Spok (SPOK) 10-Q 2007 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2007
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from          to

Commission File Number 0-51027

USA MOBILITY, INC.

(Exact name of Registrant as specified in its Charter)

DELAWARE	16-1694797
(State of incorporation)	(I.R.S. Employer Identification No.)
6677 Richmond Highway Alexandria, Virginia	22306 (Zip Code)
(Address of principal executive offices)

(866) 662-3049

(Registrant’s telephone number, including area code)

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 þ     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act. Large accelerated filer o     Accelerated filer þ     Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).  Yes o     No þ

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes þ     No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 27,316,413 shares of the Registrant’s Common Stock ($0.0001 par value per share) were outstanding as of May 11, 2007.

USA MOBILITY, INC.

QUARTERLY REPORT ONFORM 10-Q

Index

			Page
PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Unaudited Condensed Consolidated Balance Sheets as of December 31, 2006 and March 31, 2007		2
		Unaudited Condensed Consolidated Income Statements for the Three Months Ended March 31, 2006 and 2007		3
		Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2007		4
		Unaudited Notes to Condensed Consolidated Financial Statements		5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		25
	Item 4.	Controls and Procedures		25
PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings		26
	Item 1A.	Risk Factors		26
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		26
	Item 3.	Defaults upon Senior Securities		26
	Item 4.	Submission of Matters to a Vote of Security Holders		26
	Item 5.	Other Information		26
	Item 6.	Exhibits		26

1

PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements

USA MOBILITY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	December 31,		March 31,
	2006		2007
	(In thousands)
			(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	66,507	$	80,292
Accounts receivable, net		26,364		25,472
Prepaid expenses and other		12,294		10,465
Deferred income tax assets		18,399		17,972
Total current assets		123,564		134,201
Property and equipment, net		91,562		85,458
Goodwill		159,438		199,771
Intangible assets, net		26,339		23,576
Deferred income tax assets		180,244		162,144
Other assets		7,067		7,308
TOTAL ASSETS	$	588,214	$	612,458
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	63,979	$	61,501
Distributions payable		435		162
Customer deposits		2,250		2,063
Deferred revenue		16,194		16,384
Total current liabilities		82,858		80,110
Other long-term liabilities		29,384		65,698
TOTAL LIABILITIES		112,242		145,808
Stockholders’ equity:
Preferred stock		—		—
Common stock		3		3
Additional paid-in capital		475,969		466,647
Retained earnings		—		—
TOTAL STOCKHOLDERS’ EQUITY		475,972		466,650
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	588,214	$	612,458

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

2

USA MOBILITY, INC.

CONDENSED CONSOLIDATED INCOME STATEMENTS

	For the Three Months Ended March 31,
	2006			2007
	(In thousands, except share
	and per share amounts)
	(Unaudited)
Revenue:
Service, rental and maintenance, net of service credits	$	128,761		$	107,142
Product sales		6,131			4,400
Total revenue		134,892			111,542
Operating expenses:
Cost of products sold		786			687
Service, rental and maintenance		48,092			39,033
Selling and marketing		11,059			10,242
General and administrative		36,142			26,448
Depreciation, amortization and accretion		18,794			13,318
Severance and restructuring		170			17
Total operating expenses		115,043			89,745
Operating income		19,849			21,797
Interest income, net		549			951
Other income (expense), net		62			(516	)
Income before income tax expense		20,460			22,232
Income tax expense		(8,195	)		(9,206	)
Net income	$	12,265		$	13,026
Basic net income per common share	$	0.45		$	0.47
Diluted net income per common share	$	0.45		$	0.47
Basic weighted average common shares outstanding		27,397,307			27,434,418
Diluted weighted average common shares outstanding		27,503,230			27,578,066

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

3

USA MOBILITY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the
	Three Months Ended March 31,
	2006			2007
	(Unaudited and in thousands)
Cash flows from operating activities:
Net income	$	12,265		$	13,026
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		18,794			13,318
Deferred income tax expense		1,464			8,052
Amortization of stock based compensation		683			428
Provisions for doubtful accounts and service credits		5,046			3,327
Loss on disposals of property and equipment		37			648
Changes in assets and liabilities:
Accounts receivable		(507	)		(2,435	)
Prepaid expenses and other		(1,033	)		2,121
Intangibles and other long-term assets		104			493
Accounts payable and accrued expenses		(2,258	)		(3,164	)
Customer deposits and deferred revenue		965			3
Other long-term liabilities		7,509			919
Net cash provided by operating activities		43,069			36,736
Cash flows from investing activities:
Purchases of property and equipment		(4,424	)		(5,086	)
Proceeds from disposals of property and equipment		32			79
Receipts from long-term note receivable		80			—
Net cash used in investing activities		(4,312	)		(5,007	)
Cash flows from financing activities:
Repayment of long-term debt		(12	)		—
Cash distributions to stockholders		—			(17,944	)
Net cash used in financing activities		(12	)		(17,944	)
Net increase (decrease) in cash and cash equivalents		38,745			13,785
Cash and cash equivalents, beginning of period		37,547			66,507
Cash and cash equivalents, end of period	$	76,292		$	80,292
Supplemental disclosure:
Interest paid	$	—		$	—

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

4

USA MOBILITY, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Preparation of Interim Financial Statements — The condensed consolidated financial statements of USA Mobility, Inc. (“USA Mobility” or the “Company”) have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Amounts shown on the condensed consolidated income statements within the Operating Expense categories of cost of products sold; service, rental and maintenance; selling and marketing; and general and administrative are recorded exclusive of depreciation, amortization and accretion, and severance and restructuring charges. These items are shown separately on the condensed consolidated income statements within Operating Expenses.

The financial information included herein, other than the condensed consolidated balance sheet as of December 31, 2006, has been prepared without audit. The condensed consolidated balance sheet at December 31, 2006 has been derived from, but does not include all the disclosures contained in, the audited consolidated financial statements for the year ended December 31, 2006. In the opinion of management, these unaudited statements include all adjustments and accruals that are necessary for a fair presentation of the results of all interim periods reported herein. All adjustments are of a normal recurring nature.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in USA Mobility’s Annual Report onForm 10-K for the year ended December 31, 2006. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for a full year.

(2) Business — USA Mobility is a leading provider of wireless messaging in the United States. Currently, USA Mobility provides one-way and two-way messaging services. One-way messaging consists of numeric and alphanumeric messaging services. Numeric messaging services enable subscribers to receive messages that are composed entirely of numbers, such as a phone number, while alphanumeric messages may include numbers and letters, which enable subscribers to receive text messages. Two-way messaging services enable subscribers to send and receive messages to and from other wireless messaging devices, including pagers, personal digital assistants and personal computers. USA Mobility also offers voice mail, personalized greeting, message storage and retrieval and equipment lossand/or maintenance protection to both one-way and two-way messaging subscribers. These services are commonly referred to as wireless messaging and information services.

(3) Risks and Other Important Factors — See “Item 1A. Risk Factors” of Part II of this quarterly report, which describes key risks associated with USA Mobility’s operations and industry.

Based on current and anticipated levels of operations, USA Mobility’s management believes that the Company’s net cash provided by operating activities, together with cash on hand, should be adequate to meet its cash requirements for the foreseeable future.

