UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

(Mark One)

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

For the Fiscal Year Ended   December 31, 1998   
                           ----------------------

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the transition period from            to

Commission file number 33-72646

                            Arch Communications, Inc.
             (Exact name of Registrant as specified in its Charter)


              DELAWARE                                   31-1236804
     (State of incorporation)              (I.R.S. Employer Identification No.)

    1800 West Park Drive, Suite 250
      Westborough, Massachusetts                          01581
(address of principal executive offices)                (Zip Code)

                                 (508) 870-6700
              (Registrant's telephone number, including area code)

             SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE
                      SECURITIES EXCHANGE ACT OF 1934: None

             SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE
                      SECURITIES EXCHANGE ACT OF 1934: None

The Registrant meets the conditions set forth in General  Instruction  (I)(1)(a)
and (b) of Form 10-K and is filing this Form with the reduced disclosure format.

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

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

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant: Not applicable

The number of shares of Registrant's  Common Stock outstanding on March 18, 1999
was 848.7501.

                    DOCUMENTS INCORPORATED BY REFERENCE: None



<PAGE>

                                     PART I

ITEM 1. BUSINESS

GENERAL

   Arch  Communications,  Inc. ("Arch or the "Company") is a leading provider of
wireless messaging services, primarily paging services, and is the third largest
paging  company in the United States  (based on units in service).  Arch had 4.3
million units in service at December 31, 1998. Arch is a wholly-owned subsidiary
of Arch  Communications  Group, Inc.  ("Parent").  On June 29, 1998, the Company
changed its name from USA Mobile  Communications Inc. II to Arch Communications,
Inc.

   Arch  operates in 41 states and more than 180 of the 200  largest  markets in
the United States.  Arch offers local,  regional and nationwide  paging services
employing  digital  networks  covering  approximately  85% of the United  States
population.  Arch offers  four types of paging  services  through its  networks:
digital display, alphanumeric display, tone-only and tone-plus-voice.  Arch also
offers enhanced and complementary  services,  including voice mail, personalized
greeting,  message  storage  and  retrieval,  pager  loss  protection  and pager
maintenance.

   Arch  has  achieved   significant  growth  in  units  in  service  through  a
combination of internal  growth and  acquisitions.  From January 1, 1996 through
December  31,  1998,  Arch's total number of units in service grew at a compound
rate on an  annualized  basis of 28.7%.  For the same  period  on an  annualized
basis, Arch's compound rate of internal units in service growth (excluding units
added  through  acquisitions)  was 23.8%.  From  commencement  of  operations in
September 1986, Arch has completed 33 acquisitions  representing an aggregate of
1.7 million units in service at the time of purchase.

PENDING MOBILEMEDIA MERGER

   On August 18, 1998,  Parent  entered into an Agreement and Plan of Merger (as
amended as of  September  3, 1998,  December 1, 1998 and  February 8, 1999,  the
"MobileMedia  Merger  Agreement")  providing  for  a  merger  (the  "MobileMedia
Merger") of MobileMedia  Communications,  Inc.  ("MobileMedia")  with and into a
subsidiary of Arch.  The  MobileMedia  Merger is part of  MobileMedia's  Plan of
Reorganization   to  emerge  from  Chapter  11  bankruptcy   (as  amended,   the
"Reorganization Plan"). Parent's stockholders approved the MobileMedia Merger on
January 26, 1999.  On February 5, 1999,  the Federal  Communications  Commission
(the "FCC")  released an order  approving  the  transfer  of  MobileMedia's  FCC
licenses  to  Parent in  connection  with the  MobileMedia  Merger,  subject  to
approval and  confirmation  of the  Reorganization  Plan. The order granting the
transfer became a final order, no longer subject to  reconsideration or judicial
review,  on  March 7,  1999.  Consummation  of the  MobileMedia  Merger  and the
associated  debt and equity  financings  (described  below)  (collectively,  the
"MobileMedia Transactions") is subject to the confirmation of the Reorganization
Plan by the U.S.  Bankruptcy Court for the District of Delaware,  the occurrence
or waiver of the  conditions to the  consummation  of the  Reorganization  Plan,
performance by third parties of their contractual obligations,  the availability
of  sufficient  financing  and other  conditions.  There can be no assurance the
MobileMedia Merger will be consummated.

   Pursuant to the MobileMedia Merger,  Parent will: (i) issue certain stock and
warrants;  (ii) pay $479.0 million in cash to certain  creditors of MobileMedia;
(iii) pay approximately $85.0 million of administrative expenses,  amounts to be
outstanding  at  the  Effective   Time  under  the  DIP  Credit   Agreement  and
transactional  and related  costs;  (iv) raise  $217.0  million in cash  through
rights offerings of its common stock (the "Rights Offering"); and (v) cause Arch
and Arch's principal operating subsidiary, Arch Paging Inc. ("API"), to borrow a
total of  approximately  $347.0 million.  After  consummation of the MobileMedia
Transactions,  which is  expected  to occur  during the second  quarter of 1999,
MobileMedia will become a wholly owned subsidiary of API.

   Following the consummation of the MobileMedia Merger, Arch will be the second
largest paging operator in the United States as measured by units in service and
net revenues (total revenues less cost of products sold).

PAGING OPERATIONS

   Arch currently provides four basic types of paging services: digital display,
alphanumeric display, tone-only and tone-plus-voice.  Depending upon the type of
pager used, a subscriber may receive  information  displayed or broadcast by the
pager or may  receive a signal  from the pager  indicating  that the  subscriber
should call a prearranged number or a company operator to retrieve a message.

   Arch provides  paging service to subscribers  for a monthly fee.  Subscribers
either lease the pager from Arch for an additional fixed monthly fee or they own
the pager,  having  purchased  it either from Arch or from another  vendor.  The


                                       2
<PAGE>

monthly  service fee is generally based upon the type of service  provided,  the
geographic  area covered,  the number of pagers provided to the customer and the
period of the subscriber's  commitment.  Subscriber-owned  pagers provide a more
rapid recovery of Arch's capital  investment than pagers owned and maintained by
Arch,  but may  generate  less  recurring  revenue.  Arch also  sells  pagers to
third-party  resellers who lease or resell pagers to their own  subscribers  and
resell Arch's paging services under marketing agreements.

   Arch  provides  enhancements  and  ancillary  services  such as  voice  mail,
personalized greetings, message storage and retrieval, pager loss protection and
pager  maintenance  services.  Voice  mail  allows a caller to leave a  recorded
message that is stored in Arch's  computerized  message retrieval center. When a
message  is left,  the  subscriber  can be  automatically  alerted  through  the
subscriber's  pager and can retrieve the stored message by calling Arch's paging
terminal.  Personalized  greetings  allow the  subscriber to record a message to
greet  callers  who  reach the  subscriber's  pager or voice  mail box.  Message
storage and  retrieval  allows a subscriber  who leaves  Arch's  service area to
retrieve  calls that arrived  during the  subscriber's  absence from the service
area. Pager loss protection  allows  subscribers who lease pagers to limit their
costs of  replacement  upon loss or destruction  of a pager.  Pager  maintenance
services are offered to subscribers who own their own equipment. Arch is also in
the process of test marketing various non-facilities-based  value-added services
that can be integrated with existing paging services. These include, among other
services,  voicemail,  resale  of long  distance  service  and fax  storage  and
retrieval.

SUBSCRIBERS AND MARKETING

   Arch's paging  accounts are generally  businesses  with  employees who travel
frequently  but must be  immediately  accessible  to their offices or customers.
Arch's  subscribers  include  proprietors  of small  businesses,  professionals,
management  and medical  personnel,  field sales  personnel and service  forces,
members of the  construction  industry and trades,  and real estate  brokers and
developers.  Arch believes that pager use among retail  consumers  will increase
significantly in the future,  although  consumers do not currently account for a
substantial portion of Arch's subscriber base.

   Although  today  Arch  operates  in more  than  180 of the 200  largest  U.S.
markets,  Arch  historically  has focused on medium-sized and small market areas
with lower rates of pager penetration and attractive demographics. Arch believes
that such markets will continue to offer  significant  opportunities for growth,
and that its  national  scope and  presence  will also  provide Arch with growth
opportunities in larger markets.

   Arch  markets  its  paging  services  through  a direct  marketing  and sales
organization which, as of December 31, 1998,  operated  approximately 175 retail
stores.  Arch also markets its paging services  indirectly  through  independent
resellers, agents and retailers. Arch typically offers resellers paging services
in large  quantities at wholesale  rates that are lower than retail  rates,  and
resellers  offer  the  services  to  end-users  at a  markup.  Arch's  costs  of
administering and billing resellers are lower than the costs of direct end-users
on a per pager basis.

   Arch also acts as a reseller of other paging carriers' services when existing
or potential  Arch  customers  have travel  patterns that require paging service
beyond the coverage of Arch's own networks.



ITEM 2. PROPERTIES

   At December  31, 1998,  Arch owned four office  buildings  and leased  office
space (including its executive  offices) in over 175 localities in 35 states for
use in conjunction with its paging  operations.  Arch leases  transmitter  sites
and/or owns  transmitters on commercial  broadcast  towers,  buildings and other
fixed  structures in approximately  3,400 locations in 45 states.  Arch's leases
are for various terms and provide for monthly lease  payments at various  rates.
Arch  believes  that it will be able to  obtain  additional  space as  needed at
acceptable  cost. In April 1998,  Parent  announced an agreement to sell certain
tower  site  assets  (the  "Tower  Site  Sale")  pursuant  to  which  Arch  sold
communications  towers, real estate, site management  contracts and/or leasehold
interests  involving  133  sites  (including  one site  acquired  from  entities
affiliated  with Benbow PCS  Ventures,  Inc.  ("Benbow"))  in 22 states,  and is
renting  space  on the  towers  on which it  currently  operates  communications
equipment  to service its own paging  network.  As of  February  28,  1999,  the
Company  completed the sale of substantially  all of the tower sites. As part of
the Divisional Reorganization, (as defined below) the Company has closed certain
office and retail  locations and it will continue to evaluate its remaining real
estate assets during 1999.



                                       3
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

   Arch, from time to time, is involved in lawsuits arising in the normal course
of business.  Arch believes that its currently  pending lawsuits will not have a
material adverse effect on Arch.



                                     PART II

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

   All of the Common  Stock,  $0.01 par value per share (the "Common  Stock") of
Arch is held by Parent and is not publicly traded.

   Arch has never  declared or paid cash  dividends on the Common Stock and does
not  intend  to  declare  or pay  cash  dividends  on the  Common  Stock  in the
foreseeable  future.  Certain covenants in Arch's indentures,  pursuant to which
senior  debt  securities  of Arch were  issued  will,  in effect,  prohibit  the
declaration or payment of cash dividends by Arch for the foreseeable future. See
Note 3 to Arch's Consolidated  Financial  Statements and "Item 7 -- Management's
Discussion  and  Analysis  of  Financial  Condition  and  Results of  Operations
--Factors  Affecting  Future  Operating  Results --API Credit  Facility,  Bridge
Facility and Indenture Restrictions".



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

FORWARD-LOOKING STATEMENTS

   This  Annual  Report  contains  forward-looking  statements  and  information
relating  to Arch and its  subsidiaries  that are based on the beliefs of Arch's
management as well as assumptions made by and information currently available to
Arch's  management.  These  statements  are made  pursuant  to the  safe  harbor
provisions of the Private  Securities  Litigation  Reform Act of 1995. When used
herein, words such as "anticipate",  "believe",  "estimate",  "expect", "intend"
and  similar  expressions,  as they relate to Arch or its  management,  identify
forward-looking  statements.  Such statements  reflect the current views of Arch
with respect to future  events and are subject to certain  risks,  uncertainties
and  assumptions,  including  but not  limited to those  factors set forth below
under the caption "Factors  Affecting Future Operating  Results".  Should one or
more  of  these  risks  or  uncertainties  materialize,   or  should  underlying
assumptions prove incorrect, actual results or outcomes may vary materially from
those  described  herein  as  anticipated,   believed,  estimated,  expected  or
intended.  Investors  are  cautioned  not  to  place  undue  reliance  on  these
forward-looking statements,  which speak only as of their respective dates. Arch
undertakes no obligation to update or revise any forward-looking statements. All
subsequent written or oral  forward-looking  statements  attributable to Arch or
persons  acting on behalf of Arch are expressly  qualified in their  entirety by
the discussion under "Factors Affecting Future Operating Results".

OVERVIEW

   The following  discussion  and analysis  should be read in  conjunction  with
Arch's Consolidated Financial Statements and Notes thereto included elsewhere in
this Annual Report.

   Adjusted EBITDA,  as determined by Arch,  consists of EBITDA (earnings before
interest,  taxes,  depreciation and amortization) net of restructuring  charges,
equity in loss of affiliate and extraordinary  items.  EBITDA is a commonly used
measure of financial performance in the paging industry. Adjusted EBITDA is also
one  of  the  financial   measures  used  to  calculate  whether  Arch  and  its
subsidiaries  are in compliance with the covenants  under their  respective debt
agreements, but should not be construed as an alternative to operating income or
cash flows from operating  activities as determined in accordance with GAAP. One
of Arch's  financial  objectives  is to increase  its Adjusted  EBITDA,  as such
earnings are a significant  source of funds for servicing  indebtedness  and for
investment in continued growth,  including  purchase of pagers and paging system
equipment,   construction   and  expansion  of  paging  systems,   and  possible
acquisitions.  Adjusted  EBITDA,  as determined by Arch, may not  necessarily be
comparable to similarly titled data of other paging companies. Amounts reflected
as Adjusted  EBITDA are not  necessarily  available for  discretionary  use as a
result of restrictions  imposed by the terms of existing or future  indebtedness
(including  the  repayment  of such  indebtedness  or the  payment  of  interest


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<PAGE>

thereon), limitations imposed by applicable law upon the payment of dividends or
distributions or capital expenditure requirements.

   DIVISIONAL REORGANIZATION

   In  June  1998,   Parent's   Board  of   Directors   approved  a   divisional
reorganization  ("the  Divisional  Reorganization").  As part of the  Divisional
Reorganization,  which is being  implemented  over a period of 18 to 24  months,
Arch has consolidated its former Midwest,  Western,  and Northern divisions into
four  existing  operating  divisions,  and is in the  process  of  consolidating
certain regional  administrative  support  functions,  such as customer service,
collections,  inventory and billing,  to reduce redundancy and take advantage of
various operating efficiencies.

