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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 28, 2005



OR



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



For the transition period from  to



Commission File Number 1-13436



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TELETOUCH COMMUNICATIONS, INC.

(Name of registrant in its charter)



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



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

Internet Website: www.teletouch.com

(Address and telephone number of principal executive offices)



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



Indicate by check mark whether the registrant is 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  4,981,980 shares outstanding as of April
15, 2005



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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.                                                                   |  | 3       
|                              |  |                                                                                                                        
|                              |  | Consolidated Balance Sheets as of February 28, 2005 (Unaudited) and May 31, 2004                                        |  | 3       
|                              |  |                                                                                                                        
|                              |  | Consolidated Statements of Operations - Three and Nine Months Ended February 28, 2005 and February 29, 2004 (Unaudited) |  | 5       
|                              |  |                                                                                                                        
|                              |  | Consolidated Statements of Cash Flows - Nine Months Ended February 28, 2005 and February 29, 2004 (Unaudited)           |  | 6       
|                              |  |                                                                                                                        
|                              |  | Notes to Consolidated Financial Statements                                                                              |  | 8       
|                              |  |                                                                                                                        
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                   |  | 19      
|                              |  |                                                                                                                        
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                              |  | 41      
|                              |  |                                                                                                                        
|Item 4.                       |  | Controls and Procedures                                                                                                 |  | 41      
|                             
|Part II. Other Information   
|                              |  |                                                                                                                        
|Item 1.                       |  | Legal Proceedings                                                                                                       |  | 42      
|                              |  |                                                                                                                        
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                             |  | 42      
|                              |  |                                                                                                                        
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                         |  | 42      
|                              |  |                                                                                                                        
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                     |  | 42      
|                              |  |                                                                                                                        
|Item 5.                       |  | Other Information                                                                                                       |  | 42      
|                              |  |                                                                                                                        
|Item 6.                       |  | Exhibits                                                                                                                |  | 43      
|                              |  |                                                                                                                        
|                              |  | Signatures                                                                                                              |  | 44      



2



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##### Table of Contents

PART 1  FINANCIAL INFORMATION



Item 1. Financial Statements



TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



ASSETS



|                                                                                                                    |  |                             |        |   |              |   |        |  
|------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ------------ | - | ------ | -
|                                                                                                                    |  | February 28,2005(unaudited) |        |   | May 31, 2004 |  
|CURRENT ASSETS:                                                                                                     |  |                             |        |   |              |   |        |  
|Cash and cash equivalents                                                                                           |  | $                           | 1,129  |   |              | $ | 72     |  
|Accounts receivable, net of allowance of $228 in fiscal 2005 and $180 in fiscal 2004                                |  |                             | 1,341  |   |              |   | 1,585  |  
|Accounts receivable  related party                                                                                 |  |                             | 4      |   |              |   | 5      |  
|Inventories, net of reserve of $551 in fiscal 2005 and $421 in fiscal 2004                                          |  |                             | 1,361  |   |              |   | 2,273  |  
|Deferred income taxes                                                                                               |  |                             | 242    |   |              |   | 174    |  
|Note receivable                                                                                                     |  |                             |       |   |              |   | 256    |  
|Prepaid expenses and other current assets                                                                           |  |                             | 536    |   |              |   | 402    |  
|                                                                                                                    |  |                             |        |   |              |   |        |  
|Total current assets                                                                                                |  |                             | 4,613  |   |              |   | 4,767  |  
|                                                                                                                    |  |                             |        |   |              |   |        |  
|PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $16,009 in fiscal 2005 and $14,976 in fiscal 2004 |  |                             | 7,038  |   |              |   | 8,622  |  
|                                                                                                                    |  |                             |        |   |              |   |        |  
|INTANGIBLE ASSETS:                                                                                                  |  |                             |        |   |              |   |        |  
|Goodwill.                                                                                                           |  |                             | 921    |   |              |   | 883    |  
|Subscriber bases.                                                                                                   |  |                             | 226    |   |              |   | 225    |  
|FCC licenses.                                                                                                       |  |                             | 103    |   |              |   | 103    |  
|Non-compete agreements.                                                                                             |  |                             | 95     |   |              |   | 95     |  
|Internally developed software                                                                                       |  |                             | 188    |   |              |   | 185    |  
|Accumulated amortization                                                                                            |  |                             | (263   | ) |              |   | (176   | )
|                                                                                                                    |  |                             |        |   |              |   |        |  
|Total intangible assets                                                                                             |  |                             | 1,270  |   |              |   | 1,315  |  
|                                                                                                                    |  |                             |        |   |              |   |        |  
|DEFERRED INCOME TAXES                                                                                               |  |                             | 170    |   |              |   |       |  
|                                                                                                                    |  |                             |        |   |              |   |        |  
|                                                                                                                    |  | $                           | 13,091 |   |              | $ | 14,704 |  
|                                                                                                                    |  |                             |        |   |              |   |        |  



See Accompanying Notes
to Consolidated Financial Statements



3



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##### Table of Contents

TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS  (Continued)

(In thousands, except share data)



LIABILITIES AND SHAREHOLDERS EQUITY



|                                                                                                                                                              |  |                             |         |   |             |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ----------- | - | ------- | -
|                                                                                                                                                              |  | February 28,2005(unaudited) |         |   | May 31,2004 |  
|CURRENT LIABILITIES:                                                                                                                                          |  |                             |         |   |             |   |         |  
|Accounts payable                                                                                                                                              |  | $                           | 728     |   |             | $ | 978     |  
|Accounts payable  related party                                                                                                                              |  |                             | 1       |   |             |   | 5       |  
|Accrued expenses and other current liabilities                                                                                                                |  |                             | 1,986   |   |             |   | 1,881   |  
|Current portion of long-term debt                                                                                                                             |  |                             | 72      |   |             |   | 45      |  
|Current portion of redeemable common stock payable                                                                                                            |  |                             | 489     |   |             |   | 280     |  
|Current portion of unearned sale/leaseback profit                                                                                                             |  |                             | 418     |   |             |   | 418     |  
|Deferred revenue                                                                                                                                              |  |                             | 717     |   |             |   | 678     |  
|                                                                                                                                                              |  |                             |         |   |             |   |         |  
|Total current liabilities                                                                                                                                     |  |                             | 4,411   |   |             |   | 4,285   |  
|                                                                                                                                                              |  |                             |         |   |             |   |         |  
|LONG-TERM LIABILITIES:                                                                                                                                        |  |                             |         |   |             |   |         |  
|Long-term debt, net of current portion                                                                                                                        |  |                             | 115     |   |             |   | 448     |  
|Redeemable common stock purchase warrants                                                                                                                     |  |                             | 2,009   |   |             |   | 1,757   |  
|Redeemable common stock payable, net of current portion                                                                                                       |  |                             | 126     |   |             |   | 326     |  
|Unearned sale/leaseback profit, net of current portion                                                                                                        |  |                             | 746     |   |             |   | 1,064   |  
|Deferred income taxes                                                                                                                                         |  |                             |        |   |             |   | 22      |  
|                                                                                                                                                              |  |                             |         |   |             |   |         |  
|Total long-term liabilities                                                                                                                                   |  |                             | 2,996   |   |             |   | 3,617   |  
|                                                                                                                                                              |  |                             |         |   |             |   |         |  
|TOTAL LIABILITIES                                                                                                                                             |  |                             | 7,407   |   |             |   | 7,902   |  
|                                                                                                                                                              |  |                             |         |   |             |   |         |  
|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 2005
and fiscal 2004 |  |                             |        |   |             |   |        |  
|Series B convertible preferred stock, $.001 par value, 411,457 shares authorized and 0 shares issued and outstanding in fiscal 2005 and fiscal
2004           |  |                             |        |   |             |   |        |  
|Series C convertible preferred stock, $.001 par value, 1,000,000 shares authorized, issued and outstanding in fiscal 2005 and fiscal
2004                     |  |                             | 1       |   |             |   | 1       |  
|Common stock, $.001 par value, 70,000,000 shares authorized, 4,976,189 shares issued in fiscal 2005 and fiscal 2004                                           |  |                             | 5       |   |             |   | 5       |  
|Treasury stock, 429,209 shares held in fiscal 2005 and fiscal 2004                                                                                            |  |                             | (185    | ) |             |   | (185    | )
|Additional paid-in capital                                                                                                                                    |  |                             | 26,907  |   |             |   | 26,902  |  
|Accumulated deficit                                                                                                                                           |  |                             | (21,044 | ) |             |   | (19,921 | )
|                                                                                                                                                              |  |                             |         |   |             |   |         |  
|Total shareholders equity                                                                                                                                    |  |                             | 5,684   |   |             |   | 6,802   |  
|                                                                                                                                                              |  |                             |         |   |             |   |         |  
|                                                                                                                                                              |  | $                           | 13,091  |   |             | $ | 14,704  |  
|                                                                                                                                                              |  |                             |         |   |             |   |         |  



See Accompanying Notes
to Consolidated Financial Statements



4



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##### Table of Contents

TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except shares and per share amounts)

