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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 February 29, 2004



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.)



110 N. College,
Suite 200, Tyler, Texas 75702 (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 an accelerated filer (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  4,546,980 shares outstanding as of April
6, 2004



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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 (Unaudited).                                                            |  | 3       
|        |  |                                                                                                                             
|        |  | Condensed Consolidated Balance Sheets as of February 29, 2004 and May 31, 2003                                               |  | 3       
|        |  |                                                                                                                             
|        |  | Condensed Consolidated Statements of Operations - Three Months and Nine Months Ended February 29, 2004 and February 28, 2003 |  | 5       
|        |  |                                                                                                                             
|        |  | Condensed Consolidated Statements of Cash Flows - Nine Months Ended February 29, 2004 and February 28, 2003                  |  | 6       
|        |  |                                                                                                                             
|        |  | Notes to Condensed Consolidated Financial Statements                                                                         |  | 7       
|        |  |                                                                                                                             
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                        |  | 18      
|        |  |                                                                                                                             
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                                                                   |  | 27      
|        |  |                                                                                                                             
|Item 4. |  | Controls and Procedures                                                                                                      |  | 27      
|        |  |                                                                                                                             
|        |  | Part II. Other Information                                                                                                   |  |         
|        |  |                                                                                                                             
|Item 1. |  | Legal Proceedings                                                                                                            |  | 28      
|        |  |                                                                                                                             
|Item 2. |  | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities                                             |  | 28      
|        |  |                                                                                                                             
|Item 3. |  | Defaults Upon Senior Securities                                                                                              |  | 28      
|        |  |                                                                                                                             
|Item 4. |  | Submission of Matters to a Vote of Security Holders                                                                          |  | 28      
|        |  |                                                                                                                             
|Item 5. |  | Other Information                                                                                                            |  | 28      
|        |  |                                                                                                                             
|Item 6. |  | Exhibits and Reports on Form 8-K                                                                                             |  | 29      
|        |  |                                                                                                                             
|        |  | Signatures                                                                                                                   |  | 30      



2



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##### Table of Contents

PART 1  FINANCIAL INFORMATION



Item 1.
Financial Statements



TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



ASSETS



|                                                                                                                    |  |                  |        |   |             |   |        |  
|------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------ | - | ----------- | - | ------ | -
|                                                                                                                    |  | February 29,2004 |        |   | May 31,2003 |  
|                                                                                                                    |  | (unaudited)      |        |   |             |  
|CURRENT ASSETS:                                                                                                     |  |                  |        |   |             |   |        |  
|Cash and cash equivalents                                                                                           |  | $                | 291    |   |             | $ | 688    |  
|Accounts receivable, net of allowance of $172 in fiscal 2004 and $150 in fiscal 2003                                |  |                  | 1,277  |   |             |   | 1,381  |  
|Accounts receivable  related party                                                                                 |  |                  | 3      |   |             |   | 68     |  
|Inventories, net of reserve of $141 in fiscal 2004 and $215 in fiscal 2003                                          |  |                  | 2,233  |   |             |   | 2,441  |  
|Deferred income taxes                                                                                               |  |                  | 194    |   |             |   | 191    |  
|Note receivable                                                                                                     |  |                  | 257    |   |             |   |       |  
|Certificate of deposit, restricted                                                                                  |  |                  |       |   |             |   | 10     |  
|Prepaid expenses and other current assets                                                                           |  |                  | 448    |   |             |   | 417    |  
|Property held for sale                                                                                              |  |                  |       |   |             |   | 46     |  
|                                                                                                                    |  |                  |        |   |             |   |        |  
|                                                                                                                    |  |                  | 4,703  |   |             |   | 5,242  |  
|                                                                                                                    |  |                  |        |   |             |   |        |  
|                                                                                                                    |  |                 
|PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $14,826 in fiscal 2004 and $13,803 in fiscal 2003 |  |                  | 9,058  |   |             |   | 10,846 |  
|GOODWILL, INTANGIBLES AND OTHER ASSETS:                                                                             |  |                  |        |   |             |   |        |  
|Goodwill                                                                                                            |  |                  | 821    |   |             |   |       |  
|Subscriber bases                                                                                                    |  |                  | 225    |   |             |   | 77     |  
|FCC licenses                                                                                                        |  |                  | 103    |   |             |   |       |  
|Non-compete agreements                                                                                              |  |                  | 95     |   |             |   |       |  
|Internally developed software                                                                                       |  |                  | 185    |   |             |   |       |  
|Accumulated amortization                                                                                            |  |                  | (143   | ) |             |   | (75    | )
|                                                                                                                    |  |                  |        |   |             |   |        |  
|                                                                                                                    |  |                  | 1,286  |   |             |   | 2      |  
|                                                                                                                    |  |                  |        |   |             |   |        |  
|DEFERRED INCOME TAXES                                                                                               |  |                  | 68     |   |             |   |       |  
|                                                                                                                    |  |                  |        |   |             |   |        |  
|                                                                                                                    |  | $                | 15,115 |   |             | $ | 16,090 |  
|                                                                                                                    |  |                  |        |   |             |   |        |  



See Accompanying Notes
to Condensed Consolidated Financial Statements



3



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##### Table of Contents

TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS  (Continued)

(In thousands, except share data)



LIABILITIES AND SHAREHOLDERS EQUITY



|                                                                                                                                                       |  |                  |         |   |             |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------- | ------- | - | ----------- | - | ------- | -
|                                                                                                                                                       |  | February 29,2004 |         |   | May 31,2003 |  
|                                                                                                                                                       |  | (unaudited)      |         |   |             |  
|CURRENT LIABILITIES:                                                                                                                                   |  |                  |         |   |             |   |         |  
|Accounts payable and accrued expenses                                                                                                                  |  | $                | 2,989   |   |             | $ | 3,365   |  
|Accounts payable  related party                                                                                                                       |  |                  |        |   |             |   | 159     |  
|Short-term debt                                                                                                                                        |  |                  | 45      |   |             |   | 109     |  
|Current portion of long-term debt                                                                                                                      |  |                  | 39      |   |             |   |        |  
|Current portion of redeemable common stock payable                                                                                                     |  |                  | 160     |   |             |   |        |  
|Current portion of unearned sale/leaseback profit                                                                                                      |  |                  | 418     |   |             |   | 418     |  
|Deferred revenue                                                                                                                                       |  |                  | 710     |   |             |   | 726     |  
|                                                                                                                                                       |  |                  |         |   |             |   |         |  
|                                                                                                                                                       |  |                  | 4,361   |   |             |   | 4,777   |  
|                                                                                                                                                       |  |                  |         |   |             |   |         |  
|LONG-TERM LIABILITIES:                                                                                                                                 |  |                  |         |   |             |   |         |  
|Long-term debt, net of current portion                                                                                                                 |  |                  | 429     |   |             |   | 760     |  
|Redeemable common stock purchase warrants                                                                                                              |  |                  | 1,681   |   |             |   | 1,470   |  
|Redeemable common stock payable, net of current portion                                                                                                |  |                  | 475     |   |             |   |        |  
|Unearned sale/leaseback profit, net of current portion                                                                                                 |  |                  | 1,169   |   |             |   | 1,487   |  
|Deferred income taxes                                                                                                                                  |  |                  |        |   |             |   | 343     |  
|                                                                                                                                                       |  |                  |         |   |             |   |         |  
|                                                                                                                                                       |  |                  | 3,754   |   |             |   | 4,060   |  
|                                                                                                                                                       |  |                  |         |   |             |   |         |  
|TOTAL LIABILITIES                                                                                                                                      |  |                  | 8,115   |   |             |   | 8,837   |  
|                                                                                                                                                       |  |                  |         |   |             |   |         |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                          |  |                  |         |   |             |   |         |  
|                                                                                                                                                       |  |                 
|SHAREHOLDERS EQUITY:                                                                                                                                  |  |                  |         |   |             |   |         |  
|Series A cumulative convertible preferred stock, $.001 par value, 15,000 shares authorized and 0 shares issued and outstanding in fiscal 2004
and 2003 |  |                  |        |   |             |   |        |  
|Series B convertible preferred stock, $.001 par value, 411,457 shares authorized and 0 shares issued and outstanding in fiscal 2004 and
2003           |  |                  |        |   |             |   |        |  
|Series C convertible preferred stock, $.001 par value, 1,000,000 shares authorized, issued and outstanding in fiscal 2004 and
2003                     |  |                  | 1       |   |             |   | 1       |  
|Common stock, $.001 par value, 70,000,000 shares authorized, 4,976,189 shares issued in fiscal 2004 and 2003                                           |  |                  | 5       |   |             |   | 5       |  
|Treasury stock, 429,209 shares held in fiscal 2004 and 2003                                                                                            |  |                  | (185    | ) |             |   | (185    | )
|Additional paid-in capital                                                                                                                             |  |                  | 26,965  |   |             |   | 26,834  |  
|Accumulated deficit                                                                                                                                    |  |                  | (19,786 | ) |             |   | (19,402 | )
|                                                                                                                                                       |  |                  |         |   |             |   |         |  
|                                                                                                                                                       |  |                  | 7,000   |   |             |   | 7,253   |  
|                                                                                                                                                       |  |                  |         |   |             |   |         |  
|                                                                                                                                                       |  | $                | 15,115  |   |             | $ | 16,090  |  
|                                                                                                                                                       |  |                  |         |   |             |   |         |  



See Accompanying Notes
to Condensed Consolidated Financial Statements



4



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##### Table of Contents

TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except shares and per share amounts)