   Arch estimates that the Divisional  Reorganization,  once fully  implemented,
will result in annual cost savings of  approximately  $15.0 million.  These cost
savings  will  consist  primarily  of a  reduction  in  compensation  expense of
approximately  $11.5  million,  a reduction in rental  expense of facilities and
general and administrative costs of approximately $3.5 million.  Arch expects to
reinvest  a  portion  of these  cost  savings  to expand  its sales  activities,
however, to date, the extent of this reinvestment and therefore the cost has not
yet been determined.

   In connection with the Divisional Reorganization,  Arch (i) anticipates a net
reduction of approximately 10% of its workforce,  (ii) is closing certain office
locations  and  redeploying  other  real  estate  assets  and (iii)  recorded  a
restructuring  charge of $14.7 million  during 1998.  The  restructuring  charge
consisted of approximately  (i) $9.7 million for employee  severance,  (ii) $3.5
million for lease obligations and terminations,  and (iii) $1.5 million of other
costs.  The  severance  costs and lease  obligations  will  require cash outlays
throughout  the  18  to  24  month  restructuring   period.   Arch's  management
anticipates the cash  requirements  for these items to be relatively  consistent
from quarter to quarter throughout the Divisional  Reorganization  period. These
cash outlays will be funded from  operations or the Company's  credit  facility.
There can be no assurance that the desired cost savings will be achieved or that
the anticipated reorganization of Arch's business will be accomplished smoothly,
expeditiously  or  successfully.  See Note 9 to  Arch's  Consolidated  Financial
Statements.

RESULTS OF OPERATIONS

   The  following  table  presents   certain  items  from  Arch's   Consolidated
Statements of Operations  as a percentage of net revenues  (total  revenues less
cost of products sold) and certain other  information for the periods  indicated
(dollars in thousands except per pager data):



                                                       Year Ended December 31,
                                                      1997             1998
                                                      ----             ----

Total revenues.................................        107.9 %          107.8 %
Cost of products sold..........................         (7.9)            (7.8)
                                                    --------         --------
Net revenues...................................        100.0            100.0 
Operating expenses:
  Service, rental and maintenance..............         21.7             21.1 
  Selling......................................         14.0             12.8 
  General and administrative...................         28.9             29.2 
  Depreciation and amortization................         62.9             57.4 
  Restructuring charge.........................          --               3.8
                                                    --------         --------
Operating income (loss)........................        (27.5)%          (24.3)%
                                                    ========         ========
Net income (loss)..............................        (39.9)%          (43.6)%
                                                    ========         ========
Adjusted EBITDA................................         35.4 %           36.9 %
                                                    ========         ========
Cash flows provided by operating activities....     $  64,606        $  81,935
Cash flows used in investing activities........     $(102,767)       $ (82,868)
Cash flows provided by (used in) financing
  activities....................................    $  38,777        $    (932)
Annual service, rental and maintenance expenses
  per pager.....................................    $      22        $      20




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<PAGE>

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

   Total  revenues  increased  to $413.6  million (a 4.2%  increase) in the year
ended  December 31,  1998,  from $396.8  million in the year ended  December 31,
1997.  Net revenues  (total  revenues less cost of products  sold)  increased to
$383.7 million (a 4.4% increase) in the year ended December 31, 1998 from $367.7
million in the year ended December 31, 1997.  Total revenues and net revenues in
the year ended December 31, 1998 were adversely affected by a general slowing of
industry growth,  compared to prior years; revenues were also adversely affected
in the fourth quarter of 1998 by Arch's conscious  decision,  in anticipation of
the  MobileMedia  Merger,  not to replace  normal  attrition  among direct sales
personnel  and by the  reduced  effectiveness  of certain  reseller  channels of
distribution.  Arch expects revenue to continue to be adversely affected in 1999
due to its fourth  quarter 1998 decision not to replace normal  attrition  among
direct  sales  personnel  and the  reduced  effectiveness  of  certain  reseller
channels  of  distribution.  Service,  rental and  maintenance  revenues,  which
consist  primarily of recurring  revenues  associated  with the sale or lease of
pagers, increased to $371.2 million (a 5.5% increase) in the year ended December
31,  1998 from  $351.9  million  in the year  ended  December  31,  1997.  These
increases in revenues  were due  primarily  to the  increase,  through  internal
growth,  in the number of units in service from 3.9 million at December 31, 1997
to 4.3 million at December 31, 1998.  Maintenance revenues represented less than
10% of total  service,  rental  and  maintenance  revenues  in the  years  ended
December  31, 1998 and 1997.  Arch does not  differentiate  between  service and
rental revenues.  Product sales, less cost of products sold,  decreased to $12.5
million  (a 20.4%  decrease)  in the year  ended  December  31,  1998 from $15.7
million in the year ended  December  31,  1997,  respectively,  as a result of a
decline in the average revenue per pager sold.

   Service,  rental  and  maintenance  expenses,   which  consist  primarily  of
telephone  line and site rental  expenses,  increased to $80.8 million (21.1% of
net revenues) in the year ended  December 31, 1998 from $79.8 million  (21.7% of
net  revenues)  in the year  ended  December  31,  1997.  The  increase  was due
primarily  to  increased  expenses  associated  with  system  expansions  and an
increase in the number of units in service.  As existing  paging  systems become
more  populated  through  the  addition of new  subscribers,  the fixed costs of
operating  these  paging  systems  are spread  over a greater  subscriber  base.
Annualized service,  rental and maintenance  expenses per subscriber were $20.00
in the year ended December 31, 1998 compared to $22.00 in the corresponding 1997
period.

   Selling  expenses  decreased to $49.1 million  (12.8% of net revenues) in the
year ended  December 31, 1998 from $51.5 million  (14.0% of net revenues) in the
year ended  December 31, 1997.  The decrease was due  primarily to a decrease in
the number of net new  subscriber  additions and  nonrecurring  marketing  costs
incurred in 1997 to promote Arch's new Arch Paging brand identity. The number of
net new subscriber  additions  resulting from internal growth decreased by 35.1%
in the year ended  December  31, 1998  compared to the year ended  December  31,
1997,  primarily due to a general slowing of industry growth,  compared to prior
years; net new subscriber  additions were also adversely  affected in the fourth
quarter of 1998 by Arch's conscious decision, in anticipation of the MobileMedia
Merger,  not to replace normal attrition among direct sales personnel and by the
reduced  effectiveness  of certain reseller  channels.  Arch expects its selling
expenses to increase in 1999 due to increased hiring of direct sales personnel.

   General and administrative expenses increased to $112.2 million (29.2% of net
revenues) in the year ended December 31, 1998, from $106.0 million (28.9% of net
revenues) in the year ended December 31, 1997. The increase was due primarily to
administrative  and facility  costs  associated  with  supporting  more units in
service.

   Depreciation  and  amortization  expenses  decreased to $220.2 million in the
year ended  December 31, 1998 from $231.4 million in the year ended December 31,
1997.  These  expenses   principally   reflect  Arch's  acquisitions  of  paging
businesses in prior periods accounted for as purchases, and investment in pagers
and other system expansion equipment to support growth.

   Operating  losses  were $93.3  million in the year ended  December  31,  1998
compared to $101.0  million in the year ended  December 31, 1997, as a result of
the factors outlined above.

   Net interest  expense  increased to $66.4 million in the year ended  December
31, 1998 from $62.9 million in the year ended December 31, 1997. The increase is
principally attributable to an increase in Arch's outstanding debt.

   Arch  recognized  an income tax  benefit  of $21.2  million in the year ended
December 31, 1997. This benefit  represented the tax benefit of operating losses
incurred subsequent to the acquisitions of USA Mobile  Communications  Holdings,
Inc.  ("USA  Mobile")  and  Westlink  Holdings,  Inc.  ("Westlink")  which  were


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<PAGE>

available to offset deferred tax liabilities  arising from Arch's acquisition of
USA Mobile in September  1995 and Westlink in May 1996. The tax benefit of these
operating  losses  was  fully  recognized  during  1997.  Accordingly,  Arch has
established  a valuation  reserve  against its  deferred  tax assets which as of
December 31, 1998  reduced the income tax benefit to zero.  Arch does not expect
to recover,  in the foreseeable future, its deferred tax asset and will continue
to increase its valuation reserve accordingly. See Note 4 to Arch's Consolidated
Financial Statements.

   In June  1998,  Arch  recognized  an  extraordinary  charge  of $1.7  million
representing  the write-off of unamortized  deferred  financing costs associated
with the prepayment of indebtedness under prior credit facilities.

   Net loss increased to $167.1 million in the year ended December 31, 1998 from
$146.6  million in the year ended  December 31, 1997, as a result of the factors
outlined above.

FACTORS AFFECTING FUTURE OPERATING RESULTS

   GROWTH AND ACQUISITION STRATEGY

   Arch believes that the paging industry has experienced,  and will continue to
experience,  consolidation due to factors that favor larger, multi-market paging
companies,  including (i) the ability to obtain additional radio spectrum,  (ii)
greater  access to capital  markets and lower costs of  capital,  (iii)  broader
geographic  coverage of paging systems,  (iv) economies of scale in the purchase
of capital  equipment,  (v) operating  efficiencies  and (vi) enhanced access to
executive personnel.

   Arch has pursued,  and intends to continue to pursue,  acquisitions of paging
businesses as a key component of its growth  strategy.  However,  the process of
integrating  acquired paging businesses may involve unforeseen  difficulties and
may  require  a  disproportionate  amount  of the time and  attention  of Arch's
management.  No  assurance  can  be  given  that  suitable  acquisitions  can be
identified,  financed and  completed  on  acceptable  terms,  or that any future
acquisitions by Arch will be successful.

   Implementation  of Arch's growth  strategy will be subject to numerous  other
contingencies beyond the control of its management.  These contingencies include
national and regional economic conditions, interest rates, competition,  changes
in  regulation  or  technology  and the  ability to attract  and retain  skilled
employees.  Accordingly,  no assurance can be given that Arch's growth  strategy
will prove effective or that its goals will be achieved.

   FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING

   Arch's business  strategy  requires the availability of substantial  funds to
finance  the  continued  development  and  future  growth and  expansion  of its
operations,  including possible acquisitions.  The amount of capital required by
Arch  following  the  MobileMedia  Merger  will depend upon a number of factors,
including subscriber growth, the type of paging devices and services demanded by
customers,  service revenues,  technological  developments,  marketing and sales
expenses, competitive conditions, the nature and timing of Arch's N-PCS strategy
and  acquisition  strategies and  opportunities.  No assurance can be given that
additional  equity or debt  financing  will be  available to Arch when needed on
acceptable  terms, if at all. The  unavailability  of sufficient  financing when
needed would have a material adverse effect on Arch.

   COMPETITION AND TECHNOLOGICAL CHANGE

   Arch faces  competition from other paging service providers in all markets in
which it  operates,  as well as from  certain  competitors  who hold  nationwide
licenses.  Monthly fees for basic paging services have, in general,  declined in
recent  years,  due in  part  to  competitive  conditions,  and  Arch  may  face
significant  price-based  competition  in the future which could have a material
adverse effect on Arch.  Certain  competitors of Arch possess greater financial,
technical  and  other   resources   than  Arch.  A  trend   towards   increasing
consolidation   in  the  paging   industry  in   particular   and  the  wireless
communications  industry in general in recent years has led to competition  from
increasingly  larger  and  better  capitalized  competitors.   If  any  of  such
competitors were to devote additional  resources to the paging business or focus
on Arch's particular markets, there could be a material adverse effect on Arch.

   Competitors  are currently  using and  developing a variety of two-way paging
technologies.  Arch does not presently provide such two-way services, other than
as  a  reseller.  Although  such  services  generally  are  higher  priced  than
traditional one-way paging services,  technological improvements could result in
increased  capacity and  efficiency for such two-way  paging  technologies  and,
accordingly,   could  result  in   increased   competition   for  Arch.   Future
technological  advances in the  telecommunications  industry  could increase new
services or products  competitive  with the paging services  provided by Arch or
could  require  Arch to  reduce  the  price  of its  paging  services  or  incur


                                       7
<PAGE>

additional  capital  expenditures to meet competitive  requirements.  Recent and
proposed   regulatory   changes  by  the  FCC  are  aimed  at  encouraging  such
technological  advances  and new  services.  Other  forms  of  wireless  two-way
communications   technology,   including   cellular   and   broadband   personal
communications  services ("PCS"),  and specialized  mobile radio services,  also
compete  with the  paging  services  that Arch  currently  provides.  While such
services  are  primarily  focused  on  two-way  voice  communications,   service
providers are, in many cases,  electing to provide paging services as an adjunct
to their primary services. Technological change also may affect the value of the
pagers  owned by Arch and  leased  to its  subscribers.  If  Arch's  subscribers
request more  technologically  advanced pagers,  including,  but not limited to,
two-way  pagers,  Arch  could  incur  additional  inventory  costs  and  capital
expenditures  if required to replace pagers leased to its  subscribers  within a
short period of time. Such additional  investment or capital  expenditures could
have a material adverse effect on Arch. There can be no assurance that Arch will
be able to compete  successfully  with  current  and future  competitors  in the
paging  business  or  with  competitors   offering   alternative   communication
technologies. Pursuant to the 1994 Communications Assistance for Law Enforcement
Act ("CALEA"), all telecommunications  carriers,  including Arch, are subject to
certain law enforcement  assistance  capability  requirements.  These capability
requirements will likely  necessitate  equipment  modifications.  Although CALEA
requires  the federal  government  to reimburse  carriers for certain  equipment
modifications,   it  is  unclear  whether  Arch  will  be  entitled  to  such  a
reimbursement and if so, how much Arch will receive.