(Unaudited)



|                                                                                                  |  |                    |           |   |                   |   |           |                   |  |   |                   |   |  |   |           |  
|------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | - | ----------------- | - | --------- | ----------------- |  | - | ----------------- | - |  | - | --------- | -
|                                                                                                  |  | Three Months Ended |           |   | Nine Months Ended |  
|                                                                                                  |  | February 28, 2005  |           |   | February 29, 2004 |   |           | February 28, 2005 |  |   | February 29, 2004 |  
|Operating revenues:                                                                               |  |                    |           |   |                   |   |           |                   |  |   |                   |   |  |   |           |  
|Service, rent and maintenance revenue                                                             |  | $                  | 4,795     |   |                   | $ | 5,783     |                   |  | $ | 15,231            |   |  | $ | 17,816    |  
|Product sales                                                                                     |  |                    | 1,073     |   |                   |   | 769       |                   |  |   | 3,455             |   |  |   | 2,240     |  
|                                                                                                  |  |                    |           |   |                   |   |           |                   |  |   |                   |   |  |   |           |  
|Total operating revenues                                                                          |  |                    | 5,868     |   |                   |   | 6,552     |                   |  |   | 18,686            |   |  |   | 20,056    |  
|                                                                                                  |  |                    |           |   |                   |   |           |                   |  |   |                   |   |  |   |           |  
|Operating expenses:                                                                               |  |                    |           |   |                   |   |           |                   |  |   |                   |   |  |   |           |  
|Cost of service, rent and maintenance (exclusive of depreciation and amortization included below) |  |                    | 2,690     |   |                   |   | 2,772     |                   |  |   | 8,209             |   |  |   | 8,284     |  
|Cost of products sold                                                                             |  |                    | 917       |   |                   |   | 691       |                   |  |   | 3,120             |   |  |   | 1,885     |  
|Selling and general and administrative                                                            |  |                    | 2,125     |   |                   |   | 2,379     |                   |  |   | 6,152             |   |  |   | 6,849     |  
|Depreciation and amortization                                                                     |  |                    | 784       |   |                   |   | 904       |                   |  |   | 2,518             |   |  |   | 2,858     |  
|Loss (gain) on disposal of assets                                                                 |  |                    | 21        |   |                   |   | 298       |                   |  |   | (30               | ) |  |   | 365       |  
|                                                                                                  |  |                    |           |   |                   |   |           |                   |  |   |                   |   |  |   |           |  
|Total operating expenses                                                                          |  |                    | 6,537     |   |                   |   | 7,044     |                   |  |   | 19,969            |   |  |   | 20,241    |  
|                                                                                                  |  |                    |           |   |                   |   |           |                   |  |   |                   |   |  |   |           |  
|Operating loss                                                                                    |  |                    | (669      | ) |                   |   | (492      | )                 |  |   | (1,283            | ) |  |   | (185      | )
|                                                                                                  |  |                    |           |  
|Interest expense, net                                                                             |  |                    | (121      | ) |                   |   | (91       | )                 |  |   | (332              | ) |  |   | (276      | )
|                                                                                                  |  |                    |           |   |                   |   |           |                   |  |   |                   |   |  |   |           |  
|Loss before income taxes                                                                          |  |                    | (790      | ) |                   |   | (583      | )                 |  |   | (1,615            | ) |  |   | (461      | )
|Income tax benefit                                                                                |  |                    | (253      | ) |                   |   | (148      | )                 |  |   | (492              | ) |  |   | (77       | )
|                                                                                                  |  |                    |           |   |                   |   |           |                   |  |   |                   |   |  |   |           |  
|Net loss                                                                                          |  | $                  | (537      | ) |                   | $ | (435      | )                 |  | $ | (1,123            | ) |  | $ | (384      | )
|                                                                                                  |  |                    |           |   |                   |   |           |                   |  |   |                   |   |  |   |           |  
|Loss per share:                                                                                   |  |                    |           |   |                   |   |           |                   |  |   |                   |   |  |   |           |  
|Basic                                                                                             |  | $                  | (0.12     | ) |                   | $ | (0.10     | )                 |  | $ | (0.25             | ) |  | $ | (0.08     | )
|                                                                                                  |  |                    |           |   |                   |   |           |                   |  |   |                   |   |  |   |           |  
|Diluted                                                                                           |  | $                  | (0.12     | ) |                   | $ | (0.10     | )                 |  | $ | (0.25             | ) |  | $ | (0.08     | )
|                                                                                                  |  |                    |           |   |                   |   |           |                   |  |   |                   |   |  |   |           |  
|Weighted average number of common shares outstanding:                                             |  |                    |           |   |                   |   |           |                   |  |   |                   |   |  |   |           |  
|Basic                                                                                             |  |                    | 4,546,980 |   |                   |   | 4,546,980 |                   |  |   | 4,546,980         |   |  |   | 4,546,980 |  
|                                                                                                  |  |                    |           |   |                   |   |           |                   |  |   |                   |   |  |   |           |  
|Diluted                                                                                           |  |                    | 4,546,980 |   |                   |   | 4,546,980 |                   |  |   | 4,546,980         |   |  |   | 4,546,980 |  
|                                                                                                  |  |                    |           |   |                   |   |           |                   |  |   |                   |   |  |   |           |  



See Accompanying Notes
to Consolidated Financial Statements



5



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##### Table of Contents

TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                |  |                   |        |   |                   |   |        |  
|------------------------------------------------------------------------------- |  | ----------------- | ------ | - | ----------------- | - | ------ | -
|                                                                                |  | Nine Months Ended |       
|                                                                                |  | February 28, 2005 |        |   | February 29, 2004 |  
|Operating Activities:                                                           |  |                   |        |   |                   |   |        |  
|Net loss                                                                        |  | $                 | (1,123 | ) |                   | $ | (384   | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                   |        |   |                   |   |        |  
|Depreciation and amortization                                                   |  |                   | 2,518  |   |                   |   | 2,858  |  
|Non-cash compensation expense                                                   |  |                   | 5      |   |                   |   | 131    |  
|Non-cash interest expense                                                       |  |                   | 259    |   |                   |   | 211    |  
|Provision for losses on accounts receivable                                     |  |                   | 147    |   |                   |   | 164    |  
|Provision for inventory obsolescence                                            |  |                   | 731    |   |                   |   | 495    |  
|(Gain)/loss on disposal of assets                                               |  |                   | (30    | ) |                   |   | 365    |  
|Amortization of unearned sale/leaseback profit                                  |  |                   | (318   | ) |                   |   | (318   | )
|Deferred income taxes                                                           |  |                   | (260   | ) |                   |   | (414   | )
|Changes in operating assets and liabilities:                                    |  |                   |        |   |                   |   |        |  
|Accounts receivable                                                             |  |                   | 87     |   |                   |   | 147    |  
|Inventories                                                                     |  |                   | 478    |   |                   |   | 344    |  
|Prepaid expenses and other assets                                               |  |                   | (134   | ) |                   |   | (31    | )
|Accounts payable                                                                |  |                   | (250   | ) |                   |   | 106    |  
|Accrued expenses and other current liabilities                                  |  |                   | 105    |   |                   |   | (785   | )
|Deferred revenue                                                                |  |                   | 39     |   |                   |   | (16    | )
|                                                                                |  |                   |        |   |                   |   |        |  
|Net cash provided by operating activities                                       |  |                   | 2,254  |   |                   |   | 2,873  |  
|                                                                                |  |                   |        |   |                   |   |        |  
|Investing Activities:                                                           |  |                   |        |   |                   |   |        |  
|Capital expenditures, including pagers                                          |  |                   | (1,192 | ) |                   |   | (1,750 | )
|Redemption of certificates of deposit                                           |  |                   |       |   |                   |   | 10     |  
|Intangible assets                                                               |  |                   | (4     | ) |                   |   | (220   | )
|Acquisitions, net of cash acquired                                              |  |                   | (1     | ) |                   |   | (696   | )
|Proceeds from sale of assets                                                    |  |                   | 79     |   |                   |   | 59     |  
|Issuance of notes receivable                                                    |  |                   |       |   |                   |   | (257   | )
|                                                                                |  |                   |        |   |                   |   |        |  
|Net cash used in investing activities                                           |  |                   | (1,118 | ) |                   |   | (2,854 | )
|                                                                                |  |                   |        |   |                   |   |        |  
|Financing Activities:                                                           |  |                   |        |   |                   |   |        |  
|Decrease in short-term debt, net                                                |  |                   |       |   |                   |   | (84    | )
|Proceeds from borrowings                                                        |  |                   | 62     |   |                   |   | 107    |  
|Payments on long-term debt                                                      |  |                   | (141   | ) |                   |   | (439   | )
|                                                                                |  |                   |        |   |                   |   |        |  
|Net cash used in financing activities                                           |  |                   | (79    | ) |                   |   | (416   | )
|                                                                                |  |                   |        |   |                   |   |        |  
|Net increase (decrease) in cash and cash equivalents                            |  |                   | 1,057  |   |                   |   | (397   | )
|Cash and cash equivalents at beginning of period                                |  |                   | 72     |   |                   |   | 688    |  
|                                                                                |  |                   |        |   |                   |   |        |  
|Cash and cash equivalents at end of period                                      |  | $                 | 1,129  |   |                   | $ | 291    |  
|                                                                                |  |                   |        |   |                   |   |        |  



See Accompanying Notes
to Consolidated Financial Statements



6



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##### Table of Contents

TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In thousands)