(Unaudited)



|                                                    |  |                    |           |   |                   |   |            |                   |  |   |                   |   |  |   |             |  
|--------------------------------------------------- |  | ------------------ | --------- | - | ----------------- | - | ---------- | ----------------- |  | - | ----------------- | - |  | - | ----------- | -
|                                                    |  | Three Months Ended |           |   | Nine Months Ended |  
|                                                    |  | February 29, 2004  |           |   | February 28, 2003 |   |            | February 29, 2004 |  |   | February 28, 2003 |  
|Service, rent and maintenance revenue               |  | $                  | 5,783     |   |                   | $ | 6,781      |                   |  | $ | 17,816            |   |  | $ | 21,413      |  
|Product sales revenue                               |  |                    | 769       |   |                   |   | 1,421      |                   |  |   | 2,240             |   |  |   | 5,970       |  
|                                                    |  |                    |           |   |                   |   |            |                   |  |   |                   |   |  |   |             |  
|Total revenues                                      |  |                    | 6,552     |   |                   |   | 8,202      |                   |  |   | 20,056            |   |  |   | 27,383      |  
|Net book value of products sold                     |  |                    | (691      | ) |                   |   | (1,335     | )                 |  |   | (1,885            | ) |  |   | (4,460      | )
|                                                    |  |                    |           |   |                   |   |            |                   |  |   |                   |   |  |   |             |  
|                                                    |  |                    | 5,861     |   |                   |   | 6,867      |                   |  |   | 18,171            |   |  |   | 22,923      |  
|                                                    |  |                    |           |   |                   |   |            |                   |  |   |                   |   |  |   |             |  
|Costs and expenses:                                 |  |                    |           |   |                   |   |            |                   |  |   |                   |   |  |   |             |  
|Operating                                           |  |                    | 2,772     |   |                   |   | 2,993      |                   |  |   | 8,284             |   |  |   | 11,602      |  
|Selling                                             |  |                    | 671       |   |                   |   | 759        |                   |  |   | 1,728             |   |  |   | 3,976       |  
|General and administrative                          |  |                    | 1,708     |   |                   |   | 1,762      |                   |  |   | 5,121             |   |  |   | 4,817       |  
|Depreciation and amortization                       |  |                    | 904       |   |                   |   | 930        |                   |  |   | 2,858             |   |  |   | 3,633       |  
|(Gain) loss on disposal of assets                   |  |                    | 298       |   |                   |   | (8         | )                 |  |   | 365               |   |  |   | (5          | )
|Write-off of equipment                              |  |                    |          |   |                   |   |           |                   |  |   |                  |   |  |   | 810         |  
|                                                    |  |                    |           |   |                   |   |            |                   |  |   |                   |   |  |   |             |  
|Total costs and expenses                            |  |                    | 6,353     |   |                   |   | 6,436      |                   |  |   | 18,356            |   |  |   | 24,833      |  
|                                                    |  |                    |           |   |                   |   |            |                   |  |   |                   |   |  |   |             |  
|Operating income (loss)                             |  |                    | (492      | ) |                   |   | 431        |                   |  |   | (185              | ) |  |   | (1,910      | )
|Gain on debt extinguishment                         |  |                    |          |   |                   |   | 510        |                   |  |   |                  |   |  |   | 510         |  
|Gain on litigation settlement                       |  |                    |          |   |                   |   | 429        |                   |  |   |                  |   |  |   | 429         |  
|Interest expense, net                               |  |                    | (91       | ) |                   |   | (175       | )                 |  |   | (276              | ) |  |   | (274        | )
|                                                    |  |                    |           |   |                   |   |            |                   |  |   |                   |   |  |   |             |  
|Net income (loss) before income taxes               |  |                    | (583      | ) |                   |   | 1,195      |                   |  |   | (461              | ) |  |   | (1,245      | )
|Income tax expense (benefit)                        |  |                    | (148      | ) |                   |   |           |                   |  |   | (77               | ) |  |   |            |  
|                                                    |  |                    |           |   |                   |   |            |                   |  |   |                   |   |  |   |             |  
|Net income (loss)                                   |  |                    | (435      | ) |                   |   | 1,195      |                   |  |   | (384              | ) |  |   | (1,245      | )
|Gain on preferred stock transaction                 |  |                    |          |   |                   |   |           |                   |  |   |                  |   |  |   | 36,377      |  
|                                                    |  |                    |           |   |                   |   |            |                   |  |   |                   |   |  |   |             |  
|Net income (loss) applicable to common shareholders |  | $                  | (435      | ) |                   | $ | 1,195      |                   |  | $ | (384              | ) |  | $ | 35,132      |  
|                                                    |  |                    |           |   |                   |   |            |                   |  |   |                   |   |  |   |             |  
|Earnings (loss) per share  basic                   |  | $                  | (0.10     | ) |                   | $ | 0.27       |                   |  | $ | (0.08             | ) |  | $ | 7.52        |  
|                                                    |  |                    |           |   |                   |   |            |                   |  |   |                   |   |  |   |             |  
|Earnings (loss) per share  diluted                 |  | $                  | (0.10     | ) |                   | $ | 0.02       |                   |  | $ | (0.08             | ) |  | $ | 0.34        |  
|                                                    |  |                    |           |   |                   |   |            |                   |  |   |                   |   |  |   |             |  
|Weighted average shares outstanding  basic         |  |                    | 4,546,980 |   |                   |   | 4,496,980  |                   |  |   | 4,546,980         |   |  |   | 4,674,378   |  
|                                                    |  |                    |           |   |                   |   |            |                   |  |   |                   |   |  |   |             |  
|Weighted average shares outstanding  diluted       |  |                    | 4,546,980 |   |                   |   | 54,580,195 |                   |  |   | 4,546,980         |   |  |   | 104,541,730 |  
|                                                    |  |                    |           |   |                   |   |            |                   |  |   |                   |   |  |   |             |  



See Accompanying Notes
to Condensed Consolidated Financial Statements



5



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##### Table of Contents

TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                |  |                   |        |   |                   |   |        |  
|------------------------------------------------------------------------------- |  | ----------------- | ------ | - | ----------------- | - | ------ | -
|                                                                                |  | Nine Months Ended |       
|                                                                                |  | February 29, 2004 |        |   | February 28, 2003 |  
|Operating Activities:                                                           |  |                   |        |   |                   |   |        |  
|Net loss                                                                        |  | $                 | (384   | ) |                   | $ | (1,245 | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                   |        |   |                   |   |        |  
|Depreciation and amortization                                                   |  |                   | 2,858  |   |                   |   | 3,633  |  
|Non-cash store closing expense                                                  |  |                   |       |   |                   |   | 933    |  
|Non-cash compensation expense                                                   |  |                   | 131    |   |                   |   | 5      |  
|Non-cash interest expense                                                       |  |                   | 211    |   |                   |   | 61     |  
|Provision for losses on accounts receivable                                     |  |                   | 164    |   |                   |   | 397    |  
|(Gain)/Loss on disposal of assets                                               |  |                   | 365    |   |                   |   | (5     | )
|Write down on assets held for sale                                              |  |                   |       |   |                   |   | 1,460  |  
|Write-off of equipment                                                          |  |                   |       |   |                   |   | 810    |  
|Gain on extinguishment of debt                                                  |  |                   |       |   |                   |   | (510   | )
|Amortization of unearned sale/leaseback profit                                  |  |                   | (318   | ) |                   |   | (315   | )
|Deferred income taxes                                                           |  |                   | (414   | ) |                   |   |       |  
|Changes in operating assets and liabilities, net of acquisition:                |  |                   |        |   |                   |   |        |  
|Accounts receivable                                                             |  |                   | 147    |   |                   |   | 217    |  
|Inventories                                                                     |  |                   | 839    |   |                   |   | 1,672  |  
|Prepaid expenses and other assets                                               |  |                   | (31    | ) |                   |   | (170   | )
|Accounts payable and accrued expenses                                           |  |                   | (679   | ) |                   |   | (1,928 | )
|Deferred revenue                                                                |  |                   | (16    | ) |                   |   | (33    | )
|                                                                                |  |                   |        |   |                   |   |        |  
|Net cash provided by operating activities                                       |  |                   | 2,873  |   |                   |   | 4,982  |  
|                                                                                |  |                   |        |   |                   |   |        |  
|Investing Activities:                                                           |  |                   |        |   |                   |   |        |  
|Capital expenditures, including pagers                                          |  |                   | (1,750 | ) |                   |   | (2,769 | )
|Intangible assets                                                               |  |                   | (220   | ) |                   |   |       |  
|Purchase of certificates of deposit                                             |  |                   |       |   |                   |   | (10    | )
|Redemption of certificates of deposit                                           |  |                   | 10     |   |                   |   |       |  
|Acquisition, net of cash acquired                                               |  |                   | (696   | ) |                   |   |       |  
|Net proceeds from sale of assets                                                |  |                   | 59     |   |                   |   | 28     |  
|Note receivable.                                                                |  |                   | (257   | ) |                   |   |       |  
|                                                                                |  |                   |        |   |                   |   |        |  
|Net cash used in investing activities                                           |  |                   | (2,854 | ) |                   |   | (2,751 | )
|                                                                                |  |                   |        |   |                   |   |        |  
|Financing Activities:                                                           |  |                   |        |   |                   |   |        |  
|Increase in short-term debt, net                                                |  |                   | (84    | ) |                   |   | (1,159 | )
|Proceeds from borrowings                                                        |  |                   | 107    |   |                   |   | 292    |  
|Payments on long-term debt                                                      |  |                   | (439   | ) |                   |   | (2,550 | )
|                                                                                |  |                   |        |   |                   |   |        |  
|Net cash used in financing activities                                           |  |                   | (416   | ) |                   |   | (3,417 | )
|                                                                                |  |                   |        |   |                   |   |        |  
|Net decrease in cash and cash equivalents                                       |  |                   | (397   | ) |                   |   | (1,186 | )
|Cash and cash equivalents at beginning of period                                |  |                   | 688    |   |                   |   | 1,472  |  
|                                                                                |  |                   |        |   |                   |   |        |  
|Cash and cash equivalents at end of period                                      |  | $                 | 291    |   |                   | $ | 286    |  
|                                                                                |  |                   |        |   |                   |   |        |  
|Supplemental Cash Flow Data:                                                    |  |                   |        |   |                   |   |        |  
|Interest paid                                                                   |  | $                 | 49     |   |                   | $ | 147    |  
|                                                                                |  |                   |        |   |                   |   |        |  
|Income taxes paid                                                               |  | $                 | 870    |   |                   | $ |       |  
|                                                                                |  |                   |        |   |                   |   |        |  



See Accompanying Notes
to Condensed Consolidated Financial Statements



6



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##### Table of Contents

TELETOUCH COMMUNICATIONS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



NOTE A  BASIS OF PRESENTATION



The accompanying unaudited interim condensed 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 subsidiary (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 nine-months ended February 29, 2004, 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 condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Teletouchs 2003 Annual
Report on Form 10-K.



Organization: Teletouch operates
in the wireless telecommunications industry, providing paging, telemetry and two-way radio services to a diversified customer base. The Company provides services in non-major metropolitan areas and communities in Alabama, Arkansas, Louisiana,
Mississippi, Missouri, Oklahoma, Texas, Tennessee and Florida. The Company has 21 service centers and 6 two-way radio shops in those states. Through inter-carrier arrangements, Teletouch also provides nationwide and expanded regional coverage. The
Company has no foreign operations.