   GOVERNMENT REGULATION, FOREIGN OWNERSHIP AND POSSIBLE REDEMPTION

   The  paging  operations  of Arch are  subject  to  regulation  by the FCC and
various state regulatory  agencies.  The FCC paging licenses granted to Arch are
for varying terms of up to 10 years,  at the end of which  renewal  applications
must be approved by the FCC. In the past,  paging license  renewal  applications
generally  have been  granted by the FCC upon a showing of  compliance  with FCC
regulations  and of  adequate  service  to the  public.  Arch is  unaware of any
circumstances  which would  prevent  the grant of any pending or future  renewal
applications;  however,  no  assurance  can be given that any of Arch's  renewal
applications  will be free of  challenge  or will be granted  by the FCC.  It is
possible  that  there may be  competition  for radio  spectrum  associated  with
licenses  as  they  expire,  thereby  increasing  the  chances  of  third  party
interventions in the renewal proceedings.  Other than those renewal applications
still  pending,  the FCC has thus far granted each license  renewal  application
that Arch has filed.  There can be no assurance  that the FCC and various  state
regulatory  agencies will not propose or adopt  regulations or take actions that
would have a material adverse effect on Arch.

   The FCC's review and revision of rules affecting  paging companies is ongoing
and  the   regulatory   requirements   to  which  Arch  is  subject  may  change
significantly over time. For example, the FCC has decided to adopt a market area
licensing  scheme for all paging channels under which carriers would be licensed
to operate on a  particular  channel  throughout  a broad  geographic  area (for
example,  a Major  Trading  Area as defined by Rand  McNally)  rather than being
licensed on a site-by-site basis. These geographic area licenses will be awarded
pursuant to auction.  Incumbent paging licensees that do not acquire licenses at
auction  will be  entitled  to  interference  protection  from the  market  area
licensee.  Arch is participating actively in this proceeding in order to protect
its existing  operations  and retain  flexibility,  on an interim and  long-term
basis,  to modify systems as necessary to meet subscriber  demands.  The FCC has
issued a Further Notice of Proposed  Rulemaking in which the FCC sought comments
on, among other  matters,  whether it should  impose  coverage  requirements  on
licensees with  nationwide  exclusivity  (such as Arch),  whether these coverage
requirements   should  be  imposed  on  a  nationwide  or  regional  basis,  and
whether--if  such  requirements  are  imposed--failure  to meet the requirements
should  result in a  revocation  of the  entire  nationwide  license or merely a
portion  of  the  license.   If  the  FCC  were  to  impose  stringent  coverage
requirements  on  licensees  with  nationwide  exclusivity,  Arch  might have to
accelerate the build-out of its systems in certain areas.

   Changes in regulation of Arch's paging  businesses or the allocation of radio
spectrum for services that compete with Arch's business could  adversely  affect
its results of operations.  In addition,  some aspects of the Telecommunications
Act of 1996 (the  "Telecommunications  Act") may place  additional  burdens upon
Arch or subject Arch to increased competition.  For example, the FCC has adopted
rules  that  govern  compensation  to be paid to pay phone  providers  which has
resulted in increased  costs for certain  paging  services  including  toll-free
1-800  number  paging.   Arch  has  generally  passed  these  costs  on  to  its
subscribers,  which makes Arch's  services more expensive and which could affect
the  attraction  or retention of customers;  however,  there can be no assurance
that Arch will be able to continue to pass on these costs. In addition,  the FCC
also has adopted rules regarding payments by telecommunications companies into a
revamped   fund  that  will   provide  for  the   widespread   availability   of
telecommunications  services,  including  to  low-income  consumers  ("Universal
Service").  Prior to the implementation of the Telecommunications Act, Universal
Service obligations largely were met by local telephone companies,  supplemented


                                       8
<PAGE>

by   long-distance   telephone   companies.   Under  the  new   rules,   certain
telecommunications  carriers,  including  Arch,  are required to contribute to a
revised fund created for Universal  Service (the "Universal  Service Fund").  In
addition,  certain state regulatory  authorities have enacted, or have indicated
that they  intend to enact,  similar  contribution  requirements  based on state
revenues.  Arch can not yet know the full  impact  of these  state  contribution
requirements.  Moreover, Arch is not able at this time to estimate the amount of
any such  payments that it will be able to bill to their  subscribers;  however,
payments into the Universal  Service Fund will likely increase the cost of doing
business.

   Moreover, in a rulemaking  proceeding  pertaining to interconnection  between
local exchange  carriers  ("LECs") and commercial mobile radio services ("CMRS")
providers  such as  Arch,  the FCC has  concluded  that  LECs  are  required  to
compensate CMRS providers for the reasonable costs incurred by such providers in
terminating  traffic  that  originates  on  LEC  facilities,   and  vice  versa.
Consistent  with this ruling,  the FCC has determined that LECs may not charge a
CMRS provider or other  carrier for  terminating  LEC-originated  traffic or for
dedicated  facilities used to deliver  LEC-originated  traffic to one-way paging
networks. Nor may LECs charge CMRS providers for number activation and use fees.
These interconnection issues are still in dispute, and it is unclear whether the
FCC will maintain its current position.  Depending on further FCC disposition of
these  issues,  Arch may or may not be successful  in securing  refunds,  future
relief or both, with respect to charges for termination of LEC-originated  local
traffic.  If these  issues are  ultimately  resolved by the FCC in favor of CMRS
providers,  then  Arch  will  pursue  relief  through  settlement  negotiations,
administrative  complaint  procedures  or both.  If these issues are  ultimately
decided in favor of the LECs,  Arch likely would be required to pay all past due
contested  charges and may also be assessed  interest  and late  charges for the
withheld  amounts.  Although these  requirements have not to date had a material
adverse effect on Arch, these or similar requirements could in the future have a
material adverse effect on Arch.

   The  Communications Act of 1934, as amended also limits foreign investment in
and ownership of entities that are licensed as radio common carriers by the FCC.
Arch owns or controls  several radio common carriers and is accordingly  subject
to these  foreign  investment  restrictions.  Because  Arch is a parent of radio
common  carriers (but is not a radio common carrier  itself),  Arch may not have
more than 25% of its stock owned or voted by aliens or their representatives,  a
foreign government or its  representatives  or a foreign  corporation if the FCC
finds that the public  interest  would be served by denying such  ownership.  In
connection   with   the   World   Trade   Organization   Agreement   (the   "WTO
Agreement")--agreed to by 69 countries--the FCC adopted rules effective February
9, 1998 that create a very strong  presumption  in favor of permitting a foreign
interest in excess of 25% if the foreign  investor's  home market country signed
the WTO Agreement.  Arch's  subsidiaries that are radio common carrier licensees
are subject to more stringent  requirements and may have only up to 20% of their
stock owned or voted by aliens or their representatives, a foreign government or
their  representatives or a foreign corporation.  This ownership  restriction is
not  subject to waiver.  Parent's  Restated  Certificate  of  Incorporation,  as
amended permits the redemption of shares of Parent's  capital stock from foreign
stockholders  where  necessary  to  protect  FCC  licenses  held  by Arch or its
subsidiaries,  but such  redemption  would be  subject  to the  availability  of
capital to Arch and any  restrictions  contained in applicable debt  instruments
and under the Delaware General Corporation Law (which currently would not permit
any such  redemptions).  The  failure  to  redeem  such  shares  promptly  could
jeopardize the FCC licenses held by Arch or its subsidiaries.

   SUBSCRIBER TURNOVER

   The results of operations of wireless  messaging service  providers,  such as
Arch, can be significantly affected by subscriber  cancellations.  The sales and
marketing  costs  associated  with  attracting new  subscribers  are substantial
relative to the costs of providing  service to existing  customers.  Because the
paging business is characterized by high fixed costs, cancellations directly and
adversely affect EBITDA.  An increase in the subscriber  cancellation rate could
have a material adverse effect on Arch.

   DEPENDENCE ON THIRD PARTIES

   Arch does not  manufacture  any of the pagers used in its paging  operations.
Arch buys pagers primarily from Motorola,  Inc.  ("Motorola"),  NEC America Inc.
and  Panasonic  Communications  & Systems  Company and therefore is dependent on
such  manufacturers to obtain  sufficient pager inventory for new subscriber and
replacement  needs.  In addition,  Arch  purchases  terminals  and  transmitters
primarily from Glenayre Electronics,  Inc. and Motorola and thus is dependent on
such  manufacturers  for  sufficient  terminals and  transmitters  to meet their
expansion  and  replacement  requirements.  To date,  Arch  has not  experienced
significant delays in obtaining pagers, terminals or transmitters, but there can
be no assurance that Arch will not experience such delays in the future.  Arch's
purchase agreement with Motorola expires on June 19, 1999,  although it contains
a provision  for  renewals for one-year  terms.  There can be no assurance  that


                                       9
<PAGE>

Arch's  agreement  with  Motorola  will be  renewed  or, if  renewed,  that such
agreement  will be on terms and  conditions  as favorable to Arch as those under
the current  agreements.  Although  Arch believes  that  sufficient  alternative
sources of pagers,  terminals and transmitters  exist, there can be no assurance
that Arch would not be materially adversely affected if it were unable to obtain
these  items from  current  supply  sources or on terms  comparable  to existing
terms. Finally,  Arch relies on third parties to provide satellite  transmission
for some  aspects of its paging  services.  To the  extent  there are  satellite
outages or if satellite  coverage is otherwise  impaired,  Arch may experience a
loss of service until such time as satellite  coverage is restored,  which could
have a material adverse effect on Arch.

   POSSIBLE ACQUISITION TRANSACTIONS

   Arch believes that the paging  industry will undergo  further  consolidation,
and Arch expects to participate in such continued industry  consolidation.  Arch
has  evaluated  and  expects  to  continue  to  evaluate  possible   acquisition
transactions  on an  ongoing  basis  and at any  given  time may be  engaged  in
discussions   with   respect  to  possible   acquisitions   or  other   business
combinations.  The process of integrating acquired paging businesses may involve
unforeseen  difficulties and may require a  disproportionate  amount of the time
and  attention  of Arch's  management  and  financial  and other  resources.  No
assurance can be given that suitable acquisition transactions can be identified,
financed and completed on acceptable terms, that Arch's future acquisitions will
be successful,  or that Arch will participate in any future consolidation of the
paging industry.

   DEPENDENCE ON KEY PERSONNEL

   The success of Arch will depend, to a significant  extent, upon the continued
services of a relatively small group of executive personnel.  Arch does not have
employment  agreements  with, or maintain life insurance on the lives of, any of
its current executive officers, although certain executive officers have entered
into  non-competition  agreements  and all executive  officers have entered into
executive  retention  agreements with Arch. The loss or unavailability of one or
more of its  executive  officers  or the  inability  to  attract  or retain  key
employees in the future could have a material adverse effect on Arch.

   IMPACT OF THE YEAR 2000 ISSUE

   The Year 2000 problem is the result of computer  programs being written using
two  digits  (rather  than four) to define the  applicable  year.  Any of Arch's
programs  that have  time-sensitive  software may recognize a date using "00" as
the year 1900 rather than the year 2000.  This could result in a system  failure
or miscalculations  causing  disruptions of operations,  including,  among other
things, a temporary inability to process  transactions,  send invoices or engage
in similar normal business  activities.  As a result,  the computerized  systems
(including  both  information  and   non-information   technology  systems)  and
applications  used by Arch are  being  reviewed,  evaluated  and,  if and  where
necessary,  modified or replaced to ensure that all financial,  information  and
operating systems are Year 2000 compliant.

   Arch has created a  cross-functional  project group (the "Y2K Project Group")
to work on the  Year  2000  problem.  The Y2K  Project  Group is  finishing  its
analysis of external and  internal  areas likely to be affected by the Year 2000
problem. It has classified the identified areas of concern into either a mission
critical or  non-mission  critical  status.  For the  external  areas,  Arch has
distributed  vendor  surveys to its primary and secondary  vendors.  The surveys
requested  information  about hardware and/or  software  supplied by information
technology  vendors as well as  non-information  technology  system vendors that
might use embedded  technologies  in their systems or products.  Information was
requested regarding the vendor's Year 2000 compliance planning,  timing, status,
testing  and  contingency  planning.  As part  of its  evaluation  of Year  2000
vulnerability  related  to its  pager and  paging  equipment  vendors,  Arch has
discussed with them their efforts to identify  potential issues  associated with
their  equipment  and/or  software  and has  concluded  that,  to the extent any
vulnerability exists, it has been addressed.  Internally,  Arch is completing an
inventory  audit of hardware and  software  testing for both its  corporate  and
divisional  operations.  These areas of operation include:  information systems,
finance,  operations,  inventory,  billing,  pager  activation  and  purchasing.
Additional testing is scheduled to conclude in the second quarter of 1999.

   Arch expects that it will incur costs to replace existing hardware,  software
and paging equipment, which will be capitalized and amortized in accordance with
Arch's existing  accounting  policies,  while maintenance or modification  costs
will be expensed as incurred.  Arch has upgraded  hardware to enable  compliance
testing  to  be   performed  on   dedicated   test   equipment  in  an  isolated
production-like environment.  Based on Arch's costs incurred to date, as well as
estimated  costs to be incurred over the next nine months,  Arch does not expect
that resolution of the Year 2000 problem will have a material  adverse effect on
its  results  of  operations  and  financial  condition.  Costs of the Year 2000


                                       10
<PAGE>

project are based on current estimates and actual results may vary significantly
from such estimates once detailed plans are developed and implemented.

   While it is Arch's  stated goal to be  compliant,  on an internal  basis,  by
September  30,  1999,  Arch  may face  the  possibility  that one or more of its
mission critical vendors,  such as its utility providers,  telephone carriers or
satellite carriers, may not be Year 2000 compliant. Because of the unique nature
of such vendors,  alternative  providers of these services may not be available.
Additionally, although Arch has initiated its test plan for its business-related
hardware and software applications,  there can be no assurance that such testing
will detect all  applications  that may be  affected  by the Year 2000  problem.
Lastly, Arch does not manufacture any of the pagers or paging-related  equipment
used by its customers or for its own paging operations.  Although Arch is in the
process  of  testing of such  equipment  it has relied to a large  extent on the
representations  and assessments of its vendors with respect to their readiness.
Arch can offer no assurances as to the accuracy of such vendors' representations
and assessments.

   Arch has  initiated  the process of designing  and  implementing  contingency
plans  relating to the Year 2000  problem.  To this end,  each  department  will
identify the likely risks and determine commercially  reasonable solutions.  The
Y2K  Project  Group  will  collect  and  review  the  determinations  on  both a
department-by-department  and company-wide  basis.  Arch intends to complete its
Year 2000 contingency planning during calendar year 1999.