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

USA Mobility believes that future fluctuations in its revenues and operating results may occur due to many factors, particularly the decreased demand for its messaging services. If the rate of decline for the Company’s messaging services exceeds its expectations, revenues may be negatively impacted, and such impact could be material. USA Mobility’s plan to consolidate its networks may also negatively impact revenues as customers experience a reduction in, and possible disruptions of, service in certain areas. Under these circumstances, USA Mobility may be unable to adjust spending in a timely manner to compensate for any future revenue shortfall. It is possible that, due to these fluctuations, USA Mobility’s revenue or operating results may not meet the expectations of investors, which could reduce the value of USA Mobility’s common stock.

(4) New Accounting Pronouncements — In June 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. 48,Accounting for Uncertainty in Income Taxes, (“FIN 48”), an interpretation of

5

USA MOBILITY, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes, (“SFAS No. 109”).  The disclosure requirements and cumulative effect of adoption of the FIN 48 are presented in Note 12.

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities, (“SFAS No. 159”), which provides companies with an option to report selected financial assets and liabilities at fair-value. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective as of the first fiscal year beginning after November 15, 2007. SFAS No. 159 should not have a material impact on the Company’s consolidated financial position or results of operations.

Other new pronouncements issued during the first quarter 2007 are not relevant to the Company and have no effect on the Company’s consolidated financial position or results of operations.

(5) Goodwill and Other Intangible Assets — Goodwill of $199.8 million at March 31, 2007 resulted from the purchase accounting related to the November 2004 merger of Arch Wireless, Inc. and subsidiaries (“Arch”) and Metrocall Holdings, Inc. and subsidiaries (“Metrocall”). Based on Emerging Issues Task Force (“EITF”) IssueNo. 93-7,Uncertainties Related to Income Taxes in a Purchase Business Combination, (“EITFNo. 93-7”), goodwill increased by $10.0 million during the fourth quarter of 2006 due to a change in management’s estimate of the ultimate tax basis of the deferred income tax assets acquired in the purchase of Metrocall.

The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized an increase to goodwill of $40.3 million for uncertain tax positions directly related to the merger of Arch and Metrocall. The Company anticipates that approximately $17.0 million of this $40.3 million increase to goodwill recognized for uncertain tax positions may be resolved in 2007 and result in a corresponding reduction to goodwill.

Goodwill is not amortized. The Company is required to evaluate goodwill of a reporting unit for impairment at least annually and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair-value of the reporting unit below its carrying amount. For this determination, the Company as a whole is considered the reporting unit. If the fair-value of the reporting unit is less than its carrying value, an impairment loss is required to be recorded to the extent that the implied value of goodwill within the reporting unit is less than the carrying value. The fair-value of the reporting unit is determined based on discounted cash flows, market multiples or appraised values as appropriate.

Declines in the Company’s stock priceand/or prevailing circumstances that would reduce the fair-value of the reporting unit could indicate that a potential impairment has occurred. Such a decline could require evaluation of impairment more frequently than annually.

Other intangible assets were recorded at fair-value at the date of acquisition and amortized over periods generally ranging from one to five years. Aggregate amortization expense for intangible assets for the three months ended March 31, 2006 and 2007 was $4.2 million and $2.8 million, respectively.

The Company did not record any impairments of long-lived assets, intangible assets or goodwill in the first quarter of 2006 or 2007.

6

USA MOBILITY, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Amortizable intangible assets are comprised of the following at March 31, 2007 (dollars in thousands):

	Useful Life		Gross Carrying		Accumulated
	(in years)		Amount		Amortization			Net Balance
Purchased subscriber lists		5	$	68,775	$	(45,957	)	$	22,818
Purchased Federal Communications Commission licenses		5		3,527		(2,788	)		739
Other		1		68		(49	)		19
			$	72,370	$	(48,794	)	$	23,576

(6) Depreciation, Amortization and Accretion — The components of depreciation, amortization and accretion expenses for the three months ended March 31, 2006 and 2007, respectively, are as follows (dollars in thousands):

	For the
	Three Months Ended
	March 31,
	2006		2007
Depreciation	$	13,773	$	10,227
Amortization		4,231		2,764
Accretion		790		327
Total depreciation, amortization and accretion	$	18,794	$	13,318

(7) Accounts Payable and Accrued Liabilities — Accounts payable and accrued liabilities consist of the following (dollars in thousands):

	December 31,		March 31,
	2006		2007
Accounts payable	$	3,634	$	4,871
Accrued compensation, benefits and severance		16,277		14,405
Accrued network costs		3,966		3,698
Accrued taxes		27,493		26,069
Accrued other		12,609		12,458
Total accounts payable and accrued liabilities	$	63,979	$	61,501

Accrued taxes are based on the Company’s estimate of outstanding state and local taxes. This balance may be adjusted in the future as the Company settles with various taxing jurisdictions.

(8) Asset Retirement Obligations — The Company adopted the provisions of SFAS No. 143,Accounting for Asset Retirement Obligations, (“SFAS No. 143”), in 2002. SFAS No. 143 requires the recognition of liabilities and corresponding assets for future obligations associated with the retirement of assets. USA Mobility has network assets, principally transmitters that are located on leased locations. The underlying leases generally require the removal of equipment at the end of the lease term; therefore, a future obligation exists. The Company has recognized cumulative asset retirement costs of $17.4 million at both December 31, 2006 and March 31, 2007. Network assets have been increased to reflect these costs and depreciation is being recognized over their estimated lives, which range between one and nine years.

The asset retirement costs, and the corresponding liabilities, that have been recorded to date generally relate to either current plans to consolidate networks or to the removal of assets at an estimated future terminal date.

7

USA MOBILITY, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The components of the changes in the asset retirement obligation balances for the three months ended March 31, 2007 were as follows (dollars in thousands):

	Current			Long-Term
	Portion			Portion
Balance at December 31, 2006	$	4,569		$	8,955
Accretion		24			304
Amounts paid		(1,285	)		—
Balance at March 31, 2007	$	3,308		$	9,259

The balances above were included in accrued other and other long-term liabilities, respectively, at March 31, 2007.

(9) Other Long-Term Liabilities — Other long-term liabilities consist of the following (dollars in thousands):

	December 31,		March 31,
	2006		2007
Income taxes	$	17,723	$	53,313
Asset retirement obligation — long-term		8,955		9,259
Escheat liability — long-term		625		530
Distributions payable		466		554
Other long-term liabilities		1,615		2,042
Total other long-term liabilities	$	29,384	$	65,698

(10) Stockholders’ Equity — The authorized capital stock of the Company consists of 75 million shares of common stock and 25 million shares of preferred stock, par value $0.0001 per share.

•  Changes in Stockholders’ Equity — Changes in Stockholder’s Equity for the three months ended March 31, 2007 consisted of (dollars in thousands):

Balance at December 31, 2006	$	475,972
Net income for three months ended March 31, 2007		13,026
Cash distributions declared		(17,757	)
Recognition of uncertain tax positions and other		(4,420	)
Restricted stock vested under 2005 Grant, net		(614	)
Amortization of stock based compensation		356
Issuance of common stock under Equity Plan		84
Balance at March 31, 2007	$	466,647

•  General — At December 31, 2006 and March 31, 2007, there were 27,340,033 and 27,318,077 shares of common stock outstanding and no shares of preferred stock outstanding, respectively. In addition, at March 31, 2007, there were 269,139 shares of common stock reserved for issuance from time to time to satisfy general unsecured claims under the Arch plan of reorganization. For financial reporting purposes, the number of shares reserved for issuance under the Arch plan of reorganization have been included in the Company’s reported outstanding share balance.