Principles of
Consolidation:The consolidated financial statements include the accounts of Teletouch Communications, Inc. and its wholly-owned subsidiary (together, Teletouch or the Company). Teletouch Communications, Inc. owns all of
the shares of Teletouch Licenses, Inc., its only wholly owned subsidiary. Teletouch Licenses, Inc. is a company formed for the express purpose of owning all of the FCC licenses utilized by Teletouch in its paging network. All significant
intercompany accounts and transactions have been eliminated in consolidation.



Use of Estimates:Preparing financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions. Those assumptions affect the reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.



Reclassifications:Certain reclassifications
were made to the prior period financial statements to conform to the current period financial statement presentation. Specifically, gain (loss) on disposal of assets and write-off of equipment were reclassed from other income (expense) to costs and
expenses in the condensed consolidated statements of operations for all periods presented. These reclassifications did not have an impact on the Companys previously reported financial position or net income (loss) applicable to common
shareholders.



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NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



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 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 was $172,000 at February 29, 2004. While write-offs of customer accounts have
historically been within our expectations and the provisions established, management cannot guarantee that Teletouch will continue to experience the same write-off rates that it has in the past which could result in material differences in the
reserve for doubtful accounts and related provisions for write-offs.



Inventories: The Companys inventories consist of pagers, cellular telephones, telemetry equipment, two-way radios, accessories, and spare parts held for sale. Inventories are carried at the lower of cost or market using the
weighted-average first-in, first-out method. 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 reserve for inventory
obsolescence was $141,000 at February 29, 2004.



Property,
Plant and Equipment:Property, plant and equipment is recorded at cost. Depreciation is computed using the straight-line method based on the following estimated useful lives:



|                          |  |                                                  
|------------------------- |  | -------------------------------------------------
|Pagers                    |  | 3 years                                          
|Paging infrastructure     |  | 5-15 years                                       
|Building and improvements |  | 10-20 years                                      
|Other equipment           |  | 3-10 years                                       
|Leasehold improvements    |  | Shorter of estimated useful life or term of lease



Intangible Assets:Intangible assets are recorded at cost. Amortization is computed using the straight-line method based on the following estimated useful lives:



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



The Company adopted
the provisions of Statement of Financial Accounting Standards (SFAS) No. 142  Goodwill and Other Intangible Assets during the year ended May 31, 2003 and, accordingly, no longer amortizes goodwill.



Impairment of Long-Lived Assets: In accordance with Statement of
Financial Accounting Standards (SFAS) No. 144  Accounting for the Impairment or Disposal of Long-Lived Assets Teletouch evaluates the recoverability of the carrying value of its long-lived assets based on estimated
undiscounted cash flows to be generated from such assets. In assessing the recoverability of these assets, Teletouch must project estimated cash flows which are based on various operating assumptions such as average revenue per unit in service,
disconnect rates, sales productivity ratios and expenses. Management develops these cash flow projections on a periodic basis and reviews the projections based on actual operating trends. The projections assume that general economic conditions will
continue unchanged throughout the projection



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period and that their potential impact on capital spending and revenues will not fluctuate. Projected revenues are based
on the Companys estimate of units in service and average revenue per unit, as well as revenue from various new product initiatives. Projected revenues assume a continued decline in traditional messaging units in service throughout the
projection period, which is partially offset by growth of advanced messaging units in service and revenue from the new product initiatives. Projected operating expenses are based on historic experience and expected market conditions adjusted to
reflect an expected decrease in expenses resulting from cost saving initiatives.



Teletouchs review of the carrying value of its long-lived assets as of February 29, 2004 indicates that the carrying value of these assets is recoverable through future estimated cash flows. If the cash flow
estimates, or the significant operating assumptions upon which they are based, change in the future, Teletouch may be required to record impairment charges related to its long-lived assets.



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 prepaid monthly service fees paid by customers. Revenue also includes sales of messaging devices, cellular
telephones, 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 (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 delivery. Revenue from
sales of other products is recognized upon delivery.



Stock-Based Compensation:The Company grants stock options for a fixed number of shares to employees with stock option exercise prices equal to the fair market value of the shares on the date of grant. The Company accounts for stock
option grants in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.



The following table illustrates the effect on net income (loss) and earnings (loss) per share if the fair value-based method had been applied to all
outstanding awards in each period (in thousands except per share amounts):



|                                                                                                                            |  |                    |       |   |                   |   |       |                   |  |   |                   |   |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----- | - | ----------------- | - | ----- | ----------------- |  | - | ----------------- | - |  | - | ------ | -
|                                                                                                                            |  | Three Months Ended |       |   | Nine Months Ended |  
|                                                                                                                            |  | February 29, 2004  |       |   | February 28, 2003 |   |       | February 29, 2004 |  |   | February 28, 2003 |  
|Net income (loss) applicable to common shareholders                                                                         |  | $                  | (435  | ) |                   | $ | 1,195 |                   |  | $ | (384              | ) |  | $ | 35,132 |  
|Plus stock-based employee compensation expense (benefit) included in reported net income (loss), net of related tax effects |  |                    | (7    | ) |                   |   | 61    |                   |  |   | 87                |   |  |   | 40     |  
|Less total stock-based employee compensation determined under fair-value-based method, net of related tax effects           |  |                    | (5    | ) |                   |   | (10   | )                 |  |   | (23               | ) |  |   | (31    | )
|                                                                                                                            |  |                    |       |   |                   |   |       |                   |  |   |                   |   |  |   |        |  
|Pro forma net income (loss)                                                                                                 |  | $                  | (447  | ) |                   | $ | 1,246 |                   |  | $ | (320              | ) |  | $ | 35,141 |  
|                                                                                                                            |  |                    |       |   |                   |   |       |                   |  |   |                   |   |  |   |        |  
|Pro forma earnings (loss) per share:                                                                                        |  |                    |       |   |                   |   |       |                   |  |   |                   |   |  |   |        |  
|Basic                                                                                                                       |  | $                  | (0.10 | ) |                   | $ | 0.28  |                   |  | $ | (0.07             | ) |  | $ | 7.52   |  
|                                                                                                                            |  |                    |       |   |                   |   |       |                   |  |   |                   |   |  |   |        |  
|Diluted                                                                                                                     |  | $                  | (0.10 | ) |                   | $ | 0.02  |                   |  | $ | (0.07             | ) |  | $ | 0.34   |  
|                                                                                                                            |  |                    |       |   |                   |   |       |                   |  |   |                   |   |  |   |        |  



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Earnings Per Share:Basic earnings (loss) per share is determined by dividing net income (loss)
applicable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share amounts are similarly computed, but include the effect, when dilutive, of the Companys weighted
average number of stock options outstanding and the average number of common shares that would be issuable upon conversion of the Companys convertible preferred securities and the exercise of the Companys common stock purchase warrants.



Earnings (loss) per share amounts are calculated as follows
(in thousands except per share amounts):



|                                                             |  |                    |       |                   |                   |   |                   |  |   |                   |   |  |   |        
|------------------------------------------------------------ |  | ------------------ | ----- | ----------------- | ----------------- | - | ----------------- |  | - | ----------------- | - |  | - | -------
|                                                             |  | Three Months Ended |       | Nine Months Ended
|                                                             |  | February 29, 2004  |       |                   | February 28, 2003 |   | February 29, 2004 |  |   | February 28, 2003
|Net income (loss) available to common shareholders  Basic   |  | $                  | (435  | )                 |                   | $ | 1,195             |  | $ | (384              | ) |  | $ | 35,132 
|Accretion on redeemable common stock purchase warrants       |  |                    |      |                   |                   |   | 61                |  |   |                  |   |  |   | 61     
|                                                             |  |                    |       |                   |                   |   |                   |  |   |                   |   |  |   |        
|Net income (loss) available to common shareholders  Diluted |  | $                  | (435  | )                 |                   | $ | 1,256             |  | $ | (384              | ) |  | $ | 35,193 
|                                                             |  |                    |       |                   |                   |   |                   |  |   |                   |   |  |   |        
|Average shares outstanding:                                  |  |                    |       |                   |                   |   |                   |  |   |                   |   |  |   |        
|Basic                                                        |  |                    | 4,547 |                   |                   |   | 4,497             |  |   | 4,547             |   |  |   | 4,674  
|Effect of dilutive securities:                               |  |                    |       |                   |                   |   |                   |  |   |                   |   |  |   |        
|Stock options                                                |  |                    |      |                   |                   |   | 230               |  |   |                  |   |  |   | 153    
|Common stock purchase warrants                               |  |                    |      |                   |                   |   | 5,853             |  |   |                  |   |  |   | 3,930  
|Series A Preferred Stock                                     |  |                    |      |                   |                   |   |                  |  |   |                  |   |  |   | 76,097 
|Series B Preferred Stock                                     |  |                    |      |                   |                   |   |                  |  |   |                  |   |  |   | 1,436  
|Series C Preferred Stock                                     |  |                    |      |                   |                   |   | 44,000            |  |   |                  |   |  |   | 18,252 
|                                                             |  |                    |       |                   |                   |   |                   |  |   |                   |   |  |   |        
|Diluted shares outstanding                                   |  |                    | 4,547 |                   |                   |   | 54,580            |  |   | 4,547             |   |  |   | 104,542
|                                                             |  |                    |       |                   |                   |   |                   |  |   |                   |   |  |   |        
|Earnings (loss) per share:                                   |  |                    |       |                   |                   |   |                   |  |   |                   |   |  |   |        
|Basic                                                        |  | $                  | (0.10 | )                 |                   | $ | 0.27              |  | $ | (0.08             | ) |  | $ | 7.52   
|                                                             |  |                    |       |                   |                   |   |                   |  |   |                   |   |  |   |        
|Diluted                                                      |  | $                  | (0.10 | )                 |                   | $ | 0.02              |  | $ | (0.08             | ) |  | $ | 0.34   
|                                                             |  |                    |       |                   |                   |   |                   |  |   |                   |   |  |   |        



For the three and nine
months ended February 29, 2004, 1,000,000 shares of Series C preferred stock convertible into 44,000,000 shares of common stock, 6,000,000 common stock purchase warrants exercisable at $.01 and stock options to purchase 938,967 shares of common
stock at exercises prices ranging from $.24 to $3.375 per share were outstanding, but were not included in the computation of dilutive earnings per share due to their antidilutive effect.



