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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the Quarterly Period Ended November 30, 2005



OR



| ̈ | 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 1-13436



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TELETOUCH COMMUNICATIONS, INC.

(Name of registrant in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 75-2556090                          
|(State or other jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)



1913 Deerbrook,
Tyler, Texas 75703 (800) 232-3888

Internet Website: www.teletouch.com

(Address and telephone number of principal executive offices)



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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 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 in Rule 12b-2 of the Exchange Act.



|                         |  |                    |  |                        
|------------------------ |  | ------------------ |  | -----------------------
|Large accelerated filer ̈ |  | Accelerated filer ̈ |  | Non-accelerated filer x



Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes ̈No  x



Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.



Common Stock, $.001 par value  48,735,495 shares outstanding as of January 9, 2006



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##### Table of Contents

TELETOUCH COMMUNICATIONS, INC.



TABLE OF
CONTENTS



|        |  |                                                                                                                        |  |         
|------- |  | ---------------------------------------------------------------------------------------------------------------------- |  | --------
|        |  |                                                                                                                        |  | Page No.
|        |  | Part I. Financial Information                                                                                          |  |         
|        |  |                                                                                                                       
|Item 1. |  | Financial Statements - Teletouch Communications, Inc .                                                                 |  | 4       
|        |  |                                                                                                                       
|        |  | Consolidated Balance Sheets as of November 30, 2005 (Unaudited) and May 31, 2005 (Unaudited)                           |  | 4       
|        |  |                                                                                                                       
|        |  | Consolidated Statements of Operations - Three and Six Months Ended November 30, 2005 and November 30, 2004 (Unaudited) |  | 6       
|        |  |                                                                                                                       
|        |  | Consolidated Statements of Cash Flows - Six Months Ended November 30, 2005 and November 30, 2004 (Unaudited)           |  | 7       
|        |  |                                                                                                                       
|        |  | Notes to Consolidated Financial Statements                                                                             |  | 8       
|        |  |                                                                                                                       
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                  |  | 20      
|        |  |                                                                                                                       
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                                                             |  | 41      
|        |  |                                                                                                                       
|Item 4. |  | Controls and Procedures                                                                                                |  | 41      
|        |  |                                                                                                                       
|        |  | Part II. Other Information                                                                                             |  |         
|        |  |                                                                                                                       
|Item 1. |  | Legal Proceedings                                                                                                      |  | 42      
|        |  |                                                                                                                       
|Item 2. |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                            |  | 42      
|        |  |                                                                                                                       
|Item 3. |  | Defaults Upon Senior Securities                                                                                        |  | 42      
|        |  |                                                                                                                       
|Item 4. |  | Submission of Matters to a Vote of Security Holders                                                                    |  | 42      
|        |  |                                                                                                                       
|Item 5. |  | Other Information                                                                                                      |  | 42      
|        |  |                                                                                                                       
|Item 6. |  | Exhibits                                                                                                               |  | 43      
|        |  |                                                                                                                       
|        |  | Signatures                                                                                                             |  | 44      



Forward-Looking Statements



This quarterly report contains forward-looking statements
and information relating to Teletouch Communications, Inc. and its subsidiaries that are based on managements beliefs as well as assumptions



2



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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 Teletouch Communications, Inc. or its management, are forward-looking statements. Although these statements are based upon assumptions management
considers reasonable, they are subject to certain risks, uncertainties and assumptions, including, but not limited to, those factors set forth below under the captions Business, Managements Discussion and Analysis of
Financial Condition and Results of Operations and Additional Factors That Affect Our Business, Future Operating Results, and Financial Condition. Should one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results or outcomes may vary materially from those described herein as anticipated, believed, estimated, expected or intended. Investors are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their respective dates. We undertake no obligation to update or revise any forward-looking statements. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the discussion under Additional Factors That Affect Our Business, Future Operating Results, and Financial Condition.



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##### Table of Contents

PART 1  FINANCIAL INFORMATION



Item 1. Financial Statements



TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS



(unaudited)



(in thousands, except share
data)



ASSETS



|                                                                                                                    |  |                  |       |   |             |   |        |  
|------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ----- | - | ----------- | - | ------ | -
|                                                                                                                    |  | November 30,2005 |       |   | May 31,2005 |  
|CURRENT ASSETS:                                                                                                     |  |                  |       |   |             |   |        |  
|Cash and cash equivalents                                                                                           |  | $                | 942   |   |             | $ | 1,283  |  
|Accounts receivable, net of allowance of $112 in fiscal 2006 and $106 in fiscal 2005                                |  |                  | 1,459 |   |             |   | 1,265  |  
|Inventories, net of reserve of $187 in fiscal 2006 and $105 in fiscal 2005                                          |  |                  | 680   |   |             |   | 906    |  
|Current income tax receivable                                                                                       |  |                  | 685   |   |             |   | 689    |  
|Deferred income tax assets                                                                                          |  |                  | 46    |   |             |   | 52     |  
|Prepaid expenses and other current assets                                                                           |  |                  | 264   |   |             |   | 247    |  
|                                                                                                                    |  |                  |       |   |             |   |        |  
|Total Current Assets                                                                                                |  |                  | 4,076 |   |             |   | 4,442  |  
|                                                                                                                    |  |                  |       |   |             |   |        |  
|PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $15,480 in fiscal 2006 and $15,609 in fiscal 2005 |  |                  | 4,752 |   |             |   | 5,660  |  
|                                                                                                                    |  |                  |       |   |             |   |        |  
|GOODWILL                                                                                                            |  |                  | 343   |   |             |   | 343    |  
|                                                                                                                    |  |                  |       |   |             |   |        |  
|OTHER INTANGIBLE ASSETS:                                                                                            |  |                  |       |   |             |   |        |  
|Subscriber bases                                                                                                    |  |                  | 226   |   |             |   | 226    |  
|FCC licenses                                                                                                        |  |                  | 103   |   |             |   | 103    |  
|Non-compete agreements                                                                                              |  |                  | 95    |   |             |   | 95     |  
|Internally-developed software                                                                                       |  |                  | 149   |   |             |   | 149    |  
|Accumulated amortization                                                                                            |  |                  | (322  | ) |             |   | (269   | )
|                                                                                                                    |  |                  |       |   |             |   |        |  
|Total Other Intangible Assets                                                                                       |  |                  | 251   |   |             |   | 304    |  
|                                                                                                                    |  |                  |       |   |             |   |        |  
|DEFERRED INCOME TAXES                                                                                               |  |                  | 96    |   |             |   | 86     |  
|                                                                                                                    |  |                  |       |   |             |   |        |  
|TOTAL ASSETS                                                                                                        |  | $                | 9,518 |   |             | $ | 10,835 |  
|                                                                                                                    |  |                  |       |   |             |   |        |  



See Accompanying Notes
to Consolidated Financial Statements



4



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##### Table of Contents

TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES



Consolidated Balance Sheet



(unaudited)



(in thousands, except share data)



LIABILITIES AND SHAREHOLDERS EQUITY



|                                                                                                                                                                                                          |  |                  |         |   |             |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ----------- | - | ------- | -
|                                                                                                                                                                                                          |  | November 30,2005 |         |   | May 31,2005 |  
|CURRENT LIABILITIES:                                                                                                                                                                                      |  |                  |         |   |             |   |         |  
|Accounts payable                                                                                                                                                                                          |  | $                | 876     |   |             | $ | 1,038   |  
|Accrued Expenses and other current liabilities                                                                                                                                                            |  |                  | 1,642   |   |             |   | 2,131   |  
|Current portion of long-term debt                                                                                                                                                                         |  |                  | 87      |   |             |   | 74      |  
|Current portion of redeemable common stock payable                                                                                                                                                        |  |                  | 248     |   |             |   | 352     |  
|Current portion of unearned sale/leaseback profit                                                                                                                                                         |  |                  | 418     |   |             |   | 418     |  
|Deferred revenue                                                                                                                                                                                          |  |                  | 686     |   |             |   | 595     |  
|                                                                                                                                                                                                          |  |                  |         |   |             |   |         |  
|Total Current Liabilities                                                                                                                                                                                 |  |                  | 3,957   |   |             |   | 4,608   |  
|                                                                                                                                                                                                          |  |                  |         |   |             |   |         |  
|LONG-TERM LIABILITIES:                                                                                                                                                                                    |  |                  |         |   |             |   |         |  
|Long-term debt, net of current portion                                                                                                                                                                    |  |                  | 92      |   |             |   | 102     |  
|Redeemable common stock purchase warrants                                                                                                                                                                 |  |                  | 2,296   |   |             |   | 2,100   |  
|Redeemable common stock payable, net of current portion                                                                                                                                                   |  |                  |        |   |             |   | 88      |  
|Unearned sale/leaseback profit, net of current portion                                                                                                                                                    |  |                  | 428     |   |             |   | 640     |  
|                                                                                                                                                                                                          |  |                  |         |   |             |   |         |  
|Total long-term liabilities                                                                                                                                                                               |  |                  | 2,816   |   |             |   | 2,930   |  
|                                                                                                                                                                                                          |  |                  |         |   |             |   |         |  
|TOTAL LIABILITIES                                                                                                                                                                                         |  |                  | 6,773   |   |             |   | 7,538   |  
|                                                                                                                                                                                                          |  |                  |         |   |             |   |         |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                                             |  |                  |         |   |             |   |         |  
|                                                                                                                                                                                                          |  |                 
|SHAREHOLDERS EQUITY :                                                                                                                                                                                    |  |                  |         |   |             |   |         |  
|                                                                                                                                                                                                          |  |                 
|Series A cumulative convertible preferred stock, $.001 par value, 15,000 shares authorized, 0 shares issued and outstanding in fiscal 2006 and
fiscal 2005                                                |  |                  |        |   |             |   |        |  
|Series B convertible preferred stock, $.001 par value, 411,457 shares authorized, 0 shares issued and outstanding in fiscal 2006 and fiscal
2005                                                          |  |                  |        |   |             |   |        |  
|Series C convertible preferred stock, $.001 par value, 1,000,000 shares authorized, 0 shares issued and outstanding in fiscal 2006 and
1,000,000 shares authorized, issued and outstanding in fiscal 2005 |  |                  |        |   |             |   | 1       |  
|Common stock, $.001 par value, 70,000,000 shares authorized, 49,416,189 shares issued in fiscal 2006 and 5,411,189 shares issued in fiscal
2005                                                           |  |                  | 49      |   |             |   | 5       |  
|Additional paid-in capital                                                                                                                                                                                |  |                  | 31,873  |   |             |   | 31,915  |  
|Treasury Stock, 619,522 shares held in fiscal 2006 and 429,209 shares held in fiscal 2005                                                                                                                 |  |                  | (185    | ) |             |   | (185    | )
|Accumulated deficit                                                                                                                                                                                       |  |                  | (28,992 | ) |             |   | (28,439 | )
|                                                                                                                                                                                                          |  |                  |         |   |             |   |         |  
|Total Shareholders Equity                                                                                                                                                                                |  |                  | 2,745   |   |             |   | 3,297   |  
|                                                                                                                                                                                                          |  |                  |         |   |             |   |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                |  | $                | 9,518   |   |             | $ | 10,835  |  
|                                                                                                                                                                                                          |  |                  |         |   |             |   |         |  



See Accompanying Notes
to Consolidated Financial Statements



5



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TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS



(unaudited)



(in
thousands, except shares and per share amounts)



|                                                                                                        |  |                                |            |   |                              |   |           |      |  |   |            |   |  |   |           |  
|------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ---------- | - | ---------------------------- | - | --------- | ---- |  | - | ---------- | - |  | - | --------- | -
|                                                                                                        |  | Three Months EndedNovember 30, |            |   | Six Months EndedNovember 30, |  
|                                                                                                        |  | 2005                           |            |   | 2004                         |   |           | 2005 |  |   | 2004       |  
|Operating revenues:                                                                                     |  |                                |            |   |                              |   |           |      |  |   |            |   |  |   |           |  
|Service, rent, and maintenance revenue                                                                  |  | $                              | 4,241      |   |                              | $ | 5,094     |      |  | $ | 8,820      |   |  | $ | 10,436    |  
|Product sales revenue                                                                                   |  |                                | 1,186      |   |                              |   | 1,279     |      |  |   | 2,105      |   |  |   | 2,382     |  
|                                                                                                        |  |                                |            |   |                              |   |           |      |  |   |            |   |  |   |           |  
|Total operating revenues                                                                                |  |                                | 5,427      |   |                              |   | 6,373     |      |  |   | 10,925     |   |  |   | 12,818    |  
|                                                                                                        |  |                                |            |   |                              |   |           |      |  |   |            |   |  |   |           |  
|Operating expenses:                                                                                     |  |                                |            |   |                              |   |           |      |  |   |            |   |  |   |           |  
|Cost of service, rent and maintenance (exclusive of depreciation and amortization included below)       |  |                                | 2,361      |   |                              |   | 2,737     |      |  |   | 5,012      |   |  |   | 5,519     |  
|Cost of products sold                                                                                   |  |                                | 768        |   |                              |   | 1,205     |      |  |   | 1,441      |   |  |   | 2,203     |  
|Selling and general and administrative                                                                  |  |                                | 1,818      |   |                              |   | 2,056     |      |  |   | 3,548      |   |  |   | 4,027     |  
|Depreciation and amortization                                                                           |  |                                | 503        |   |                              |   | 829       |      |  |   | 1,264      |   |  |   | 1,734     |  
|Loss (gain) on disposal of assets                                                                       |  |                                | (1         | ) |                              |   | 3         |      |  |   | (2         | ) |  |   | (51       | )
|                                                                                                        |  |                                |            |   |                              |   |           |      |  |   |            |   |  |   |           |  
|Total operating expenses                                                                                |  |                                | 5,449      |   |                              |   | 6,830     |      |  |   | 11,263     |   |  |   | 13,432    |  
|                                                                                                        |  |                                |            |   |                              |   |           |      |  |   |            |   |  |   |           |  
|Operating loss                                                                                          |  |                                | (22        | ) |                              |   | (457      | )    |  |   | (338       | ) |  |   | (614      | )
|                                                                                                        |  |                                |            |  
|Interest expense, net                                                                                   |  |                                | (100       | ) |                              |   | (108      | )    |  |   | (215       | ) |  |   | (211      | )
|                                                                                                        |  |                                |            |   |                              |   |           |      |  |   |            |   |  |   |           |  
|Loss before income tax benefit                                                                          |  |                                | (122       | ) |                              |   | (565      | )    |  |   | (553       | ) |  |   | (825      | )
|Income tax benefit                                                                                      |  |                                |           |   |                              |   | (201      | )    |  |   |           |   |  |   | (239      | )
|                                                                                                        |  |                                |            |   |                              |   |           |      |  |   |            |   |  |   |           |  
|Net loss                                                                                                |  | $                              | (122       | ) |                              | $ | (364      | )    |  | $ | (553       | ) |  | $ | (586      | )
|                                                                                                        |  |                                |            |   |                              |   |           |      |  |   |            |   |  |   |           |  
|Basic and diluted loss per share                                                                        |  | $                              | (0.01      | ) |                              | $ | (0.08     | )    |  | $ | (0.05      | ) |  | $ | (0.13     | )
|                                                                                                        |  |                                |            |   |                              |   |           |      |  |   |            |   |  |   |           |  
|Denominator for basic and diluted loss per share - weighted average number of common shares outstanding |  |                                | 18,844,548 |   |                              |   | 4,546,980 |      |  |   | 11,824,400 |   |  |   | 4,546,980 |  
|                                                                                                        |  |                                |            |   |                              |   |           |      |  |   |            |   |  |   |           |  



See Accompanying Notes
to Consolidated Financial Statements



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##### Table of Contents

TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS



(unaudited)