(Unaudited)



|                                                       |  |                   |     |                  |   |    
|------------------------------------------------------ |  | ----------------- | --- | ---------------- | - | ---
|                                                       |  | Nine Months Ended
|                                                       |  | February 28,2005  |     | February 29,2004
|Supplemental Cash Flow Data:                           |  |                   |     |                  |   |    
|Cash payments for interest                             |  | $                 | 82  |                  | $ | 49 
|                                                       |  |                   |     |                  |   |    
|Cash payments for income taxes                         |  | $                 | 5   |                  | $ | 870
|                                                       |  |                   |     |                  |   |    
|Non-Cash Transactions:                                 |  |                   |     |                  |   |    
|Purchase Price Adjustment  Delta Communications, Inc. |  | $                 | 38  |                  | $ |   
|                                                       |  |                   |     |                  |   |    
|Exchange of Note Receivable for Note Payable           |  | $                 | 258 |                  | $ |   
|                                                       |  |                   |     |                  |   |    
|Transfer of pager inventory to fixed assets.           |  | $                 | 297 |                  | $ | 530
|                                                       |  |                   |     |                  |   |    



See Accompanying Notes
to Consolidated Financial Statements



7



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##### Table of Contents

TELETOUCH COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



NOTE A  BASIS OF PRESENTATION



The accompanying unaudited interim consolidated financial statements included herein have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission (SEC). The interim condensed consolidated financial statements include the consolidated accounts of Teletouch Communications, Inc. and our wholly-owned subsidiaries (collectively, the Company or
Teletouch). In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of financial position, results of operations and cash flows for the interim periods presented have been
made. The results of operations for the three and nine months ended February 28, 2005, are not necessarily indicative of the results to be expected for the full year.



Some information and footnote disclosures normally included in financial statements or notes thereto prepared in accordance
with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. We believe, however, that our disclosures are adequate to make the information presented not misleading. These interim
consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Teletouchs 2004 Annual Report on Form 10-K.



Reclassifications:Certain reclassifications were made to the prior period financial statements to conform to the
current period financial statement presentation. Loss on disposal of assets was reclassed from other expense to costs and expenses in the consolidated statements of operations for all periods presented. Cost of products sold was reclassed from the
gross margin section to operating expenses in the consolidated statements of operations for all periods resented. Previously reported operating expenses have been retitled to cost of service, rent and maintenance to more accurately reflect the
nature of these expenses in the consolidated statements of operations. These reclassifications did not have an impact on the Companys previously reported financial position or net loss applicable to common shareholders.



NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



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



8



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##### Table of Contents

The following table illustrates the effect on net loss and 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 28, 2005  |       |   | February 29, 2004 |   |       | February 28, 2005 |  |   | February 29, 2004 |  
|Net loss                                                                                                          |  | $                  | (537  | ) |                   | $ | (435  | )                 |  | $ | (1,123            | ) |  | $ | (384  | )
|Plus stock-based employee compensation expense included in reported net income, net of related tax effects        |  |                    | 5     |   |                   |   | (11   | )                 |  |   | 5                 |   |  |   | 87    |  
|Less total stock-based employee compensation determined under fair-value-based method, net of related tax effects |  |                    | (11   | ) |                   |   | (5    | )                 |  |   | (33               | ) |  |   | (23   | )
|                                                                                                                  |  |                    |       |   |                   |   |       |                   |  |   |                   |   |  |   |       |  
|Pro forma net income (loss)                                                                                       |  | $                  | (543  | ) |                   | $ | (451  | )                 |  | $ | (1,151            | ) |  | $ | (320  | )
|                                                                                                                  |  |                    |       |   |                   |   |       |                   |  |   |                   |   |  |   |       |  
|Pro forma earnings (loss) per share:                                                                              |  |                    |       |   |                   |   |       |                   |  |   |                   |   |  |   |       |  
|                                                                                                                  |  |                    |       |  
|Basic                                                                                                             |  | $                  | (0.12 | ) |                   | $ | (0.10 | )                 |  | $ | (0.25             | ) |  | $ | (0.07 | )
|                                                                                                                  |  |                    |       |   |                   |   |       |                   |  |   |                   |   |  |   |       |  
|Diluted                                                                                                           |  | $                  | (0.12 | ) |                   | $ | (0.10 | )                 |  | $ | (0.25             | ) |  | $ | (0.07 | )
|                                                                                                                  |  |                    |       |   |                   |   |       |                   |  |   |                   |   |  |   |       |  



Property, Plant and
Equipment:Property, plant and equipment is recorded at cost. Depreciation is computed using the straight-line method. The following table contains the property, plant and equipment by estimated useful life, net of accumulated depreciation as of
February 28, 2005 (in thousands):



|                       |  |                  |     |             |   |             |  |               |     |               |   |         |  |                |       |  |   |    |  |   |      
|---------------------- |  | ---------------- | --- | ----------- | - | ----------- |  | ------------- | --- | ------------- | - | ------- |  | -------------- | ----- |  | - | -- |  | - | -----
|                       |  | Less than3 years |     | 3 to 4years |   | 5 to 9years |  | 10 to 14years |     | 15 to 19years |   | 20years |  | Total NetValue
|Buildings              |  | $                |    |             | $ |            |  | $             |    |               | $ | 1       |  | $              | 4     |  | $ | 10 |  | $ | 15   
|LAN & Other Computers  |  |                  |    |             |   | 275         |  |               | 194 |               |   |        |  |                |      |  |   |   |  |   | 469  
|Equipment              |  |                  |    |             |   | 11          |  |               | 90  |               |   | 3       |  |                | 9     |  |   |   |  |   | 113  
|Furniture & Fixtures   |  |                  |    |             |   | 47          |  |               | 3   |               |   | 57      |  |                |      |  |   |   |  |   | 107  
|Leasehold Improvements |  |                  |    |             |   | 4           |  |               | 2   |               |   |        |  |                |      |  |   | 2  |  |   | 8    
|Office Equipment       |  |                  |    |             |   | 2           |  |               | 6   |               |   | 1       |  |                |      |  |   |   |  |   | 9    
|Paging Infrastructure  |  |                  |    |             |   | 1           |  |               | 189 |               |   | 552     |  |                | 3,224 |  |   | 3  |  |   | 3,969
|Vehicles               |  |                  |    |             |   | 1           |  |               | 230 |               |   |        |  |                |      |  |   |   |  |   | 231  
|Pager Fleet            |  |                  |    |             |   | 1,909       |  |               |    |               |   |        |  |                |      |  |   |   |  |   | 1,909
|Radio Fleet            |  |                  |    |             |   | 1           |  |               |    |               |   |        |  |                |      |  |   |   |  |   | 1    
|Assets Not In Service  |  |                  | 207 |             |   |            |  |               |    |               |   |        |  |                |      |  |   |   |  |   | 207  
|                       |  |                  |     |             |   |             |  |               |     |               |   |         |  |                |       |  |   |    |  |   |      
|                       |  | $                | 207 |             | $ | 2,251       |  | $             | 714 |               | $ | 614     |  | $              | 3,237 |  | $ | 15 |  | $ | 7,038
|                       |  |                  |     |             |   |             |  |               |     |               |   |         |  |                |       |  |   |    |  |   |      



Recent Accounting Pronouncements:



In November 2004, the FASB issued SFAS No. 151
Inventory Costs, an amendment of ARB No. 43, Chapter 4. The amendments made by Statement 151 clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as
current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June
15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. The Company has evaluated SFAS No. 151 and it will have no impact on the Companys overall results of operations or
financial position.



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In December 2004, the FASB issued SFAS No.153, Exchanges of Nonmonetary Assets, an amendment of APB
Opinion No. 29, Accounting for Nonmonetary Transactions. The amendments made by Statement 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the
amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Previously, Opinion 29 required that
the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. Opinion 29 provided an exception
to its basic measurement principle (fair value) for exchanges of similar productive assets. The Board believes that exception required that some nonmonetary exchanges, although commercially substantive, be recorded on a carryover basis. By focusing
the exception on exchanges that lack commercial substance, the Board believes this Statement produces financial reporting that more faithfully represents the economics of the transactions. The Statement is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date of issuance. The provisions of this Statement shall be applied
prospectively. The Company does not anticipate that the adoption of SFAS 153 will have a significant impact on the Companys overall results of operations or financial position.



In December 2004, the FASB issued SFAS No.123 (revised 2004), Share-Based Payment. Statement 123(R) will provide
investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be
measured based on the fair value of the equity or liability instruments issued. Statement 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Statement 123, as
originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in Opinion
25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. Public entities (other than those filing as small business issuers) will be required to apply
Statement 123(R) as of the beginning of the annual reporting period that begins after June 15, 2005. The Company does not anticipate that the adoption of SFAS 123 (R) will have a significant impact on the Companys overall results of operations
or financial position.



