers.

Two-Way   Messaging.   Unlike  two-way  paging,   two-way   messaging   provides
approximately equal amounts of throughput both to and from the mobile user. Some
traditional paging companies,  such as PageNet,  and certain companies providing
packetized  data to vertical  markets,  such as BS Wireless  Data, are expanding
into this horizontal  offering.  Typical  applications  include wireless e-mail,
near-real  time delivery of stock quotes and other time  sensitive  information,
and mobile workforce communications. The Company considers this to be one of the
most dynamic markets in which it competes, offering considerable opportunity and
risk because it is untested.

Mobile  Satellite   Services.   The  Company's  voice  and  data  services  face
competition  from a number of companies  selling or developing  services using a
variety of  satellite  technologies.  The  principal  competing  satellite-based
communications   system   available   to  the   trucking   market  is   Qualcomm
Incorporated's   ("Qualcomm")   OmniTracs  nationwide  data  service.   Qualcomm
currently  provides  low-speed  mobile data services using  terminals  which are
priced  competitively with the Company's  satellite-only  terminals.  Qualcomm's
OmniTracs  service  does  not  provide  a  terrestrial  communications  path  or
least-cost routing  capabilities similar to the Company's multi-mode product. As
a result,  transmissions to and from a vehicle must be routed exclusively over a
satellite  network  and are  subject  to  line  of  sight  blocking  and  higher
transmission costs, limiting the product's  functionality and cost-effectiveness
in segments that require urban coverage or large volumes of data transmission.

NORCOM Networks Inc.  ("NORCOM") is in the process of  commercially  deploying a
satellite-based  packet data  service  that  competes  with the  Company's  data
services in the  transportation  and field service  segments.  NORCOM  currently
purchases channel capacity on the Company's satellite over which it operates its
network,  and  combines its  satellite  data  service  product with  terrestrial
services provided by BS Wireless Data and by the Company.

The Company's  satellite  services also compete for mobile maritime  subscribers
with TMI, a Canadian  company  operating a satellite  comparable to MSAT-2,  and
with  Inmarsat,  a consortium  of 70  countries  that is  authorized  to provide
maritime  voice  and data  services  along the North  American  coasts.  Because
Inmarsat's  current  system  operates  at a much lower power level than does the
Company's satellite,  its mobile terminals must be equipped with antenna systems
that are  larger  and more  expensive  than  those  required  for the  Company's
network.  The Inmarsat system also has per minute charges  significantly  higher
than those  charged by the Company.  Comsat,  the U.S.  signatory  for Inmarsat,
applied to the FCC for authority to provide mobile satellite services ("MSS") in
the United States through Inmarsat facilities. TMI, which is technically capable
of providing service within the United States, has also applied for authority to
provide MSS to domestic customers over MSAT-1. Although the FCC has consistently
denied Comsat's  application,  most recently on January 9, 1998, there can be no
assurances that Comsat,  TMI, or any other satellite  provider,  will not become
authorized  to provide  MSS in the United  States.  The FCC has  granted  SatCom


                                     - 12 -

<PAGE>


Systems,  Inc., a reseller of TMI's  service,  temporary  authority to operate a
limited  number of mobile  terminals in the United States so that it may conduct
market trials. (See "Regulation").

Recently,  several  Low Earth  Orbit  ("LEO")  and Medium  Earth  Orbit  ("MEO")
satellite  systems have  commenced  deployment.  These  systems,  which are more
complex and costly than the Company's  geosynchronous  network,  include Iridium
LLC; Globalstar  Telecommunications,  Ltd., and ICO Global. When deployed, these
systems  will  offer  certain  advantages  over the  Company's  voice  telephony
service,  including the ability to support  small  handheld  telephones  and, in
certain instances,  reduced  transmission delay.  However,  the Company does not
expect that these systems will provide a nationwide  dispatch service or support
data  service in excess of 4,800 bps.  Moreover,  these  companies  are  focused
primarily on  consumer-oriented  and global  traveler  applications  and not the
business markets that are the focus of the Company.  Further,  because these are
satellite  systems,  they are not expected to compete against urban  in-building
data services provided by the Company.

In addition to relatively  complex LEO systems  designed to provide mobile voice
services,  there are relatively  simple  "little" LEO systems that would provide
only low-speed packet data services.  These systems,  including  ORBCOMM Global,
L.P.,  and LEO One USA, have access to  comparatively  limited  spectrum and are
expected to compete for customers  who require  specialty  applications  such as
asset tracking services for unpowered trailers.

                                   Regulation
                                   ----------

American Mobile's satellite network and ARDIS terrestrial  two-way wireless data
network  are  regulated  to varying  degrees at the  federal,  state,  and local
levels.  Various  legislative and regulatory  proposals under consideration from
time to time by Congress  and the FCC have in the past  materially  affected and
may in the future materially affect the telecommunications  industry in general,
and American  Mobile in particular.  In addition,  many aspects of regulation at
the federal,  state and local level  currently are subject to judicial review or
are the subject of administrative or legislative proposals to modify, repeal, or
adopt new laws and administrative  regulations and policies.  The following is a
summary of significant laws, regulations and policies affecting the operation of
American Mobile business.

General
-------

The  ownership and operation of American  Mobile's  satellite  network and ARDIS
terrestrial  network are subject to the rules and  regulations of the FCC, which
acts under authority  established by the  Communications Act and related federal
laws.  Among other  things,  the FCC allocates  portions of the radio  frequency
spectrum to certain  services and grants  licenses to and  regulates  individual
entities using that spectrum.  

American Mobile operates pursuant to various licenses granted by the FCC.

American  Mobile is a Commercial  Mobile  Radio  Service  ("CMRS")  provider and
therefore is regulated as a common  carrier.  The Company must offer  service at
just and  reasonable  rates on a  first-come,  first-served  basis,  without any
unjust or unreasonable discrimination,  and it is subject to the FCC's complaint
processes. The FCC has forborne from applying numerous common carrier provisions
of the Communications Act to CMRS providers.  In particular,  American Mobile is
not subject to traditional  public utility  rate-of-return  regulation,  and the
Company is not required to file tariffs with the FCC for its domestic services.



                                     - 13 -

<PAGE>



As providers  of  interstate  telecommunications  services,  American  Mobile is
required to contribute to the FCC's universal  service fund,  which supports the
provision of affordable telecommunications to high-cost areas, and the provision
of advanced  telecommunications services to schools, libraries, and rural health
care  providers.  Under the FCC's current rules,  American Mobile is required to
contribute a percentage of the end-user  telecommunications  revenues it derives
from the retail sale of telecommunications  services.  Currently excluded from a
carrier's universal service contribution base are end-user revenues derived from
the sale of information and other non-telecommunications  services and wholesale
revenues derived from the sale of  telecommunications.  A significant portion of
the ARDIS network revenue falls within the excluded categories, thereby reducing
American  Mobile's  universal  service  assessments.  Current  rules also do not
require that American  Mobile imputes to its  contribution  base retail revenues
derived when it uses its own  transmission  facilities to provide a service that
includes both information service and telecommunications  components.  There can
be no assurances that the FCC will retain the exclusions described herein or its
current policy regarding the scope of a carrier's contribution base. A number of
parties have filed  petitions for review of the FCC's  universal  service policy
and these appeals have been  consolidated  in the U.S.  Court of Appeals for the
Fifth  Circuit.  American  Mobile may also be  required to  contribute  to state
universal  service  programs.  The  requirement  to make these  state  universal
service payments, the amount of which in some cases may be subject to change and
is not yet determined,  may have a material adverse impact on the conduct of its
business.

American Mobile is subject to the Communications  Assistance for Law Enforcement
Act ("CALEA").  Under CALEA,  American  Mobile must ensure that law  enforcement
agencies can intercept  certain  communications  transmitted  over its networks.
American  Mobile  must also  ensure that law  enforcement  agencies  are able to
access certain call-identifying  information relating to communications over its
networks.  The Company  must comply  with the CALEA  requirements  and any rules
subsequently promulgated by June 30, 2000 or face possible sanctions,  including
substantial  fines and possible  imprisonment  of company  officials.  It is not
clear  whether the Company will be able to comply with CALEA's  requirements  or
will be able to do so in a timely  manner.  CALEA  establishes a federal fund to
compensate   telecommunications  carriers  for  all  reasonable  costs  directly
associated  with   modifications   performed  by  carriers  in  connection  with
equipment,  facilities,  and services installed or deployed on or before January
1, 1995. For equipment, facilities, and services deployed after January 1, 1995,
the CALEA fund is supposed  to  compensate  carriers  for any  reasonable  costs
associated  with   modifications   required  to  make   compliance   "reasonably
achievable."  It is possible that all necessary  modifications  will not qualify
for this  compensation  and that the  available  funds will not be sufficient to
reimburse  American  Mobile.  The  requirement to comply with CALEA could have a
material adverse effect on the conduct of its business.

As a matter of general  regulation  by the FCC,  American  Mobile is subject to,
among other things,  payment of regulatory  fees,  restrictions  on the level of
radio frequency  emissions of its systems'  mobile  terminals and base stations,
and "rate  integration"  regulations  requiring  that  providers  of  interstate
interexchange  telecommunications  services  charge  the same  rates  for  these
services in every state,  including Puerto Rico and the U.S. Virgin Islands. Any
of these regulations may have an adverse impact on the conduct of its business.

The  FCC  licenses  of  American  Mobile  are  subject  to  restrictions  in the
Communications  Act  that  (i)  certain  FCC  licenses  may  not  be  held  by a
corporation  of which more than 20% of its capital  stock is  directly  owned of
record or voted by non-U.S.  citizens or entities or their  representatives  and
(ii) that no such FCC license may be held by a corporation controlled by another



                                     - 14 -

<PAGE>


corporation   ("indirect  ownership")  if  more  than  25%  of  the  controlling
corporation's capital stock is owned of record or voted by non-U.S.  citizens or
entities or their representatives,  if the FCC finds that the public interest is
served  by the  refusal  or  revocation  of  such  license.  However,  with  the
implementation of the Basic  Telecommunications  Agreement  ("BTA"),  negotiated
under the  auspices  of the World  Trade  Organization  ("WTO") and to which the
United States is a party, the FCC will presume that indirect ownership interests
in excess of 25% by non-U.S.  citizens or entities  will be  permissible  to the
extent that the ownership interests are from WTO-member countries.  The BTA took
effect on February 5, 1998, and the FCC's  implementing  regulations took effect
on February 9, 1998.


American Mobile's Satellite Network
-----------------------------------

American Mobile is licensed by the FCC to provide a broad range of mobile voice,
data and dispatch services via satellite to land, air and sea-based customers in
a service area  consisting of the  continental  United States,  Alaska,  Hawaii,
Puerto Rico,  the U.S.  Virgin  Islands and U.S.  coastal  waters and  airspace.
American Mobile is also authorized to provide fixed site voice and data services
via  satellite to locations  within this service  area, so long as such services
remain incidental to American Mobile's mobile communications services.  American
Mobile  is  authorized  to  build,  launch  and  operate  three   geosynchronous
satellites in accordance  with a specified  schedule.  American Mobile is not in
compliance with the schedule for commencement and construction of its second and
third satellites and has petitioned the FCC for changes to the schedule. Certain
of these extension requests have been opposed by third parties.  The FCC has not
acted on American  Mobile's  requests.  The FCC has the  authority to revoke the
authorizations  for the second and third satellites and, in connection with such
a revocation, could exercise its authority to rescind American Mobile's license.
American  Mobile  believes  that the  exercise of such  authority to rescind the
license is unlikely. The term of the license for each of American Mobile's three
authorized  satellites is ten years,  beginning when American  Mobile  certifies
that the respective  satellite is operating in compliance with American Mobile's
license.  The ten-year term of MSAT-2 began August 21, 1995.  Although  American
Mobile  anticipates  that the  authorizations  are likely to be  extended in due
course to correspond to the useful lives of the satellites and that new licenses
will be  granted  for  replacement  satellites,  there is no  assurance  of such
extension or grant.

On July 2, 1998,  American  Mobile filed an application  for authority to launch
and operate its  second-generation  mobile satellite  system.  This satellite is
intended to support American Mobile's existing satellite services and also allow
the  provision  of an  extended  array of  services,  such as  higher  data rate
services and services to lower-power  terminals.  There is no guarantee that the
FCC will grant this  application.  The filing of the application does not commit
American  Mobile to expend any resources  toward this project;  however,  should
American  Mobile  decide  to  proceed  with the  construction  of the  follow-on
satellite,  American  Mobile would be required to raise  substantial  additional
capital to fund this project.

American  Mobile's  current  foreign  ownership  level,  for which the  indirect
ownership  limits are applicable,  is at least 14%. This figure does not include
any foreign  ownership  of Motorola,  Inc.  which holds  approximately  a 20.23%
interest in  American  Mobile.  Singapore,  which is the  domicile of  Singapore
Telecom, one of American Mobile's largest shareholders, is a WTO-member country.

MSAT-2 is designed to be able to operate  over the  1530-1559/1631.5-1660.5  MHz
bands (the "L-band").  American  Mobile is currently  licensed to operate in the
1544-1559/1645-1660.5  MHz bands (the "upper  L-band").  The FCC has  designated
American Mobile as the licensee for both MSS and  Aeronautical  Mobile Satellite




                                     - 15 -

<PAGE>

(Route) Service ("AMS(R)S").  AMS(R)S includes satellite  communications related
to air traffic control, as well as aeronautical  safety-related  operational and
administrative  functions. As a condition to its authorization,  American Mobile
is required by the FCC to be capable of providing priority and preemptive access
for AMS(R)S traffic in the upper L-band and to be interoperable with and capable
of transferring  AMS(R)S traffic to international  and foreign systems providing
such service.  American  Mobile  currently  anticipates  it will be able to meet
these  requirements  without any material  adverse  effect on its  business.  If
American Mobile is unable to meet these requirements,  the FCC may authorize and
give priority  spectrum access to one or more additional  satellite systems that
meet the specified requirements.

American  Mobile has  applied  for  authorization  to operate in the  additional
1530-1544/  1631.5-1645.5 MHz bands (the "lower L-band").  If American Mobile is
assigned spectrum in the lower L-band, it will be required by the FCC to provide
similar priority and preemptive access in that spectrum to maritime distress and
safety  communications.  With  respect to its mobile voice  terminals,  American
Mobile currently  anticipates it will be able to meet this  requirement  without
any material adverse effect on its business. The Federal Aviation Administration
("FAA")  filed  comments,   however,   in  connection  with  American   Mobile's
application to operate up to 30,000 mobile data terminals that were transitioned
from leased space  segment to MSAT-2 in late 1995,  stating its concern that the
mobile data terminals  cannot be operated in compliance  with American  Mobile's
obligation to provide  priority and preemptive  access in the upper L-band.  The
FAA has proposed that American  Mobile  operate the mobile data terminals in the
lower  L-band.  American  Mobile has  received  successive  six-month  grants of
special temporary authority ("STA"),  under a two-year waiver of the FCC's rules
on priority and preemptive access, to operate up to 15,100 mobile data terminals
in the lower L-band.  This number was increased to 33,100 terminals  pursuant to
American  Mobile's  acquisition  of  the  mobile  data  equipment  and  services
previously licensed to Rockwell.  The two-year waiver expired on August 1, 1997,
but remains in effect while American  Mobile's request for a two-year  extension
of that  waiver is  pending at the FCC.  American  Mobile  will need  additional
authority to increase the number of mobile data  terminals that it is authorized
to operate in order to achieve  planned  growth in its data  services.  American
Mobile will also need  permission  from the FCC to operate mobile data terminals
with a different transmission design than those operated under its current lower
L-band  authorization.  Transmissions  from these terminals require a wider band
width than do transmissions from American Mobile's existing terminals.  American
Mobile was granted a six-month  STA to operate up to 10,000 of these mobile data
terminals  on  February  12,  1999.  American  Mobile  will be  need  additional
authorization  from the FCC to  operate  up to  100,000  of these  terminals  as
contemplated.  There can be no assurance  that American  Mobile will continue to
receive  authority  to operate  these new  mobile  data  terminals  or any other
additional mobile data terminals in the lower L-band.

American Mobile's mobile terminal  authorizations are subject to compliance with
certain requirements regarding interference protection to the Global Positioning
System ("GPS").  With the consent of the FAA, the FCC granted American  Mobile's
application  subject  to  certain  conditions,  including  that the grant may be
modified after the  interference  issue is studied.  The FCC is now proposing to
impose more stringent  limits on the  out-of-band  emissions from certain mobile
terminals,  including those used in connection with American Mobile's system, in
order  to  protect  GPS and  the  Russian  Global  Navigation  Satellite  System
("Glonass").  Some of American Mobile's existing mobile terminals may not comply
with  this  proposed  standard.  Under the  Commission's  proposal,  all  mobile
terminals  commissioned  after  January 1, 2002 must comply with this new limit,
and any  terminals  not  meeting  the new  specifications  must  be  retired  or
retrofitted  by 2005.  While  American  Mobile  believes that it will be able to
comply  with the  proposed  2002  deadline  for  newly  commissioned  terminals,
American Mobile will oppose the 2005 deadline for the retirement or retrofitting


                                     - 16 -

<PAGE>


of existing,  non-compliant  terminals. If adopted by the FCC, this policy could
have a material adverse effect on American Mobile's business.

American Mobile's license  authorizes MSAT-2 to operate using certain telemetry,
transfer and control frequencies in the Ku-band. American Mobile operates MSAT-2
at the 101 degrees W.L. orbital location. GE American Communications,  Inc. ("GE
American"),  also operates a satellite at the 101 degrees W.L. orbital location.
American  Mobile and GE  American  have an  agreement  covering  MSAT-2 that may
require  American Mobile to modify its operations or make certain payments to GE
American if  American  Mobile's  operations  cause  interference  to those of GE
American. While there can be no assurances,  the Company does not anticipate any
interference in the operations of MSAT-2 and those of GE American.

American Mobile's  subscriber  equipment will operate in L-band frequencies that
are limited in  available  bandwidth.  The  feeder-link  earth  stations and the
network communications controller of the CGS operate in the more plentiful fixed
satellite  service  Ku-band  frequencies.  Of the 30  MHz  in the  upper  L-band
frequencies,   American   Mobile  is  currently   licensed  to  operate  in  the
1544-1559/1645.5-1660.5  MHz bands. Of the 30 MHz assigned to American Mobile by
the FCC,  one MHz is  limited  to  AMS(R)S  and  one-way  paging and two MHz are
limited to distress and safety communications.  American Mobile does not plan to
operate on these three MHz of bandwidth.

In June 1996, the FCC issued a notice of proposed rulemaking proposing to assign
to  American  Mobile  the  first 28 MHz of  internationally  coordinated  L-band
spectrum  from either the upper or lower  portion of the MSS  L-band.  Under the
FCC's  proposal,  American  Mobile would have first  priority  access to use the
lower L-band  spectrum as necessary to compensate for spectrum  unavailable  for
coordination  in the upper  L-band.  In the event the  United  States is able to
coordinate more than 28 MHz of L-band  spectrum,  the FCC has proposed  allowing
other applicants to apply for assignment of those frequencies.  Certain entities
have filed with the FCC  petitions to deny  American  Mobile's  application  and
comments  opposing the assignment of additional  frequencies to American Mobile.
While there can be no assurances,  American Mobile believes the FCC is likely to
grant American Mobile's application.

In the Ku-band  frequencies,  American  Mobile is currently  licensed to operate
MSAT-2 using 200 MHz within the bands 10.75-10.95 GHz for downlink transmissions
and 13.0-13.15 GHz and 13.2-13.25 GHz for uplink transmissions.  American Mobile
has applied for  authority to operate  using an  additional  200 MHz of spectrum
within the same bands.

Spectrum availability, particularly in the L-band, is a function not only of how
much spectrum is assigned to American  Mobile by the FCC, but also the extent to
which the same  frequencies  are used by other  systems  in the  North  American
region,  and the manner of such use. All spectrum use must be  coordinated  with
other  parties  that are  providing  or plan to provide  mobile  satellite-based
communications in the same geographical region using the same spectrum.  At this
time,  the other  parties with which  spectrum use must be  coordinated  include
Canada, Mexico, the Russian Federation and Inmarsat. In addition, a new Japanese
system  that is to be  launched  this year  proposes to operate in a manner that
would interfere with American  Mobile's system and other systems in this region,
and this Japanese  system's  spectrum use will have to be coordinated with these
regional operators.


                                     - 17 -

<PAGE>



Use of the spectrum is determined  through a series of negotiations  between the
United States government and the other user agencies,  pursuant to the rules and
regulations of the International  Telecommunication  Union ("ITU"). For the past
several years, each of the countries and international  organizations  that have
used or will use L-band  frequencies  within the North American region have been
meeting  regularly to negotiate and  coordinate  their current and future use of
that spectrum.  American Mobile estimates that  international  coordination will
make  approximately 20 MHz of L-band spectrum available to the United States for
MSAT-2.  Since the  coordination  process  involves  many  parties  and there is
uncertainty about the total outcome, the actual amount of spectrum available may
be more or less than that  estimated.  The operation of the new Japanese  system
may have the effect of further  reducing  American  Mobile's access to spectrum.
Some of the  spectrum  that may be  available  to American  Mobile may include a
portion of the 28 MHz lower L-band spectrum adjacent to the frequencies  already
assigned to American Mobile by the FCC.

The ITU's  Radio  Regulations  include  a table of  frequency  allocations  that
prescribe  the  permitted  uses of the  radio  spectrum.  As a result of the ITU
satellite  plan for parts of the  Ku-band,  there  also may be  restrictions  on
American Mobile's ability to deploy feederlink earth stations in Alaska, Hawaii,
Puerto Rico, and the U.S. Virgin Islands.

During the course of the licensing process for American Mobile and several times
since,  the FCC has stated that there is only enough  spectrum in the MSS L-band
for the FCC to  authorize  a single MSS system to provide  service in the United
States.  In 1995,  however,  Comsat  applied for authority to provide MSS in the
United  States  in  the  L-band  over  the  Inmarsat  satellite  system.  Comsat
subsequently  filed an  application  seeking  a  blanket  authorization  for the
operation of 5,000 mobile  terminals in the United States,  as well as a request
for an STA to operate 50 mobile  terminals in the United  States.  On January 9,
1998, the FCC denied Comsat's  request for an STA and required that Comsat amend
its underlying applications to conform with the requirements  established in the
FCC's  November  1997  order on  market  access  by  foreign-licensed  satellite
systems.  This order  conforms the FCC's  regulations  with the BTA and makes it
easier for foreign  satellite  systems from  WTO-member  countries to access the
United States market,  while at the same time making clear that the FCC may deny
access  to such  satellite  applicants  on the basis of  spectrum  availability,
applicants'  technical,  legal,  or  financial  qualifications,  or  foreign  or
domestic policy  factors.  The order also requires Comsat to make an appropriate
waiver of immunity from any suit as part of any application to provide  domestic
services over Inmarsat's  system. On January 12, 1998, Comsat filed an appeal of
this order with the U.S.  Court of Appeals for the D.C.  Circuit,  and  American
Mobile is opposing  this appeal as an  intervenor.  On February 6, 1998,  Comsat
filed an  application  for review of the FCC's denial of its request for an STA,
and a petition  for waiver of the FCC's new market  access rules to permit it to
offer MSS on a temporary basis in the United States. American Mobile has opposed
these filings, which remain pending.

In its January 9, 1998 denial of Comsat's  STA  request,  the FCC stated that it
would be willing to authorize Comsat to provide  international service if Comsat
amended  its  blanket  license  application  to show that  service  through  its
terminals and Inmarsat's MSS system could be limited to  international  traffic.
Comsat has  amended  its  application  in order to make this  showing.  American
Mobile has opposed this application, which remains pending.

On  October  23,  1998,  the FCC  issued an order  permitting  Comsat to provide
aeronautical  services via Inmarsat to the domestic legs of the same aircraft in
international  flight.  As the FCC noted,  this  action has a minimal  effect on
American Mobile's access to L-band spectrum.  Additionally, the Company does not
believe this action will have any effect on revenues.


                                     - 18 -

<PAGE>



TMI, which is technically capable of providing service within the United States,
also hopes to provide MSS to domestic  customers over MSAT-1. On March 10, 1998,
SatCom Systems, Inc. filed an application for a blanket license to operate up to
25,000 mobile  terminals in the United States over MSAT-1 on a permanent  basis.
American Mobile has opposed this application, which remains pending. On July 20,
1998, the International Bureau of the FCC granted SatCom an STA to operate up to
500  mobile  terminals  for 180 days on a private  carrier  basis so that it may
conduct marketing trials;  this STA was subsequently  extended to July 12, 1999.
On July 30, 1998,  American  Mobile filed an Application for Review and a Motion
for Stay of this STA grant with the FCC, and these filings remain pending.

On March 30,  1998,  TMI  filed its own  application  for a blanket  license  to
operate up to 100,000  mobile  terminals  in the United  States over MSAT-1 on a
permanent  basis.  American Mobile has opposed this  application,  which remains
pending.

On January 30, 1998, Kitcomm Satellite  Communications Ltd.  ("Kitcomm") filed a
letter of intent with the FCC to provide MSS to U.S. customers over its proposed
foreign-licensed  satellite  system.  Kitcomm proposes to provide two-way remote
data  collection,  tracing,  and messaging  services over a global system in the
lower  L-band at  1525-1530/1626.5-1631  MHz.  American  Mobile has  opposed the
operation of this proposed  system in the United States,  since such  operations
would likely reduce the spectrum available to American Mobile either directly or
as a result  of  international  frequency  coordination.  In  order  to  provide
domestic service,  Kitcomm will also have to request authority to operate mobile
terminals  in the  United  States,  and  American  Mobile  will  oppose  any FCC
application  by Kitcomm  that would  reduce the  spectrum  available to American
Mobile either directly or as a result of international frequency coordination.

In addition to providing  additional  competition to American Mobile, a grant of
domestic   authority  by  the  FCC  to  one  of  these  foreign   systems  would
significantly increase the demand for spectrum in the international coordination
process and could adversely affect American Mobile's business.

American  Mobile is operating  under waivers of certain FCC rules.  In 1996, the
FCC  issued an order  requiring  all CMRS  providers  to offer what are known as
"enhanced  9-1-1  services"  including the ability to  automatically  locate the
position of all transmitting  mobile  terminals.  American Mobile would not have
been  able  to  offer  this  automatic  location   information   without  adding
substantially  to the cost of its mobile  equipment  and  reconfiguring  its CGS
software.  The FCC  decided  not to  impose  specific  new  requirements  on MSS
providers,  including  American  Mobile,  at that  time.  The FCC did  state its
expectation  that  such  providers  eventually  would  be  required  to  provide
"appropriate   access  to  emergency   services."  A  decision  to  impose  this
requirement  on MSS providers  could have a material  adverse effect on American
Mobile.

The FCC enacted  "rate  integration"  regulations  requiring  that  providers of
interstate interexchange  telecommunications  services charge the same rates for
these  services  in every  state,  including  Puerto  Rico  and the U.S.  Virgin
Islands.  American  Mobile has opposed the  imposition of this rate  integration
requirement on its MSS system, so that it may preserve the flexibility to charge
more for service in areas covered by satellite beams that require more satellite
power. The FCC has denied American  Mobile's  request for a permanent  exemption
from  its  rate  integration  requirement,  but has not yet  ruled  on  American
Mobile's  request for a temporary  waiver of a year or more. The FCC has granted
American Mobile an interim waiver from its rate  integration  requirement  until
its decision on American Mobile's temporary waiver request.


                                     - 19 -

<PAGE>




American Mobile's ARDIS Terrestrial Network
-------------------------------------------

American Mobile's ARDIS  terrestrial  network consists of base stations licensed
in the Business Radio and Specialized Mobile Radio Service, all operating in the
800 MHz  frequency  band.  The ARDIS network is  interconnected  with the public
switched data network.

The  FCC's  licensing  regime in effect  when it issued  licenses  for the ARDIS
network provided for the issuance of individual  licenses for specific  channels
at  specific  sites.  With  respect  to the part of the band in which all of the
ARDIS base stations  operate,  however,  the FCC has implemented a new licensing
regime.  The new  licensing  regime  involves  the  auctioning  of licenses  for
specific channels for wide geographic areas, within which the licensee will have
substantial  flexibility to operate any number of base stations,  including base
stations  that may operate on the same channels as incumbent  licensees  such as
American Mobile. The FCC proposes to prohibit the new geographic  licensees from
causing interference to incumbents,  but there is concern that such interference
may occur and that practical application of these rules is uncertain.

American  Mobile  believes that it has licenses for sufficient  channels to meet
its current needs for capacity on the ARDIS network. To the extent that it needs
additional  capacity,  it may be required to either  participate in the upcoming
auctions or acquire channels from other licensees.  As part of its new licensing
regime,  the FCC  permits  a  wide-area  geographic  licensee,  with  prior  FCC
approval,  to sell a portion  of its  geographic  area to another  entity.  This
partitioning  authority may increase  American  Mobile's  flexibility to operate
additional base stations,  but the practical utility of this option is uncertain
at this time.

American  Mobile  operates  the ARDIS  network  under a number of waivers of the
FCC's technical rules, including rules on station identification, for-profit use
of excess capacity,  system loading, and multiple station ownership.  Several of
these  waivers  were first  obtained  individually  by IBM and  Motorola,  which
operated separate wireless data systems until forming the ARDIS joint venture in
1990. The FCC  incorporated a number of these waivers into its regulations  when
it implemented  Congress' statutory provision creating the CMRS  classification,
and American Mobile no longer requires those waivers. As of March 3, 1999, ARDIS
completed  its  planned   construction  of  base  stations  for  which  extended
implementation was granted by the FCC in 1996.

The  foregoing  does not purport to describe all present and  proposed  federal,
state, and local regulation and legislation  relating to the industries in which
American Mobile operates.  Other existing federal,  state, and local regulations
currently  are the  subject of a variety of  judicial  proceedings,  legislative
hearings,  and  administrative  and legislative  proposal which could change, in
varying  degrees,  the manner in which  American  Mobile  operates.  Neither the
outcome of these  proceedings nor their impact on American  Mobile's  operations
can be predicted at this time.


                               Year 2000 Readiness
                               -------------------

American Mobile has developed and is implementing a Year 2000 Readiness  Program
("Year 2000 Readiness Program") to address Year 2000 issues.  "Year 2000 Ready,"
or "Year 2000  Readiness,"  means that  customers  will  experience  no material
difference in performance and functionality of the Company's  networks prior to,
during or after the year 2000.


                                     - 20 -

<PAGE>



The  Company's  Year 2000  Readiness  Program uses the phased  approach  that is
standard in its industry.  The Awareness,  Inventory and Assessment  phases have
been  completed,  and American  Mobile is at various  stages of the  Renovation,
Validation/Test and  Implementation/Rollout  phases, depending on the particular
system involved.

The Inventory and Assessment Phases  concentrated on the Company's core business
systems:  those systems, both hardware and software,  whose failure could have a
material  impact on its financial  condition and operations.  Vendors  providing
critical  products  and  services to American  Mobile are also  included in this
definition of core business systems.  Although the core business systems are the
top priority in the  Company's  Year 2000  Readiness  Program,  American  Mobile
assessed all of its software and hardware for Year 2000 Readiness.

American    Mobile's   plans   for   the   Renovation,    Validation/Test    and
Implementation/Rollout  Phases  call for it to be Year 2000  Ready by the end of
the third  quarter of 1999. In addition,  the Company is currently  scheduled to
complete  renovation,   implementation  and  rollout  of  its  internal  systems
(including its voice customer billing  software,  CMIS) in the fourth quarter of
1999;  these internal  software  systems do not affect the Company's  ability to
pass customer traffic and therefore will not affect Year 2000 Readiness.

The complex of hardware  and  software  that the Company  maintains  consists of
commercial  off-the-shelf (COTS) software,  as well as custom software developed
specifically for American Mobile's networks. In certain cases, American Mobile's
Year 2000 Readiness Program involves upgrading COTS software that is unsupported
by the vendor or whose Year 2000 Readiness  could not be  determined.  Upgrading
such COTS software,  as planned,  provides greater certainty  regarding the Year
2000  Readiness  of such  products  and  ensures  that  vendor  support  will be
available.

The  total  cost  of  American   Mobile's  Year  2000   Readiness   Program  was
approximately  $2.4 million in 1998.  Expenditures  for the Year 2000  Readiness
Program in 1999 are estimated to be up to $7.4 million. Some modification costs,
including  the  purchase of  software  upgrades  and  consulting  services,  are
expensed as incurred while other modification costs, such as hardware purchases,
are being treated as capital expenditures.

The estimated cost and date on which American  Mobile  believes its network will
be Year 2000 Ready are based on management's best estimates.  However,  there is
no  guarantee  that the Company will achieve  these  results and actual  results
could  differ  materially  from those  anticipated.  Some of  American  Mobile's
critical  business systems depend  significantly on software  programs and third
party services that are not within the Company's control.  Failure to solve Year
2000 errors within American  Mobile's  critical business systems could result in
possible service outages, miscalculations or disruption of operations that could
have a material impact on the Company's business. Because of the Company's heavy
dependence  on  software,  some  Year  2000  problems  may not be  found  or the
remediation  efforts may introduce new bugs that are not identified  before they
impact operations. This applies to both COTS software and custom software.