(in
thousands)



|                                                                  |  |                              |       |   |      |   |       |  
|----------------------------------------------------------------- |  | ---------------------------- | ----- | - | ---- | - | ----- | -
|                                                                  |  | Six Months EndedNovember 30, |      
|                                                                  |  | 2005                         |       |   | 2004 |  
|Operating Activities:                                             |  |                              |       |   |      |   |       |  
|Net loss                                                          |  | $                            | (553  | ) |      | $ | (586  | )
|Depreciation and amortization                                     |  |                              | 1,264 |   |      |   | 1,734 |  
|Non-cash interest expense                                         |  |                              | 200   |   |      |   | 170   |  
|Provision for losses on accounts receivable                       |  |                              | 33    |   |      |   | 121   |  
|Provision for inventory obsolescence                              |  |                              | 16    |   |      |   | 562   |  
|Gain on disposal of assets                                        |  |                              | (2    | ) |      |   | (51   | )
|Amortization of unearned sale/leaseback profit                    |  |                              | (212  | ) |      |   | (212  | )
|Deferred income taxes                                             |  |                              | (4    | ) |      |   | (212  | )
|Changes in operating assets and liabilities, net of acquisitions: |  |                              |       |   |      |   |       |  
|Accounts receivable, net                                          |  |                              | (227  | ) |      |   | 250   |  
|Inventories                                                       |  |                              | 258   |   |      |   | 357   |  
|Current income tax receivable                                     |  |                              | 4     |   |      |   |      |  
|Prepaid expenses and other assets                                 |  |                              | (17   | ) |      |   | 38    |  
|Accounts payable                                                  |  |                              | (162  | ) |      |   | (211  | )
|Accrued Expenses and other current liabilities                    |  |                              | (489  | ) |      |   | (43   | )
|Deferred revenue                                                  |  |                              | 91    |   |      |   | 123   |  
|                                                                  |  |                              |       |   |      |   |       |  
|Net cash provided by operating activities                         |  |                              | 200   |   |      |   | 2,040 |  
|                                                                  |  |                              |       |   |      |   |       |  
|Investing Activities:                                             |  |                              |       |   |      |   |       |  
|Capital expenditures, including pagers                            |  |                              | (387  | ) |      |   | (817  | )
|Intangible assets                                                 |  |                              |      |   |      |   | (4    | )
|Acquisitions, net of cash acquired                                |  |                              |      |   |      |   | (1    | )
|Proceeds from sale of assets                                      |  |                              | 70    |   |      |   | 75    |  
|                                                                  |  |                              |       |   |      |   |       |  
|Net cash used for investing activities                            |  |                              | (317  | ) |      |   | (747  | )
|                                                                  |  |                              |       |   |      |   |       |  
|Financing Activities:                                             |  |                              |       |   |      |   |       |  
|Proceeds from borrowings                                          |  |                              |      |   |      |   |      |  
|Payments on long-term debt and redeemable common stock            |  |                              | (225  | ) |      |   | (106  | )
|Proceeds from exercise of employee stock options                  |  |                              | 1     |   |      |   |      |  
|                                                                  |  |                              |       |   |      |   |       |  
|Net cash provided by (used) for financing activities              |  |                              | (224  | ) |      |   | (106  | )
|                                                                  |  |                              |       |   |      |   |       |  
|Net increase (decrease) in cash and cash equivalents              |  |                              | (341  | ) |      |   | 1,187 |  
|Cash and cash equivalents at beginning of period                  |  |                              | 1,283 |   |      |   | 72    |  
|                                                                  |  |                              |       |   |      |   |       |  
|Cash and cash equivalents at end of period                        |  | $                            | 942   |   |      | $ | 1,259 |  
|                                                                  |  |                              |       |   |      |   |       |  
|Supplemental Cash Flow Data:                                      |  |                              |       |   |      |   |       |  
|Cash payments for interest                                        |  | $                            | 15    |   |      | $ | 42    |  
|                                                                  |  |                              |       |   |      |   |       |  
|Non-Cash Transactions:                                            |  |                              |       |   |      |   |       |  
|Purchase Price Adjustment-Delta Communications, Inc.              |  | $                            |      |   |      | $ | 38    |  
|                                                                  |  |                              |       |   |      |   |       |  
|Exchange of Note Receivable for Note Payable                      |  | $                            |      |   |      | $ | 258   |  
|                                                                  |  |                              |       |   |      |   |       |  
|Transfer of pager inventory to fixed assets                       |  | $                            | 48    |   |      | $ | 230   |  
|                                                                  |  |                              |       |   |      |   |       |  
|Purchase of vehicles with bank financing                          |  | $                            | 31    |   |      | $ | 62    |  
|                                                                  |  |                              |       |   |      |   |       |  



See Accompanying Notes
to Consolidated Financial Statements



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##### Table of Contents

TELETOUCH COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



NOTE 1  BASIS OF PRESENTATION



The accompanying unaudited interim consolidated financial statements included herein have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission (SEC). The interim condensed consolidated financial statements include the consolidated accounts of Teletouch Communications, Inc. and our wholly-owned subsidiaries (collectively, the
Company or Teletouch). In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of financial position, results of operations and cash flows for the interim
periods presented have been made. The results of operations for the three and six months ended November 30, 2005, are not necessarily indicative of the results to be expected for the full year.



Some information and footnote disclosures normally included in financial
statements or notes thereto prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. We believe, however, that our disclosures are adequate to make the
information presented not misleading. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Teletouchs 2005 Annual Report on Form 10-K.



Financial Condition and Going Concern: As of
November 30, 2005, the Companys consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company incurred net losses of $122,000 and $364,000 in the three months ended
November 30, 2005 and 2004, respectively and $553,000 and $586,000 in the six months ended November 30, 2005 and 2004, respectively, primarily due to continued declines in its paging revenues. As of November 30, 2005, the Company had
a working capital surplus of $119,000. The Company has sustained its operations primarily through continuous cost reductions. During 2005, the Company attempted to secure additional debt financing to fund a potential acquisition and provide
additional working capital to the Company but was unable to do so due to the declining performance of the Companys paging business. As a result of the continued deterioration of the Companys financial position and its operating results,
the Company entered into an agreement in August 2005 to sell substantially all of the assets related to the paging business (see Note 3 to the Consolidated Financial Statements) and this transaction is expected to close in March 2006 if shareholder
approval is obtained. The sale of the Companys core paging business, combined with additional financing, is expected to generate sufficient cash to enable the Company to acquire a profitable and growing business that could support the embedded
overhead costs of remaining a public company and return the Company to profitability. There can be no assurance, however, that we will be successful in selling the assets related to the paging business, or that we will be able to complete any
additional debt or equity financing on favorable terms.



If the
Company is unable to complete the contemplated sale, realization of a major portion of the assets in the accompanying consolidated balance sheet would be dependent upon continued operations of the Company. The Company has been successful in its
efforts to maintain its two-way revenues to the higher levels achieved in fiscal 2005, stabilize the rate of decline in its paging business while reducing expenses in this business and reduce its overhead costs. However, these successes have not
been sufficient to overcome the loss in profitability resulting from the significant decline in the Companys paging subscriber bases over the past several years. Further, the Company has been unsuccessful in securing any additional financing
during the year and has continued to be unable to grow the revenues from the telemetry business. These conditions raise substantial doubt about the Companys ability to continue as a going concern.



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Reclassifications:Certain reclassifications were made to the prior period financial statements to
conform to the current period financial statement presentation. These reclassifications did not have an impact on the Companys previously reported financial position or net loss.



NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Stock-Based Compensation:SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS
No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, provides companies with a choice to follow the provisions of SFAS No. 123 in determination of stock-based compensation expense under the alternative
fair value accounting or to continue with the provisions of APB No. 25, Accounting for Stock Issued to Employees and related interpretations in accounting for stock-compensation plans. The Company has elected to follow the
provisions of APB 25 under which no compensation expense is recognized if the exercise price of the Companys stock options equals or exceeds the market price of the underlying Common Stock on the date of grant; generally, no compensation
expense is recognized.



Pro forma information regarding net
loss and loss per share is required by SFAS 123, and has been determined as if Teletouch had accounted for its stock options under the fair value method of that statement. Option valuation models are used in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The Companys stock options have
characteristics significantly different from those of traded options. Further, changes in the subjective input assumptions related to the options can materially affect the fair value estimate. Therefore, in managements opinion the existing
models do not necessarily provide a reliable single measure of the fair value of the Companys stock options.



For purposes of pro forma disclosures, the estimated fair value of stock options is amortized to expense over the options vesting period. Therefore,
future pro forma compensation expense may be greater as additional options are granted. The Companys pro forma information follows (in thousands):



|                                                                                                                  |  |                                |       |   |                              |   |       |      |  |   |       |   |  |   |       |  
|----------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ----- | - | ---------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                                                                                  |  | Three months endedNovember 30, |       |   | Six months endedNovember 30, |  
|                                                                                                                  |  | 2005                           |       |   | 2004                         |   |       | 2005 |  |   | 2004  |  
|Net loss applicable to common sharesholders as reported                                                           |  | $                              | (122  | ) |                              | $ | (364  | )    |  | $ | (553  | ) |  | $ | (586  | )
|Plus stock-based employee compensation expense included in reported net loss, net of related tax effects          |  |                                | (62   | ) |                              |   | 27    |      |  |   |      |   |  |   |      |  
|Less total stock-based employee compensation determined under fair-value-based method, net of related tax effects |  |                                | (35   | ) |                              |   | (5    | )    |  |   | (66   | ) |  |   | (10   | )
|                                                                                                                  |  |                                |       |   |                              |   |       |      |  |   |       |   |  |   |       |  
|Pro forma net loss                                                                                                |  | $                              | (219  | ) |                              | $ | (342  | )    |  | $ | (619  | ) |  | $ | (596  | )
|                                                                                                                  |  |                                |       |   |                              |   |       |      |  |   |       |   |  |   |       |  
|Loss per share - basic and diluted:                                                                               |  |                                |       |   |                              |   |       |      |  |   |       |   |  |   |       |  
|As reported                                                                                                       |  | $                              | (0.01 | ) |                              | $ | (0.08 | )    |  | $ | (0.05 | ) |  | $ | (0.13 | )
|                                                                                                                  |  |                                |       |   |                              |   |       |      |  |   |       |   |  |   |       |  
|Pro forma                                                                                                         |  | $                              | (0.01 | ) |                              | $ | (0.08 | )    |  | $ | (0.05 | ) |  | $ | (0.13 | )
|                                                                                                                  |  |                                |       |   |                              |   |       |      |  |   |       |   |  |   |       |  



Loss Per Share:Basic earnings (loss) per share (EPS) is generally calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding. Diluted EPS is generally calculated by dividing net
income available to common shareholders by the weighted average number of common shares outstanding and potential shares outstanding. However, during the quarter, the Company had 1,000,000 shares of Series C Preferred Stock and 6,000,000 GM Warrants
outstanding which were convertible into 44,000,000 and 6,000,000 shares of common stock, respectively.



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On November 1, 2005, the 1,000,000 shares of Series C Preferred Stock were converted into 44,000,000 shares of
common stock. These securities, prior to their conversion, are considered to be Participating Securities under Financial Accounting Standards No. 128 (FAS 128) for EPS calculations. Both the Series C Preferred Stock and
the GM Warrants are considered Participating Securities because the common stock underlying these securities participates in dividends (if declared) at the same rate as the common shareholders. Emerging Issues Task Force (EITF) Topic
03-06 requires that Participating Securities be included in the computation of basic EPS using the two-class method, if the effect would be dilutive to EPS. Although these securities meet the definition of Participating Securities since they
participate in dividends, in light of the losses and the fact that there is no contractual obligation for the security holders to share in losses of the Company, they have not been included in the basic and diluted earnings per share calculations.



The following securities were outstanding but were not
included in the computation of diluted earnings per share due to their antidilutive effect (in thousands):



|                               |  |                  |  |                 
|------------------------------ |  | ---------------- |  | ----------------
|                               |  | November 30,2005 |  | November 30,2004
|Common stock options           |  | 1,861            |  | 1,942           
|Common stock purchase warrants |  | 6,000            |  | 6,000           
|Series C Preferred Stock       |  |                 |  | 44,000          
|                               |  |                  |  |                 
|                               |  | 7,861            |  | 51,942          
|                               |  |                  |  |                 



NOTE 3  PROPOSED SALE OF
PAGING BUSINESS



On July 7, 2005, the Board of
Directors of the Company (the Board) met and reviewed a proposal made by management to sell the Companys core paging and two-way radio businesses to raise the necessary cash to acquire unidentified high growth businesses in the
future. Prior to this meeting, management had obtained a draft letter of intent from a prospective buyer of the paging business, which was presented to the Board at this meeting. After review of the information presented by management, which
included the future business direction of the Company, its ability to continue to operate as a going concern and the estimated value of its paging business unit, the Board met on July 10, 2005 and authorized the Companys management to
continue negotiations with the prospective buyer of the paging business. Additionally, the Board authorized the Company to solicit offers on the two-way radio business. On December 2, 2005, the Board determined not to sell the Companys
two-way radio business after concluding that the two-way radio business was sufficiently profitable and that there was a low likelihood of a material reduction or loss of value to this business over the next few years. These and other matters are
described below.



Sale of Paging Business



On August 22, 2005, the Company entered into an Asset Purchase
Agreement (the APA) to sell substantially all of the assets of its paging business to Teletouch Paging, LP, a newly formed limited partnership, wholly-owned by an unrelated, private Fort Worth, Texas investment group, (the
Buyer).



The assets included in the asset sale
transaction include substantially all of the designated assets of the paging business (the Acquired Assets) with a net carrying value at November 30, 2005 of approximately $3.6 million.



The Buyers aggregate consideration for the Acquired Assets was
originally contemplated to be approximately $5.25 million as of August 31, 2005 and would have been payable as follows: (i) $4,000,000 less the cumulative earnings before interest, taxes, depreciation and amortization (EBITDA)
attributable to



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the paging business from September 1, 2005 through the closing date to be payable in cash to the Company on the
closing date, (ii) $1,200,000 non-interest bearing note payable to the Company due in 12 monthly payments of $100,000 each beginning the earlier of the date that Buyer has satisfied its obligations under its senior borrowings or August 31,
2007 and (iii) the assumption of approximately $50,000 notes payable related to vehicles being sold (collectively, the Purchase Price). Because the transaction is not expected to close before March 2, 2006, the consideration to
be received by the Company for the sale was to be reduced by an estimated $1.8 million which approximates the EBITDA of the paging business from September 1, 2005 through February 28, 2006. The $1.2 million promissory note payable to the
Company was to be secured by a lien on the assets subject to customary subordination provisions required by the Buyers senior lender. On December 30, 2005, the payment terms of the APA were amended to limit the reductions that can be
taken against the cash portion of the consideration so that in no event will such amount be more of less than $2.2 million. Additionally, the amendment to the APA provides that the $1.2 million promissory note will be prepaid at closing. Therefore,
the total cash consideration payable to the Company at closing will be $3.4 million and the promissory note will be cancelled.



The Purchase Price is subject to adjustment based on the Companys net working capital, as defined in the APA, at closing and the value of any excess
net working capital transferred will be paid to the Company by the Buyer within 45 days of closing. As of November 30, 2005, approximately $60,000 in excess working capital, as defined in the APA, is related to the paging business and would be
transferred to the Buyer if the transaction were to have closed at that date. Because the levels of working capital change monthly, there is no way to estimate the balance that will exist as of closing.



The APA does not contemplate any termination or breakup fees or penalties.
The APA also contains representations and warranties, indemnification and other provisions customary for agreements of this nature. Closing of the APA is contingent upon obtaining the approval of the Companys shareholders as well as approvals
from federal regulators and other customary closing conditions. The absence of these approvals at this stage presents transaction risks. The transaction is expected to close within ten days following the receipt of the required shareholder approval.
The Company filed preliminary proxy solicitation materials on January 3, 2006 in connection with a special meeting of the shareholders of the Company to be held to vote on this proposed asset sale transaction. The Company has tentatively
scheduled this special meeting of its shareholders for March 1, 2006.



The parties to the APA have also entered into a Management Agreement (MA), to facilitate a smooth transition of the paging business operations from Teletouch to the Buyer. In the MA, the Buyer has the
authority, on a limited basis consistent with the effective regulations of the FCC, to implement operational policies and to provide general management services with respect to the day-to-day operations of TLLs paging operations, subject to
reporting to and approval of the President of Teletouch and its Board. As its compensation for the management services provided under the MSA, the Buyer shall be entitled to a flat fee of $50,000 per month during the period before the closing date,
payable in two equal installments per month, beginning September 2, and 16, 2005, respectively. The term of the MSA will be from September 1, 2005 to the earlier of: (i) the APA final closing date, or (ii) the termination of the
APA.



Redemption of Common Stock Purchase Warrants



On September 19, 2005 the Company received notice from the holders of
6,000,000 common stock warrants (the GM Warrants) of their intent to redeem these warrants upon the sale of the paging business. Under the terms of the GM Warrants, the holder may accelerate the redemption of the warrants upon the sale
of substantially all of the Companys assets. Under the initial terms of the GM Warrants, they could be redeemed at $0.50 per warrant, at the option of the holder in December 2007. The holders of the GM Warrants have claimed that the sale of
the paging business represents substantially all of the Companys assets. The Company is trying to negotiate a reduction in the amount due to the Warrant Holders upon the closing of the sale transaction and believes if it is unsuccessful in
reaching terms on this obligation, the warrant holders may vote against the sale of the paging business.



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If the Company is unsuccessful in negotiating a settlement or alternative arrangement with the holders of
the GM Warrants and receives shareholder approval to continue with the sale of the paging business, the Company may be obligated to redeem the GM Warrants for $3,000,000 shortly after the closing on the sale of the paging business. As of
November 30, 2005, the Company has recorded this as a long-term liability at its fair value of $2,296,000. The GM Warrants are being accreted in value over time to their settlement value of $3,000,000 in December 2007 according to their
original terms. If the Company is unsuccessful in negotiating a settlement or alternative arrangement with the holders of the GM Warrants and continues with the sale of the paging business, the Company will record a charge to net income equal to the
difference in the carrying value of the GM Warrants at that date and $3,000,000 and this amount will be classified as a current liability which may be paid after the closing on the sale of the paging business. Further, under rights included in the
GM Warrants, the warrant holders will be permitted to vote separately as a class on matters involving the sale of substantially all of the assets of the Company. This right applies to the sale of the Companys paging business (discussed above)
and the approval of this transaction is dependent on receiving an affirmative vote from the holders of the GM Warrants.