NOTE C  LOSS PER SHARE



Basic earnings per share (EPS) is generally calculated by
dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted EPS is generally calculated by dividing net income available to common stockholders by the weighted average number of common
shares outstanding and potential shares outstanding. However, the Company has 1,000,000 shares of Series C Preferred Stock and 6,000,000 GM Warrants outstanding which are convertible into 44,000,000 and 6,000,000 shares of common stock,
respectively. These securities are considered to be Participating Securities under Financial Accounting Standards No. 128 (FAS 128) for EPS calculations. Both the Series C Preferred Stock and the GM Warrants are considered
participating securities because the common stock underlying these securities participates in dividends (if declared) at the same rate as the common stockholders. Emerging Issues Task Force (EITF) Topic 03-06 requires that Participating
Securities be included in the computation of basic EPS using the two-class method, if the effect would be dilutive to EPS. Although these securities meet the definition of Participating Securities since they participate in dividends, in light of the
losses and the fact that there is no contractual obligation for the security holders to share in losses of the Company, they have not been included in the basic and diluted earnings per share calculations.



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The following table provides a reconciliation of the numerators and the denominators used to calculate
basic and diluted loss per share as disclosed in our Consolidated Statement of Operations for the three and nine months ended February 28, 2005 and February 29, 2004 (in thousands except per share amounts):



|                                                        |  |                    |       |   |                   |   |       |                   |  |   |                   |   |  |   |       |  
|------------------------------------------------------- |  | ------------------ | ----- | - | ----------------- | - | ----- | ----------------- |  | - | ----------------- | - |  | - | ----- | -
|                                                        |  | Three Months Ended |       |   | Nine Months Ended |  
|                                                        |  | February 28,2005   |       |   | February 29, 2004 |   |       | February 28, 2005 |  |   | February 29, 2004 |  
|Numerator:                                              |  |                    |       |   |                   |   |       |                   |  |   |                   |   |  |   |       |  
|Net loss                                                |  | $                  | (537  | ) |                   | $ | (435  | )                 |  | $ | (1,123            | ) |  | $ | (384  | )
|Less: net loss attributable to participating securities |  |                    |      |   |                   |   |      |                   |  |   |                  |   |  |   |      |  
|                                                        |  |                    |       |   |                   |   |       |                   |  |   |                   |   |  |   |       |  
|Net loss available to common stockholders - basic       |  |                    | (537  | ) |                   |   | (435  | )                 |  |   | (1,123            | ) |  |   | (384  | )
|Plus: effect of dilutive securities                     |  |                    |      |   |                   |   |      |                   |  |   |                  |   |  |   |      |  
|                                                        |  |                    |       |   |                   |   |       |                   |  |   |                   |   |  |   |       |  
|Net loss available to common stockholders - diluted     |  | $                  | (537  | ) |                   | $ | (435  | )                 |  | $ | (1,123            | ) |  | $ | (384  | )
|                                                        |  |                    |       |  
|Denominator:                                            |  |                    |       |   |                   |   |       |                   |  |   |                   |   |  |   |       |  
|Basic shares outstanding:                               |  |                    |       |   |                   |   |       |                   |  |   |                   |   |  |   |       |  
|Weighted average common shares outstanding              |  |                    | 4,547 |   |                   |   | 4,547 |                   |  |   | 4,547             |   |  |   | 4,547 |  
|Plus effect of dilutive securities:                     |  |                    |       |   |                   |   |       |                   |  |   |                   |   |  |   |       |  
|Common stock payable                                    |  |                    |      |   |                   |   |      |                   |  |   |                  |   |  |   |      |  
|Stock options                                           |  |                    |      |   |                   |   |      |                   |  |   |                  |   |  |   |      |  
|                                                        |  |                    |       |   |                   |   |       |                   |  |   |                   |   |  |   |       |  
|Diluted shares outstanding                              |  |                    | 4,547 |   |                   |   | 4,547 |                   |  |   | 4,547             |   |  |   | 4,547 |  
|                                                        |  |                    |       |  
|Loss per share:                                         |  |                    |       |   |                   |   |       |                   |  |   |                   |   |  |   |       |  
|Basic                                                   |  | $                  | (0.12 | ) |                   | $ | (0.10 | )                 |  | $ | (0.25             | ) |  | $ | (0.08 | )
|                                                        |  |                    |       |   |                   |   |       |                   |  |   |                   |   |  |   |       |  
|Diluted                                                 |  | $                  | (0.12 | ) |                   | $ | (0.10 | )                 |  | $ | (0.25             | ) |  | $ | (0.08 | )
|                                                        |  |                    |       |   |                   |   |       |                   |  |   |                   |   |  |   |       |  



The total number of
equivalent shares of common stock outstanding as of February 28, 2005 and February 29, 2004 are as follows:



|                         |  |                                        |  |                                   |  |                                        |  |                                  
|------------------------ |  | -------------------------------------- |  | --------------------------------- |  | -------------------------------------- |  | ---------------------------------
|                         |  | February 28, 2005                      |  | February 29, 2004                
|                         |  | # Shares /Options /WarrantsOutstanding |  | EquivalentCommonSharesOutstanding |  | # Shares /Options /WarrantsOutstanding |  | EquivalentCommonSharesOutstanding
|Securities outstanding:  |  |                                        |  |                                   |  |                                        |  |                                  
|Common stock             |  | 4,546,980                              |  | 4,546,980                         |  | 4,546,980                              |  | 4,546,980                        
|Common stock warrants    |  | 6,000,000                              |  | 6,000,000                         |  | 6,000,000                              |  | 6,000,000                        
|Common stock options     |  | 1,982,487                              |  | 1,982,487                         |  | 947,073                                |  | 947,073                          
|Redeemable common stock  |  | 580,000                                |  | 580,000                           |  | 640,000                                |  | 640,000                          
|Series C preferred stock |  | 1,000,000                              |  | 44,000,000                        |  | 1,000,000                              |  | 44,000,000                       
|                         |  |                                        |  |                                   |  |                                        |  |                                  
|Total                    |  |                                        |  | 57,109,467                        |  |                                        |  | 56,134,053                       
|                         |  |                                        |  |                                   |  |                                        |  |                                  



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The common stock warrants, common stock options, redeemable common stock and Series C preferred stock
listed in the table above were outstanding but were not included in the calculation of basic or diluted EPS due to their antidilutive effect.



NOTE D  LIQUIDITY, RISKS AND FINANCIAL CONDITION



Based on current and anticipated levels of operations, the Companys management anticipates that net cash provided by operating activities including
the effects of planned restructuring activities, if successful, together with the $1.1 million of cash on hand will be adequate to meet its anticipated cash requirements for the next twelve months. Revenues from the Companys telemetry product
lines have continued to be insignificant during the three and nine months ended February 28, 2005 and management expects that revenues from the telemetry product line will continue to be insignificant through at least the fourth quarter of fiscal
2005 due to the level of activity and qualified sales leads as well as the progress of the various customer evaluations that are underway. New telemetry products and channels continue to be developed but are being developed slowly due to the capital
requirements of this activity. The Company introduced three new telemetry devices during the third quarter of 2005 and anticipates generating limited revenues from these products during the fourth quarter.



Because the Companys new revenue initiatives have been slow to develop,
management is currently executing a restructuring of its operations to eliminate certain expenses to help the Company meet its cash requirements for the remainder of fiscal 2005. In December 2004, the Company relocated its corporate offices and
eliminated headcount from its field operations and its corporate office. The relocation allowed the Company to bring all of its corporate functions together in one facility further improving the efficiency of its operations. During the third
quarter, management developed a new compensation program for its two way business to emphasize sales on its Logic Trunked Radio (LTR) system. Additionally, during the third quarter, the Company has neared the completion of exiting one of
its paging systems in Arkansas by migrating those subscribers to another of its existing paging systems. The Company is currently in discussions with another paging carrier to exchange certain systems that are more geographically beneficial to both
parties and would likely result in cost savings for both. Continued cost saving and revenue generating activities are planned during the fourth quarter which are designed to further improve cash flow and operating efficiency. The Company can provide
no assurances that reductions in its operating costs or its revenue growth initiatives will be sufficient to generate positive cash flows or that additional financing would be available or, if available, offered on acceptable terms.



Teletouch believes that future fluctuations in its revenues and operating
results may occur due to many factors, particularly the decreased demand for its messaging services. If the rate of decline of messaging units in service exceeds the Companys expectations, its revenues will be negatively impacted, and such
impact could be material. The Companys plan to reduce operating expenses may also negatively impact revenues as customers may experience a reduction in the level of customer service in certain areas, although cost saving measures taken over
the past several years have had a minimal impact on revenues as a result of decreased customer services. The Company may be unable to adjust spending in a timely manner to compensate for any future revenue shortfall. It is possible that, due to
these fluctuations, Teletouchs revenue or operating results may not meet the expectations of investors and creditors, which could impair the value of its equity securities.



As of February 28, 2005, the Company has no borrowings outstanding under its $2.2 million promissory note with TLL Partners,
a company controlled by Robert McMurrey, Chairman of the Board of Teletouch. Any borrowings under this arrangement are subject to the approval of the Progressive Concepts Communications, Inc. (PCCI) Board of Directors and availability of
funds. TLL Partners is a wholly owned subsidiary of PCCI. The Company has had limited borrowings under this agreement in the past and has been given no assurances from TLL Partners or PCCI that the necessary approval would be given by the PCCI Board
of Directors to fund any future operating or capital needs of Teletouch. The Companys



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management does not anticipate that the necessary approvals would be granted by the PCCI Board of Directors, therefore,
it is operating under the assumption that there are no available borrowings under this agreement.