If American Mobile's customers fail to become Year 2000 ready on time with their
own hardware and software systems,  their  applications may not function even if
American  Mobile's  systems  are Year 2000  Ready.  This will  result in reduced
traffic and  revenues.  Also,  suppliers  of goods and  services may suffer Year
2000-related  failures  from which the  Company  cannot  adequately  protect its
business.




                                     - 21 -

<PAGE>



While  management  believes  that the Company  will be able to achieve Year 2000
Readiness in a timely manner,  the schedule for completing the implementation of
several core business  systems  extends to the third quarter 1999 and there is a
possibility  that  American  Mobile  may not  become  Year 2000 Ready on time or
within budget.  Contingency  planning, as discussed below, is currently underway
to minimize  the risk of  business  interruptions  caused by Year 2000  problems
within the core business systems.

American Mobile has contingency plans in place to minimize service interruptions
that can  mitigate,  although not  eliminate,  interruptions  caused by problems
resulting  from Year 2000  issues.  For  example,  the Company has backup  power
supplies  and  generators  in place for certain  portions of its networks in the
event of electrical  power  outages.  In addition,  for some  services  American
Mobile has contracted with more than one service provider.  These plans, systems
and services are being  incorporated  into the Company's  Year 2000  contingency
planning.  To the extent that it is  commercially  reasonable to do so, American
Mobile will include other  redundant or  alternative  sources of services in its
Year 2000  contingency  planning  efforts.  American Mobile  anticipates  having
additional Year 2000 contingency plans in place by June 1999.


                                    Employees
                                    ---------

At March 29, 1999,  the Company had  approximately  470  employees.  None of the
Company's  employees is represented by a labor union. The Company  considers its
relations with its employees to be good.


Item 2.  Properties.
-------  -----------

The Company leases  approximately  94,000 square feet at its headquarters office
space and network  operations center in Reston,  Virginia.  The lease has a term
which runs  through  August 3, 2003  (which  may be  extended  at the  Company's
election for an  additional  five  years).  In  addition,  the Company  leases a
back-up Ku-band radio frequency  facility in Alexandria,  Virginia.  The Company
also leases  approximately  86,000  square feet of space for office space and an
operations  center in  Lincolnshire,  Illinois,  the  lease  for  which  expires
December  31,  2000  (which may be extended  at the  Company's  election  for an
additional five years),  and  approximately  7,800 square feet for a remote data
center in Lexington,  Kentucky,  the lease for which expires April 30, 2001. The
Company  also  leases  site  space for  approximately  1,700 base  stations  and
antennas across the country for the terrestrial  network under one- to five-year
lease contracts with renewal provisions. The Company anticipates that it will be
able to  gain  access  to  additional  base  station  sites  when  necessary  on
acceptable terms.


Item 3.  Legal Proceedings.
-------  ------------------

As previously  reported,  in 1992, a former  director of American Mobile filed a
lawsuit against the Company alleging violations of the Communications Act and of
the Sherman Act and breach of contract.  The suit was  dismissed on November 10,
1998 prior to  commencement of trial pursuant to an agreement to settle the suit
by payment of $250,000,  which represents the Company's  estimate of its cost of
going to trial.


                                     - 22 -

<PAGE>


Item 4.  Submission of Matters to a Vote of Security Holders.
-------  ----------------------------------------------------

No matters were  submitted to a vote of the  Company's  Stockholders  during the
fourth quarter of fiscal 1998.



                                     - 23 -

<PAGE>





                                     PART II
                                     -------

Items 5, 6, 7 and 8.
--------------------

The  information  called for by Items 5 through 8 of Part II is  presented  in a
separate  section  of this  Annual  Report on Form 10-K  commencing  on the page
numbers specified below:

Form 10-K Item                                                              Page
--------------                                                              ----

Item 5 - Market for the Registrant's Common Equity and Related Matters      F-56

Item 6 - Selected Financial Data                                            F-57

Item 7- Management's Discussion and Analysis of Financial Condition
        and Results of Operations                                           F- 1

Item 8 - Financial Statements and Supplementary Data                        F-19

Item 9 - Changes in and Disagreements with Accountants on Accounting 
and Financial Disclosure.                                                   None





                                     - 24 -

<PAGE>



                                    PART III
                                    --------


Items 10, 11, 12 and 13.
------------------------

The information called for by Part III (Items 10, 11, 12 and 13) is incorporated
herein by reference from the material  included  under the captions  "Nominees,"
"Executive Officers," "Executive  Compensation,"  "Security Ownership of Certain
Beneficial   Owners   and   Management,"    "Agreements   Among   Stockholders,"
"Compensation and Stock Option Committee  Interlocks and Insider  Participation"
and "Section 16(a) Beneficial  Ownership Reporting  Compliance" in the Company's
definitive  proxy statement (to be filed) for its Annual Meeting of Stockholders
to be held May 26, 1999 (the "Proxy  Statement").  The Proxy  Statement is being
prepared and will be filed with the Securities and Exchange  Commission pursuant
to  Regulation  14A, and furnished to the  Company's  Stockholders,  on or about
April 21, 1999.





                                     - 25 -

<PAGE>




                                     PART IV
                                     -------


Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
--------  -----------------------------------------------------------------


(a)  1.  Financial Statements.
         ---------------------

The  following   consolidated  financial  statements  of  the  Company  and  its
subsidiaries  are included in a separate  section of this Annual  Report on Form
10-K commencing on the page numbers specified below:


INDEX
-----

Management's Discussion and Analysis of Financial Condition
          and Results of Operations......................................  F-  2

Report of Independent Public Accountants.................................  F- 19

Consolidated Statements of Loss..........................................  F -20

Consolidated Balance Sheets..............................................  F -21

Consolidated Statements of Stockholders' (Deficit) Equity................  F -22

Consolidated Statements of Cash Flows....................................  F -24

Notes to Consolidated Financial Statements...............................  F -25

Quarterly Financial Data.................................................  F -56

Selected Financial Data..................................................  F -57





                                     - 26 -

<PAGE>



         2.  Financial Statement Schedules.
             ------------------------------

Financial  Statement  Schedules not included with the one listed below have been
omitted because they are not required or not applicable, or because the required
information is shown in the financial statements or notes thereto.

         I.   Condensed Financial
              Information of Registrant.................................Page S-1


         2.   Exhibits

         3.1  -     Restated  Certificate of  Incorporation of AMSC (as restated
                    effective May 1, 1996) (Incorporated by reference to Exhibit
                    3.1a to the  Company's  Quarterly  Report on Form 10-Q filed
                    for the  periods  ending  March 31,  1996 and June 30,  1996
                    (File No. 0-23044))

         3.2  -     Amended and Restated Bylaws of AMSC (as amended and restated
                    effective  March 25, 1999)(filed herewith)

         9.1  -     Amended and  Restated  Stockholders'  Agreement  dated as of
                    December 1, 1993,  between  AMSC and certain  holders of its
                    capital stock  (Incorporated  by reference to Exhibit 9.1 to
                    the Company's  Registration  Statement on Form S-1 (Reg. No.
                    33- 70468))

         10.1 -     Contract  for an MSAT  Spacecraft,  dated  December  7, 1990
                    between AMSC and Hughes Aircraft  Company,  amended June 15,
                    1993  (Amendment  Nos.  1  through  4) and  further  amended
                    November 11, 1993 (Amendment No. 5), between AMSC Subsidiary
                    Corporation,  as  assignee  of  AMSC,  and  Hughes  Aircraft
                    Company  (Incorporated  by  reference to Exhibit 10.3 to the
                    Company's  Registration  Statement  on Form  S-1  (Reg.  No.
                    33-70468))

         10.1a      -  Amendment  No.  6 to  the  AMSC  Hughes  MSAT  Spacecraft
                       Contract, dated October 11, 1994, between AMSC Subsidiary
                       Corporation, as assignee to  AMSC,  and  Hughes  Aircraft
                       Company (Incorporated  by reference  to  Exhibit 10.3a to
                       the Company's Annual  Report on Form 10-K for the  fiscal
                       year ended December 31, 1994 (File No. 0-23044))

         10.1b      -  Mutual  Final  Release,  dated  October 11, 1994, between
                       AMSC  Subsidiary  Corporation,   Hughes  Aircraft,   Spar
                       Aerospace Limited and Lockheed  Missiles & Space Company,
                       Inc. (Incorporated by  reference to  Exhibit 10.3b to the
                       Company's Annual Report on Form 10-K for  the fiscal year
                       ended December 31, 1994 (File No. 0-23044))



                                     - 27 -

<PAGE>



         10.1c      -  Amendment  No.  7  to  the  AMSC  Hughes  MSAT Spacecraft
                       Contract, dated October 11, 1994, between AMSC Subsidiary
                       Corporation, as  assignee  to  AMSC,  and Hughes Aircraft
                       Company  (Incorporated  by  reference  to  Exhibit  10.3c
                       previously  filed  with  the  Report on Form 10-K for the
                       period ending December 31, 1997 (File No. 0-23044)))

         10.2 -     Memorandum  of  Agreement  for  Satellite  Capacity,   dated
                    February 17, 1992,  between AMSC Subsidiary  Corporation and
                    Telesat Mobile Inc., as amended by Amending  Agreement dated
                    October 18, 1993 among AMSC, AMSC Subsidiary Corporation and
                    TMI  Communications  and Company,  Limited  Partnership,  as
                    successor in interest to Telesat Mobile Inc., and as further
                    amended  by  letter   agreement   dated   October  18,  1993
                    (Incorporated  by reference to Exhibit 10.7 to the Company's
                    Registration Statement on Form S-1 (Reg. No. 33-70468))

         10.3 -     Agreement  for  Cooperation  in  Joint  Procurement  of  MSS
                    Systems,  dated September 19, 1988,  between American Mobile
                    Satellite   Consortium   Inc.   and   Telesat   Mobile  Inc.
                    (Incorporated by reference to Exhibit 10.32 to the Company's
                    Registration Statement on Form S-1 (Reg. No. 33-70468))

         10.4 -     Joint  Operating  Agreement,  dated April 25, 1990,  between
                    AMSC  and  Telesat   Mobile  Inc.  as  amended  by  Amending
                    Agreement dated October 18, 1993 among AMSC, AMSC Subsidiary
                    Corporation  and TMI  Communications  and  Company,  Limited
                    Partnership, as successor in interest to Telesat Mobile Inc.
                    (Incorporated by reference to Exhibit 10.33 to the Company's
                    Registration Statement on Form S-1 (Reg. No. 33-70468))

         10.5 -     Right of First Offer Agreement dated as of November 30, 1993
                    among AMSC, Hughes Communications  Satellite Services, Inc.,
                    Singapore  Telecommunications Ltd., Satellite Communications
                    Investments  Corporation,  Space  Technologies  Investments,
                    Inc.,  Satellite  Mobile  Telephone  Company  L.P.,  Transit
                    Communications, Inc., MTel Space Technologies, L.P. and MTel
                    Space Technologies Corporation (Incorporated by reference to
                    Exhibit  10.11 to the  Company's  Registration  Statement on
                    Form S-1 (Reg. No. 33-70468))

         10.5a      - Amendment  No.  1  dated  June 28, 1996, to Right of First
                      Offer   Agreement    among   American   Mobile   Satellite
                      Corporation,   Hughes  Communications  Satellite Services,
                      Inc.,   Singapore   Telecommunications   Ltd.,   Satellite
                      Communications Investments Corporation, Space Technologies
                      Investments,  Inc.,   and  Transit  Communications,   Inc.
                      (Incorporated by  reference to  Exhibit XI  to the Amended
                      and  Restated  Schedule  13D dated  July 1, 1996, filed by
                      Hughes  Communications  Satellite  Services, Inc.,  Hughes
                      Communications,  Inc.,  Hughes  Aircraft  Company,  Hughes
                      Electronics  Corporation  and  General  Motors Corporation
                      with respect to shares of Common Stock, $.01 par value, of
                      American Mobile Satellite Corporation)



                                     - 28 -

<PAGE>



         10.6*-     Amended and Restated Stock Option Plan (as amended effective
                    May 20, 1998) (Incorporated by reference to Exhibit 10.13 to
                    the  Company's  Registration  Statement  on Form  S-8  (Reg.
                    No.333-30099))

         10.6a*     -  Amended  Form  of  Employee  Stock  Option  Agreement
                       (Incorporated  by  reference   to  Exhibit  10.3b  to the
                       Company's Annual Report  on  Form  10-K  for  the  fiscal
                       year  ended December 31, 1994 (File No. 0-23044))

         10.7*-     Employee  Stock  Purchase  Plan,  as amended  June 25,  1998
                    (filed herewith).

         10.8*-     Form of  Directors  and Officers  Indemnification  Agreement
                    (Incorporated by reference to Exhibit 10.41 to the Company's
                    Annual  Report  on Form  10-K  for  the  fiscal  year  ended
                    December 31, 1993 (File No. 0-23044))

         10.9*-     1994  Stock   Option   Plan  for   Non-Employee   Directors.
                    (Incorporated by reference to Exhibit 10.53 to the Company's
                    Annual  Report  on Form  10-K  filed  for the  period  ended
                    December 31, 1996 (File No. 0-23044))

         10.10*-    Form of Executive  Agreements  (Incorporated by reference to
                    Exhibit  10.54 to the  Company's  Annual Report on Form 10-K
                    filed for the  period  ending  December  31,  1996 (File No.
                    0-23044))

         10.11*-    Form  of  Restricted   Stock  Agreement   (Incorporated   by
                    reference to Exhibit  10.13b to the Company's  Annual Report
                    on Form 10-K for the fiscal  year ended  December  31,  1997
                    (File No. 0-23044))

         10.12 -    Mobile Terminal Production Agreement, dated October 6, 1992,
                    between  AMSC  Subsidiary   Corporation   and   Westinghouse
                    Electric Corporation acting through Westinghouse  Electronic
                    Systems Company  (Incorporated by reference to Exhibit 10.17
                    to the  Company's  Registration  Statement on Form S-1 (Reg.
                    No. 33-70468))

         10.12a     -  Amendment  No. 1 to Mobile Terminal Production Agreement,
                       dated   November  21,  1994,  between   AMSC   Subsidiary
                       Corporation and  Westinghouse Electric Corporation acting
                       through   Westinghouse   Electronic   Systems   Company 
                       (Incorporated  by  reference  to  Exhibit  10.17a  to the
                       Company's Annual Report on  Form 10-K for the fiscal year
                       ended December 31, 1994 (File No. 0-23044))

         10.12b     -  Amendment No. 2  to Mobile Terminal Production Agreement,
                       dated  January  23,  1995,   between   AMSC   Subsidiary
                       Corporation and  Westinghouse Electric Corporation acting
                       through   Westinghouse  Electronic   Systems   Company
                       (Incorporated  by  reference  to  Exhibit  10.17b  to the
                       Company's  Annual Report on Form 10-K for the fiscal year
                       ended December 31, 1994 (File No. 0-23044))


                                     - 29 -

<PAGE>



         10.12c     -   Amendment No. 3 to Mobile Terminal Production Agreement,
                        dated  March  21,  1995,  between   AMSC  Subsidiary 
                        Corporation and Westinghouse Electric Corporation acting
                        through   Westinghouse   Electronic   Systems   Company 
                        (Incorporated   by  reference  to   Exhibit  10.17c  the
                        Company's Annual Report on Form 10-K for the fiscal year
                        ended December 31, 1994 (File No. 0-23044))

         10.13 -    Mobile Termination  Production Contract,  dated November 30,
                    1992,  between AMSC  Subsidiary  Corporation  and Mitsubishi
                    Electric  Corporation  (Incorporated by reference to Exhibit
                    10.18 to the  Company's  Registration  Statement on Form S-1
                    (Reg. No. 33-70468))


         10.14 -    Deed of Lease at Reston,  Virginia,  dated  February 4, 1993
                    and  amended   June  21,  1993,   between  AMSC   Subsidiary
                    Corporation  and  Trust  Company  of  the  West  as  Trustee
                    (Incorporated by reference to Exhibit 10.20 to the Company's
                    Registration Statement on Form S-1 (Reg. No. 33-70468))

         10.14a     -   Amendment No. 4 to Deed of Lease, dated October 7, 1994,
                        between AMSC Subsidiary Corporation and Trust Company of
                        the  West  as  Trustee  (Incorporated  by  reference  to
                        Exhibit 10.20a  to  the  Company's Annual Report on Form
                        10-K for the fiscal year ended December 31, 1994 (File
                        No. 0-23044))

         10.15 -    Master Lease  Agreement,  dated June 23, 1993,  between AMSC
                    Subsidiary Corporation and Digital Equipment Corporation and
                    Amendment to Master Lease Agreement  between AMSC Subsidiary
                    Corporation and Digital  Equipment  Corporation dated August
                    2, 1993  (Incorporated  by reference to Exhibit 10.25 to the
                    Company's  Registration  Statement  on Form  S-1  (Reg.  No.
                    33-70468))

         10.16 -    Telemetry, Tracking and Control Satellite Service Agreement,
                    dated  as  of  August  5,  1993,   between  AMSC  Subsidiary
                    Corporation and Hughes  Communications  Satellite  Services,
                    Inc.  (Incorporated  by  reference  to Exhibit  10.27 to the
                    Company's  Registration  Statement  on Form  S-1  (Reg.  No.
                    33-70468))

         10.17 -    Agreement  dated  as  of  December  14,  1992  between  AMSC
                    Subsidiary   Corporation   and  GTE   Spacenet   Corporation
                    (Incorporated by reference to Exhibit 10.35 to the Company's
                    Registration Statement on Form S-1 (Reg. No. 33-70468))

         10.17a     -   Amendment  No.  1  dated  as  of November 7, 1997 to the
                        Agreement dated as of December 14, 1992, by GTE Spacenet
                        Corporation   and   AMSC   Subsidiary   Corporation 
                        (Incorporated by reference to Exhibit  10.65  previously
                        filed with the Report on Form 10-K for the period ending
                        December 31, 1997 (File No. 0-23044))


                                     - 30 -

<PAGE>



         10.18 -    Master  Agreement dated March 30, 1994,  between  Washington
                    International  Teleport,  Inc.,  and AMSC  (Incorporated  by
                    reference to Exhibit  10.36a to the Company's  Annual Report
                    on Form 10-K for the fiscal  year ended  December  31,  1993
                    (File No. 0-23044))

         10.18a     - Contract Amendment No. A001, dated July 1, 1994,   between
                      Washington   International   Teleport,  Inc.,   and  AMSC 
                      (Incorporated  by  reference  to  Exhibit  10.36b  to  the
                      Company's  Quarterly  Report  on  Form  10-Q filed for the
                      period  ending  September 30, 1994 (File No. 0-23044))

         10.18b     - Contract Amendment No. A002, dated July 1, 1994,   between
                      Washington   International   Teleport,   Inc.,   and  AMSC
                      (Incorporated  by  reference  to  Exhibit  10.36c  to  the
                      Company's  Quarterly  Report  on  Form 10-Q  filed for the
                      period  ending  September 30, 1994 (File No. 0-23044))


         10.19 -    Asset Sale  Agreement  dated as of November 22, 1996, by and
                    among  Rockwell  Collins,  Inc.  American  Mobile  Satellite
                    Corporation and AMSC Subsidiary Corporation (Incorporated by
                    reference to Exhibit 10.61 to the Company's  Current  Report
                    on Form 8-K dated  November 22, 1996,  and filed on December
                    9, 1996 (File No. 0-23044))

         10.20 -    Stock  Purchase  Agreement for the  Acquisition  of Motorola
                    ARDIS  Acquisition,  Inc. and Motorola  ARDIS,  Inc. by AMSC
                    Acquisition  Company,  Inc., a  Wholly-Owned  Subsidiary  of
                    American Mobile Satellite Corporation,  Dated as of December
                    31,  1997   (Incorporated  by  reference  to  Exhibit  10.65
                    previously filed with the Report on Form 10-K for the period
                    ending December 31, 1997 (File No. 0-23044)).

         10.20a     -  Amendment  No.  1  dated  March  31,  1998  to  the Stock
                       Purchase Agreement for  the Acquisition of Motorola ARDIS
                       Acquisition,  Inc.  and  Motorola  ARDIS,  Inc.  by  AMSC
                       Acquisition Company, Inc., a  Wholly-Owned  Subsidiary of
                       American  Mobile  Satellite  Corporation (Incorporated by
                       reference to Exhibit 4.2 to the Schedule 13D  dated March
                       31, 1998, filed by Motorola, Inc.).

         10.21 -    Participation Rights Agreement by and among Motorola,  Inc.,
                    American  Mobile  Satellite  Corporation,  and  the  parties
                    listed  on  Schedule  A,  dated  as  of  December  31,  1997
                    (Incorporated by reference to Exhibit 10.65 previously filed
                    with the Report on Form 10-K for the period ending  December
                    31, 1997 (File No. 0-23044)).

         10.21a     -  Registration  Rights  Agreement  by  and  among Motorola,
                       Inc.,  American Mobile  Satellite  Corporation  dated  as
                       of   March   31,   1998  (Incorporated  by  reference  to
                       Exhibit 4.4  to  the  Schedule  13D dated March 31, 1998,
                       filed by Motorola, Inc.)


                                     - 31 -

<PAGE>



         10.22 -    Credit  Agreement  by and between  Motorola  Inc.  and ARDIS
                    Company  dated June 17, 1998  (Incorporated  by reference to
                    Exhibit 10.61 to the Company's  Current  Report on Form 10-Q
                    dated June 30, 1998 (File No. 0-23044)).


         10.23 -    Indenture of AMSC Acquisition  Company,  Inc.,  Series A and
                    Series B, 12 1/4%  Senior  Notes Due 2008,  dated  March 31,
                    1998 (Incorporated by reference to Registration Statement on
                    Form S-4 filed on May 15, 1998 (File No. 333-52777)).

         10.24 -    Debt  Registration  Rights Agreement dated March 31, 1998 by
                    and among AMSC Acquisition  Company,  Inc., Bear,  Stearns &
                    Co. Inc., J.P. Morgan  Securities  Inc., TD Securities (USA)
                    Inc. and  BancAmerica  Robertson  Stephens,  and  guarantors
                    party  thereto  (Incorporated  by reference to  Registration
                    Statement  on Form  S-4  filed  on May 15,  1998  (File  No.
                    333-52777)).

         10.25 -    Unit Agreement Among American Mobile Satellite  Corporation,
                    AMSC  Acquisition  Company,  Inc.  and State Street Bank and
                    Trust   Company  as  Unit   Agent,   dated  March  31,  1998
                    (Incorporated by reference to Registration Statement on Form
                    S-4 filed on May 15, 1998 (File No. 333-52777)).

         10.26 -    Warrant   Agreement   between   American  Mobile   Satellite
                    Corporation  as  Issuer  and  State  Street  Bank and  Trust
                    Company as Warrant Agent dated March 31, 1998  (Incorporated
                    by reference to Registration  Statement on Form S-4 filed on
                    May 15, 1998 (File No. 333-52777)).

         10.27 -    Warrant  Registration  Rights Agreement dated March 31, 1998
                    By and Among American Mobile Satellite Corporation and Bear,
                    Stearns  & Co.  Inc.,  J.P.  Morgan  Securities  Inc.,  T.D.
                    Securities  (USA)  Inc.,   BancAmerica   Robertson  Stephens
                    (Incorporated by reference to Registration Statement on Form
                    S-4 filed on May 15, 1998 (File No. 333-52777)).

         10.28 -    Pledge and Security  Agreement by and among AMSC Acquisition
                    Company,  Inc.,  State  Street  Bank and Trust  Company,  as
                    Trustee  and  State  Street  Bank  and  Trust  Company,   as
                    Collateral  Agent  dated  March 31,  1998  (Incorporated  by
                    reference to Registration Statement on Form S-4 filed on May
                    15, 1998 (File No. 333-52777)).

         10.29 -    Guaranty  Issuance  Agreement,  dated as of March 31,  1998,
                    among    Hughes    Electronics    Corporation,     Singapore
                    Telecommunications  Ltd., and Baron Capital  Partners,  L.P.
                    and  American   Mobile   Satellite   Corporation   and  AMSC
                    Acquisition  Company,  Inc.  (Incorporated  by  reference to
                    Exhibit 1 to the Schedule 13D dated March 31, 1998, filed by
                    Hughes Communications Satellite Services, Inc. )

         10.29a     -  Amendment No. 1 to the Guaranty Issuance Agreement, dated
                       as  of  January  15,  1999,  among  Hughes   Electronics
                       Corporation, Singapore Telecommunications Ltd., and Baron
                       Capital  Partners,  L.P.  and American  Mobile  Satellite
                       Corporation  and  AMSC  Acquisition  Company, Inc. (filed
                       herewith).

                                     - 32 -

<PAGE>



         10.29b     -  Amendment No. 2 to the Guaranty Issuance Agreement, dated
                       as  of   March  29,  1999,  among  Hughes  Electronics
                       Corporation, Singapore Telecommunications Ltd., and Baron
                       Capital  Partners,  L.P.  and  American  Mobile Satellite
                       Corporation  and  AMSC  Acquisition  Company, Inc. (filed
                       herewith).

         10.30 -    Warrant No. 1 for the Purchase of 3,750,000  Shares (subject
                    to adjustment) of Common Stock of American Mobile  Satellite
                    Corporation issued to Hughes Electronics Corporation,  dated
                    June 28, 1996  (Incorporated by reference to Exhibit XIII to
                    the Amended and  Restated  Schedule  13D dated July 1, 1996,
                    filed by Hughes  Communications  Satellite  Services,  Inc.,
                    Hughes Communications, Inc., Hughes Aircraft Company, Hughes
                    Electronics  Corporation and General Motors Corporation with
                    respect  to shares  of  Common  Stock,  $.01 par  value,  of
                    American Mobile Satellite Corporation).

         10.30a     -  Amendment  No. 1 to the  Warrant Certificate, dated as of
                       March 27, 1997,  by  and  among American Mobile Satellite
                       Corporation and Hughes Electronics Corporation, Singapore
                       Telecommunications Ltd., and Baron Capital Partners, L.P.
                       (Incorporated  by  reference  to  Exhibit  4  to  the
                       Schedule  13D  dated  March  31,  1997,  filed  by Hughes
                       Communications Satellite Services, Inc. )

         10.30b     -  Amendment  No. 2 to the Warrant  Certificate, dated as of
                       March 31, 1998,  by  and  among American Mobile Satellite
                       Corporation and Hughes Electronics Corporation, Singapore
                       Telecommunications Ltd., and Baron Capital Partners, L.P.
                       (Incorporated by reference to Exhibit 4 to  the  Schedule
                       13D dated  March 31, 1998, filed by Hughes Communications
                       Satellite Services, Inc. )

         10.30c     -  Amendment No. 3  to  the  Warrant  Certificates  for  the
                       Purchase of Shares of  Common  Stock of  American  Mobile
                       Satellite Corporation, dated  as of  April  1,  1999,  by
                       and   among   American   Mobile   Satellite   Corporation
                       and   Hughes   Electronics   Corporation,   Singapore  
                       Telecommunications   Ltd., and  Baron  Capital  Partners,
                       L.P. (filed  herewith,  as  an  exhibit to Exhibit 10.29b
                       herein)

         10.31 -    Registration  Rights  Agreement  dated as of June 28,  1996,
                    among  American   Mobile   Satellite   Corporation,   Hughes
                    Electronics Corporation,  Singapore Telecommunications Ltd.,
                    and Baron Capital Partners,  L.P. (Incorporated by reference
                    to Exhibit  XIV to the  Amended and  Restated  Schedule  13D
                    dated July 1, 1996, filed by Hughes Communications Satellite
                    Services, Inc., Hughes Communications, Inc., Hughes Aircraft
                    Company,  Hughes Electronics  Corporation and General Motors
                    Corporation with respect to shares of Common Stock, $.01 par
                    value,   of   American   Mobile   Satellite    Corporation).
                    (Incorporated by reference to Exhibit 10.57 to the Company's
                    Quarterly  Report on Form 10-Q  filed for the  period  ended
                    June 30, 1996 (File No. 0-23044))



                                     - 33 -

<PAGE>



         10.32 -    Warrant  for the  Purchase  of  Shares  of  Common  Stock of
                    American Mobile Satellite Corporation, dated as of March 31,
                    1998 (Incorporated by reference to Exhibit 2 to the Schedule
                    13D dated  March 31,  1998,  filed by Hughes  Communications
                    Satellite Services, Inc. )

         10.32a     -  Amendment  No.  1  to  Warrant  Certificates  for  the 
                       Purchase  of Shares of Common  Stock of  American  Mobile
                       Satellite Corporation,  dated  as  of  April 1,  1999  by
                       and  among  Hughes  Electronics   Corporation,  Singapore
                       Telecommunications Ltd. and  Baron Capital Partners, L.P.
                       (filed herewith, as an exhibit to Exhibit 10.29b herein)

         10.33 -    Amended and Restated Registration Rights Agreement, dated as
                    of  March  31,  1998,   among  American   Mobile   Satellite
                    Corporation and Hughes  Electronics  Corporation,  Singapore
                    Telecommunications  Ltd., and Baron Capital  Partners,  L.P.
                    (Incorporated  by reference to Exhibit 3 to the Schedule 13D
                    dated  March  31,  1998,  filed  by  Hughes   Communications
                    Satellite Services, Inc.)

         10.34 -    Term  Credit  Agreement  dated as of March  31,  1998  among
                    American Mobile Satellite Corporation, Morgan Guaranty Trust
                    Company of New York,  Toronto  Dominion  (Texas),  Inc.  and
                    other banks party  thereto  (Incorporated  by  reference  to
                    Exhibit 10.61 to the Company's  Current  Report on Form 10-Q
                    dated March 31, 1998 (File No. 0-23044))

         10.34a     -  Amendment No. 1 and Waiver to Term Credit Agreement dated
                       as  of  January  15, 1999 among American Mobile Satellite
                       Corporation, Morgan  Guaranty  Trust Company of New York,
                       Toronto  Dominion  (Texas),  Inc.  and  other banks party
                       thereto (filed herewith)

         10.35 -    Revolving  Credit Agreement dated as of March 31, 1998 among
                    AMSC Acquisition  Company,  Inc.,  American Mobile Satellite
                    Corporation,  Morgan  Guaranty Trust Company of New York and
                    Toronto Dominion (Texas), Inc. and other banks party thereto
                    (Incorporated by reference to Exhibit 10.61 to the Company's
                    Current  Report on Form 10-Q dated  March 31, 1998 (File No.
                    0-23044))

         10.35a     -  Amendment  No. 1 and Waiver to Revolving Credit Agreement
                       dated  as  of  January  15,  1999  among AMSC Acquisition
                       Company,  Inc.,  American  Mobile  Satellite Corporation,
                       Morgan  Guaranty Trust Company of New  York  and  Toronto
                       Dominion (Texas),  Inc.  and  other  banks  party thereto
                       (filed herewith)

         11.1  -   Computation of Net Loss Per Share (filed herewith)

         21.1  -   Subsidiaries of AMSC (filed herewith)

         23.1  -   Consent of Arthur Andersen LLP (filed herewith)

                                     - 34 -

<PAGE>



         23.2  -   Consent of KPMG LLP (filed herewith)

         27.1  -   Financial Data Schedule (filed herewith)

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

*Management contract or compensatory plan or arrangement required to be filed as
an exhibit to this report pursuant to Item 14(c) of this report.



(b)      Reports on Form 8-K:

         On October 9, 1998,  the  Company  filed a Current  Report on Form 8-K,
         describing  in response to Item  5-Other  Events,  the  resignation  of
         director   Ho   Siaw   Hong,   the   representative    from   Singapore
         Telecommunications, Ltd.

         On October 29, 1998,  the Company  filed a Current  Report on Form 8-K,
         describing in response to Item 5-Other Events,  announced the financial
         results for its third quarter ended September 30, 1998. On that date it
         also  announced  that it  reached  an  agreement  with  Stratos  Global
         Corporation  to  consolidate   American  Mobile's  marine  distribution
         channel.  In addition,  on that date,  American Mobile  announced that,
         effective  January 1,1999,  its President Walt Purnell would assume the
         added  responsibilities  of chief executive officer,  with Gary Parsons
         continuing  as  Chairman  of the Board with  oversight  of mergers  and
         acquisitions, strategic planning and American Mobile's investment in XM
         Satellite Radio, Inc.

         On January 5, 1999,  the  Company  filed an  Amendment  to its  Current
         Report on Form 8-K,  describing  in  response to Item  5-Other  Events,
         announced  that  effective  January 1, 1999, the Board of Directors has
         appointed Walter V. Purnell, Jr. as a director of American Mobile.