On January 1, 2006, the Company implemented the provisions of SFAS No. 123R,Share-Based Payment, (“SFAS No. 123R”). The implementation of SFAS No. 123R, including the cumulative effect of changes in expense attribution, did not have a material impact on the Company’s financial position or results of operations. The Company has followed the modified prospective transition election.

8

USA MOBILITY, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

At March 31, 2007, the Company has no options.

In connection with and prior to the merger, the Company established the USA Mobility, Inc. Equity Incentive Plan (“Equity Plan”). Under the Equity Plan, the Company has the ability to issue up to 1,878,976 shares of its common stock to eligible employees and non-employee members of its Board of Directors in the form of common stock, stock options, restricted shares of common stock (“restricted stock”), stock grants or units. Restricted stock awarded under the Equity Plan entitle the stockholder to all rights of common stock ownership except that the shares may not be sold, transferred, exchanged, or otherwise disposed of during the restriction period, which will be determined by the Compensation Committee of the Board of Directors of the Company.

The following table summarizes the activities under the Equity Plan as of March 31, 2007:

	Activity
Securities approved under Equity Plan		1,878,976
Less: Restricted Stock Issued to Management
2005 Grant		(103,937	)
2006 Grant		(132,572	)
Restricted Stock Units Issued to Board of Directors(a)		(11,667	)
Common Stock Issued to Board of Directors(b)		(6,926	)
Add: 2005 Grant Vested by Management, net(c)		33,213
Add: Restricted Stock Forfeited by Management
2005 Grant		21,450
2006 Grant		7,393
Total available at March 31, 2007		1,685,930

(a)	Restricted stock units issued to the members of the Board of Directors for services performed, of which 878 restricted stock units relate to cash distributions.
(b)	Common shares issued in lieu of cash payments to the members of the Board of Directors for services performed.
(c)	The Company’s executives sold 22,403 shares of common stock to the Company in payment of required tax withholdings on vested restricted stock.

Restricted Stock.  For the 2005 grant of restricted stock (“2005 Grant”), the Company used the fair-value based method of accounting for the award and will ratably amortize the $2.2 million to expense over the vesting period. A total of $0.4 million and $0.1 million was included in stock based compensation for the three months ended March 31, 2006 and 2007, respectively, in relation to these shares.

On January 1, 2007, 55,616 shares of restricted stock of the 2005 Grant were vested, of which 22,403 shares were sold back to the Company in payment of required tax withholdings at a price per share of $22.37, the Company’s closing stock price on December 29, 2006. On April 2, 2007, 6,708 shares of restricted stock were vested, of which 2,165 shares were sold back to the Company in payment of required tax withholdings at a price per share of $19.93, the Company’s closing stock price on March 30, 2007. The shares purchased by the Company were retired and will not be reissued. The remaining 20,163 shares are scheduled to vest ratably over the remainder of 2007, such that all shares awarded are scheduled to fully vest by December 31, 2007.

For the 2006 grant of restricted stock (“2006 Grant”), the Company used the fair-value based method of accounting for the award and will ratably amortize the $3.5 million to expense over the vesting period. A total of $0.2 million and $0.3 million was included in stock based compensation for the three months ended March 31, 2006 and 2007, respectively, in relation to these shares.

9

USA MOBILITY, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the three months ended March 31, 2007, no shares were forfeited. As of March 31, 2007, there were 125,179 shares scheduled to fully vest by January 1, 2009.

Cash Award.  Also on February 1, 2006, the Company provided long-term cash performance awards to the same certain eligible employees. The vesting date for these long-term cash performance awards is January 1, 2009 and payment will be made after the vesting date. The Company will ratably amortize the $3.6 million to expense over the vesting period. A total of $0.2 million and $0.3 million was included in payroll and related expenses for the three months ended March 31, 2006 and 2007, respectively, in relation to these long-term cash performance awards. Any unvested long-term cash performance awards are forfeited if the participant terminates employment with USA Mobility.

Restricted Stock Units.  On May 3, 2006, the Board of Directors granted the non-executive directors restricted stock units (“RSUs”) in addition to cash compensation for service on the Board as well as any standing committees of the Board on which they serve. On March 31, 2007, the Company awarded 4,030 RSUs to the Company’s non-executive directors, of which 391 RSUs represent distributions on previously granted RSUs. These RSUs are fully vested on the date of grant. No shares of common stock are issued for the RSUs until the earlier of (i) the date the participant is no longer an eligible director, or (ii) immediately prior to a change in the ownership of the Company. Prior to the issuance of shares of common stock underlying the RSUs, the RSUs represent unsecured obligations of the Company. USA Mobility used the fair-value based method of accounting for the award. As the RSUs are fully vested on the date of grant and relate to service performed during the first quarter of 2007, the Company recognized the expense of $0.1 million during the three months ended March 31, 2007.

Common Stock.  In lieu of cash payments of $10,000 for directors’ fees earned in the fourth quarter 2006, one director elected to receive a total of 447 shares of common stock in January 2007, based upon the fair market value of a share of common stock at the date of issuance. A total of 501 shares of common stock will be issued in April 2007 for fees of $10,000 earned in the three months ended March 31, 2007.

Cash Distributions to Stockholders.  On February 7, 2007, the Board of Directors of USA Mobility declared the second regular quarterly cash distribution of $0.65 per share, with a record date of February 22, 2007, and a payment date of March 15, 2007. This cash distribution of approximately $17.8 million was paid from available cash on hand. Cash distributions paid include previously declared cash distributions on restricted stock that vested in January 2007.

Future Cash Distributions to Stockholders.  On May 2, 2007, the Board of Directors of USA Mobility declared the regular quarterly cash distribution of $0.65 per share and also declared an additional special one-time cash distribution to stockholders of $1.00 per share. Both distributions have a record date of May 17, 2007 and a payment date of June 7, 2007. The total cash distributions of approximately $45.1 million will be paid from available cash on hand.

Additional Paid-in Capital.  During the three months ended March 31, 2007, additional paid-in capital decreased by $9.7 million due to the recognition of uncertain tax positions, the correction of the deferred income tax assets established in 2003, cash distributions declared on February 7, 2007 and the vesting and repurchase of shares of restricted stock under the 2005 Grant. This was offset by the issuance of RSUs, distributions and common stock to the non-executive directors discussed above.