NOTE 4  INVENTORY



The following table reflects the components of inventory (in thousands):



|                                      |  |                   |     |         |              |      |           |  |   |      |   |         |   |       |           |   |      |   |  |   |     |  
|------------------------------------- |  | ----------------- | --- | ------- | ------------ | ---- | --------- |  | - | ---- | - | ------- | - | ----- | --------- | - | ---- | - |  | - | --- | -
|                                      |  | November 30, 2005 |     |         | May 31, 2005 |     
|                                      |  | Cost              |     | Reserve |              |      | Net Value |  |   | Cost |   | Reserve |   |       | Net Value |  
|Pagers and parts                      |  | $                 | 304 |         | $            | (52  | )         |  | $ | 252  |   |         | $ | 383   |           | $ | (38  | ) |  | $ | 345 |  
|Two-Way radios and parts              |  |                   | 363 |         |              | (33  | )         |  |   | 330  |   |         |   | 390   |           |   | (16  | ) |  |   | 374 |  
|Telemetry devices and parts           |  |                   | 200 |         |              | (54  | )         |  |   | 146  |   |         |   | 238   |           |   | (11  | ) |  |   | 227 |  
|                                      |  |                   |     |         |              |      |           |  |   |      |   |         |   |       |           |   |      |   |  |   |     |  
|Total inventory and specific reserves |  | $                 | 867 |         | $            | (139 | )         |  | $ | 728  |   |         | $ | 1,011 |           | $ | (65  | ) |  | $ | 946 |  
|                                      |  |                   |     |         |              |     
|General obsolescence reserve          |  |                   |    |         |              | (48  | )         |  |   | (48  | ) |         |   |      |           |   | (40  | ) |  |   | (40 | )
|                                      |  |                   |     |         |              |      |           |  |   |      |   |         |   |       |           |   |      |   |  |   |     |  
|Total inventory and reserves          |  | $                 | 867 |         | $            | (187 | )         |  | $ | 680  |   |         | $ | 1,011 |           | $ | (105 | ) |  | $ | 906 |  
|                                      |  |                   |     |         |              |      |           |  |   |      |   |         |   |       |           |   |      |   |  |   |     |  



NOTE 5  PROPERTY, PLANT AND
EQUIPMENT



Property, plant and equipment consisted of the
following (in thousands):



|                           |  |                   |         |   |              |   |         |  
|-------------------------- |  | ----------------- | ------- | - | ------------ | - | ------- | -
|                           |  | November 30, 2005 |         |   | May 31, 2005 |  
|Leased pagers and radios   |  | $                 | 2,346   |   |              | $ | 2,671   |  
|Paging infrastructure      |  |                   | 15,433  |   |              |   | 16,176  |  
|Buildings and improvements |  |                   | 386     |   |              |   | 386     |  
|Other equipment            |  |                   | 2,067   |   |              |   | 2,036   |  
|                           |  |                   |         |   |              |   |         |  
|                           |  |                   | 20,232  |   |              |   | 21,269  |  
|Accumulated depreciation   |  |                   | (15,480 | ) |              |   | (15,609 | )
|                           |  |                   |         |   |              |   |         |  
|                           |  | $                 | 4,752   |   |              | $ | 5,660   |  
|                           |  |                   |         |   |              |   |         |  



Depreciation expense
was approximately $477,000 and $800,000 for the three months ended November 30, 2005 and 2004, respectively, and $1,212,000 and $1,676,000 for the six months ended November 30, 2005 and 2004, respectively.



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Property, plant and equipment is recorded at cost. Depreciation is computed using the straight-line
method. The following table contains the property, plant and equipment by estimated useful life, net of accumulated depreciation as of November 30, 2005 (in thousands):



|                       |  |                  |     |             |   |             |  |               |     |               |   |         |  |                |       |  |   |    |  |   |      
|---------------------- |  | ---------------- | --- | ----------- | - | ----------- |  | ------------- | --- | ------------- | - | ------- |  | -------------- | ----- |  | - | -- |  | - | -----
|                       |  | Less than3 years |     | 3 to 4years |   | 5 to 9years |  | 10 to 14years |     | 15 to 19years |   | 20years |  | Total NetValue
|Buildings              |  | $                |    |             | $ |            |  | $             |    |               | $ |        |  | $              | 4     |  | $ | 9  |  | $ | 13   
|LAN & Other Computers  |  |                  |    |             |   | 169         |  |               | 21  |               |   |        |  |                |      |  |   |   |  |   | 190  
|Equipment              |  |                  |    |             |   | 29          |  |               | 3   |               |   | 3       |  |                |      |  |   |   |  |   | 35   
|Furniture & Fixtures   |  |                  |    |             |   | 26          |  |               | 0   |               |   | 23      |  |                |      |  |   |   |  |   | 49   
|Leasehold Improvements |  |                  | 44  |             |   | 3           |  |               | 1   |               |   |        |  |                |      |  |   |   |  |   | 48   
|Office Equipment       |  |                  |    |             |   | 3           |  |               | 4   |               |   | 1       |  |                |      |  |   |   |  |   | 8    
|Paging Infrastructure  |  |                  |    |             |   | 2           |  |               | 272 |               |   | 96      |  |                | 2,183 |  |   | 3  |  |   | 2,556
|Vehicles               |  |                  |    |             |   |            |  |               | 223 |               |   |        |  |                |      |  |   |   |  |   | 223  
|Pager Fleet            |  |                  |    |             |   | 1,503       |  |               |    |               |   |        |  |                |      |  |   |   |  |   | 1,503
|Radio Fleet            |  |                  |    |             |   | 15          |  |               |    |               |   |        |  |                |      |  |   |   |  |   | 15   
|Assets Not In Service  |  |                  | 112 |             |   |            |  |               |    |               |   |        |  |                |      |  |   |   |  |   | 112  
|                       |  |                  |     |             |   |             |  |               |     |               |   |         |  |                |       |  |   |    |  |   |      
|                       |  | $                | 156 |             | $ | 1,750       |  | $             | 524 |               | $ | 123     |  | $              | 2,187 |  | $ | 12 |  | $ | 4,752
|                       |  |                  |     |             |   |             |  |               |     |               |   |         |  |                |       |  |   |    |  |   |      



NOTE 6  GOODWILL AND OTHER
INTANGIBLE ASSETS



Intangible Assets with Indefinite
Lives: In accordance with SFAS No. 142,Goodwill and Other Intangible Assets, the Company performs an annual impairment test of goodwill as well as evaluates this goodwill for recoverability upon any significant change in the
business. There were no changes in the carrying amount of intangible assets with indefinite lives for the three or six months ended November 30, 2005.



The reported goodwill of the Company at November 30, 2005 and May 31, 2005 relates entirely to the two-way radio segment and was purchased in
the acquisition of the assets of Delta Communications and Electronics, Inc. which was completed in January 2004. The Company evaluates the recoverability of this goodwill at least once annually on March 1st of each year.



Intangible Assets with Definite Lives:The following is a summary of
the Companys intangible assets that are subject to amortization (in thousands):



|                                        |  |                     |     |                         |   |      |                  |  |                     |     |                         |   |     |                  |   |      |   |  |   |    
|--------------------------------------- |  | ------------------- | --- | ----------------------- | - | ---- | ---------------- |  | ------------------- | --- | ----------------------- | - | --- | ---------------- | - | ---- | - |  | - | ---
|                                        |  | November 30, 2005   |     | May 31, 2005           
|                                        |  | GrossCarryingAmount |     | AccumulatedAmortization |   |      | NetCarryingValue |  | GrossCarryingAmount |     | AccumulatedAmortization |   |     | NetCarryingValue
|Business combinations:                  |  |                     |     |                         |   |      |                  |  |                     |     |                         |   |     |                  |   |      |   |  |   |    
|Subscriber bases                        |  | $                   | 226 |                         | $ | (155 | )                |  | $                   | 71  |                         | $ | 226 |                  | $ | (143 | ) |  | $ | 83 
|FCC licenses                            |  |                     | 103 |                         |   | (21  | )                |  |                     | 82  |                         |   | 103 |                  |   | (15  | ) |  |   | 88 
|Non-compete agreements                  |  |                     | 95  |                         |   | (35  | )                |  |                     | 60  |                         |   | 95  |                  |   | (25  | ) |  |   | 70 
|                                        |  |                     |     |                         |   |      |                  |  |                     |     |                         |   |     |                  |   |      |   |  |   |    
|                                        |  | $                   | 424 |                         | $ | (211 | )                |  | $                   | 213 |                         | $ | 424 |                  | $ | (183 | ) |  | $ | 241
|                                        |  |                     |     |                         |   |     
|Internally developed assets:            |  |                     |     |                         |   |      |                  |  |                     |     |                         |   |     |                  |   |      |   |  |   |    
|Software                                |  |                     | 149 |                         |   | (111 | )                |  |                     | 38  |                         |   | 149 |                  |   | (86  | ) |  |   | 63 
|                                        |  |                     |     |                         |   |      |                  |  |                     |     |                         |   |     |                  |   |      |   |  |   |    
|Balance at November 30 and May 31, 2005 |  | $                   | 573 |                         | $ | (322 | )                |  | $                   | 251 |                         | $ | 573 |                  | $ | (269 | ) |  | $ | 304
|                                        |  |                     |     |                         |   |      |                  |  |                     |     |                         |   |     |                  |   |      |   |  |   |    



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Amortization is computed using the straight-line method based on the following estimated useful lives:



|                              |  |          
|----------------------------- |  | ---------
|Subscriber bases              |  | 1-5 years
|FCC licenses                  |  | 9 years  
|Non-competition agreements    |  | 5 years  
|Internally-developed software |  | 3 years  



The intangible assets
acquired in business combinations primarily relate to the purchase of the assets of Delta Communications in January 2004. The internally developed intangible assets relate to software developed to manage the Companys telemetry data and
customer reporting requirements.



Total amortization expense
for the three months ended November 30, 2005 and 2004 was approximately $26,000 and $29,000, respectively and $52,000 and $58,000 for the six months ended November 30, 2005 and 2004 respectively.



NOTE 7  ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES



Accrued expenses and other current liabilities consist of (in thousands):



|                                            |  |                  |       |             |   |      
|------------------------------------------- |  | ---------------- | ----- | ----------- | - | -----
|                                            |  | November 30,2005 |       | May 31,2005
|Accrued payroll and other personnel expense |  | $                | 457   |             | $ | 999  
|Accrued state and local taxes               |  |                  | 282   |             |   | 221  
|Unvouchered accounts payable                |  |                  | 724   |             |   | 589  
|Customer deposits payable                   |  |                  | 55    |             |   | 118  
|Other                                       |  |                  | 124   |             |   | 204  
|                                            |  |                  |       |             |   |      
|Total                                       |  | $                | 1,642 |             | $ | 2,131
|                                            |  |                  |       |             |   |      



NOTE 8 - INCOME TAXES



Teletouch uses the liability method to account for income
taxes. Under this method, deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates that are expected to be in
effect when the differences reverse.



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##### Table of Contents

Significant components of the Companys deferred taxes are as follows (in thousands):



|                                      |  |                   |       |   |              |   |       |  
|------------------------------------- |  | ----------------- | ----- | - | ------------ | - | ----- | -
|                                      |  | November 30, 2005 |       |   | May 31, 2005 |  
|Deferred Tax Assets:                  |  |                   |       |   |              |   |       |  
|Current Deferred Tax Assets:          |  |                   |       |   |              |   |       |  
|Accrued liabilities                   |  | $                 | 9     |   |              | $ | 32    |  
|Inventory reserves                    |  |                   | 28    |   |              |   |      |  
|Deferred revenue                      |  |                   | 39    |   |              |   | 39    |  
|Bad debt reserve                      |  |                   | 33    |   |              |   | 31    |  
|                                      |  |                   |       |   |              |   |       |  
|                                      |  |                   | 109   |   |              |   | 102   |  
|Valuation Allowance                   |  |                   | (51   | ) |              |   | (32   | )
|                                      |  |                   |       |   |              |   |       |  
|Net Current Deferred Tax Assets       |  |                   | 58    |   |              |   | 70    |  
|                                      |  |                  
|Non-Current Deferred Tax Assets:      |  |                   |       |   |              |   |       |  
|Unrecognized gain                     |  |                   | 288   |   |              |   | 360   |  
|Intangible assets                     |  |                   | 1,420 |   |              |   | 1,541 |  
|                                      |  |                   |       |   |              |   |       |  
|                                      |  |                   | 1,708 |   |              |   | 1,901 |  
|Valuation Allowance                   |  |                   | (685  | ) |              |   | (589  | )
|                                      |  |                   |       |   |              |   |       |  
|Net Non-Current Deferred Tax Assets   |  |                   | 1,023 |   |              |   | 1,312 |  
|                                      |  |                   |       |   |              |   |       |  
|Deferred Tax Liabilities:             |  |                   |       |   |              |   |       |  
|Current Deferred Tax Liabilities:     |  |                   |       |   |              |   |       |  
|Other                                 |  |                   | 12    |   |              |   | 18    |  
|                                      |  |                   |       |   |              |   |       |  
|Non-Current Deferred Tax Liabilities: |  |                   |       |   |              |   |       |  
|Depreciation methods                  |  |                   | 927   |   |              |   | 1,226 |  
|                                      |  |                   |       |   |              |   |       |  
|Net Current Deferred Tax Asset        |  | $                 | 46    |   |              | $ | 52    |  
|                                      |  |                   |       |   |              |   |       |  
|Net Non-Current Deferred Tax Asset    |  | $                 | 96    |   |              | $ | 86    |  
|                                      |  |                   |       |   |              |   |       |  



NOTE 9  RELATED PARTY
TRANSACTIONS



The Company had certain related party sales,
purchases and incurred certain expenses during the three and six months ended November 30, 2005 and November 30, 2004 with Progressive Concepts, Inc. (PCI) a company controlled by Robert McMurrey, Teletouchs Chairman.



The Company primarily purchases call center services from PCI to support the
Companys existing answering service accounts within the paging segment of its business and to support a monitoring contract that the Company has with an unrelated telemetry provider. The call center services to support Teletouchs
answering service accounts were billed by PCI at $30,000 per month through August 2005 and beginning in September 2005 these fees were raised to $35,000 per month. Teletouch is charged an additional monthly charge based on the call volume and number
of subscribers being serviced related to the telemetry monitoring contract. The telemetry monitoring contract was executed by the Company during the first quarter of fiscal 2006. During the three months ended November 30, 2005, the Company
incurred $145,000 in total call center charges to PCI as compared to $90,000 in the same three months of the prior year. During the six months ended November 30, 2005, the Company incurred $286,000 in total call center charges to PCI as
compared to $180,000 in the same six months of the prior year.



NOTE 10
 SHAREHOLDERS EQUITY



Common Stock Purchase
Warrants: At November 30, 2005, the Company has 6,000,000 issued and outstanding warrants (the GM Warrants) to purchase shares of Teletouch Common Stock. The GM Warrants will be exercisable beginning in December of 2005,
terminating in December of 2010. In December of 2007 or earlier upon specific events, the holder of the GM Warrants may require the Company



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to redeem the warrants at $0.50 per warrant. Because of this mandatory redemption feature, the Company has recorded the
estimated fair value of the GM Warrants as a long-term liability on its consolidated balance sheet, and will adjust the amount to reflect changes in the fair value of the warrants, including accretion in value due to the passage of time, with such
changes charged or credited to interest expense.



Assuming that
there is no acceleration of the warrants redemption feature prior to December 2007 or increase in the fair value of the warrants more than the redemption value, interest expense recorded due to accretion in value of the warrants will be as
follows (in thousands):



|                                |  |                  |    
|------------------------------- |  | ---------------- | ---
|                                |  | Interest Expense
|December 1, 2005 - May 31, 2006 |  | $                | 214
|June 1, 2006 - May 31, 2007     |  | $                | 490



As a result of the
proposed sale of the paging business, the redemption of the GM Warrants will be accelerated upon the closing of this transaction. The Company is currently negotiating with the holders of the GM Warrants for a reduced amount payable upon the closing
of the sale transaction (see Note 3 for further discussion).