There is no assurance that the Company will be able to improve its cash flow from operations, obtain additional third party financing, generate additional
new revenues, complete any acquisitions it is evaluating or successfully complete its planned restructuring activities. If a combination of these events does not occur the Company may not have sufficient cash to operate the business over the next
year. These matters raise substantial doubt about the Companys ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the
recoverability of assets and liquidation of liabilities that may result from this uncertainty.



NOTE E  INVENTORY



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



|                                      |  |                   |       |         |              |      |          |  |   |       |   |         |   |       |          |   |      |   |  |   |       |  
|------------------------------------- |  | ----------------- | ----- | ------- | ------------ | ---- | -------- |  | - | ----- | - | ------- | - | ----- | -------- | - | ---- | - |  | - | ----- | -
|                                      |  | February 28, 2005 |       |         | May 31, 2004 |     
|                                      |  | Cost              |       | Reserve |              |      | NetValue |  |   | Cost  |   | Reserve |   |       | NetValue |  
|Pagers and parts                      |  | $                 | 635   |         | $            | (115 | )        |  | $ | 520   |   |         | $ | 1,113 |          | $ | (129 | ) |  | $ | 984   |  
|Cellular phones and electronics       |  |                   | 11    |         |              | (11  | )        |  |   |      |   |         |   | 129   |          |   | (90  | ) |  |   | 39    |  
|Two-way radios and parts              |  |                   | 491   |         |              | (52  | )        |  |   | 439   |   |         |   | 601   |          |   |     |   |  |   | 601   |  
|Telemetry devices and parts           |  |                   | 775   |         |              | (292 | )        |  |   | 483   |   |         |   | 851   |          |   | (120 | ) |  |   | 731   |  
|                                      |  |                   |       |         |              |      |          |  |   |       |   |         |   |       |          |   |      |   |  |   |       |  
|Total inventory and specific reserves |  |                   | 1,912 |         |              | (470 | )        |  |   | 1,442 |   |         |   | 2,694 |          |   | (339 | ) |  |   | 2,355 |  
|                                      |  |                   |       |         |              |     
|General obsolescence reserve          |  |                   |      |         |              | (81  | )        |  |   | (81   | ) |         |   |      |          |   | (82  | ) |  |   | (82   | )
|                                      |  |                   |       |         |              |      |          |  |   |       |   |         |   |       |          |   |      |   |  |   |       |  
|Total inventory and reserves          |  | $                 | 1,912 |         | $            | (551 | )        |  | $ | 1,361 |   |         | $ | 2,694 |          | $ | (421 | ) |  | $ | 2,273 |  
|                                      |  |                   |       |         |              |      |          |  |   |       |   |         |   |       |          |   |      |   |  |   |       |  



NOTE F  NOTE RECEIVABLE



On June 20, 2004, Teletouch assigned its interest in a
promissory note, due from Streamwaves.com, to TLL Partners, an entity controlled by Robert McMurrey, Chairman of Teletouch. Consideration paid by TLL Partners equaled $257,778, the full value of the Streamwaves Note and interest accrued through June
20, 2004. Payment of the note was in the form of a reduction in the amount due on the TLL Note held by TLL Partners.



NOTE G  ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES



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



|                                            |  |                  |       |             |   |      
|------------------------------------------- |  | ---------------- | ----- | ----------- | - | -----
|                                            |  | February 28,2005 |       | May 31,2004
|Accrued payroll and other personnel expense |  | $                | 807   |             | $ | 711  
|Accrued state and local taxes               |  |                  | 144   |             |   | 203  
|Unvouchered accounts payable                |  |                  | 719   |             |   | 679  
|Customer deposits payable                   |  |                  | 144   |             |   | 145  
|Other                                       |  |                  | 172   |             |   | 143  
|                                            |  |                  |       |             |   |      
|Total                                       |  | $                | 1,986 |             | $ | 1,881
|                                            |  |                  |       |             |   |      



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NOTE H  SHORT-TERM DEBT



In February 2005, the Company cancelled its Multiple Advance Promissory Note (MAP Note) with First Community
Financial Corporation (FCFC). The Company initiated the early termination of the MAP Note because it had not needed to access this line of credit for the past several quarters and the continuance of this agreement created unnecessary
administration functions and their related costs within the Company. Under the terms of the MAP Note, the Company was 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 first and second quarters of fiscal 2005, the Company was unable to maintain compliance with certain financial covenants in the MAP Note. The Company did receive a waiver of these
covenants which allowed the Company to remain in good standing under the terms of the MAP Note for the quarters ending August 31, 2004 and November 30, 2004.



NOTE I  PROVISION FOR LEASE ABANDONMENT AND OTHER COSTS



The following table provides a rollforward of the Companys liability for future lease payments related to previously closed stores for the three and
nine months ended February 28, 2005 (in thousands):



|                             |  |                       |     |  
|---------------------------- |  | --------------------- | --- | -
|                             |  | Future Lease Payments |    
|Balance at May 31, 2004      |  | $                     | 113 |  
|Change in estimate           |  |                       | (7  | )
|Cash outlay                  |  |                       | (35 | )
|                             |  |                       |     |  
|Balance at August 31, 2004   |  | $                     | 71  |  
|Change in estimate           |  |                       | (6  | )
|Cash outlay                  |  |                       | (17 | )
|                             |  |                       |     |  
|Balance at November 30, 2004 |  | $                     | 48  |  
|Change in estimate           |  |                       | 2   |  
|Cash outlay                  |  |                       | (17 | )
|                             |  |                       |     |  
|Balance at February 28, 2005 |  | $                     | 33  |  
|                             |  |                       |     |  



The provision for
lease abandonment and other costs is included in accrued expenses and other liabilities on the Consolidated Balance Sheet. As of February 28, 2005, the remaining amount of $33,000 is expected to be paid through 2005. The $33,000 balance remaining in
this provision relates to one remaining retail facility in Waco, Texas. This lease on the Waco building will expire in August 2005. Although the Company does not anticipate significant changes, the actual costs may differ from these estimates.



NOTE J  RELATED PARTY TRANSACTIONS



The Company had certain related party sales, purchases and incurred certain
expenses during the three and nine months ended February 28, 2005 and February 29, 2004 with Progressive Concepts, Inc. (PCI) a company controlled by Robert McMurrey, Teletouchs Chairman, as follows:



|                                      |  |                    |        |                   |   |                  |  |                  |         |  |   |        
|------------------------------------- |  | ------------------ | ------ | ----------------- | - | ---------------- |  | ---------------- | ------- |  | - | -------
|                                      |  | Three Months Ended |        | Nine Months Ended
|                                      |  | February 28,2005   |        | February 29,2004  |   | February 28,2005 |  | February 29,2004
|Revenues from PCI:                    |  |                    |        |                   |   |                  |  |                  |         |  |   |        
|Pager sales                           |  | $                  | 900    |                   | $ | 4,800            |  | $                | 400     |  | $ | 17,600 
|Pager services and other              |  |                    | 2,900  |                   |   | 10,600           |  |                  | 17,400  |  |   | 39,200 
|                                      |  |                    |        |                   |   |                  |  |                  |         |  |   |        
|Total revenues from PCI               |  | $                  | 3,800  |                   | $ | 15,400           |  | $                | 17,800  |  | $ | 56,800 
|                                      |  |                    |        |                  
|Purchases from PCI:                   |  |                    |        |                   |   |                  |  |                  |         |  |   |        
|Cellular phone equipment and services |  | $                  | 4,000  |                   | $ | 1,700            |  | $                | 11,500  |  | $ | 9,700  
|                                      |  |                    |        |                  
|Expenses with PCI:                    |  |                    |        |                   |   |                  |  |                  |         |  |   |        
|Answering services                    |  | $                  | 90,000 |                   | $ | 90,000           |  | $                | 270,000 |  | $ | 270,000



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The Company has negotiated purchase prices with PCI on cellular equipment equaling cost plus 5%.



On June 20, 2004, Teletouch assigned its interest in the
Streamwaves Note to TLL Partners, an entity controlled by Robert McMurrey, Chairman of Teletouch. In consideration for the assignment of the Streamwaves Note, Teletouch received a reduction in its note payable to TLL Partners.



On October 19, 2004, Teletouch engaged Thomas A. Hyde, Jr. to serve as its
Chief Executive Officer. Mr. Hyde is the President of State Hawk Security, Inc. (State Hawk), a subsidiary of Progressive Concepts Communications, Inc. (PCCI), an entity owned and controlled by Mr. Robert McMurrey,
Teletouchs Chairman. In addition, Mr. Hyde served as the General Manager of Progressive Concepts, Inc. dba Hawk Security Services (Hawk Security), also an entity owned and controlled by Mr. McMurrey. On October 25, 2004 the Company
concurrently executed two non-binding letters of intent to acquire the outstanding equity securities of State Hawk Security, Inc. and the assets of the Hawk Security Services division of Progressive Concepts, Inc. The Company is currently in the
process of performing its due diligence on these transactions. Both purchase transactions are contingent upon the satisfactory completion of due diligence, the negotiation of definitive purchase agreements including determination of final purchase
prices and the receipt of a fairness opinion by the Companys Board of Directors. Teletouch is actively seeking financing to complete these transactions.