Earnings per Share.  Basic earnings per share is computed on the basis of the weighted average common shares outstanding. Diluted earnings per share is computed on the basis of the weighted average common shares outstanding plus the effect of outstanding stock options and outstanding restricted stock using the “treasury stock” method plus the effect of outstanding restricted stock units, which are treated as contingently issuable shares. As noted above, the Company acquired 22,403 and 2,165 shares of the Company’s common stock on January 1, 2007 and April 2, 2007, respectively, from the Company’s executives in payment of required tax withholdings. The shares of common stock acquired on January 1, 2007 were retired and excluded in the Company’s reported outstanding

10

USA MOBILITY, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

share balance as of March 31, 2007. The components of basic and diluted earnings per share were as follows (in thousands, except share and per share amounts):

	For the
	Three Months Ended
	March 31,
	2006		2007
Net income	$	12,265	$	13,026
Weighted average shares of common stock outstanding		27,397,307		27,434,418
Dilutive effect of:
Options to purchase common stock, restricted stock and restricted stock units		105,923		143,648
Weighted average shares of common stock and common stock equivalents		27,503,230		27,578,066
Earnings per share
Basic	$	0.45	$	0.47
Diluted	$	0.45	$	0.47

(11) Stock Based Compensation — Compensation expense associated with options and restricted stock was recognized in accordance with the fair-value provisions of SFAS No. 123R, over the instruments’ vesting period. The following table reflects the income statement line items that include the $0.7 million and $0.4 million of stock based compensation expense for the three months ended March 31, 2006 and 2007, respectively (dollars in thousands):

	For the
	Three Months Ended March 31,
	2006		2007
Service, rental and maintenance expense	$	81	$	31
Selling and marketing expense		171		93
General and administrative expense		431		304
Total stock based compensation expense	$	683	$	428

(12) Income Taxes — The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized an additional liability of approximately $32.8 million for uncertain tax positions for a total liability of approximately $52.0 million. This increase in the liability was reflected as a corresponding increase to goodwill of $40.3 million for uncertain tax positions directly related to the merger of Arch and Metrocall, a decrease to long-term deferred income tax assets of $10.5 million with the remaining $3.0 million accounted for as a reduction to additional paid-in capital. In addition, the Company recognized a $1.4 million reduction in its deferred income tax assets that was primarily accounted for as reduction in the January 1, 2007 balance of additional paid-in capital due to the correction of the deferred income tax assets established in 2003. As of January 1, 2007 the Company had approximately $372.4 million of unrecognized tax benefits (net of the federal and state tax).

The Company anticipates that approximately $24.4 million of the $52.0 million liability recognized for uncertain tax positions may be resolved in 2007.

11

USA MOBILITY, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company recognizes accrued interest and penalties related to uncertain tax positions in income tax expense. As of March 31, 2007, the Company had accrued approximately $3.0 million for the payment of tax-related interest and penalties.

The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The Company is not currently under audit by the Internal Revenue Service (“IRS”). The Company’s 2002 through 2005 tax years are still subject to examination by the IRS. Various state jurisdiction tax years remain open to examination.

The Company evaluates the recoverability of its deferred income tax assets on an ongoing basis. The assessment is required to determine whether, based on all available evidence, it is more likely than not that all of USA Mobility’s net deferred income tax assets will be realized in future periods.

The evaluation of the recoverability of the deferred income tax assets is based on historical and continued evidence of profitability since emerging from bankruptcy and the Company’s projections of increased profitability as a result of anticipated cost synergies made available through the November 2004 merger. To the extent that these anticipated cost synergies may not be realized in the future, or the Company is unable to generate sufficient revenue and projections of future revenue are adjusted downward, a partial, or full valuation allowance against deferred income tax assets may be required.

The anticipated effective tax rate is expected to continue to differ from the statutory federal tax rate of 35%, primarily due to the effect of state income taxes.

(13) Related Party Transactions — Effective November 16, 2004, two members of the Company’s Board of Directors also serve as directors for entities that lease transmission tower sites to the Company. During the three months ended March 31, 2006 and 2007, the Company paid $4.5 million and $4.5 million, and $3.3 million and $3.8 million, respectively, to these two landlords for rent expenses that are included in service, rental and maintenance expense.

(14) Segment Reporting — USA Mobility believes it currently has two operating segments: domestic operations and international operations, but no reportable segments, as international operations are immaterial to the consolidated entity.

(15) Commitments and Contingencies — USA Mobility, from time to time, is involved in lawsuits arising in the normal course of business. USA Mobility believes that its pending lawsuits will not have a material adverse effect on its reported results of operations, cash flows or financial position.

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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This quarterly report contains forward-looking statements and information relating to USA Mobility, Inc. and its subsidiaries (“USA Mobility” or the “Company”) that are based on management’s beliefs as well as assumptions made by and information currently available to management. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “anticipate”, “believe”, “estimate”, “expect”, “intend” and similar expressions, as they relate to USA Mobility and its subsidiaries or its management are forward-looking statements. Although these statements are based upon assumptions management considers reasonable, they are subject to certain risks, uncertainties and assumptions, including but not limited to those factors set forth below under the captions “Business”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”), and “Item 1A. Risk Factors”. 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. The Company undertakes no obligation to update or revise any forward-looking statements. All subsequent written or oral forward-looking statements attributable to USA Mobility, Inc. and its subsidiaries or persons acting on their behalf are expressly qualified in their entirety by the discussion under “Item 1A. Risk Factors” section.

Overview

The following discussion and analysis should be read in conjunction with USA Mobility’s condensed consolidated financial statements and related notes and “Item 1A. Risk Factors”, which describe key risks associated with the Company’s operations and industry, and the following subsections of the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2006: “Overview,” “Results of Operations,” “Liquidity and Capital Resources,” “Inflation” and “Application of Critical Accounting Policies.”

Sales and Marketing

USA Mobility markets and distributes its services through a direct sales force and a small indirect sales force.

Direct.  The direct sales force rents or sells products and messaging services directly to customers ranging from small and medium-sized businesses to Fortune 1000 companies, healthcare and related businesses and government agencies. USA Mobility intends to continue to market to commercial enterprises utilizing its direct sales force as these commercial enterprises have typically disconnected service at a lower rate than individual consumers. As of March 31, 2007, USA Mobility sales personnel were located in approximately 78 offices in 35 states throughout the United States. In addition, the Company maintains several corporate sales groups focused on medical sales; federal government accounts; large enterprise; advanced wireless services; systems sales applications; telemetry and other product offerings.

Indirect.  Within the indirect channel the Company contracts with and invoices an intermediary for airtime services. The intermediary or “reseller” in turn markets, sells, and provides customer service to the end user. Generally, there is no contractual relationship that exists between USA Mobility and the end subscriber. Therefore, operating costs per unit to provide these services are lower than those required in the direct distribution channel. Indirect units in service typically have lower average monthly revenue per unit than direct units in service. The rate at which subscribers disconnect service in the indirect distribution channel has been higher than the rate experienced with direct customers, and USA Mobility expects this to continue in the foreseeable future.

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The following table sets forth units in service associated with the Company’s channels of distribution:

	As of					As of					As of
	March 31,					December 31,					March 31,
	2006					2006					2007
	Units		%			Units		%			Units		%
	(Units in thousands)
Direct		4,002		86	%		3,598		88	%		3,442		88	%
Indirect		632		14	%		507		12	%		470		12	%
Total		4,634		100	%		4,105		100	%		3,912		100	%

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

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

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

	As of										As of
	March 31,					As of December 31,					March 31,
	2006					2006					2007
	Units		%			Units		%			Units		%
	(Units in thousands)
One-way messaging		4,214		91	%		3,735		91	%		3,557		91	%
Two-way messaging		420		9	%		370		9	%		355		9	%
Total		4,634		100	%		4,105		100	%		3,912		100	%

USA Mobility provides wireless messaging services to subscribers for a monthly fee, as described above. In addition, subscribers either lease a messaging device from the Company for an additional fixed monthly fee or they own a device, having purchased it either from the Company or from another vendor. USA Mobility also sells devices to resellers who lease or resell devices to their subscribers and then sell messaging services utilizing the Company’s networks.