NOTE C  LIQUIDITY, RISKS AND OTHER IMPORTANT FACTORS



Sources of System Equipment and Inventory:Teletouch does not manufacture its paging network equipment, including but
not limited to antennas, transmitters, and paging terminals, nor does it manufacture any of the pagers, two-way radios or telemetry devices it sells or leases. This equipment is available for purchase from multiple sources, and the Company
anticipates that such equipment will continue to be available in the foreseeable future, consistent with normal manufacturing and delivery lead times. Because of the high degree of compatibility among different models of transmitters, computers and
other paging and voice mail equipment manufactured by its suppliers, Teletouchs paging network is not dependent upon any single source of such equipment. The Company currently purchases pagers and transmitters from several competing sources
and the Company expects that there will be an adequate supply of equipment throughout the remainder of fiscal 2004 to meet the Companys needs.



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Concentration of Credit Risk: Teletouch provides paging and other wireless telecommunications
services to a diversified customer base of businesses and individual consumers, primarily in non-metropolitan areas and communities in the southeast United States. As a result, no significant concentration of credit risk exists. The Company performs
periodic credit evaluations of its customers to determine individual customer credit risks and promptly terminates services for nonpayment. Credit losses have been within managements expectations.



Risks and Uncertainties: The Companys future results of
operations and financial condition could be impacted by the following factors, among others:



| |  | We could experience increased subscriber attrition and reduction in ARPU as a result of more competitive services products and pricing.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------



| |  | Termination or impairment of our relationship with a small number of key telemetry suppliers or vendors could adversely affect our revenue opportunities and results of operations.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Market prices for paging, two-way and telemetry services may decline in the future as competition increases.
| | - | ------------------------------------------------------------------------------------------------------------



| |  | We rely on airtime arrangements with other carriers to provide our telemetry services, which we may be unable to obtain or maintain in the future.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  | If the demand for telemetry services does not grow, or if we fail to capitalize on such demand, it could have an adverse effect on our growth potential.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We may increase our debt in the future to fund potential acquisitions, which could subject us to various restrictions and higher interest costs and decrease our cash flow and
earnings.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | If we do not maintain compliance with the American Stock Exchange requirements for continued listing, our common stock could be de-listed.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our ability to fund the costs inherent with complying with new statutes and regulations applicable to public reporting companies, such as the Sarbanes-Oxley Act of 2002, could have
an adverse impact on the operations of the Company.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | There are substantial capital requirements that we will need to fund in order to maintain, operate and upgrade our information systems network to a level at which we can support our
new revenue initiatives.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our ability to efficiently integrate future acquisitions, if any, could alter the plans for future growth and profitability.
| | - | ----------------------------------------------------------------------------------------------------------------------------



| |  | Our operations are subject to government regulation that could have adverse effects on our business.
| | - | ----------------------------------------------------------------------------------------------------



| |  | Equipment failure and natural disasters or terrorist acts may adversely affect our business.
| | - | --------------------------------------------------------------------------------------------



NOTE D  NOTE RECEIVABLE



On November 7, 2003, the Company issued a $250,000 convertible secured promissory note (the Streamwaves Note) to Streamwaves.com, Inc.
(Streamwaves). The Streamwaves Note is secured by substantially all of Streamwaves assets and bears interest at a rate of 10%. All outstanding principal and unpaid accrued interest is payable on June 20, 2004.



The Streamwaves Note contains a conversion feature which, at the option of
Teletouch, allows the outstanding principal and unpaid accrued interest to be converted into shares of Streamwaves Common Stock. The conversion price of the Streamwaves Common Stock will be $1.00 if the conversion date is on or before June 20, 2004
or $0.20 if the conversion date is after June 20, 2004.



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NOTE E  SHORT-TERM DEBT



|                                                          |  |                  |    |             |   |    
|--------------------------------------------------------- |  | ---------------- | -- | ----------- | - | ---
|                                                          |  | February 29,2004 |    | May 31,2003
|Short-term debt consists of the following (in thousands): |  |                  |    |             |   |    
|FCFC MAP note                                             |  | $                | 45 |             | $ | 109



Agreements With
First Community:On May 20, 2002, Teletouch executed two promissory notes in favor of First Community Financial Corporation (FCFC), (a) a $2,000,000 Multiple Advance Promissory Note (MAP Note) and (b) a Term Promissory
Note in the initial principal amount of $250,000 (Term Note, and together with the MAP Note, the Credit Facility). In May 2003, the Company paid the Term Note in full and has no additional borrowing available under this note.
The remaining MAP Note is collateralized by an accounts receivable security agreement (FCFC Security Agreement) which gives FCFC a superior priority security interest in all accounts receivable and substantially all other assets of the
Company, excluding its FCC licenses and certain real property. FCFC is an unrelated third party with no prior relationships with the Company or its affiliates.



FCFC MAP Note: The MAP Note provides for a revolving line of credit of up to a maximum amount of $2,000,000. The MAP Note bears interest
at a floating rate of 5.25% above the prime rate of Bank One Arizona, Phoenix, Arizona. The interest rate cannot be less than an annual rate of 10%. Interest is payable on the MAP Note on the first day of each month and is the greater of actual
calculated interest or $5,000. Borrowings under the MAP Note are limited to amounts, which together with amounts previously borrowed, do not exceed a borrowing base. This borrowing base is defined as 75% of the Companys eligible commercial
accounts receivable and 50% of the Companys eligible reseller accounts receivable, with certain adjustments. Repayments under the MAP Note have been arranged by assigning the proceeds of the Companys lockbox to FCFC. Deposits into the
lockbox are transferred automatically each day to FCFC. No advances will be made by FCFC if an event of default (as that term is defined under the FCFC Security Agreement) occurs and Teletouch fails to cure the event of default. The MAP Note matures
upon the termination of the FCFC Security Agreement. The FCFC Security Agreement provides for an initial term of two years from date of execution and subsequent one-year renewal terms. In consideration for establishing the line of credit, Teletouch
paid to FCFC a commitment and funding fee of 1.5% of the line of credit amount, or $30,000, on the date the Company executed the MAP Note. In the event FCFC and Teletouch agree to extend the term of the MAP Note, Teletouch will pay an additional
0.5% or $10,000, of the line of credit amount on each anniversary of any MAP Note extensions.



Under the terms of the MAP Note, the Company is required to comply with certain financial covenants on a monthly basis. Failure to maintain compliance with these covenants is an event of default as defined under FCFC
Security Agreement. During the third quarter of fiscal 2004, the Company was unable to maintain compliance with certain financial covenants in the MAP Note for the months of December 2003 and January 2004 but did maintain compliance with the
financial covenants for the month of February 2004. The Company did receive a waiver of these covenants for these months, which allowed the Company to remain in good standing under the terms of the MAP Note for the quarter ending February 29, 2004.



Effective February 1, 2004, the Company negotiated an
extension of the MAP Note through May 1, 2005 which included modifications to certain of the financial covenants included in the agreement.



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NOTE F  LONG-TERM DEBT



|                                                         |  |                  |     |             |   |    
|-------------------------------------------------------- |  | ---------------- | --- | ----------- | - | ---
|                                                         |  | February 29,2004 |     | May 31,2003
|Long-term debt consists of the following (in thousands): |  |                  |     |             |   |    
|TLL note  affiliate, including accrued interest         |  | $                | 333 |             | $ | 760
|Binion note                                              |  |                  | 60  |             |   |   
|Vehicle notes                                            |  |                  | 75  |             |   |   
|                                                         |  |                  |     |             |   |    
|                                                         |  |                  | 468 |             |   | 760
|Less current portion                                     |  |                  | 39  |             |   |   
|                                                         |  |                  |     |             |   |    
|                                                         |  | $                | 429 |             | $ | 760
|                                                         |  |                  |     |             |   |    



TLL Note:On
May 17, 2002, the Company entered into a note agreement with TLL Partners (TLL Note), an entity controlled by Robert McMurrey, Chairman of Teletouch, which allows for borrowings in the aggregate principal amount of $2,200,000. The outstanding
principal and accrued interest becomes payable in full May 17, 2007 and accrues interest at the rate of 10% annually. The TLL Note is subordinated to the interests of FCFC and does not require the maintenance of any financial or operating covenants.



Binion Note: 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 issued a note payable to Glen Binion, an employee of Delta, in the amount of $60,000 for the purchase of
certain FCC licenses owned by Mr. Binion. The note bears interest at a rate of 5% per year and is payable in three annual installments of $20,000 beginning February 28, 2005.



Vehicle Notes: The Company enters into various vehicle financing arrangements, as necessary, to purchase vehicles for
its service technicians. The terms of these financing arrangements extend between 24 and 48 months and such notes are fully collateralized by the vehicles purchased.



NOTE G  PROVISION FOR LEASE ABANDONMENT AND OTHER COSTS



In May 2002, the Company completed a review of the financial performance of its retail stores and subsequently developed a
restructuring plan to exit the retail business (Retail Exit Plan). The Retail Exit Plan resulted in the Company closing the majority of its 66 retail facilities and converting the remaining facilities to customer service centers. At
February 29, 2004, the Company has 21 customer service centers and 6 two-way radio shops remaining open.



The following table provides a rollforward of the Retail Exit Plan liabilities for the nine months ended February 29, 2004 (in thousands):



|                             |  |                       |     |  
|---------------------------- |  | --------------------- | --- | -
|                             |  | Future Lease Payments |    
|Balance at May 31, 2003      |  | $                     | 398 |  
|Cash outlay                  |  |                       | (89 | )
|                             |  |                       |     |  
|Balance at August 31, 2003   |  |                       | 309 |  
|Change in estimate           |  |                       | (21 | )
|Cash outlay                  |  |                       | (76 | )
|                             |  |                       |     |  
|Balance at November 30, 2003 |  |                       | 212 |  
|Cash outlay                  |  |                       | (30 | )
|                             |  |                       |     |  
|Balance at February 29, 2004 |  | $                     | 182 |  
|                             |  |                       |     |  



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As of February 29, 2004, the remaining amount of $182,000 is expected to be paid through 2005. Although
the Company does not anticipate significant changes, the actual costs may differ from these estimates.



NOTE H  UNEARNED SALE/LEASEBACK PROFIT



In 1997, the Company entered into a sale/leaseback arrangement. Under the arrangement, the Company sold transmission towers and leased them back for a period of 10 years. The leaseback has been accounted for as an
operating lease. The gain of $4.1 million realized in this transaction has been deferred and is being amortized as an offset to rental expense in proportion to the rental expense charges recorded over the term of the lease.