Redeemable Common Stock Payable:On January 29, 2004, Teletouch acquired substantially all of the two-way radio assets of DCAE, Inc. d/b/a Delta Communications, Inc. (Delta), and in conjunction, the Company deferred
the issuance of 640,000 shares of Teletouchs common stock subject to certain reductions specified in the asset purchase agreement between Teletouch and Delta that could not exceed 100,000 shares of common stock. This obligation was payable on
February 15, 2005 but due to certain negotiations with Delta regarding certain share reductions allowable under the purchase agreement, the Company did not issue these securities until March 2005. During March 2005, the Company and Delta agreed
to a net number of shares to be issued of 580,000 shares of Teletouch common stock. Before the issuance of this common stock, Delta notified the Company of its intention to immediately redeem 25% of these securities in accordance with the purchase
agreement. Therefore, in March 2005, the Company issued 435,000 shares of its common stock to Delta and a payment of $152,250 for the redemption of the remaining 145,000 shares of common stock that Delta chose to redeem. The shares of common stock
issued contain a put option allowing the holder to sell 25% of the remaining shares held each quarter back to the company at a specified price as follows:



|                                               |  |           |      |        |        
|---------------------------------------------- |  | --------- | ---- | ------ | -------
|Date in Which Stock Can be Put Back to Company |  | Put Price |      | Shares
|November 30, 2005                              |  | $         | 1.05 |        | 61,172 
|February 28, 2006 - November 30, 2006          |  | $         | 1.10 |        | 183,515
|                                               |  |           |      |        |        
|                                               |  |           |      |        | 244,687
|                                               |  |           |      |        |        



The following table
provides a rollforward of the redeemable common stock held by Delta through November 30, 2005 (dollars in thousands):



|                             |  |          |   |  |                  |      |  
|---------------------------- |  | -------- | - |  | ---------------- | ---- | -
|                             |  | Shares   |   |  | Redemption Value |     
|Balance at May 31, 2005      |  | 435,000  |   |  | $                | 440  |  
|                             |  |         
|Less: Redemption of shares   |  | (108,750 | ) |  |                  | (114 | )
|Add: Accretion               |  |         |   |  |                  | 4    |  
|                             |  |          |   |  |                  |      |  
|Balance at August 31, 2005   |  | 326,250  |   |  | $                | 330  |  
|                             |  |         
|Less: Redemption of shares   |  | (81,563  | ) |  |                  | (86  | )
|Add: Accretion               |  |         |   |  |                  | 4    |  
|                             |  |          |   |  |                  |      |  
|Balance at November 30, 2005 |  | 244,687  |   |  |                  | 248  |  
|                             |  |          |   |  |                  |      |  



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On December 1, 2005 Delta redeemed 61,172 shares of its redeemable common stock at $1.05 per share
receiving a cash payment of $64,230 from the Company.



Because
of this mandatory redemption feature, the Company has recorded the estimated fair value of the Redeemable Common Stock Payable as both a current and long-term liability on its consolidated balance sheet, and will adjust the amount to reflect changes
in the fair value of the obligation, including accretion in value due to the passage of time, with such changes charged or credited to interest expense. As of November 30, 2005, the entire obligation under the Redeemable Common Stock Payable is
recorded as a current liability on the consolidated balance sheet since the holder can redeem all of these shares within the next twelve months at the holders option.



Series C Preferred Stock: At November 30, 2005, no shares of Series C Preferred Stock with a par value of $0.001
are issued and outstanding. On November 1, 2005, 1,000,000 shares of Series C Preferred Stock were converted into 44,000,000 shares of Common Stock resulting in the retirement of all of the outstanding shares of Series C Preferred Stock.



The material terms of the Series C Preferred Stock were as
follows: after payment of all amounts due under the Amended Credit Agreement which was paid in full in December 2002, (1) dividends may be paid on a pro rata basis; (2) assets may be distributed upon voluntary or involuntary liquidation,
dissolution or winding up of the Company; and (3) holders may convert all, but not less than all, of their Series C Preferred Stock into shares of Common Stock after May 20, 2005, subject to the following terms and conditions. The Series C
Preferred Stock will be convertible into a number of shares of Common Stock computed by dividing (1) the product of (A) the number of shares of Series C Preferred Stock to be converted and (B) 22, by (2) the conversion price in
effect at the time of conversion. The conversion price for delivery of Common Stock shall initially be $0.50 and subject to adjustment. The Series C Preferred Stock was non-voting. Holders of Series C Preferred Stock were entitled to notice of all
shareholders meetings. The consent of at least a majority of the Series C Preferred Stock (calculated on an as converted basis) was required to effect any amendment (a) to voting powers, preferences or rights of the holders of
Series C Preferred Stock or (b) to the Certificate of Incorporation authorizing, creating or increasing the amount of any shares of any class or series prior or equal to the Series C Preferred Stock for payment of dividends or (c) any
merger or consolidation unless the surviving entity shall have no class or series of shares or securities authorized or outstanding ranking prior to the Series C Preferred Stock.



NOTE 11  SEGMENT INFORMATION



The Companys consolidated financial statements include two reportable segments: Paging Services and Two-Way Radio Services. The Company determines
its reportable segments based on the aggregation criteria of Financial Accounting Standards No. 131 Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131). Paging and messaging services
represent paging services provided to subscribers on the Companys one-way paging system and related pager equipment sales. Two-way radio services represent services provided on the Companys Logic Trunked Radio (LTR) system
and the related radio equipment sales as well as radio equipment sales to customers operating their own two-way radio system. The Company measures the operating performance of each segment based on adjusted EBITDA.



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##### Table of Contents

The following summarizes the Companys financial results for each segment (in thousands):



|                                            |  |                                |       |                              |   |       |  |      |        |  |   |       
|------------------------------------------- |  | ------------------------------ | ----- | ---------------------------- | - | ----- |  | ---- | ------ |  | - | ------
|                                            |  | Three Months EndedNovember 30, |       | Six Months EndedNovember 30,
|                                            |  | 2005                           |       | 2004                         |   | 2005  |  | 2004
|Service, rent and maintenance revenue       |  |                                |       |                              |   |       |  |      |        |  |   |       
|Paging                                      |  | $                              | 3,714 |                              | $ | 4,600 |  | $    | 7,761  |  | $ | 9,436 
|Two-Way Radio                               |  |                                | 476   |                              |   | 453   |  |      | 965    |  |   | 924   
|Other                                       |  |                                | 51    |                              |   | 41    |  |      | 94     |  |   | 76    
|                                            |  |                                |       |                              |   |       |  |      |        |  |   |       
|Total service, rent and maintenance revenue |  | $                              | 4,241 |                              | $ | 5,094 |  | $    | 8,820  |  | $ | 10,436
|                                            |  |                                |       |                              |   |       |  |      |        |  |   |       
|Product sales revenue                       |  |                                |       |                              |   |       |  |      |        |  |   |       
|Paging                                      |  | $                              | 121   |                              | $ | 158   |  | $    | 237    |  | $ | 346   
|Two-Way Radio                               |  |                                | 965   |                              |   | 1,030 |  |      | 1,719  |  |   | 1,804 
|Other                                       |  |                                | 100   |                              |   | 91    |  |      | 149    |  |   | 232   
|                                            |  |                                |       |                              |   |       |  |      |        |  |   |       
|Total product sales revenue                 |  |                                | 1,186 |                              |   | 1,279 |  |      | 2,105  |  |   | 2,382 
|                                            |  |                                |       |                             
|Operating Revenue                           |  | $                              | 5,427 |                              | $ | 6,373 |  | $    | 10,925 |  | $ | 12,818
|                                            |  |                                |       |                              |   |       |  |      |        |  |   |       



Reconciliation of
adjusted EBITDA to net loss:



|                                         |  |                                |       |   |                              |   |        |      |  |   |        |   |  |   |        |  
|---------------------------------------- |  | ------------------------------ | ----- | - | ---------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                         |  | Three Months EndedNovember 30, |       |   | Six Months EndedNovember 30, |  
|                                         |  | 2005                           |       |   | 2004                         |   |        | 2005 |  |   | 2004   |  
|Adjusted EBITDA                          |  |                                |       |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Paging                                   |  | $                              | 1,196 |   |                              | $ | 2,493  |      |  | $ | 3,849  |   |  | $ | 5,142  |  
|Two-Way Radio                            |  |                                | 115   |   |                              |   | 133    |      |  |   | 161    |   |  |   | 317    |  
|Corporate Overhead                       |  |                                | (781  | ) |                              |   | (2,041 | )    |  |   | (2,692 | ) |  |   | (4,072 | )
|Other                                    |  |                                | (117  | ) |                              |   | (177   | )    |  |   | (398   | ) |  |   | (337   | )
|                                         |  |                                |       |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Total adjusted EBITDA                    |  |                                | 413   |   |                              |   | 408    |      |  |   | 920    |   |  |   | 1,050  |  
|                                         |  |                                |       |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Less non-recurring and non-cash expenses |  |                                |       |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Restructure Expense                      |  |                                | (5    | ) |                              |   | (9     | )    |  |   | (4     | ) |  |   | (19    | )
|Compensation Exp-Stock Options           |  |                                | (62   | ) |                              |   | 42     |      |  |   |       |   |  |   |       |  
|                                         |  |                                |       |   |                              |   |        |      |  |   |        |   |  |   |        |  
|                                         |  |                                | (67   | ) |                              |   | 33     |      |  |   | (4     | ) |  |   | (19    | )
|                                         |  |                                |       |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Less:                                    |  |                                |       |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Depreciation and amortization            |  |                                | 503   |   |                              |   | 829    |      |  |   | 1,264  |   |  |   | 1,734  |  
|Interest expense, net                    |  |                                | 100   |   |                              |   | 108    |      |  |   | 215    |   |  |   | 211    |  
|Loss (gain) on disposal of assets        |  |                                | (1    | ) |                              |   | 3      |      |  |   | (2     | ) |  |   | (51    | )
|Income tax benefit                       |  |                                |      |   |                              |   | (201   | )    |  |   |       |   |  |   | (239   | )
|                                         |  |                                |       |   |                              |   |        |      |  |   |        |   |  |   |        |  
|                                         |  |                                | 602   |   |                              |   | 739    |      |  |   | 1,477  |   |  |   | 1,655  |  
|                                         |  |                                |       |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Net loss                                 |  | $                              | (122  | ) |                              | $ | (364   | )    |  | $ | (553   | ) |  | $ | (586   | )
|                                         |  |                                |       |   |                              |   |        |      |  |   |        |   |  |   |        |  



The Company measures
accounts receivable, inventory and property, plant and equipment by segments. A component of corporate assets is cash in the amount of $0.9 million and $1.3 million as of November 30, 2005 and May 31, 2005, respectively. Also, included in
corporate assets is related party accounts receivable, deferred income taxes, prepaid expenses and property, plant and equipment.



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The Companys assets by segment are as follows (in thousands):



|             |  |                  |       |             |   |       
|------------ |  | ---------------- | ----- | ----------- | - | ------
|             |  | November 30,2005 |       | May 31,2005
|Assets       |  |                  |       |             |   |       
|Paging       |  | $                | 4,398 |             | $ | 5,420 
|Two-Way      |  |                  | 2,503 |             |   | 2,346 
|Corporate    |  |                  | 2,166 |             |   | 2,588 
|Other        |  |                  | 451   |             |   | 481   
|             |  |                  |       |             |   |       
|Total Assets |  | $                | 9,518 |             | $ | 10,835
|             |  |                  |       |             |   |       



Teletouch refers to
adjusted EBITDA in its segment reporting which is a non-GAAP financial measure. Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be considered as a substitute for or superior to
other measures of financial performance reported in accordance with GAAP. Teletouch defines adjusted EBITDA as earnings before interest, taxes, depreciation, amortization and other certain non-recurring and non-cash expenses. Teletouchs
definition of adjusted EBITDA may differ from that of other companies.



NOTE
12  SUBSEQUENT EVENTS



AMEX Listing Matters



On December 9, 2005, the American Stock Exchange (the AMEX)
Listing Qualifications staff notified the Company that after a review of the Companys Form 10-K for the fiscal year ended May 31, 2005 and Form 10-Q for the period ended August 31, 2005, it was no longer in compliance with
Section 1003(a)(ii) of the AMEX Company Guide since its shareholders equity was less than $4,000,000, and that it sustained losses from continuing operations in three of its four most recent fiscal years. The AMEX staff invited the
Company to submit a plan of compliance addressing the continued listing deficiency by no later than January 17, 2006, which was filed by the Company on that date.



The Company plans to make a timely submission to the AMEX staff in which it will outline the timeframe within which the
Company intends to cure the listing deficiency and to regain its compliance with the AMEX continued listing requirements. In the event the AMEX staff accepts the Companys plan of compliance, the Companys stock will continue trading on
the AMEX for the duration of the compliance period. In the event the AMEX staff does not accept the Companys plan of compliance, the AMEX staff has indicated that it will initiate delisting proceedings. There is no assurance that the AMEX
staff will accept the Companys plan of compliance or that, even if such plan is accepted, the Company will be able to implement the plan within the prescribed timeframe. The Company may appeal a staff determination to initiate such proceedings
and seek a hearing before an AMEX panel. The time and place of such a hearing will be determined by the Panel. If the Panel does not grant the relief sought by the Company, its securities could be de-listed from the AMEX and may continue to be
listed on the Pink Sheets trading system. The Company may also apply for a listing on the NASDAQ OTC Bulletin Board Market when current in its public reporting.



Within five days of this AMEX listing deficiency notification, the Companys stock trading symbol was modified to include the .BC
indicator to denote its continued listing noncompliance. The trading symbol will bear the foregoing indicator until the Company regains its compliance with the AMEX continued listing requirements.



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##### Table of Contents

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



Overview



The following discussion and analysis of the results of operations and financial condition of the Company should be read in conjunction with the
consolidated financial statements and the related notes and the discussions under Application of Critical Accounting Policies, which describes key estimates and assumptions we make in the preparation of our financial statements and
Additional Factors That May Affect Our Business, Future Operating Results, and Financial Condition which describes key risks associated with our operations and industry.



Teletouch is a leading provider of wireless telecommunications services, primarily paging services, in non-major
metropolitan areas and communities in the southeast United States. For the three and six months ended November 30, 2005, the Company had total revenues of $5.4 million and $10.9 million, respectively as compared to $6.4 million and $12.8
million for the three and six months ended November 30, 2004. As of November 30, 2005, the Company had approximately 125,500 pagers in service as compared to 169,400 pagers in service at November 30, 2004. Teletouch has experienced a
substantial decline in the paging business over the last several years and expects that net subscriber deletions will continue as the demand for one way paging continues to decline. The Company derives the majority of its revenues from fixed,
periodic fees, not dependent on usage, charged to subscribers for paging services. As long as a subscriber remains on service, operating results benefit from the recurring payments of the fixed, periodic fees without incurring additional selling
expenses or other fixed costs.



Proposed Sale of Paging Business



On July 7, 2005, the Board of Directors of the
Company (the Board) met and reviewed a proposal made by management to sell the Companys core paging and two-way radio businesses to raise the necessary cash to acquire unidentified high growth businesses in the future. Prior to
this meeting, management had obtained a draft letter of intent from a prospective buyer of the paging business, which was presented to the Board at this meeting. After review of the information presented by management, which included the future
business direction of the Company, its ability to continue to operate as a going concern and the estimated value of its paging business unit, the Board met on July 10, 2005 and authorized the Companys management to continue negotiations
with the prospective buyer of the paging business. Additionally, the Board authorized the Company to solicit offers on the two-way radio business. On December 2, 2005, the Board determined not to sell the Companys two-way radio business
after concluding that the two-way radio business was sufficiently profitable and that there was a low likelihood of a material reduction or loss of value to this business over the next few years.



On August 22, 2005, the Company entered into an Asset Purchase Agreement
(the APA) to sell substantially all of the assets of its paging business to Teletouch Paging, LP, a newly formed limited partnership, wholly-owned by a private Fort Worth, Texas investment group, (the Buyer). The assets
included in the asset sale transaction include substantially all of the designated assets of the paging business (the Acquired Assets) with a net carrying value at November 30, 2005 of approximately $3.6 million.



The Buyers aggregate consideration for the Acquired Assets was
originally contemplated to be approximately $5.25 million as of August 31, 2005 and would have been payable as follows: (i) $4,000,000 less the cumulative earnings before interest, taxes, depreciation and amortization (EBITDA)
attributable to the paging business from September 1, 2005 through the closing date to be payable in cash to the Company on the closing date, (ii) $1,200,000 non-interest bearing note payable to the Company due in 12 monthly payments of
$100,000 each beginning the earlier of the date that Buyer has satisfied its obligations under its senior borrowings or August 31, 2007 and (iii) the assumption of approximately $50,000 notes payable



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##### Table of Contents

related to vehicles being sold (collectively, the Purchase Price). Because the transaction is not expected to
close before March 2, 2006, the consideration to be received by the Company for the sale was be reduced by an estimated $1.8 million which approximates the EBITDA of the paging business from September 1, 2005 through February 28,
2006. The $1.2 million promissory note payable to the Company was be secured by a lien on the assets subject to customary subordination provisions required by the Buyers senior lender. On December 30, 2005, the payment terms of the APA
were amended to limit the reductions that can be taken against the cash portion of the consideration so that in no event will such amount be more of less than $2.2 million. Additionally, the amendment to the APA provides that the $1.2 million note
payable will be prepaid at closing. Therefore, the total cash consideration payable to the Company at closing will be $3.4 million and the promissory note will be cancelled.



The Purchase Price is subject to adjustment based on the Companys net working capital, as defined in the APA, at
closing and the value of any excess net working capital transferred will be paid to the Company by the Buyer within 45 days of closing. As of November 30, 2005, approximately $60,000 in excess working capital, as defined in the APA, is related
to the paging business and would be transferred to the Buyer if the transaction were to have closed at that date. Because the levels of working capital change monthly, there is no way to estimate the balance that will exist as of closing.