   HISTORY OF LOSSES

   Since its inception,  Arch has not reported any net income. Arch reported net
losses of $87.0  million,  $146.6  million,  $167.1  million in the fiscal years
ended  December 31, 1996,  1997 and 1998,  respectively.  These  historical  net
losses have resulted principally from substantial  depreciation and amortization
expense, primarily related to intangible assets and pager depreciation, interest
expense and other costs of growth. Substantial and increased amounts of debt are
expected to be  outstanding  for the  foreseeable  future,  which will result in
significant  additional  interest  expense  which could have a material  adverse
effect  on  Arch.  Arch  expects  to  continue  to  report  net  losses  for the
foreseeable  future,  whether or not the MobileMedia Merger is consummated.  See
Arch's Consolidated Financial Statements included elsewhere herein.

   INDEBTEDNESS AND HIGH DEGREE OF LEVERAGE

   Arch is highly leveraged. At December 31, 1998, Arch and its subsidiaries had
outstanding $621.9 million of total debt, including (i) $125.0 million principal
amount of Arch's 9 1/2% Senior Notes due 2004 (the "9 1/2% Notes"),  (ii) $100.0
million  principal amount of Arch's 14% Senior Notes due 2004 (the "14% Notes"),
(iii) $127.6 million accreted value of Arch's 12 3/4% Senior Notes due 2007 (the
"12 3/4%  Notes"  and,  together  with the 9 1/2% Notes and the 14%  Notes,  the
"Notes") and (iv) $267.0  million of borrowings  under the API Credit  Facility.
Arch's  high  degree  of  leverage  may  have  adverse  consequences  for  Arch,
including:   (i)  the  ability  of  Arch  to  obtain  additional  financing  for
acquisitions,  working capital,  capital expenditures or other purposes,  may be
impaired or  extinguished  or such  financing may not be available on acceptable
terms, if at all; (ii) a substantial portion of Adjusted EBITDA will be required
to pay interest  expense,  which will reduce the funds which would  otherwise be
available for operations and future business opportunities; (iii) the API Credit
Facility and the indentures  (the "Arch  Indentures")  under which the Notes are
outstanding contain financial and restrictive  covenants,  the failure to comply
with  which may  result in an event of  default  which,  if not cured or waived,
could  have a  material  adverse  effect on Arch;  (iv) Arch may be more  highly
leveraged than its competitors which may place it at a competitive disadvantage;
(v) Arch's high degree of leverage will make it more vulnerable to a downturn in
its business or the economy  generally;  and (vi) Arch's high degree of leverage
may impair its ability to participate in the future  consolidation of the paging
industry. Arch has implemented various initiatives to reduce capital costs while
sustaining  acceptable  levels of unit and revenue growth.  As a result,  Arch's
rate of internal growth in units in service has slowed and is expected to remain
below the rates of internal growth previously achieved by Arch, but Arch has not
yet reduced its financial leverage significantly. There can be no assurance that
Arch will be able to reduce its financial  leverage  significantly  or that Arch
will achieve an appropriate balance between growth which it considers acceptable
and future  reductions  in  financial  leverage.  If Arch is not able to achieve
continued  growth in  EBITDA,  it may be  precluded  from  incurring  additional
indebtedness  due  to  cash  flow  coverage  requirements  under  existing  debt
instruments.  EBITDA  is  not a  measure  defined  in  GAAP  and  should  not be
considered in isolation or as a substitute for measures of performance  prepared
in accordance  with GAAP.  Adjusted  EBITDA may not necessarily be comparable to
similarly  titled  data of  other  paging  companies.  See  Arch's  Consolidated
Financial Statements and Notes thereto included elsewhere herein.


                                       11
<PAGE>

   MOBILEMEDIA MERGER CASH REQUIREMENTS

   To fund the estimated  cash payments  required by the  MobileMedia  Merger of
approximately  $347.0 million (consisting of $262.0 million to fund a portion of
the cash payments to MobileMedia's  secured  creditors and $85.0 million to fund
estimated  administrative  expenses,  amounts to be outstanding at the Effective
Time under the DIP Credit Agreement and transaction expenses),  API and The Bank
of New York,  Toronto Dominion (Texas),  Inc., Royal Bank of Canada and Barclays
Bank, PLC have executed a commitment letter for a $200.0 million increase to the
API  Credit  Facility  (the "API  Credit  Facility  Increase").  The API  Credit
Facility Increase was approved on November 16, 1998 by all API lenders, provided
the  MobileMedia  Transactions  were completed prior to March 31, 1999. The four
API lenders that were to fund the API Credit  Facility  Increase have  indicated
their  willingness  to seek approval to extend $135.0  million of the API Credit
Facility Increase through June 30, 1999, subject to formal approval,  definitive
documentation  and  negotiation of certain terms.  In addition,  Arch intends to
issue $200.0 million of new senior notes (the "Planned Notes").  There can be no
assurance  that Arch will  complete an  offering  of the Planned  Notes on terms
satisfactory to it, if at all. As a result, Arch and The Bear Stearns Companies,
Inc., TD Securities  (USA),  Inc., the Bank of New York and Royal Bank of Canada
have  executed a commitment  letter for a $120.0  million  bridge  facility (the
"Bridge  Facility")  which  would  be  available  to Arch in the  absence  of an
offering of the Planned  Notes.  The Bridge  Facility was scheduled to expire on
February 28, 1999 but Arch  elected to extend it to June 30,  1999.  The Planned
Notes,  the Bridge Facility and the MobileMedia  Merger each require approval by
the Required Lenders (as defined in the API Credit  Facility),  and there can be
no assurance  such approval  will be granted.  If API's lenders do not grant the
foregoing  approvals,  and Arch is not able to arrange alternative  financing to
make the cash payments  required by the  MobileMedia  Merger and therefore could
not  consummate  the  MobileMedia  Merger,  and Arch's  failure  to perform  its
obligations  under the MobileMedia  Merger  Agreement is not otherwise  excused,
Arch will be liable  to pay the  MobileMedia  Breakup  Fee of $32.5  million  to
MobileMedia.

   API CREDIT FACILITY, BRIDGE FACILITY AND INDENTURE RESTRICTIONS

   The API Credit Facility,  the Bridge Facility and the Arch Indentures  impose
(or will impose) certain  operating and financial  restrictions on Arch. The API
Credit Facility requires API and, in certain cases,  Arch, to maintain specified
financial ratios,  among other  obligations,  including a maximum leverage ratio
and a minimum  fixed charge  coverage  ratio,  each as defined in the API Credit
Facility. In addition, the API Credit Facility limits or restricts,  among other
things,  API's ability to: (i) declare dividends or redeem or repurchase capital
stock;  (ii) prepay,  redeem or purchase  debt;  (iii) incur liens and engage in
sale/leaseback  transactions;   (iv)  make  loans  and  investments;  (v)  incur
indebtedness  and  contingent  obligations;  (vi) amend or otherwise  alter debt
instruments   and  other   material   agreements;   (vii)   engage  in  mergers,
consolidations, acquisitions and asset sales; (viii) engage in transactions with
affiliates;  and (ix) alter its lines of  business  or  accounting  methods.  In
addition, the Bridge Facility and the Arch Indentures limit, among other things:
(i)  the  incurrence  of  additional  indebtedness  by Arch  and its  Restricted
Subsidiaries  (as  defined  therein);  (ii) the payment of  dividends  and other
restricted  payments  by Parent and its  Restricted  Subsidiaries;  (iii)  asset
sales; (iv) transactions with affiliates;  (v) the incurrence of liens; and (vi)
mergers and consolidations.  Arch's ability to comply with such covenants may be
affected  by events  beyond  its  control,  including  prevailing  economic  and
financial  conditions.  A breach  of any of these  covenants  could  result in a
default  under the API  Credit  Facility,  the Bridge  Facility  and/or the Arch
Indentures.  Upon the  occurrence  of an event of  default  under the API Credit
Facility, the Bridge Facility or the Arch Indentures,  the creditors could elect
to declare all amounts  outstanding,  together with accrued and unpaid interest,
to be  immediately  due and  payable.  If Arch  were  unable  to repay  any such
amounts,  the creditors could proceed against the collateral securing certain of
such indebtedness.  If the lenders under the API Credit Facility  accelerate the
payment of such indebtedness,  there can be no assurance that the assets of Arch
would  be  sufficient  to  repay  in  full  such   indebtedness  and  the  other
indebtedness  of Arch,  including the Notes and any borrowings  under the Bridge
Facility. In addition,  because the API Credit Facility, the Bridge Facility and
the Arch  Indentures  limit (or will  limit)  the  ability  of Arch to engage in
certain transactions except under certain circumstances,  Arch may be prohibited
from entering into  transactions  that could be beneficial to Arch including the
MobileMedia Merger, which is subject to the approval of the Required Lenders (as
defined  under  the API  Credit  Facility).  Arch will be  incurring  additional
indebtedness in connection with the MobileMedia Merger and the Reorganization.

   POSSIBLE FLUCTUATIONS IN REVENUES AND OPERATING RESULTS

   Arch believes that future  fluctuations in its revenues and operating results
are possible as the result of many factors,  including  competition,  subscriber
turnover,  new service developments and technological change. Arch's current and
planned debt repayment  levels are, to a large extent,  fixed in the short term,


                                       12
<PAGE>

and are based in part on its expectations as to future revenues, and Arch may be
unable to adjust  spending  in a timely  manner to  compensate  for any  revenue
shortfall.

   DIVISIONAL REORGANIZATION

   In  June  1998,   Parent's   Board  of  Directors   approved  the  Divisional
Reorganization.  As  part  of  such  reorganization,  which  is  expected  to be
implemented  over a period of 18 to 24 months,  Arch has consolidated its former
Midwest,  Western and Northern divisions into four existing operating  divisions
and is in the process of consolidating certain regional  administrative  support
functions,  such as customer  service,  collections,  inventory and billing,  to
reduce redundancy and to take advantage of various operating efficiencies.  Once
fully implemented, the Divisional Reorganization is expected to result in annual
cost savings of approximately $15.0 million.  Arch expects to reinvest a portion
of these cost savings to expand its sales  activities.  In  connection  with the
Divisional Reorganization, Arch (i) anticipates a net reduction of approximately
10% of its workforce,  (ii) plans to close certain office locations and redeploy
other real  estate  assets and (iii)  recorded a  restructuring  charge of $14.7
million in 1998. The  restructuring  charge consisted of approximately  (i) $9.7
million for  employee  severance,  (ii) $3.5 million for lease  obligations  and
terminations  and (iii) $1.5 million of other  costs.  There can be no assurance
that the expected  cost savings will be achieved or that the  reorganization  of
Arch's business will be accomplished  smoothly,  expeditiously  or successfully.
The  difficulties  of  such  reorganization  may be  increased  by the  need  to
integrate  MobileMedia's  operations  in multiple  locations  and to combine two
corporate  cultures.  The inability to successfully  integrate the operations of
MobileMedia would have a material adverse effect on Arch.

RECENT AND PENDING ACCOUNTING PRONOUNCEMENTS

   In June 1997, the Financial  Accounting  Standards Board issued  Statement of
Financial  Accounting  Standards  ("SFAS")  No.  130  "Reporting   Comprehensive
Income".  SFAS No.  130  establishes  standards  for  reporting  and  display of
comprehensive income and its components (revenues,  expenses,  gains and losses)
in a full set of general-purpose financial statements. Arch adopted SFAS No. 130
in 1998.  The adoption of this  standard did not have an effect on its reporting
of income.

   In June 1997, the Financial  Accounting  Standards  Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information".  SFAS No.
131 establishes  standards for reporting information about operating segments in
annual financial  statements and requires  selected  information about operating
segments in interim financial reports.  SFAS No. 131 also establishes  standards
for related disclosures about products and services,  geographic areas and major
customers.  Arch  adopted  SFAS No. 131 for its year ended  December  31,  1998.
Adoption of this standard did not have a significant impact on its reporting.

   In March 1998, the Accounting Standards Committee of the Financial Accounting
Standards Board issued  Statement of Position 98-1 ("SOP 98-1")  "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use". SOP 98-1
establishes  criteria for capitalizing  costs of computer software  developed or
obtained for internal  use.  Arch adopted SOP 98-1 in 1998.  The adoption of SOP
98-1 has not had a material  effect on Arch's  financial  position or results of
operations.

   In April 1998, the Accounting  Standards Executive Committee of the Financial
Accounting  Standards  Board  issued  Statement  of Position  98-5 ("SOP  98-5")
"Reporting  on the Costs of Start-Up  Activities".  SOP 98-5  requires  costs of
start-up  activities  and  organization  costs to be expensed as incurred.  Arch
adopted SOP 98-5 effective January 1, 1999. Initial application of SOP 98-5 will
be reported as the cumulative  effect of a change in accounting  principle.  The
adoption  of SOP  98-5 is not  expected  to have a  material  effect  on  Arch's
financial position or results of operations.

   In June 1998, the Financial  Accounting  Standards  Board issued SFAS No. 133
"Accounting  for Derivative  Instruments and Hedging  Activities".  SFAS No. 133
requires  that every  derivative  instrument be recorded in the balance sheet as
either an asset or liability  measured at its fair value and that changes in the
derivative's  fair value be  recognized  currently in earnings.  Arch intends to
adopt this standard  effective  January 1, 2000. Arch has not yet quantified the
impact of adopting SFAS No. 133 on its financial statements,  however,  adopting
SFAS No. 133 could  increase  volatility  in  earnings  and other  comprehensive
income.


                                       13
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   The  majority of the  Company's  long-term  debt is subject to fixed rates of
interest or interest rate protection. In the event that the interest rate on the
Company's non-fixed rate debt fluctuates by 10% in either direction, the Company
believes  the  impact on its  results of  operations  would be  immaterial.  The
Company transacts  infrequently in foreign currency and therefore is not exposed
to significant foreign currency market risk.



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   The financial  statements  and schedules  listed in Item 14(a)(1) and (2) are
included in this Report beginning on Page F-1.



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

   None.