         On January 29, 1999,  the Company  filed a Current  Report on Form 8-K,
         describing in response to Item 5-Other Events, American Mobile provided
         an  additional   $21.4  million  of   convertible   financing  for  its
         subsidiary, XM Satellite Radio Holdings, Inc. ("XM Radio").


                                     - 35 -

<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.

                                        AMERICAN MOBILE SATELLITE CORPORATION


                                        By /s/Walter V. Purnell, Jr.
                                           -------------------------
                                           Walter V. Purnell, Jr.
                                           President and Chief Executive Officer

Date:   March 30, 1999

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the dates indicated.


/s/Walter V. Purnell, Jr.       President and Chief 
-------------------------       Executive Officer
Walter V. Purnell, Jr.          (principal executive officer)     March 30, 1999


/s/W. Bartlett Snell            Senior Vice President and         March 30, 1999
-------------------------       Chief Financial Officer 
W. Bartlett Snell               (principal financial and 
                                accounting officer)

/s/Gary M. Parsons              Chairman of the Board             March 30, 1999
-------------------------
Gary M. Parsons

/s/Douglas I. Brandon
-------------------------       Director                          March 30, 1999
Douglas I. Brandon


/s/Billy J. Parrott
-------------------------       Director                          March 30, 1999
Billy J. Parrott





                                     - 36 -

<PAGE>





/s/Jack A. Shaw
-------------------------       Director                          March 30, 1999
Jack A. Shaw

/s/Roderick M. Sherwood, III
-------------------------       Director                          March 30, 1999
Roderick M. Sherwood, III



                                     - 37 -

<PAGE>

                                      INDEX



Management's Discussion and Analysis of Financial Condition
          and Results of Operations.......................................F -  2

Report of Independent Public Accountants..................................F - 19

Consolidated Statements of Operations.....................................F - 20

Consolidated Balance Sheets...............................................F - 21

Consolidated Statements of Stockholders' (Deficit) Equity ................F - 22

Consolidated Statements of Cash Flows.....................................F - 24

Notes to Consolidated Financial Statements................................F - 25

Quarterly Financial Data..................................................F - 56

Selected Financial Data...................................................F - 57













                                       F-1

<PAGE>



Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
--------------------------------------------------------------------------------
Operations
----------

This Annual Report on Form 10-K includes "forward-looking statements" within the
meaning of Section  27A of the  Securities  Act of 1933 and  Section  21E of the
Securities  Exchange Act of 1934.  Such  statements are identified by the use of
forward-looking  words or phrases  including,  but not limited  to,  "believes,"
"intended,"   "will  be   positioned,"   "expects,"   "expected,"   "estimates,"
"anticipates" and "anticipated." These  forward-looking  statements are based on
the Company's  current  expectations.  All statements  other than  statements of
historical  facts included in this Annual Report,  including those regarding the
Company's financial position,  business strategy,  projected costs and financing
needs,  and plans and  objectives  of  management  for  future  operations,  are
forward-looking statements.  Although the Company believes that the expectations
reflected in such  forward-looking  statements are  reasonable,  there can be no
assurance  that  such  expectations  will  prove to have been  correct.  Because
forward-looking statements involve risks and uncertainties, the Company's actual
results  could  differ  materially.  Important  factors  that could cause actual
results  to  differ  materially  from the  Company's  expectations  ("Cautionary
Statements")  are disclosed under  "Business" and  "Management's  Discussion and
Analysis of Financial  Condition  and Results of  Operations,"  and elsewhere in
this Annual Report,  including,  without  limitation,  in  conjunction  with the
forward-looking statements included in this Annual Report. These forward-looking
statements  represent the  Company's  judgment as of the date hereof and readers
are cautioned not to place undue reliance on these  forward-looking  statements.
All subsequent written and oral forward-looking  statements  attributable to the
Company or persons  acting on behalf of the Company are  expressly  qualified in
their entirety by the Cautionary Statements. Readers should carefully review the
risk factors  described in other  documents  the Company files from time to time
with  the  Securities  and  Exchange  Commission,   including  the  Registration
Statement on Form S-3, No. 333-71423,and Form 10-Q Quarterly Reports to be filed
by the  Company  subsequent  to this Annual Report on Form 10-K and any  Current
Reports on Form 8-K and registration statements filed by the Company.

General
-------

The following  discussion and analysis  provides  information  which  management
believes  is  relevant  to an  assessment  and  understanding  of the  financial
condition and  consolidated  results of operations of American Mobile  Satellite
Corporation  (with its subsidiaries,  "American  Mobile" or the "Company").  The
discussion  should  be read  in  conjunction  with  the  consolidated  financial
statements and notes thereto.

American Mobile  Satellite  Corporation was  incorporated in May 1988 and, until
1996,  was a  development  stage  company,  engaged  primarily  in  the  design,
development,  construction,  deployment  and  financing  of a  mobile  satellite
communication   system.   On  March  31,  1998,   the  Company   acquired   (the
"Acquisition") ARDIS Company ("ARDIS"),  a wholly-owned  subsidiary of Motorola,
Inc.  ("Motorola") that owns and operates a two-way wireless data communications
network. With the acquisition of ARDIS, the Company became a leading provider of
nationwide wireless communications services,  including data, dispatch and voice
services,  primarily  to business  customers in the United  States.  The Company
offers a broad  range of  end-to-end  wireless  solutions  utilizing  a seamless
network  consisting of the nation's  largest,  most fully- deployed  terrestrial
wireless data network (the "ARDIS  Network")  and a satellite in  geosynchronous
orbit (the "Satellite Network") (together, the "Network").

                                      F-2

<PAGE>

In connection with the  Acquisition,  the Company and its  subsidiaries  entered
into agreements with respect to the following  financings and refinancings:  (1)
$335  million of Units;  (2) the  restructuring  of its  existing  $200  million
Revolving  Credit Facility and Term Loan Facility  (collectively,  the "New Bank
Financings");  and (3) $10 million  commitment  with respect to Motorola  vendor
financing.  See "Liquidity and Capital Resources."  Additionally,  in connection
with the Acquisition and related financing,  the Company  transferred all of its
rights,  title and interests in AMSC  Subsidiary  Corporation,  American  Mobile
Satellite  Sales  Corporation,  and AMSC Sales Corp. Ltd.  (together,  "American
Mobile Subsidiaries") to Acquisition Company.

On October 16, 1997, XM Satellite  Radio Inc.,  formerly  American  Mobile Radio
Corporation, an indirect subsidiary of American Mobile through its subsidiary XM
Satellite Radio Holdings Inc., formerly AMRC Holdings,  Inc.,  (together with XM
Satellite  Radio Inc., "XM Radio"),  was awarded a license by the FCC to provide
satellite-based  Digital  Audio Radio  Service  ("DARS")  throughout  the United
States,  following its successful $89.9 million bid at auction on April 2, 1997.
The operations and financing of XM Radio are maintained  separate and apart from
the  operations  and financing of American  Mobile (see  "Liquidity  and Capital
Resources").  Through its  investment in XM Radio,  WorldSpace  has an option to
increase its ownership in XM Radio subject to FCC approval.  On October 30, 1998
the Company  and  WorldSpace  jointly  filed an  application  for consent to the
transfer of control of XM Radio in  anticipation of future exercise of the World
Space options.  On January  15,1999,  the Company  provided an additional  $21.4
million of  convertible  financing  for XM Radio  through an issuance of a $21.5
million subordinated,  non-recourse note of the Company to Baron Asset Fund. The
Company's  note issued to Baron Asset Fund is  exchangeable  into  approximately
half of the  additional XM Radio common stock to be received by the Company as a
result of the January 15  transaction.  Assuming  conversion of all  convertible
notes  and  exercise  of  the  outstanding  WorldSpace  options,  the  Company's
ownership  in XM Radio  would be 22.6%  (compared  with the 18.3%  post-exercise
position previously reported).

On  December  4, 1997,  the  Company  entered  into an  agreement  with  African
Continental  Telecommunications Ltd. ("ACTEL") to lease the Company's satellite,
"MSAT-2" (the  "Satellite  Lease  Agreement")  for deployment  over  sub-Saharan
Africa.  Simultaneously,  the Company agreed with TMI Communications and Company
Limited  Partnership  ("TMI") to acquire a one-half  ownership interest in TMI's
satellite,  "MSAT-1"  (the  "Satellite  Purchase  Agreement").  As ACTEL had not
obtained the requisite  financing,  the agreements  were terminated on March 24,
1999. Following the termination of the ACTEL-related agreements, the Company and
TMI will each  maintain  operations  on their two  satellites,  and  continue to
provide each other  emergency  back-up and restoral  services in accordance with
long-standing  arrangements.  See  Item I.  "Business  --  Satellite  Lease  and
Purchase  Agreement",  "-Satellite  Back-up and  Technology,"  and  Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
Liquidity and Capital Resources."

                                       F-3

<PAGE>



In late  1996  the  Company  expanded  its  mobile  data  business  through  the
acquisition  of  Rockwell  International  Corporation's  ("Rockwell")  dual mode
mobile  messaging and global  positioning and monitoring  service for commercial
trucking fleets  ("MCSS").  In the transaction,  the Company assumed  Rockwell's
existing customer contracts,  and acquired Rockwell's system  infrastructure for
delivering  their  mobile  data  product,  as well as  Rockwell's  rights to the
multi-mode, satellite-terrestrial product.

Given these  acquisitions  and the  Company's  historically  high  growth  rate,
management  believes the period to period comparison of the Company's  financial
results  are not  necessarily  meaningful  and should  not be relied  upon as an
indication of future operating performance.

Overview
--------

The Company has incurred significant operating losses and negative cash flows in
each year since it commenced  operations,  due primarily to start-up costs,  the
costs of  developing  and  building  the  Networks  and the cost of  developing,
selling  and  providing  its  products  and  services.  The Company is, and will
continue to be, highly leveraged.

The Company's future operating  results could be adversely  affected by a number
of uncertainties and factors, including:

     o    the timely  completion and  deployment of future  products and related
          services,   including  among  other  things,  availability  of  mobile
          telephones,  data  terminals  and other  equipment to be used with the
          Network  ("Subscriber  Equipment") being manufactured by third parties
          over which the Company has limited control,
     o    the market's acceptance of the Company's services,
     o    the ability and the commitment of the Company's  distribution channels
          to market and distribute the Company's services,
     o    the Company's ability to modify its organization, strategy and product
          mix to maximize the market opportunities in light of changes therein,
     o    competition  from  existing  companies  that  provide  services  using
          existing   communications   technologies   and  the   possibility   of
          competition from companies using new technology in the future,
     o    capacity  constraints  arising  from the  reconfiguration  of  MSAT-2,
          subsequent   anomalies   affecting   MSAT-2,   or   power   management
          recommendations affecting MSAT-2 previously reported,
     o    additional  technical  anomalies  that may occur within the  Satellite
          Network,  including  those  relating  to MSAT-2,  which could  impact,
          among other things,  the  operation of the  Satellite  Network and the
          cost, scope or availability of in-orbit insurance,
     o    subscriber  equipment  inventory  commitments  assumed by the  Company
          including  the  ability of the  Company  to  realize  the value of its
          inventory in a timely manner,

                                       F-4

<PAGE>



     o    the Company's  ability to fund its anticipated  capital  expenditures,
          operating  losses and debt  service  requirements  and its  ability to
          secure additional financing as may be necessary,
     o    the Company's  ability to respond and react to changes in its business
          and the industry as a result of being highly leveraged,
     o    the timely roll-out of certain key customer initiatives and products,
     o    the  ability of the  Company to  successfully  integrate  ARDIS and to
          achieve certain business synergies, and
     o    the ability of the Company to manage growth effectively.

The  Company's  operating  results  and capital  and  liquidity  needs have been
materially  affected by delays experienced in the acquisition of subscribers and
the  related  equipment  sales.  The  impact  of this  delay  has  substantially
decreased the Company's anticipated revenues and increased the Company's capital
and liquidity  needs. No assurance can be given that additional  delays relating
to the acquisition of subscribers and equipment sales will not be encountered in
the future and not have an adverse impact on the Company.

As of December 31, 1998, there were approximately 105,700 units on the Network.

Years Ended December 31, 1998 and 1997
--------------------------------------

Service  revenues,  which  includes both the Company's  voice and data services,
approximated  $58.0 million for 1998, which constitutes a $37.3 million increase
over 1997.  The  significant  increase  in service  revenues  year over year was
primarily  attributable  to the ARDIS data service.  Absent the  acquisition  of
ARDIS on March 31, 1998,  service  revenues for 1998  increased 33% year to year
from $20.7 million to $27.6 million.

<TABLE>
<CAPTION>

                                                Year Ended
Summary of  Revenue                            December 31,
-------------------                            ------------
(in millions)                           1998         1997      Change   % Change
                                        ----         ----      ------   --------
<S>                                    <C>          <C>          <C>       <C>
Voice Service                          $14.0        $10.0        $4.0       40%
Data Service                            40.1          7.6        32.5      428%
Capacity Resellers and Other             3.9          3.1         0.8       26%
Equipment Revenue                       29.2         23.5         5.7       24%
</TABLE>

The increase in service  revenue from voice services was primarily a result of a
34%  increase in voice  customers  in 1998 as compared to 1997.  The increase in
service  revenue from the Company's  data services was a result of $30.4 million
from the ARDIS data service and a 26% increase in mobile data units during 1998.

                                       F-5

<PAGE>



Service  revenue  from  capacity  resellers,  who  handle  both  voice  and data
services, increased primarily as a result of increased contract commitments from
current customers.

The increase in revenue from the sale of Subscriber  Equipment includes the sale
of  approximately  $8.5 million of maritime  voice  equipment to Stratos  Global
Corporation in the fourth quarter of 1998. Excluding this sale, revenue from the
sale of Subscriber  Equipment  decreased due to reductions in prices for certain
data products. ARDIS equipment sales were $1.4 million.

<TABLE>
<CAPTION>

                                                Year Ended
Summary of Expenses                            December 31,
-------------------                            ------------
(in millions)                      1998          1997          Change       % Change
                                   ----          ----          ------       --------
<S>                               <C>           <C>             <C>          <C> 
Cost of Service & Operations      $58.0         $32.0           $26.0         81 %
Cost of Equipment Sales            30.4          40.3            (9.9)       (25)%
Sales & Advertising                16.9          12.1             4.8         40 %
General & Administrative           17.3          14.8             2.5         17 %
Depreciation & Amortization        52.7          42.4            10.3         24 %

</TABLE>

Cost of service and operations  for 1998 includes  costs to support  subscribers
and to operate the Network.  As a percentage of total revenues,  cost of service
and operations was 67% and 72% for 1998 and 1997, respectively.  The increase in
cost of service and operations was primarily  attributable  to (i) $26.9 million
related  to ARDIS  and  (ii)  increased  interconnect  charges  associated  with
increased service usage,  offset by (iii) a reduction in information  technology
costs  caused by reducing  the  dependence  on outside  consultants.  Absent the
acquisition of ARDIS on March 31, 1998,  cost of service and operations for 1998
was $31.1, or a $.9 million decrease from 1997.

The  decrease  from  1997 to 1998 in the cost of  equipment  sold was  primarily
attributable to the impact of an inventory  valuation allowance of approximately
$12.0 million recorded in the fourth quarter of 1997 and the resulting  decrease
in  1998  equipment  prices,  offset  by the  cost of the  sale of the  maritime
equipment, mentioned above.

The 40%  increase  in  sales  and  advertising  expenses  from  1997 to 1998 was
primarily  attributable  to ARDIS.  Absent the  acquisition of ARDIS,  sales and
advertising expenses for 1998 were $12.3 million, or an increase of less than 2%
over 1997. Sales and advertising  expenses were 19% of total revenue in 1998 and
27% of revenue in 1997.

General and administrative  expenses represented 20% and 34% of total revenue in
1998 and 1997, respectively. The dollar increase in  general and  administrative


                                       F-6

<PAGE>


expenses for 1998 compared to 1997 was primarily attributable to $5.4 million of
ARDIS costs  offset by  reductions  of  approximately  $2.9  million of expenses
attributable to (i) $.9 million in taxes relating to a reversal of an accrual as
a result of obtaining a favorable  property tax ruling,  and (ii)  reductions of
bad debt expense.  Absent the acquisition of ARDIS,  general and  administrative
expenses for 1998 were $11.9 million.

Depreciation and amortization  expense  represented  approximately  60% of total
revenue  in 1998,  as  compared  to 96% of total  revenue  in 1997.  The  dollar
increase in depreciation and amortization expense was primarily  attributable to
the addition of ARDIS assets and step-up in the basis of ARDIS licenses.  Absent
the acquisition of ARDIS,  depreciation and  amortization  expenses for 1998 was
$40.0 million, or a reduction of $2.4 million from 1997.

Interest  and other income was $4.4 million for 1998 as compared to $1.1 million
for 1997.  The  increase  was  primarily a result of interest  earned on escrows
established with the proceeds from the $335 million debt offering (the "Notes").
The Company incurred $53.8 million of interest expense in 1998 compared to $21.6
million in 1997,  reflecting  (i) the  amortization  of debt  discount,  prepaid
interest  and debt  offering  costs in the  amount  of  $16.2  million  in 1998,
compared to $9.4  million in 1997,  (ii)  interest  expense on the $335  million
Notes at 12.25%, offset by lower debt balances on the New Bank Facility.

Interest expense in 1998 was significant as a result of borrowings under the New
Bank Financing, the amortization of borrowing costs incurred in conjunction with
securing the  facility,  and  interest  accrued on the Notes issued in the ARDIS
acquisition.   It  is  anticipated  that  interest  costs  will  continue  to be
significant as a result of the New Bank Financing and Notes (see  "Liquidity and
Capital Resources").

Net capital  expenditures for 1998 for property and equipment were $12.5 million
compared to $8.6 million in 1997. The increase was largely  attributable  to the
acquisition of assets necessary to continue the required build-outs of the ARDIS
network.

Years Ended December 31, 1997 and 1996
--------------------------------------

Service  revenues,  which  include both the Company's  voice and data  services,
approximated  $20.7  million for 1997 as  compared to $9.2  million for 1996 and
represents a 125% increase year over year.

<TABLE>
<CAPTION>

                                                Year Ended
Summary of  Revenue                            December 31,
(in millions)                               1997         1996        Change      % Change
                                            ----         ----        ------      --------
<S>                                        <C>           <C>           <C>         <C> 
Voice Service                              $10.0         $5.0          $5.0        100%
Data Service                                 7.6          2.3           5.3        230%
Capacity Resellers and other                 3.1          1.9           1.2         63%
Equipment Revenue                           23.5         18.5           5.0         27%
</TABLE>


                                       F-7

<PAGE>






Service  revenue from voice services  increased  primarily as a result of a 101%
increase in voice customers during 1997. Service revenue from the Company's data
services increased as a result of additional revenue from subscribers added as a
result of the  acquisition,  on November  1996, of  Rockwell's  dual mode mobile
messaging and global  positioning  and  monitoring  service,  as compared to the
revenue received in 1996 for satellite capacity leased by Rockwell. The increase
in service  revenue  from  capacity  resellers,  who handle  both voice and data
services, was a result of additional data customer contracts.

The increase in the sale of Subscriber  Equipment was primarily  attributable to
increased  equipment sales of the dual-mode mobile messaging product,  discussed
above.


<TABLE>
<CAPTION>

Summary of Expenses                             Year Ended
(in millions)                                  December 31,
-------------------                            ------------
                                           1997          1996          Change         % Change
                                           ----          ----          ------         --------
<S>                                       <C>           <C>              <C>            <C>
Cost of Service & Operations              $32.0         $30.5            $1.5             5 %
Cost of Equipment Sales                    40.3          31.9             8.4            26 %
Sales & Advertising                        12.1          24.5           (12.4)          (51)%
General & Administrative                   14.8          17.5            (2.7)          (15)%
Depreciation & Amortization                42.4          43.4            (1.0)           (2)%
</TABLE>

Cost of service and operations,  which includes costs to support subscribers and
to operate the Satellite  Network,  as a percentage of total revenues,  were 72%
and 110% for 1997 and 1996,  respectively.  The  increase in cost of service and
operations  was primarily  attributable  to (i) increased  interconnect  charges
associated  with increased  service usage by customers,  and (ii) the additional
cost associated with supporting the dual mode mobile messaging product discussed
above,  offset by a  reduction  in  information  technology  costs  affected  by
reducing the dependence on outside consultants.

The cost of equipment sold  represented 91% of total revenue in 1997 and 115% of
total revenue in 1996. While this percentage  decrease was primarily a result of
the increase in the total revenue,  the dollar increase in the cost of equipment
sold was  primarily  attributable  to (i)  increased  sales  as a result  of the
acquisition of the dual mode messaging product,  (ii) an increase of $600,000 in
inventory  carrying  costs  as  certain  subscriber   equipment  contracts  were
fulfilled,  and (iii) a $12.0 million  write-down of inventory to net realizable
value in 1997 as  compared to a $11.1  million  write-down  and  reconfiguration
charges in 1996.

Sales and advertising expenses as a percentage of total revenue were 27% in 1997
and 88% in 1996. The decrease of sales and advertising expenses was primarily


                                       F-8

<PAGE>


attributable to (i) a more focused  approach to advertising as the company moved
from consumer markets to targeted  business-to-business sales, and the resulting
reduction in print  advertising,  (ii)  increased  costs in the first quarter of
1996 for the  development  of  collateral  material  needed to support sales and
marketing and (iii) costs incurred in the first quarter of 1996  associated with
the formal launch of service.

General and  administrative  expenses  decreased  for 1997, as compared to 1996,
primarily  as a  result  of  reductions  made in  staffing  due to a  management
restructuring  in the third quarter of 1996 and the associated  severance costs.
As  a  percentage  of  total  revenue,   general  and  administrative   expenses
represented 34% in 1997 and 63% in 1996.

Depreciation and amortization expense represented  approximately 96% and 157% of
revenue  for 1997 and 1996,  respectively.  The  decrease  in  depreciation  and
amortization  expense was attributable to the reduction of the carrying value of
the satellite as a result of the resolution, in August 1996, of claims under the
Company's  satellite  insurance  contracts  and  policies  and  the  receipt  of
approximately  $66.0 million,  offset by a $1.0 million one-time charge,  in the
second quarter of 1997,  associated  with increased  amortization  in accordance
with SFAS No.86 of certain cost  associated  with software  development  for the
mobile data product.

Interest  income was $247,000 in 1997 compared to $552,000 in 1996. The decrease
was a result of lower average cash balances.  The Company incurred $21.6 million
of interest  expense in 1997  compared to $15.2  million of interest  expense in
1996 reflecting (i) the amortization of debt discount and debt offering costs in
the amount of $9.4 million in 1997,  compared to $5.7 million in 1996,  and (ii)
higher  outstanding loan balances as compared to 1996.  During 1997, the company
received other income in the amount of $875,000  representing  proceeds from the
licensing of certain technology associated with the Satellite Network.

Net capital  expenditures  for 1997 for property and equipment were $8.6 million
compared  to capital  reductions  of $51.9  million in 1996.  The $60.5  million
increase  was  largely  attributable  to (i) the net  proceeds  in 1996 of $66.0
million  from  the  resolution  of the  claims  under  the  Company's  satellite
insurance  contracts and policies as previously  disclosed and (ii) the decrease
in asset acquisitions  associated with the final build-out of the communications
ground segment (the "CGS").

Liquidity and Capital Resources
-------------------------------

Adequate  liquidity  and capital  are  critical to the ability of the Company to
continue  as a  going  concern  and  to  fund  subscriber  acquisition  programs
necessary to achieve positive cash flow and profitable  operations.  The Company
expects to  continue to make  significant  capital  outlays for the  foreseeable
future to fund interest expense,  capital expenditures and working capital prior
to the time that it begins to generate positive cash flow from operations. These
outlays are expected to continue for the foreseeable future thereafter.



                                       F-9

<PAGE>

$335 Million Unit Offering
--------------------------

In connection with the Acquisition,  the Acquisition Company issued $335 million
of Units  (the  "Units")  consisting  of 12 1/4%  Senior  Notes  due  2008  (the
"Notes"),  and Warrants to purchase shares of Common Stock of the Company.  Each
Unit  consists of $1,000  principal  amount of Notes and one Warrant to purchase
3.75749  shares of Common  Stock at an exercise  price of $12.51 per share.  The
Warrants were valued at $8.5 million and are reflected in the balance sheet as a
debt discount.  A portion of the net proceeds of the sale of the Units were used
to finance  the  Acquisition.  In  connection  with the Notes,  the  Acquisition
Company has purchased  approximately  $112.3 million of pledged  securities that
are  intended to provide for the payment of the first six  interest  payments on
the Notes. The Acquisition  Company incurred  approximately $15 million in costs
associated  with  the  placement  of the  Notes  and the  Acquisition.  Interest
payments are due semi-annually, in arrears, beginning October 1, 1998. The Notes
are fully guaranteed by American Mobile Satellite Corporation.

New Bank Financing
------------------

In connection with the Acquisition, the Company, the Acquisition Company and its
subsidiaries  restructured  the existing $200 million Bank  Financing  (the "New
Bank  Financing")  to  provide  for two  facilities:  (i) the  Revolving  Credit
Facility, a $100 million unsecured five-year reducing revolving credit facility,
and (ii) the Term Loan Facility,  a $100 million  five-year,  term loan facility
with  up to  three  additional  one-year  extensions  subject  to  the  lendors'
approval.  The Revolving  Credit  Facility ranks pari passu with the Notes.  The
Term Loan  Facility  is secured by the assets of the  Company,  principally  its
stockholdings in XM Radio and the Acquisition  Company,  and will be effectively
subordinated  to the  Revolving  Credit  Facility  and the  Notes.  The New Bank
Financing is severally guaranteed by Hughes Electronics  Corporation,  Singapore
Telecommunications  Ltd., and Baron Capital Partners,  L.P.  (collectively,  the
"Bank  Facility  Guarantors").  The  lenders'  placement  fee for  the New  Bank
Financing was approximately $500,000.

The Revolving Credit Facility
-----------------------------

The Revolving  Credit  Facility bears an interest rate,  generally,  of 50 basis
points above London  Interbank  Offered Rate ("LIBOR") and is unsecured,  with a
negative  pledge on the assets of the Acquisition  Company and its  subsidiaries
ranking pari passu with the Notes. The Revolving Credit Facility will be reduced
$10 million each quarter,  beginning with the quarter ending June 30, 2002, with
the balance due on maturity of March 31, 2003.  Certain proceeds received by the
Acquisition  Company would be required to repay and reduce the Revolving  Credit
Facility,  unless  otherwise  waived  by  the  lenders  and  the  Bank  Facility
Guarantors:  (1) 100% of excess cash flow obtained by the  Acquisition  Company;
(2) the first $25.0 million net proceeds of the lease or sale of MSAT-2 received
by the  Acquisition  Company,  and  thereafter  75% of  the  remaining  proceeds
received  from such  lease or sale (the  remaining  25% may be  retained  by the
Acquisition  Company for business  operations);  (3) 100% of the proceeds of any
other asset sales by the Acquisition Company; (4) 50% of the net proceeds of any
offerings of the Acquisition  Company's equity (the remaining 50% to be retained
by the Acquisition Company for business  operations);  and (5) 100% of any major
casualty  proceeds.  At such time as the Revolving  Credit Facility is repaid in
full, and subject to satisfaction of the restrictive  payments provisions of the


                                      F-10

<PAGE>


Notes, any prepayment  amounts that would otherwise have been used to prepay the
Revolving  Credit  Facility  will be  dividended  to American  Mobile  Satellite
Corporation.

The Term Loan Facility
----------------------

The Term Loan Facility  bears an interest  rate,  generally,  of 50 basis points
above  LIBOR and is  secured  by the  assets  of the  Company,  principally  its
stockholdings in XM Radio and the Acquisition  Company.  The Term Loan Agreement
does not include any scheduled  amortization  until  maturity,  but does contain
certain  provisions for  prepayment  based on certain  proceeds  received by the
Company,  unless otherwise waived by the Banks and the Bank Facility Guarantors:
(1) 100% of excess  cash  flow  obtained  by the  Company;  (2) the first  $25.0
million net proceeds of the lease or sale of MSAT-2 received by the Company, and
thereafter 75% of the remaining  proceeds  received from such lease or sale (the
remaining  25%  to  be  retained  by  the   Acquisition   Company  for  business
operations);  (3) 100% of the  proceeds of any other asset sales by the Company;
(4)  50% of the  net  proceeds  of any  equity  offerings  of the  Company  (the
remaining  50% to be retained by the Company for business  operations);  and (5)
100% of any major casualty proceeds of the Company.  To the extent that the Term
Loan Facility is repaid, the  aforementioned  proceeds that would otherwise have
been used to repay the Term Loan  Facility  will be used to repay and reduce the
commitment under the Revolving Credit Facility.


The Guarantees
--------------

In connection with the New Bank Financing, the Bank Facility Guarantors extended
separate  guarantees of the obligations of each of the  Acquisition  Company and
the Company to the banks,  which on a several basis  aggregated to $200 million.
In their  agreement  with each of the  Acquisition  Company and the Company (the
"Guarantee  Issuance  Agreement"),  the Bank Facility  Guarantors agreed to make
their  guarantees  available  for the New Bank  Financing.  In exchange  for the
additional risks  undertaken by the Bank Facility  Guarantors in connection with
the New Bank  Financing,  the Company  agreed to  compensate  the Bank  Facility
Guarantors,  principally  in the  form  of 1  million  additional  warrants  and
re-pricing of 5.5 million warrants  previously issued (together,  the "Guarantee
Warrants").  The Guarantee Warrants were issued with an exercise price of $12.51
and were valued at approximately $17.7 million. Additionally, on March 29, 1999,
the Bank Facility  Guarantors agreed to eliminate certain covenants contained in
the  Guarantee   Issuance   Agreement  relating  to  earnings  before  interest,
depreciation, amortization and taxes ("EBITDA") and service revenue. In exchange
for this  waiver,  the Company  agreed to  re-price  their  Guarantee  Warrants,
effective  April 1, 1999,  from $12.51 to $7.50.  As of February 28,  1999,  the
Company had outstanding  borrowings of $100 million of the Term Loan Facility at
5.8125%,  and $48 million under the Revolving  Credit  Facility at rates ranging
from 5.4375% to 5.5%.




                                      F-11

<PAGE>


Further,  in connection with the Guarantee Issuance  Agreement,  the Company has
agreed  to  reimburse  the  Bank  Facility  Guarantors  in the  event  that  the
Guarantors are required to make payment under the New Bank Financing guarantees,
and, in  connection  with this  Reimbursement  Commitment  has provided the Bank
Facility Guarantors a junior security interest with respect to the assets of the
Company, principally its stockholdings in XM Radio and the Acquisition Company.

In connection with the New Bank Financing,  the Company entered into an interest
rate swap  agreement,  with an implied annual rate of 6.51%.  The swap agreement
reduces the impact of interest  rate  increases on the Term Loan  Facility.  The
Company paid a fee of approximately $17.9 million for the swap agreement.  Under
the swap  agreement,  the Company  will receive an amount equal to LIBOR plus 50
basis  points,  paid directly to the banks on a quarterly  basis,  on a notional
amount of $100 million until the termination date of March 31, 2001. The Company
has reflected as an asset the unamortized fee paid for the swap agreement in the
accompanying  financial  statements.  The Company is exposed to a credit loss in
the event of non-performance by the counter party under the swap agreement.  The
Company does not believe there is a significant risk of  non-performance  as the
counter party to the swap agreement is a major financial institution.

Motorola Vendor Financing
-------------------------

Motorola has entered  into an agreement  with ARDIS to provide up to $10 million
of vendor financing (the "Vendor Financing Commitment"), to finance up to 75% of
the  purchase  price of  additional  network  base  stations.  Loans  under this
facility bear interest at a rate equal to LIBOR plus 7.0% and will be guaranteed
by the Company and each subsidiary of the Acquisition  Company. The terms of the
facility  require that amounts  borrowed be secured by the  equipment  purchased
therewith.  As of December 31, 1998,  $1.6  million was  outstanding  under this
facility.

Summary of Recent Financing
---------------------------

The Company's  current  operating  assumptions  and  projections,  which reflect
management's  best  estimate  of  subscriber  and revenue  growth and  operating
expenses,  indicate that anticipated  capital  expenditures,  operating  losses,
working capital and debt service  requirements  through 1999, and beyond, can be
met by cash flows from  operations,  the net proceeds  from the sale of the $335
million  in Notes and  Warrants,  together  with the  borrowings  under the $200
million New Bank Financing,  the Vendor Financing  Commitment and deferred terms
on  certain  trade  payables;   however,  the  Company's  ability  to  meet  its
projections is subject to numerous  uncertainties  and there can be no assurance
that the Company's  current  projections  regarding the timing of its ability to
achieve positive operating cash flow will be accurate, and if the Company's cash
requirements  are more  than  projected,  the  Company  may  require  additional
financing  in  amounts  which may be  material.  The type,  timing  and terms of
financing  selected by the Company will be  dependent  upon the  Company's  cash
needs, the availability of other financing sources and the prevailing conditions
in the financial  markets.  There can be no assurance that any such sources will
be available  to the Company at any given time or available on favorable  terms.
See "Overview."