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

	As of										As of
	March 31,					As of December 31,					March 31,
	2006					2006					2007
	Units		%			Units		%			Units		%
	(Units in thousands)
Owned and leased		3,625		78	%		3,308		81	%		3,183		81	%
Owned by subscribers		377		8	%		290		7	%		259		7	%
Owned by indirect customers or their subscribers		632		14	%		507		12	%		470		12	%
Total		4,634		100	%		4,105		100	%		3,912		100	%

14

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

The following table sets forth the Company’s gross placements and disconnects for the periods stated.

	For the Three Months Ended
	March 31, 2006				December 31, 2006				March 31, 2007
	Gross				Gross				Gross
	Placements		Disconnects		Placements		Disconnects		Placements		Disconnects
	(Units in thousands)
Direct		123		304		127		250		103		259
Indirect		28		100		42		73		27		64
Total		151		404		169		323		130		323

The demand for one-way and two-way messaging services declined during the three months ended March 31, 2007, and USA Mobility believes demand will continue to decline for the foreseeable future in line with recent trends.

The following table sets forth information on the Company’s direct units in service by account size for the period stated.

	For the Three Months Ended March 31,										Increase/
Account Size Ending Units In Service (000’s)	2006		% of Total			2007		% of Total			(Decrease)
1 to 3 Units		358		8.9	%		251		7.3	%		(107	)
4 to 10 Units		203		5.1			150		4.4			(53	)
11 to 50 Units		489		12.2			368		10.7			(121	)
51 to 100 Units		265		6.6			215		6.2			(50	)
101 to 1000 Units		1,068		26.7			924		26.8			(144	)
> 1000 Units		1,619		40.5			1,534		44.6			(85	)
Total Direct Customers		4,002		100.0	%		3,442		100.0	%		(560	)

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The following table sets forth information on the percentage of account size net unit loss for the Company’s direct customers for the period stated.

	For the
	Three Months Ended March 31,						Favorable/
Account Size Net Unit Loss %	2006			2007			(Unfavorable)
1 to 3 Units		(7.8	)%		(9.0	)%		(1.2	)%
4 to 10 Units		(8.2	)		(7.9	)		0.3
11 to 50 Units		(7.2	)		(7.6	)		(0.4	)
51 to 100 Units		(7.0	)		(4.9	)		2.1
101 to 1000 Units		(5.8	)		(4.4	)		1.4
> 1000 Units		(0.5	)		(2.2	)		(1.7	)
Total Direct Customers		(4.3	)%		(4.3	)%		0.0	%

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

	For the Three Months Ended
	March 31,		December 31,		March 31,
	2006		2006		2007
Direct	$	9.44	$	9.09	$	9.18
Indirect	$	4.89	$	4.92	$	4.79
Consolidated	$	8.80	$	8.57	$	8.65

While ARPU for similar services and distribution channels is indicative of changes in monthly charges and the revenue rate applicable to new subscribers, this measurement on a consolidated basis is affected by several factors, most notably the mix of units in service. Gross revenues decreased year over year, and the Company expects future sequential quarterly revenues to decline in line with recent trends. The increase in consolidated ARPU for the quarter ended March 31, 2007 from the quarter ended December 31, 2006, was due primarily to selected rate increases that the Company implemented in the fourth quarter 2006 and first quarter 2007. The decrease in consolidated ARPU for the quarter ended March 31, 2007 from the quarter ended March 31, 2006 was primarily due to the change in composition of the Company’s customer base as the percentage of units in service attributable to larger customers continues to increase. The change in ARPU in the direct distribution channel is the most significant indicator of rate-related changes in the Company’s revenues. USA Mobility expects that ARPU for its direct units in service will decline in future periods.

16

The following table sets forth information on the account size ARPU for the period stated.

	For the
	Three Months Ended March 31,				Increase/
Account Size ARPU	2006		2007		(Decrease)
1 to 3 Units	$	14.02	$	14.71	$	0.69
4 to 10 Units		13.02		13.42		0.40
11 to 50 Units		10.88		10.95		0.07
51 to 100 Units		9.59		9.44		(0.15	)
101 to 1000 Units		8.34		8.24		(0.10	)
> 1000 Units		8.18		7.92		(0.26	)
Total Direct Customers	$	9.44	$	9.18	$	(0.26	)

Operations

USA Mobility’s revenues were $134.9 million and $111.5 million for the three months ended March 31, 2006 and 2007, respectively. The Company’s operating expenses are presented in functional categories. Certain of the Company’s functional categories are especially important to overall expense control; these operating expenses are categorized as follows:

•  Service, rental and maintenance.  These are expenses associated with the operation of the Company’s networks and the provision of messaging services and consist largely of telecommunications expenses to deliver messages over the Company’s networks, site rent expenses for transmitter locations and payroll and related expenses for the Company’s engineering and pager repair functions.

•  Selling and marketing.  These are expenses associated with USA Mobility’s direct and indirect sales forces and marketing expenses in support of the sales force. This classification consists primarily of salaries, commissions, and other payroll related expenses.

•  General and administrative.  These are expenses associated with customer service, inventory management, billing, collections, bad debt and other administrative functions.

USA Mobility reviews the percentages of these operating expenses to revenues on a regular basis. Even though the operating expenses are classified as described above, expense controls are also performed by expense category. In the period ended March 31, 2007, approximately 53.0% of the operating expenses referred to above were incurred in three expense categories: payroll and related expenses; telecommunications expenses; and site rent expenses for transmitter locations.

Payroll and related expenses include wages, commissions, incentives, employee benefits and related taxes. USA Mobility reviews the number of employees in major functional categories such as direct sales, engineering and technical staff, customer service, collections and inventory on a monthly basis. The Company also reviews the design and physical locations of functional groups to continuously improve efficiency, to simplify organizational structures and to minimize the number of physical locations. Since the merger on November 16, 2004, the Company has reduced its employee base from 2,844 full time equivalent employees (“FTEs”) at the time of the merger to 1,183 FTEs at March 31, 2007. The Company anticipates continued staffing reductions during 2007; however the most significant reductions occurred throughout 2006.

Site rent expenses for transmitter locations are largely dependent on the Company’s messaging networks. USA Mobility operates local, regional and nationwide one-way and two-way messaging networks. These networks each require locations on which to place transmitters, receivers and antennae. Generally, site rent expenses are incurred for each transmitter location. Therefore, site rent expenses for transmitter locations are highly dependent on the number of transmitters, which, in turn, is dependent on the number of networks. In addition, these expenses generally do not vary directly with the number of subscribers or units in service, which is detrimental to the Company’s operating margin as revenues decline. In order to reduce these expenses, USA Mobility has an active

17

program to consolidate the number of networks and thus transmitter locations, which the Company refers to as network rationalization.

Telecommunications expenses are incurred to interconnect USA Mobility’s messaging networks and to provide telephone numbers for customer use, points of contact for customer service and connectivity among the Company’s offices. These expenses are dependent on the number of units in service and the number of office and network locations the Company maintains. The dependence on units in service is related to the number of telephone numbers provided to customers and the number of telephone calls made to the Company’s call centers, though this is not always a direct dependency. For example, the number or duration of telephone calls to call centers may vary from period to period based on factors other than the number of units in service, which could cause telecommunications expenses to vary regardless of the number of units in service. In addition, certain phone numbers USA Mobility provides to its customers may have a usage component based on the number and duration of calls to the subscriber’s messaging device. Telecommunications expenses do not necessarily vary in direct relationship to units in service. Therefore, based on the factors discussed above, efforts are underway to review and reduce telephone circuit inventories and capacities and to reduce the number of transmitter and office locations at which the Company operates.