                                     PART IV

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

(a) (1)  Financial Statements

         Consolidated Balance Sheets as of December 31, 1997 and 1998

         Consolidated  Statements of  Operations  for Each of the Three Years in
            the Period Ended December 31, 1998

         Consolidated  Statements of Stockholder's  Equity for Each of the Three
            Years in the Period Ended December 31, 1998

         Consolidated  Statements  of Cash Flows for Each of the Three  Years in
            the Period Ended December 31, 1998

         Notes to Consolidated Financial Statements

(a) (2)  Financial Statement Schedule

         Schedule II - Valuation and Qualifying Accounts

(b)      Reports on Form 8-K

         No  reports  on Form 8-K were  filed  during  the  three  months  ended
         December 31, 1998.

(c)      Exhibits

         The exhibits listed in the accompanying  index to exhibits are filed as
         part of this Annual Report on Form 10-K.




                                       14
<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.

                                        ARCH COMMUNICATIONS, INC.




                                        By: /s/  C. Edward Baker, Jr.          
                                           ------------------------------------
                                            C. Edward Baker, Jr.
                                            Chairman of the Board and Chief 
                                            Executive Officer
   March 18, 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/ C. Edward Baker, Jr.      Chairman of the Board and        March 18, 1999
---------------------------     Chief Executive Officer 
  C. Edward Baker, Jr.          (principal executive officer)



  /s/ John B. Saynor            Executive Vice President,        March 18, 1999
---------------------------     Director     
  John B. Saynor



  /s/ J. Roy Pottle             Executive Vice President         March 18, 1999
---------------------------     and Chief Financial Officer 
  J. Roy Pottle                 (principal financial officer and
                                principal accounting officer)


  /s/ R. Schorr Berman          Director                         March 18, 1999
---------------------------
  R. Schorr Berman



                                Director                         
---------------------------
  James S. Hughes



  /s/ John Kornreich            Director                         March 18, 1999
---------------------------
  John Kornreich



  /s/ Allan L. Rayfield         Director                         March 18, 1999
---------------------------
  Allan L. Rayfield



  /s/ John A. Shane             Director                         March 18, 1999
---------------------------
  John A. Shane




                                       15
<PAGE>

                          INDEX TO FINANCIAL STATEMENTS



                                                                           Page
                                                                           ----
Report of Independent Public Accountants..... ........................      F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998..........      F-3
Consolidated Statements of Operations for Each of the Three Years in 
  the Period Ended December 31, 1998..................................      F-4
Consolidated Statements of Stockholder's Equity for Each of the Three
  Years in the Period Ended December 31, 1998.........................      F-5
Consolidated Statements of Cash Flows for Each of the Three Years in 
  the Period Ended December 31, 1998..................................      F-6
Notes to Consolidated Financial Statements............................      F-7


                                      F-1
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To Arch Communications, Inc.:

   We  have  audited  the  accompanying  consolidated  balance  sheets  of  Arch
Communications,  Inc., a wholly owned subsidiary of Arch  Communications  Group,
Inc. (a Delaware  corporation)  (the "Company") and  subsidiaries as of December
31,  1997 and 1998,  and the  related  consolidated  statements  of  operations,
stockholder's  equity and cash  flows for each of the three  years in the period
ended  December  31,  1998.  These  consolidated  financial  statements  and the
schedule referred to below are the  responsibility of the Company's  management.
Our  responsibility  is to express an  opinion on these  consolidated  financial
statements and the schedule 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 consolidated financial position of
Arch Communications, Inc. and subsidiaries as of December 31, 1997 and 1998, 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.

   Our  audits  were made for the  purpose  of  forming  an opinion on the basic
consolidated  financial statements taken as a whole. The schedule listed in Item
14(a)(2) is presented for purposes of complying with the Securities and Exchange
Commission's  rules  and  is  not  part  of  the  basic  consolidated  financial
statements.  The schedule has been subjected to the auditing  procedures applied
in the  audits  of the  basic  consolidated  financial  statements  and,  in our
opinion,  is fairly  stated in all  material  respects  in relation to the basic
consolidated financial statements taken as a whole.





                                               /s/ Arthur Andersen LLP



Boston, Massachusetts 
February 24, 1999


                                      F-2
<PAGE>

                            ARCH COMMUNICATIONS, INC.
         (A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 1997 and 1998
                      (in thousands, except share amounts)
<TABLE>
<CAPTION>

                                                                               1997          1998
                                                                               ----          ----
                                                        ASSETS
<S>                                                                        <C>            <C>
Current assets:
    Cash and cash equivalents.........................................     $     1,887    $        22
    Accounts receivable (less reserves of $5,744 and $6,583 in 1997 and
      1998, respectively).............................................          30,147         30,753
    Inventories.......................................................          12,633         10,319
    Prepaid expenses and other........................................           4,917          8,007
                                                                           -----------    -----------
        Total current assets..........................................          49,584         49,101
                                                                           -----------    -----------
Property and equipment, at cost:
    Land, buildings and improvements..................................          10,089         10,480
    Paging and computer equipment.....................................         361,713        400,312
    Furniture, fixtures and vehicles..................................          16,233         17,381
                                                                           -----------    -----------
                                                                               388,035        428,173 
    Less accumulated depreciation and amortization....................         146,542        209,128
                                                                           ------------   -----------
    Property and equipment, net.......................................         241,493        219,045
                                                                           ------------   -----------
Intangible and other assets (less accumulated amortization of $258,856
  and $368,903 in 1997 and 1998, respectively)........................         718,969        626,439
                                                                           -----------    -----------
                                                                           $ 1,010,046    $   894,585
                                                                           ===========    ===========
<CAPTION>
                                 LIABILITIES AND STOCKHOLDER'S EQUITY
<S>                                                                        <C>            <C>        
Current liabilities:
    Current maturities of long-term debt..............................     $    24,513    $     1,250 
    Accounts payable..................................................          22,486         25,683 
    Accrued restructuring charge......................................              --         11,909
    Accrued expenses..................................................          11,894         11,689
    Accrued interest..................................................          11,174         20,922
    Customer deposits.................................................           6,150          4,528
    Deferred revenue..................................................           8,787         10,958
                                                                           -----------    -----------
        Total current liabilities.....................................          85,004         86,939
                                                                           -----------    -----------
Long-term debt, less current maturities...............................         623,000        620,629
                                                                           -----------    -----------
Other long-term liabilities...........................................             --          27,235
                                                                           -----------    -----------
Commitments and contingencies
Stockholder's equity:
    Common stock--$.01 par value, authorized 1,000 shares, issued and
      outstanding 849 shares..........................................             --             --
    Additional paid-in capital........................................         617,563        642,406
    Accumulated deficit...............................................        (315,521)      (482,624)
                                                                           -----------    -----------
        Total stockholder's equity ...................................         302,042        159,782
                                                                           -----------    -----------
                                                                           $ 1,010,046    $   894,585
                                                                           ===========    ===========
</TABLE>






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




                                      F-3
<PAGE>

                            ARCH COMMUNICATIONS, INC.
         (A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                            Years Ended December 31,
                                 (in thousands)
<TABLE>
<CAPTION>

                                                      1996          1997         1998
                                                    --------      --------     --------
<S>                                                <C>           <C>          <C>       
Service, rental and maintenance revenues........   $  291,399    $  351,944   $  371,154
Product sales...................................       39,971        44,897       42,481
                                                   ----------    ----------   ----------
     Total revenues.............................      331,370       396,841      413,635
Cost of products sold...........................      (27,469)      (29,158)     (29,953)
                                                   ----------    ----------   ----------
                                                      303,901       367,683      383,682
                                                   ----------    ----------   ----------
Operating expenses:
   Service, rental and maintenance..............       64,957        79,836       80,782
   Selling......................................       46,962        51,474       49,132
   General and administrative...................       86,181       106,041      112,181
   Depreciation and amortization................      191,101       231,376      220,172
   Restructuring charge.........................           --            --       14,700
                                                   ----------    ----------   ----------
     Total operating expenses...................      389,201       468,727      476,967
                                                   ----------    ----------   ----------
Operating income (loss).........................      (85,300)     (101,044)     (93,285)
Interest expense................................      (50,330)      (63,680)     (68,094)
Interest income.................................        1,270           796        1,685
Equity in loss of affiliate.....................       (1,968)       (3,872)      (5,689)
                                                   ----------    ----------   ----------
Income (loss) before income tax benefit and
   extraordinary item...........................     (136,328)     (167,800)    (165,383)
Benefit from income taxes.......................       51,207        21,172           --
                                                   ----------    ----------   ----------
Income (loss) before extraordinary item.........      (85,121)     (146,628)    (165,383)
Extraordinary charge from early
   extinguishment of debt.......................       (1,904)           --       (1,720)
                                                   ----------    ----------   ----------
Net income (loss)...............................   $  (87,025)   $ (146,628)  $ (167,103)
                                                   ==========    ==========   ==========
</TABLE>





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





                                      F-4
<PAGE>

                            ARCH COMMUNICATIONS, INC.
         (A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
                 CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
                                 (in thousands)
<TABLE>
<CAPTION>
                                                         Additional                   Total
                                                Common     Paid-in    Accumulated  Stockholder's
                                                 Stock     Capital      Deficit       Equity
                                                -------   ---------    ---------    --------- 
<S>                                             <C>       <C>          <C>          <C>      
Balance, December 31, 1995 ..................   $  --     $ 358,411    $ (81,868)   $ 276,543
   Capital Contribution from Arch
     Communications Group, Inc. .............      --       262,329         --        262,329
   Net loss .................................      --          --        (87,025)     (87,025)
                                                -------   ---------    ---------    ---------
Balance, December 31, 1996 ..................      --       620,740     (168,893)     451,847
   Distribution to Arch Communications 
     Group, Inc .............................      --        (3,177)        --         (3,177)
   Net loss .................................      --          --       (146,628)    (146,628)
                                                -------   ---------    ---------    ---------
Balance, December 31, 1997 ..................      --       617,563     (315,521)     302,042
   Capital Contribution from Arch
     Communications Group, Inc. .............      --        24,843         --         24,843
   Net loss .................................      --          --       (167,103)    (167,103)
                                                -------   ---------    ---------    ---------
Balance, December 31, 1998 ..................   $  --     $ 642,406    $(482,624)   $ 159,782
                                                =======   =========    =========    =========

</TABLE>





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





                                      F-5
<PAGE>

                            ARCH COMMUNICATIONS, INC.
         (A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                            Years Ended December 31,
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                  1996         1997         1998
                                                                  ----         ----         ----
<S>                                                            <C>          <C>          <C>      
Cash flows from operating activities:
  Net income (loss) ........................................   $ (87,025)   $(146,628)   $(167,103)
  Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:
  Depreciation and amortization ............................     191,101      231,376      220,172
  Deferred income tax benefit ..............................     (51,207)     (21,172)        --
  Extraordinary charge from early extinguishment of debt ...       1,904         --          1,720
  Equity in loss of affiliate ..............................       1,968        3,872        5,689
  Accretion of discount on senior notes ....................        --           --            141
   Gain on Tower Site Sale .................................        --           --         (2,500)
  Accounts receivable loss provision .......................       8,198        7,181        8,545
  Changes in assets and liabilities,  net of effect from  
    acquisitions of paging companies:
    Accounts receivable ....................................     (15,513)     (11,984)      (9,151)
    Inventories ............................................       1,845       (2,394)       2,314
    Prepaid expenses and other .............................          89         (386)      (3,090)
    Accounts payable and accrued expenses ..................     (12,440)       3,683       24,649
    Customer deposits and deferred revenue .................       1,556        1,058          549
                                                               ---------    ---------    ---------
Net cash provided by operating activities ..................      40,476       64,606       81,935
                                                               ---------    ---------    ---------
Cash flows from investing activities:
  Additions to property and equipment, net .................    (138,899)     (87,868)     (79,249)
  Additions to intangible and other assets .................     (16,676)     (14,899)     (33,935)
  Net proceeds from Tower Site Sale ........................        --           --         30,316
  Acquisition of paging companies, net of cash acquired ....    (325,420)        --           --
                                                               ---------    ---------    ---------
Net cash used for investing activities .....................    (480,995)    (102,767)     (82,868)
                                                               ---------    ---------    ---------
Cash flows from financing activities:
  Issuance of long-term debt ...............................     401,000       91,000      463,239
  Repayment of long-term debt ..............................    (225,166)     (49,046)    (489,014)
  Capital contribution from (distribution to) Arch
    Communications Group, Inc. .............................     262,329       (3,177)      24,843
                                                               ---------    ---------    ---------
Net cash provided by (used in) financing activities ........     438,163       38,777         (932)
                                                               ---------    ---------    ---------
Net (decrease) increase in cash and cash equivalents .......      (2,356)         616       (1,865)
Cash and cash equivalents, beginning of period .............       3,627        1,271        1,887
                                                               ---------    ---------    ---------
Cash and cash equivalents, end of period ...................   $   1,271    $   1,887    $      22
                                                               =========    =========    =========

Supplemental disclosure:
  Interest paid ............................................   $  46,448    $  61,322    $  56,249
                                                               =========    =========    =========
  Liabilities assumed in acquisition of paging companies ...   $  58,233    $    --      $    --
                                                               =========    =========    =========

</TABLE>



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


                                      F-6
<PAGE>

                            ARCH COMMUNICATIONS, INC.
         (A WHOLLY-OWNED SUBSIDIARY OF ARCH COMMUNICATIONS GROUP, INC.)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. Organization and Significant Accounting Policies

   Organization--Arch  Communications,  Inc.  ("Arch"  or  the  "Company")  is a
leading provider of wireless messaging services,  primarily paging services, and
is the third  largest  paging  company in the United  States  (based on units in
service).  The financial statements for the Company represent the merger of Arch
Communications  Enterprises,  Inc.  ("ACE")  with and into a  subsidiary  of USA
Mobile  Communications,  Inc.  II  ("USAM").  ACE,  USAM  and  the  Company  are
wholly-owned subsidiaries of Arch Communications Group, Inc. ("Parent").

   Principles  of   Consolidation--The   accompanying   consolidated   financial
statements   include  the  accounts  of  the  Company,   and  its   wholly-owned
subsidiaries.  All significant  intercompany accounts and transactions have been
eliminated in consolidation.

   Revenue  Recognition--Arch   recognizes  revenue  under  rental  and  service
agreements  with customers as the related  services are  performed.  Maintenance
revenues and related costs are recognized  ratably over the respective  terms of
the agreements. Sales of equipment are recognized upon delivery. Commissions are
recognized as an expense when incurred.