                                      F-12

<PAGE>






XM Radio
--------

As  previously  mentioned  (see  "Organization  and  Business"),  XM Radio was a
winning  bidder  for,  and on October  16,  1997,  was awarded an FCC license to
provide DARS  throughout  the United  States.  XM Radio has and will continue to
receive funding for this business from independent  sources in exchange for debt
and equity  interests  in XM Radio.  Accordingly,  it is not  expected  that the
development  of this  business  will have a  material  impact  on the  Company's
financial position,  results of operations,  or cash flows. The Company's equity
interest  in XM Radio may,  however,  even on a fully  diluted  basis,  become a
material asset of the Company.

On January 15, 1999, the Company entered into an agreement with Baron Asset Fund
("Baron") for the placement of a $21.5 million note  convertible  into shares of
XM Radio  common  stock (the  "Baron XM Radio  Convertible  Note").  The Company
subsequently  loaned  approximately $21.4 million to XM Radio in exchange for XM
Radio  common  stock and for a note  convertible  into XM Radio  shares (the "XM
Radio Note  Receivable").  The Baron XM Radio Convertible Note ranks subordinate
to  any  other  securities  of  the  Company  and  is  fully  collateralized  by
approximately one-half of the shares received by the Company as a result of this
transaction.  The XM Radio Note Receivable is a non-recourse note collateralized
by the  additonal  XM Radio  shares that would be  received by the Company  upon
conversion of the note.  The XM Radio Note  Receivable  earns  interest at LIBOR
plus 5% and is due on the  September 30, 2006  maturity  date,  and the Baron XM
Radio  Convertible  Note accrues  interest at the rate of 6% annually,  with all
payments deferred until maturity or extinguished upon conversion.

Deferred Trade Payables
-----------------------

The Company has arranged  the  financing of certain  trade  payables,  and as of
December 31, 1998,  $5.1 million of deferred trade payables were  outstanding at
rates ranging from 6.10% to12.0% and are generally payable by the end of 1999.

Purchase and Lease of Satellite
-------------------------------

On December 4, 1997, the Company entered into two agreements with respect to two
future  transactions.  The Company agreed with TMI  Communications  and Company,
Limited  Partnership  ("TMI") to acquire a one-half  ownership interest in TMI's
satellite,  MSAT-1.  Simultaneously,  the Company entered into an agreement with
African Continental  Telecommunications Ltd. ("ACTEL"), for the lease of MSAT-2,
for deployment over sub-Saharan Africa. Closing under the agreements was subject
to a number of conditions, some of which were not met. As ACTEL had not obtained
the requisite financing, the agreements were terminated on March 24, 1999.


                                      F-13

<PAGE>



Other
-----

At December 31,  1998,  the Company had  remaining  contractual  commitments  to
purchase both mobile data terminal  inventory and mobile telephone  inventory in
the maximum amount of $11.4 million during 1999.  Additionally,  the Company had
remaining  contractual  commitments  in the  amount  of  $1.0  million  for  the
development of certain next generation data terminal inventory.  Contingent upon
the successful research and development  efforts, the Company would have maximum
additional  contractual  commitments  for mobile  communications  data  terminal
inventory in the amount of $27.0  million over a three-year  period  starting in
1999.  The Company has the right to terminate the research and  development  and
inventory  commitment by paying cancellation fees of between $1 million and $2.5
million,  depending on when the termination  option is exercised during the term
of the  contract.  The Company  also has the right to  terminate  the  inventory
commitment by incurring a cancellation  penalty representing a percentage of the
unfulfilled  portion of the contract.  The Company has also  contracted  for the
purchase of $26.2  million of next  generation  wireless  data  terminals  to be
delivered  beginning  early  1999.  The  contract  contains  a 50%  cancellation
penalty. Additionally, the Company has remaining contractual commitments for the
purchase  of  $4.7  million  of  base  stations  required  to  complete  certain
necessary site build-outs,  $1.2 million for certain software  development,  and
certain other  multi-year  operating  expense  contract  commitments  that total
approximately $2.3 million over the next two years.

On  July  2,  1998,   the  Company  filed  an   application   with  the  Federal
Communications   Commission   ("FCC")  to  construct   and  launch  a  follow-on
geostationary  mobile satellite for its business.  The filing of the application
does not  commit  the  Company  to expend any  resources  toward  this  project;
however,  should the  Company  decide to proceed  with the  construction  of the
follow-on  satellite,  the  Company  would  be  required  to  raise  substantial
additional capital to fund this project.

On October 28, 1998,  the Company  entered into  agreements  with Stratos Global
Corporation to consolidate the Company's marine distribution channel,  including
the transfer of inventory and the assignment of certain  customer  contracts and
servicing agreements,  in exchange for $8.5 million. Apart from the initial cash
inflow,  it is not expected that this transaction will have a material impact on
the Company's financial position, results of operations, or cash flows.

All wholly owned subsidiaries of the Company are subject to financing agreements
that limit the amount of cash  dividends  and loans that can be  advanced to the
Company.  At  December  31,  1998,  all of these  subsidiaries'  net assets were
restricted under these agreements. These restrictions will have an impact on the
Company's ability to pay dividends.

Cash used in operating  activities  was $35.6 million for 1998 compared to $50.9
million  for  1997.  The  decrease  in cash  used in  operating  activities  was
primarily  attributable to (i) decreased  operating  losses,  and (ii) decreased
inventory  balances.  Cash used in  investing  activities  was  $210.6  for 1998
compared to $10.2 million for 1997. This increase was primarily  attributable to
the  acquisition  of ARDIS  and the  funding  of  certain  escrows  required  in

                                      F-14

<PAGE>


connection  with the  Acquisition  and  issuance  of  Notes.  Cash  provided  by
financing  activities was $246.3 million in 1998 as compared to $61.1 million in
1997  reflecting  the issuance of the Notes,  offset by the repayment of certain
vendor  financing  and  other  long-term  debt.  Proceeds  from the sale of debt
securities  and Common Stock were $335.4 million and $284,000 for 1998 and 1997,
respectively.  Payments on long-term  debt and capital  leases were $8.3 million
and $8.8  million  for 1998 and 1997,  respectively.  In  addition,  the Company
incurred $14.7 million of debt issuance costs  associated  with the placement of
the Notes and amendments to the New Bank Financing,  as compared to $1.5 million
in 1997. As of December 31, 1998,  the Company had $2.3 million of cash and cash
equivalents  and working  capital of $49.2 million,  including  $41.0 million of
investments restricted for the payment of interest.

Regulation
----------

The ownership and operations of the Company's  communication systems are subject
to significant  regulation by the FCC, which acts under authority granted by the
Communications Act of 1934, as amended (the  "Communications  Act"), and related
federal laws. A number of the  Company's  licenses are subject to renewal by the
FCC and,  with respect to the  Company's  satellite  operations,  are subject to
international  frequency  coordination.  In  addition,  current FCC  regulations
generally  limit the  ownership  and  control  of  American  Mobile by  non-U.S.
citizens  or  entities  to 25%.  There can be no  assurances  that the rules and
regulations  of the FCC will  continue to support the  Company's  operations  as
presently  conducted and contemplated to be conducted in the future, or that all
existing  licenses will be renewed and requisite  frequencies  coordinated.  See
"Part I, Item 1. Business - Regulation".

On June 5, 1996,  the FCC  waived  its  one-year  construction  requirement  and
granted ARDIS  extensions  of time to complete  buildouts of  approximately  190
sites, as required to maintain previously granted licenses.  American Mobile has
completed  its planned  construction  of base  stations on the ARDIS Network for
which the extended implementation was granted by the FCC.

Other Matters
-------------

As previously  reported,  the satellite  has, in the past,  experienced  certain
technological  anomalies,  and there can be no assurance that the satellite will
not experience  subsequent  anomalies that could adversely  impact the Company's
financial condition, results of operations and cash flows. See "Part I, Item 1.
Business-Satellite Back-up and Technology".

Year 2000 Readiness
-------------------

American Mobile has developed and is implementing a Year 2000 Readiness  Program
("Year 2000 Readiness Program") to address Year 2000 issues.  "Year 2000 Ready,"
or "Year 2000  Readiness,"  means that  customers  will  experience  no material
difference in performance and functionality of the Company's  networks prior to,
during or after the year 2000.

                                      F-15

<PAGE>



The  Company's  Year 2000  Readiness  Program uses the phased  approach  that is
standard in its industry.  The Awareness,  Inventory and Assessment  phases have
been  completed,  and American  Mobile is at various  stages of the  Renovation,
Validation/Test and  Implementation/Rollout  phases, depending on the particular
system involved.

The Inventory and Assessment Phases  concentrated on the Company's core business
systems:  those systems, both hardware and software, whose failure could  have a
material  impact on its financial  condition and operations.  Vendors  providing
critical  products  and  services to American  Mobile are also  included in this
definition of core business systems.  Although the core business systems are the
top priority in the  Company's  Year 2000  Readiness  Program,  American  Mobile
assessed all of its software and hardware for Year 2000 Readiness.

American    Mobile's   plans   for   the   Renovation,    Validation/Test    and
Implementation/Rollout  Phases  call for it to be Year 2000  Ready by the end of
the third  quarter of 1999. In addition,  the Company is currently  scheduled to
complete  renovations,  implementation  and  rollout  of  its  internal  systems
(including its voice customer billing software,  CMIS), in the fourth quarter of
1999;  these internal  software  systems do not affect the Company's  ability to
pass customer traffic and therefore will not affect Year 2000 Readiness.

The complex of hardware  and  software  that the Company  maintains  consists of
commercial  off-the-shelf (COTS) software,  as well as custom software developed
specifically for American Mobile's networks. In certain cases, American Mobile's
Year 2000 Readiness Program involves upgrading COTS software that is unsupported
by the vendor or whose Year 2000 Readiness  could not be  determined.  Upgrading
such COTS software,  as planned,  provides greater certainty  regarding the Year
2000  Readiness  of such  products  and  ensures  that  vendor  support  will be
available.

The  total  cost  of  American   Mobile's  Year  2000   Readiness   Program  was
approximately  $2.4 million in 1998.  Expenditures  for the Year 2000  Readiness
Program in 1999 are estimated to be up to $7.4 million. Some modification costs,
including  the  purchase of  software  upgrades  and  consulting  services,  are
expensed as incurred while other modification costs, such as hardware purchases,
are being treated as capital expenditures.

The estimated cost and date on which American  Mobile  believes its network will
be Year 2000 Ready are based on management's best estimates.  However,  there is
no  guarantee  that the Company will achieve  these  results and actual  results
could  differ  materially  from those  anticipated.  Some of  American  Mobile's
critical  business systems depend  significantly on software  programs and third
party services that are not within the Company's control.  Failure to solve Year
2000 errors within American  Mobile's  critical business systems could result in
possible service outages, miscalculations or disruption of operations that could
have a material impact on the Company's business. Because of the Company's heavy
dependence  on  software,  some  Year  2000  problems  may not be  found  or the
remediation  efforts may introduce new bugs that are not identified  before they
impact operations. This applies to both COTS software and custom software.

                                      F-16

<PAGE>



If American Mobile's customers fail to become Year 2000 ready on time with their
own hardware and software systems,  their  applications may not function even if
American  Mobile's  systems  are Year 2000  Ready.  This will  result in reduced
traffic and  revenues.  Also,  suppliers  of goods and  services may suffer Year
2000-related  failures  from which the  Company  cannot  adequately  protect its
business.

While  management  believes  that the Company  will be able to achieve Year 2000
Readiness in a timely manner,  the schedule for completing the implementation of
several core business  systems  extends to the third quarter 1999 and there is a
possibility  that  American  Mobile  may not  become  Year 2000 Ready on time or
within budget.  Contingency  planning, as discussed below, is currently underway
to minimize  the risk of  business  interruptions  caused by Year 2000  problems
within the core business systems.

American Mobile has contingency plans in place to minimize service interruptions
that can  mitigate,  although not  eliminate,  interruptions  caused by problems
resulting  from Year 2000  issues.  For  example,  the Company has backup  power
supplies  and  generators  in place for certain  portions of its networks in the
event of electrical  power  outages.  In addition,  for some  services  American
Mobile has contracted with more than one service provider.  These plans, systems
and services are being  incorporated  into the Company's  Year 2000  contingency
planning.  To the extent that it is  commercially  reasonable to do so, American
Mobile will include other  redundant or  alternative  sources of services in its
Year 2000  contingency  planning  efforts.  American Mobile  anticipates  having
additional Year 2000 contingency plans in place by June 1999.

Accounting Standards
--------------------

In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial  Accounting  Standards ("SFAS") No. 130,  "Reporting  Comprehensive
Income," and SFAS No. 131,  "Disclosures  about  Segments of an  Enterprise  and
Related Information." The Company adopted both of these standards during 1998.

SFAS No.  130  requires  "comprehensive  income"  and the  components  of "other
comprehensive  income" to be reported in the financial  statements  and/or notes
thereto.  Since the Company does not have any components of "other comprehensive
income," reported net income is the same as "comprehensive  income" for the year
ended December 31, 1998 and 1997.

SFAS  No.  131  requires  an  entity  to  disclose   financial  and  descriptive
information  about  its  reportable  operating  segments.  It  also  establishes
standards for related disclosures about products and services, geographic areas,
and major customers.  For purposes of adopting SFAS 131, the Company will report
only one operating segment;  however,  the Company has made additional  footnote
disclosures  about  certain  product  lines of the  business.  (See Footnote 2 -
"Segment Disclosures").

                                      F-17

<PAGE>



In June  1998,  FASB  issued  Statement  No.  133,  "Accounting  for  Derivative
Instruments  and Hedging  Activities,"  which  requires the  recognition  of all
derivatives as either assets or liabilities  measured at fair value. The Company
is in the process of determining  the impact the adoption of this statement will
have  on its  financial  position  and  results,  but it is not  expected  to be
significant.



                                      F-18

<PAGE>



Report of Independent Public Accountants
----------------------------------------



To American Mobile Satellite Corporation:

We have audited the accompanying  consolidated balance sheets of American Mobile
Satellite  Corporation (a Delaware  corporation) and Subsidiaries as of December
31,  1998 and 1997,  and the  related  consolidated  statements  of  operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period  ended   December  31,  1998.   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 an 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 disclosure 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 American  Mobile  Satellite
Corporation  and  Subsidiaries as of December 31, 1998 and 1997, and the results
of their  operations  and their  cash  flows for each of the three  years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.




/s/Arthur Andersen LLP
Washington, D.C.
March 29, 1999



                                      F-19

<PAGE>



             American Mobile Satellite Corporation and Subsidiaries
             ------------------------------------------------------
                      Consolidated Statements of Operations
                      -------------------------------------
                      (in thousands, except per share data)
             

<TABLE>
<CAPTION>


                                                        Years Ended December 31
                                                        -----------------------

                                                1998             1997             1996
                                             -----------      -----------       -------


REVENUES

<S>                                          <C>              <C>              <C>   
       Services                                $57,994          $20,684          $9,201
       Sales of equipment                       29,227           23,530          18,529
                                               -------          -------          ------

       Total Revenues                           87,221           44,214          27,730


COSTS AND EXPENSES

       Cost of service and operations           58,086           31,959           30,471
       Cost of equipment sold                   30,449           40,335           31,903
       Sales and advertising                    16,854           12,066           24,541
       General and administrative               17,332           14,819           17,464
       Depreciation and amortization            52,707           42,430           43,390
                                               -------          -------           ------

       Operating Loss                          (88,207)         (97,395)        (120,039)


INTEREST AND OTHER  INCOME                       4,372            1,122              552
EQUITY IN LOSS OF XM RADIO                        (342)          (1,301)              --
INTEREST EXPENSE                               (53,771)         (21,633)         (15,151)
                                            -----------      -----------        ---------


NET LOSS                                     $(137,948)       $(119,207)       $(134,638)
                                             ==========       ==========       ==========

Basic and Diluted Loss Per Share of
   Common Stock                                 $(4.52)          $(4.74)          $(5.38)
Weighted-Average Common Shares
   Outstanding During the Period (000's)        30,496           25,131           25,041
</TABLE>


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





                                      F-20

<PAGE>
             American Mobile Satellite Corporation and Subsidiaries
             ------------------------------------------------------
                           Consolidated Balance Sheets
                           ---------------------------
                      (in thousands, except per share data)
                        as of December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS                                                                                   1998           1997
                                                                                         ----           ----
CURRENT ASSETS:
<S>                                                                                <C>             <C>   
      Cash and cash equivalents                                                        $2,285         $2,106
      Inventory                                                                        18,593         40,321
      Prepaid in-orbit insurance                                                        3,381          4,564
      Accounts receivable-trade, net of allowance for doubtful accounts
      of $935 in 1998 and $1,930 in 1997                                               15,325          8,140
      Restricted short-term investments                                                41,038             --
      Other current assets                                                             13,231          9,608
                                                                                      -------        -------
             Total current assets                                                      93,853         64,739

PROPERTY AND EQUIPMENT, net (gross balances include
   $140,485 and $135,586 purchased from related parties through
   1998 and 1997, respectively)                                                       246,553        233,174
GOODWILL AND INTANGIBLES, net                                                          53,235             --
RESTRICTED INVESTMENTS                                                                 67,199          1,000
DEFERRED CHARGES AND OTHER ASSETS, net of
   accumulated amortization of $17,653 in 1998 and $14,096 in 1997                     28,954         12,534
                                                                                    ---------      ---------
             Total assets                                                            $489,794       $311,447
                                                                                    =========      =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY

CURRENT LIABILITIES:

      Accounts payable and accrued expenses                                           $33,797        $35,861
      Obligations under capital leases due within one year                              5,971            798
      Current portion of vendor financing commitment due to related party                 543             --
      Current portion of deferred trade payables                                        4,498         15,254
      Other current liabilities                                                           162          7,520
                                                                                    ---------        -------
             Total current liabilities                                                 44,971         59,433

LONG-TERM LIABILITIES:

      Obligations under New Bank Financing                                            132,000        198,000
      Obligations under Notes, net of discount                                        327,147             --
      Capital lease obligations                                                         5,824          3,147
      Net assets acquired in excess of purchase price                                   2,028          2,725
      Vendor financing commitment due to related party                                  1,069             --
      Deferred trade payables                                                             620          1,364
      Other long-term liabilities                                                         540            647
                                                                                     --------      ---------
             Total long-term liabilities                                              469,228        205,883

             Total liabilities                                                        514,199        265,316
                                                                                     --------        -------
COMMITMENTS (Note 11)

STOCKHOLDERS' (DEFICIT) EQUITY:
      Preferred Stock; par value $0.01; authorized 200,000 shares; no
       shares outstanding                                                                  --            --
      Common  Stock;  voting,  par value $0.01;  authorized  75,000,000  shares;
      32,198,735 shares issued and outstanding in 1998, 25,159,311 shares issued
      and outstanding in 1997                                                             322            252
      Additional paid-in capital                                                      508,084        451,892
      Deferred compensation                                                            (1,528)            --
      Common Stock purchase warrants                                                   59,108         36,338
      Unamortized guarantee warrants                                                  (33,678)       (23,586)
      Cumulative loss                                                                (556,713)      (418,765)
                                                                                     ---------      ---------
STOCKHOLDERS' (DEFICIT) EQUITY:                                                       (24,405)        46,131
                                                                                      --------        ------

                   Total liabilities and stockholders' (deficit) equity              $489,794       $311,447
                                                                                    =========      =========
</TABLE>                                 
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
                                      F-21
<PAGE>

             American Mobile Satellite Corporation and Subsidiaries
            Consolidated Statements of Stockholders' (Deficit) Equity
                      (in thousands, except per share data)
                   for the period from January 1, 1996 through
                                December 31, 1998

<TABLE>
<CAPTION>

                                                                                                           Additional 
                                                                                Common Stock                 Paid-In      Deferred
                                                                                   Shares       Par Value    Capital    Compensation
                                                                                   ------       ---------    -------    ------------
                                                                                                           
<S>                                                                               <C>              <C>      <C>                    
BALANCE, December 31, 1995                                                        24,961,130       $250     $448,757             --
    Common Stock issued under Stock Purchase  Plan                                    39,366         --          635             --
    Common Stock purchase warrants issued for Bridge Financing                            --         --           --             --
    Common Stock issued for exercise of stock options and award
      of bonus stock                                                                  37,320         --          612             --
    Common Stock issued upon exercise of Warrants                                     37,500          1          844             --
    Common Stock purchase warrants issued for Bank Financing                              --         --           --             --
    Amortization of Guarantee Warrants                                                    --         --           --             --
    Common Stock issued under the 401(k) Savings Plan                                 22,261         --          411             --
    Net Loss                                                                              --         --           --             --
                                                                                 -----------        ---    ---------     -----------
BALANCE, December 31, 1996                                                        25,097,577        251      451,259             --
    Common Stock issued under the 401(k) Savings Plan                                 31,684          1          349             --
    Common Stock issued under the Stock Purchase Plan                                 29,930         --          283             --
    Common Stock issued for award of bonus stock                                         120         --            1             --
    Guarantee Warrants revaluation                                                        --         --           --             --
    Amortization of Guarantee Warrants                                                    --         --           --             --
    Net Loss                                                                              --         --           --             --
                                                                                 -----------        ---    ---------     -----------
BALANCE, December 31, 1997                                                        25,159,311        252      451,892             --
    Common Stock issued under the 401(k) Savings Plan                                105,089          1          847             --
    Common Stock issued under the Stock Purchase Plan                                 47,011         --          278             --
    Common Stock issued for ARDIS Acquisition                                      6,520,532         65       49,716             --
    Common Stock issued for exercise of stock options and award of
      bonus stock                                                                     10,681         --          135             --
    Issuance of Stock Purchase Warrants pursuant to Notes
      financing                                                                           --         --           --             --
    Issuance of Restricted Stock                                                     356,111          4        1,776         (1,780)
    Amortization of compensation expense                                                  --         --           --            252
    Guarantee Warrants revaluation                                                        --         --           --             --
    Amortization of Guarantee Warrants                                                    --         --           --             --
    Expiration of Stock Purchase Warrants                                                 --         --        3,440             --
    Net Loss                                                                              --         --           --             --
                                                                                 -----------      -----    ---------     -----------
BALANCE, December 31, 1998                                                        32,198,735       $322     $508,084        ($1,528)
                                                                                  ==========       ====     ========        ========

</TABLE>
                                      F-22

<PAGE>


             American Mobile Satellite Corporation and Subsidiaries
            Consolidated Statements of Stockholders' (Deficit) Equity
                      (in thousands, except per share data)
                  for the period from January 1, 1996 through
                                December 31, 1998
                                  (Continued)

<TABLE>
<CAPTION>

                                                                        Common
                                                                         Stock        Unamortized
                                                                        Purchase       Guarantee      Cumulative 
                                                                        Warrants        Warrants         Loss          Total
                                                                        --------        --------         ----          -----

<S>                                                                   <C>              <C>           <C>            <C>    
BALANCE, December 31, 1995                                               $3,440               --       ($164,920)    $287,527
    Common Stock issued under Stock Purchase  Plan                           --               --              --          635
    Common Stock purchase warrants issued for Bridge Financing            2,253               --              --        2,253
    Common Stock issued for exercise of stock options and award of 
      bonus stock                                                            --               --              --          612
    Common Stock issued upon exercise of Warrants                          (845)              --              --           --
    Common Stock purchase warrants issued for Bank Financing             19,000          (19,000)             --           --
    Amortization of Guarantee Warrants                                       --            1,900              --        1,900
    Common Stock issued under the 401(k) Savings Plan                        --               --              --          411
    Net Loss                                                                 --               --        (134,638)    (134,638)
                                                                       --------         --------       ----------    ---------
BALANCE, December 31, 1996                                               23,848          (17,100)       (299,558)     158,700
    Common Stock issued under the 401(k) Savings Plan                        --               --              --          350
    Common Stock issued under the Stock Purchase Plan                        --               --              --          283
    Common Stock issued for award of bonus stock                             --               --              --            1
    Guarantee Warrants revaluation                                       12,490          (12,490)             --           --
    Amortization of Guarantee Warrants                                       --            6,004              --        6,004
    Net Loss                                                                 --               --        (119,207)    (119,207)
                                                                       --------         --------       ----------    ---------
BALANCE, December 31, 1997                                               36,338          (23,586)       (418,765)      46,131
    Common Stock issued under the 401(k) Savings Plan                        --               --              --          848
    Common Stock issued under the Stock Purchase Plan                        --               --              --          278
    Common Stock issued for ARDIS Acquisition                                --               --              --       49,781
    Common Stock issued for exercise of stock options and award of
      bonus stock                                                            --               --              --          135
    Issuance of Stock Purchase Warrants pursuant to Notes
      financing                                                           8,490               --              --        8,490
    Issuance of Restricted Stock                                             --               --              --           --
    Amortization of compensation expense                                     --               --              --          252
    Guarantee Warrants revaluation                                       17,720          (17,720)             --           --
    Amortization of Guarantee Warrants                                       --            7,628              --        7,628
    Expiration of Stock Purchase Warrants                                (3,440)              --              --           --
    Net Loss                                                                 --               --        (137,948)    (137,948)
                                                                       ---------        --------        ---------    ---------
BALANCE, December 31, 1998                                              $59,108         ($33,678)      ($556,713)    ($24,405)
                                                                        =======         ========       ==========    =========

</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

                                      F-23

<PAGE>



             American Mobile Satellite Corporation and Subsidiaries
             ------------------------------------------------------
                      Consolidated Statements of Cash Flows
                      -------------------------------------
                             (in thousands)


<TABLE>
<CAPTION>
                                                                                 Years Ended December 31,
                                                                     -------------------------------------------------
                                                                                   1998           1997            1996
                                                                                   ----           ----            ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                           <C>            <C>             <C>       
Net loss                                                                      $(137,948)     $(119,207)      $(134,638)
Adjustments to reconcile net loss to net cash used in operating activities:
    Amortization of Guarantee Warrants and debt related costs                    16,171          9,350           5,721
    Depreciation and amortization                                                52,707         42,430          43,307
    Equity in loss of XM Radio                                                      342          1,301              --
    Changes in assets and liabilities, net of acquisitions:
        Inventory                                                                21,947         (2,287)        (27,482)
        Prepaid in-orbit insurance                                                1,183            516            (257)
        Accounts receivable - trade                                                (105)        (1,537)         (5,229)
        Other current assets                                                      7,240          4,639           1,970
        Accounts payable and accrued expenses                                    16,876         (5,820)          1,672
        Deferred trade payables                                                  (6,567)        11,685              --
        Deferred items - net                                                     (7,396)         8,038           1,347
                                                                               ---------     ----------      ----------

Net cash used in operating activities                                           (35,550)       (50,892)       (113,589)


CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for  acquisition of ARDIS                                             (52,373)            --              --
Purchase of restricted investments                                             (125,128)            --          (1,000)
Payment of escrow interest                                                      (20,633)            --              --
Investment in XM Radio                                                               --         (1,643)             --
Insurance proceeds applied to equipment in service                                   --             --          66,000
Additions to property and equipment                                             (12,470)        (8,598)        (14,054)
                                                                               ---------      ---------      ----------

Net cash (used in) provided by investing activities                            (210,604)       (10,241)         50,946

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from issuance of Common Stock                                              412            284           1,247
Proceeds from Notes and Stock Purchase Warrants                                 335,000             --              --
Principal payments under capital leases                                          (3,395)        (2,576)         (3,994)
Principal payments under Vendor Financing                                           (16)            --              --
Proceeds from bridge loan                                                        10,000             --          70,000
Payment of bridge loan                                                          (10,000)            --         (70,000)
Repayment of Bank Financing                                                    (100,000)            --              --
Proceeds from Bank Financing and New Bank Financing                              34,000         71,000         127,000
Proceeds from debt issuance                                                          --             --           1,700
Payments on long-term debt                                                       (4,933)        (6,180)        (59,190)
Debt issuance costs                                                             (14,735)        (1,471)        (10,803)
                                                                               ---------      ---------      ----------

Net cash provided by financing activities                                       246,333         61,057          55,960

Net increase (decrease) in cash and cash equivalents                                179            (76)         (6,683)
CASH AND CASH EQUIVALENTS, beginning of period                                    2,106          2,182           8,865
                                                                               ---------       --------          -----
CASH AND CASH EQUIVALENTS, end of period                                         $2,285         $2,106          $2,182
                                                                                =======        =======         =======

Supplemental Cash Flow Information - Interest Payments                          $32,198        $11,785          $8,293
</TABLE>

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

                                      F-24


<PAGE>

             AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES
             ------------------------------------------------------
                   Notes to Consolidated Financial Statements
                     as of December 31, 1998, 1997 and 1996





1. ORGANIZATION, BUSINESS AND LIQUIDITY
---------------------------------------

American Mobile Satellite Corporation (with its subsidiaries,  "American Mobile"
or the "Company") was  incorporated on May 3, 1988. The FCC authorized  American
Mobile to construct, launch, and operate a mobile satellite services system (the
"Satellite  Network ") to provide a full range of mobile voice and data services
via satellite to land, air and sea-based  customers in a service area consisting
of the continental United States,  Alaska,  Hawaii, Puerto Rico, the U.S. Virgin
Islands, U.S. coastal waters,  international waters and airspace and any foreign
territory where the local government has authorized the provision of service. On
April 7, 1995, the Company successfully launched its first satellite ("MSAT-2"),
from Cape Canaveral, Florida. In late 1996, the Company expanded its mobile data
business  through the  acquisition  of a dual mode mobile  messaging  and global
positioning and monitoring service for commercial trucking fleets.

On  March  31,  1998  the  Company  (through  its   newly-formed,   wholly-owned
subsidiary,  AMSC Acquisition Company,  Inc.  ("Acquisition  Company")) acquired
ARDIS Company  ("ARDIS"),  a wholly-owned  subsidiary of Motorola Inc. that owns
and operates a two-way  wireless  data  communications  network,  for a purchase
price of  approximately  $50  million in cash and $50  million in the  Company's
Common Stock (the "Acquisition"). The Company, through the acquisition of ARDIS,
became a  nationwide  provider of wireless  communications  services,  including
data,  dispatch,  and voice  services,  primarily  to business  customers in the
United States.

On October 16, 1997, XM Satellite  Radio Inc.,  formerly  American  Mobile Radio
Corporation, an indirect subsidiary of American Mobile through its subsidiary XM
Satellite Radio Holdings Inc., formerly AMRC Holdings,  Inc.,  (together with XM
Satellite  Radio Inc., "XM Radio"),  was awarded a license by the FCC to provide
satellite-based  Digital  Audio Radio  Service  ("DARS")  throughout  the United
States,  following its successful $89.9 million bid at auction on April 2, 1997.
XM Radio  has and will  continue  to  receive  funding  for this  business  from
independent  sources  in  exchange  for debt and equity  interests  in XM Radio.
Accordingly,  it is not expected that the development of this business will have
a material impact on the Company's financial position, results of operations, or
cash flows.

American  Mobile is devoting its efforts to expanding its business.  This effort
involves   substantial   risk,   including   successfully   integrating   ARDIS.
Specifically,  future operating results will be subject to significant business,
economic,    regulatory,    technical,   and   competitive   uncertainties   and
contingencies. Depending on their extent and timing, these factors, individually
or in the  aggregate,  could have an adverse  effect on the Company's  financial
condition and future results of operations.

Liquidity and Financing Requirements
------------------------------------

Adequate  liquidity  and capital  are  critical to the ability of the Company to
continue  as a  going  concern  and  to  fund  subscriber  acquisition  programs

                                      F-25

<PAGE>



necessary to achieve positive cash flow and profitable  operations.  The Company
expects to  continue to make  significant  capital  outlays for the  foreseeable
future to fund interest expense,  capital expenditures and working capital prior
to the time that it begins to generate  positive cash flow from  operations  and
for the foreseeable future thereafter.

In connection  with the  Acquisition  on March 31, 1998, and to meet its ongoing
cash  requirements,  the  Acquisition  Company issued $335 million of Units (the
"Units")  consisting  of 12 1/4%  Senior Notes due 2008 (the  "Notes"),  and one
warrant to  purchase  3.75749  shares of Common  Stock of the  Company  for each
$1,000 principal amount of Notes (the "Warrants"). The Company also restructured
its existing Bank Financing (the "New Bank  Financing").  The New Bank Financing
of  $200  million  consists  of a  $100  million  unsecured  five-year  reducing
Revolving Credit Facility  maturing March 31, 2003 and a $100 million  five-year
Term Loan Facility with up to three additional  one-year  extensions  subject to
lender approval.  As of February 28, 1999, the Company had $52 million available
for borrowing under the Revolving  Credit Facility.  Additionally,  Motorola has
agreed to provide the Company  with up to $10 million of vendor  financing  (the
"Vendor Financing  Commitment"),  which is available to finance up to 75% of the
purchase  price of  additional  base  stations  needed to meet  ARDIS'  buildout
requirements under certain customer contracts (See Note 8).