USA Mobility did experience limited damage to transmission equipment located in the Gulf of Mexico region of the United States from Hurricanes Katrina and Rita in the third quarter of 2005. Expenses resulting from storm-related recovery efforts and loss of damaged assets were immaterial and were recorded in 2005 and 2006. The Company received $0.7 million in May 2007 as settlement of related insurance claims. The settlement will be recorded as Other Income in the second quarter 2007.

The total of USA Mobility’s cost of products sold; service, rental and maintenance; selling and marketing; and general and administrative expenses was $96.1 million and $76.4 million for the three months ended March 31, 2006 and 2007, respectively. Since the Company believes the demand for, and the Company’s revenues from, one-way and two-way messaging will continue to decline in future quarters, expense reductions will continue to be necessary in order for USA Mobility to mitigate the financial impact of such revenue declines on its cash from operating activities. However, there can be no assurance that the Company will be able to maintain margins or generate net cash from operating activities.

Results of Operations

Comparison of the Results of Operations for the Three Months Ended March 31, 2006 and 2007

	For the Three Months Ended March 31,
	2006					2007					Change Between
			% of					% of			2006 and 2007
	Amount		Revenue			Amount		Revenue			Amount			%
						(Dollars in thousands)
Revenues:
Service, rental and maintenance	$	128,761		95.5	%	$	107,142		96.1	%	$	(21,619	)		(16.8	)%
Product sales		6,131		4.5			4,400		3.9			(1,731	)		(28.2	)
	$	134,892		100.0	%	$	111,542		100.0	%	$	(23,350	)		(17.3	)%
Selected operating expenses:
Cost of products sold	$	786		0.6	%	$	687		0.6	%	$	(99	)		(12.6	)%
Service, rental and maintenance		48,092		35.7			39,033		35.0			(9,059	)		(18.8	)
Selling and marketing		11,059		8.2			10,242		9.2			(817	)		(7.4	)
General and administrative		36,142		26.8			26,448		23.7			(9,694	)		(26.8	)
	$	96,079		71.2	%	$	76,410		68.5	%	$	(19,669	)		(20.5	)%

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Revenues

Service, rental and maintenance revenues consist primarily of recurring fees associated with the provision of messaging services and rental of leased units. Product sales consist primarily of revenues associated with the sale of devices and charges for leased devices that are not returned. The decrease in revenues reflects the decrease in demand for the Company’s wireless services. USA Mobility’s total revenues were $134.9 million and $111.5 million for the three months ended March 31, 2006 and 2007, respectively.

	For the
	Three Months Ended
	March 31,
	2006		2007
	(Dollars in thousands)
Service, rental and maintenance revenues:
Paging:
Direct:
One-way messaging	$	92,099	$	77,547
Two-way messaging		23,794		19,426
	$	115,893	$	96,973
Indirect:
One-way messaging	$	7,742	$	5,301
Two-way messaging		2,038		1,729
	$	9,780	$	7,030
Total Paging:
One-way messaging	$	99,841	$	82,848
Two-way messaging		25,832		21,155
	$	125,673	$	104,003
Non-Paging revenue		3,088		3,139
Total service, rental and maintenance revenues	$	128,761	$	107,142

The table below sets forth units in service and service revenues, the changes in each between the three months ended March 31, 2006 and 2007 and the change in revenue associated with differences in ARPU and the number of units in service.

	Units in Service							Revenues
	As of March 31,							For the Three Months Ended March 31,							Change Due to:
	2006		2007		Change			2006(a)		2007(a)		Change			ARPU			Units
	(Units in thousands)							(Dollars in thousands)
One-way messaging		4,214		3,557		(657	)	$	99,841	$	82,848	$	(16,993	)	$	(1,302	)	$	(15,691	)
Two-way messaging		420		355		(65	)		25,832		21,155		(4,677	)		(423	)		(4,254	)
Total		4,634		3,912		(722	)	$	125,673	$	104,003	$	(21,670	)	$	(1,725	)	$	(19,945	)

(a) Amounts shown exclude non-paging and product sales revenues.

As previously discussed, demand for messaging services has declined over the past several years and the Company anticipates that it will continue to decline for the foreseeable future, which would result in reductions in service, rental and maintenance revenues due to the lower number of subscribers and related units in service.

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Operating Expenses

Cost of Products Sold.  Cost of products sold consists primarily of the cost basis of devices sold to or lost by USA Mobility’s customers. The $0.1 million decrease for the three months ended March 31, 2007 was due primarily to a decrease in product sales.

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

	For the Three Months Ended March 31,
	2006					2007					Change Between
			% of					% of			2006 and 2007
	Amount		Revenue			Amount		Revenue			Amount			%
	(Dollars in thousands)
Site rent	$	26,099		19.3	%	$	22,284		20.0	%	$	(3,815	)		(14.6	)%
Telecommunications and related		9,099		6.7			7,058		6.3			(2,041	)		(22.4	)
Payroll and related		7,046		5.2			6,488		5.8			(558	)		(7.9	)
Stock based compensation		81		0.1			31		0.0			(50	)		(61.7	)
Other		5,767		4.3			3,172		2.8			(2,595	)		(45.0	)
Total service, rental and maintenance	$	48,092		35.7	%	$	39,033		35.0	%	$	(9,059	)		(18.8	)%
FTEs		377					359					(18	)		(4.8	)%

As illustrated in the table above, service, rental and maintenance expenses decreased $9.1 million or 18.8% from 2006.

Following is a discussion of each significant item listed above:

•  Site rent — The decrease of $3.8 million in site rent expenses is primarily due to the rationalization of the Company’s networks which has decreased the number of transmitters required to provide service to the Company’s customers.

•  Telecommunications and related — The decrease of $2.0 million in telecommunications and related expenses is due to the consolidation of the Company’s networks. Continued reductions in these expenses should occur as the Company’s networks continue to be consolidated throughout 2007.

•  Payroll and related — Payroll consists largely of field technicians and their managers. This functional work group does not vary as closely to direct units in service as other work groups since these individuals are a function of the number of networks the Company operates rather than the number of units in service on its networks. Payroll and related expenses decreased $0.6 million due primarily to a reduction in headcount. Total FTEs declined by 18 from 377 FTEs at March 31, 2006 to 359 FTEs at March 31, 2007.

•  Stock based compensation — Stock based compensation expense consists primarily of amortization of compensation expense associated with restricted stock issued to certain members of management and the Board of Directors under the Equity Plan and the compensation cost associated with the 2003 Arch Long-Term Incentive Plan (“2003 Arch LTIP”). The decrease for the three months ended March 31, 2007 is due primarily to the higher amortization of compensation expense associated with the 2005 Grant in the first quarter 2006, offset by one month less of amortization of compensation expense for the 2006 Grant compared to the same period in 2007.

•  Other — Other expenses consist primarily of a decrease in repairs and maintenance expense of $2.6 million due to lower contractor costs as repairs are now performed by Company employees.