   Use of Estimates--The  preparation of financial statements in conformity with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of  contingent  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.

   Cash  Equivalents--Cash  equivalents  include  short-term,   interest-bearing
instruments  purchased  with  remaining  maturities of three months or less. The
carrying amount  approximates  fair value due to the relatively  short period to
maturity of these instruments.

   Inventories--Inventories  consist of new pagers which are held  primarily for
resale.  Inventories  are  stated  at the  lower of cost or  market,  with  cost
determined on a first-in, first-out basis.

   Property and Equipment--Pagers sold or otherwise retired are removed from the
accounts at their net book value using the first-in,  first-out method. Property
and  equipment  is stated  at cost and is  depreciated  using the  straight-line
method over the following estimated useful lives:

     Asset Classification                            Estimated Useful Life
     --------------------                            ---------------------
     Buildings and improvements.....................        20 Years
     Leasehold improvements.........................       Lease Term
     Pagers.........................................         3 Years
     Paging and computer equipment..................        5-8 Years
     Furniture and fixtures.........................        5-8 Years
     Vehicles.......................................         3 Years


   Depreciation  and  amortization  expense  related to property  and  equipment
totaled $87.5  million,  $108.0  million and $101.1  million for the years ended
December 31, 1996, 1997 and 1998, respectively.



                                      F-7
<PAGE>

   Intangible and Other  Assets--Intangible and other assets, net of accumulated
amortization, are composed of the following (in thousands):


                                                          December 31,
                                                        1997        1998
                                                        ----        ----
     Goodwill.....................................   $ 312,017   $ 271,808
     Purchased FCC licenses.......................     293,922     256,519
     Purchased subscriber lists...................      87,281      56,825
     Deferred financing costs.....................         526      13,983
     Investment in Benbow PCS Ventures, Inc.......       6,189      11,347
     Investment in CONXUS Communications, Inc.....       6,500       6,500
     Non-competition agreements...................       2,783       1,790
     Other........................................       9,751       7,667
                                                     ---------   ---------
                                                     $ 718,969   $ 626,439
                                                     =========   =========


   Amortization  expense  related to intangible  and other assets totaled $103.7
million,  $123.4  million and $119.1  million for the years ended  December  31,
1996, 1997 and 1998, respectively.

   Subscriber  lists,  Federal  Communications  Commission  ("FCC") licenses and
goodwill are amortized over their estimated  useful lives,  ranging from five to
ten  years  using  the  straight-line  method.  Non-competition  agreements  are
amortized over the terms of the agreements using the straight-line method. Other
assets  consist of  contract  rights,  organizational  and FCC  application  and
development costs which are amortized using the straight-line  method over their
estimated  useful lives not exceeding ten years.  Development and start up costs
include nonrecurring,  direct costs incurred in the development and expansion of
paging  systems,  and are amortized over a two-year  period.  In April 1998, the
Accounting  Standards Executive Committee of the Financial  Accounting Standards
Board issued Statement of Position 98-5 ("SOP 98-5")  "Reporting on the Costs of
Start-Up  Activities".  SOP 98-5  requires  costs  of  start-up  activities  and
organization  costs to be expensed as incurred.  Arch adopted SOP 98-5 effective
January  1,  1999.  Initial  application  of SOP 98-5  will be  reported  as the
cumulative effect of a change in accounting principle.

   Deferred financing costs incurred in connection with Arch's credit agreements
(see Note 3) are being  amortized  over  periods  not to exceed the terms of the
related agreements.  As credit agreements are amended and restated,  unamortized
deferred financing costs are written off as an extraordinary charge. During 1996
and  1998,  charges  of  $1.9  million  and  $1.7  million,  respectively,  were
recognized in connection with the closing of new credit facilities.

   In connection  with Arch's May 1996  acquisition of Westlink  Holdings,  Inc.
("Westlink")  (see Note 2), Arch acquired  Westlink's 49.9% share of the capital
stock of Benbow PCS Ventures, Inc. ("Benbow").  Benbow has exclusive rights to a
50kHz  outbound/12.5kHz  inbound narrowband personal  communications  license in
each of the central and western regions of the United States. Arch is obligated,
to the extent such funds are not  available  to Benbow from other  sources,  and
subject to the approval of Arch's  designee on Benbow's  Board of Directors,  to
advance Benbow  sufficient funds to service debt obligations  incurred by Benbow
in connection with its acquisition of its narrowband PCS licenses and to finance
the build out of a regional  narrowband PCS system.  Arch's investment in Benbow
is  accounted  for under the equity  method  whereby  Arch's  share of  Benbow's
losses,  since  the  acquisition  date of  Westlink,  are  recognized  in Arch's
accompanying  consolidated  statements of operations under the caption equity in
loss of affiliate.

   On November 8, 1994, CONXUS  Communications,  Inc.  ("CONXUS"),  formerly PCS
Development  Corporation,  was  successful  in acquiring the rights to a two-way
paging  license  in five  designated  regions  in the  United  States in the FCC
narrowband wireless spectrum auction. As of December 31, 1998, Arch's investment
in CONXUS totaled $6.5 million and is accounted for under the cost method.

   In accordance with Statement of Financial  Accounting  Standards ("SFAS") No.
121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets To
Be Disposed Of" Arch evaluates the  recoverability  of its carrying value of the
Company's  long-lived  assets and certain  intangible  assets based on estimated
undiscounted  cash flows to be generated from each of such assets as compared to
the original estimates used in measuring the assets. To the extent impairment is
identified,  Arch reduces the carrying value of such impaired  assets.  To date,
Arch has not had any such impairments.



                                      F-8
<PAGE>

   Fair Value of Financial Instruments--Arch's financial instruments, as defined
under SFAS No. 107  "Disclosures  about  Fair Value of  Financial  Instruments",
include its cash,  its debt financing and interest rate  protection  agreements.
The fair value of cash is equal to the  carrying  value at December 31, 1997 and
1998.

   As discussed in Note 3, Arch's debt  financing  primarily  consists of senior
bank debt and fixed rate senior notes.  Arch  considers the fair value of senior
bank debt to be equal to the carrying value since the related  facilities bear a
current  market rate of  interest.  Arch's  fixed rate  senior  notes are traded
publicly.  The  following  table depicts the fair value of the fixed rate senior
notes based on the  current  market  quote as of December  31, 1997 and 1998 (in
thousands):
<TABLE>
<CAPTION>
                                                  December 31, 1997       December 31, 1998
                                                ---------------------   ---------------------
                                                Carrying                Carrying
 Description                                      Value    Fair Value     Value    Fair Value
 -----------                                    ---------  ----------   ---------  ----------
<S>                                             <C>        <C>          <C>        <C>       
 9 1/2% Senior Notes due 2004................   $ 125,000  $  122,488   $ 125,000  $  112,500
 14% Senior Notes due 2004...................     100,000     112,540     100,000     103,000
 12 3/4% Senior Notes due 2007...............         --          --      127,604     127,604
</TABLE>


   Arch had off-balance-sheet  interest rate protection agreements consisting of
interest  rate  swaps and  interest  rate caps with  notional  amounts of $140.0
million and $80.0 million, respectively, at December 31, 1997 and $265.0 million
and $40.0  million,  respectively,  at December 31, 1998. The fair values of the
interest   rate  swaps  and   interest   rate  caps  were  $47,000  and  $9,000,
respectively,  at December  31,  1997.  The cost to  terminate  the  outstanding
interest  rate swaps and interest rate caps at December 31, 1998 would have been
$6.4 million. See Note 3.

   Reclassifications--Certain  amounts of prior  periods  were  reclassified  to
conform with the 1998 presentation.

2. Acquisitions

   In May 1996, Arch completed its  acquisition of all the  outstanding  capital
stock of  Westlink  for $325.4  million in cash,  including  direct  transaction
costs.  The  purchase  price was  allocated  based on the fair  values of assets
acquired and  liabilities  assumed  (including  deferred income taxes arising in
purchase  accounting),  which  amounted  to $383.6  million  and $58.2  million,
respectively.

   This acquisition has been accounted for as a purchase, and the results of its
operations have been included in the consolidated  financial statements from the
date of the  acquisition.  Goodwill  resulting  from  the  acquisition  is being
amortized over a ten-year period using the straight-line method.

   The following  unaudited pro forma summary presents the consolidated  results
of operations as if the  acquisition had occurred at the beginning of the period
presented,  after giving effect to certain adjustments,  including  depreciation
and  amortization of acquired assets and interest  expense on acquisition  debt.
These pro forma results have been prepared for comparative  purposes only and do
not purport to be  indicative  of what would have  occurred had the  acquisition
been made at the beginning of the period presented, or of results that may occur
in the future.

                                                             Year Ended
                                                         December 31, 1996
                                                   (unaudited and in thousands)
     Revenues...................................            $  358,900 
     Income (loss) before extraordinary item....              (100,807)
     Net income (loss)..........................              (102,711)


                                      F-9
<PAGE>

3. Long-term Debt

   Long-term debt consisted of the following (in thousands):


                                                    December 31,
                                                 1997          1998
                                              ----------    ----------

     Senior Bank Debt......................   $  422,500    $  267,000
     9 1/2% Senior Notes due 2004..........      125,000       125,000
     14% Senior Notes due 2004.............      100,000       100,000
     12 3/4% Senior Notes due 2007.........          --        127,604
     Other.................................           13         2,275
                                              ----------    ----------
                                                 647,513       621,879
     Less-- Current maturities.............       24,513         1,250
                                              ----------    ----------
     Long-term debt........................   $  623,000    $  620,629
                                              ==========    ==========


   Senior  Bank  Debt-- The  Company,  through its  operating  subsidiary,  Arch
Paging,  Inc. ("API") entered into senior secured revolving credit and term loan
facilities in the aggregate  amount of $400.0  million  (collectively,  the "API
Credit Facility")  consisting of (i) a $175.0 million reducing  revolving credit
facility (the "Tranche A Facility"),  (ii) a $100.0  million  364-day  revolving
credit  facility under which the principal  amount  outstanding on June 27, 1999
will  convert  to a term  loan (the  "Tranche  B  Facility")  and (iii) a $125.0
million term loan (the "Tranche C Facility").

   The  Tranche A Facility  will be subject to  scheduled  quarterly  reductions
commencing on September 30, 2000 and will mature on June 30, 2005. The term loan
portion of the Tranche B Facility  will be amortized  in quarterly  installments
commencing  September 30, 2000, with an ultimate maturity date of June 30, 2005.
The  Tranche C Facility  will be  amortized  in annual  installments  commencing
December 31, 1999, with an ultimate maturity date of June 30, 2006.

   API's  obligations under the API Credit Facility are secured by its pledge of
its  interests  in Arch LLC and Arch  Connecticut  Valley,  Inc.  The API Credit
Facility is guaranteed by Parent, Arch and Arch LLC and Arch Connecticut Valley,
Inc.  Parent's  guarantee is secured by a pledge of Parent's  stock and notes in
Arch,  and the  guarantees  of Arch LLC and Arch  Connecticut  Valley,  Inc. are
secured by a security  interest in those  assets that were  pledged  under ACE's
former credit facility.

   Borrowings  under the API Credit  Facility bear interest based on a reference
rate equal to either the Bank's  Alternate Base Rate or LIBOR, in each case plus
a margin  based on Arch's or API's  ratio of total debt to  annualized  Adjusted
EBITDA.

   The API Credit Facility  requires payment of fees on the daily average amount
available  to be  borrowed  under  the  Tranche  A  Facility  and the  Tranche B
Facility,  which fees vary  depending  on Arch's or API's ratio of total debt to
annualized Adjusted EBITDA.

   The API Credit  Facility  requires  that at least 50% of Arch's  total  debt,
including the outstanding  borrowings under the API Credit Facility,  be subject
to a fixed interest rate or interest rate protection  agreements.  Entering into
interest rate cap and swap  agreements  involves both the credit risk of dealing
with  counterparties  and their  ability to meet the terms of the  contracts and
interest rate risk. In the event of  nonperformance by the counterparty to these
interest  rate  protection  agreements,  API would be subject to the  prevailing
interest rates specified in the API Credit Facility.

   Under the interest rate swap agreements,  the Company will pay the difference
between  LIBOR and the fixed swap rate if the swap rate exceeds  LIBOR,  and the
Company will  receive the  difference  between  LIBOR and the fixed swap rate if
LIBOR  exceeds the swap rate.  Settlement  occurs on the  quarterly  reset dates
specified by the terms of the contracts.  The notional  principal  amount of the
interest  rate swaps  outstanding  was $65.0  million at December 31, 1998.  The
weighted  average fixed payment rate was 5.93%,  while the weighted average rate
of  variable  interest  payments  under  the API  Credit  Facility  was 5.30% at


                                      F-10
<PAGE>

December  31,  1998.  At  December  31,  1997 and 1998,  the  Company  had a net
receivable  of  $18,000  and a net  payable  of  $47,000,  respectively,  on the
interest rate swaps.

   The interest rate cap agreements will pay the Company the difference  between
LIBOR and the cap level if LIBOR  exceeds the cap levels at any of the quarterly
reset dates.  If LIBOR  remains  below the cap level,  no payment is made to the
Company. The total notional amount of the interest rate cap agreements was $40.0
million  with  cap  levels  between  7.5%  and  8% at  December  31,  1998.  The
transaction fees for these instruments are being amortized over the terms of the
agreements.

   The API Credit Facility contains restrictions that limit, among other things:
additional  indebtedness  and  encumbrances on assets;  cash dividends and other
distributions;  mergers and sales of assets;  the  repurchase  or  redemption of
capital stock; investments;  acquisitions that exceed certain dollar limitations
without the lenders' prior approval;  and prepayment of indebtedness  other than
indebtedness under the API Credit Facility. In addition, the API Credit Facility
requires API and its subsidiaries to meet certain financial covenants, including
covenants  with  respect  to ratios of EBITDA to fixed  charges,  EBITDA to debt
service,  EBITDA to interest  service and total  indebtedness  to EBITDA.  As of
December 31, 1998, API and its operating  subsidiaries  were in compliance  with
the covenants of the API Credit Facility.

   As of December 31, 1998, $267.0 million was outstanding and $93.5 million was
available  under the API Credit  Facility.  At December 31, 1998,  such advances
bore interest at an average annual rate of 8.45%.