The Company's  current  operating  assumptions  and  projections,  which reflect
management's  best  estimate  of  subscriber  and revenue  growth and  operating
expenses,  indicate that anticipated  capital  expenditures,  operating  losses,
working capital and debt service  requirements  through 1999, and beyond, can be
met by cash flows from  operations,  the net proceeds  from the sale of the $335
million  in Notes and  Warrants,  together  with the  borrowings  under the $200
million New Bank Financing,  the Vendor Financing  Commitment and deferred terms
on  certain  trade  payables;   however,  the  Company's  ability  to  meet  its
projections is subject to numerous  uncertainties  and there can be no assurance
that the Company's  current  projections  regarding the timing of its ability to
achieve positive operating cash flow will be accurate, and if the Company's cash
requirements  are more  than  projected,  the  Company  may  require  additional
financing  in  amounts  which may be  material.  The type,  timing  and terms of
financing  selected by the Company will be  dependent  upon the  Company's  cash
needs, the availability of other financing sources and the prevailing conditions
in the financial  markets.  There can be no assurance that any such sources will
be available to the Company at any given time or available on favorable terms.

2. SIGNIFICANT ACCOUNTING POLICIES
----------------------------------

Accounting Estimates
--------------------

The preparation of financial  statements in conformity  with generally  accepted
accounting   principles  (GAAP)  requires   management  to  make  estimates  and
assumptions  that affect the reported  amount of assets and  liabilities  at the
date of the  financial  statements  and the  reported  amounts of  revenues  and
expenses  during the reporting  period.  Actual  results could differ from those
estimates.  The Company's most significant  estimates relate to the valuation of
inventory and committed inventory purchases, the allowance for doubtful accounts
receivable, and the realizability of long-term assets.

                                      F-26

<PAGE>



Consolidation
-------------

The consolidated  financial  statements  include the accounts of American Mobile
and its wholly owned subsidiaries.  All significant  inter-company  transactions
and  accounts  have  been  eliminated.  As  discussed  in Note 1,  XM  Radio,  a
subsidiary  of the  Company,  was awarded a license to provide  DARS and entered
into an agreement with World Space,  Inc. ("World  Space"),  whereby World Space
acquired a 20% participation in XM Radio, and options which, if exercised, could
reduce the Company's  ownership interest in XM Radio to 22.6% (compared with the
18.3%  post-exercise  position  previously  reported).  On October  30, 1998 the
Company and WorldSpace  jointly filed an application for consent to the transfer
of control of XM Radio in  anticipation  of future  exercise  of the World Space
options.  Additionally,  the agreement gives  WorldSpace  certain  participative
rights which provide for their  participation in significant  business decisions
that would be made in the ordinary course of business;  therefore, in accordance
with Emerging Issues Task Force ("EITF") No. 96-16, the Company's  investment in
XM Radio is carried on the equity method.

The following  represents  the summary  financial  information of XM Radio as of
December 31, 1998 and 1997.

<TABLE>
<CAPTION>

                                                      As of                As of
                                               December 31,         December 31,
(in thousands)                                         1998                 1997
                                                       ----                 ----
<S>                                                 <C>                  <C>   
Current assets                                       $  482              $     1
Noncurrent assets                                   170,003               91,932
Current liabilities                                 130,823               82,949
Noncurrent liabilities                               46,845                   --
Total stockholders' (deficit) equity                 (7,183)               8,984
</TABLE>




<TABLE>
<CAPTION>

                                                 Year Ended          Year Ended
                                                December 31,        December 31,
                                                        1998                1997
                                                        ----                ----
<S>                                                   <C>                 <C>   
Gross sales                                           $   --              $   --
Operating expenses                                    16,193               1,110
Interest (income) expense                                (26)                549
Net loss                                              16,167               1,659

</TABLE>

Cash Equivalents
----------------

The Company considers highly liquid investments with remaining  maturities of 90
days or less at the time of acquisition to be cash equivalents.

                                      F-27

<PAGE>



Restricted Investments
----------------------

Restricted  investments  represent those investments made by the Company to fund
either customer  obligations or required interest  payments  associated with the
Notes. The Company considers all required funding from these accounts due within
the next twelve  months to be current and reflects  these amounts as such in the
accompanying  balance sheets.  The Company accounts for these  investments on an
amortized cost basis.

Inventories
-----------

Inventories,  which consist primarily of finished goods, are stated at the lower
of cost or market.  Cost is determined  using the weighted  average cost method.
The Company  periodically  assesses the market value of its inventory,  based on
sales trends and  forecasts  and  technological  changes and records a charge to
current  period  income  when such  factors  indicate  that a  reduction  to net
realizable value is appropriate. Management considers both inventory on hand and
inventory which it has committed to purchase.  The Company  recorded  charges to
cost of equipment  sold in the amount of $12.0 million and $11.1 million in 1997
and 1996, respectively,  related to the realizability of the Company's inventory
investment. No such charges were made in 1998.

Other Current Assets
--------------------

Other current assets consist of the following:

<TABLE>
<CAPTION>

                                                       December 31,
(in thousands)                                     1998            1997
                                                   ----            ----
<S>                                             <C>              <C>                   
Interest rate swap (Note 8)                      $5,964          $   --
Prepaid expenses                                  3,990           1,617
Deposits                                          3,010           6,647
Non-trade receivables and other                     267           1,344
                                                -------          ------
                                                $13,231          $9,608
                                                =======          ======
</TABLE>

Fair Value of Financial Instruments
-----------------------------------

Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures about
Fair Value of Financial  Instruments," requires disclosures of the fair value of
certain  financial  instruments.  Cash  and  cash  equivalents,  trade  accounts
receivable,  accounts payable and deferred trade payables approximate fair value
because of the  relatively  short maturity of these  instruments.  The Notes are
valued at their quoted market price. The fair value of the interest rate swap is
the  estimated  amount  that the Company  would  receive to  terminate  the swap
agreement on December 31, 1998,  taking into account current  interest rates and
the current  creditworthiness  of the swap counter  parties.  As a result of the
Guarantees  associated  with the New Bank  Financing,  it is not  practicable to
estimate the fair value of this facility. For debt issues that are not quoted on


                                      F-28

<PAGE>



an exchange,  interest rates currently  available to the company for issuance of
debt with  similar  terms and  remaining  maturities  are used to estimate  fair
value.

<TABLE>
<CAPTION>

                                           As of December 31, 1998                As of December 31, 1997
                                           -----------------------                -----------------------
                                        Carrying                               Carrying
(in thousands)                            Amount          Fair Value             Amount          Fair Value
                                          ------          ----------             ------          ----------
Assets:
<S>                                     <C>                 <C>                  <C>                 <C>   
     Restricted investments             $108,237            $107,010             $1,000              $1,000
     Interest rate swap (Note 8)          13,419              11,884                 --                  --
Liabilities:
     Notes                               327,147             211,050                 --                  --
     Vendor financing commitment           1,612               1,612                 --                  --
     Capital leases                       11,795              11,795              3,945               3,945
                                                                                                         
</TABLE>

Concentrations of Credit Risk
-----------------------------

Financial instruments which potentially subject the Company to concentrations of
credit risk  consist  principally  of  temporary  cash  investments,  restricted
investments  and accounts  receivable.  The Company  places its  temporary  cash
investments  and restricted  investments in debt  securities  such as commercial
paper,  time  deposits,   certificates  of  deposit,  bankers  acceptances,  and
marketable  direct  obligations  of the United  States  Treasury.  The Company's
intent is to hold its investments in debt  securities to maturity.  To date, the
majority of the Company's business has been transacted with  telecommunications,
field  services,  natural  resources  and  transportation  companies,  including
maritime  and trucking  companies  located  throughout  the United  States.  The
Company  grants  credit  based  on an  evaluation  of the  customer's  financial
condition,  generally  without  requiring  collateral  or deposits.  Exposure to
losses on trade accounts  receivable,  for both service and for inventory sales,
is principally  dependent on each customer's  financial  condition.  The Company
anticipates  that its credit risk with respect to trade  accounts  receivable in
the future will continue to be diversified  due to the large number of customers
expected to comprise the Company's subscriber base and their expected dispersion
across many different industries and geographies.

After giving pro forma effect to the Acquisition,  as of December 31, 1998, five
customers accounted for approximately 40% of the Company's service revenue, with
one of those customers accounting for approximately 19%.

Software Development Costs
--------------------------

The Company  capitalizes costs related to the development of certain software to
be used with its mobile  messaging  and position  location  service (the "Mobile
Data  Communications  Service") product.  The Company commenced  amortization of
these costs in the first quarter of 1996.  These costs are amortized  over three
years.  As of December 31, 1998 and 1997, net capitalized  software  development
costs were $869,000 and $1.8 million, respectively, and are included in property
and equipment in the accompanying balance sheets.

                                      F-29

<PAGE>



Additionally, during 1998, the Company adopted Statement of Position ("SOP") No.
98-1 - "Accounting for the Costs of Computer Software  Developed or Obtained for
Internal  Use." As of December 31, 1998, net  capitalized  internal use software
costs were $1.1  million  and are  included  in property  and  equipment  in the
accompanying balance sheet and are amortized over three years.

Deferred Charges and Other Assets
---------------------------------

Other assets  primarily  consist of the long term  portion of the interest  rate
swap  purchased  in  connection  with the New Bank  Financing  (see Note 8), the
unamortized  financing  costs and debt issue costs  associated with the existing
vendor  financing  arrangements,  the Notes, the Bank Financing and the New Bank
Financing.  As of December 31,  1998,  the Company had a balance of $7.5 million
representing the long-term  portion of the interest rate swap, and $20.6 million
and $11.8 million of unamortized  financing  costs recorded at December 31, 1998
and  1997,  respectively.  Financing  costs are  amortized  over the term of the
related  facility  using  the  straight  line  method,  which  approximates  the
effective interest method.

Revenue Recognition
-------------------

The Company  recognizes service revenue when  communications  services have been
rendered.  Equipment sales are recognized upon shipment of products and customer
acceptance, if required.

Research and Development Costs
------------------------------

Research and  development  costs are expensed as  incurred.  Such costs  include
internal  research  and  development  activities  and expenses  associated  with
external  product  development  agreements.  The Company  incurred  research and
development  costs of  approximately  $1.1 million in 1998,  none for 1997,  and
approximately $57,000 for 1996.

Advertising Costs
-----------------

Advertising  costs are charged to  operations  in the year  incurred and totaled
$2.9  million,  $3.4  million,  and $6.0  million  for  1998,  1997,  and  1996,
respectively.

Stock Based Compensation
------------------------

The Company  accounts for employee  stock options using the method of accounting
prescribed by Accounting  Principles  Board ("APB") Opinion No. 25,  "Accounting
for Stock Issued to Employees."  Generally,  no expense is recognized related to
the Company's  stock options  because the option's  exercise price is set at the
stock's fair market value on the date the option is granted.




                                      F-30

<PAGE>

Assessment of Asset Impairment
------------------------------

The  Company  adopted  the  provisions  of  SFAS  No.  121  "Accounting  for the
Impairment of  Long-Lived  Assets and for  Long-Lived  Assets to be Disposed of"
which requires that long-lived  assets and certain  identifiable  intangibles be
reviewed for impairment  whenever  events or changes in  circumstances  indicate
that the carrying amount of an asset may not be recoverable.  Recoverability  of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are  considered  to be  impaired,  the  impairment  to be  recognized  is
measured by the amount by which the  carrying  amount of the assets  exceeds the
fair value of the assets.  Assets to be disposed of are reported at the lower of
the carrying  amount or the fair value less costs to sell.  Adoption of SFAS No.
121 did not have a material impact on the Company's financial position,  results
of operation, or liquidity during 1998, 1997 or 1996.

The Company has assessed the satellite and its related assets as of December 31,
1998, and determined that an impairment did not exist; however,  there can be no
assurance that a material  provision for impairment  will not be required in the
future. Management will continue to assess the recoverability of these assets on
an on-going basis.

Loss Per Share
--------------

Basic  earnings per share excludes  dilution and is computed by dividing  income
available to common stockholders by the weighted-average number of common shares
outstanding  for the period.  Diluted  earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were  exercised  or  converted  into common stock or resulted in the issuance of
common  stock  that then  shared in the  earnings  of the  entity.  Options  and
warrants to purchase shares of common stock were not included in the computation
of loss per share as the effect would be  antidilutive.  As a result,  the basic
and diluted  earnings per share amounts are identical.  As of December 31, 1998,
there  were  approximately  70,000  options  and  warrants  that would have been
included in this calculation, had the effect not been antidilutive.

Comprehensive Income
--------------------

SFAS No.  130,  "Reporting  of  Comprehensive  Income"  requires  "comprehensive
income" and the components of "other comprehensive income" to be reported in the
financial  statements and/or notes thereto.  Since the Company does not have any
components of "other  comprehensive  income," reported net income is the same as
"comprehensive income" for the years ended December 31, 1998, 1997, and 1996.

Segment Disclosures
-------------------

In accordance  with SFAS 131,  "Disclosures  about Segments of an Enterprise and
Related  Information,"  the  Company  has only one  operating  segment  which is
engaged in the  provision  of  nationwide  wireless  communication.  The Company
provides  services  within  North  America and parts of Central  America and the
Caribbean, and all revenues are derived from customers within the United States.
The following summarizes service revenue by major product lines:


                                      F-31

<PAGE>

<TABLE>
<CAPTION>


                                                    Revenue for the
                                                Year Ended December 31,
                                                -----------------------
(in millions)                              1998         1997         1996
                                            ----         ----         ----
<S>                                        <C>          <C>           <C> 
Voice Service                              $14.0        $10.0         $5.0
Data Service                                40.1          7.6          2.3
Capacity Resellers and Other                 3.9          3.1          1.9

</TABLE>

Reclassification
----------------

Certain amounts from prior years'  consolidated  financial  statements have been
reclassified to conform with the 1998 presentation.

New Accounting Pronouncements
-----------------------------

In June  1998,  FASB  issued  Statement  No.  133,  "Accounting  for  Derivative
Instruments  and Hedging  Activities,"  which  requires the  recognition  of all
derivatives as either assets or liabilities  measured at fair value. The Company
is in the process of determining  the impact the adoption of this statement will
have  on its  financial  position  and  results,  but it is not  expected  to be
significant.

3. STOCKHOLDERS'  EQUITY
------------------------

The Company has  authorized  200,000  shares of Preferred  Stock and  75,000,000
shares of  Common  Stock.  The par  value  per share is $0.01 for each  class of
stock.  For each share held,  Common  stockholders  are  entitled to one vote on
matters  submitted  to the  stockholders.  Cumulative  voting  applies  for  all
elections of directors of the Company.

The Preferred Stock may be issued in one or more series at the discretion of the
Board of Directors (the "Board"),  without  stockholder  approval.  The Board is
authorized   to  determine   the  number  of  shares  in  each  series  and  all
designations, rights, preferences, and limitations on the shares in each series,
including,  but not limited to, determining whether dividends will be cumulative
or non-cumulative.

Certain   controlling   stockholders   of  the  Company   have  entered  into  a
Stockholders'  Agreement (the "Agreement") which contains provisions relating to
the election of directors,  procedures for maintaining compliance with the FCC's
alien ownership  restrictions,  certain  restrictions on the transfer,  sale and
exchange  of Common  Stock,  and  procedures  for  appointing  directors  to the
Executive  Committee of the Board,  among  others.  The  Agreement  continues in
effect until  terminated by an affirmative  vote of holders of  three-fourths of
the  Company's  Common  Stock held by parties to the  Agreement.  Other  matters


                                      F-32

<PAGE>


relating  to the  Company's  governance  of the  Company  are set  forth  in the
Certificate of Incorporation and Bylaws.

As of  December  31,  1998,  the Company had  reserved  Common  Stock for future
issuance as detailed below.

<TABLE>
<CAPTION>

<S>                                                                   <C>      
Shares issuable upon exercise of warrants                              7,821,259
Amended and Restated Stock Option Plan for Employees                   4,062,534
Stock Option Plan for Non-Employee Directors                              50,000
Employee Stock Purchase Plan                                             143,126
Defined Contribution Plan                                                248,403
                                                                       ---------
        Total                                                         12,325,322
                                                                      ==========
</TABLE>

4. PROPERTY AND EQUIPMENT
-------------------------

Property and equipment consists of the following:
<TABLE>
<CAPTION>

                                                              December 31,
(in thousands)                                           1998            1997
                                                         ----            ----
<S>                                                  <C>             <C>     
Space Segment                                        $188,150        $187,976
Ground Segment                                        110,942         109,691
Network equipment                                      49,089              --
Construction in progress                                7,580              --
Office equipment and furniture                         16,252          19,305
Mobile data communications service equipment           17,384          21,118
                                                       ------          ------
                                                      389,397         338,090
Less accumulated depreciation and amortization        142,844         104,916
                                                      -------         -------
Property and equipment, net                          $246,553        $233,174
                                                     ========        ========
</TABLE>

Property and equipment is recorded at cost and depreciated  over its useful life
using the straight line method.  Assets recorded as capital leases are amortized
over the shorter of their useful lives or the term of the lease.  The  estimated
useful lives of office  furniture and equipment vary from 2-10 years. The ground
segment is depreciated over 8 years, the network equipment is depreciated over 7
years, and the mobile data communications  service equipment is depreciated over
3 1/2 years.

The Company is depreciating  its satellite over its estimated  useful life of 10
years, which was based on several factors,  including current conditions and the
estimated  remaining  fuel of MSAT-2.  The  original  estimated  useful  live is
periodically  reviewed  using  current  Telemetry  Tracking and Control data. To
date, no significant  change in the original estimated useful life has resulted.
The  telecommunications  industry is subject to rapid technological change which
may require the Company to revise the  estimated  useful lives of MSAT-2 and the
ground  segment  or to adjust  their  carrying  amounts.  The  Company  has also
capitalized  certain  costs to develop and implement  its  computerized  billing
system.  These costs are included in property and equipment and are  depreciated
over 8 years.


                                      F-33

<PAGE>



The costs of constructing and putting satellites into service are capitalized in
the financial  statements and depreciated  over the estimated useful life of the
satellite. A failure of the satellite from unsuccessful launches and/or in orbit
anomalies would result in a current  write-down of the satellite value.  Partial
satellite failures are recognized currently to the extent such losses are deemed
abnormal to the operation of the  satellite.  A partial  failure which is deemed
normal  would  not  result  in a loss  of  satellite  capacity  beyond  what  is
considered  normal satellite wear and tear.  Additionally,  all future incentive
arrangements  relating to the  construction of satellites will be capitalized at
launch.

5.  GOODWILL AND INTANGIBLE ASSETS
--  ------------------------------

Goodwill and intangible  assets  resulting from the  Acquisition  consist of the
following:
<TABLE>
<CAPTION>


                                                                December 31,
(in thousands)                                                          1998
                                                                        ----
<S>                                                                  <C>    
FCC Licenses                                                         $49,179
Goodwill                                                               6,154
                                                                       -----
                                                                      55,333
Less accumulated amortization                                          2,098
                                                                      ------
Goodwill and intangible assets, net                                  $53,235
                                                                     =======
</TABLE>  

Goodwill and Intangible Assets are being amortized on a straight-line basis over
20 years.

6. STOCK OPTIONS AND RESTRICTED STOCK
-------------------------------------

The Company has two active stock option  plans.  The American  Mobile  Satellite
Corporation  1989 Amended and  Restated  Stock  Option Plan for  Employees  (the
"Plan") permits the grant of non-statutory  options and the award of bonus stock
up to a total of 4.5  million  shares of  Common  Stock.  Under  the  Plan,  the
exercise   price  and  vesting   schedule  for  options  is  determined  by  the
Compensation  Committee of the Board,  which was  established  to administer the
Plan. Generally, options vest over a three year period and will have an exercise
price not less than the fair  market  value of a share on the date the option is
granted or have a term greater than ten years.

The  Company  also has a Stock  Option  Plan  for  Non-Employee  Directors  (the
"Director Plan") which provides for the grant of options up to a total of 50,000
shares of Common Stock.  Directors  receive an initial  option to purchase 1,000
shares of Common  Stock,  with annual  option  grants to purchase  500 shares of
Common Stock.  Options under the Director Plan can be exercised at a price equal
to the fair  market  value of the  stock on the date of the  grant and are fully
vested and  immediately  exercisable  on the date of grant.  Each  Director Plan
option  expires  on the  earlier of (i) ten years from the date of grant or (ii)
seven months after the Director's termination.

                                      F-34

<PAGE>



In January  1998,  the Board of Directors  granted  restricted  stock to certain
members of senior  management.  These grants  include both a three-year  vesting
schedule as well as specific corporate  performance  targets. As of December 31,
1998, the Company recorded costs of approximately  $252,000  associated with the
vesting of these shares. In January 1999,  performance  requirements were waived
for certain senior  executives,  excluding the chairman and  president,  for the
first year of vesting. These performance  requirements will remain in place, and
unless  further  waived by the Board of  Directors,  failure  to meet a required
performance target would prevent the vesting of the restricted shares.

Information regarding the Company's stock option plans is summarized below:

<TABLE>
<CAPTION>

                                                                                                     Weighted Average
                                                                Available            Granted and     Option Price Per
                                                                for Grant            Outstanding          Share
                                                                ---------            -----------          -----
<S>                                                            <C>                    <C>                 <C>   
Balance, December 31, 1995                                        184,778                590,850          $17.94
  Additional shares authorized for grant                        1,241,138                     --              --
  Granted                                                      (1,565,272)             1,565,272           18.37
  Exercised and awarded                                                --                (37,320)          16.41
  Forfeited and canceled                                          623,356               (623,356)          23.23
                                                                 --------              ---------
Balance, December 31, 1996                                        484,000              1,495,446           16.22
  Additional shares authorized for grant                        1,500,000                     --              --
  Granted                                                      (1,292,443)             1,292,443           12.67
  Exercised and awarded                                                --                   (120)          10.28
  Forfeited                                                     1,104,828             (1,104,828)          17.15
                                                               ----------             ----------
Balance, December 31, 1997                                      1,796,385              1,682,941           13.08
  Restricted stock granted                                       (356,111)               356,111              --
  Restricted stock awarded                                             --               (356,111)             --
  Additional shares authorized for grant                        1,000,000                     --              --
  Options granted                                              (1,406,249)             1,406,249            8.81
  Exercised and awarded                                                --                (10,681)          12.62
  Forfeited                                                       349,438               (349,438)          10.85
                                                               ----------              ---------
Balance, December 31, 1998                                      1,383,463              2,729,071          $11.11
                                                               ==========             ==========          

</TABLE>


Options Exercisable at December 31:

<TABLE>
<CAPTION>

                                                   Average
                           Options              Exercise Price
                           -------              --------------

<S>                        <C>                      <C>   
1998                       957,617                  $13.29
1997                       595,432                  $14.39
1996                       276,804                  $17.97
</TABLE>

                                      F-35

<PAGE>


The  Company  accounts  for  stock  compensation  costs in  accordance  with the
provisions  of APB No.  25,  "Accounting  for Stock  Issued to  Employees."  Had
compensation cost been determined based on the fair value at the grant dates for
awards  under  the  Company's  stock  plans in  accordance  with  SFAS No.  123,
"Accounting  for  Stock  Based  Compensation",  the net  loss  would  have  been
increased  by $8.9  million  ($.29 per share) in 1998,  $5.3  million  ($.21 per
share) in 1997,  and $2.3 million in 1996 ($.09 per share).  As required by SFAS
No. 123,  the fair value of each option  grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following  assumptions for
1998, 1997 and 1996: no historical  dividend yield; an expected life of 10 years
for options and three years for restricted stock;  historical  volatility of 95%
in 1998,  65% in 1997,  and 45% in 1996,  and a risk-free rate of return ranging
from 4.85% to 6.44%.

Exercise prices for options outstanding as of December 31, 1998, are as follows:

<TABLE>
<CAPTION>

                                   Options Outstanding                                          Options Exercisable
                                   -------------------                                          -------------------
                                                    Weighted
                                Number              Average           Weighted              Number              Weighted
                            Outstanding as        Contractual          Average        Exercisable as of          Average
       Range of            of December 31,            Life            Exercise           December 31,           Exercise
   Exercise Prices               1998              Remaining            Price                1998                 Price
   ---------------               ----              ---------            -----                ----                 -----
<S>       <C>                <C>                     <C>               <C>                <C>                    <C>  
  $5.00 - $8.87               1,200,583              8.56               $8.80                   300               $8.87
   9.06 - 12.00                 463,464              7.83               11.44               285,725               11.61
  12.50 - 12.81                 432,711              8.04               12.74               146,668               12.74
  13.00 - 13.00                 492,112              6.49               13.00               384,723               13.00
  14.62 - 25.75                 140,201              3.91               18.11               140,201               18.11
                             -----------                                                   --------
  $5.00 - $25.75              2,729,071              7.74              $11.11               957,617              $13.29
                             ===========                                                  ==========
</TABLE>


7. INCOME TAXES
---------------

The Company  accounts for income taxes under the liability method as required in
the SFAS No. 109,  "Accounting  for Income  Taxes." Under the liability  method,
deferred  income taxes are  recognized  for the tax  consequences  of "temporary
differences"  by applying  enacted  statutory  tax laws and rates  applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities.  Under this method, the effect
on deferred taxes of a change in tax rates is recognized in income in the period
that  includes  the  enactment  date.  Potential  tax  benefits,  related to net
operating losses and temporary differences,  have been recorded as an asset, and
a valuation allowance for the same amount has been established.  The Company has
paid no income taxes since inception.

The following is a summary of the Company's net deferred tax assets.

                                      F-36

<PAGE>



<TABLE>
<CAPTION>

                                                                                                     December 31
(in thousands)                                                                                 1998             1997
                                                                                               -----            ----
<S>                                                                                         <C>             <C>     
Net Operating Loss Carryforwards                                                            $276,034        $217,918
Deferred Taxes Related to Temporary Differences:
  Tangible asset bases, lives and depreciation methods                                       (61,977)        (65,898)
  Other                                                                                      (11,266)          8,700
                                                                                            --------           -----
Total deferred tax asset                                                                     202,791         160,720
Less valuation allowance                                                                    (202,791)       (160,720)
                                                                                            ---------       ---------
Net deferred tax asset                                                                      $      -        $      -
                                                                                            =========       =========
</TABLE>


Significant  timing  differences  affecting  deferred  taxes in 1998 reflect the
treatment of costs  associated  with the Space Segment for  financial  reporting
purposes  compared to tax  purposes.  As of December 31,  1998,  the Company had
estimated net operating loss carryforwards  ("NOLs") of $680.8 million. The NOLs
expire in years  2004  through  2018.  These NOL  carryforwards  are  subject to
certain  limitations  if there  is  determined  to be a  substantial  change  in
ownership as defined in the Internal Revenue Code.

8. LONG-TERM DEBT
-----------------

<TABLE>
<CAPTION>

                                                                                          December 31
(in thousands)                                                                      1998             1997
                                                                                    ----             ----
<S>                                                                             <C>             <C>      
Notes, net of discount                                                          $327,147        $      --
New Bank Financing - Term Loan Facility                                          100,000          100,000
New Bank Financing - Revolving Credit Facility                                    32,000           98,000
Deferred Trade Payables                                                            5,118           11,685
Vendor Financing Commitment                                                        1,612               --
Loan Agreement                                                                        --            4,933
                                                                                --------        ---------
                                                                                 465,877          214,618
Less current maturities                                                            5,041           15,254
                                                                                --------        ---------
Long-term debt                                                                  $460,836         $199,364
                                                                                ========         ========
</TABLE>


$335 Million Unit Offering
--------------------------

In connection with the Acquisition,  the Acquisition Company issued $335 million
of Units  (the  "Units")  consisting  of 12 1/4%  Senior  Notes  due  2008  (the
"Notes"),  and Warrants to purchase shares of Common Stock of the Company.  Each
Unit  consists of $1,000  principal  amount of Notes and one Warrant to purchase
3.75749  shares of Common  Stock at an exercise  price of $12.51per  share.  The
Warrants were valued at $8.5 million and are reflected in the balance sheet as a
debt discount.  A portion of the net proceeds of the sale of the Units were used
to finance  the  Acquisition.  In  connection  with the Notes,  the  Acquisition
Company purchased  approximately  $112.3 million of restricted  investments that


                                      F-37

<PAGE>


are restricted for the payment of the first six interest  payments on the Notes.
Interest payments are due semi-annually,  in arrears, beginning October 1, 1998.
The Notes are fully guaranteed by American Mobile Satellite Corporation.

New Bank Financing
------------------

In connection with the Acquisition, the Company, the Acquisition Company and its
subsidiaries  restructured  the existing $200 million Bank  Financing  (the "New
Bank  Financing")  to  provide  for two  facilities:  (i) the  Revolving  Credit
Facility, a $100 million unsecured five-year reducing revolving credit facility,
and (ii) the Term Loan Facility,  a $100 million  five-year,  term loan facility
with  up to  three  additional  one-year  extensions  subject  to  the  lenders'
approval.  The Revolving  Credit  Facility ranks pari passu with the Notes.  The
Term Loan  Facility  is secured by the assets of the  Company,  principally  its
stockholdings in XM Radio and the Acquisition  Company,  and will be effectively
subordinated  to the  Revolving  Credit  Facility  and the  Notes.  The New Bank
Financing is severally guaranteed by Hughes Electronics  Corporation,  Singapore
Telecommunications  Ltd. and Baron Capital  Partners,  L.P.  (collectively,  the
"Bank  Facility  Guarantors").   As  of  February  28,  1999,  the  Company  had
outstanding  borrowings of $100 million under the Term Loan Facility at 5.8125%,
and $48  million  under the  Revolving  Credit  Facility at rates  ranging  from
5.4375% to 5.5%.

The Term Loan Facility
----------------------

The Term Loan Facility  bears an interest  rate,  generally,  of 50 basis points
above London Interbank Offered Rate ("LIBOR").  The Term Loan Agreement does not
include any scheduled  amortization  until  maturity,  but does contain  certain
provisions for  prepayment  based on certain  proceeds  received by the Company,
unless  otherwise  waived  by  the  banks  and  the  Bank  Facility  Guarantors,
including:  (1) 100% of excess cash flow obtained by the Company;  (2) the first
$25.0 million of net proceeds  from the lease or sale of MSAT-2  received by the
Company,  and thereafter 75% of the remaining  proceeds received from such lease
or sale  (the  remaining  25% to be  retained  by the  Acquisition  Company  for
business  operations);  (3) 100% of the proceeds of any other asset sales by the
Company; (4) 50% of the net proceeds of any equity offerings of the Company (the
remaining  50% to be retained by the Company for business  operations);  and (5)
100% of any major casualty proceeds of the Company.  To the extent that the Term
Loan Facility is repaid, the  aforementioned  proceeds that would otherwise have
been used to repay the Term Loan Facility will be used to repay and  permanently
reduce the commitment under the Revolving Credit Facility.

The Revolving Credit Facility
-----------------------------

The Revolving  Credit  Facility bears an interest rate,  generally,  of 50 basis
points above LIBOR and is unsecured, with a negative pledge on the assets of the
Acquisition Company and its subsidiaries  ranking pari passu with the Notes. The
Revolving  Credit  Facility will be reduced $10 million each quarter,  beginning
with the quarter ending June 30, 2002, with the balance due on maturity of March
31, 2003. Certain proceeds received by the Acquisition Company would be required
to repay and reduce the Revolving  Credit  Facility,  unless otherwise waived by
the lendors and the Bank Facility Guarantors, including: (1) 100% of excess cash
flow obtained by the Acquisition


                                      F-38

<PAGE>


Company, as defined; (2) the first $25.0 million of net proceeds of the lease or
sale of MSAT-2  received by the Acquisition  Company,  and thereafter 75% of the
remaining  proceeds  received from such lease or sale (the  remaining 25% may be
retained by the Acquisition  Company for business  operations);  (3) 100% of the
proceeds of any other asset sales by the Acquisition Company; (4) 50% of the net
proceeds of any offerings of the Acquisition Company's equity (the remaining 50%
to be retained by the Acquisition Company for business operations); and (5) 100%
of any major casualty proceeds. At such time as the Revolving Credit Facility is
repaid  in  full,  and  subject  to  satisfaction  of the  restrictive  payments
provisions of the Notes,  any prepayment  amounts that would otherwise have been
used to prepay the  Revolving  Credit  Facility  will be  dividended to American
Mobile Satellite Corporation.