NOTE K  SHAREHOLDERS EQUITY



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



|                                                    |  |          |  
|--------------------------------------------------- |  | -------- | -
|Original shares per agreement                       |  | 640,000  |  
|Less: negotiated share reduction                    |  | (60,000  | )
|                                                    |  |          |  
|Net shares due to Delta                             |  | 580,000  |  
|Less: 25% of shares redeemed in advance of issuance |  | (145,000 | )
|                                                    |  |          |  
|Net shares issued to Delta in March 2005            |  | 435,000  |  
|                                                    |  |          |  



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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 in Which Stock Can be Put Back to Company |  | Put 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  SEGMENT INFORMATION



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



16



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##### Table of Contents

The following summarizes the Companys financial results for each segment for the three and nine
months ended February 28, 2005 and February 29, 2004 (in thousands):



|                                                        |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |        |  
|------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | ---------------- |  | - | ---------------- | - |  | - | ------ | -
|                                                        |  | Three Months Ended |        |   | Nine Months Ended |  
|                                                        |  | February 28,2005   |        |   | February 29,2004  |   |        | February 28,2005 |  |   | February 29,2004 |  
|Service, rent and maintenance revenue                   |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |        |  
|Paging                                                  |  | $                  | 4,364  |   |                   | $ | 5,401  |                  |  | $ | 13,800           |   |  | $ | 16,750 |  
|Two Way                                                 |  |                    | 393    |   |                   |   | 355    |                  |  |   | 1,318            |   |  |   | 1,007  |  
|Other                                                   |  |                    | 38     |   |                   |   | 27     |                  |  |   | 113              |   |  |   | 59     |  
|                                                        |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |        |  
|Total service, rent and maintenance revenue             |  |                    | 4,795  |   |                   |   | 5,783  |                  |  |   | 15,231           |   |  |   | 17,816 |  
|                                                        |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |        |  
|Product sales revenue                                   |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |        |  
|Paging                                                  |  |                    | 149    |   |                   |   | 200    |                  |  |   | 506              |   |  |   | 688    |  
|Two Way                                                 |  |                    | 904    |   |                   |   | 492    |                  |  |   | 2,707            |   |  |   | 1,180  |  
|Other                                                   |  |                    | 20     |   |                   |   | 77     |                  |  |   | 242              |   |  |   | 372    |  
|                                                        |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |        |  
|Total product sales revenue                             |  |                    | 1,073  |   |                   |   | 769    |                  |  |   | 3,455            |   |  |   | 2,240  |  
|                                                        |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |        |  
|Operating Revenue                                       |  | $                  | 5,868  |   |                   | $ | 6,552  |                  |  | $ | 18,686           |   |  | $ | 20,056 |  
|                                                        |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |        |  
|Reconciliation of adjusted EBITDA to net income (loss): |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |        |  
|Adjusted EBITDA                                         |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |        |  
|Paging                                                  |  | $                  | 2,378  |   |                   | $ | 3,801  |                  |  | $ | 7,530            |   |  | $ | 12,396 |  
|Two Way                                                 |  |                    | 104    |   |                   |   | 32     |                  |  |   | 421              |   |  |   | (11    | )
|Corporate Overhead                                      |  |                    | (2,172 | ) |                   |   | (2,952 | )                |  |   | (6,253           | ) |  |   | (9,159 | )
|Other                                                   |  |                    | (167   | ) |                   |   | (188   | )                |  |   | (505             | ) |  |   | (117   | )
|                                                        |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |        |  
|Total adjusted EBITDA                                   |  |                    | 143    |   |                   |   | 693    |                  |  |   | 1,193            |   |  |   | 3,109  |  
|                                                        |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |        |  
|Less non-recurring and non-cash expenses:               |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |        |  
|Restructure Expense                                     |  |                    | 2      |   |                   |   |       |                  |  |   | (17              | ) |  |   | (60    | )
|Compensation Exp - Stock Options                        |  |                    | 5      |   |                   |   | (17    | )                |  |   | 5                |   |  |   | 131    |  
|                                                        |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |        |  
|                                                        |  |                    | 7      |   |                   |   | (17    | )                |  |   | (12              | ) |  |   | 71     |  
|                                                        |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |        |  
|Less:                                                   |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |        |  
|Depreciation and amortization                           |  |                    | 784    |   |                   |   | 904    |                  |  |   | 2,518            |   |  |   | 2,858  |  
|Interest expense, net                                   |  |                    | 121    |   |                   |   | 91     |                  |  |   | 332              |   |  |   | 276    |  
|Loss (gain) on disposal of assets                       |  |                    | 21     |   |                   |   | 298    |                  |  |   | (30              | ) |  |   | 365    |  
|Income tax benefit                                      |  |                    | (253   | ) |                   |   | (148   | )                |  |   | (492             | ) |  |   | (77    | )
|                                                        |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |        |  
|                                                        |  |                    | 673    |   |                   |   | 1,145  |                  |  |   | 2,328            |   |  |   | 3,422  |  
|                                                        |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |        |  
|Net loss                                                |  | $                  | (537   | ) |                   | $ | (435   | )                |  | $ | (1,123           | ) |  | $ | (384   | )
|                                                        |  |                    |        |   |                   |   |        |                  |  |   |                  |   |  |   |        |  



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##### Table of Contents

The Company measures accounts receivable, inventory and property, plant and equipment by segments.
A component of corporate assets is cash in the amount of $1.1 million and $0.1 million as of February 28, 2005 and May 31, 2004, respectively. Also, included in corporate assets is related party accounts receivable, deferred income taxes, prepaid
expenses and property, plant and equipment.



The Companys
assets by segment as of February 28, 2005 and May 31, 2004 are as follows (in thousands):



|             |  |                  |        |             |   |       
|------------ |  | ---------------- | ------ | ----------- | - | ------
|             |  | February 28,2005 |        | May 31,2004
|Assets       |  |                  |        |             |   |       
|Paging       |  | $                | 7,339  |             | $ | 9,690 
|Two Way      |  |                  | 2,472  |             |   | 2,701 
|Corporate    |  |                  | 2,655  |             |   | 1,380 
|Other        |  |                  | 625    |             |   | 933   
|             |  |                  |        |             |   |       
|Total Assets |  | $                | 13,091 |             | $ | 14,704
|             |  |                  |        |             |   |       



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



Adjusted
EBITDA should not be considered as an alternative to operating income and income before taxes as an indicator of the companys operations in accordance with generally accepted accounting principles. Adjusted EBITDA for the core business areas
are presented in the table above, in addition to a reconciliation of adjusted EBITDA to net income at the company level. A reconciliation of adjusted EBITDA to operating income for the core business areas and sub-segments is presented above.



NOTE M  ACQUISITIONS



On May 20, 2004, Teletouch acquired substantially all of the paging assets
of Preferred Networks, Inc. (PNI), a corporation headquartered in Atlanta, Georgia. These assets were acquired out of bankruptcy and consisted of two distinct paging networks, one in the Southeast and one in the Northeast United States.
The total purchase price for the assets of PNI was approximately $257,000. In a concurrent transaction, Teletouch sold the paging network and the associated paging subscribers in the Northeast for $155,000. During the quarter ended August 31, 2004,
the Company sold certain excess paging infrastructure equipment acquired from PNI for $55,000. The net result of the asset purchase and sale transactions by Teletouch involving the PNI assets was that Teletouch retained all of the paging
infrastructure in the Southeast, primarily around Atlanta, Georgia and the associated paging subscribers. 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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##### Table of Contents

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



FORWARD-LOOKING STATEMENTS



Our disclosure and analysis in this document may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995 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 for the purpose of the safe harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words estimate,
project, intend, expect, believe, plan, and similar expressions are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this document. Any Form 10-K, Annual Report to Shareholders, Form 10-Q or Form 8-K of Teletouch may include forward-looking statements. In addition, other written or oral statements
which constitute forward-looking statements have been made and may in the future be made by or on behalf of Teletouch, including with respect to the matters referred to above. These forward-looking statements are necessarily estimates, reflecting
the best judgment of senior management that rely on a number of assumptions concerning future events, many of which are outside of our control, 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, including those set forth in this document. 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 unit;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Uncertainty concerning the growth rate for the wireless communications and telemetry industries 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;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



Overview



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



Teletouch is a leading provider of wireless telecommunications services,
primarily paging services, in non-major metropolitan areas and communities in the southeast United States. As of February 28, 2005, the Company had approximately 162,300 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.