   On November  16,  1998,  the  lenders to API  approved an increase in the API
Credit Facility from $400.0 million to $600.0 million, subject to completing the
MobileMedia Merger and certain other conditions.  The increase of $200.0 million
(the "API Credit Facility Increase") was to fund a portion of the cash necessary
for Parent to complete the MobileMedia  Merger. The API Credit Facility Increase
was to be provided by four of API's existing  lenders,  provided the MobileMedia
Transactions  were completed  prior to March 31, 1999. The four API lenders that
were to fund the API Credit Facility  Increase have indicated their  willingness
to seek approval to extend $135.0  million of the API Credit  Facility  Increase
through June 30, 1999, subject to formal approval,  definitive documentation and
negotiation of certain terms.

   Senior Notes--Interest on the 14% Senior Notes due 2004 (the "14% Notes") and
the 9 1/2% Senior Notes due 2004  (collectively,  the "Senior Notes") is payable
semiannually.  The  Senior  Notes  contain  certain  restrictive  and  financial
covenants,  which,  among other things,  limit the ability of Parent or Arch to:
incur additional  indebtedness;  pay dividends;  grant liens on its assets; sell
assets;  enter into  transactions  with related parties;  merge,  consolidate or
transfer  substantially all of its assets;  redeem capital stock or subordinated
debt; and make certain investments.

   Arch has entered into  interest rate swap  agreements in connection  with the
14% Notes. Under the interest rate swap agreements,  the Company has effectively
reduced  the  interest  rate on the 14% Notes from 14% to the fixed swap rate of
9.45%. In the event of nonperformance by the counterparty to these interest rate
protection  agreements,  the Company  would be subject to the 14% interest  rate
specified  on the notes.  As of December  31,  1998,  the  Company had  received
$2,275,000  in excess of the amounts  paid under the swap  agreements,  which is
included in long-term debt in the  accompanying  balance sheet.  At December 31,
1998, the Company had a net receivable of $733,500 on these interest rate swaps.

   On June 29, 1998, Arch issued and sold $130.0 million  principal amount of 12
3/4%  Senior  Notes due 2007 (the "12 3/4%  Notes")  for net  proceeds of $122.6
million  (after  deducting the discount to the initial  purchasers and estimated
offering  expenses  payable by Arch).  The 12 3/4% Notes were sold at an initial
price to investors of 98.049%. The 12 3/4% Notes mature on July 1, 2007 and bear
interest  at a rate of 12 3/4% per annum,  payable  semi-annually  in arrears on
January 1 and July 1 of each year, commencing January 1, 1999.

   The  indenture  under which the 12 3/4% Notes were issued  ("the  Indenture")
contains certain  covenants that, among other things,  limit the ability of Arch
to incur additional  indebtedness,  issue preferred stock, pay dividends or make
other  distributions,  repurchase  Capital Stock (as defined in the  Indenture),
repay subordinated indebtedness or make other Restricted Payments (as defined in
the  Indenture),  create certain  liens,  enter into certain  transactions  with
affiliates,  sell  assets,  issue or sell  Capital  Stock of  Arch's  Restricted
Subsidiaries  (as defined in the  Indenture)  or enter into certain  mergers and
consolidations.



                                      F-11
<PAGE>

   Maturities of Debt--Scheduled long-term debt maturities at December 31, 1998,
are as follows (in thousands):


                   Year Ending December 31,
                   ------------------------
                   1999 .........................   $  1,250
                   2000 .........................     17,725
                   2001 .........................     29,650
                   2002 .........................     29,650
                   2003 .........................     29,650
                   Thereafter ...................    513,954
                                                    --------
                                                    $621,879
                                                    ========

4. Income Taxes

   Arch  accounts  for  income  taxes  under  the  provisions  of SFAS  No.  109
"Accounting  for  Income  Taxes".   Deferred  tax  assets  and  liabilities  are
determined based on the difference between the financial statement and tax bases
of assets and liabilities given the provisions of enacted laws.

   The  components of the net deferred tax asset  (liability)  recognized in the
accompanying  consolidated  balance  sheets at December 31, 1997 and 1998 are as
follows (in thousands):

                                                  1997         1998
                                                  ----         ----
         Deferred tax assets ...............   $ 134,944    $ 179,484
         Deferred tax liabilities ..........     (90,122)     (67,652)
                                               ---------    ---------
                                                  44,822      111,832
         Valuation allowance ...............     (44,822)    (111,832)
                                               ---------    ---------
                                               $     --     $     --
                                               =========    =========  


   The approximate effect of each type of temporary  difference and carryforward
at December 31, 1997 and 1998 is summarized as follows (in thousands):

                                                     1997          1998
                                                     ----          ----
       Net operating losses ...................   $ 106,214    $ 128,213
       Intangibles and other assets ...........     (87,444)     (62,084)
       Depreciation of property and equipment .      24,388       39,941
       Accruals and reserves ..................       1,664        5,762
                                                  ---------    ---------
                                                     44,822      111,832
       Valuation allowance ....................     (44,822)    (111,832)
                                                  ---------    ---------
                                                  $     --     $     --
                                                  =========    =========  


   The  effective  income tax rate differs from the  statutory  federal tax rate
primarily due to the nondeductibility of goodwill amortization and the inability
to recognize  the benefit of current net operating  loss ("NOL")  carryforwards.
The NOL carryforwards expire at various dates through 2013. The Internal Revenue
Code contains  provisions that may limit the NOL  carryforwards  available to be
used in any given year if certain events occur, including significant changes in
ownership, as defined.

   The Company has established a valuation  reserve against its net deferred tax
asset until it becomes  more likely than not that this asset will be realized in
the foreseeable future.

5. Commitments and Contingencies

   In March 1996,  Parent  completed a public offering of 107/8% Senior Discount
Notes ("Parent  Discount  Notes") in aggregate  principal  amount at maturity of
$467.4 million  ($275.0  million initial  accreted  value).  The Parent Discount
Notes mature on March 15, 2008.  Interest does not accrue on the Parent Discount
Notes prior to March 15, 2001. Thereafter, interest on the Parent Discount Notes
will  accrue at the rate of  107/8%  per annum  (approximately  $50.8  million),
payable  semi-annually.  Parent has no significant  business  operations and its


                                      F-12
<PAGE>

primary asset  represents  its investment in Arch. The ability of Parent to make
payments  of  principal  and  interest  on the  Parent  Discount  Notes  will be
dependent  upon Arch's  achieving and  sustaining  levels of  performance in the
future that would permit the Company to pay dividends,  distributions or fees to
Parent  which are  sufficient  to permit such  payments  on the Parent  Discount
Notes.

   In the ordinary  course of  business,  the Company and its  subsidiaries  are
defendants in a variety of judicial  proceedings.  In the opinion of management,
there is no proceeding  pending,  or to the knowledge of management  threatened,
which, in the event of an adverse  decision,  would result in a material adverse
change in the financial condition of the Company.

   Arch has operating leases for office and transmitting  sites with lease terms
ranging from one month to approximately  ten years. In most cases,  Arch expects
that,  in the normal  course of business,  leases will be renewed or replaced by
other leases.

   Future  minimum  lease  payments  under  noncancellable  operating  leases at
December 31, 1998 are as follows (in thousands):

                    Year Ending December 31,
                    ------------------------
                    1999 .........................   $21,372
                    2000 .........................    13,826
                    2001 .........................     8,853
                    2002 .........................     6,026
                    2003 .........................     2,495
                    Thereafter ...................     1,516 
                                                     -------
                         Total ...................   $54,088
                                                     =======


   Total rent expense under  operating  leases for the years ended  December 31,
1996, 1997 and 1998 approximated $14.7 million, $19.8 million and $19.6 million,
respectively.

6. Employee Benefit Plans

   Retirement Savings Plan--Arch has a retirement savings plan, qualifying under
Section  401(k) of the Internal  Revenue Code covering  eligible  employees,  as
defined.  Under the plan, a  participant  may elect to defer receipt of a stated
percentage  of  the  compensation  which  would  otherwise  be  payable  to  the
participant for any plan year (the "deferred  amount") provided,  however,  that
the deferred amount shall not exceed the maximum amount  permitted under Section
401(k) of the Internal  Revenue Code.  The plan  provides for employer  matching
contributions.  Matching  contributions  for the years ended  December 31, 1996,
1997 and 1998 approximated $217,000, $302,000 and $278,000, respectively.

   Stock  Options--Employees  of Arch are eligible to be granted  options  under
Parent's  stock  option  plans.  Parent has a 1989 Stock  Option Plan (the "1989
Plan") and a 1997 Stock  Option Plan (the "1997  Plan"),  which  provide for the
grant of incentive and  nonqualified  stock options to key employees,  directors
and consultants to purchase  Parent's common stock.  Incentive stock options are
granted at exercise  prices not less than the fair  market  value on the date of
grant.  Options  generally  vest over a five-year  period from the date of grant
with the first such vesting (20% of granted options) occurring one year from the
date of grant and  continuing  ratably at 5% on a  quarterly  basis  thereafter.
However, in certain circumstances, options may be immediately exercised in full.
Options  generally  have a duration of 10 years.  The 1989 Plan provides for the
granting of options to purchase a total of 1,128,944 shares of common stock. All
outstanding  options on  September  7, 1995,  under the 1989 Plan,  became fully
exercisable  and vested as a result of the USAM Merger.  The 1997 Plan  provides
for the  granting of options to purchase a total of  6,000,000  shares of common
stock.

   Effective  October  23,  1996,  the  Compensation  Committee  of the Board of
Directors of Parent authorized the grant of new options to each employee who had
an  outstanding  option at a price greater than $12.50 (the fair market value of
Parent's  common  stock on October 23,  1996).  The new option  would be for the
total  number of shares (both vested and  unvested)  subject to each  employee's
outstanding  stock  option  agreement(s).  As a result  of this  action  424,206
options were terminated and regranted at a price of $12.50.  The Company treated
this as a cancellation and reissuance under APB opinion No. 25,  "Accounting for
Stock Issued to Employees".

   As a result of the USAM Merger, Parent assumed a stock option plan originally
adopted by USA Mobile in 1994 and amended and  restated on January 26, 1995 (the
"1994 Plan"),  which provides for the grant of up to 601,500 options to purchase


                                      F-13
<PAGE>

Parent's  common  stock.  Under the 1994 Plan,  incentive  stock  options may be
granted to employees and nonqualified stock options may be granted to employees,
directors  and  consultants.  Incentive  stock  options  are granted at exercise
prices not less than the fair market value on the date of grant. Option duration
and vesting  provisions  are similar to the 1989 Plan. All  outstanding  options
under the 1994 Plan became fully  exercisable and vested as a result of the USAM
Merger.

   On December 16, 1997, the Compensation Committee of the Board of Directors of
Parent  authorized  the Company to offer an election  to its  employees  who had
outstanding  options at a price  greater  than $5.06 to cancel such  options and
accept  new  options at a lower  price.  In  January  1998,  as a result of this
election by certain of its employees,  the Company  canceled  1,083,216  options
with exercise prices ranging from $5.94 to $20.63 and granted the same number of
new options with an exercise price of $5.06 per share,  the fair market value of
the stock on December 16, 1997.

   The following table summarizes the activity under Parent's stock option plans
for the periods presented:

                                                                      Weighted
                                                                      Average
                                                         Number of    Exercise
                                                          Options      Price
                                                          -------      -----
   Options Outstanding at December 31, 1995 .........    1,005,755    $13.02
           Granted ..................................      695,206     15.46
           Exercised ................................     (169,308)     8.69
           Terminated ...............................     (484,456)    21.60
                                                        ----------    ------
   Options Outstanding at December 31, 1996 .........    1,047,197     11.37
           Granted ..................................      500,394      6.68
           Exercised ................................         --         --
           Terminated ...............................     (186,636)    10.65
                                                        ----------    ------
   Options Outstanding at December 31, 1997 .........    1,360,955      9.74
           Granted ..................................    1,968,337      4.76
           Exercised ................................      (94,032)     3.13
           Terminated ...............................   (1,290,407)     9.51
                                                        ----------    ------
   Options Outstanding at December 31, 1998 .........    1,944,853    $ 5.17
                                                        ==========    ======
   Options Exercisable at December 31, 1998 .........      333,541    $ 6.92
                                                        ==========    ======


   The  following   table   summarizes  the  options   outstanding  and  options
exercisable by price range at December 31, 1998:

                                    Weighted
                                    Average    Weighted               Weighted
                                   Remaining   Average                Average
  Range of Exercise    Options    Contractual  Exercise    Options    Exercise
       Prices        Outstanding      Life       Price   Exercisable    Price
  $1.44 - $ 4.13        162,533       9.38      $ 3.36       4,500     $ 1.89
   4.53 -   4.53        511,201       9.17        4.53         --        --
   4.56 -   4.94        152,625       9.00        4.91       6,625       4.59
   5.06 -   5.06        969,057       9.04        5.06     231,827       5.06
   6.25 -  27.56        149,437       7.02       10.29      90,589      12.11
  --------------      ---------       ----      ------     -------     ------
  $1.44 - $27.56      1,944,853       8.94      $ 5.17     333,541     $ 6.92
  ==============      =========       ====      ======     =======     ======


   Employee Stock Purchase  Plans--Employees of Arch may participate in Parent's
stock purchase plans. On May 28, 1996, Parent's  stockholders  approved the 1996
Employee  Stock Purchase Plan (the "1996 ESPP").  The 1996 ESPP allows  eligible
employees the right to purchase  common stock,  through  payroll  deductions not
exceeding 10% of their compensation,  at the lower of 85% of the market price at
the beginning or the end of each six-month  offering  period.  During 1996, 1997
and 1998, 46,842, 151,343 and 257,988 shares were issued at an average price per


                                      F-14
<PAGE>

share of $7.97,  $5.29 and $2.13,  respectively.  At December 31,  1998,  43,827
shares are available for future issuance.

   On January 26, 1999, Parent's  stockholders  approved the 1999 Employee Stock
Purchase Plan ( the "1999 ESPP").  The 1999 ESPP allows  eligible  employees the
right to purchase common stock,  through payroll deductions not exceeding 10% of
their compensation,  at the lower of 85% of the market price at the beginning or
the end of each six-month  offering  period.  Parent's  stockholders  authorized
1,500,000 shares for future issuance under this plan.