NOTE I  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.



The Company made payments of $643,000 for
fiscal year 2003 federal income taxes and $227,000 for fiscal year 2004 estimated federal income taxes in the nine months ended February 29, 2004.



NOTE J  RELATED PARTY TRANSACTIONS



The Company had certain related party sales during the three months and nine months ended February 29, 2004 and February 28, 2003 to Progressive Concepts,
Inc. (PCI) a company controlled by Robert McMurrey, Teletouchs Chairman. During the three months and nine months ended February 29, 2004, Teletouch recognized approximately $10,600 and $35,000 respectively in revenue and $7,500 and $22,600 in
gross margin respectively on the sales of pagers, service and cellular products to PCI. For the three months and nine months ended February 28, 2003, the Company recognized $268,000 and $386,000 in revenue respectively, and $14,400 and $31,500 of
gross margin respectively on the sales of pagers, service, and cellular products. Additionally, the Company purchased cellular equipment from this related party during the three months and nine months ended February 29, 2004 totaling approximately
$1,700 and $9,700, respectively. For the three months and nine months ended February 28, 2003, the Company purchased both car audio equipment and cellular accessories totaling approximately $29,300 and $215,300, respectively. The Company has
negotiated purchase prices with PCI on both cellular and audio equipment equaling cost plus 5%. For the three months and nine months ended February 29, 2004 and February 28, 2003, Teletouch also recognized expenses of $90,000 and $270,000 and
$90,000 and $180,000 respectively for costs related to the outsourcing of the Companys answering service center operations to PCI.



NOTE K  SHAREHOLDERS EQUITY



Capital Structure: Subsequent to the common shareholder approval obtained in November 2002 of an amendment to the Companys Certificate of
Incorporation, Teletouchs authorized capital structure allows for the issuance of 70,000,000 shares of common stock with a $0.001 par value and 5,000,000 shares of preferred stock with a $0.001 par value. Of the preferred stock authorized,
15,000 shares of Series A Preferred Stock, 411,457 shares of Series B Preferred Stock and 1,000,000 shares of Series C Preferred Stock have been designated by the Company.



In connection with its initial public offering, Teletouch issued to certain consultants the Consultant Warrants to purchase
266,666 shares of common stock at an exercise price of $0.75 per share. The Consultant Warrants expired in January 2004.



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Series A and Series B Preferred Stock: In connection with the acquisition of Dial-A-Page, Inc.,
Teletouch designated 15,000 shares of authorized preferred stock as Series A 14% Cumulative Preferred Stock (the Series A Preferred Stock) and 411,457 shares as Series B Preferred Stock. The Series A Preferred
Stock carried an initial liquidation value of $1,000 per share while each share of the Series B Preferred Stock was convertible into 6 shares of Common Stock. The Series A Preferred Stock and the Series B Preferred Stock were non-voting except as to
the merger or consolidation with another entity or entities, or the sale of substantially all of the assets of the Company. The holder of the Series A Preferred Stock and the Series B Preferred Stock had the right to require that its securities be
registered for public sale two years after the conversion into common stock.



On May 17, 2002, TLL Partners exercised an option it had previously purchased to acquire all of the securities held by Continental Illinois Venture Corporation (CIVC) which included 295,649 shares of
common stock, 36,019 shares of Series B Preferred Stock, 2,660,840 warrants to purchase common stock, 324,173 warrants to purchase Series B Preferred Stock and 13,200 shares of Series A Preferred Stock from CIVC.



There were 15,000 shares of the Series A Preferred Stock originally
sold by the Company to a group of investors led by CIVC (CIVC Investors). TLL Partners purchased these shares of Series A Preferred Stock on May 17, 2002. Dividends on the Series A Preferred Stock accrued at the rate of 14% per annum and
compounded on a quarterly basis. Each share of Series A Preferred Stock, as well as dividends in arrears, were convertible after August 3, 2003 into common stock, at the option of the Series A Preferred Shareholder, based on a stated formula.



The CIVC Investors also originally received warrants,
exercisable at a nominal price, to purchase 3,377,301 shares of Teletouch common stock (the Common Stock Purchase Warrants) and 411,457 shares of Series B Preferred Stock (the Series B Preferred Stock Purchase Warrants). As
of May 17, 2002, holders had exercised an aggregate of 716,461 Common Stock Purchase Warrants and 87,284 Series B Preferred Stock Purchase Warrants. The remaining 324,173 Series B Preferred Stock Purchase Warrants and the remaining 2,660,840 Common
Stock Purchase Warrants were purchased by TLL Partners on May 17, 2002.



Series C Preferred Stock: At May 31, 2003 and February 29, 2004, 1,000,000 shares of Series C Preferred Stock with a par value of $0.001 have been issued and are outstanding.



The material terms of the Series C Preferred Stock are as follows: after
payment of all amounts due under the Amended Credit Agreement, (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 is subject to adjustment. The Series C Preferred Stock is non-voting. Holders of Series C Preferred Stock are entitled to notice of all stockholders meetings. The consent of at least a majority of the Series C Preferred Stock
(calculated on an as converted basis) is 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.



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Common Stock Purchase Warrants: At February 29, 2004, the Company has 6,000,000 issued and
outstanding warrants (the GM Warrants) at an exercise price of $0.01 to purchase shares of Teletouch Common Stock. The GM Warrants will be exercisable beginning in May 2005 and expire in May 2010. In May 2007, the holder of the GM
Warrants may require the Company 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 net income.



Securities Retired Under the Restructuring Agreement:Pursuant to the
terms and conditions of the Restructuring Agreement completed upon the approval and issuance of the Series C Preferred Stock and the GM Warrants, the following securities were surrendered to the Company by TLL Partners as of November 30, 2002: a)
15,000 shares of Series A Preferred Stock, b) 85,394 shares of Series B Preferred Stock, c) 2,660,840 common stock purchase warrants, d) 295,649 shares of Teletouch common stock, e) 324,172 Series B Preferred Stock purchase warrants. As of February
29, 2004, the Company has 15,000 shares of Series A Preferred Stock and 411,457 shares of Series B Preferred Stock authorized with no shares issued and outstanding. The 429,209 shares of Teletouch common stock surrendered are being held in treasury.



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), (see Note M) and in conjunction, the Company deferred the issuance of 640,000 shares of Teletouchs common
stock subject to certain reductions specified in the Delta Asset Purchase Agreement that cannot exceed 100,000 shares of common stock. This obligation is payable on February 15, 2005 at which time up to 640,000 restricted shares of common stock will
be issued. The shares of common stock to be issued contain a put option allowing the holder to sell 25% of the remaining shares held each quarter, beginning February 28, 2005, back to the company at a specified price as follows:



|                                      |  |            |     
|------------------------------------- |  | ---------- | ----
|Date to be Sold Back to Company       |  | Sell Price
|February 28, 2005  November 30, 2005 |  | $          | 1.05
|December 1, 2005  November 30, 2006  |  | $          | 1.10
|December 1, 2006  November 30, 2007  |  | $          | 1.15



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.



NOTE L  STOCK OPTIONS



In December 1999, the Company reduced the exercise price of all outstanding employees and director owned stock options to $0.87, which was equal to the
average of the closing price of the Companys common stock for the 20-trading days prior to December 1, 1999. In November 2001, the Company reduced the exercise price of all outstanding employees and director owned stock options to $0.24, which
was equal to the average of the closing price of the Companys common stock for the 20-trading days prior to November 21, 2001. Compensation expense associated with these repriced options will be measured and recognized in accordance with the
recently issued Financial Accounting Standards Board Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation. Based on the market value of Teletouchs common



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stock and in accordance with Financial Accounting Standards Board Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation,a reduction of compensation expense of $16,400 and $131,700 was recorded for the three months and nine months ended February 29, 2004 respectively. For the three months and nine months ended February
28, 2003, compensation expense of $36,100 and $5,000 was recorded respectively. Additional compensation expense may be recorded in future periods based on fluctuations in the market value of the Companys common stock.



On November 7, 2002, the Companys common stockholders voted to adopt
and ratify the Teletouch 2002 Stock Option and Appreciation Rights Plan (2002 Plan). Under the 2002 Plan, Teletouch may issue options which will result in the issuance of up to an aggregate of ten million (10,000,000) shares of Teletouch common
stock. The 2002 Plan provides for options which qualify as incentive stock options (Incentive Options) under Section 422 of the Code, as well as the issuance of non-qualified options (Non-Qualified Options). The shares issued by Teletouch under the
2002 Plan may be either treasury shares or authorized but unissued shares as Teletouchs board of directors may determine from time to time. Pursuant to the terms of the 2002 Plan, Teletouch may grant Non-Qualified Options and Stock
Appreciation Rights (SARs) only to officers, directors, employees and consultants of Teletouch or any of Teletouchs subsidiaries as selected by the board of directors or the Compensation Committee. The 2002 Plan also provides that the
Incentive Options shall be available only to officers or employees of Teletouch or any of Teletouchs subsidiaries as selected by the board of directors or Compensation Committee. The price at which shares of common stock covered by the option
can be purchased is determined by Teletouchs Compensation Committee or board of directors; however, in all instances the exercise price is never less than the fair market value of Teletouchs common stock on the date the option is
granted. To the extent that an Incentive Option or Non-Qualified Option is not exercised within the period in which it may be exercised in accordance with the terms and provisions of the 2002 Plan described above, the Incentive Option or
Non-Qualified Option will expire as to the then unexercised portion.



NOTE M
 ACQUISITION



On January 29, 2004, Teletouch
acquired substantially all of the two-way radio assets of DCAE, Inc. d/b/a Delta Communications, Inc. (Delta), a corporation headquartered in Garland, Texas, which continues to operate the business providing Nextel cellular service in
the Dallas / Fort Worth market. As part of the purchase, Teletouch acquired approximately 2,500 additional two-way radio subscribers and the logic trunked radio (LTR) infrastructure in the Dallas / Fort Worth market. The total purchase
price for the assets of Delta was approximately $1,535,000 which consisted of certain cash and equity consideration. The consideration paid or payable in cash consisted of a cash payment of $650,000, a cash payment to be made within one year of
$50,000 (Cash Holdback) which is subject to certain adjustments, a promissory note payable in the amount of $60,000 (see Binion Note in Note E), approximately $46,000 in other cash expenditures related to closing and the
assumption of $89,000 in other liabilities from Delta. The equity consideration given is a note which is payable in 640,000 shares of Teletouchs common stock which was valued at $640,000, based on market price, on the date of closing (see
Redeemable Common Stock Payable in Note K). The acquisition was accounted for using the purchase method of accounting and the total purchase price was allocated as follows: $161,000 to property, plant and equipment, $112,000 to
subscriber bases, $104,000 to FCC licenses, $95,000 to non-compete agreements, $100,000 to inventory, $142,000 to accounts receivable and $821,000 to goodwill. Teletouch is in the process of reviewing third-party valuations of certain intangible
assets; thus, the allocation of the purchase price is subject to refinement. The results of operations of the acquisition, which are immaterial to the consolidated operations, are included with that of the Company from the date of closing.