The Company continues to follow
its overall business strategy of minimizing the level of customer attrition while attempting to develop new recurring revenue streams from telemetry products or through acquisitions to minimize the impact of the loss in recurring revenues from its
declining paging subscriber base. On October 25, 2004, the Company executed two non-binding letters of intent to purchase the home and commercial security alarm businesses owned and operated by Progressive Concepts Communications, Inc.
(PCCI), a company controlled by Robert McMurrey, Chairman of Teletouch. These businesses have a growing base of security subscribers that generate monthly recurring revenues that would help Teletouch offset some of the losses in its
pager revenues. Additionally, these companies are based on technologies that are complementary to those used by Teletouchs developing telemetry business. The Companys successful recapitalization of its debt and certain equity securities
during fiscal 2002 and the restructuring of its operations during fiscal 2003 and 2004 have allowed the Company to be able to generate sufficient cash flows to meet its capital needs for the previous two fiscal years. In order for the Company to
continue to generate sufficient cash flow to meet its operating and capital needs during the remainder of fiscal 2005, management has begun to restructure its operations and reduce certain operating expenses. In December 2004, the Company relocated
its corporate offices and eliminated headcount from its field operations and its corporate office. The relocation allowed the Company to bring all of its corporate functions together in one facility further improving the efficiency of its
operations. During the third quarter, management developed a new



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##### Table of Contents

compensation program for its two way business to emphasize sales on its Logic Trunked Radio (LTR) system.
Additionally, during the third quarter, the Company has neared the completion of exiting one of its paging systems in Arkansas by migrating those subscribers to another of its existing paging systems. The Company is currently in discussions with
another paging carrier to exchange certain systems that are more geographically beneficial to both parties and would likely result in cost savings for both. Continued cost saving and revenue generating activities are planned during the fourth
quarter which are designed to further improve cash flow and operating efficiency. During the first nine months of fiscal 2005, revenues from the telemetry business were less than forecast. Currently, management is less than optimistic that the
revenues from the telemetry business will meet expectations during the fourth quarter based on level of active and qualified sales leads as well as the progress of the various customer evaluations that are underway. New telemetry products and sales
channels continue to be developed. The Company introduced three new telemetry devices during the third quarter of 2005. Management continues to review the progress of this product line on an ongoing basis.



During the remainder of fiscal year 2005, the Company intends to continue
focusing on developing its telemetry services but will place an increased emphasis on stabilizing its core paging business and adding subscribers to its two-way radio system. By continuing to reduce overhead costs, developing a strategy to defend
itself in the increasingly competitive pager market and focusing on paging customer retention, the Company believes that it can minimize the impact on operating margins of its declining paging subscriber base while it develops recurring revenue
streams from its telemetry products and services or through acquisition to offset the declining paging service revenue. Additionally, if the opportunity to acquire other companies arises, the Company believes it can achieve better operating results
than those achieved by the businesses separately by consolidating administrative functions and taking advantage of economies of scale.



In February 2005, the Company cancelled its Multiple Advance Promissory Note (MAP Note) with First Community Financial Corporation
(FCFC). The Company initiated the early termination of the MAP Note because it had not had to access this line of credit for the past several quarters and the continuance of this facility created unnecessary administration and related
costs within the Company. Under the terms of the MAP Note, the Company was 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 first and second quarters of fiscal 2005, the Company was unable to maintain compliance with certain financial covenants in the MAP Note. The Company did receive a waiver of these covenants which allowed the Company to
remain in good standing under the terms of the MAP Note for the quarters ending August 31, 2004 and November 30, 2004.



Security Business Potential Acquisitions



On October 25, 2004 the Company concurrently executed two non-binding letters of intent to acquire the outstanding equity securities of State Hawk
Security, Inc. (State Hawk) and the assets of the Hawk Security Services (Hawk Security) division of Progressive Concepts, Inc. The Company has engaged the Howard Frazier Barker Elliott, Inc. firm to issue a fairness opinion
and perform due diligence on these transactions. Both purchase transactions are contingent upon the satisfactory completion of due diligence, the negotiation of definitive purchase agreements including determination of final purchase prices and the
receipt of a fairness opinion by the Companys Board of Directors. Teletouch is actively seeking financing to complete these transactions.



Hawk Security is an entity that originates security monitoring contracts and performs the customer installation and setup of the systems. State Hawk is a
special purpose entity that purchases security monitoring contracts to-date, exclusively from Hawk Security. State Hawk finances these contract acquisitions through a revolving line of credit that it has secured from a third party. See Note J to the
financial statements (Related Party Transactions) for a discussion relating to our managements relationship with this entity.



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##### Table of Contents

RESULTS OF OPERATIONS



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



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



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



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



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



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



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



The Company has a relatively fixed cost structure related to maintaining its paging network which includes rental of tower space or other fixed location
space for its transmitting equipment, telecommunication charges to connect its paging network, and repair and maintenance costs, the Company has been able to reduce its operating expenses over the past year at a rate relative to its losses in
revenues. As the Company moves forward with the potential acquisitions of the security business its plan is to leverage the operations of Teletouch to grow the new businesses. The new businesses may afford opportunities in geographic areas that are
becoming difficult to justify for paging only operations. Therefore, it is likely that the Company will retain its infrastructure and the related operating expenses in these geographic areas pending completion of the potential acquisitions on the
expectation that the new revenue opportunities will justify the expenses. The retaining of certain operating expenses in anticipation of new revenue opportunities coupled with a continuing decline in paging subscribers and the related recurring
revenues will likely result in a continued increase in net losses until the Company is able to generate sufficient new revenue growth.



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##### Table of Contents

In December 2004, the Company relocated its corporate offices and implemented other cost savings
measures. The relocation allowed the Company to bring all of its corporate functions together in one facility further improving the efficiency of its operations. Other sales, operational and organizational changes are planned during the fourth
quarter which will further improve cash flow and operating efficiency. Restructuring of the Companys paging operations will be difficult as the personnel and facilities costs have been reduced to a level that the Companys management
believes that further reductions in these areas may have some negative impact on revenues due to a potential impairment in Teletouchs ability to service its existing customers. The Company is currently evaluating the profitability of each of
its paging systems throughout the Southeast United States. If the revenues on a system were to decline to the point that the system was unprofitable, the Company would be forced to consider its alternatives, which could include shutting that system
down and forfeiting the revenues associated unless it is able to convert those customers to another compatible system. During the prior quarter, the Company identified a few paging systems that it operates that have suffered subscriber deterioration
to a point that the system was unprofitable. During the third quarter, the Company has neared the completion of exiting one of its unprofitable paging systems in Arkansas by migrating those subscribers to another of its existing paging systems. The
Company is currently in discussions with another paging carrier to exchange certain systems that are more geographically beneficial to both parties and would likely result in cost savings for both which would likely improve the profitability of
these systems. Continued cost saving and revenue generating activities are planned during the fourth quarter which are designed to further improve cash flow and operating efficiency. The Company will continue to review and implement certain programs
during fiscal 2005 in an attempt to stabilize its current paging subscriber base and reduce the cost of supporting these customers.



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##### Table of Contents

Service, Rent and Maintenance Revenue and Cost of Service, Rent and Maintenance for the Three and Nine Months ended
February 28, 2005 and February 29, 2004



|                                                                                 |                  |   |        |               |  |    |                  |  |   |               |   |  |         |                           |  |   |        |   |  |     |   
|-------------------------------------------------------------------------------- | ---------------- | - | ------ | ------------- |  | -- | ---------------- |  | - | ------------- | - |  | ------- | ------------------------- |  | - | ------ | - |  | --- | --
|(dollars in thousands)                                                           |                  |   |        |               |  |    |                  |  |   |               |   |  |         | Change from Previous Year | 
|                                                                                 | February 28,2005 |   |        | % of Oper Rev |  |    | February 29,2004 |  |   | % of Oper Rev |   |  | Dollars |                           |  | % |       
|Three Months ended                                                               |                  |   |        |               |  |    |                  |  |   |               |   |  |         |                           |  |   |        |   |  |     |   
|                                                                                 |                  |   |        |               |  |   
|Service, rent, and maintenance revenue                                           |                  |   |        |               |  |    |                  |  |   |               |   |  |         |                           |  |   |        |   |  |     |   
|Paging                                                                           |                  | $ | 4,364  |               |  | 74 | %                |  | $ | 5,401         |   |  | 83      | %                         |  | $ | (1,037 | ) |  | (19 | )%
|Two way radio                                                                    |                  |   | 393    |               |  | 7  | %                |  |   | 355           |   |  | 5       | %                         |  |   | 38     |   |  | 11  | % 
|Telemetry                                                                        |                  |   | 37     |               |  | 1  | %                |  |   | 26            |   |  | 0       | %                         |  |   | 11     |   |  | 42  | % 
|Other                                                                            |                  |   | 1      |               |  | 0  | %                |  |   | 1             |   |  | 0       | %                         |  |   |       |   |  | 0   | % 
|                                                                                 |                  |   |        |               |  |    |                  |  |   |               |   |  |         |                           |  |   |        |   |  |     |   
|Service, rent, and maintenance revenue                                           |                  |   | 4,795  |               |  | 82 | %                |  |   | 5,783         |   |  | 88      | %                         |  |   | (988   | ) |  | (17 | )%
|Cost of service, rent and maintenance (exclusive of depreciation & amortization) |                  |   | 2,690  |               |  | 46 | %                |  |   | 2,772         |   |  | 42      | %                         |  |   | (82    | ) |  | (3  | )%
|                                                                                 |                  |   |        |               |  |    |                  |  |   |               |   |  |         |                           |  |   |        |   |  |     |   
|Service gross margin                                                             |                  | $ | 2,105  |               |  |    |                  |  | $ | 3,011         |   |  |         |                           |  | $ | (906   | ) |  |     |   
|                                                                                 |                  |   |        |               |  |    |                  |  |   |               |   |  |         |                           |  |   |        |   |  |     |   
|Service gross margin percentage                                                  |                  |   | 44     | %             |  |    |                  |  |   | 52            | % |  |         |                           |  |   | 92     | % |  |     |   
|                                                                                 |                  |   |        |               |  |    |                  |  |   |               |   |  |         |                           |  |   |        |   |  |     |   
|Nine Months ended                                                                |                  |   |        |               |  |    |                  |  |   |               |   |  |         |                           |  |   |        |   |  |     |   
|                                                                                 |                  |   |        |               |  |   
|Service, rent, and maintenance revenue                                           |                  |   |        |               |  |    |                  |  |   |               |   |  |         |                           |  |   |        |   |  |     |   
|Paging                                                                           |                  | $ | 13,800 |               |  | 74 | %                |  | $ | 16,750        |   |  | 84      | %                         |  | $ | (2,950 | ) |  | (18 | )%
|Two way radio                                                                    |                  |   | 1,318  |               |  | 7  | %                |  |   | 1,007         |   |  | 5       | %                         |  |   | 311    |   |  | 31  | % 
|Telemetry                                                                        |                  |   | 113    |               |  | 1  | %                |  |   | 59            |   |  | 0       | %                         |  |   | 54     |   |  | 92  | % 
|Other                                                                            |                  |   |       |               |  | 0  | %                |  |   |              |   |  | 0       | %                         |  |   |       |   |  | 0   | % 
|                                                                                 |                  |   |        |               |  |    |                  |  |   |               |   |  |         |                           |  |   |        |   |  |     |   
|Service, rent, and maintenance revenue                                           |                  |   | 15,231 |               |  | 82 | %                |  |   | 17,816        |   |  | 89      | %                         |  |   | (2,585 | ) |  | (15 | )%
|Cost of service, rent and maintenance (exclusive of depreciation & amortization) |                  |   | 8,209  |               |  | 44 | %                |  |   | 8,284         |   |  | 41      | %                         |  |   | (75    | ) |  | (1  | )%
|                                                                                 |                  |   |        |               |  |    |                  |  |   |               |   |  |         |                           |  |   |        |   |  |     |   
|Service gross margin                                                             |                  | $ | 7,022  |               |  |    |                  |  | $ | 9,532         |   |  |         |                           |  | $ | (2,510 | ) |  |     |   
|                                                                                 |                  |   |        |               |  |    |                  |  |   |               |   |  |         |                           |  |   |        |   |  |     |   
|Service gross margin percentage                                                  |                  |   | 46     | %             |  |    |                  |  |   | 54            | % |  |         |                           |  |   | 97     | % |  |     |   
|                                                                                 |                  |   |        |               |  |    |                  |  |   |               |   |  |         |                           |  |   |        |   |  |     |   