   Accounting for Stock-Based  Compensation--Arch  accounts for its stock option
and stock purchase  plans under APB Opinion No. 25 "Accounting  for Stock Issued
to Employees". Since all options have been issued at a grant price equal to fair
market  value,  no  compensation  cost has been  recognized  in the Statement of
Operations.  Had  compensation  cost for these plans been determined  consistent
with SFAS No. 123, "Accounting for Stock-Based Compensation",  Arch's net income
(loss) would have been increased to the following pro forma amounts:

                                               Year Ended December 31,
                                            1996         1997         1998
                                         ----------   ---------    ---------
                                                    (in thousands)
   Net income (loss), as reported ....   $ (87,025)   $(146,628)   $(167,103)
   Net income (loss), pro forma ......     (88,149)    (148,224)    (169,117)


   Because  the SFAS No. 123 method of  accounting  has not been  applied to the
options  granted prior to January 1, 1995, the resulting pro forma  compensation
cost may not be  representative of that to be expected in future years. The fair
value  of each  option  grant  is  estimated  on the  date of  grant  using  the
Black-Scholes  option pricing model. In computing these pro forma amounts,  Arch
has assumed risk-free  interest rates of 4.5% - 6%, an expected life of 5 years,
an expected dividend yield of zero and an expected volatility of 50% - 85%.

   The weighted average fair values  (computed  consistent with SFAS No. 123) of
options  granted  under all plans in 1996,  1997 and 1998 were $4.95,  $3.37 and
$2.78,  respectively.  The weighted  average fair value of shares sold under the
ESPP in 1996, 1997 and 1998 was $5.46, $2.83 and $1.88, respectively.

10. Related Party Transactions

   Intercompany  Transactions with Arch Communications Group, Inc.-- On June 29,
1998, two partnerships  managed by Sandler Capital Management Company,  Inc., an
investment management firm, together with certain other private investors,  made
an  equity  investment  in  Parent  of $25.0  million  in the  form of  Series C
Convertible   Preferred   Stock  of  Parent   ("Series  C   Preferred   Stock").
Simultaneously, Parent contributed to Arch as an equity investment $24.0 million
of the net proceeds from the sale of Series C Preferred Stock,  Arch contributed
such  amount to API as an equity  investment  and API used such  amount to repay
indebtedness  under ACE's existing credit facility as part of the  establishment
of the Amended Credit Facility.

8. Tower Site Sale

   In April 1998,  Arch announced an agreement to sell certain of its tower site
assets (the "Tower Site Sale") for approximately  $38.0 million in cash (subject
to  adjustment),  of which $1.3  million  was paid to entities  affiliated  with
Benbow in payment for certain  assets owned by such entities and included in the
Tower Site Sale. In the Tower Site Sale, Arch is selling  communications towers,
real estate, site management  contracts and/or leasehold interests involving 133
sites in 22 states  and will  rent  space on the  towers  on which it  currently
operates  communications  equipment to service its own paging network. Arch used
its net proceeds  from the Tower Site Sale to repay  indebtedness  under the API
Credit  Facility.  Arch held the initial  closing of the Tower Site Sale on June
26, 1998 with gross proceeds to Arch of approximately  $12.0 million  (excluding
$1.3  million  which was paid to  entities  affiliated  with  Benbow for certain
assets which such entities sold as part of this  transaction)  and held a second
closing on September 29, 1998 with gross proceeds to Arch of approximately $20.4
million.

   Arch entered into options to repurchase  each site and until this  continuing
involvement   ends  the  gain  is  deferred  and  included  in  other  long-term
liabilities.  At December  31, 1998,  Arch had sold 117 of the 133 sites,  which
resulted in a total gain of approximately $23.5 million and through December 31,
1998  approximately  $2.5  million  of this  gain  had  been  recognized  in the
statement of operations and is included in operating income.



                                      F-15
<PAGE>

9. Divisional Reorganization

   In June 1998, Parent's Board of Directors approved a reorganization of Arch's
operations  (the  "Divisional  Reorganization").   As  part  of  the  Divisional
Reorganization,  which is being  implemented  over a period of 18 to 24  months,
Arch has  consolidated its former Midwest,  Western and Northern  divisions into
four existing operating divisions and is in the process of consolidating certain
regional   administrative   support   functions,   such  as  customer   service,
collections,  inventory and billing,  to reduce redundancy and take advantage of
various   operating   efficiencies.    In   connection   with   the   Divisional
Reorganization, Arch (i) anticipates a net reduction of approximately 10% of its
workforce, (ii) is closing certain office locations and redeploying other assets
and  (iii)  recorded  a  restructuring  charge  of $14.7  million  in 1998.  The
restructuring  charge consisted of  approximately  (i) $9.7 million for employee
severance,  (ii) $3.5 million for lease  obligations and  terminations and (iii)
$1.5 million of other costs.

   The provision for lease  obligations and  terminations  relates  primarily to
future lease  commitments on local,  regional and divisional  office  facilities
that  will be  closed  as  part of the  Divisional  Reorganization.  The  charge
represents future lease  obligations,  on such leases past the dates the offices
will be closed by the Company,  or for certain  leases,  the cost of terminating
the leases prior to their scheduled expiration.  Cash payments on the leases and
lease  terminations  will occur over the remaining lease terms,  the majority of
which expire prior to 2001.

   Through  the  elimination  of  certain  local  and  regional   administrative
operations and the consolidation of certain support functions,  the Company will
eliminate  approximately  280 net positions.  As a result of  eliminating  these
positions,  the Company will involuntarily terminate an estimated 900 personnel.
The  majority  of the  positions  to be  eliminated  will be related to customer
service,  collections,  inventory  and billing  functions  in local and regional
offices which will be closed as a result of the Divisional Reorganization. As of
December 31, 1998,  217  employees  had been  terminated  due to the  Divisional
Reorganization. The majority of the remaining severance and benefits costs to be
paid by the Company will be paid during 1999.

   The  Company's  restructuring  activity as of December 31, 1998 is as follows
(in thousands):


                                Reserve
                               Initially   Utilization of  Remaining
                              Established     Reserve       Reserve
                              -----------     -------       -------
    Severance costs ........    $ 9,700       $ 2,165       $ 7,535
    Lease obligation costs..      3,500           366         3,134
    Other costs ............      1,500           260         1,240
                                -------       -------       -------
          Total ............    $14,700       $ 2,791       $11,909
                                =======       =======       =======


10.   Segment Reporting

   The Company operates in one industry:  providing wireless messaging services.
On December 31, 1998, the Company operated approximately 175 retail stores in 35
states of the United States.



                                      F-16
<PAGE>

11. Quarterly Financial Results (Unaudited)

   Quarterly  financial  information  for the years ended  December 31, 1997 and
1998 is summarized below (in thousands):
<TABLE>
<CAPTION>

                                                      First      Second       Third       Fourth
                                                     Quarter     Quarter     Quarter      Quarter
                                                     -------     -------     -------      -------
<S>                                                <C>         <C>         <C>          <C>      
Year Ended December 31, 1997:
Revenues........................................   $  95,539   $  98,729   $ 101,331    $ 101,242
Operating income (loss).........................     (26,389)    (29,403)    (26,965)     (18,287)
Net income (loss)...............................     (37,337)    (40,680)    (38,683)     (29,928)
Year Ended December 31, 1998:
Revenues........................................   $ 102,039   $ 103,546   $ 104,052    $ 103,998
Operating income (loss).........................     (19,175)    (35,114)    (20,568)     (18,428)
Income (loss) before extraordinary item.........     (36,500)    (52,711)    (38,209)     (37,963)
Extraordinary charge............................         --       (1,720)        --           --
Net income (loss)...............................     (36,500)    (54,431)    (38,209)     (37,963)
</TABLE>


                                      F-17
<PAGE>

                            ARCH COMMUNICATIONS, INC.

                        VALUATION AND QUALIFYING ACCOUNTS

                  Years Ended December 31, 1996, 1997 and 1998
                                 (in thousands)
<TABLE>
<CAPTION>



                                                Balance at                    Other                    Balance
                                                Beginning    Charged to    Additions to               at End of
       Allowance for Doubtful Accounts          of Period      Expense     Allowance(1)   Write-Offs   Period
       -------------------------------          ---------      -------     ------------   ----------   ------
<S>                                             <C>            <C>           <C>          <C>          <C>    
Year ended December 31, 1996.............       $  2,125       $ 8,198       $ 1,757      $ (7,969)    $ 4,111
                                                ========       =======       =======      ========     =======
Year ended December 31, 1997.............       $  4,111       $ 7,181       $   --       $ (5,548)    $ 5,744
                                                ========       =======       =======      ========     =======
Year ended December 31, 1998.............       $  5,744       $ 8,545       $   --       $ (7,706)    $ 6,583
                                                ========       =======       =======      ========     =======
<FN>
(1)      Additions arising through acquisitions of paging companies
</FN>
</TABLE>



<TABLE>
<CAPTION>


                                                Balance at                                             Balance
                                                Beginning    Charged to       Other                   at End of
        Accrued Restructuring Charge            of Period      Expense      Additions    Deductions    Period
        ----------------------------            ---------      -------      ---------    ----------    ------
<S>                                             <C>            <C>           <C>          <C>          <C>    
Year ended December 31, 1998.............       $    --        $14,700       $   --       $ (2,791)    $11,909
                                                ========       =======       =======      ========     =======
</TABLE>





                                      S-1
<PAGE>

                                  EXHIBIT INDEX



     2.1  Agreement and Plan of Merger, dated as of August 18, 1998 by and among
          Arch  Communications   Group,  Inc.,  Farm  Team  Corp.,   MobileMedia
          Corporation and MobileMedia Communications, Inc. (1)
     2.2  First Amendment to Agreement and Plan of Merger, dated as of September
          3, 1998, by and among Arch Communications Group, Inc., Farm Team Corp.
          and MobileMedia Communications, Inc. (1)
     2.3  Second Amendment to Agreement and Plan of Merger, dated as of December
          1, 1998, by and among Arch Communications Group, Inc., Farm Team Corp.
          and MobileMedia Communications, Inc. (1)
     2.4  Third Amendment to Agreement and Plan of Merger,  dated as of February
          8, 1999 by and among Arch Communications Group, Inc., Farm Team Corp.,
          MobileMedia Corporation and MobileMedia communications, Inc. (7)
     3.1  Restated Certificate of Incorporation. (2)
     3.2  By-laws, as amended. (2)
     4.1  Indenture,  dated February 1, 1994, between Arch Communications,  Inc.
          (formerly  known as USA  Mobile  Communications,  Inc.  II) and United
          States Trust Company of New York,  as Trustee,  relating to the 9 1/2%
          Senior Notes due 2004 of Arch Communications, Inc. (2)
     4.2  Indenture, dated December 15, 1994, between Arch Communications,  Inc.
          and United States Trust  Company of New York, as Trustee,  relating to
          the 14% Senior Notes due 2004 of Arch Communications, Inc. (3)
     4.3  Indenture, dated June 29, 1998, between Arch Communications,  Inc. and
          U.S. Bank Trust National Association,  as Trustee,  relating to the 12
          3/4% Senior Notes due 2007 of Arch Communications, Inc. (4)
    10.1  Second Amended and Restated Credit Agreement  (Tranche A and Tranche C
          Facilities), dated June 29, 1998, among Arch Paging, Inc., the Lenders
          party thereto,  The Bank of New York, Royal Bank of Canada and Toronto
          Dominion (Texas), Inc. (4)
    10.2  Second  Amended and Restated  Credit  Agreement  (Tranche B Facility),
          dated June 29,  1998,  among Arch  Paging,  Inc.,  the  Lenders  party
          thereto.  The Bank of New  York,  Royal  Bank of  Canada  and  Toronto
          Dominion (Texas), Inc. (4)
    10.3  Amendment No. 1 and Amendment No. 2 to the Second Amended and Restated
          Credit Agreement (Tranche A and Tranche C Facilities). (6)
    10.4  Amendment No. 1 and Amendment No. 2 to the Second Amended and Restated
          Credit Agreement (Tranche B Facility). (6)
    10.5  Asset  Purchase  and Sale  Agreement,  dated  April  10,  1998,  among
          OmniAmerica,  Inc.  and certain  subsidiaries  of Arch  Communications
          Group, Inc. (4)
    10.6  Letter  Agreement,  dated June 10, 1998,  between Arch  Communications
          Group, Inc. and Motorola, Inc. (4) (5)
    10.7  Debtors'  Third  Amended  Joint  Plan of  Reorganization,  dated as of
          December 1, 1998. (1)
    10.8  Disclosure   Statement  of  Debtors'   Third  Amended  Joint  Plan  of
          Reorganization, dated December 3, 1998. (1)
    10.9  Bridge  Commitment  Letter,  dated as of August 18,  1998,  among Arch
          Communications,  Inc., Arch  Communications  Group,  Inc. and The Bear
          Stearns  Companies,  Inc.,  The Bank of New York, TD Securities  (USA)
          Inc. and the Royal Bank of Canada.(1)
    10.10 Preferred  Distributor  Agreement  dated  June 1, 1998 by and  between
          Arch Communications Group, Inc. and NEC America, Inc. (5)(6)
    27.1* Financial Data Schedule.
---------------- 
     *    Filed herewith.
     +    Identifies exhibits constituting a management contract or compensation
          plan.
     (1)  Incorporated by reference from the Registration  Statement on Form S-4
          (file No. 333-63519) of Arch Communications Group, Inc.
     (2)  Incorporated by reference from the Registration  Statement on Form S-1

<PAGE>

          (File No. 33-72646) of Arch Communications, Inc.
     (3)  Incorporated by reference from the Registration  Statement on Form S-1
          (File No. 33-85580) of Arch Communications, Inc.
     (4)  Incorporated by referenced from the Current Report on Form 8-K of Arch
          Communications Group, Inc. dated June 26, 1998.
     (5)  A  Confidential  Treatment  Request  has been  filed  with  respect to
          portions of this exhibit so incorporated by reference.
     (6)  Incorporated  by reference from the Annual Report on Form 10-K of Arch
          Communications Group, Inc. for the year ended December 31, 1998.
     (7)  Incorporated  by reference from the Current Report on Form 8-K of Arch
          Communications Group, Inc., dated March 2, 1999.