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



You should read the following discussion and analysis in conjunction with information disclosed in our 2003 Annual Report on Form 10-K and the
financial statements and notes presented in Item 1 of this Form 10-Q. Except for the historical information, the following discussion contains forward-looking statements that involve risks and uncertainties, such as our objectives, expectations, and
intentions. Actual results could differ materially from results that may be anticipated by such forward-looking statements and discussed elsewhere in this report. Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in the section below, and those discussed under Additional Factors That May Affect Our Business, Future Operating Results and Financial Condition. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully
review and consider the various disclosures made in this report and in our other filings made with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business, prospects, and
results of operations. We make our periodic and current reports available, free of charge, on our website as soon as reasonably practicable after such material is electronically filed with the Commission.



INTRODUCTION



Teletouch is a leading provider of wireless telecommunications services, primarily paging services, in non-major
metropolitan areas and communities in the southeast United States. As of February 29, 2004 the Company had 190,371 pagers in service. 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. A high level of
customer attrition is common in the paging industry and Teletouch must be able to replace terminating paging subscribers and attract additional wireless subscribers to maintain operating margins. During recent months, customer attrition (churn) has
remained relatively flat but continues to result in a net decline in the number of pagers in service. Teletouch expects that net paging subscriber deletions will continue in future quarters as the demand for one-way paging continues to decline.
Teletouch is implementing customer retention programs and expanding its existing product lines to minimize the impact of the level of customer attrition. The sales and marketing expenses and other costs associated with attracting new subscribers are
substantial and there is no guarantee that our future efforts in this area will improve subscriber growth or retention.



Teletouchs primary focus during the fiscal years of 2002 and 2003 was on positioning the Company for growth in the future through the
recapitalization of its debt and certain equity securities and the restructuring of its operations to maximize efficiency and profitability. The Company succeeded in recapitalizing its debt and certain equity securities in May 2002. In November
2002, the Company completed its restructuring efforts and exited its retail distribution channel. The operational restructuring started in May 2002 and ended November 2002 and resulted in the closure of 37 retail stores and the reduction in the
Companys workforce by 210 employees. The Company continues to follow its overall business strategy of minimizing the level of customer attrition while attempting to develop new revenue streams from telemetry products to minimize the impact of
the loss in recurring revenues from its declining paging subscriber base. The Companys management believes that the successful recapitalization of its debt and certain equity securities and the restructuring of its operations will help
position the Company to be able to generate sufficient future cash flows to meet the Companys capital needs for the next fiscal year. During



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the fiscal years of 2004 and 2005, the Company intends to focus most of its efforts on developing its telemetry services.
By reducing overhead costs and focusing on customer service, the Company believes that it can minimize the impact on operating margins of its declining paging subscriber base while it develops its telemetry products and services with recurring
revenue streams to replace the losses from paging service revenue. Additionally, if the opportunity to acquire other paging or two-way radio companies arises, the Company believes it can achieve better operating results than those achieved by the
businesses separately by consolidating administrative functions, taking advantage of economies of scale, and sharing common frequencies to offer existing customers a wider area of coverage.



On January 29, 2004, Teletouch acquired substantially all of the two-way
radio assets of DCAE, Inc. d/b/a Delta Communications, Inc. (Delta), a corporation headquartered in Garland, Texas, which continues to operate the business providing Nextel cellular service in the Dallas / Fort Worth market. As part of
the purchase, Teletouch acquired approximately 2,500 additional two-way radio subscribers and the logic trunked radio (LTR) infrastructure in the Dallas / Fort Worth market. The total purchase price for the assets of Delta was
approximately $1,535,000 which consisted of certain cash and equity consideration. This acquisition allows the Company to expand its operations from its mid-sized markets in eastern Texas to the larger Dallas/Fort Worth market as well as creates an
opportunity to combine these networks to provide larger two way radio coverage for its customers.



In November 2001, Teletouch entered the wireless telemetry market with a product line branded Tracker by Teletouch, which operates on the
cellular network in virtually all areas of the United States. The initial product offering centered on fixed monitoring applications in the water/wastewater and poultry industries. In February 2002, Teletouch increased its telemetry product offering
to include Tracker AVL, which monitors mobile assets using global positioning satellites to help customers monitor and track their vehicles, detached trailers and virtually any other mobile asset.



In July 2002, the Tracker product line was expanded to include a satellite
communications network in addition to the cellular network. This provides more enhanced communications capability for large fleet operators and trucking companies as well as products with more advanced fixed and mobile asset monitoring capabilities,
including the ability to operate on multiple networks. To complement the Tracker offering, Teletouch has announced its GEOFLEET brand software, which is customizable for mobile fleet and fixed asset management, and gives the user the ability to
monitor and track multiple vehicles on multiple networks at the same time on the same screen.



In January 2003, Teletouch developed the LifeGuard system. Designed to safeguard lone workers, LifeGuard can signal a distress call to a company dispatcher, pinpointing the workers location and automatically
provide vital information on the workers medical history, giving the dispatcher the necessary information for notifying emergency personnel. For example, should a lone worker have a heart attack, the worker can manually signal an emergency
using the LifeGuard device worn on the workers belt. Should a worker suffer an injury that renders him unconscious, the device will sense the lack of movement and automatically signal a distress call.



In July 2003, the Company announced the introduction of its GeoTrax product
line. Developed specifically to monitor detached equipment such as trailers and rail cars, GeoTrax gives companies the ability to pinpoint the location of these assets. Of the six to eight million detachable trailers in the United States, as many as
10 percent are unaccounted for at any given time. GeoTrax provides location information on trailers, allowing companies to remotely monitor and track their movement. Trailers equipped with GeoTrax will report back to the monitoring station at
regular intervals and more frequently when certain events occur.



To date revenues from telemetry sales and service have been insignificant to the Companys overall revenue.



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Critical Accounting Policies



The following 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 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, 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 was $172,000 as of February 29, 2004. While write-offs of customer accounts have historically been within our expectations and the provisions established, management cannot
guarantee that Teletouch will continue to experience the same write-off rates that it has in the past which could result in material differences in the reserve for doubtful accounts and related provisions for write-offs.



Reserve for Inventory Obsolescence: Estimates are used in
determining the reserve for inventory obsolescence and are based on sales trends, a ratio of inventory to revenue, 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. Teletouchs reserve for inventory obsolescence was $141,000 as of February 29, 2004. While
inventory obsolescence has historically been within our expectations and the provision established, management cannot guarantee that Teletouch will continue to experience the same obsolescence rates that it has in the past which could result in
material differences in the reserve for inventory obsolescence and the related inventory write-offs.



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 prepaid monthly service fees paid by customers. Revenue also includes sales of messaging devices, cellular telephones, 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 (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.



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RESULTS OF OPERATIONS



The following table presents certain items from the Companys condensed consolidated statements of operations and certain other information for the
periods indicated (in thousands, except pagers, ARPU and per share amounts):



|                                                  |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | ----------------- |  | - | ----------------- | - |  | - | ------- | -
|                                                  |  | Three Months Ended |         |   | Nine Months Ended |  
|                                                  |  | February 29, 2004  |         |   | February 28, 2003 |   |         | February 29, 2004 |  |   | February 28, 2003 |  
|Service, rent and maintenance revenue             |  | $                  | 5,783   |   |                   | $ | 6,781   |                   |  | $ | 17,816            |   |  | $ | 21,413  |  
|Product sales revenue                             |  |                    | 769     |   |                   |   | 1,421   |                   |  |   | 2,240             |   |  |   | 5,970   |  
|                                                  |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Total revenues                                    |  | $                  | 6,552   |   |                   | $ | 8,202   |                   |  | $ | 20,056            |   |  | $ | 27,383  |  
|Net book value of products sold                   |  |                    | (691    | ) |                   |   | (1,335  | )                 |  |   | (1,885            | ) |  |   | (4,460  | )
|                                                  |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|                                                  |  | $                  | 5,861   |   |                   | $ | 6,867   |                   |  | $ | 18,171            |   |  | $ | 22,923  |  
|                                                  |  |                    |         |  
|Total costs and expenses                          |  | $                  | 6,353   |   |                   | $ | 6,436   |                   |  | $ | 18,356            |   |  | $ | 24,833  |  
|                                                  |  |                    |         |  
|Operating income (loss)                           |  | $                  | (492    | ) |                   | $ | 431     |                   |  | $ | (185              | ) |  | $ | (1,910  | )
|                                                  |  |                    |         |  
|Net income (loss)                                 |  | $                  | (435    | ) |                   | $ | 1,195   |                   |  | $ | (384              | ) |  | $ | (1,245  | )
|                                                  |  |                    |         |  
|Earnings (loss) applicable to common shareholders |  | $                  | (435    | ) |                   | $ | 1,195   |                   |  | $ | (384              | ) |  | $ | 35,132  |  
|                                                  |  |                    |         |  
|Earnings (loss) per share  basic                 |  | $                  | (0.10   | ) |                   | $ | 0.27    |                   |  | $ | (0.08             | ) |  | $ | 7.52    |  
|                                                  |  |                    |         |  
|Earnings (loss) per share  diluted               |  | $                  | (0.10   | ) |                   | $ | 0.02    |                   |  | $ | (0.08             | ) |  | $ | 0.34    |  
|                                                  |  |                    |         |  
|Pagers in service at end of period                |  |                    | 190,371 |   |                   |   | 230,092 |                   |  |   | 190,371           |   |  |   | 230,092 |  
|                                                  |  |                    |         |  
|Average revenue per unit (ARPU)                   |  | $                  | 8.78    |   |                   | $ | 8.84    |                   |  | $ | 8.83              |   |  | $ | 8.89    |  



Results of Operations for the Three
Months and Nine Months ended February 29, 2004 and February 28, 2003