The APA does not contemplate any termination or breakup fees
or penalties. The APA also contains representations and warranties, indemnification and other provisions customary for agreements of this nature. Closing of the APA is contingent upon obtaining the approval of the Companys shareholders as well
as approvals from federal regulators and other customary closing conditions. The absence of these approvals at this stage presents transaction risks.



The parties to the APA have also entered into a Management Agreement (MA), to facilitate a smooth transition of the paging business operations
from Teletouch to the Buyer. In the MA, the Buyer has the authority, on a limited basis consistent with the effective regulations of the FCC, to implement operational policies and to provide general management services with respect to the day-to-day
operations of TLLs paging operations, subject to reporting to and approval of the President of Teletouch and its Board. As its compensation for the management services provided under the MA, the Buyer shall be entitled to a flat fee of $50,000
per month during the period before the closing date, payable in two $25,000 installments per month, beginning September 2, and 16, 2005, respectively. The term of the MA will be from September 1, 2005 to the earlier of: (i) the APA
final closing date, or (ii) the termination of the APA.



As a result of certain rights contained in 6,000,000 redeemable common stock warrants issued by the Company as part of its debt and equity restructuring in 2002 (the GM Warrants), the holders of these warrants have a right to
vote separately as a class on the sale of the paging business since these rights are triggered upon a sale of substantially all of the assets of the Company, as defined in the terms of the GM Warrants. On September 19, 2005, the
holders of the GM Warrants notified the Company of their intent to accelerate the redemption of the GM Warrants based on the same trigger event that allows them voting rights causing the $3,000,000 redemption value to become due and payable upon the
closing of this sale. Under the basic terms of the GM Warrants the redeemable common stock warrants could not be redeemed until December 2007. The Company is currently negotiating for a reduction in the amount due to the holders of the GM Warrants
upon the closing of the sale of the paging business and believes if it is unsuccessful in its negotiations, the holders of the GM Warrants may vote against the sale of the paging business and block this transaction. Robert M. McMurrey, Chairman of
Teletouch, controls approximately 92% of the outstanding common stock of Teletouch as of the date hereof, has agreed to vote in favor of the sale of the paging business unless an agreement cannot be reached with the holders of the GM Warrants which
reduces the amount payable upon the sale of the paging business. The sale of the paging business is expected to close within ten days following the receipt of the required shareholder approval. The Company filed preliminary proxy solicitation
materials on January 3, 2006 in connection with a special meeting of the shareholders of the Company to be held to vote on this proposed asset sale transaction. The Company has tentatively scheduled this special meeting of its shareholders for
March 1, 2006.



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The proposed sale of the paging business represents substantially all of the assets and operations of
Teletouch Communications, Inc. The proceeds expected from this sale transaction are planned to be used to acquire a growth business for the Company. The Company has identified and is in negotiations with a number of target companies available for
acquisition. The Company plans to remain in the two-way radio and telemetry business after the sale transaction is complete although the current telemetry business will be restructured and is planned for integration with one of the companies
targeted for acquisition. Readers of this Form 10-Q should consider these proposed transactions and their impact on the Company as it is presented in this filing.



AMEX Listing Matters



On December 9, 2005, the American Stock Exchange (the AMEX) Listing Qualifications staff notified the Company that after a review of the
Companys Form 10-K for the fiscal year ended May 31, 2005 and Form 10-Q for the period ended August 31, 2005, it was no longer in compliance with Section 1003(a)(ii) of the AMEX Company Guide since its shareholders equity
was less than $4,000,000, and that it sustained losses from continuing operations in three of its four most recent fiscal years. The AMEX staff invited the Company to submit a plan of compliance addressing the continued listing deficiency by no
later than January 17, 2006 which was filed by the Company on that date.



The Company plans to make a timely submission to the AMEX staff in which it will outline the timeframe within which the Company intends to cure the listing deficiency and to regain its compliance with the AMEX
continued listing requirements. In the event the AMEX staff accepts the Companys plan of compliance, the Companys stock will continue trading on the AMEX for the duration of the compliance period. In the event the AMEX staff does not
accept the Companys plan of compliance, the AMEX staff has indicated that it will initiate delisting proceedings. There is no assurance that the AMEX staff will accept the Companys plan of compliance or that, even if such plan is
accepted, the Company will be able to implement the plan within the prescribed timeframe. The Company may appeal a staff determination to initiate such proceedings and seek a hearing before an AMEX panel. The time and place of such a hearing will be
determined by the Panel. If the Panel does not grant the relief sought by the Company, its securities could be de-listed from the AMEX and may continue to be listed on the Pink Sheets trading system. The Company may also apply for a listing on the
NASDAQ OTC Bulletin Board Market when current in its public reporting.



Within five days of this AMEX listing deficiency notification, the Companys stock trading symbol was modified to include the .BC indicator to denote its continued listing noncompliance. The trading symbol will bear the
foregoing indicator until the Company regains its compliance with the AMEX continued listing requirements.



2006 Business Strategy



As discussed above, it will become necessary for the Company to sell its core paging business in 2006 to raise sufficient cash to purchase one or more growing businesses in order to continue to generate sufficient cash flow going forward.
This decision was made by the Companys Board of directors in July 2005, and the Company has located a buyer for its paging business. The Company has struggled for the past several years to minimize the costs of operating its paging business in
a time of declining revenues. With paging revenues expected to continue declining for the foreseeable future and a relatively fixed cost structure of maintaining the paging network and infrastructure, it has become increasingly difficult to



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##### Table of Contents

maintain a positive cash flow from the paging business. The two-way radio business experienced some revenue growth in
2005 and has stabilized at this level to date in fiscal 2006 due to homeland security grants being made available to local public safety entities to upgrade their communications systems. We believe these revenue opportunities will extend for the
next few years at which time some of these customers utilizing homeland security grant monies today may have limited needs for replacement or upgrades of their radio systems in future years which could result in a decline in revenues for the two-way
radio segment of the Company. The two-way radio business also operates a radio system on which it sells subscription services. This business has been declining over the past year as customers migrate to newer technologies including cellular
telephones. The Company does not believe the two-way radio business is a high growth business, although it has been a stable business for the Company for many years.



Three years ago, the Company recognized the trends in its core paging and two-way radio businesses and began to develop a
telemetry business. To date revenues from the telemetry business have been insignificant. The market for telemetry products is large and relatively new but continued technical issues with our telemetry products have prohibited the Company from
growing this business. In October 2005 the Company decided to restructure its telemetry operations. Although certain operational aspects and personnel have been changed in the telemetry business as of the end of December 2005, the restructuring
efforts were slightly delayed as a result of the resignation of J. Kernan Crotty, the Companys President, on December 19, 2005. Mr. Crotty was directly responsible for the operations of the Companys telemetry business while he
was with Teletouch. The completion of the current restructuring of the telemetry business is expected to be completed by February 2006, after a thorough review of the operations of this business is completed by management. This restructuring is
expected to result in changes to the existing telemetry product lines and disposition of certain assets related to the business. However, the Company will retain ownership of all intellectual property related to this business. The Company may
attempt to sell part of its telemetry customer base that uses products that the Company no longer plans to support as well as to dispose of certain finished goods inventory and fixed assets not directly utilized in supporting the intellectual
property or the ongoing product lines.



After selling the
paging business, the Company plans to acquire one or more growth companies and integrate them into the existing infrastructure at Teletouch. The Company believes that the sale of its paging business is necessary at this point while there is still
value in this business and has currently identified and is in negotiations with several target companies for acquisition. In the interim period after the sale and through the time a new company is acquired, Teletouch will continue to operate as a
publicly traded company in the two-way radio and telemetry business. The Company anticipates integrating its ongoing telemetry operations with one of the potential acquisition targets. Most of the efforts over the coming months will focus on
minimizing expenses of the remaining operations while securing additional financing to complete an acquisition.



RESULTS OF OPERATIONS



Operating revenues primarily consist of paging, two-way radio and telemetry service revenues and revenues generated from sales of pager, radio and
telemetry equipment and their related accessories. Service revenues primarily include fixed monthly access charges for pager, two-way radio and telemetry services. We recognize revenue for access charges and other services charged at fixed amounts
ratably over the service period, net of credits and adjustments for service discounts and billing disputes. We recognize equipment and accessory sales revenue when title passes to the customer.



Cost of providing service, rent and maintenance consists primarily of:



| |  |  | Costs to operate and maintain our network, primarily including direct switch and transmitter site costs, such as rent, utilities, property taxes and maintenance for the network
switches and sites, payroll and facilities costs associated with our network engineering employees, frequency leasing costs and roaming fees paid to other carriers;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Fixed and variable telecommunication costs, the fixed component of which consists of monthly flat-rate fees for facilities leased from local exchange carriers based on the number of
transmitter sites and switches in service in a particular period and the related equipment installed at each site, and the variable component of which generally consists of per-minute use fees charged by wireline providers for long distance charges
related to customer use of toll free numbers;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The costs to provide customer service and activate service for new subscribers, including payroll of customer service representatives and collection associates and rent, utilities
and maintenance of customer service center locations.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Cost of products sold consists of the net book value of items sold from the Companys product lines which are pager, radio and telemetry equipment and their related accessories and expenses and write-downs of equipment and accessory
inventory for shrinkage and obsolescence. We recognize cost of products sold, other than costs related to write-downs of equipment and accessory inventory due to shrinkage and obsolescence, when title passes to the customer.



Selling and general and administrative costs primarily consist of customer
acquisition costs, commissions earned by our salespeople, payroll costs associated with our direct sales force, billing costs, information technology operations, bad debt expense and back office support activities including customer retention,
legal, finance, human resources, strategic planning and technology and product development, along with the related payroll and facilities costs.



The Company has a relatively fixed cost structure related to maintaining its paging network which includes rental of tower space or other fixed location
space for its transmitting equipment, telecommunication charges to connect its paging network, and repair and maintenance costs.



With the proposed sale of substantially all of the assets of the paging business as discussed above in Proposed Sale of Paging Business, the
Company will retain certain operating costs related to maintaining the corporate functions of the public company. Subsequent to the sale and prior to any future acquisitions, the Company expects to generate losses. The infrastructure that remains at
Teletouch will be leveraged upon to facilitate future acquisitions and integrations.



During the interim period after the sale, the Company will continue to focus on maximizing the profitability of its remaining operations while minimizing the cost of its corporate functions. The Company has been
successful in controlling expenses in periods of declining revenue and plans to continue doing so as the Company moves forward.



24



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##### Table of Contents

Service, Rent and Maintenance Revenue for the Three and Six Months ended
November 30, 2005 and 2004



|                                       |  |                  |       |              |    |   |                  |   |              |  |    |                          |  |   |        |   |  |     |  
|-------------------------------------- |  | ---------------- | ----- | ------------ | -- | - | ---------------- | - | ------------ |  | -- | ------------------------ |  | - | ------ | - |  | --- | -
|                                       |  |                  |       |              |    |   |                  |   |              |  |    | Change fromPrevious Year | 
|(dollars in thousands)                 |  | November 30,2005 |       | % of OperRev |    |   | November 30,2004 |   | % of OperRev |  |    | Dollars                  |  |   | %      |  
|Three Months Ended                     |  |                  |       |              |    |   |                  |   |              |  |    |                          |  |   |        |   |  |     |  
|                                       |  |                  |       |              |    |  
|Service, rent, and maintenance revenue |  |                  |       |              |    |   |                  |   |              |  |    |                          |  |   |        |   |  |     |  
|Paging                                 |  | $                | 3,714 |              | 68 | % |                  | $ | 4,600        |  | 72 | %                        |  | $ | (886   | ) |  | -19 | %
|Two-way radio                          |  |                  | 476   |              | 9  | % |                  |   | 453          |  | 7  | %                        |  |   | 23     |   |  | 5   | %
|Telemetry                              |  |                  | 51    |              | 1  | % |                  |   | 41           |  | 1  | %                        |  |   | 10     |   |  | 24  | %
|                                       |  |                  |       |              |    |   |                  |   |              |  |    |                          |  |   |        |   |  |     |  
|Service, rent, and maintenance revenue |  | $                | 4,241 |              | 78 | % |                  | $ | 5,094        |  | 80 | %                        |  | $ | (853   | ) |  | -17 | %
|                                       |  |                  |       |              |    |   |                  |   |              |  |    |                          |  |   |        |   |  |     |  
|Six Months Ended                       |  |                  |       |              |    |   |                  |   |              |  |    |                          |  |   |        |   |  |     |  
|                                       |  |                  |       |              |    |  
|Service, rent, and maintenance revenue |  |                  |       |              |    |   |                  |   |              |  |    |                          |  |   |        |   |  |     |  
|Paging                                 |  | $                | 7,761 |              | 71 | % |                  | $ | 9,436        |  | 73 | %                        |  | $ | (1,675 | ) |  | -18 | %
|Two-way radio                          |  |                  | 965   |              | 9  | % |                  |   | 924          |  | 7  | %                        |  |   | 41     |   |  | 4   | %
|Telemetry                              |  |                  | 94    |              | 1  | % |                  |   | 76           |  | 1  | %                        |  |   | 18     |   |  | 24  | %
|                                       |  |                  |       |              |    |   |                  |   |              |  |    |                          |  |   |        |   |  |     |  
|Service, rent, and maintenance revenue |  | $                | 8,820 |              | 81 | % |                  | $ | 10,436       |  | 81 | %                        |  | $ | (1,616 | ) |  | -15 | %
|                                       |  |                  |       |              |    |   |                  |   |              |  |    |                          |  |   |        |   |  |     |  



Service, Rent
and Maintenance Revenue Discussion for the Three and Six Months Ended November 30, 2005 and 2004



The decline in paging service revenue for the three and six months ended November 30, 2005 resulted primarily from fewer pagers in service. Pagers in
service decreased to approximately 125,500 as of November 30, 2005 as compared to approximately 169,400 as of November 30, 2004, due to a continuing decline in the demand for one-way paging service and the completion of the sale of
approximately 15,000 subscribers in the Georgia market to Satellink Communications, Inc. in July, 2005. Paging subscriber loss rates as a percentage of total paging subscribers (commonly called Churn Rate) has remained relatively flat
from year to year, however, a stable Churn Rate on a declining base of subscribers results in a declining loss of gross subscribers each period which results in a declining loss of service revenues. Teletouch anticipates that the demand for one way
paging services will continue to decline for the foreseeable future, which will result in reductions in service, rent and maintenance revenues due to the lower volume of subscribers.



25



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##### Table of Contents

Cost of Service, Rent and Maintenance for the Three and Six Months Ended
November 30, 2005 and 2004



Cost of service, rent and
maintenance expense consist of the following significant expense items:



|                                            |  |                  |       |                  |   |                          |  |   |      |  
|------------------------------------------- |  | ---------------- | ----- | ---------------- | - | ------------------------ |  | - | ---- | -
|(dollars in thousands)                      |  | November 30,2005 |       | November 30,2004 |   | Change fromPrevious Year | 
|Three Months Ended                          |  |                  |       |                  |   |                          |  |   |      |  
|                                            |  |                  |      
|Cost of service, rent and maintenance       |  |                  |       |                  |   |                          |  |   |      |  
|Tower lease expense                         |  | $                | 580   |                  | $ | 699                      |  | $ | (119 | )
|Third party airtime and network telco costs |  |                  | 550   |                  |   | 853                      |  |   | (303 | )
|Salaries and other personnel expense        |  |                  | 950   |                  |   | 929                      |  |   | 21   |  
|Office expense                              |  |                  | 203   |                  |   | 171                      |  |   | 32   |  
|Other expenses                              |  |                  | 78    |                  |   | 85                       |  |   | (7   | )
|                                            |  |                  |       |                  |   |                          |  |   |      |  
|Total cost of service, rent and maintenance |  | $                | 2,361 |                  | $ | 2,737                    |  | $ | (376 | )
|                                            |  |                  |       |                  |   |                          |  |   |      |  
|Six Months Ended                            |  |                  |       |                  |   |                          |  |   |      |  
|                                            |  |                  |      
|Cost of service, rent and maintenance       |  |                  |       |                  |   |                          |  |   |      |  
|Tower lease expense                         |  | $                | 1,245 |                  | $ | 1,431                    |  | $ | (186 | )
|Third party airtime and network telco costs |  |                  | 1,235 |                  |   | 1,618                    |  |   | (383 | )
|Salaries and other personnel expense        |  |                  | 1,950 |                  |   | 1,905                    |  |   | 45   |  
|Office expense                              |  |                  | 365   |                  |   | 389                      |  |   | (24  | )
|Other expenses                              |  |                  | 217   |                  |   | 176                      |  |   | 41   |  
|                                            |  |                  |       |                  |   |                          |  |   |      |  
|Total cost of service, rent and maintenance |  | $                | 5,012 |                  | $ | 5,519                    |  | $ | (507 | )
|                                            |  |                  |       |                  |   |                          |  |   |      |  



Explanations for
changes in expenses greater than 50,000 are provided below:



Cost of Service, Rent and Maintenance Discussion for the Three and Six Months Ended November 30, 2005 and 2004



| |  |  | The decrease in tower lease expense for the three and six months ended November 30, 2005 is attributable to the sale of the PNI paging network in July 2005, shutting down the
0AT frequency in August 2005 and an internal review of the Companys tower leases which resulted in a reduction of tower leases compared with the same periods from the prior year.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decrease in third party airtime and network telco costs for the three and six months ended November 30, 2005 is due primarily to the continued decline in the paging
subscriber base as well as a reduction in paging subscribers with coverage on other affiliates paging network. The decrease is also attributable to an internal review of the Companys telephone charges which resulted in disconnecting
unnecessary phone lines, trunks and telephone services.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Sales Revenue and Cost of Products Sold for the Three and Six Months ended
November 30, 2005 and 2004



|                                  |  |                  |       |               |         |   |                  |   |               |  |    |                          |  |   |      |   |  |     |  
|--------------------------------- |  | ---------------- | ----- | ------------- | ------- | - | ---------------- | - | ------------- |  | -- | ------------------------ |  | - | ---- | - |  | --- | -
|(dollars in thousands)            |  | November 30,2005 |       | % of Oper Rev |         |   | November 30,2004 |   | % of Oper Rev |  |    | Change fromPrevious Year | 
|                                  |  |                  |       |               | Dollars |   |                  | % |              
|Three Months Ended                |  |                  |       |               |         |   |                  |   |               |  |    |                          |  |   |      |   |  |     |  
|                                  |  |                  |       |               |         |  
|Product sales revenue             |  |                  |       |               |         |   |                  |   |               |  |    |                          |  |   |      |   |  |     |  
|Pagers and accessories            |  | $                | 121   |               | 2       | % |                  | $ | 158           |  | 3  | %                        |  | $ | (37  | ) |  | -24 | %
|Two-way radios and parts          |  |                  | 965   |               | 18      | % |                  |   | 1,030         |  | 16 | %                        |  |   | (65  | ) |  | -6  | %
|Telemetry devices and accessories |  |                  | 93    |               | 2       | % |                  |   | 67            |  | 1  | %                        |  |   | 26   |   |  | 39  | %
|Other                             |  |                  | 7     |               | 0       | % |                  |   | 24            |  | 0  | %                        |  |   | (17  | ) |  | -71 | %
|                                  |  |                  |       |               |         |   |                  |   |               |  |    |                          |  |   |      |   |  |     |  
|Total product sales revenue       |  | $                | 1,186 |               | 22      | % |                  | $ | 1,279         |  | 20 | %                        |  | $ | (93  | ) |  | -7  | %
|                                  |  |                  |       |               |         |   |                  |   |               |  |    |                          |  |   |      |   |  |     |  
|Cost of products sold             |  | $                | 768   |               | 14      | % |                  | $ | 1,205         |  | 19 | %                        |  | $ | (437 | ) |  | -36 | %
|                                  |  |                  |       |               |         |   |                  |   |               |  |    |                          |  |   |      |   |  |     |  
|Six Months Ended                  |  |                  |       |               |         |   |                  |   |               |  |    |                          |  |   |      |   |  |     |  
|                                  |  |                  |       |               |         |  
|Product sales revenue             |  |                  |       |               |         |   |                  |   |               |  |    |                          |  |   |      |   |  |     |  
|Pagers and accessories            |  | $                | 237   |               | 2       | % |                  | $ | 346           |  | 3  | %                        |  | $ | (109 | ) |  | -32 | %
|Two-way radios and parts          |  |                  | 1,719 |               | 16      | % |                  |   | 1,804         |  | 14 | %                        |  |   | (85  | ) |  | -5  | %
|Telemetry devices and accessories |  |                  | 128   |               | 1       | % |                  |   | 173           |  | 2  | %                        |  |   | (45  | ) |  | -26 | %
|Other                             |  |                  | 21    |               | 0       | % |                  |   | 59            |  | 0  | %                        |  |   | (38  | ) |  | -64 | %
|                                  |  |                  |       |               |         |   |                  |   |               |  |    |                          |  |   |      |   |  |     |  
|Total product sales revenue       |  | $                | 2,105 |               | 19      | % |                  | $ | 2,382         |  | 19 | %                        |  | $ | (277 | ) |  | -12 | %
|                                  |  |                  |       |               |         |   |                  |   |               |  |    |                          |  |   |      |   |  |     |  
|Cost of products sold             |  | $                | 1,441 |               | 13      | % |                  | $ | 2,203         |  | 17 | %                        |  | $ | (762 | ) |  | -35 | %
|                                  |  |                  |       |               |         |   |                  |   |               |  |    |                          |  |   |      |   |  |     |  



Sales Revenue
and Cost of Products Sold Discussion for the Three and Six Months Ended November 30, 2005 and 2004



Product sales revenue:



The decrease in paging sales revenue for the three and six months ended November 30, 2005 is attributable primarily to a continuing decline in paging
subscriber base particularly within the wholesale distribution channel which has historically accounted for the largest percentage of the pager equipment sales. Teletouchs current business customers that purchase paging services primarily
lease their paging equipment from the Company.



The decrease in
two-way radios and parts sales revenue for the three and six months ended November 30, 2005 is due primarily to a decline in slight decline in sales contracts to entities utilizing 2005 federal grant monies under the Homeland Security programs.
Some of the federal grant monies for the later part of calendar 2005 were diverted for disaster relief in the wake of the hurricane damage sustained on the Gulf Coast. The Company anticipates that additional grant monies will be made available
during calendar 2006 for local public safety entities to continue upgrading their communications systems.



Cost of products sold:



The decrease in cost of products sold for the three and six months ended November 30, 2005 is primarily due to the decrease in inventory obsolescence
expense as well as a decline in product sales. Inventory obsolescence expense was $0 for the three months ended November 30, 2005 as compared to $331,000 for the three months ended November 30, 2004 and $16,000 for the six months ended
November 30, 2005 as compared to $562,000 for the six months ended November 30, 2004. The inventory write-offs in first six months of fiscal 2005 were related to slow moving paging inventory and identifying obsolete two-way radios, pager
parts and cellular inventory. A portion of the write offs were attributable to the impairment of the majority of the fixed monitoring telemetry devices in stock after the Company made a decision to withdraw from this product line. During the current
year, the Company has maintained a much lower level of inventory within all of its businesses and has focused on purchasing only inventory that has been requested by customers versus purchasing larger quantities of inventory to achieve volume
pricing.



27



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##### Table of Contents

Selling and General and Administrative Expenses for the Three and Six Months ended November 30,
2005 and 2004



Selling and general and
administrative expenses consist of the following significant expense items:



|                                                   |  |                  |       |   |                  |   |                          |  |   |      |  
|-------------------------------------------------- |  | ---------------- | ----- | - | ---------------- | - | ------------------------ |  | - | ---- | -
|(dollars in thousands)                             |  | November 30,2005 |       |   | November 30,2004 |   | Change fromPrevious Year | 
|Three Months Ended                                 |  |                  |       |   |                  |   |                          |  |   |      |  
|                                                   |  |                  |      
|Selling and general and administrative expenses    |  |                  |       |   |                  |   |                          |  |   |      |  
|Salaries and other personnel expenses              |  | $                | 841   |   |                  | $ | 1,124                    |  | $ | (283 | )
|Office expense                                     |  |                  | 39    |   |                  |   | 92                       |  |   | (53  | )
|Advertising expense                                |  |                  | 20    |   |                  |   | 56                       |  |   | (36  | )
|Professional fees                                  |  |                  | 509   |   |                  |   | 130                      |  |   | 379  |  
|Taxes and licenses fees                            |  |                  | 91    |   |                  |   | 158                      |  |   | (67  | )
|Stock-based compensation expense                   |  |                  | (62   | ) |                  |   | 42                       |  |   | (104 | )
|Other expenses                                     |  |                  | 380   |   |                  |   | 454                      |  |   | (74  | )
|                                                   |  |                  |       |   |                  |   |                          |  |   |      |  
|Total selling, general and administrative expenses |  | $                | 1,818 |   |                  | $ | 2,056                    |  | $ | (238 | )
|                                                   |  |                  |       |   |                  |   |                          |  |   |      |  
|Six Months Ended                                   |  |                  |       |   |                  |   |                          |  |   |      |  
|                                                   |  |                  |      
|Selling and general and administrative expenses    |  |                  |       |   |                  |   |                          |  |   |      |  
|Salaries and other personnel expenses              |  | $                | 1,782 |   |                  | $ | 2,186                    |  | $ | (404 | )
|Office expense                                     |  |                  | 106   |   |                  |   | 187                      |  |   | (81  | )
|Advertising expense                                |  |                  | 39    |   |                  |   | 103                      |  |   | (64  | )
|Professional fees                                  |  |                  | 694   |   |                  |   | 364                      |  |   | 330  |  
|Taxes and licenses fees                            |  |                  | 195   |   |                  |   | 321                      |  |   | (126 | )
|Stock-based compensation expense                   |  |                  |      |   |                  |   |                         |  |   |     |  
|Other expenses                                     |  |                  | 732   |   |                  |   | 866                      |  |   | (134 | )
|                                                   |  |                  |       |   |                  |   |                          |  |   |      |  
|Total selling, general and administrative expenses |  | $                | 3,548 |   |                  | $ | 4,027                    |  | $ | (479 | )
|                                                   |  |                  |       |   |                  |   |                          |  |   |      |  



Explanations for
changes in expenses greater than $50,000 are provided below:



Selling and General and Administrative Expenses Discussion for the Three and Six Months Ended November 30, 2005 and 2004



| |  |  | The decrease in salaries and other personnel expense for the three and six months ended November 30, 2005 is due to a reduction in the number of selling and general and
administrative employees, 17 employees as of November 30, 2005 as compared to 58 employees as of November 30, 2004.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decrease in office expense for the three and six months ended November 30, 2005 is primarily due to the relocation of the corporate office in December 2004 which resulted
in a monthly lease expense savings of approximately $10,000.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decrease in advertising expense for the six months ended November 30, 2005 is primarily due to the Companys decision to discontinue the majority of its marketing
efforts related to the Telemetry product line during the first quarter of fiscal 2006.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The increase in professional fees for the three and six months ended November 30, 2005 is due primarily to accounting and legal fees related to the preparation of the
Companys response to a comment letter received from the Securities and Exchange Commission related to the Companys Form 10-K for the year ended May 31, 2004. Additional professional fees were
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  | incurred during this period related to the negotiation of an asset purchase agreement related to the proposed sale of the paging business as well as related to certain management
fees in the amount of $50,000 per month paid to the prospective buyer of the Companys paging business which began September 1, 2005 and will terminate upon the closing of the transaction. The management fees being paid by the Company are
for services provided by the buyer related to managing the day to day operations of the paging business subsequent to the execution of the asset purchase agreement.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decrease in taxes and licenses fees for the three and six months ended November 30, 2005 compared with the same period from the prior year is primarily due to a reduction
in franchise tax, state income tax and ad valorem taxes as a result of lower revenues, lower inventory levels and a reduced value of fixed assets. Additionally, fees paid to the Federal Communications Commission related to maintaining the
Companys paging licenses were reduced during this period resulting from decreased revenues.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decrease in stock-based compensation expense for the three months ended November 30, 2005 is attributable to a decrease in the market price of the Companys stock for
the three months ended November 30, 2005 when compared to the same period from the prior year.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decrease in other expenses for the three months ended November 30, 2005 as compared to same period from the prior year is attributable to fewer bank and credit card charges
due to reduced number of bank accounts as well as a reduction in bad debt due to improved collection efforts. The decrease is also attributable to lower non-personnel insurance premiums, particularly related to the renewal of the Companys
directors and officers liability policy. The decrease in other expenses is partially offset by an increase in investor relations expense related to a $45,000 listing fee with the American Stock Exchange for the issuance of shares to TLL Partners
paid in November 2005 related to the conversion of 1,000,000 shares of Series C Preferred Stock to 44,000,000 shares of the Companys Common Stock.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Other Operating Expenses for the Three and Six Months Ended November 30, 2005 and 2004



|                               |  |                   |       |   |                   |   |       |                           |  |   |      |  
|------------------------------ |  | ----------------- | ----- | - | ----------------- | - | ----- | ------------------------- |  | - | ---- | -
|(dollars in thousands)         |  | November 30, 2005 |       |   | November 30, 2004 |   |       | Change from Previous Year | 
|Three months ended             |  |                   |       |   |                   |   |       |                           |  |   |      |  
|Depreciation and amortization  |  | $                 | 503   |   |                   | $ | 829   |                           |  | $ | (326 | )
|Loss (Gain) on sale of assets  |  |                   | (1    | ) |                   |   | 3     |                           |  |   | (4   | )
|                               |  |                   |       |   |                   |   |       |                           |  |   |      |  
|Total other operating expenses |  | $                 | 502   |   |                   | $ | 832   |                           |  | $ | (330 | )
|                               |  |                   |       |   |                   |   |       |                           |  |   |      |  
|Six months ended               |  |                   |       |   |                   |   |       |                           |  |   |      |  
|Depreciation and amortization  |  | $                 | 1,264 |   |                   | $ | 1,734 |                           |  | $ | (470 | )
|(Gain) on sale of assets       |  |                   | (2    | ) |                   |   | (51   | )                         |  |   | 49   |  
|                               |  |                   |       |   |                   |   |       |                           |  |   |      |  
|Total other operating expenses |  | $                 | 1,262 |   |                   | $ | 1,683 |                           |  | $ | (421 | )
|                               |  |                   |       |   |                   |   |       |                           |  |   |      |  



Other Operating
Expenses Discussion for the Three and Six Months Ended November 30, 2005 and 2004



Depreciation and amortization: The decline in depreciation and amortization expense is due to the continued effort of the Company to purchase
equipment only as necessary to maintain the paging infrastructure and an adequate supply of pagers to lease to customers as well as the aging of the existing capital assets that have been fully depreciated. For the three months ended
November 30, 2005, depreciation expense declined approximately $105,000 as a result of the reduction of the Companys leased pager fleet and $197,000 due to paging infrastructure assets that were fully depreciated as compared to the same
period from the prior year. For the six months ended November 30, 2005, depreciation expense declined approximately $243,000 as a result of the reduction of the Companys leased pager fleet and $197,000 due to paging infrastructure assets



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that were fully depreciated as compared to the same period from the prior year. Many of the Companys paging
infrastructure assets acquired in 1995, during the time the Companys major paging business expansion through acquisition, became fully depreciated late in the first quarter of fiscal 2006.



Interest Expense, Net of Interest Income for the Three
and Six Months Ended November 30, 2005 and 2004



Interest expense, net of interest income primarily consists of the accretion of the redeemable common stock purchase warrants and common stock payable and the interest related to various automobile notes.



Income Tax Expense (Benefit) for the Six Months Ended
November 30, 2005 and 2004



The effective benefit tax
rate was 21% prior to a valuation allowance of approximately $115,000 recorded against deferred tax assets resulting in tax expense of $0 for the six months ended November 30, 2005. For the six months ended November 30, 2004, the
Companys effective tax benefit rate was 29%. The difference in the effective benefit rate and the statutory rate is due primarily to interest expense related to the redeemable common stock warrants being non-deductible for tax purposes.



FINANCIAL CONDITION



|                                      |  |                   |      |   |                   |   |       |        |  |   |        |  
|------------------------------------- |  | ----------------- | ---- | - | ----------------- | - | ----- | ------ |  | - | ------ | -
|(dollars in thousands)                |  | November 30, 2005 |      |   | November 30, 2004 |   |       | Change | 
|Cash provided by operating activities |  | $                 | 200  |   |                   | $ | 2,040 |        |  | $ | (1,840 | )
|Cash used in investing activities     |  |                   | (317 | ) |                   |   | (747  | )      |  |   | 430    |  
|Cash used in financing activities     |  |                   | (224 | ) |                   |   | (106  | )      |  |   | (118   | )
|                                      |  |                   |      |   |                   |   |       |        |  |   |        |  
|Net increase (decrease) in cash       |  | $                 | (341 | ) |                   | $ | 1,187 |        |  | $ | (1,528 | )
|                                      |  |                   |      |   |                   |   |       |        |  |   |        |  



Operating Activities



Teletouchs cash balance was $0.9 million as of
November 30, 2005 as compared to $1.3 million at May 31, 2005. The decrease in cash provided by operations during the six months ended November 30, 2005 over the same period in the prior year is primarily due to a increased losses in
paging business primarily due to $1,784,000 reduction in paging service revenues resulting from the continuing decline in paging subscribers. Additionally, during the first quarter of fiscal 2006, the Company paid approximately $531,000 in
previously accrued management bonuses related to fiscal 2005. The decrease in cash provided by operations is also due to an increase in accounts receivable of $227,000 during the six months ended November 30, 2005 as compared to May 31,
2005 versus enhanced collections in accounts receivable of $250,000 for the six months ended November 30, 2004. The growth in accounts receivable from May 2005 to November 2005 relates primarily to certain receivables within the two-way radio
segment that are due from local entities waiting on federal funding.