The Guarantees
--------------

In connection with the New Bank Financing, the Bank Facility Guarantors extended
separate  guarantees of the obligations of each of the  Acquisition  Company and
the Company to the banks,  which on a several basis  aggregated to $200 million.
In their  agreement  with each of the  Acquisition  Company and the Company (the
"Guarantee  Issuance  Agreement"),  the Bank Facility  Guarantors agreed to make
their  guarantees  available  for the New Bank  Financing.  In exchange  for the
additional risks  undertaken by the Bank Facility  Guarantors in connection with
the New Bank  Financing,  the Company  agreed to  compensate  the Bank  Facility
Guarantors,  principally  in the  form  of 1  million  additional  warrants  and
re-pricing of 5.5 million  warrants  previously  issued in  connection  with the
original Bank  Facility  (together,  the  "Guarantee  Warrants").  The Guarantee
Warrants  were  issued  with an  exercise  price of  $12.51  and were  valued at
approximately $17.7 million.

Further,  in connection with the Guarantee Issuance  Agreement,  the Company has
agreed  to  reimburse  the  Bank  Facility  Guarantors  in the  event  that  the
Guarantors are required to make payment under the New Bank Financing guarantees,
and, in  connection  with this  reimbursement  commitment  has provided the Bank
Facility Guarantors a junior security interest with respect to the assets of the
Company, principally its stockholdings in XM Radio and the Acquisition Company.

In connection with the New Bank Financing,  the Company entered into an interest
rate swap  agreement,  with an implied annual rate of 6.51%.  The swap agreement
reduces the impact of interest  rate  increases on the Term Loan  Facility.  The
Company paid a fee of approximately $17.9 million for the swap agreement.  Under
the swap agreement,  an amount equal to LIBOR plus 50 basis points, is paid on a
quarterly basis directly to the respective banks on behalf of the Company,  on a
notional  amount of $100 million until the  termination  date of March 31, 2001.
The Company has reflected,  as an asset,  the  unamortized fee paid for the swap
agreement in the accompanying consolidated financial statements.  The Company is
exposed to a credit loss in the event of  non-performance  by the counter  party
under the swap  agreement.  The Company does not believe  there is a significant
risk of  non-performance  as the counter party to the swap  agreement is a major
financial institution.


                                      F-39

<PAGE>

Motorola Vendor Financing
-------------------------

Motorola has entered  into an agreement  with ARDIS to provide up to $10 million
of Vendor  Financing  Commitment,  to finance up to 75% of the purchase price of
additional  network base stations.  Loans under this facility bear interest at a
rate equal to LIBOR plus 7.0% and will be  guaranteed  by the  Company  and each
subsidiary of the Acquisition  Company.  The terms of the facility  require that
amounts borrowed be secured by the equipment purchased therewith.  Advances made
during a quarter constitute a loan, which is then amortized on a quarterly basis
over three years. As of December 31, 1998,  $1.6 million was  outstanding  under
this facility at interest rates ranging from 12.07% to 13.0%.

Deferred Trade Payables
-----------------------

The Company has arranged  the  financing of certain  trade  payables,  and as of
December 31, 1998,  $5.1 million of deferred trade payables were  outstanding at
rates ranging from 6.10% to 12.00% and are generally payable by the end of 1999.
As of December 31, 1997,  $11.7  million was  outstanding  at rates ranging from
6.23% to 14.00%.

Bridge Loan
-----------

On December 31, 1997,  the Company  entered  into a Bridge Loan  Agreement  (the
"Bridge Loan") with Hughes Communications Satellite Services, Inc. ("Hughes") in
the principal amount of up to $10 million,  secured by a pledge of the Company's
interest in its 80%-owned  subsidiary,  XM Radio.  The Bridge Loan bore interest
rate at an annual  rate of 12% and was fully  repaid in March  1998.  No further
borrowings are available under the Bridge Loan.

Loan Agreement
--------------

The Company  entered into a Loan Agreement with Northern  Telecom to finance the
purchase  of  certain  equipment  to be used in the  ground  segment.  This Loan
Agreement  was  repaid  in full in April  1998  and no  further  borrowings  are
available under this Loan Agreement.

Assets Pledged and Secured
--------------------------

All wholly owned subsidiaries of the Company are subject to financing agreements
that limit the amount of cash  dividends  and loans that can be  advanced to the
Company.  At  December  31,  1998,  all of the  subsidiaries'  net  assets  were
restricted under these  agreements.  These  restrictions  will have an impact on
American Mobile Satellite Corporation's ability to pay dividends.

Covenants
---------

The debt agreements and related Guarantee Agreements entered into by the Company
contain various restrictions,  covenants, defaults, and requirements customarily
found in such financing agreements.  Among other restrictions,  these provisions
include  limitations on cash dividends,  restrictions  on  transactions  between
American  Mobile and its  subsidiaries,  restrictions  on capital  acquisitions,
material  adverse  change  clauses,   and  maintenance  of  specified  insurance
policies.

                                      F-40

<PAGE>





On March 29, 1999,  the Bank  Facility  Guarantors  agreed to eliminate  certain
covenants  contained in the Guarantee  Issuance  Agreement  relating to earnings
before  interest,  depreciation,  amortization  and taxes ("EBITDA") and service
revenue.  In exchange  for this  waiver,  the Company  agreed to re-price  their
Guarantee Warrants, effective April 1, 1999, from $12.51 to $7.50.

9. RELATED PARTIES
------------------

In 1990,  following a competitive bid process,  American Mobile signed contracts
with Hughes  Aircraft,  the parent  company of Hughes  Communications  Satellite
Services ("Hughes Communications"), an American Mobile stockholder, to construct
MSAT-2 (the "Satellite  Construction  Contract").  The contract  contains flight
performance  incentives  payable  by the  Company to Hughes  Aircraft  if MSAT-2
performs according to the contract. As a result of certain  previously-disclosed
performance  considerations,  additional  contract payment issues were raised by
the Company. At present, the Company's obligation to make additional performance
payments  to Hughes  Aircraft  remains  at issue  and  ongoing  discussions  are
underway between the parties.

The Company has entered into various  transactions and agreements with Motorola,
Inc. ("Motorola"), an American Mobile stockholder, which include the purchase by
American Mobile of services, network hardware and software maintenance services,
facility rentals, inventory and network gateway fees. Additionally, Motorola has
provided the Vendor Financing Commitment,  which will be available to finance up
to 75% of the purchase price of additional network base stations (See Note 8).

Additionally,  the Company has entered into various  transactions and agreements
with affiliates of AT&T Wireless Services,  Inc. ("AT&T Wireless"),  an American
Mobile stockholder.  The arrangements include the purchase of satellite capacity
and equipment by AT&T, the purchase by American Mobile of certain  equipment for
use in the Satellite Network, the leasing of certain  office equipment,  and the
engagement  of  AT&T  to  be  one  of  the  Company's  long-distance  providers.
Additionally,  the Company sublet certain office space to AT&T Wireless  through
September  1996;  however,  as a result  of the  Acquisition  in March  1998 and
issuance of shares to Motorola, AT&T's ownership fell below 10%; therefore, they
ceased to be deemed a related  party;  and,  as such,  the 1998  amounts  do not
include transactions with AT&T.


                                      F-41

<PAGE>




The following table represents a summary of all related party transactions.

<TABLE>
<CAPTION>

                                                                                 Years Ended December 31
(in thousands)                                                             1998                1997                1996
                                                                           ----                ----                ----

Payments made to (from) related parties:
<S>                                                                    <C>                 <C>                 <C>   
     Additions to property and equipment                                 $4,931                $200              $2,847
     Proceeds from debt issuance                                        (10,000)                 --             (10,000)
     Payments on debt obligations                                        10,017                 292              20,926
     Payment for guarantees                                                  --                  --               3,000
     Operating expenses                                                   7,568               2,706               3,817
     Satellite capacity/airtime/equipment revenue                            --              (2,836)             (1,276)
     Sublease income                                                         --                  --                (205)
                                                                       --------             -------            ---------
Net payments to related parties                                         $12,516                $362             $19,109
                                                                        =======               =====             =======

Due to (from) related parties:
     Operating expenses                                                    $698              $1,209                $185
     Capital leases                                                          --                 249                 446
     Vendor financing                                                     1,638                  --                  --
     Satellite capacity/airtime revenue                                      (3)               (495)               (416)
     Capital acquisitions                                                   450               2,120               1,584
                                                                       --------            --------             -------
Net amounts due to related parties                                       $2,783              $3,083              $1,799
                                                                         ======             =======              ======

</TABLE>


 10. LEASES
 ----------

Capital Leases
--------------

The Company  leases  certain  office  equipment,  ground  segment  equipment and
switching  equipment under  agreements  accounted for as capital leases.  Assets
recorded  as capital  leases in the  accompanying  balance  sheets  include  the
following:

<TABLE>
<CAPTION>

                                                                December 31
(in thousands)                                              1998          1997
                                                            ----          ----
<S>                                                      <C>            <C>   
Ground segment equipment                                 $ 7,263        $7,263
Switch equipment                                           8,346            --
Office equipment                                           3,069         4,033
Less accumulated amortization                             (6,612)       (4,750)
                                                          -------       -------

Total                                                    $12,066        $6,546
                                                         ========       ======
</TABLE>
<PAGE>

Operating Leases
----------------

The  Company  leases  substantially  all  of  its  base  station  sites  through
cancellable operating  leases.  The majority of these leases provide for renewal
options for various  periods at their fair rental  value at the time of renewal.
In the normal course of business,  the operating leases are generally renewed or
replaced by other leases.  Additionally,  the Company leases certain  facilities
and equipment under arrangements  accounted for as operating leases.  Certain of
these arrangements have renewal terms.  Total rent expense,  under all operating
leases, approximated $5.9 million, $2.9 million, and $2.5 million in 1998, 1997,
and 1996, respectively.

At December  31,  1998,  minimum  future  lease  payments  under  noncancellable
operating and capital leases are as follows:

<TABLE>
<CAPTION>

                               Operating          Capital
                                Leases             Leases
                               ---------          -------
(in thousands)
<S>                            <C>                <C>   
1999                            $3,436             $6,841
2000                             3,517              6,043
2001                             2,183                 35
2002                             2,190                 --
2003                             1,524                 --
2004 and thereafter                661                 --
                                  ----             ------

Total                          $13,511            $12,919
                               =======
Less: Interest                                      1,124
                                                   ------
                                                  $11,795
                                                  =======

</TABLE>


                                      F-43

<PAGE>



11. OPERATING AGREEMENTS AND COMMITMENTS
----------------------------------------


Joint Operating and Satellite Capacity Agreements
-------------------------------------------------

On December 4, 1997, the Company entered into two agreements with respect to two
simultaneous  transactions.  The  Company  agreed  with TMI  Communications  and
Company, Limited Partnership ("TMI") to acquire a one-half ownership interest in
TMI's  satellite,  MSAT-1,  and  simultaneously,  the  Company  entered  into an
agreement  (the   "Satellite   Lease   Agreement")   with  African   Continental
Telecommunications Ltd. ("ACTEL"),  for the lease of MSAT-2, for deployment over
sub-Saharan  Africa.  As ACTEL has not obtained  the  requisite  financing,  the
agreements were terminated on March 24, 1999; however,  the Company and TMI will
remain parties to a Joint Operating Agreement and a Satellite Capacity Agreement
under which the parties agree to provide,  among other things,  emergency backup
and  restoral  services  to each party  during  any period in which the  other's
satellite is not functioning properly. Additionally, each party will be entitled
to lease excess capacity from the other party's  satellite under specified terms
and conditions.  The  implementation  of these  agreements  requires  regulatory
approvals  by the FCC and  Industry  Canada  (formerly  Canada's  Department  of
Industry and Science). The Company has received, and expects to continue to seek
approvals contemplated under these agreements on a timely basis.

Commitments
-----------

At December 31,  1998,  the Company had  remaining  contractual  commitments  to
purchase both mobile data terminal  inventory and mobile telephone  inventory in
the maximum amount of $11.4 million during 1999.  Additionally,  the Company had
remaining  contractual  commitments  in the  amount  of  $1.0  million  for  the
development of certain next generation data terminal inventory.  Contingent upon
the successful research and development  efforts, the Company would have maximum
additional  contractual  commitments  for mobile  communications  data  terminal
inventory in the amount of $27.0  million over a three-year  period  starting in
1999.  The Company has the right to terminate the research and  development  and
inventory  commitment  by paying  cancellation  fees of between $1.0 million and
$2.5 million,  depending on when the termination  option is exercised during the
term of the contract.  The Company also has the right to terminate the inventory
commitment by incurring a cancellation  penalty representing a percentage of the
unfulfilled  portion of the contract.  The Company has also  contracted  for the
purchase of $26.2  million of next  generation  wireless  data  terminals  to be
delivered  beginning  early  1999.  The  contract  contains  a 50%  cancellation
penalty. Additionally, the Company has remaining contractual commitments for the
purchase of $4.7 million of base stations required to complete certain necessary
site build-outs,  $1.2 million for the purchase of certain software development,
and certain other multi-year  operating expense contract  commitments that total
approximately $2.3 million over the next two years.

The aggregate fixed and  determinable  portion of all inventory  commitments and
obligations for other fixed contracts is as follows:


                                      F-44

<PAGE>




          (in thousands)
          1999                                        $30,310
          2000                                         31,892
          2001                                         11,621
                                                       ------
          Total                                       $73,823
                                                      =======


12. EMPLOYEE BENEFITS
---------------------

Defined Contribution Plan
-------------------------

The Company sponsors a 401(k) defined  contribution plan ("401(k) Savings Plan")
in which all employees can  participate.  The 401(k) Savings Plan provided for a
Company match of employee contributions, in the form of Common Stock, limited to
the fair market value of up to one-half of the  employee's  contribution  not to
exceed 6% of an employee's compensation.  The 401(k) Savings Plan was amended in
1998 to reflect the following changes:  (i) the increase of the Company match up
to 100% of the first 4% of an  employee's  compensation,  (ii) the addition of a
discretionary annual employer non-elective  contribution,  (iii) the addition of
the  option  to have  plan  benefits  distributed  in the  form  of  installment
payments,  and (iv)  provide for the  reallocation  of  forfeitures,  if any, to
active participants.  In 1998 the ARDIS Individual Capital Accumulation Plan was
merged into the 401(k)  Savings Plan to allow for a combined  company plan.  The
Company's matching expense was $847,538 for 1998, reflecting the addition of the
ARDIS employees, $350,000 for 1997, and $411,000 for 1996.


Employee Stock Purchase Plan
----------------------------

The Company has an Employee Stock Purchase Plan ("Stock Purchase Plan") to allow
eligible  employees to purchase  shares of the Company's  Common Stock at 85% of
the lower of market value on the first and last  business  day of the  six-month
option period. An aggregate of 47,011, 29,930, and 39,366 shares of Common Stock
were issued under the Stock Purchase Plan in 1998, 1997, and 1996, respectively.


13.  BUSINESS ACQUISITION
---  --------------------

On  March  31,  1998,  the  Company  acquired  ARDIS  for a  purchase  price  of
approximately  $50 million in cash and $50 million in the Company's Common Stock
(the  "Purchase  Price").   The  purchase  method  of  accounting  for  business
combinations  was used  for the  recording  of the  acquisition.  The  operating
results of ARDIS have been included in the Company's consolidated  statements of
operations from the date of  acquisition.  The purchase price for the net assets
acquired  was  allocated  ($1.6)  million to net current  assets and net current
liabilities,  $50.4  million to property  and  equipment,  $49.4  million to FCC
licenses  and $1.3  million to  goodwill.  Additionally,  the  Company  incurred
acquisition  costs  of  approximately  $2.6  million  and  recorded   additional
liabilities of approximately $2.3 million


                                      F-45

<PAGE>


The  unaudited pro forma  results give effect to (i) the  Acquisition,  (ii) the
Notes  and  (iii)  the New  Bank  Financing  as if such  transactions  had  been
consummated on January 1 of each of the periods presented.

<TABLE>
<CAPTION>

(in thousands, except per share data)               1998                 1997
                                                    ----                 ----

<S>                                             <C>                  <C>    
Revenues                                        $ 97,153              $87,965
Net Loss                                        (151,555)            (176,207)
Loss per share                                     (4.72)               (5.61)

</TABLE>


14. LEGAL, REGULATORY AND OTHER MATTERS
---------------------------------------

Legal and Regulatory Matters
----------------------------

Like other mobile  service  providers in the  telecommunications  industry,  the
Company is subject to substantial domestic, foreign and international regulation
including the need for regulatory  approvals to operate and expand the Satellite
Network and operate and modify subscriber equipment.

The  ownership  and  operation  of the  mobile  satellite  services  system  and
ground-based  two-way  wireless  data  system  are  subject  to  the  rules  and
regulations of the FCC, which acts under authority granted by the Communications
Act and related federal laws. Among other things,  the FCC allocates portions of
the radio  frequency  spectrum to certain  services  and grants  licenses to and
regulates  individual  entities  using the spectrum.  American  Mobile  operates
pursuant to various licenses granted by the FCC.

The  successful  operation of the Satellite  Network is dependent on a number of
factors,  including the amount of L-band  spectrum made available to the Company
pursuant  to  an  international  coordination  process.  The  United  States  is
currently  engaged in an  international  process of  coordinating  the Company's
access to the  spectrum  that the FCC has  assigned  to the  Company.  While the
Company  believes that  substantial  progress has been made in the  coordination
process and expects that the United  States  government  will be  successful  in
securing the necessary spectrum,  the process is not yet complete. The inability
of the United States  government  to secure  sufficient  spectrum  could have an
adverse effect on the Company's  financial  position,  results of operations and
cash flows.

The Company has the necessary regulatory  approvals,  some of which are pursuant
to  special  temporary  authority,  to  continue  its  operations  as  currently
contemplated.  The  Company has filed  applications  with the FCC and expects to
file applications in the future with respect to the continued operations, change
in  operation  and  expansion  of the Network and  certain  types of  subscriber
equipment.  Certain of its  applications  pertaining to future service have been
opposed.  While the Company, for various reasons,  believes that it will receive
the necessary  approvals on a timely basis,  there can be no assurance  that the
requests  will be granted,  will be granted on a timely basis or will be granted
on  conditions  favorable  to  the  Company.  Any  significant  changes  to  the


                                      F-46

<PAGE>


applications resulting from the FCC's review process or any significant delay in
their approval could adversely affect the Company's financial position,  results
of operations and cash flows.

There are applications now pending before the FCC to use the Inmarsat system and
TMI's  Canadian-licensed  system,  both of which operate in the Mobile Satellite
Services  ("MSS")  L-band  and have  satellite  footprints  covering  the United
States,  to provide  service in the United States.  American  Mobile has opposed
these  filings.  In addition to  providing  additional  competition  to American
Mobile,  a grant of domestic  authority  by the FCC to use any of these  foreign
systems  may  increase  the  demand  by  these   systems  for  spectrum  in  the
international  coordination process and could adversely affect American Mobile's
ability to coordinate its spectrum access.

On July 20, 1998, the International Bureau of the FCC granted an application for
Special Temporary Authority ("STA") to use TMI's space segment to conduct market
tests in the U.S. for six months using up to 500 mobile  terminals.  On July 30,
1998,  American  Mobile filed an Application for Review and a Motion for Stay of
this STA grant with the FCC, and these filings remain  pending.  On December 18,
1998,  SatCom filed a request for a six-month  extension of this STA,  which was
extended to July 12, 1999.

On October 23, 1998, the FCC issued an order permitting  Comsat  Corporation via
Inmarsat  to provide  aeronautical  services  to the  domestic  legs of the same
aircraft in international  flight.  As the FCC noted,  this action has a minimal
effect on American Mobile's access to L-band spectrum. Additionally, the Company
does not  believe  this  action  will have a  material  effect on the  Company's
financial position or results of operations.

American Mobile is authorized to build, launch, and operate three geosynchronous
satellites in accordance  with a specific  schedule.  American  Mobile is not in
compliance with the schedule for commencement and construction of its second and
third satellites and has petitioned the FCC for changes to the schedule. Certain
of these extension requests have been opposed by third parties.  The FCC has not
acted on American  Mobile's  requests.  The FCC has the  authority to revoke the
authorizations  for the second and third  satellites and in connection with such
revocation  could exercise its authority to rescind American  Mobile's  license.
American  Mobile  believes  that the  exercise of such  authority to rescind the
license is unlikely. The term of the license for each of American Mobile's three
authorized  satellites is ten years,  beginning when American  Mobile  certifies
that the respective  satellite is operating in compliance with American Mobile's
license.  The ten-year term of MSAT-2 began August 21, 1995.  Although  American
Mobile anticipates that the authorization for MSAT-2 is likely to be extended in
due course to  correspond  to the useful life of the satellite and a new license
granted for any replacement satellites,  there is no assurance of such extension
or grants.

On July 2, 1998,  American  Mobile filed an application  for authority to launch
and operate its  second-generation  mobile satellite  system.  This satellite is
intended to support the Company's  existing  satellite services and, also, allow
the  provision  of an  extended  array of  services,  such as  higher  data rate
services and services to lower-power  terminals.  There is no guarantee that the
FCC will grant this  application.  The filing of the application does not commit


                                      F-47

<PAGE>


the Company to expend any  resources  toward this project;  however,  should the
Company decide to proceed with the construction of the follow-on satellite,  the
Company would be required to raise substantial  additional  capital to fund this
project.

In 1992, a former director of American Mobile filed an Amended Complaint against
the Company alleging  violations of the  Communications Act of 1934, as amended,
and of the  Sherman  Act and  breach  of  contract.  The suit was  dismissed  on
November 10, 1998,  prior to the  commencement of trial pursuant to an agreement
to settle the suit by payment by the Company of $250,000.

Other Matters
-------------

As previously  reported,  the satellite  has, in the past,  experienced  certain
technological anomalies, most significantly with respect to its eastern beam. On
August 1,  1996,  the  Company  reached a  resolution  of the  claims  under its
satellite  insurance  contracts and policies and received proceeds in the amount
of $66.0  million.  Based on certain  engineering  studies and the design of the
satellite, the Company believed that the insurance proceeds reflected the actual
cost of damage sustained to the satellite,  and, as a result, the carrying value
of the satellite was reduced by the net insurance proceeds,  which resulted in a
reduction of future depreciation charges beginning in the third quarter of 1996.
There can be no assurance  that the  satellite  will not  experience  subsequent
anomalies that could adversely impact the Company's financial condition, results
of operations and cash flows.

The Company has received a recommendation  from a subcontractor to its satellite
manufacturer  that, pending further results from an ongoing  investigation,  the
satellite  should be operated at modified power management  levels.  The Company
and its satellite  manufacturer  continue to investigate  the basis, if any, for
this  recommendation.  Based on the  information  available to date,  management
believes that, even if maintained, the power management recommendation would not
have a material  negative effect on the Company's  business plan within the next
three to five years,  based on  anticipated  traffic  patterns  and  anticipated
subscriber  levels.  In the event that  traffic  patterns or  subscriber  levels
materially exceed those  anticipated,  the power management  recommendation,  if
maintained,  could have a material  impact on the Company's  long-term  business
plan.

15. SUPPLEMENTAL CASH FLOW INFORMATION
--------------------------------------

<TABLE>
<CAPTION>

                                                                                              Years Ended 31
(in thousands)                                                                       1998          1997           1996
                                                                                     ----          ----           ----
Noncash investing and financing activities:
<S>                                                                                <C>           <C>            <C> 
Leased asset and related obligations                                                 $648          $182           $284
Issuance of Common Stock for Acquisition                                           49,781            --             --
Issuance of Restricted Stock                                                        1,780            --             --
Issuance and repricing of Common Stock purchase warrants                           26,210        12,490         21,253
Issuance of Common Stock upon exercise of Common
  Stock purchase warrants                                                              --            --            845
Vendor financing for property in service                                            1,628            --          2,440
Issuance of Common Stock under the Defined Contribution Plan                          848           350            411


</TABLE>

                                      F-48

<PAGE>




NOTE 16 - SUBSEQUENT EVENTS
---------------------------

On January 15, 1999, the Company entered into an agreement with Baron Asset Fund
("Baron") for the placement of a $21.5 million note  convertible  into shares of
XM Radio  common  stock (the  "Baron XM Radio  Convertible  Note").  The Company
subsequently  loaned  approximately $21.4 million to XM Radio in exchange for XM
Radio  common  stock and for a note  convertible  into XM Radio  shares (the "XM
Radio Note  Receivable").  The Baron XM Radio Convertible Note ranks subordinate
to  any  other  securities  of  the  Company  and  is  fully  collateralized  by
approximately one-half of the shares received by the Company as a result of this
transaction.  The  XM  Radio  Note  Receivable  is a  non-recourse  note  and is
exchangeable into  approximately half of the additional XM Radio common stock to
be received by the Company as a result of the January 15  transaction.  Assuming
conversion of all convertible  notes and exercise of the outstanding  WorldSpace
options,  the Company's  ownership in XM Radio would be 22.6% (compared with the
18.3% post-exercise position previously reported).  The XM Radio Note Receivable
earns  interest at LIBOR plus 5% and is due on the  September  30, 2006 maturity
date, and the Baron XM Radio Convertible Note accrues interest at the rate of 6%
annually,  with all  payments  deferred  until  maturity  or  extinguished  upon
conversion.

NOTE 17 - FINANCIAL STATEMENTS OF SUBSIDIARIES
----------------------------------------------

In connection with the Acquisition and related  financing  discussed  above, the
Company formed a new wholly-owned  subsidiary,  AMSC Acquisition  Company,  Inc.
("Acquisition  Company"). The Company contributed all of its inter-company notes
receivables and  transferred its rights,  title and interests in AMSC Subsidiary
Corporation,  American Mobile Satellite Sales Corporation,  and AMSC Sales Corp.
Ltd. (together with ARDIS, the "Subsidiary  Guarantors") to Acquisition Company,
and  Acquisition  Company  was the  acquirer of ARDIS and the issuer of the $335
million  of Notes.  American  Mobile  Satellite  Corporation  ("American  Mobile
Parent") is a guarantor of the Notes.  The Notes contain  covenants that,  among
other things,  limit the ability of Acquisition  Company and its Subsidiaries to
incur  additional  indebtedness,  pay  dividends  or make  other  distributions,
repurchase  any  capital  stock  or  subordinated  indebtedness,   make  certain
investments,   create  certain  liens,  enter  into  certain  transactions  with
affiliates,  sell assets,  enter into certain  mergers and  consolidations,  and
enter into sale and leaseback transactions.

Acquisition Company is a holding company with no material  operations.  It holds
the  Notes  and  Revolving  Credit  Facility,   both  of  which  are  fully  and

                                      F-49

<PAGE>


unconditionally  guaranteed  on  a  joint  and  several  basis  by  all  of  its
subsidiaries,   and  holds  the   inter-company   notes   receivable   from  its
subsidiaries. Separate company financial statements for Acquisition Company have
not  been  prepared,   as  management   believes  the  differences  between  the
Acquisition Company and the Subsidiary  Guarantors  statements to be immaterial,
and therefore not material information to the investors.

Summarized  financial  information  with  respect  to  American  Mobile  Parent,
Acquisition Company and with respect to the Subsidiary  Guarantors on a combined
basis as of December 31, 1998 and for the years ended December 31, 1998 and 1997
is as follows (unaudited):

<TABLE>
<CAPTION>

                                               American Mobile Parent                        Acquisition Company
Operating Statement Data                      1998                 1997                  1998                  1997
                                              ----                 ----                  ----                  ----
(in thousands)
<S>                                       <C>                  <C>                   <C>                       <C> 
Net Revenue                                 $1,200               $1,200                  $ --                  $ --
Equity in loss of subsidiaries            (137,793)            (149,566)             (116,332)                   --
Operating income (loss)                         13                   35                  (110)                   --
Net loss                                  (137,948)            (119,207)             (137,793)                   --

</TABLE>


<TABLE>
<CAPTION>

Balance Sheet Data                       December 31,                               December 31,
(in thousands)                               1998                                       1998
                                             ----                                       ----
<S>                                          <C>                                      <C>    
Current assets                              $6,019                                    $41,058
Non-current assets                          69,655                                    392,591
Current liabilities                             79                                     10,715
Non-current liabilities                    100,000                                    359,147
Shareholders' (Deficit) Equity             (24,405)                                    63,787

</TABLE>





                                      F-50

<PAGE>



<TABLE>
<CAPTION>


                                               Combined Subsidiary Guarantors
Operating Statement Data                         1998                 1997
                                                 ----                 ----
(in thousands)
<S>                                          <C>                   <C>    
Net Revenue                                   $87,221               $44,214
Equity in loss of subsidiaries                     --                    --
Operating loss                                (88,635)              (99,535)
Net loss                                     (116,332)             (149,566)

</TABLE>


<TABLE>
<CAPTION>

Balance Sheet Data                                            December 31,
(in thousands)                                                        1998
                                                                      ----
<S>                                                               <C>    
Current assets                                                     $46,776
Non-current assets                                                 316,728
Current liabilities                                                 33,842
Non-current liabilities                                            691,445
Shareholders' Deficit                                             (361,783)
</TABLE>

Major  differences  between the financial  statements of Parent and  Acquisition
Company include (i) the Term Loan Facility which, as of the  Acquisition,  is an
obligation of Parent and, as such,  the related debt and interest  costs are not
included in the Acquisition  Company financial  statements for the periods ended
and  as  of  December  31,  1998,  and  (ii)  certain  immaterial  inter-company
management fees and expenses between the Parent and Acquisition  Company are not
eliminated at the Acquisition Company level.

The consolidated condensed unaudited financial statements of Acquisition Company
are set forth below.