Total revenue: The changes in Teletouchs total revenue are shown in the table below:



|                                      |  |                                                 |       |      |                                                |        |  |   |        |   |      |   |        |  |   |        |  |   |        |  
|------------------------------------- |  | ----------------------------------------------- | ----- | ---- | ---------------------------------------------- | ------ |  | - | ------ | - | ---- | - | ------ |  | - | ------ |  | - | ------ | -
|                                      |  | Three Months Ended February 29 and February 28, |       |      | Nine Months Ended February 29 and February 28, |       
|                                      |  | 2004                                            |       | 2003 |                                                | Change |  |   | 2004   |   | 2003 |   | Change | 
|Service, rent and maintenance revenue |  | $                                               | 5,783 |      | $                                              | 6,781  |  | $ | (998   | ) |      | $ | 17,816 |  | $ | 21,413 |  | $ | (3,597 | )
|Product sales revenue                 |  |                                                 | 769   |      |                                                | 1,421  |  |   | (652   | ) |      |   | 2,240  |  |   | 5,970  |  |   | (3,730 | )
|                                      |  |                                                 |       |      |                                                |        |  |   |        |   |      |   |        |  |   |        |  |   |        |  
|Gross Revenue                         |  | $                                               | 6,552 |      | $                                              | 8,202  |  | $ | (1,650 | ) |      | $ | 20,056 |  | $ | 27,383 |  | $ | (7,327 | )
|                                      |  |                                                 |       |      |                                                |        |  |   |        |   |      |   |        |  |   |        |  |   |        |  



Service, rent and
maintenance revenue: Service, rent and maintenance revenues declined due to losses in paging and messaging revenues of $1.0 million and $3.6 million for the three months and nine months ended February 29, 2004 compared to the same periods in
fiscal 2003. This resulted from fewer pagers in service and lower demand for one-way paging. Pagers in service decreased to approximately 190,400 as of February 29, 2004 as compared to approximately 230,100 as of February 28, 2003, due to a
continuing decline in the demand for one-way paging service.



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Teletouch expects that the introduction of new products and services will partially offset the loss in
paging subscribers and the related recurring revenues and result in a slower decline in total revenue.



Product sales revenue: The decline in product sales revenues was due primarily to the Companys exit from the retail business in November 2002
which resulted in a decline in cellular revenues of $0.4 million for the three months and $2.7 million for the nine months ended February 29, 2004, a decline in consumer electronic sales of $0.2 million for the three months and nine months ended
February 29, 2004. The decline in revenue for the three months and nine months ended February 29, 2004 also reflects a $0.2 million and $0.6 million, respectively, decline in pager equipment sales due to the continued decline in the demand for
paging service primarily in the consumer and wholesale markets, as well as a decline in two-way equipment sales of $0.2 million for the nine months ended February 29, 2004, primarily due to increased competition in the East Texas market.



Total costs and expenses: The comparability of operating, selling
and general and administrative expenses for the fiscal 2003 and 2004 periods is affected by the inclusion in the fiscal 2003 amounts of certain restructuring costs relating to the Companys closing of retail stores in November 2002. The changes
in Teletouchs total costs and expenses are shown in the table below (in thousands):



|                                                                                       |  |                                                 |       |   |                                                |   |       |        |  |   |      |   |  |      |        |   |        |   |        |   |  |   |        |  
|-------------------------------------------------------------------------------------- |  | ----------------------------------------------- | ----- | - | ---------------------------------------------- | - | ----- | ------ |  | - | ---- | - |  | ---- | ------ | - | ------ | - | ------ | - |  | - | ------ | -
|                                                                                       |  | Three Months Ended February 29 and February 28, |       |   | Nine Months Ended February 29 and February 28, |  
|                                                                                       |  | 2004                                            |       |   | 2003                                           |   |       | Change |  |   | 2004 |   |  | 2003 |        |   | Change |  
|Operating expense                                                                      |  | $                                               | 2,772 |   |                                                | $ | 2,993 |        |  | $ | (221 | ) |  | $    | 8,284  |   |        | $ | 11,602 |   |  | $ | (3,318 | )
|Selling expense                                                                        |  |                                                 | 671   |   |                                                |   | 759   |        |  |   | (88  | ) |  |      | 1,728  |   |        |   | 3,976  |   |  |   | (2,248 | )
|General and administrative expense                                                     |  |                                                 | 1,708 |   |                                                |   | 1,762 |        |  |   | (54  | ) |  |      | 5,121  |   |        |   | 4,817  |   |  |   | 304    |  
|Less: restructuring costs                                                              |  |                                                 |      |   |                                                |   | (157  | )      |  |   | 157  |   |  |      |       |   |        |   | (2,391 | ) |  |   | 2,391  |  
|                                                                                       |  |                                                 |       |   |                                                |   |       |        |  |   |      |   |  |      |        |   |        |   |        |   |  |   |        |  
|Operating, selling and general and administrative expense excluding restructuring cost |  | $                                               | 5,151 |   |                                                | $ | 5,357 |        |  | $ | (206 | ) |  | $    | 15,133 |   |        | $ | 18,004 |   |  | $ | (2,871 | )
|                                                                                       |  |                                                 |       |   |                                                |  
|% of total revenue                                                                     |  |                                                 | 79    | % |                                                |   | 65    | %      |  |   |      |   |  |      | 75     | % |        |   | 66     | % |  |   |        |  
|                                                                                       |  |                                                 |       |   |                                                |  
|Depreciation and amortization                                                          |  |                                                 | 904   |   |                                                |   | 930   |        |  |   | (26  | ) |  |      | 2,858  |   |        |   | 3,633  |   |  |   | (775   | )
|                                                                                       |  |                                                 |       |   |                                                |  
|(Gain) loss on disposal of assets                                                      |  |                                                 | 298   |   |                                                |   | (8    | )      |  |   | 306  |   |  |      | 365    |   |        |   | (5     | ) |  |   | 370    |  
|                                                                                       |  |                                                 |       |   |                                                |  
|Write-off of equipment                                                                 |  |                                                 |      |   |                                                |   |      |        |  |   |     |   |  |      |       |   |        |   | 810    |   |  |   | (810   | )
|                                                                                       |  |                                                 |       |   |                                                |  
|Add: restructuring costs                                                               |  |                                                 |      |   |                                                |   | 157   |        |  |   | (157 | ) |  |      |       |   |        |   | 2,391  |   |  |   | (2,391 | )
|                                                                                       |  |                                                 |       |   |                                                |   |       |        |  |   |      |   |  |      |        |   |        |   |        |   |  |   |        |  
|Total costs and expenses                                                               |  | $                                               | 6,353 |   |                                                | $ | 6,436 |        |  | $ | (83  | ) |  | $    | 18,356 |   |        | $ | 24,833 |   |  | $ | (6,477 | )
|                                                                                       |  |                                                 |       |   |                                                |   |       |        |  |   |      |   |  |      |        |   |        |   |        |   |  |   |        |  



Operating, selling
and general and administrative expenses: The decline in operating, selling and general and administrative expenses, excluding restructuring costs, for the three months ended February 29, 2004 as compared to the three months ended February 28,
2003, reflects a decline in third party airtime expenses of $0.2 million due to better rates negotiated by the Company.



The decline in operating, selling and general and administrative expenses, excluding restructuring costs, for the nine months ended February 29, 2004 as
compared to the nine months ended February 28, 2003 reflects declines in payroll and commission expense of $1.7 million and office lease expense of $0.5 million. These declines reflect the effects of fewer retail stores and lower sales. In addition,
third party airtime expense declined $0.4 million due to better rates negotiated by the Company and bad debt expense has declined $0.2 million due to fewer retail paging subscribers and improved collection efforts.



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Restructuring charges recorded during the nine months ended February 28, 2003 related to the
Companys Retail Exit Plan included $475,000 for the abandonment of certain leased retail space, $34,000 for the abandonment of related leasehold improvements, $456,000 for personnel related costs and $1,426,000 for write-downs on excess
furniture and fixtures and computer equipment held for sale.



Operating costs as a percentage of total revenue have increased while the Companys paging subscriber base continued to decline during the three months and nine months ended February 29, 2004 as compared to the same period in fiscal
2003. The Company has a relatively fixed cost structure related to maintaining its paging network. As paging subscribers and the related recurring revenues continue to decline, operating expenses as a percentage of total revenue will continue to
increase until the Company is able to generate sufficient revenue growth in its other product and service offerings. Additionally, the Company is continuing to invest in developing its telemetry product line which is contributing to the increase in
operating expenses as a percentage of total revenue. To date, sales of the Companys telemetry products have been insignificant to its overall operations but there is increasing market awareness and interest in these products.



Depreciation and amortization: The decline in depreciation and
amortization expense is due primarily to a write-off in fiscal year 2003 of certain paging infrastructure equipment of $0.8 million, write-downs on excess furniture, fixtures and computer equipment held for sale of $1.5 million, and charges to
write-off leasehold improvements relating to store closings of $0.2 million.



(Gain) loss on disposal of assets:The increase in loss on disposal of assets is due primarily to the write-off of $0.3 million of computer software programs in the quarter ended February 29, 2004. The Company
purchased the computer software, in fiscal 2003, which was represented to be a fully integrated system. After a year of implementation, it was determined that the software was not capable of handling the complexities of a telecommunications company.
The Company is currently investigating any potential legal claims it may have against the vendor.



Write-off of equipment: The write-off of equipment for the nine months ended February 28, 2003 related to the completion of a physical inventory by
the Company of all of its fixed assets. The fixed asset physical inventory resulted in $0.8 million of paging infrastructure equipment being written off during the quarter ended November 30, 2002.



Income taxes: The effective benefit tax rate is 17% for the nine
months ended February 29, 2004, primarily a result of the interest expense related to the redeemable common stock warrants being non-deductible for tax purposes.



FINANCIAL CONDITION



Teletouchs cash balance was $0.3 million as of February 29, 2004 as compared to $0.7 million at May 31, 2003. Cash provided by operating activities
decreased to $2.9 million for the nine months ended February 29, 2004 from $5.0 million for the nine months ended February 29, 2003. The decrease in cash provided by operations during the nine months ended February 29, 2004 is primarily due to the
continued decline in paging and messaging service revenue. In addition, the Company made payments of $643,000 for fiscal year 2003 federal income taxes and $227,000 for fiscal year 2004 estimated federal income taxes in the nine months ended
February 29, 2004. The decrease in cash provided by operations is partially offset by a reduction in operating costs as a result of the completion of the Retail Exit Plan. The Company expects that cash flow provided from operations, together with
the Companys existing credit facilities, will be sufficient to fund its working capital needs during the remainder of fiscal 2004.