20

Selling and Marketing.  Selling and marketing expenses consist of the following major items:

	For the Three Months Ended March 31,
	2006					2007					Change Between
			% of					% of			2006 and 2007
	Amount		Revenue			Amount		Revenue			Amount			%
	(Dollars in thousands)
Payroll and related	$	7,709		5.7	%	$	6,740		6.0	%	$	(969	)		(12.6	)%
Commissions		2,226		1.7			2,170		1.9			(56	)		(2.5	)
Stock based compensation		171		0.1			93		0.1			(78	)		(45.6	)
Other		953		0.7			1,239		1.1			286			30.0
Total selling and marketing	$	11,059		8.2	%	$	10,242		9.2	%	$	(817	)		(7.4	)%
FTEs		468					372					(96	)		(20.5	)%

As indicated in the table above, selling and marketing expenses consist primarily of payroll and related expenses. Selling and marketing payroll and related expenses decreased $1.0 million or 12.6% over 2006. While total FTEs declined by 96 from 468 FTEs at March 31, 2006 to 372 FTEs at March 31, 2007, the Company has continued a major initiative to reposition the Company and refocus its marketing goals. This initiative has resulted in selling and marketing expenses increasing as a percentage of revenue. The sales and marketing staff are all involved in selling the Company’s paging products and services on a nationwide basis as well as reselling other wireless products and services such as cellular phones and email devices under authorized agent agreements.

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

	For the Three Months Ended March 31,
	2006					2007					Change Between
			% of					% of			2006 and 2007
	Amount		Revenue			Amount		Revenue			Amount			%
	(Dollars in thousands)
Payroll and related	$	12,330		9.1	%	$	9,560		8.6	%	$	(2,770	)		(22.5	)%
Stock based compensation		431		0.3			304		0.3			(127	)		(29.5	)
Bad debt		1,790		1.3			1,402		1.3			(388	)		(21.7	)
Facility		4,104		3.0			2,947		2.6			(1,157	)		(28.2	)
Telecommunications		2,248		1.7			1,764		1.6			(484	)		(21.5	)
Outside services		6,419		4.8			5,504		4.9			(915	)		(14.3	)
Taxes, licenses and permits		4,149		3.1			2,316		2.1			(1,833	)		(44.2	)
Other		4,671		3.5			2,651		2.4			(2,020	)		(43.2	)
Total general and administrative	$	36,142		26.8	%	$	26,448		23.7	%	$	(9,694	)		(26.8	)%
FTEs		744					452					(292	)		(39.2	)%

As illustrated in the table above, general and administrative expenses decreased $9.7 million or 26.8% from 2006 due primarily to headcount reductions, office closures and reduced taxes, licenses and permits expense. The percentages of these expenses to revenue also decreased, primarily due to the following:

•  Payroll and related — Payroll and related expenses include employees in customer service, inventory, collections, finance and other support functions as well as executive management. The decrease in these expenses was due primarily to a reduction in headcount since November 2004. Total general and administration FTEs decreased by 292 from 744 at March 31, 2006 to 452 FTEs at March 31, 2007. In June 2006, the Company sold an internally managed and staffed call center to an outside provider, which resulted in a reduction of 203 FTEs. The Company has engaged this third party to provide outsourced customer service. USA Mobility anticipates continued staffing reductions during 2007; however the most significant reductions occurred throughout 2006.

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•  Stock based compensation — Stock based compensation expense consists primarily of amortization of compensation expense associated with restricted stock and options issued to certain members of management and the Board of Directors under the Equity Plan and the compensation cost associated with the 2003 Arch LTIP. The decrease for the three months ended March 31, 2007 was due primarily to the vesting under the 2003 Arch LTIP in March 2006 and higher amortization of compensation expense in the first quarter 2006 associated with the 2005 Grant. This was offset by one month less of amortization of compensation expense for the 2006 Grant compared to the same period in 2007.

•  Bad debt — The decrease of $0.4 million in bad debt expense reflects a revision to the Company’s analysis of its bad debt experience and is consistent with the decrease in revenue during the same period.

•  Facility — The decrease of $1.2 million in facility expense is primarily due to the closure of office facilities as part of the Company’s continued rationalization of its operating requirements to meet lower revenue and customer demand.

•  Telecommunications — The decrease of $0.5 million in telecommunications expense reflects continued office and staffing reductions as USA Mobility continues to streamline its operations.

•  Outside services — Outside services expense consists primarily of costs associated with printing and mailing invoices, outsourced customer service, temporary help and various professional fees. The decrease in 2007 was due primarily to a reduction in professional service fees for integration-related activities incurred in 2006, offset by increased outsourced customer service costs in 2007 resulting from the 2006 sale of an internally managed call center to an outside provider.

•  Taxes, licenses and permits — Taxes, licenses and permits expense consists of property, franchise, gross receipts and transactional taxes. The decrease in taxes, licenses and permits of $1.8 million is mainly due to lower gross receipts taxes, transactional and property taxes. These taxes are based on the lower revenue and property base resulting from the Company’s operations.

•  Other — Other expenses consist primarily of a decrease to repairs and maintenance expense of $0.5 million, a decrease of $0.5 million to office expenses and a decrease of $0.1 million to travel and entertainment expense, all of which result from continued site and office reductions as USA Mobility continues to streamline its operations. In addition, workers’ compensation insurance refunds from prior periods reduced miscellaneous expenses by $0.9 million.

Depreciation, Amortization and Accretion.  Depreciation, amortization and accretion expenses decreased from $18.8 million for the three months ended March 31, 2006 to $13.3 million for the three months ended March 31, 2007. The decrease was primarily due to $2.6 million in lower depreciation in 2007 from fully depreciated paging infrastructure and other assets, $1.0 million in lower depreciation expense on paging devices resulting from fewer purchases of paging devices and from fully depreciated paging devices, and $1.5 million in lower amortization expense.

Interest Income.  Net interest income increased from $0.6 million for the three months ended March 31, 2006 compared to $1.0 million for the three months ended March 31, 2007. This increase was due to the investment of available cash in short-term interest bearing accounts for the three months ended March 31, 2007.

Income Tax Expense.  For the three months ended March 31, 2007, the Company recognized $9.2 million of income tax expense which includes $0.5 million for interest on the liability for uncertain tax positions. The provision for the three months ended March 31, 2006 was $8.2 million. The increase in the provision for the current year was primarily due to higher income before income tax expense. USA Mobility anticipates recognition of provisions for income taxes to be required for the foreseeable future.

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Liquidity and Capital Resources

Overview

Based on current and anticipated levels of operations, USA Mobility anticipates net cash provided by operating activities, together with the available cash on hand at March 31, 2007, should be adequate to meet anticipated cash requirements for the foreseeable future.

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

The Company’s net cash flows from operating, investing, and financing activities for the periods indicated in the table below were as follows (dollars in thousands):

	For the
	Three Months Ended
	March 31,						Increase/
	2006			2007			(Decrease)
Net cash provided by operating activities	$	43,069		$	36,736		$	(6,333	)
Net cash used in investing activities	$	(4,312	)	$	(5,007	)	$	695
Net cash used in financing activities	$	(12	)	$	(17,944	)	$	17,932

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

	For the
	Three Months Ended
	March 31,				Increase/
	2006		2007		(Decrease)
Cash received from customers	$	141,957	$	111,669	$	(30,288	)
Cash paid for —
Payroll and related expenses		29,153		26,946		(2,207	)
Site rent expenses		27,335		23,092		(4,243	)
Telecommunications expenses		9,808		7,679		(2,129	)
Other operating expenses		32,592		17,216		(15,376	)
		98,888		74,933		(23,955	)
Net cash provided by operating activities	$	43,069	$	36,736	$	(6,333	)

Net cash provided by operating activities decreased $6.3 million from the three months ended March 31, 2006 compared to the three months ended March 31, 2007 due primarily to the following:

•  Cash received from customers decreased $30.3 million from the three months ended March 31, 2006 compared to the same period in 2007. This measure consists of revenues and direct taxes billed to customers adjusted for changes in accounts receivable, deferred revenue and tax withholding amounts. The decrease was due primarily to revenue decreases of $23.4 million, as discussed earlier, and a decrease in accounts receivable of $4.6 million in 2006 compared to $0.9 million in 2007.