Investing Activities



Cash used by investing
activities decreased during the six months ended November 30, 2005 as compared to the same period in the prior year due to a $430,000 reduction in capital expenditures, of which approximately $230,000 related to reduced spending on leased
pagers, $146,000 in reduced computer equipment and software purchases and $54,000 in reduced vehicle purchases, all of which relate to continued declines in the paging business and reduced operations within the Company.



Teletouchs operations require capital investment to purchase inventory
for lease to customers and to acquire paging infrastructure equipment to support the Companys existing subscribers. Net capital



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expenditures, including pagers, were $387,000 and $817,000 for the first six months of fiscal years 2006 and 2005,
respectively. Teletouch anticipates capital expenditures to continue to decline during the remainder of fiscal 2006 due primarily to the continuing decline in the number of leased pagers in service, which will result in total capital expenditures
declining as compared to fiscal 2005. Additionally, the Company plans to replace only necessary equipment to maintain the paging infrastructure. If the sale of the paging business discussed above does not occur, Teletouch expects to pay for these
expenditures with cash generated from operations.



Financing Activities



The increase in cash used by financing activities for the
six months ended November 30, 2005 as compared to the same period in the prior year was primarily due to payments of $196,000 for the redeemable common stock payable in the first six months of fiscal 2006.



Current Position/Future Requirements



It will become necessary for the Company to exit its core paging business in
2006 to raise sufficient cash to purchase one or more growing businesses in order to continue to generate sufficient cash flow going forward. This decision was made by the Companys Board of directors in July 2005 and, as discussed above, the
Company has located a buyer for its paging business. The Company has struggled for the past several years to minimize the costs of operating its paging business in a time of declining revenues. With paging revenues expected to continue declining for
the foreseeable future and a relatively fixed cost structure of maintaining the paging network and infrastructure, it has become increasingly difficult to maintain a positive cash flow from the paging business. The two-way radio business experienced
some revenue growth in 2005 and has stabilized at this level to date in fiscal 2006 due to homeland security grants being made available to local public safety entities to upgrade their communications systems. We believe these revenue opportunities
will extend for the next few years at which time some of these customers utilizing homeland security grant monies today may have limited needs for replacement or upgrades of their radio systems in future years which could result in a decline in
revenues for the two-way radio segment of the Company. The two-way radio business also operates a radio system on which it sells subscription services. The Company does not believe the two-way radio business is a high growth business, although it
has been a stable business for the Company for many years.



After selling the paging business, the Company plans to acquire one or more growth companies and integrate them into the existing infrastructure at Teletouch. The Company believes that the sale of its paging business is necessary at this
point while there is still value in this business and has currently identified and is in negotiations with several target companies for acquisition. In the interim period after the sale and through the time a new company is acquired, Teletouch will
continue to operate as a publicly traded company in the two-way radio and telemetry business. The Company anticipates integrating its ongoing telemetry operations with one of the potential acquisition targets. Most of the efforts over the coming
months will focus on minimizing expenses of the remaining operations while securing additional financing to complete an acquisition.



From May 2002 through the first quarter of fiscal 2005, the Company had available borrowings under a credit facility with TLL Partners, a company
controlled by Robert McMurrey, Chairman of the Board of Teletouch, and under a separate credit facility with FCFC. During the quarter ended November 30, 2004, the Company was notified by both lenders of restrictions placed on the availability
of these borrowings.



As of November 30, 2005, the Company
has no borrowings outstanding under its $2.2 million promissory note with TLL Partners. Any borrowings under this arrangement are subject to the approval of



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the PCCI Board of Directors and availability of funds. TLL Partners is a wholly owned subsidiary of PCCI. The Company has
had limited borrowings under this agreement in the past and has been given no assurances from TLL Partners or PCCI that the necessary approval would be given by the PCCI Board of Directors to fund any future operating or capital needs of Teletouch.
The Companys management does not anticipate that the necessary approvals would be granted by the PCCI Board of Directors; therefore, it is operating under the assumption that there are no available borrowings under this agreement.



There is no assurance that the Company will be able to improve its cash
flow from operations, obtain additional third party financing, generate additional new revenues, or complete any acquisitions it is evaluating. If a combination of these events does not occur, the Company may not have sufficient cash to operate the
business over the next year from the proceeds of the sale of the paging business alone. The sale of the paging business is contingent on shareholder approval. As a result of certain rights contained in 6,000,000 redeemable common stock warrants
issued by the Company as part of its debt and equity restructuring in 2002 (the GM Warrants), the holders of these warrants have a right to vote separately as a class on the sale of the paging business since these rights are triggered
upon a sale of substantially all of the assets of the Company, as defined in the terms of the GM Warrants. On September 19, 2005, the holders of the GM Warrants notified the Company of their intent to accelerate the redemption of
the GM Warrants based on the same trigger event that allows them voting rights causing the $3,000,000 redemption value to become due and payable upon the closing of this sale. Under the basic terms of the GM Warrants the redeemable common stock
warrants could not be redeemed until December 2007. The Company is currently negotiating for a reduction in the amount due to the holders of the GM Warrants upon the closing of the sale of the paging business and believes if it is unsuccessful in
its negotiations, the holders of the GM Warrants may vote against the sale of the paging business and block this transaction. Robert M. McMurrey, Chairman of Teletouch, controls approximately 92% of the outstanding common stock of Teletouch as of
the date hereof, has agreed to vote in favor of the sale of the paging business unless an agreement cannot be reached with the holders of the GM Warrants which reduces the amount payable upon the sale of the paging business. The sale of the paging
business is expected to close within ten days following the receipt of the required shareholder approval. The Company filed preliminary proxy solicitation materials on January 3, 2006 in connection with a special meeting of the shareholders of
the Company to be held to vote on this proposed asset sale transaction. The Company has tentatively scheduled this special meeting of its shareholders for March 1, 2006.



Based on current and anticipated levels of operations, the Companys management anticipates that net cash provided by
the sale of the paging business, if the Company is successful in closing this sale, together with the $0.09 million of cash on hand will be adequate to meet its anticipated cash requirements for the next twelve months if the Company is successful in
its negotiations to reduce the amount due under the GM Warrants upon the sale of the paging business as discussed above. Additional financing will likely be necessary to complete any acquisitions during this period. During the next twelve months,
management estimates that it will need approximately $2.2 million to maintain the administrative and corporate functions of the Company and between $0.5 million and $1.5 million to settle its obligations under its redeemable common stock warrants if
the Company is successful in closing on the sale of its paging business and the warrant holders are successful in accelerating their redemption rights.



Going Concern Matters



As of November 30, 2005, the Companys consolidated financial statements have been prepared assuming that the Company will continue as a going
concern. The Company incurred net losses of $122,000 and $364,000 in the three months ended November 30, 2005 and 2004, respectively and $553,000 and $586,000 in the six months ended November 30, 2005 and 2004, respectively, primarily due
to continued declines in its paging revenues. As of November 30, 2005, the Company had a working capital surplus of $119,000. The Company has sustained its operations primarily through continuous cost reductions. During



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2005, the Company attempted to secure additional debt financing to fund a potential acquisition and provide additional
working capital to the Company but was unable to do so due to the declining performance of the Companys paging business. As a result of the continued deterioration of the Companys financial position and its operating results, the Company
entered into an agreement in August 2005 to sell substantially all of the assets related to the paging business and this transaction is expected to close in March 2006 if shareholder approval is obtained. The sale of the Companys paging
business, combined with additional financing, is expected to generate sufficient cash to enable the Company to acquire a profitable and growing business that could support the embedded overhead costs of remaining a public company and return the
Company to profitability. There can be no assurance, however, that we will be successful in selling the assets related to the paging business, or that we will be able to complete any additional debt or equity financing on favorable terms.



If the Company is unable to complete the contemplated sale,
realization of a major portion of the assets in the accompanying consolidated balance sheet would be dependent upon continued operations of the Company. The Company has been successful in its efforts to grow its two-way revenues, stabilize the rate
of decline in its paging business while reducing expenses in this business and reduce its overhead costs. However, these successes have not been sufficient to overcome the loss in profitability resulting from the significant decline in the
Companys paging subscriber bases over the past several years. Further, the Company has been unsuccessful in securing any additional financing during the year and has continued to be unable to grow the revenues from the telemetry business.
These conditions raise substantial doubt about the Companys ability to continue as a going concern.



Obligations and Commitments



As of November 30, 2005, our contractual payment obligations under our long-term debt agreements and operating leases for office and transmitter locations are indicated in the table below. For purposes of the table below, purchase
obligations are defined as agreements to purchase goods or services that are enforceable and legally binding and that specify significant terms, including: fixed or minimum quantities to be purchased, minimum pricing and the approximate timing of
transactions. Teletouch has no such purchase obligations at November 30, 2005. Other long-term liabilities is comprised of certain redeemable common stock warrants issued in conjunction with the Companys debt restructuring in May 2002 and
certain shares of Teletouch Common Stock which were issued in February 2005 in conjunction with the purchase of certain assets from Delta Communications, Inc.



|                                               |  |                                   |       |      |   |       |  |      |       |      |   |            |  |   |     |  |   |    
|---------------------------------------------- |  | --------------------------------- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ---------- |  | - | --- |  | - | ---
|(in thousands)                                 |  | Twelve Months Ending November 30,
|Significant Contractual Obligations            |  | Total                             |       | 2006 |   | 2007  |  | 2008 |       | 2009 |   | Thereafter
|Debt obligations                               |  | $                                 | 186   |      | $ | 92    |  | $    | 82    |      | $ | 12         |  | $ |    |  | $ |   
|Operating lease obligations                    |  |                                   | 4,888 |      |   | 2,349 |  |      | 1,200 |      |   | 789        |  |   | 440 |  |   | 110
|Other long-term liabilities                    |  |                                   | 3,267 |      |   | 267   |  |      | 3,000 |      |   |           |  |   |    |  |   |   
|                                               |  |                                   |       |      |   |       |  |      |       |      |   |            |  |   |     |  |   |    
|Total significant contractual cash obligations |  | $                                 | 8,341 |      | $ | 2,708 |  | $    | 4,282 |      | $ | 801        |  | $ | 440 |  | $ | 110
|                                               |  |                                   |       |      |   |       |  |      |       |      |   |            |  |   |     |  |   |    



Redemption of
Common Stock Purchase Warrants:On September 19, 2005 the Company received notice from the holders of 6,000,000 common stock warrants (the GM Warrants) of their intent to redeem these warrants upon the sale of the paging
business. Under the terms of the GM Warrants, the holder may accelerate the redemption of the warrants upon the sale of significantly all of the Companys assets. Under the initial terms of the GM Warrants, they could be redeemed at $0.50 per
warrant, at the option of the holder in December 2007. The holders of the GM Warrants have claimed that the sale of the paging



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business represents significantly all of the Companys assets. The Company is in the process of negotiating with the
holders of the warrants an arrangement that will defer a portion of the redemption value of these warrants.



If the Company is unsuccessful in negotiating a settlement or alternative arrangement with the holders of the GM Warrants and continues with the sale of
the paging business, the Company would be obligated to redeem the GM Warrants for $3,000,000 shortly after the closing on the sale of the paging business. As of November 30, 2005, the Company has recorded this as a long-term liability at its
fair value of $2,296,000. The GM Warrants are being accreted in value over time to their redemption value of $3,000,000 in December 2007 according to their original terms. If the Company is unsuccessful in negotiating a settlement or alternative
arrangement with the holders of the GM Warrants and continues with the sale of the paging business, the Company will record a charge to net income equal to the difference in the carrying value of the GM Warrants at that date and $3,000,000 and this
amount will be classified as a current liability to be paid after the closing on the sale of the paging business. Additionally, under the rights of the GM Warrants, the holders are allowed to vote these shares as a separate class on matters
involving a sale of substantially all of the assets of the Company. The sale of the paging business triggers this voting right which requires their vote to complete the sale transaction.



Redeemable Common Stock Payable:On January 29, 2004, Teletouch acquired substantially all of the two-way
radio assets of DCAE, Inc. d/b/a Delta Communications, Inc. (Delta), and in conjunction, the Company deferred the issuance of 640,000 shares of Teletouchs common stock subject to certain reductions specified in the asset purchase
agreement between Teletouch and Delta that could not exceed 100,000 shares of common stock. This obligation was payable on February 15, 2005 but due to certain negotiations with Delta regarding certain share reductions allowable under the
purchase agreement, the Company did not issue any of these securities until March 2005. During March 2005, the Company and Delta agreed to a net number of shares to be issued of 580,000 shares of Teletouch common stock. Before the issuance of this
common stock, Delta notified the Company of its intention to immediately redeem 25% of these securities in accordance with the purchase agreement, therefore, in March 2005, the Company issued 435,000 shares of its common stock to Delta and a payment
of $152,250 for the redemption of the remaining 145,000 shares of common stock that Delta chose to redeem.



The shares of common stock issued contain a put option allowing the holder to sell 25% of the remaining shares held each quarter back to the company at a
specified price as follows:



|                                               |  |           |      |        |        
|---------------------------------------------- |  | --------- | ---- | ------ | -------
|Date in Which Stock Can be Put Back to Company |  | Put Price |      | Shares
|November 30, 2005                              |  | $         | 1.05 |        | 61,172 
|February 28, 2006 - November 30, 2006          |  | $         | 1.10 |        | 183,515
|                                               |  |           |      |        |        
|                                               |  |           |      |        | 244,687
|                                               |  |           |      |        |        



On December 1,
2005 Delta redeemed 61,172 shares of its redeemable common stock at $1.05 per share receiving a cash payment of $64,230 from the Company.



Because of this mandatory redemption feature, the Company has recorded the estimated fair value of the Redeemable Common Stock Payable as both a current
and long-term liability on its consolidated balance sheet, and will adjust the amount to reflect changes in the fair value of the obligation, including accretion in value due to the passage of time, with such changes charged or credited to net
income.



Application of Critical Accounting Policies



The preceding discussion and analysis of financial condition and results of
operations are based upon Teletouchs consolidated financial statements, which have been prepared in conformity with accounting



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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, Teletouch evaluates its estimates and assumptions, including but not limited to those related to
the impairment of long-lived assets, reserves for doubtful accounts, provision for income taxes, revenue recognition and certain accrued liabilities. Teletouch bases its 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 that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.



Allowance for Doubtful Accounts: Estimates are used in determining the allowance for doubtful accounts and are based on historic collection experience, current trends and a percentage of the accounts receivable aging
categories. In determining these percentages Teletouch reviews historical write-offs, including comparisons of write-offs to provisions for doubtful accounts and as a percentage of revenues; Teletouch compares the ratio of the allowance for doubtful
accounts to gross receivables to historic levels and Teletouch monitors collections amounts and statistics. Teletouchs allowance for doubtful accounts is approximately $112,000 as of November 30, 2005. Based on the information available
to the Company, management believes the allowance for doubtful accounts as of November 30, 2005 was adequate. However, actual write-offs might exceed the recorded allowance.



Reserve for Inventory Obsolescence: Reserves for inventory obsolescence are computed using estimates that are
based on sales trends, a ratio of inventory to sales, and a review of specific categories of inventory. In establishing its reserve, Teletouch reviews historic inventory obsolescence experience including comparisons of previous write-offs to
provision for inventory obsolescence and the inventory count compared to recent sales trends. The Company recorded additional telemetry inventory reserves of approximately $54,000 in the first quarter of fiscal 2006 related to the impairment of the
aging VisionTrax and Panther product line. Teletouch management cannot guarantee that the Company will experience better obsolescence rates than it has in the past which could result in material differences in the reserve for inventory
obsolescence and the related inventory write-offs. The reserve for inventory obsolescence is approximately $187,000 at November 30, 2005.



Provision for Income Taxes: The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, using
the asset and liability approach, which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of such assets and liabilities. This
method utilizes enacted statutory tax rates in effect for the year in which the temporary differences are expected to reverse and gives immediate effect to changes in income tax rates upon enactment. Deferred tax assets are recognized, net of any
valuation allowance, for temporary differences and net operating loss and tax credit carry forwards. Deferred income tax expense represents the change in net deferred assets and liability balances. Deferred income taxes result from temporary
differences between the basis of assets and liabilities recognized for differences between the financial statement and tax basis thereon, and for the expected future tax benefits to be derived from net operating losses and tax credit carry forwards.
A valuation allowance is recorded when it is more likely than not that deferred tax assets will be unrealizable in future periods. The provision for income taxes is approximately $736,000 at November 30, 2005.



Revenue Recognition: Teletouchs revenue consists
primarily of monthly service and lease revenues charged to customers on a monthly, quarterly, semi-annual or annual basis. Deferred revenue represents service fees billed in advance and recognized into earnings as the services are provided. Revenue
also includes sales of messaging devices, two-way radios, telemetry devices and other products directly to customers and resellers. Teletouch recognizes revenue over the period the service is performed in accordance with SEC Staff Accounting
Bulletin No. 104, Revenue Recognition in Financial Statements



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(SAB 104). SAB 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive
evidence of an arrangement exists, (2) delivery has occurred or services rendered, (3) the fee is fixed and determinable, and (4) collectibility is reasonably assured. Teletouch believes, relative to sales of one-way messaging
equipment, that all of these conditions are met, therefore, product revenue is recognized at the time of shipment. Revenue from sales of other products is recognized upon delivery.