                                      F-51

<PAGE>




            AMSC Acquisition Company, Inc. and Subsidiary Guarantors
                      Consolidated Statements of Operations
                             (dollars in thousands)
                                   (unaudited)

<TABLE>
<CAPTION>

                                                                     Years Ended December 31,
                                                             -----------------------------------------

                                                                 1998              1997           1996
                                                             -----------       -----------     -------


REVENUES

<S>                                                           <C>              <C>            <C>   
       Services                                                 $57,994          $20,684         $9,201
       Sales of equipment                                        29,227           23,530         18,529
                                                                 ------          -------         ------

       Total Revenues                                            87,221           44,214         27,730


COSTS AND EXPENSES:

       Cost of service and operations                            58,086           31,959         30 471
       Cost of equipment sold                                    30,449           40,335         31,903
       Sales and advertising                                     16,733           12,030         24,541
       General and administrative                                17,465           14,890         16,212
       Depreciation and amortization                             53,233           44,535         45,496
                                                                 ------          -------         ------

       Operating Loss                                           (88,745)         (99,535)      (120,893)


INTEREST AND OTHER  INCOME                                        3,612            1,122            552
INTEREST EXPENSE                                                (52,660)         (51,153)       (44,636)
                                                                --------         --------      ---------


NET LOSS                                                      $(137,793)       $(149,566)     $(164,977)
                                                              ==========       ==========     ========== 

</TABLE>




                                      F-52

<PAGE>



                         AMSC Acquisition Company, Inc. and Subsidiary Guarantor
                           Consolidated Balance Sheets
                             (dollars in thousands)
                        as of December 31, 1998 and 1997
                                   (unaudited)

<TABLE>
<CAPTION>

ASSETS                                                     1998           1997
                                                           ----           ----

CURRENT ASSETS:

<S>                                                   <C>             <C>   
      Cash and cash equivalents                          $2,285         $2,106
      Inventory                                          18,593         40,321
      Prepaid in-orbit insurance                          3,381          4,564
      Accounts receivable-trade, net of allowance 
       for doubtful accounts                             15,325          8,140
      Current portion of restricted short-term 
       investments                                       41,038             --
      Other current assets                                7,212          9,608
                                                        -------          -----
             Total current assets                        87,834         64,739

PROPERTY AND EQUIPMENT, net                             246,553        250,335
RESTRICTED INVESTMENTS                                   56,439             --
GOODWILL AND INTANGIBLES, net                            53,235             --
DEFERRED CHARGES AND OTHER ASSETS, net                   33,846         36,722
                                                         ------         ------

             Total assets                              $477,907       $351,796
                                                       ========       ========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)


CURRENT LIABILITIES:

      Accounts payable and accrued expenses              33,718        $35,825
      Obligations under capital leases due 
        within one year                                   5,971            798
      Current portion of deferred trade payables          5,041         15,254
      Other current liabilities                             162          7,520
                                                       --------        -------
             Total current liabilities                   44,892         59,397


DUE TO PARENT                                                --        441,836



LONG-TERM LIABILITIES:

      Obligations under New Bank Financing               32,000        198,000
      Notes, net of discount                            327,147             --
      Capital lease obligations                           5,824          3,147
      Deferred trade payables                             1,689          1,364
      Net assets acquired in excess of 
        purchase price                                    2,028          2,725
      Other long-term liabilities                           540            647
                                                       --------       --------

             Total long-term liabilities                369,228        205,883

             Total liabilities                          414,120        707,116
                                                        -------        -------


STOCKHOLDERS' EQUITY (DEFICIT)                           63,787       (355,320)
                                                         ------       ---------


       Total liabilities and stockholders' equity      $477,907       $351,796
                                                       =========      =========
</TABLE>


                                      F-53

<PAGE>



            AMSC Acquisition Company, Inc. and Subsidiary Guarantors
            Consolidated Statements of Stockholders' Equity (Deficit)
                             (dollars in thousands)
          for the period from January 1, 1996 through December 31, 1998
                                   (unaudited)



<TABLE>
<CAPTION>
                                                                      Total
<S>               <C> <C>                                             <C>      
BALANCE, December 31, 1995                                            $(40,777)
    Net Loss                                                          (164,977)
                                                                      ---------
BALANCE, December 31, 1996                                            (205,754)
    Net Loss                                                          (149,566)
                                                                      ---------
BALANCE, December 31, 1997                                            (355,320)
    Net Loss                                                          (137,793)
    Investment by Parent Company                                       556,900
                                                                       -------
BALANCE, December 31, 1998                                             $63,787
                                                                       =======

</TABLE>


                                      F-54

<PAGE>



            AMSC Acquisition Company, Inc. and Subsidiary Guarantors
                      Consolidated Statements of Cash Flows
                             (dollars in thousands)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                   Years Ended December 31
                                                          ------------------------------------------
                                                                    1998           1997         1996
                                                                    ----           ----         ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                            <C>            <C>          <C>       
Net loss                                                       ($137,793)     $(149,566)   $(164,977)
Adjustments to reconcile net loss to net cash used in
operating activities:
     Amortization of debt discount                                10,845          9,350        5,721
     Depreciation and amortization                                53,233         44,535       45,413
     Changes in assets and liabilities:
         Inventory                                                21,947         (2,287)     (27,482)
         Prepaid in-orbit insurance                                1,183            516         (257)
         Trade accounts receivable                                  (105)        (1,537)      (5,229)
         Other current assets                                      7,185          4,639        1,970
         Accounts payable and accrued expenses                    16,864         (5,844)       1,668
         Deferred trade payables                                  (6,567)        11,685           --
         Deferred items - net                                     (7,396)         8,038        1,347
                                                                 --------      ---------    ---------

Net cash used in operating activities                            (40,604)       (80,471)    (141,826)


CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of ARDIS                                             (52,373)            --           --
Purchase of long-term restricted securities                      (96,976)            --       (1,000)
Payment of escrow interest                                       (20,633)            --           --
Insurance proceeds applied to equipment in service                    --             --       66,000

Additions to property and equipment                              (12,470)        (8,598)     (14,054)
                                                                 --------        -------     --------

Net cash provided by (used in) investing activities             (182,452)        (8,598)      50,946

CASH FLOWS FROM FINANCING ACTIVITIES:

Funding (to)  from Parent                                        (22,686)        28,220       29,485
Proceeds from  Notes                                             335,000             --           --
Principal payments under capital leases                           (3,395)        (2,576)      (3,994)
Principal payments under Vendor Financing                            (16)            --           --
Proceeds from short-term borrowings                               10,000             --       70,000
Payments on short-term borrowings                                (10,000)            --      (70,000)
Repayment of Bank Financing                                     (100,000)            --           --
Proceeds from New Bank Financing and Bank Financing               34,000         71,000      127,000
Proceeds from debt issuance                                           --             --        1,700
Payments on long-term debt                                        (4,933)        (6,180)     (59,190)
Debt issuance costs                                              (14,735)        (1,471)     (10,803)
                                                                 --------        -------     --------

Net cash provided by financing activities                        223,235         88,993       84,198

Net increase (decrease)  in cash and cash equivalents                179            (76)      (6,682)
CASH AND CASH EQUIVALENTS, beginning of period                     2,106          2,182        8,864
                                                                  ------         ------       ------
CASH AND CASH EQUIVALENTS, end of period                          $2,285         $2,106       $2,182
                                                                 =======        =======       ======
</TABLE>


                                      F-55

<PAGE>



                      QUARTERLY FINANCIAL DATA (unaudited)

<TABLE>
<CAPTION>
                                                  (dollars in thousands, except for per share data)

                                                         1998-quarters                                     1997-quarters
                                        1st           2nd         3rd          4th         1st          2nd         3rd        4th
                                        ---           ---         ---          ---         ---          ---         ---        ---
<S>                                  <C>          <C>         <C>          <C>          <C>          <C>        <C>         <C>    
Revenues                             $10,022      $22,410     $21,802      $32,987      $8,685       $10,753    $10,795     $13,981
Operating expenses (1)                28,425       47,274      44,178       55,551      32,341        32,420     30,617      46,231
                                     -------      -------     -------      -------     -------       ------     -------      ------
Loss from operations                 (18,403)     (24,864)    (22,376)     (22,564)    (23,656)      (21,667)   (19,822)    (32,250)
Interest and other income (expense)   (6,839)     (14,099)    (13,922)     (14,881)     (3,425)       (5,175)    (6,442)     (6,770)
                                      -------     --------    --------     --------     -------      -------     -------     -------
Net Loss                             (25,242)     (38,963)    (36,298)     (37,445)    (27,081)      (26,842)   (26,264)    (39,020)
Net loss per common share (2)         $(1.00)      $(1.23)     $(1.14)      $(1.16)     $(1.08)       $(1.07)    $(1.04)     $(1.55)

Weighted-average common shares
outstanding during the period
(000s)                                25,241       31,719      31,773       32,154      25,109        25,120     25,145      25,151
Market price per share (3)
          High                        $16.13       $14.31      $10.69        $6.25      $14.75        $12.13     $10.88      $10.75
          Low                          $6.75        $9.25       $4.50        $3.50       $9.37         $8.50      $6.23       $6.28

</TABLE>


(1)      Operating  expenses include charges of  approximately  $12.0 million in
         the  fourth  quarter  of  1997  related  to  the  realizability  of the
         Company's inventory investment.

(2)      Loss per share  calculations  for each of the quarters are based on the
         weighted average number of shares  outstanding for each of the periods,
         and the sum of the  quarters may not  necessarily  be equal to the full
         year loss per share amount.

(3)      The  Company's  Common  Stock is listed  under the  symbol  SKYC on the
         Nasdaq National  Market System.  The quarterly high and low sales price
         represents the closing price in the Nasdaq National Market System.  The
         quotations represent inter-dealer  quotations,  without retail markups,
         markdowns or  commissions,  and may not  necessarily  represent  actual
         transactions.  As of February 26, 1999,  there were 275 stockholders of
         record of the Company's Common Stock.

                                      F-56

<PAGE>



Selected Financial Data
-----------------------

Set forth  below is the  selected  financial  data for the  Company for the five
fiscal years ended December 31, 1998:


<TABLE>
<CAPTION>
(dollars in thousands, except for per share data)
                                                         1998          1997             1996          1995           1994
                                                         ------        ------           ------        ------         ----
<S>                                                   <C>           <C>              <C>            <C>            <C>   
Revenues                                                $87,221       $44,214          $27,730        $8,797         $5,240
Net Loss                                               (137,948)     (119,207)        (134,638)      (66,917)       (21,103)
Basic and diluted Loss per Common Share                  $(4.52)       $(4.74)          $(5.38)       $(2.69)        $(0.86)
Dividends on Common Stock (1)                              None          None             None          None           None
Consolidated Balance Sheet Data:
Cash and Cash Equivalents                                $2,285        $2,106           $2,182        $8,865       $137,287
Property Under Construction                                  --            --               --            --        263,505
Total Assets                                            489,794       311,447          350,173       398,351        448,674
Current Liabilities                                      44,971        59,433           57,669       104,772         37,251
Long-Term Obligations                                   469,228       205,883          133,804         6,052         59,879
Stockholders' (Deficit)  Equity                         (24,405)       46,131          158,700       287,527        351,544
</TABLE>


(1)      The Company has paid no dividends  on its Common Stock since  inception
         and  does  not  plan  to pay  dividends  on  its  Common  Stock  in the
         foreseeable future. In addition, the payment of dividends is subject to
         restrictions  described  in  Note 8 to  the  financial  statements  and
         discussed in Management's Discussion and Analysis.

                                      F-57

<PAGE>




                 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
                          (A Development Stage Company)

                        Consolidated Financial Statements

                 December 31, 1998 and 1997, and for the period
               from December 15, 1992 (date of inception) through
                                December 31, 1998

                   (With Independent Auditors' Report Thereon)







<PAGE>

                                                                            Page

Independent Auditors' Report                                                   1

Consolidated Balance Sheets                                                    2

Consolidated Statements of Operations                                          3

Consolidated Statements of Stockholders' Equity (Deficit)                      4

Consolidated Statements of Cash Flows                                          5

Notes to Consolidated Financial Statements                                  6-18





















                                   (Continued)



<PAGE>






                          Independent Auditors' Report

To the Board of Directors and Stockholders
XM Satellite Radio Holdings Inc. and Subsidiary:

We have audited the  accompanying  consolidated  balance  sheets of XM Satellite
Radio Holdings Inc. and subsidiary (a development  stage company) as of December
31,  1998 and 1997,  and the  related  consolidated  statements  of  operations,
stockholders' equity (deficit),  and cash flows for the years ended December 31,
1998 and 1997,  and the period from  December  15, 1992 (date of  inception)  to
December  31,   1998.   These   consolidated   financial   statements   are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial position of XM Satellite Radio
Holdings Inc. and  subsidiary (a  development  stage company) as of December 31,
1998 and 1997, and the results of their  operations and their cash flows for the
years then ended and for the period from  December 15, 1992 (date of  inception)
to  December  31,  1998,  in  conformity  with  generally  accepted   accounting
principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will  continue as a going  concern.  As discussed in note 11 to
the consolidated financial statements, the Company has not commenced operations,
has negative working capital of  $130,341,000,  and is dependent upon additional
debt and equity financings,  which raises substantial doubt about its ability to
continue as a going  concern.  Management's  plan in regard to these  matters is
also described in note 11. The consolidated  financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

McLean, Virginia                                       /s/KPMG LLP
February 12, 1999


<PAGE>




                 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
                          (A Development Stage Company)
                           Consolidated Balance Sheets
                           December 31, 1998 and 1997
                      (in thousands except for share data)
<TABLE>
<CAPTION>


                                                                                    1998              1997
                                                                                  --------          --------
                                       Assets
                                       ------
<S>                                                                               <C>               <C>     
Current assets:             
   Cash and cash equivalents                                                      $     310                 1
   Prepaid and other current assets                                                     172                --
                                                                                  ---------          --------
   

          Total current assets                                                          482                 1

Other assets:
   System under construction                                                        169,029            91,932
   Property and equipment, net of accumulated depreciation                              
    and amortization of $57 and $0                                                      449                --
   Other assets                                                                         525                --
                                                                                  ---------         ---------
          Total assets                                                            $ 170,485            91,933
                                                                                  =========         =========
                   Liabilities and Stockholders' Equity (Deficit)
                   ----------------------------------------------
Current Liabilities:
   Accounts payable                                                               $  23,125                --
   Due to related parties                                                            13,767               445
   Accrued interest on loans payable                                                  1,907             1,886
   Loans payable due to related parties                                              91,546            80,618
   Term loan                                                                             34                --
   Accrued expenses                                                                     444                --
                                                                                  ---------         ---------
          Total current liabilities                                                 130,823            82,949

   Term loan, net of current portion                                                     53                --
   Convertible notes payable due to related party                                    45,583                --
   Accrued interest on convertible notes payable due to related party                 1,209                --
                                                                                  ---------         ---------
          Total liabilities                                                         177,668            82,949
                                                                                  ---------         ---------
Common stock - $0.10 par value; authorized 3,000 shares;
   125 shares issued and outstanding at December 31, 1998 and 1997                       --                --
Additional paid-in capital                                                           10,643            10,643
Deficit accumulated during development stage                                        (17,826)           (1,659)
                                                                                    --------           -------
          Total stockholders' equity (deficit)                                       (7,183)            8,984
                                                                                     -------            -----
Commitments and contingencies (notes 4, 7, 8, 11, 12, and 13)
                                                                                  $ 170,485            91,933
                                                                                  ==========        ==========
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

                 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
                          (A Development Stage Company)
                      Consolidated Statements of Operations
               Years ended December 31, 1998 and 1997, and for the
                period from December 15, 1992 (date of inception)
                              to December 31, 1998
                      (in thousands except for share data)


<TABLE>
<CAPTION>

                                                                                                        December 15, 1992
                                                                                                       (date of inception)
                                                                                                         to December 31,
                                                                           1998           1997                1998
                                                                         --------       --------            --------
<S>                                                                     <C>            <C>                 <C>        
Revenue                                                                 $        --             --                  --
                                                                        ------------   ------------        ------------
Operating expenses:
         Research and development                                             6,941              --              6,941
         Professional fees                                                    5,242           1,090              6,332
         General and administrative                                           4,010              20              4,030
                                                                        ------------   ------------        ------------
                     Total operating expenses                                16,193           1,110             17,303
                                                                        ------------   ------------        ------------
                     Operating loss                                          16,193           1,110             17,303
                                                                        ------------   ------------        ------------
Other expenses (income):
         Interest expense (income), net                                         (26)            549                523
                                                                        ------------   ------------        ------------
                     Total other (expense) income                               (26)            549                523
                                                                        ------------   ------------        ------------
                     Net loss                                           $    16,167           1,659             17,826
                                                                        ------------   ------------        ============
Net loss per share:
         Basic and diluted                                              $       129              14
                                                                        ============   =============
Weighted average shares used in computing
         net loss per share - basic and diluted                                 125             119
                                                                        ============   =============


</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

                 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
                          (A Development Stage Company)
            Consolidated Statements of Stockholders' Equity (Deficit)
               Years ended December 31, 1998 and 1997, and for the
                period from December 15, 1992 (date of inception)
                              to December 31, 1998
                      (in thousands except for share data)

<TABLE>
<CAPTION>

                                                                                                   Deficit
                                                                                                 accumulated            Total
                                                                                 Additional         during          stockholders'
                                                        Common stock              paid-in        development           equity
                                                        ------------
                                                       Shares   Amount             capital           stage             (deficit)
                                                       ------   ------           ----------      ------------       -------------
<S>                                                     <C>     <C>              <C>              <C>                <C>        
Issuance of common stock (December 15, 1992)             100    $   --                  --              --                  --
                                                        -----   ------           ----------       ---------          ----------
Balance at December 31, 1992                             100        --                  --              --                  --
Net Loss                                                  --        --                  --              --                  --
                                                        -----   ------           ----------       ---------          ----------
Balance at December 31, 1993                             100        --                  --              --                  --
Net Loss                                                  --        --                  --              --                  -- 
                                                        -----   ------           ----------       ---------          ----------
Balance at December 31, 1994                             100        --                  --              --                  --
Net Loss                                                  --        --                  --              --                  -- 
                                                        -----   ------           ----------       ---------          ----------
Balance at December 31, 1995                             100        --                  --              --                  --
Net Loss                                                  --        --                  --              --                  -- 
                                                        -----   ------           ----------       ---------          ----------
Balance at December 31, 1996                             100        --                  --              --                  --
Contributions to paid-in capital                          --        --                 143              --                 143
Issuance of common stock and capital contributions        25        --               9,000              --               9,000
Issuance of options                                       --        --               1,500              --               1,500
Net Loss                                                  --        --                  --          (1,659)             (1,659)
                                                        -----   ------           ----------       ---------          ----------
Balance at December 31, 1997                             125        --              10,643          (1,659)              8,984
Net Loss                                                  --        --                  --         (16,167)            (16,167)
                                                        -----   ------           ----------       ---------          ----------
Balance at December 31, 1998                             125    $   --              10,643         (17,826)             (7,183)
                                                        =====   ======           ==========       =========            ========


</TABLE>


<PAGE>

                 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
                          (A Development Stage Company)
                      Consolidated Statements of Cash Flows
               Years ended December 31, 1998 and 1997, and for the
                period from December 15, 1992 (date of inception)
                              to December 31, 1998
                                 (in thousands)


<TABLE>
<CAPTION>

                                                                                                               December 15, 1992
                                                                                                              (date of inception)
                                                                                                                to December 31,
                                                                                  1998            1997               1998
                                                                                --------        --------           --------
Cash flows from operating activities:
<S>                                                                             <C>             <C>               <C>     
       Net loss                                                                 ($16,167)         (1,659)           (17,826)
       Adjustments to reconcile net loss to net cash used in
           operating activities:
              Depreciation                                                            57              --                 57
              Note discount amortization                                              --              33                 33
              Changes in operating liabilities:
                    Increase in prepaid and other current assets                    (212)             --               (212)
                    Increase in accounts payable and accrued expense                1,701              --              1,701
                    Increase in amounts due to related parties                     13,322             445             13,767
                    Increase (decrease) in accrued interest                            (2)            517                515
                                                                                ---------       ---------         ----------
                         Net cash provided by (used in) operating activities      (1,301)           (664)            (1,965)
                                                                                ---------       ---------         ----------
Cash flows from investing activities:
       Purchase of property and equipment                                           (506)              --              (506)
       Additions to system under construction                                    (43,406)         (90,031)         (133,437)
                                                                                ---------        ---------        ----------
                         Net cash used in investing activities                   (43,912)         (90,031)         (133,943)
                                                                                ---------        ---------        ----------
Cash flows from financing activities:
       Proceeds from sale of common stock and capital contribution                    --            9,143             9,143
       Proceeds from issuance of loan payable to related party                       337           80,053            80,390
       Proceeds from issuance of options                                              --            1,500             1,500
       Proceeds from issuance of convertible notes to related party               45,583               --            45,583
       Payment to establish collateral for term loan                                 (92)              --               (92)
       Proceeds from term loan                                                        92               --                92
       Repayments of term loan                                                        (5)              --                (5)
       Payments for deferred financing costs                                        (393)              --              (393)
                                                                                ---------         --------          --------

                      Net cash provided by financing activities                   45,522           90,696           136,218
                                                                                ---------         --------          --------
                      Net increase in cash and cash equivalents                      309                1               310

Cash and cash equivalents at beginning of year                                         1               --                --
                                                                                ---------         --------          --------
Cash and cash equivalents at end of year                                        $    310                1               310
                                                                                =========         ========          ========
Supplemental cash flow disclosure:
       Interest capitalized                                                     $ 11,824            1,901            13,725
                                                                                =========         ========          ========
       Interest converted into principal note balance                           $  9,157              501             9,658
                                                                                =========         ========          ========
       Accrued system milestone payments                                        $ 21,867               --            21,867
                                                                                =========         ========          ========



</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>


(1)      Summary of Significant Accounting Policies and Practices

         (a)   Nature of Business

               XM Satellite Radio Inc.  (XMSR),  formerly  American Mobile Radio
               Corporation,  was  incorporated on December 15, 1992 in the State
               of  Delaware as a wholly  owned  subsidiary  of  American  Mobile
               Satellite  Corporation  (AMSC)  for the  purpose of  procuring  a
               digital audio radio service license (DARS). Business activity for
               the period  December  15,  1992  through  December  31,  1996 was
               insignificant.

               XM Satellite  Radio  Holdings Inc. (the  Company),  formerly AMRC
               Holdings Inc., was  incorporated  in the State of Delaware on May
               16, 1997 for the purpose of constructing, launching and operating
               a domestic  communications  satellite system for the provision of
               DARS.  Pursuant to various financing  agreements  entered in 1997
               between AMSC, XMSR and WorldSpace,  Inc. (WSI), WSI acquired a 20
               percent  interest in XMSR.  In May 1997,  AMSC and WSI  exchanged
               their  respective  interests  in XMSR  for  all of the  Company's
               common stock.

         (b)   Principles of Consolidation and Basis of Presentation

               The consolidated  financial statements include the accounts of XM
               Satellite  Radio Holdings Inc. and its  subsidiary,  XM Satellite
               Radio  Inc.  All  significant   inter-company   transactions  and
               accounts  have been  eliminated.  The  Company's  management  has
               devoted  substantially  all  of its  time  to  the  planning  and
               organization  of the  Company  and to the  process of  addressing
               regulatory matters, initiating research and development programs,
               conducting  market  research,   initiating  construction  of  the
               satellite  system,  securing  content  providers,   and  securing
               adequate debt and equity capital for  anticipated  operations and
               growth.  Accordingly,  the  Company's  financial  statements  are
               presented  as  those  of  a  development  stage  enterprise,   as
               prescribed by Statement of Financial  Accounting Standards No. 7,
               Accounting and Reporting by Development Stage Enterprises.

         (c)   Cash and Cash Equivalents

               The Company considers short-term,  highly liquid investments with
               an  original  maturity  of  three  months  or  less  to  be  cash
               equivalents.

         (d)   Property and Equipment

               Property  and  equipment  are  carried  at cost less  accumulated
               depreciation and  amortization.  Depreciation and amortization is
               calculated  using the  straight-line  method  over the  following
               estimated useful lives:

               Furniture, fixtures and computer equipment               3 years
               Machinery and equipment                                  7 years
               Leasehold improvements                      Remaining lease term


          (e)  System Under Construction

               The Company is currently  developing its satellite system.  Costs
               related to the project are being  capitalized  to the extent that
               they have future  benefits.  As of December 31, 1998, all amounts
               recorded as system under construction relate to costs incurred in
               obtaining a Federal Communications Commission ("FCC") license and
               approval as well as the system development.


<PAGE>




               On October 16, 1997, the FCC granted XMSR a license to launch and
               operate two geostationary satellites for the purpose of providing
               digital audio radio in the United States in the 2332.5 - 2345 Mhz
               (space-to-earth)  frequency  band,  subject to achieving  certain
               technical milestones and international  regulatory  requirements.
               The license is valid for eight years upon  successful  launch and
               orbital  insertion  of  the  satellites.  The  Company's  license
               requires that it comply with a construction  and launch  schedule
               specified by the FCC for each of the two  authorized  satellites.
               The FCC has the  authority  to revoke the  authorizations  and in
               connection with such  revocation  could exercise its authority to
               rescind the  Company's  license.  The Company  believes  that the
               exercise of such authority to rescind the license is unlikely.

               The license  asset value  consists of the total  payments made to
               the FCC for the  license  of  $90,031,000.  Associated  with this
               license is capitalized  interest of $10,991,000 and $1,901,000 as
               of December 31, 1998 and 1997,  respectively.  Costs incurred for
               system  development were $65,273,000.  Associated with the system
               development  costs  is  capitalized  interest  of  $2,734,000  at
               December 31, 1998.

               The Company  adopted the  provisions  of  Statement  of Financial
               Accounting   Standards   (SFAS)  No.  121,   Accounting  for  the
               Impairment of Long-Lived  Assets and for Long-Lived  Assets to be
               Disposed of (SFAS No. 121), during fiscal year 1997. SFAS No. 121
               requires  that   long-lived   assets  and  certain   identifiable
               intangibles be reviewed for impairment whenever events or changes
               in  circumstances  indicate that the carrying  amount of an asset
               may not be recoverable.  Recoverability  of assets to be held and
               used is measured by a  comparison  of the  carrying  amount of an
               asset to future net cash flows  expected to be  generated  by the
               asset.  If  such  assets  are  considered  to  be  impaired,  the
               impairment  to be  recognized  is measured by the amount by which
               the  carrying  amount of the assets  exceed the fair value of the
               assets. Assets to be disposed of are reported at the lower of the
               carrying  amount of fair value less  costs to sell.  Adoption  of
               this SFAS No. 121 did not have a material impact on the Company's
               financial  position,  results of operations,  or liquidity during
               1998 or 1997.

         (f)   Stock-Based Compensation

               During fiscal year 1997, the Financial Accounting Standards Board
               issued  SFAS No. 123,  Accounting  for  Stock-based  Compensation
               (SFAS No.  123),  which  encourages,  but does not  require,  the
               recognition of stock-based  employee  compensation at fair value.
               SFAS No.  123 also  allows  entities  to  continue  to apply  the
               provisions of APB Opinion No. 25,  Accounting for Stock Issued to
               Employees, and related interpretations,  and to provide pro forma
               net  income  and pro forma  earnings  per share  disclosures  for
               employee stock option grants made during the year of adoption and
               in future years as if the fair-value-based method defined in SFAS
               No. 123 had been applied.  The Company has elected to continue to
               apply the  provisions  of APB  Opinion No. 25 and provide the pro
               forma  disclosure   provisions  of  SFAS  No.  123.  Accordingly,
               compensation cost for options to purchase common stock granted to
               employees is measured as the excess, if any, of the fair value of
               common stock at the date of the grant over the exercise  price an
               employee must pay to acquire the common stock.

               Warrants to purchase common stock granted to other than employees
               as consideration for goods or services rendered are recognized at
               fair market value.





<PAGE>

         (g)   Research and Development

               Research and development costs are expensed as incurred.

         (h)   Net Loss Per Share

               In December 1997, the Company  adopted the provisions of SFAS No.
               128, Earnings per Share, (SFAS 128). SFAS 128 supersedes APB. 15,
               Earnings   per  Share  and  its  related   interpretations,   and
               promulgates  new  accounting  standards for the  computation  and
               manner of presentation of the Company's loss per share.  SFAS 128
               requires  the  presentation  of basic and diluted loss per share.
               Basic  earnings per share is calculated by dividing net income by
               the  weighted-average  number of common shares outstanding during
               the  period.  The  computation  of  diluted  earnings  per  share
               includes all common  stock  options and warrants and other common
               stock, to the extent dilutive,  that potentially may be issued as
               a result of  conversion  privileges,  including  the  convertible
               notes  payable  due  to  related  party.   The  Company  has  not
               previously  reported  annual loss per share  data.  Due to losses
               incurred  during 1998 and 1997,  the impact of other  potentially
               dilutive  securities is anti-dilutive  and is not included in the
               diluted loss per share calculation.

         (i)   Income Taxes

               The  Company   accounts  for  income  taxes  in  accordance  with
               Statement of Financial  Accounting  Standards No. 109, Accounting
               for Income Taxes.  Deferred  income taxes are  recognized for the
               tax  consequences in future years of differences  between the tax
               bases of  assets  and  liabilities  and the  financial  reporting
               amounts at each year-end, based on enacted tax laws and statutory
               tax rates  applicable to the periods in which the differences are
               expected  to affect  taxable  income.  Valuation  allowances  are
               established  when necessary to reduce  deferred tax assets to the
               amount expected to be realized.  Income tax expense is the sum of
               tax  payable  for the period and the change  during the period in
               deferred tax assets and liabilities.

         (j)   Comprehensive Income

               In December  1998,  the Company  adopted SFAS No. 130,  Reporting
               Comprehensive  Income  (SFAS  130).  This  statement  establishes
               standards for reporting and displaying  comprehensive  income and
               its  components in the financial  statements.  This  statement is
               effective for all interim and annual  periods with the year ended
               December 31, 1998.  The Company has evaluated  the  provisions of
               SFAS 130 and has determined that there were no transactions  that
               have taken  place  during the years ended  December  31, 1998 and
               1997 that would be classified as other comprehensive income.

         (k)   Accounting Estimates

               The  preparation  of  the  Company's   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  at the date of the
               financial  statements and the reported amounts of expenses during
               the  reporting  period.  The  estimates  involve  judgments  with
               respect to, among other things,  various future factors which are
               difficult  to predict and are beyond the control of the  Company.
               Significant   estimates   include   valuation  of  the  Company's
               investment  in the DARS  license and the benefit for income taxes
               and related  valuation  allowances.  Accordingly,  actual amounts
               could differ from these estimates.





<PAGE>

         (l)   Reclassifications

               Certain  fiscal  year  1997  amounts  have been  reclassified  to
               conform  to the  fiscal  1998  consolidated  financial  statement
               presentation.


(2)       Related Party Transactions

          The  Company  had  related  party   transactions  with  the  following
          shareholders:

          (a)  AMSC

               In 1997, AMSC  contributed  $143,000 for the Company to establish
               the original  application for the FCC license. On March 28, 1997,
               the Company received  $1,500,000 as a capital  contribution  from
               AMSC. During 1998, AMSC incurred general and administrative costs
               and  professional   fees  for  the  Company  and  established  an
               inter-company balance of $458,000 (see note 3).

         (b)   WSI

               On March 28, 1997, the Company  received  $1,500,000 as a capital
               contribution from WSI. The Company issued WSI 25 shares of common
               stock for this consideration.

               On April 16, 1997,  the Company  received  $15,000,000  from WSI,
               which   represented   $6,000,000   as   an   additional   capital
               contribution  and $9,000,000 as a six-month bridge loan (see note
               4).

               On May 16,  1997,  the  Company  obtained  a  $1,000,000  working
               capital loan  facility  from WSI.  During 1997,  the Company drew
               down $663,000  against the facility  with the remaining  $337,000
               drawn in 1998 (see note 4).

               On October 16, 1997, the Company  received  $71,911,000 from WSI,
               which represented an additional $13,522,000 under the bridge loan
               and $58,389,000 under the additional amounts loan (see note 4).

               On April 1, 1998, the Company  entered into an agreement with WSI
               to issue  $54,536,000  in  convertible  notes.  During 1998,  the
               Company drew down $45,583,000 under the agreement (see note 4).

               In July 1998, the Company  acquired  furniture and equipment from
               WSI for $104,000 and has established a due to WSI for the balance
               (see note 3).



<PAGE>



               In addition  to  financing,  the Company has relied upon  certain
               related parties for legal and technical services.  Total expenses
               incurred in transactions  with related parties are as follows (in
               thousands):
<TABLE>
<CAPTION>
                                                  Year ended December 31, 1998
                                                  ----------------------------

                                                   WSI         AMSC       Total
                                                   ---         ----       -----

<S>                                               <C>        <C>        <C>  
               Research and development           $ 6,624       --        6,624
               Professional fees                    2,529      353        2,882
               General and administrative             903       60          963
                                                  -------      ---       ------
                                                  $10,056      413       10,469
                                                  =======    =====      ======= 

</TABLE>

<TABLE>
<CAPTION>

                                                  Year ended December 31, 1997
                                                  ----------------------------

                                                   WSI         AMSC       Total
                                                   ---         ----       -----
<S>                                               <C>        <C>        <C>  
               Professional fees                  $   960      130        1,090
               General and administrative              --       20           20
                                                  -------      ---       ------
                                                  $   960      150        1,110
                                                  =======    =====      ======= 

</TABLE>

               Additionally,  during 1998 the Company  incurred  $925,000 of WSI
               project  management  costs that were capitalized to the satellite
               system.


(3)      Due to Related Parties


         Due to related parties included the following amounts:

<TABLE>
<CAPTION>
                                                       December 31,
                                                       ------------
                                                      1998      1997
                                                   -------    ------
<S>                                                <C>        <C>      
          Advances from WSI                        $ 7,405        --
          Due to WSI                                 5,904       390
          Due to AMSC                                  458        55
                                                   -------    ------
                                                   $13,767       445
                                                   -------    ------
</TABLE>




               Advances  represent  funding  provided  by WSI  for 30  days.  If
               amounts  are not  repaid  within  this  time  period,  additional
               convertible notes will be issued.


(4)      Debt

         (a)   Loans Payable Due to Related Party

               In  March  1997,   XMSR  entered  into  a  series  of  agreements
               (Participation  Agreement)  with  AMSC  and  WSI  in  which  both
               companies provided various equity and debt funding commitments to
               XMSR for the  purpose  of  financing  the  activities  of XMSR in



<PAGE>


               connection with the  establishment  of a DARS satellite system in
               the  United  States.  On May 16,  1997  certain  portions  of the
               Participation   Agreement   were   subsequently   ratified   with
               substantially  the same  terms and  conditions  under the  Bridge
               Loan, Additional Amounts Loan and Working Capital Credit Facility
               (Loan Agreement).

               The Company has loans  payable with a face amount of  $91,546,000
               and  $82,053,000  with  a  carrying  amount  of  $91,546,000  and
               $80,618,000   at  December  31,  1998  and  1997,   respectively,
               outstanding with WSI as follows (in thousands):
<TABLE>
<CAPTION>
                                                          1998          1997
                                                          ----          ----

<S>                                                    <C>            <C>   
               Bridge loan                             $25,556        23,001
               Additional amounts loan                  64,875        58,389
               Working capital loan                      1,115           663
                                                         -----           ---
                                                        91,546        82,053
               Discount arising from 
               concurrent issuance of 
               options (note 7), net                        --        (1,435)
                                                            --        -------

                                                       $91,546        80,618
                                                       =======        ======
              
</TABLE>



                    Bridge Loan

                    The  Company  executed  the  bridge  loan  with  WSI  in two
                    tranches.  On April 16, 1997, the Company received  proceeds
                    of $8,479,000  for a loan with a face amount of  $9,000,000.
                    On October  16,  1997,  the  Company  received  proceeds  of
                    $12,771,000  for a loan with a face  amount of  $13,522,000.
                    The first  tranche was a  six-month  loan at LIBOR plus five
                    percent per annum, equaling 11.03 percent. The first tranche
                    was  rolled  over  with  the  establishment  of  the  second
                    tranche,  which  is a  six-month  loan at  LIBOR  plus  five
                    percent per annum,  equaling  9.94  percent at December  31,
                    1998 and due in April 1999.  The accrued  interest under the
                    bridge loan is compounded to the loan balance each April and
                    October.