•  Cash payments for payroll and related expenses decreased $2.2 million due primarily to a reduction in headcount. The lower payroll and related expenses resulted from the Company’s integration and consolidation activities.

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•  Cash payments for site rent expenses decreased $4.2 million. This decrease was due primarily to lower site rent expenses for leased locations as the Company rationalized its network and negotiated lower payments under its master lease agreements (“MLAs”).

•  Cash payments for telecommunications expenses decreased $2.1 million. This decrease was due primarily to factors presented above in the discussions of service, rental and maintenance expenses and general and administrative expenses as the Company has reduced its operating expenses to support its smaller customer base.

•  Cash payments for other operating expenses primarily include repairs and maintenance, facility rents, taxes, licenses and permits, and various other expenses. The decrease in these payments was primarily related to lower repairs and maintenance of $3.0 million, facility rents of $1.2 million, taxes, licenses and permits of $1.8 million and miscellaneous expenses of $1.0 million. Various other expenses have decreased as the Company has reduced overall costs to match its declining subscriber base.

Net Cash Used In Investing Activities.  Net cash used in investing activities increased $0.7 million from the three months ended March 31, 2006 compared to the same period in 2007 due primarily to increased capital expenditures. USA Mobility’s business requires funds to finance capital expenditures, which primarily include the purchase of messaging devices, system and transmission equipment and information systems. Capital expenditures for the three months ended March 31, 2007 consisted primarily of the purchase of messaging devices and other equipment, offset by the net proceeds from the sale of assets. The amount of capital USA Mobility will require in the future will depend on a number of factors, including the number of existing subscriber devices to be replaced, the number of gross placements, technological developments, total competitive conditions and the nature and timing of the Company’s strategy to integrate and consolidate its networks. USA Mobility anticipates its total capital expenditures for 2007 to be between $18.0 and $20.0 million, and expects to fund such requirements from net cash provided by operating activities.

Net Cash Used In Financing Activities.  Net cash used in financing activities increased $17.9 million from the three months ended March 31, 2006 compared to the same period in 2007 primarily due to cash distributions to stockholders.

Cash Distributions to Stockholders.  On February 7, 2007, the Board of Directors of USA Mobility declared the second regular quarterly cash distribution, with a record date of February 22, 2007, and a payment date of March 15, 2007. This cash distribution of approximately $17.8 million was paid from available cash on hand. Cash distributions paid include previously declared cash distributions on restricted stock that vested in January 2007.

Future Cash Distributions to Stockholders.  On May 2, 2007, the Board of Directors of USA Mobility declared the regular quarterly cash distribution of $0.65 per share and also declared an additional special one-time cash distribution to stockholders of $1.00 per share. Both distributions have a record date of May 17, 2007 and a payment date of June 7, 2007. The total cash distributions of approximately $45.1 million will be paid from available cash on hand.

Borrowings.  At March 31, 2007, the Company had no borrowings or associated debt service requirements.

Commitments and Contingencies

Operating Leases.  USA Mobility has operating leases for office and transmitter locations. Substantially all of these leases have lease terms ranging from one month to five years. USA Mobility is rationalizing its office and transmitter locations, and intends to replace, reduce or consolidate leases, where possible. Total rent expense under operating leases for the three months ended March 31, 2007 was approximately $24.3 million.

Other Commitments.  USA Mobility has a commitment to fund annual cash flow deficits, if any, of Global Technical Engineering Solutions, LLC (“GTES”), a company in which it has a majority ownership interest, of up to $1.5 million during the initial three-year period following the investment date of February 11, 2004. Funds may be provided to GTES in the form of capital contributions or loans. No funding was required through February 10, 2007 when the commitment period expired.

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USA Mobility also has various Letters of Credit (“LOCs”) outstanding with multiple state agencies. The LOCs typically have three-year contract requirements but are renewed annually. The deposits related to these LOCs are classified within Other Assets on the balance sheet.

Off-Balance Sheet Arrangements.  USA Mobility does not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, the Company is not exposed to any financing, liquidity, market or credit risk that could arise if it had engaged in such relationships.

Contingencies.  USA Mobility, from time to time, is involved in lawsuits arising in the normal course of business. USA Mobility believes that its pending lawsuits will not have a material adverse effects on its financial position, results of operations, or cash flows.

Related Party Transactions

Effective November 16, 2004, two members of the Company’s Board of Directors also serve as directors for entities that lease transmission tower sites to the Company. During the three months ended March 31, 2006 and 2007, the Company paid $4.5 million and $4.5 million, and $3.3 million and $3.8 million, respectively, to these two landlords for rent expenses that are included in service, rental and maintenance expense.

Application of Critical Accounting Policies

The preceding discussion and analysis of financial condition and results of operations are based on USA Mobility’s consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an on-going basis, the Company evaluates estimates and assumptions, including but not limited to those related to the impairment of long-lived assets, allowances for doubtful accounts and service credits, revenue recognition, asset retirement obligations, severance and restructuring, accrued liabilities and income taxes. Management bases their estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At March 31, 2007, the Company has no outstanding debt financing.

ITEM 4.   CONTROLS AND PROCEDURES

  Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), the Company conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures, as such term is defined underRule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2007. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed the evaluation.

  Changes in Internal Control Over Financial Reporting

During the first quarter ended March 31, 2007, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.   Legal Proceedings

USA Mobility, from time to time is involved in lawsuits arising in the normal course of business. USA Mobility believes that its pending lawsuits will not have a material adverse effect on its reported results of operations, cash flows or financial position.

Item 1A.   Risk Factors

The risk factors included in the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2006 have not materially changed. See “Item 1A. Risk Factors” of Part I of the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2006 for these risk factors.

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.   Defaults upon Senior Securities

None.

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

None.

Item 5.   Other Information

None.

Item 6.   Exhibits

The exhibits listed in the accompanying Exhibit Index are filed as part of this Quarterly Report onForm 10-Q and such Exhibit Index is incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements 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.

USA MOBILITY, INC.

/s/  Thomas L. Schilling

Thomas L. Schilling

Chief Financial Officer

Dated: May 15, 2007

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EXHIBIT INDEX

Exhibit No.			Description
	10	.17	USA Mobility, Inc. Severance Pay Plan and Summary Plan Description (For certain C-Level, not including CEO)(1)
	31	.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, dated May 15, 2007(2)
	31	.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, dated May 15, 2007(2)
	32	.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 dated May 15, 2007(2)
	32	.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 dated May 15, 2007(2)

(1)	Incorporated by reference to USA Mobility’s Current Report onForm 8-K filed on April 18, 2007.
(2)	Filed herewith.

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