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Teletouchs operations require capital investment to purchase inventory for lease to customers and
to acquire paging infrastructure equipment to support the Companys growth. Net capital expenditures, including pagers, were $1.7 million and $2.8 million for the first nine months of fiscal years 2004 and 2003, respectively. Teletouch
anticipates capital expenditures to remain fairly constant during the remainder of fiscal 2004 which will result in total capital expenditures declining as compared to fiscal 2003 as the Company plans to only replace necessary equipment to maintain
the paging infrastructure while continuing to purchase an adequate supply of pagers to lease to customers. Teletouch expects to pay for these expenditures with cash generated from operations.



Under the Companys credit agreements with First Community Financial
Corporation and TLL Partners, the Company has available borrowings of up to $2.5 million which is dependent on the Companys borrowing base primarily consisting of accounts receivable at any point in time. Under these credit facilities, $0.4
million was funded as of February 29, 2004.



During the third
quarter of fiscal 2004, the Company was unable to maintain compliance with certain financial covenants under the FCFC loan agreement but these covenants were waived by FCFC to allow the Company to remain in good standing for this period. The FCFC
loan agreement is a revolving line of credit that the Company has utilized during the third quarter to bridge the timing of the receipt of customer payments with its operating cash outflows. As of February 29, 2004, $44,200 was funded under this
agreement. Effective February 1, 2004, the Company negotiated an extension of its loan agreement with FCFC through May 1, 2005 which included modifications to certain of the financial covenants included in the agreement. These modifications will
make it easier for the Company to comply with the financial covenants in future quarters. If this loan facility were to be unavailable, the Company could experience temporary cash shortages during the quarter that could cause payments to vendors to
be delayed.



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.



| |  | We could experience increased subscriber attrition and reduction in ARPU as a result of more competitive services products and pricing.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------



| |  | Termination or impairment of our relationship with a small number of key telemetry suppliers or vendors could adversely affect our revenue opportunities and results of operations.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Market prices for paging, two-way and telemetry services may decline in the future as competition increases.
| | - | ------------------------------------------------------------------------------------------------------------



| |  | We rely on airtime arrangements with other carriers to provide our telemetry services, which we may be unable to obtain or maintain in the future.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  | If the demand for telemetry services does not grow, or if we fail to capitalize on such demand, it could have an adverse effect on our growth potential.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We may increase our debt in the future to fund potential acquisitions, which could subject us to various restrictions and higher interest costs and decrease our cash flow and
earnings.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | If we do not maintain compliance with the American Stock Exchange requirements for continued listing, our common stock could be de-listed.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------



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| |  | Our ability to fund the costs inherent with complying with new statutes and regulations applicable to public reporting companies, such as the Sarbanes-Oxley Act of 2002, could have
an adverse impact on the operations of the Company;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | There are substantial capital requirements that we will need to fund in order to maintain, operate and upgrade our information systems network to a level at which we can support our
new revenue initiatives.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our ability to efficiently integrate future acquisitions, if any, could alter the plans for future growth and profitability.
| | - | ----------------------------------------------------------------------------------------------------------------------------



| |  | Our operations are subject to government regulation that could have adverse effects on our business.
| | - | ----------------------------------------------------------------------------------------------------



| |  | Equipment failure and natural disasters or terrorist acts may adversely affect our business.
| | - | --------------------------------------------------------------------------------------------



FORWARD-LOOKING STATEMENTS



Our disclosure and analysis in this document may contain forward-looking statements with respect to financial condition, results of operations, cash
flows, financing plans, business strategies, operating efficiencies or synergies, capital and other expenditures, network upgrades, competitive positions, availability of capital, growth opportunities for existing and new products and services, our
acquisition and growth strategy, benefits from new technologies, availability and deployment of new technologies, plans and objectives of management, and other matters.



Statements in this document that are not historical facts are hereby identified as forward-looking statements. These
forward-looking statements, including, without limitation, those relating to the future business prospects, revenues, working capital, liquidity, capital needs, network build-out, interest costs and income, in each case, relating to us, wherever
they occur in this document, are necessarily estimates reflecting the best judgment of senior management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking
statements. These forward-looking statements should, therefore, be considered in light of various important factors. Important factors that could cause actual results to differ materially from estimates or projections contained in the
forward-looking statements include, without limitation:



| |  | The effects of vigorous competition in the markets in which we operate and competition for more valuable customers, which may decrease prices charged, increase churn, and change the
customer mix, profitability, and average revenue per user;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Uncertainty concerning the growth rate for the wireless industry in general;
| | - | ----------------------------------------------------------------------------



| |  | The risks associated with the implementation of our telemetry products and services and our technology development strategy, including risks relating to the implementation and
operations of new systems and technologies, and potential unanticipated costs, the need to enter into agreements with third parties, uncertainties regarding the adequacy of suppliers on whom we must rely to provide both network and consumer
equipment, and consumer acceptance of the products and services to be offered;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Uncertainty about the level of consumer demand for our telemetry products and services, including the possibility of consumer dissatisfaction which could result from unfamiliarity
with new technology and different footprint, service areas, and levels of customer care;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The ability to enter into agreements to provide services throughout the United States and the cost of entering new markets necessary to provide these services;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our ability to effectively develop and implement new services, offers, and business models to profitably serve that segment of the population not currently using telemetry services
and the possible impact of those services and offers on our business;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | The risk of increased churn and adverse impacts on our ability to grow our paging subscriber base resulting from popularity of cellular products and services provided by our
competitors, or customer dissatisfaction with our products and services;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The ongoing global and U.S. trend towards consolidation in the telecommunications industry, which may have the effect of making our competitors larger and better financed and give
these competitors more extensive resources, improved buying power, and greater geographic reach, allowing them to compete more effectively;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The requirements imposed on us or latitude allowed to competitors by the FCC or state regulatory commissions under the Telecommunications Act of 1996 or other applicable laws and
regulations;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The inability to establish a significant market presence in new geographic and service markets;
| | - | -----------------------------------------------------------------------------------------------



| |  | The availability and cost of capital and the consequences of increased leverage;
| | - | --------------------------------------------------------------------------------



| |  | The impact of any unusual items resulting from ongoing evaluations of our business strategies;
| | - | ----------------------------------------------------------------------------------------------



| |  | The risks and uncertainties associated with the acquisition and integration of businesses and operations;
| | - | ---------------------------------------------------------------------------------------------------------



| |  | The risk of insolvency of vendors, customers, and others with whom we do business;
| | - | ----------------------------------------------------------------------------------



| |  | The additional risks and uncertainties not presently known to us or that we currently deem immaterial; and
| | - | ----------------------------------------------------------------------------------------------------------



| |  | Those factors discussed under Additional Factors That May Affect Our Business, Future Operating Results, and Financial Condition.
| | - | ----------------------------------------------------------------------------------------------------------------------------------



The words estimate, project, intend,
expect, believe, plan, and similar expressions are intended to identify forward-looking statements. These forward-looking statements are found at various places throughout this document. You are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of the date of this document. Moreover, in the future, we may make forward-looking statements about the matters described in this document or other matters concerning us.



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Item 3. Quantitative and Qualitative Disclosures About Market Risk



The risk inherent in Teletouchs market risk sensitive instruments, such as its credit facilities is the potential loss arising from adverse changes
in interest rates. As of February 29, 2004, the debt obligation with FCFC, comprised of the MAP Note was subject to a variable interest rate. The MAP Note is a short term revolving line of credit that is borrowed against and repaid as often as
daily. Due to the revolving nature of the MAP Note and the Companys ability to choose whether to obligate itself through borrowings, the inherent risk in the MAP Note is minimal related to changes in interest rates.



We did not have any foreign currency hedges or other derivative financial
instruments as of February 29, 2004. 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



Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this quarterly report, the Company carried out, under the supervision and with the participation of the Companys management, including the
Companys principal executive and financial officers (the Certifying Officers), an evaluation of the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under
the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based on this evaluation, the Certifying Officers have concluded that such disclosure controls and procedures are effective to ensure that information required to be
disclosed in the Companys filings under the Exchange Act with respect to the Company and its consolidated subsidiaries is recorded, processed, summarized and reported within the time periods in order to comply with the Companys
disclosure obligations under the Exchange Act and the rules and regulation promulgated thereunder.



Changes in Internal Control. We have made no changes in internal control over financial reporting during the last fiscal quarter that materially
affected or are reasonably likely to materially affect our 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.



Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities



On January 29, 2004, the Company acquired certain assets of DCAE, Inc. d/b/a/ Delta Communications, Inc. In connection with the acquisition, the Company
issued its note payable on February 15, 2005, in 640,000 shares of the Companys common stock valued at $640,000, based on market price, on the date of closing. The terms of the redeemable common stock issuable are further described in Note K
to the Notes to the Financial Statements, which description is incorporated herein by reference. The Company relied upon the exemption from registration afforded by Section 4(2) under the Securities Act of 1933 in connection with the issuance of the
Securities.



Purchases of Equity Securities by the Issuer and Affiliated
Purchasers



None



Item 3. Defaults Upon Senior Securities



None



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



N/A



Item 5. Other Information



None



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Item 6. Exhibits and Reports on Form 8-K



(a)
Exhibits.



|              |  |                                                                                                                            
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Title of Exhibit                                                                                                           
|              | 
|10.1          |  | Asset Purchase Agreement between Teletouch Communications, Inc., a Delaware corporation and DCAE, Inc., a Texas corporation
|              | 
|10.2          |  | Asset Purchase Agreement between Teletouch Communications, Inc., a Delaware corporation and Glen Binion, an individual     
|              | 
|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                                                 



(b) Reports on Form 8-K.



None



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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: April 14, 2004 |  | TELETOUCH COMMUNICATIONS, INC.Registrant
|                     |  |                                         
|                     |  | By:                                      |  | /s/ Robert M. McMurrey                                                                                                  
|                     |  |                                          |  | Robert M. McMurrey Chairman of the Board                                                                                
|                     |  |                                         
|                     |  | By:                                      |  | /s/ J. Kernan Crotty                                                                                                    
|                     |  |                                          |  | J. Kernan Crotty President, Chief Operating Officer, Chief Financial Officer and Director (Principal Accounting Officer)



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