ADDITIONAL FACTORS THAT MAY AFFECT OUR BUSINESS, FUTURE OPERATING RESULTS, AND FINANCIAL CONDITION



You should carefully consider the following factors that may affect our
business, future operating results and financial condition, as well as other information included in this report. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to
us, that we have not identified as risks, or that we currently deem immaterial may also impair our business operations. If any of the following risks actually occur, our business, financial condition and operating results could be materially
adversely affected.



As discussed throughout this filing
there is substantial doubt about the Companys ability to continue as a going concern if it is unable to complete the sale of its paging business as contemplated. The following operational risks are included to discuss the factors that may
impact the Company in the normal course of business. The operational and industry risks described below should be read understanding the overall risk to the Company that it may be unable to complete the sale transactions due to any or all of the
following:



| |  |  | The sale of the paging business is contingent on shareholder approval. Both the common shareholder and the holder of certain redeemable common stock warrants must vote separately to
approve this transaction.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The sale of the paging business will trigger an acceleration of amounts due under the Companys redeemable common stock warrants. The amount that will become due immediately
upon the sale of the business could equal the full redemption value of the warrants which is $3,000,000 unless the Company is successful in negotiating a lesser payment with the holder of the warrants.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Companys negotiating position with the holders of the redeemable common stock warrants is limited due to their ability to block the sale transaction through the exercise
of their voting rights discussed above.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



If the
sale transaction is unable to be completed, the Company would be faced with running the business in an aggressive manner to generate sufficient cash to offset the cost of maintaining its status as a public company. This manner of reducing expenses
to maximize cash flows would have a negative impact on revenues and limit the viability of the Company going forward.



Operational Risks



Teletouch may be unable to secure the financing needed for future acquisitions



Teletouch may be unable to secure financing or only be presented with financing options that contain unfavorable terms to
finance future acquisitions. If financing is unavailable to the Company, Teletouch will be unable to complete the acquisitions it is currently evaluating which could generate additional revenues. The Company would then be forced to grow its revenues
from its existing businesses, which to-date has proved difficult without adequate capital funding.



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Teletouch must continue to minimize the reduction in its subscriber base while expanding its product offerings to
offset the losses in its paging service revenues.



Teletouchs future revenue growth is not dependent on any single or small group subscriber base, but will continue to concentrate on business accounts and on individuals interested in continuity, quality and personal service. As of
November 30, 2005, Teletouch had approximately 125,500 pagers in service as compared to approximately 169,400 pagers in service as of November 30, 2004. Teletouch must minimize the reduction in its subscriber base and expand its product
offerings to generate revenues to offset the losses in its paging service revenues. There is no guarantee that our future efforts in this area will decrease subscriber attrition.



Any type of systems failure could reduce sales, increase costs or result in claims of liability.



Despite the Companys implementation of preventive safety measures,
Teletouchs technology is vulnerable to system failure due to such things as computer viruses, unauthorized access, energy blackouts, natural disasters, and telecommunications failures. Any system failure, accident or security breach could
cause significant interruptions in our operations. In addition, we could be subject to liability for any loss or damage to our customers data or applications or inappropriate disclosure of customers confidential information. The cost to
remedy a system failure, accident or security breach could have a significant effect on our financial condition.



Any disruption from our satellite feeds or backup landline feeds could result in delays in our subscribers ability to receive information. We cannot
be sure that our systems will operate appropriately if we experience a hardware or software failure or if there is an earthquake, fire or other natural disaster, a power or telecommunications failure, intentional disruptions of service by third
parties, an act of God or an act of war. A failure in our systems could cause delays in transmitting data, and as a result we may lose customers or face litigation that could involve material costs and distract management from operating our business



As we seek to serve fleet owners, we face competition from businesses with
greater financial resources, and we may be unable to compete effectively with these businesses.



The existing market for wireless and mobile data solutions for the transportation industry is competitive. Competition is vigorous for fleet owners, which
is a customer segment we seek to serve. We expect competition to increase further as companies develop new products and/or modify their existing products to compete directly with ours. These competitors may have better name recognition, better
product lines, greater sales, marketing and distribution capabilities, significantly greater financial resources, and existing relationships with some of our potential customers. We may not be able to effectively compete with these companies.
Greater financial resources and product development capabilities may allow our competitors to respond more quickly to new or emerging technologies and changes in customer requirements that may render our products obsolete. In addition, these
companies may reduce costs to customers and seek to obtain our customers through cost-cutting and other measures. To the extent these companies compete effectively with us, our business could be adversely affected.



Any defects in Teletouchs products or in those provided to us by our suppliers could
expose the Company to liability, damage our reputation and customer relations, and adversely affect the development and release of future products.



Teletouchs products are inherently complex; therefore, it is possible that any defects contained therein may only be detectable once the product is
in use. Given the critical services our products provide, these defects could have a serious adverse impact on our customers, which could damage our reputation, harm customer relations and expose us to liability. Furthermore, any product defects
could require



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significant recalls, which may not be covered by warranty reserves. Resolving product defects could consume significant
financial and engineering resources, which could adversely affect the development and release of future products. Any product defect could result in shipment delays and a decreased demand for our products, which could reduce our revenues and
adversely affect our level of profitability.



A reduction or interruption in
component supply or a significant increase in component prices could have a material adverse effect on our profitability.



Our ability to meet our obligations to our customers partially depends on the timely delivery of parts and components from our suppliers and our internal
capacity to install these products. Supply shortages could adversely affect our ability to satisfy our customers demands, which could damage our reputation and customer relations, in turn reducing demand for our products. Such delays or
decreases in demand could reduce our revenues and adversely affect our level of profitability.



Although we target smaller metropolitan areas where we believe there is less industry competition, demand for our products may be adversely affected by the presence of our competitors in these markets.



Although Teletouch focuses on smaller metropolitan
markets, where we believe there is less competition and more opportunity for internal growth, demand for our products may be adversely affected by industry competitors. Teletouch currently faces competition in these markets and expects that
competition to increase. Some of our competitors have more extensive engineering, manufacturing and marketing capabilities and greater financial, technical and personnel resources than we do. Furthermore, Teletouchs competitors may have
greater brand recognition, broader product lines, and more established customer relations.



Our success depends on the introduction and acceptance of new products.



The telecommunications market is constantly changing due, in part, to technological advances, evolving industry standards and the development of new
products. Teletouchs future success will depend on our ability to keep up with these changes by developing new products with a high market demand. The Company expends significant resources on research and development in its telemetry business
to design new products and product enhancements to respond to the ever-changing market demands. If we fail to develop such products in response to market demands, we could fail to obtain an adequate return on our investments and could lose market
share to our competitors. Failure to develop new, in-demand products in a cost-efficient manner could reduce the Companys growth potential or adversely affect our business operations.



We face risks inherent in new product and service offerings as well as new markets.



From time to time we introduce new products and services
or expand our previous product and service offerings to our existing and target markets. Our products must therefore be considered in light of the risks, expenses, problems and delays inherent in establishing new lines of business in a rapidly
changing industry. Although we believe we can successfully differentiate our product and service offerings from others in the marketplace, we must be able to compete against other companies who may already be established in the marketplace and have
greater resources. There can be no assurance we will be successful in adding products or services or expanding into new markets or that our administrative, operational, infrastructure and financial resources and systems will be adequate to
accommodate such offerings or expansion.



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Teletouch may be unsuccessful in obtaining and enforcing intellectual property protection for its technology.



The Companys ability to compete with industry
competitors depends in part on its ability to enforce its intellectual property rights such as trademarks and to obtain and enforce future intellectual property protection, including patents, trademarks, copyrights and trade secrets.



If we determine that our intellectual property rights have been infringed or
if we are notified that we are infringing upon certain intellectual property rights, the Company may become involved in litigation. Such litigation or claims could result in substantial costs and diversion of resources. Furthermore, an adverse
result in an action against the Company may require that we pay substantial damages, cease sales of the infringing product or technology and expend significant resources to either license the infringing technology or develop a non-infringing product
or technology. We cannot give any assurance that such technology would be available to us on reasonable terms or that we would be able to develop similar non-infringing technology or products.



Compliance with changing regulation of corporate governance and public disclosure may
result in additional expenses and delisting of our common stock.



Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and AMEX rules, have required most public companies, including our Company, to
devote additional internal and external resources to various governance and compliance matters. Because we have a relatively small corporate staff, we rely heavily on outside professional advisers to assist us with these efforts. As a result, we
incurred additional operating expenses in 2004 and will incur further expenses in the future. These future costs will include increased accounting related fees associated with preparing the attestation report on our internal controls over financial
reporting as required under Section 404 of the Sarbanes-Oxley Act of 2002. In addition, these new or changed laws, regulations and standards are subject to varying interpretations, as well as modifications by the government and AMEX. The way in
which they are applied and implemented may change over time, which could result in even higher costs to address and implement revisions to compliance (including disclosure) and governance practices. Our failure to meet these corporate governance
requirements may result in delisting of our common stock from AMEX.



Industry Risks



Our products are subject to
government regulation.



Radio communications are subject
to regulation by the government. Teletouchs products and technology must conform to domestic rules and regulations established to avoid interference among users and facilitate interconnection of telecommunications systems. It is our opinion
that our products and technology are in compliance with all currently existing government rules and regulations. However, new rules or regulations could adversely affect our business by requiring that current products or technology be modified to
comply with such rules or regulations or by rendering current products or technology obsolete. Furthermore, Teletouch cannot predict if and when new rules or regulations will come into effect. Regulatory changes could adversely affect our business
by restricting our development of our products and increasing the opportunity for additional competition.



The Federal Communications Commission (the FCC) must approve renewal applications for Teletouchs radio licenses.



The FCC grants radio licenses for varying terms of up to 10 years, and the FCC must approve



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renewal applications. In the past, the FCC renewal applications have been more or less routinely granted. However, there
can be no assurance that the FCC will approve or act upon Teletouchs future applications in a timely manner. Delays in or denial of our renewal applications could adversely affect our business operations, which could reduce our revenues and
decrease our level of profitability.



Future applications by Teletouch for
additional transmitter sites to expand our coverage on existing frequencies must be approved by the FCC.



Teletouch regularly applies to the FCC to use additional frequencies and to add additional transmitter sites to expand coverage on existing frequencies.
Under current FCC guidelines, we can expand our coverage and add additional sites only on frequencies formerly classified as PCP frequencies below 929 MHz. All other paging frequencies below 929 MHz on which Teletouch holds licenses are frozen in a
status quo condition pending the final announcement and implementation of geographic area licensing auctions. In addition, FCC approval is required for the Companys acquisitions of radio licenses held by other companies, as well as transfers
of controlling interests of any entities that hold radio licenses. Teletouch cannot be sure that the FCC will approve or act upon the Companys future applications in a timely manner. Denial or delayed approval by the FCC could affect our
business operations, which could reduce our revenues and adversely affect our level of profitability.



Also, all major modification and expansion applications are subject to competitive bidding procedures. Teletouch cannot predict the impact that these
procedures will have on its licensing practices.



The telecommunications
market is volatile.



During the last several years, the
telecommunications industry has been very volatile as a result of overcapacity, which has led to price erosion and bankruptcies. If the Company cannot control subscriber and customer attrition through maintaining competitive services and pricing,
revenue could decrease significantly.



Terrorist attacks or acts of war may
seriously harm our business.



Terrorist attacks or acts of
war may cause damage or disruption to our operations, our employees, our facilities and our customers, which could significantly impact our revenues, costs and expenses, and financial condition. The terrorist attacks that took place in the United
States on September 11, 2001 were unprecedented events that have created many economic and political uncertainties, some of which may materially adversely affect our business, results of operations, and financial condition. The potential for
future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility have created many economic and political uncertainties, which could materially adversely affect our business, results of
operations, and financial condition in ways that management currently cannot predict.



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Item 3. Quantitative and Qualitative Disclosures About Market Risk



We did not have any foreign currency hedges or other derivative financial instruments as of November 30, 2005. We do not enter into financial
instruments for trading or speculative purposes and do not currently utilize derivative financial instruments. Our operations are conducted primarily in the United States and as such are not subject to material foreign currency exchange rate risk.



Item 4. Controls and Procedures



As of the end of the period covered by this Quarterly Report on Form 10-Q (the Quarterly Report), our Chief Executive Officer and Interim Chief Financial Officer (the Certifying Officers) have conducted evaluations
of our disclosure controls and procedures. As defined under Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act), the term disclosure controls and procedures means controls
and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or
submits under the Exchange Act is accumulated and communicated to the issuers management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding the required disclosure. Based on their evaluation of these disclosure controls and procedures, the Certifying Officers have concluded that the disclosure controls and procedures were effective as of
the date of such evaluation to ensure that material information is recorded, processed, summarized and reported by management of the Company on a timely basis in order to comply with the Companys disclosure obligations under the Exchange Act
and the rules and regulations promulgated thereunder.



Further,
there were no changes in the Companys internal control over financial reporting during the fiscal quarter that has materially affected, or is 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



Teletouch is subject to various legal proceedings arising in the ordinary course of business. The Company believes there is no proceeding, either threatened or pending, against it that could result in a material adverse effect on its
results of operations or financial condition.



In October 2005,
Teletouch filed suit in Federal court against Richard D. Fry (Fry), a former employee, and Locatient, Ltd., an Oklahoma limited liability company, claiming copyright infringement and theft of trade secrets, among other things. The suit
claims that Fry used Company trade secrets to develop a software package while he was working for Teletouch. The Company claims that the software package Fry developed while working for the company is based on the same database structure and format
that he developed while working at Teletouch. The suit seeks an injunction to prevent Fry from continuing to sell and market software based on the Companys copyrighted work, and award of actual and exemplary damages. As of the date hereof
there have been no changes in the status of this lawsuit since it was filed. The Company continues to believe it will prevail as this suit moves forward based on the results of an independent evaluation of its software package compared to the
package being marketed by Fry.



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



Summary of Stock Repurchases

(unaudited)



|                                        |  |                                 |  |                        |      |                                                                            |         |                                                                           |        
|--------------------------------------- |  | ------------------------------- |  | ---------------------- | ---- | -------------------------------------------------------------------------- | ------- | ------------------------------------------------------------------------- | -------
|                                        |  | Total Number ofShares Purchased |  | Average PricePer Share |      | Total Number ofSharesPurchased asPart of PubliclyAnnouncedPlans orPrograms |         | MaximumNumber ofShares that MayYet Be PurchasedUnder the Plansor Programs
|June 1, 2005 to June 30, 2005           |  | 108,750                         |  | $                      | 1.05 |                                                                            | 108,750 |                                                                           | 326,250
|July 1, 2005 to July 31, 2005           |  |                                |  |                        |     |                                                                            |        |                                                                           | 326,250
|August 1, 2005 to August 31, 2005       |  |                                |  |                        |     |                                                                            |        |                                                                           | 326,250
|September 1, 2005 to September 30, 2005 |  | 81,563                          |  |                        | 1.05 |                                                                            | 81,563  |                                                                           | 244,687
|October 1, 2005 to October 31, 2005     |  |                                |  |                        |     |                                                                            |        |                                                                           | 244,687
|November 1, 2005 to November 30, 2005   |  |                                |  |                        |     |                                                                            |        |                                                                           | 244,687
|                                        |  |                                 |  |                        |      |                                                                            |         |                                                                           |        
|Total                                   |  | 190,313                         |  | $                      | 1.05 |                                                                            | 190,313 |                                                                           | 244,687



All shares detailed
above were repurchases related to certain redeemable shares of common stock issued by the Company in March 2004 to purchase the two-way radio assets of DCAE, Inc. d/b/a Delta Communications. For a description of these redeemable shares of common
stock, see Note 10 to the consolidated financial statements Redeemable Common Stock Payable.



Item 3. Defaults Upon Senior Securities



None



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



None



Item 5. Other Information



None



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Item 6. Exhibits



|              |  |                                                                           
|------------- |  | --------------------------------------------------------------------------
|ExhibitNumber |  | Title of Exhibit                                                          
|31.1          |  | Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a)               
|              | 
|31.2          |  | Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a)               
|              | 
|32.1          |  | Certification pursuant to 1350, Chapter 63, Title 18 of United States Code
|              | 
|32.2          |  | Certification pursuant to 1350, Chapter 63, Title 18 of United States Code



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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.



|                       |  |                                           |  |                                                                                              
|---------------------- |  | ----------------------------------------- |  | ---------------------------------------------------------------------------------------------
|Date: January 17, 2006 |  | TELETOUCH COMMUNICATIONS, INC. Registrant
|                       |  |                                          
|                       |  | By:                                       |  | /s/ Thomas A. Hyde, Jr.                                                                      
|                       |  |                                           |  | Thomas A. Hyde, Jr. Chief Executive Officer                                                  
|                       |  |                                           |  | (Principal Executive Officer)                                                                
|                       |  |                                          
|                       |  | By:                                       |  | /s/ Douglas E. Sloan                                                                         
|                       |  |                                           |  | Douglas E. Sloan Interim Chief Financial Officer (Principal Financial and Accounting Officer)



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