                    Additional Amounts Loan

                    On October 16, 1997,  the Company  executed  the  additional
                    amounts loan with WSI and received  proceeds of  $58,219,000
                    for a loan with a face amount of $58,389,000. This loan is a
                    six-month  loan  at  LIBOR  plus  five  percent  per  annum,
                    equaling  9.94 percent at December 31, 1998 and due in April
                    1999. The accrued interest under the additional amounts loan
                    is compounded to the loan balance each April and October.

                    Working Capital Loan

                    On May 16, 1997,  the Company  executed the working  capital
                    loan with WSI whereby the Company would receive  proceeds of
                    $920,000  for a loan with a face amount of  $1,000,000.  The
                    Company  drew  down  $663,000  against  the  line of  credit
                    through  December 31, 1997. This loan is a six-month loan at
                    LIBOR plus five percent per annum,  with an interest rate of
                    10.19 percent at December 31, 1998 and due in May 1999.  The
                    accrued interest on the loan is compounded to the balance in
                    May and November.



<PAGE>



                    Restrictive Covenants

                    The financing agreements contain restrictive covenants which
                    include a  prohibition  of the Company or its  subsidiary to
                    merge  or  consolidate,  or  sell,  transfer,  or  otherwise
                    dispose of substantially  all of its assets.  The Company or
                    the  subsidiary  may not incur  additional  indebtedness  in
                    excess of $1,000,000  without prior written  consent of WSI.
                    Additionally,  the  financing  agreements  provide for other
                    restrictive covenants including a restriction on the payment
                    of dividends.

                    The Company has pledged  64.7511 percent of its share of the
                    issued and outstanding common stock of the subsidiary to WSI
                    as collateral for the financings.

         (b)   Convertible Notes Payable Due to Related Party

               Effective  April 1, 1998, the Company  entered into a convertible
               note   agreement   with  WSI  that  provides  for  a  maximum  of
               $54,536,000  through the issuance of convertible notes. The notes
               mature on September  30, 2006 and carry an interest rate of LIBOR
               plus five  percent  per  annum,  which was  10.15  percent  as of
               December 31,  1998.  Under the terms of the note  agreement,  WSI
               shall have the right to convert all or a portion of the aggregate
               principal  amount of the notes into  shares of common  stock at a
               conversion  price of $875,000 per share. As of December 31, 1998,
               $45,583,000  had been drawn  through the issuance of  convertible
               notes. Interest is payable upon maturity.

         (c)   Term Loan

               On November  1, 1998,  the Company  reached an  agreement  with a
               commercial  bank for a $92,000  installment  loan with a 36 month
               term at 7 percent interest per annum. The Company pledged $92,000
               as collateral  for the loan and placed this balance on deposit at
               the  commercial   bank.  At  December  31,  1998,  the  Company's
               outstanding balance was $87,000.


(5)       Fair Value of Financial Instruments

          The  carrying  amounts  of cash  and  cash  equivalents,  receivables,
          accounts  payable,  accrued  expenses,  and the term loan  approximate
          their fair market value because of the  relatively  short  duration of
          these instruments as of December 31, 1998 and 1997, in accordance with
          SFAS No. 107, Disclosures about Fair Value of Financial Instruments.

          The fair value of the loans and convertible notes due to related party
          could  not be  estimated  as such  amounts  are  due to the  Company's
          stockholders.


(6)  Common Stock

          (a) 1998 Shares Award Plan

              On June 1, 1998,  the Company  adopted the 1998 Shares  Award Plan
              (the Plan) under which  employees,  consultants,  and non-employee
              directors  may be  granted  options to  purchase  shares of common
              stock of the  Company.  The  Company has  authorized  25 shares of
              common  stock  under the Plan.  The  options  are  exercisable  in
              installments  determined  by  the  compensation  committee  of the
              Company's board of directors.  The options expire as determined by



<PAGE>


               the  committee,  but no  later  than ten  years  from the date of
               grant.  Transactions and other  information  relating to the Plan
               for the year ended December 31, 1998 are summarized below:
<TABLE>
<CAPTION>

                                                       Outstanding options
                                                       -------------------
                                                                 Weighted-
                                                  Number of       average
                                                   shares      exercise price  
                                                   ------      --------------  
     
<S>                                                <C>            <C>
               Balance, January 1, 1998                --                --
               
                   Options granted                 14.712         $ 875,000
                   Options canceled or expired         --                --
                   Options exercised                   --                --
                                                   ------         ---------
               Balance, December 31, 1998          14.712         $ 875,000
                                                   ======         =========
</TABLE>


               The following table  summarizes  information  about stock options
               outstanding at December 31, 1998:
<TABLE>
<CAPTION>

                                        Options outstanding                          Options exercisable
                                        -------------------                          -------------------
                                                  Weighted-
                                                   average        Weighted-                           Weighted-
                                  Number          remaining        average          Number             average
               Exercise       outstanding at     contractual       exercise     exercisable at        exercise 
                 price      December 31, 1998        life            price    December 31, 1998         price
               --------     -----------------    -----------      ----------  -----------------       ---------
<S>            <C>                <C>             <C>              <C>                     <C>         <C>     
               $875,000           14.712          9.5 years        $875,000                  --        $875,000
               ========           ======          =========        ========                ====        ========
</TABLE>


               There were no stock  options  exercisable  at December  31, 1998.
               There  were  10.288  shares  available  under the plan for future
               grants at December  31, 1998.  At December 31, 1998,  all options
               have been issued to employees.

               The per share  weighted-average  fair value of  employee  options
               granted  during the year ended  December 31, 1998 was $564,000 on
               the date of grant using the  Black-Sholes  Option  Pricing  Model
               with the following weighted-average assumptions:
<TABLE>
<CAPTION>

                                                            December 31, 1998
                                                            -----------------

<S>                                                         <C>
               Expected dividend yield                                     0%
               Volatility                                              56.23%
               Risk-free interest rate range                   4.53% to 5.67%
               Expected life                                        7.5 years
                                                            =================
</TABLE>


<PAGE>



               The Company applies APB Opinion No. 25 in accounting for its Plan
               and,  accordingly,  no compensation  cost has been recognized for
               its stock  options in the financial  statements.  Had the Company
               determined compensation cost based on the fair value at the grant
               date for its stock  options  under SFAS 123,  the  Company's  net
               income and  earnings per share would have been reduced to the pro
               forma amounts indicated below (in thousands):
<TABLE>
<CAPTION>

                                                                              Year ended
                                                                          December 31, 1998
                                                                              (dollars in
                                                                                thousands)

<S>            <C>                                                             <C> 
               Net loss:
                 As reported                                                   $16,167
                 Pro forma                                                      17,508
                 As reported -- net loss per share -- basic and diluted            129
                 Pro forma -- net loss per share -- basic and diluted              140
                                                                               =======     
</TABLE>

         (b)   Restrictive Covenants

               Certain  actions  require the unanimous  affirmative  vote of the
               board of directors of the Company. Such actions include the entry
               into, or the amendment, modification, extension or termination of
               any  agreements for amounts in excess of $40,000,000 or with AMSC
               or WSI;  the entry into any  agreements  outside of the  ordinary
               course  of  business;   merger  or  consolidation;   issuance  of
               additional  shares of  capital  stock;  and the  declaration  and
               payment  of  dividends.  If WSI holds more than 50 percent of the
               shares of common stock,  this  provision  requiring the unanimous
               affirmative  vote of the board of directors will be of no further
               force and effect. Additionally, an affirmative vote of 81 percent
               of all the issued and outstanding shares of common stock shall be
               required to approve any voluntary filing of a bankruptcy petition
               by the Company or its subsidiary.


(7)       WSI Options

          The Company issued WSI three options.  Under the first option, WSI may
          purchase  97.2222  shares of  common  stock at  $241,714  per share to
          acquire  common  stock.  The  option may be  exercised  in whole or in
          incremental amounts between April 16, 1998 and October 16, 2002. Under
          certain circumstances,  AMSC may require WSI to exercise the option in
          whole.  The Company  allocated  $1,250,000  to the  option.  Under the
          second option, WSI may purchase 128.8876 shares at $477,005 per share.
          The option may be exercised  between  October 16, 1997 and October 16,
          2003. The Company  allocated  $170,000 to the option.  Under the third
          option, WSI may purchase 3.5111 shares of common stock at $284,811 per
          share.  The option  may be  exercised  between  October  16,  1997 and
          October 17, 2002. The Company allocated $80,000 to the option.

          The exercise of these options is subject to prior  approval of the FCC
          to the extent that such exercise would constitute transfer of control.
          The allocation was based upon independent valuation.






<PAGE>

(8)       Employee Benefit Plan

          On July 1, 1998, the Company has adopted a profit sharing and employee
          savings plan under Section 401(k) of the Internal  Revenue Code.  This
          plan  allows  eligible  employees  to defer up to 15  percent of their
          compensation on a pre-tax basis through  contributions  to the savings
          plan.  The  company  contributed  $0.50 in 1998 for every  dollar  the
          employees contributed up to 6 percent of compensation,  which amounted
          to $14,000.


(9)       Interest Cost

          The Company  capitalizes  a portion of interest cost as a component of
          the cost of the FCC license and satellite  system under  construction.
          The following is a summary of interest cost incurred  during  December
          31, 1998 and 1997,  and for the period from December 15, 1992 (date of
          inception) to December 31, 1998 (in thousands): 
<TABLE>
<CAPTION>

                                                                                   December 15, 1992
                                                                                (date of inception) to
                                                              1998      1997       December 31, 1998
                                                              ----      ----       -----------------

<S>                                                         <C>        <C>               <C>   
          Interest cost capitalized                         $11,824    1,901             13,725
          Interest cost charged to expense                       --      549                549
                                                            -------    -----             ------
 
                    Total interest cost incurred            $11,824    2,450             14,274
                                                            =======   ======             ======  
</TABLE>

          Interest  costs  incurred  prior  to the  award  of the  license  were
          expensed in 1997.


(10)      Income Taxes

          For the period from  December 15, 1992 (date of inception) to December
          31, 1998, the Company filed consolidated federal and state tax returns
          with  its  majority   stockholder  AMSC.  The  Company  generated  net
          operating  losses  and other  deferred  tax  benefits  which  were not
          utilized  by  AMSC.  As no  formal  tax  sharing  agreement  has  been
          finalized,  the  Company  was not  compensated  for the net  operating
          losses.  Had the Company filed on a stand-alone  basis,  it would have
          had no tax  provision  as the  deferred  tax benefit of  approximately
          $7,164,000  and $650,000 for 1998 and 1997,  respectively,  would have
          been fully offset by a valuation allowance.


(11)      Accumulated Deficit

          The Company is devoting its efforts to develop, construct and expand a
          digital audio radio network. This effort involves substantial risk and
          future  operating  results  will be subject to  significant  business,
          economic,  regulatory,  technical,  and competitive  uncertainties and
          contingencies.  These factors  individually  or in the aggregate could
          have an adverse effect on the Company's financial condition and future
          operating  results  and  create  an  uncertainty  as to the  Company's
          ability to continue as a going  concern.  The financial  statements do
          not include any adjustments that might be necessary should the Company
          be unable to continue as a going concern.

          In order to commence  satellite-based radio broadcasting services, the
          Company will require  substantial  funds to develop and  construct the
          DARS  system,  develop  and launch  radio  communications  satellites,
          retire debt incurred in connection  with the  acquisition  of the DARS
          license and to sustain  operations  until it generates  positive  cash
          flow. At December 31, 1998, the Company has negative  working  capital
          of $130,341,000.



<PAGE>



          At the Company's current stage of development,  economic uncertainties
          exist regarding  successful  acquisition of additional debt and equity
          financing  and  ultimate   profitability  of  the  Company's  proposed
          service. The Company is currently constructing its satellites and will
          require  substantial   additional  financing  before  construction  is
          completed.  Failure to obtain the required  long-term  financing  will
          prevent  the  Company  from   realizing  its  objective  of  providing
          satellite-delivered  radio  programming.  Management's  plan  to  fund
          operations and capital expansion  includes the additional sale of debt
          and equity securities through public and private sources. There are no
          assurances, however, that such financing will be obtained.


(12)      Commitments and Contingencies

          (a)  FCC License

               The FCC has  established  certain system  development  milestones
               that must be met for the  Company  to  maintain  its  license  to
               operate the system.  The Company  believes  that it is proceeding
               into the system development as planned and in accordance with the
               FCC milestones.

         (b)   Application for Review of FCC License

               One  of the  losing  bidders  for  the  DARS  licenses  filed  an
               Application  for  Review by the full FCC of the  Licensing  Order
               which granted the Company its FCC license.  The  Application  for
               Review alleges that WorldSpace has  effectively  taken control of
               the Company  without FCC approval.  The FCC or the U.S.  Court of
               Appeals  has the  authority  to  overturn  the  award  of the FCC
               license should they rule in favor of the losing bidder.  Although
               the Company  believes  that the FCC license  will  withstand  the
               challenge,  no prediction of the outcome of this challenge can be
               made with any certainty.

         (c)   Satellite Purchase Contract

               On March 20,  1998,  as  amended  on June 5,  1998,  the  Company
               entered into an agreement for the construction of two satellites,
               two launch vehicles,  and related  equipment,  services and spare
               parts,  including launch services. The total commitment under the
               amended  agreement,  excluding  financing fees, is  approximately
               $438,013,000 as of December 31, 1998.  These amounts are due upon
               the  completion of certain  milestones.  The Company has incurred
               costs of  $64,348,000 as of December 31, 1998. One of the members
               of the board of  directors is an executive of an affiliate of the
               Contractor.

               Under the terms of this  agreement,  the Contractor  shall invest
               $15,000,000  in a  private  or  public  equity  offering  of  the
               Company, should it be consummated prior to March 20, 1999.

         (d)   Technical Services and Technology Licenses

               Effective  January 1, 1998, the Company entered into an agreement
               with  AMSC and  WorldSpace  Management  Corporation  ("WorldSpace
               MC"),  an  affiliate  of WSI,  in which  WorldSpace  MC  provides
               technical  support in areas related to the  development of a DARS
               system.  Payments for services  provided under this agreement are
               made based on  negotiated  hourly  rates.  This  agreement may be
               terminated   by  either  party  on  or  after  the  date  of  the
               commencement of commercial  operation following the launch of the
               Company's first satellite.  There is no minimum services purchase
               requirement.  The Company  incurred costs of $4,770,000 under the
               agreement during 1998.

               Effective  January  1,  1998,  XMSR  entered  into  a  technology
               licensing  agreement  with  AMSC  and  WorldSpace  MC by which as
               compensation  for  certain  licensed up to  technology  currently



<PAGE>


               under  development  to be used in the XM Radio system,  XMSR will
               pay up to $14,300,000 over a ten-year period.  In addition,  XMSR
               agreed to pay 1.2 percent of quarterly net revenues to WorldSpace
               MC and a royalty for equipment manufactured using the technology,
               if  it  were  to  use  the  source   encoding   and  decoding  of
               transmission  signals under  development.  No liability exists to
               AMSC  or   WorldSpace   MC   should   such   developments   prove
               unsuccessful.   XMSR  incurred  costs  of  $6,624,000  under  the
               agreement during 1998.

         (e)   FCC Occurrences

               On October 30, 1998,  AMSC and WSI submitted an  application  for
               Consent and Transfer  Control with the FCC.  These  entities have
               requested the FCC's consent to WSI's exercise of certain  options
               that would  increase  its  shareholding  interest in the Company.
               There have been challenges filed against the application.

         (f)   Leases

               The Company  has two  noncancelable  operating  leases for office
               space that expire over the next four  years.  The future  minimum
               lease payments under noncancelable leases as of December 31, 1998
               are (in thousands):

<TABLE>
<CAPTION>

                    Year ending December 31:
<S>                 <C>                                     <C>    
                    1999                                    $    42
                    2000                                         44
                    2001                                         46
                    2002                                         48
                    2003                                         --
                                                             ------
                                                            $   180
                                                             ======
</TABLE>

<PAGE>


               Rent expense for 1998 and 1997 was $231,000 and $0, respectively.


(13)      Subsequent Events

          On January 12,  1999,  a competitor  of the Company  commenced  action
          against  the  Company for patent  infringement  and for a  declaratory
          judgment of future patent infringement by the Company. There have been
          no damages  specified  in the action and the Company is in the process
          of  responding  to the  complaint.  Should it be  unsuccessful  in its
          defense,  the Company could be liable for monetary damages,  and could
          be forced  to  engineer  alternative  technologies  related  to signal
          reception or seek a license from, or pay royalties to, the competitor.
          The Company  intends to vigorously  defend against the suit;  however,
          the outcome is uncertain at this time.

          Effective  January 15, 1999, the Company issued a convertible  note to
          AMSC for  $21,419,000.  This note  matures on  September  30, 2006 and
          carries an interest  rate of LIBOR plus five percent per annum.  Under
          the terms of this note,  AMSC shall have the right to convert all or a
          portion of the aggregate  principal  amount of the note into shares of
          common stock at a conversion price of $875,000 per share.  Interest is
          payable upon maturity.


(14)      Quarterly Data (Unaudited) (in thousands)
<TABLE>
<CAPTION>
    
                                                                              1998
                                                            -------------------------------------
                                                              1st      2nd        3rd       4th
                                                            Quarter   Quarter   Quarter   Quarter
                                                            -------   -------   -------   -------
<S>                                                         <C>       <C>       <C>       <C>             
          Revenues                                          $    --        --        --        --
          Operating loss                                      3,100     5,032     3,849     4,204
          Loss before income taxes                            3,100     5,032     3,857     4,178      
          Net loss                                            3,100     5,032     3,857     4,178
                                                            =======   =======   =======   =======
          Net loss per share -- basic and diluted                25        40        31        33
                                                            =======   =======   =======   =======
</TABLE>

<TABLE>
<CAPTION>

                                                                              1997
                                                            -------------------------------------
                                                              1st      2nd        3rd       4th
                                                            Quarter   Quarter   Quarter   Quarter
                                                            -------   -------   -------   -------
<S>                                                         <C>       <C>       <C>       <C>             
          Revenues                                          $    --        --        --        --
          Operating loss                                         --        51       185       874
          Loss before income taxes                               --       270       459       930      
          Net loss                                               --       270       459       930      
                                                            =======   =======   =======   =======
          Net loss per share -- basic and diluted                --         2         4         7
                                                            =======   =======   =======   =======

</TABLE>



The sum of quarterly per share net losses for 1997 do not  necessarily  agree to
the net loss per share for the year due to the timing of stock issuances.




<PAGE>




                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS





To American Mobile Satellite Corporation

We have audited in accordance with generally  accepted auditing  standards,  the
consolidated  financial statements of American Mobile Satellite  Corporation and
Subsidiaries (a Delaware corporation) included in this Form 10-K and have issued
our report thereon dated March 29, 1999. Our audits were made for the purpose of
forming an  opinion  on the basic  financial  statements  taken as a whole.  The
Schedule I -- American  Mobile  Satellite  Corporation  --  Condensed  Financial
Information of Registrant, 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.  The
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.




/s/ Arthur Andersen LLP
Washington, D.C.,
March 29, 1999


<PAGE>



                                   SCHEDULE I

                      AMERICAN MOBILE SATELLITE CORPORATION

                  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                              (Parent Company Only)
                            Condensed Balance Sheets

<TABLE>
<CAPTION>

(in thousands)                                            December 31,
                                                    1998               1997

ASSETS
<S>                                              <C>              <C>
Current portion of prepaid interest                $6,019               $--
Long term portion of prepaid interest               7,942                --
Restricted long-term investments                   10,760                --
Investment in subsidiaries                         50,953            46,168
                                                 --------          --------
Total assets                                      $75,674         $  46,168
                                                 ========         =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Accounts payable and accrued expenses                 $79               $37
Term Loan payable                                 100,000                --
                                                 --------          --------
  Total Liabilities                               100,079               $37
Stockholders' (Deficit) Equity:
  Preferred Stock                                      --                --
  Common Stock                                        322               252
  Additional paid-in capital                      508,084           451,892
  Common stock purchase warrants                   59,108            36,338
  Deferred compensation                            (1,528)               --
  Unamortized stock purchase warrants             (33,678)          (23,586)
  Accumulated loss                               (556,713)         (418,765)
                                                 ---------         ---------
Total Stockholders' (Deficit) Equity              (24,405)           46,131
Total Liabilities and Stockholders'
  (Deficit)Equity                                $ 75,674         $  46,168
                                                 ========         =========

</TABLE>


<PAGE>



                                   SCHEDULE I

                      AMERICAN MOBILE SATELLITE CORPORATION

                  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                              (Parent Company Only)
                       Condensed Statements of Operations

<TABLE>
<CAPTION>

                                                         For the Years Ended December 31,
(in thousands)                                       1998            1997               1996
                                                     ----            ----               ----
<S>                                             <C>             <C>                <C>   
Management fees from wholly-owned subsidiary       $1,200          $1,200             $1,200
Operating Expenses
    Sales and marketing                               120              36                 --
    General and administrative                      1,067           1,129              2,452
                                                   ------          ------              -----
    Total operating expenses                        1,187           1,165              2,452
    ------------------------                        -----           -----              -----
Income (loss) from operations                          13              35             (1,252)
Interest income                                     8,472          31,625             31,591
Interest expenses                                  (8,298)             --                 --
Equity loss in XM Radio                              (342)         (1,301)                --
                                                    -----         -------            -------
Loss before net loss of Acquisition Company          (155)         30,359             30,339
     Net loss of Acquisition Company - Note A    (137,793)       (149,566)          (164,977)
                                                 ---------       ---------          ---------
Net Loss                                        $(137,948)      $(119,207)         $(134,638)
                                                ==========      ==========         ==========

</TABLE>


<PAGE>



                                   SCHEDULE I

                      AMERICAN MOBILE SATELLITE CORPORATION
                  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                              (Parent Company Only)
                       Condensed Statements of Cash Flows

<TABLE>
<CAPTION>

                                                          For the Years Ended December 31,
(in thousands)                                        1998             1997               1996
                                                      ----             ----               ----
<S>                                               <C>              <C>               <C>      
Cash Provided from Operating Activities           $  5,054         $ 29,579          $  28,234
Investing Activities
   Purchase of restricted securities               (28,152)              --                 --
   Advances to and investment in subsidiaries      (85,805)         (29,863)           (29,482)
                                                   --------            -----            -------
Cash (used in) investing activities               (113,957)         (29,863)           (29,482)
Financing Activities
   Proceeds from the issuance of Warrants            8,490               --                 --
   Proceeds from Term Facility                     100,000               --                 --
   Proceeds from sale of Common Stock                  413              284              1,248
                                                   --------        ---------           --------
Cash Provided by Financing Activities              108,903              284              1,248
                                                   --------        ---------           --------
(Decrease) increase for the period                      --               --                 --
Beginning of period                                     --               --                 --
                                                   --------        ---------           --------
End of period                                     $     --         $     --          $      --
                                                  =========        =========         ==========


</TABLE>


<PAGE>


            
                                                                      SCHEDULE I

                      AMERICAN MOBILE SATELLITE CORPORATION

                  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                              (Parent Company Only)

                     Notes to Condensed Financial Statements

Note A -- Background and Basis of Presentation

American Mobile Satellite Corporation (with its subsidiaries,  "American Mobile"
or the  "Company")  was  incorporated  on May 3,  1988.  The FCC has  authorized
American Mobile to construct,  launch,  and operate a mobile satellite  services
system (the  "Satellite  Network ") to provide a full range of mobile  voice and
data  services via satellite to land,  air and sea-based  customers in a service
area consisting of the continental United States,  Alaska,  Hawaii, Puerto Rico,
the U.S. Virgin Islands, U.S. coastal waters,  international waters and airspace
and any  foreign  territory  where  the  local  government  has  authorized  the
provision of service.  On April 7, 1995, the Company  successfully  launched its
first satellite ("MSAT-2"), from Cape Canaveral, Florida.

In late  1996,  the  Company  expanded  its mobile  data  business  through  the
acquisition  of  Rockwell  International  Corporation's  ("Rockwell")  dual mode
mobile  messaging and global  positioning and monitoring  service for commercial
trucking  fleets.  Rockwell was a private network  customer of the Company which
had purchased capacity from the Company on MSAT-2.

On  March  31,  1998  the  Company  (through  its   newly-formed,   wholly-owned
subsidiary,  AMSC Acquisition Company,  Inc.  ("Acquisition  Company")) acquired
ARDIS Company  ("ARDIS"),  a wholly-owned  subsidiary of Motorola Inc. that owns
and operates a two-way  wireless  data  communications  network,  for a purchase
price of  approximately  $50  million in cash and $50  million in the  Company's
Common Stock (the "Purchase  Price").  The Company,  through the  acquisition of
ARDIS,  becomes a  nationwide  provider  of  wireless  communications  services,
including data, dispatch, and voice services, primarily to business customers in
the United States.

On October 16, 1997, XM Satellite  Radio Inc.,  formerly  American  Mobile Radio
Corporation, an indirect subsidiary of American Mobile through its subsidiary XM
Satellite Radio Holdings Inc., formerly AMRC Holdings,  Inc.,  (together with XM
Satellite  Radio Inc., "XM Radio"),  was awarded a license by the FCC to provide
satellite-based  Digital  Audio Radio  Service  ("DARS")  throughout  the United
States,  following its successful $89.9 million bid at auction on April 2, 1997.
XM Radio  has and will  continue  to  receive  funding  for this  business  from
independent  sources  in  exchange  for debt and equity  interests  in XM Radio.
Accordingly,  it is not expected that the development of this business will have
a material impact on the Company's financial position, results of operations, or
cash flows.


                                      S-1

<PAGE>


In the parent Company-only  financial  statements,  the Company's  investment in
subsidiaries  is  stated at cost less  losses of  subsidiaries.  The net loss of
subsidiaries is included in these financial  statements using the equity method.
Certain amounts have been reclassified from prior years to reflect the push down
of interest expense related to the Revolving Credit Facility (see below) held by
its  subsidiaries.  The Company has entered into various  transactions  with its
subsidiaries  which have not been  eliminated  in the  December 31, 1998 audited
consolidated financial statements and are summarized as follows:

<TABLE>
<CAPTION>
                                                         1998        1997          1996
                                                         ----        ----          ----
<S>                                                   <C>         <C>          <C>     
Investment in and amounts due from subsidiaries       $50,953     $46,167      $158,713
Management fees                                         1,200       1,200         1,200
Interest income                                         7,188      31,625        31,591
Interest expense allocated to subsidiaries              3,804       6,005         1,900
</TABLE>

Note B -- Investment in Subsidiaries

As stated in Note A, the Company  records its investment in  subsidiaries on the
equity  method.  In connection  with the  Acquisition,  the Company formed a new
wholly-owned subsidiary ("Acquisition Company") to hold the stock of all current
wholly-owned   operating   subsidiaries.   The   Acquisition   Company  has  six
wholly-owned subsidiaries. Additionally, the Company has an equity investment in
XM  Radio.  The  recoverability  of such  investment  is  subject  to the  risks
associated  with  expanding  a  developing  business,   including   successfully
integrating  ARDIS.  Specifically,  future operating  results will be subject to
significant  business,   economic,   regulatory,   technical,   and  competitive
uncertainties  and  contingencies.  Depending on their extent and timing,  these
factors,  individually or in the aggregate,  could have an adverse effect on the
Subsidiaries' financial condition and future results of operations.

Adequate  liquidity  and capital  are  critical to the ability of the Company to
continue  as a  going  concern  and  to  fund  subscriber  acquisition  programs
necessary to achieve positive cash flow and profitable  operations.  The Company
expects to  continue to make  significant  capital  outlays for the  foreseeable
future to fund interest expense,  capital expenditures and working capital prior
to the time that it begins to generate  positive cash flow from  operations  and
for the foreseeable future thereafter.

In connection with the Acquisition,  and to meet its ongoing cash  requirements,
the Acquisition Company issued $335 million of Units (the "Units") consisting of
12 1/4 % Senior  Notes due 2008  (the  "Notes"),  and one  warrant  to  purchase
3.75749 shares of Common Stock of the Company for each $1,000  principal  amount
of Notes.  The Company also  restructured  its existing Bank Financing (the "New
Bank  Financing").  The New Bank  Financing of $200  million  consists of a $100
million unsecured  five-year  reducing  Revolving Credit Facility maturing March
31,  2003 and a $100  million  five-year  Term  Loan  Facility  with up to three
additional  one-year  extensions  subject  to  lender  approval.   Additionally,
Motorola  has agreed to provide  the  Company  with up to $10  million of vendor
financing (the "Vendor Financing Commitment"),  which is available to finance up
to 75% of the purchase price of additional  base stations  needed to meet ARDIS'
buildout requirements under certain customer contracts.

                                      S-2

<PAGE>



The Company's  current  operating  assumptions  and  projections,  which reflect
management's  best  estimate  of  subscriber  and revenue  growth and  operating
expenses,  indicate that anticipated  capital  expenditures,  operating  losses,
working capital and debt service  requirements  through 1999, and beyond, can be
met by cash flows from  operations,  the net proceeds  from the sale of the $335
million  in Notes and  Warrants,  together  with the  borrowings  under the $200
million New Bank Financing,  the Vendor Financing  Commitment and deferred terms
on  certain  trade  payables;   however,  the  Company's  ability  to  meet  its
projections is subject to numerous  uncertainties  and there can be no assurance
that the Company's  current  projections  regarding the timing of its ability to
achieve positive operating cash flow will be accurate, and if the Company's cash
requirements  are more  than  projected,  the  Company  may  require  additional
financing  in  amounts  which may be  material.  The type,  timing  and terms of
financing  selected by the Company will be  dependent  upon the  Company's  cash
needs, the availability of other financing sources and the prevailing conditions
in the financial  markets.  There can be no assurance that any such sources will
be available to the Company at any given time or available on favorable terms.

On  December  4, 1997,  the  Company  entered  into an  agreement  with  African
Continental  Telecommunications Ltd. ("ACTEL") to lease the Company's satellite,
"MSAT-2" (the  "Satellite  Lease  Agreement")  for deployment  over  sub-Saharan
Africa.  Simultaneously,  the Company agreed with TMI Communications and Company
Limited  Partnership  ("TMI") to acquire a one-half  ownership interest in TMI's
satellite, "MSAT-1" (the "Satellite Purchase Agreement"). On March 24,  1999, as
ACTEL had not obtained the requisite  financing,  the Company and TMI terminated
the agreements.  Following the termination of the ACTEL-related agreements,  the
Company  and TMI will each  maintain  operations  on their two  satellites,  and
continue  to provide  each other  emergency  back-up  and  restoral  services in
accordance with long-standing  arrangements.  See Item I. "Business -- Satellite
Lease  and  Purchase  Agreement",   "-Satellite  Back-up  and  Technology,"  and
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations - Liquidity and Capital Resources."

Note C -- Guarantee

The Company has guaranteed  various  obligations of Acquisition  Company.  These
guaranteed  obligations  include amounts  borrowed under the New Bank Financing,
ground segment financing  agreements and obligations of Acquisition  Company and
its  subsidiaries  under certain vendor  financing  agreements,  an office lease
agreement and various capital equipment leases.


Note D -- Legal Matters

In 1992, a former director of American Mobile filed an Amended Complaint against
the Company alleging  violations of the  Communications Act of 1934, as amended,
and of the  Sherman  Act and  breach  of  contract.  The suit was  dismissed  on
November 10, 1998,  prior to the  commencement of trial pursuant to an agreement
to settle the suit by payment by the Company of $250,000.

Note E - Subsequent Events

On January 15, 1999, the Company entered into an agreement with Baron Asset Fund
("Baron")  for the placement of a $21.5  million note payable  convertible  into


                                      S-3

<PAGE>


shares of XM Radio common  stock (the "Baron XM Radio  Convertible  Note").  The
Company  subsequently loaned approximately $21.4 million to XM Radio in exchange
for XM Radio common stock and for a note  convertible  into XM Radio shares (the
"XM  Radio  Note  Receivable").  The  Baron  XM  Radio  Convertible  Note  ranks
subordinate to any other  securities of the Company and is fully  collateralized
by  approximately  one-half of the shares received by the Company as a result of
this  transaction.   The  XM  Radio  Note  Receivable  is  a  non-recourse  note
collateralized  by the  addition  XM Radio  shares that would be received by the
Company upon conversion of the note. The XM Radio Note Receivable earns interest
at LIBOR plus 5% and is due on the  September 30, 2006  maturity  date,  and the
Baron XM Radio  Convertible  Note  accrues  interest at the rate of 6% annually,
with all payments  deferred  until  maturity or  extinguished  upon  conversion.
Assuming  conversion of all  convertible  notes and exercise of the  outstanding
WorldSpace options, the Company's ownership in XM Radio would be 22.6% (compared
with the 18.3% post-exercise position previously reported).

On March 29, 1999,  the Bank  Facility  Guarantors  agreed to eliminate  certain
covenants  contained in the Guarantee  Issuance  Agreement  relating to earnings
before  interest,  depreciation,  amortization  and taxes ("EBITDA") and service
revenue.  In exchange  for this  waiver,  the Company  agreed to re-price  their
Guarantee Warrants, effective April 1, 1999, from $12.51 to $7.50.


                                      S-4