Service, Rent
and Maintenance Revenue Discussion for the Three Months Ended February 28, 2005 and February 29, 2004



The 19% decline in paging service revenue for the three months ended February 28, 2005 resulted from fewer pagers in service. Pagers in service decreased
to approximately 162,300 as of February 28, 2005 as compared to approximately 190,400 as of February 29, 2004, due to a continuing decline in the demand for one-way paging service. Paging subscriber loss rates as a percentage of total paging
subscribers has remained flat from year to year, however, as the subscriber base continues to shrink the impact on revenues of these subscriber losses continues to decline. Teletouch anticipates that the demand for one way paging services will
continue to decline for the foreseeable future, which will result in reductions in service, rent and maintenance revenues due to the lower volume of subscribers.



The 11 % increase in two-way service revenue for the three months ended February 28, 2005 is due primarily to the
acquisition of the customer base from Delta Communications in the Dallas / Fort Worth, Texas market. The asset purchase transaction with Delta Communications was closed in January 2004.



The 42% increase in telemetry service revenue for the three months ended February 28, 2005 is due to the Company beginning
to recognize limited sales success in this new product line as a result of the resolution of many of the technical issues experienced with these products in the prior year. The primary source of revenue during the quarter ended February 28, 2005 was
from services provided for the VisionTrax product
which is used to track trailers and rail cars as well as other mobile assets.



24



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##### Table of Contents

Service, Rent and Maintenance Revenue Discussion for the Nine Months Ended February 28, 2005 and
February 29, 2004



The 18% decline in paging service
revenues for the nine months ended February 28, 2005 resulted from fewer pagers in service. Pagers in service decreased to approximately 162,300 as of February 28, 2005 as compared to approximately 190,400 as of February 29, 2004, due to a
continuing decline in the demand for one-way paging service. Paging subscriber loss rates as a percentage of total paging subscribers has remained flat from year to year, however, as the subscriber base continues to shrink the impact on revenues of
these subscriber losses continues to decline. Teletouch anticipates that it will continue to decline for the foreseeable future, which will result in reductions in service, rent and maintenance revenues due to the lower volume of subscribers.



The increase in two-way service revenues for the nine months
ended February 28, 2005 is due primarily to the acquisition in January 2004 of the customer base from Delta Communications in the Dallas / Fort Worth, Texas market offset by net losses of two way radio customers during the past two quarters as a
result of increased competition and a lack of internal focus on additions to the two way radio system. Late in the quarter ended February 28, 2005, the Company revised its compensation plan for its two way radio salespeople to emphasize acquiring
customers on its two way radio system and began a capital project to upgrade its Dallas/Fort Worth and East Texas two way radio systems. As of April 19, 2005 the Company has received all of the necessary equipment to upgrade its radio systems and
has installed the majority of such equipment. The upgrade of the systems is expected to be completed by the end of April 2005. The Company realized a positive shift in activations upon implementing the new compensation plan and anticipates that
subscriber additions will exceed subscriber losses during the next quarter.



The 92% increase in telemetry service revenue for the nine months ended February 28, 2005 is due to the Company beginning to recognize limited sales success in this new product line as a result of the resolution of
many of the technical issues experienced with these products in the prior year. The primary source of revenue during the quarter ended February 28, 2005 was from services related to the VisionTrax product which is used to track trailers and rail cars as well as other mobile assets.



Teletouch continues to strive to develop new products and
services that could partially offset the loss in paging subscribers and the related recurring revenues. To date, the revenues generated by the Companys new telemetry products have offset only an insignificant portion of the decline in paging
revenues. The Company continues to be able to generate sufficient cash to operate the business as a result of certain cost saving measures it has implemented over the past several years. The Company is currently executing a restructuring of its
operations, including the relocation of its corporate offices, organizational changes and other cost saving measures to offset some of the continuing paging revenue deterioration and ensure sufficient cash to operate the business during the
remainder of fiscal 2005 and into fiscal 2006. During the third quarter, the Company has neared the completion of exiting one of its paging systems in Arkansas by migrating those subscribers to another of its existing paging systems. The Company is
currently in discussions with another paging carrier to exchange certain systems that are more geographically beneficial to both parties and would likely result in cost savings for both. Continued cost saving and revenue generating activities are
planned during the fourth quarter which are designed to further improve cash flow and operating efficiency. The Company will continue to review and implement certain programs during fiscal 2005 in an attempt to stabilize its current paging
subscriber base and reduce the cost of supporting these customers. Some areas of focus include: more aggressive customer retention efforts, pricing strategies to combat the increasingly competitive paging market and locating strategic paging carrier
partners to share in the relatively fixed network costs of the paging infrastructure.



25



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##### Table of Contents

Cost of Service, Rent and Maintenance for the Three and Nine Months Ended February 28, 2005 and
February 29, 2004



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



|                                            |  |                  |       |                  |   |                          |  |   |      |  
|------------------------------------------- |  | ---------------- | ----- | ---------------- | - | ------------------------ |  | - | ---- | -
|(dollars in thousands)                      |  | February 28,2005 |       | February 29,2004 |   | Change fromPrevious Year | 
|Three Months ended                          |  |                  |       |                  |   |                          |  |   |      |  
|                                            |  |                  |      
|Cost of service, rent and maintenance       |  |                  |       |                  |   |                          |  |   |      |  
|Tower lease expense                         |  | $                | 815   |                  | $ | 588                      |  | $ | 227  |  
|Third party airtime and network telco costs |  |                  | 750   |                  |   | 821                      |  |   | (71  | )
|Salaries and other personnel expense        |  |                  | 905   |                  |   | 1,040                    |  |   | (135 | )
|Office expense                              |  |                  | 155   |                  |   | 244                      |  |   | (89  | )
|Other expenses                              |  |                  | 65    |                  |   | 79                       |  |   | (14  | )
|                                            |  |                  |       |                  |   |                          |  |   |      |  
|Total cost of service, rent and maintenance |  | $                | 2,690 |                  | $ | 2,772                    |  | $ | (82  | )
|                                            |  |                  |       |                  |   |                          |  |   |      |  
|Nine Months ended                           |  |                  |       |                  |   |                          |  |   |      |  
|                                            |  |                  |      
|Cost of service, rent and maintenance       |  |                  |       |                  |   |                          |  |   |      |  
|Tower lease expense                         |  | $                | 2,246 |                  | $ | 1,725                    |  | $ | 521  |  
|Third party airtime and network telco costs |  |                  | 2,386 |                  |   | 2,547                    |  |   | (161 | )
|Salaries and other personnel expense        |  |                  | 2,806 |                  |   | 2,898                    |  |   | (92  | )
|Office expense                              |  |                  | 552   |                  |   | 755                      |  |   | (203 | )
|Other expenses                              |  |                  | 219   |                  |   | 359                      |  |   | (140 | )
|                                            |  |                  |       |                  |   |                          |  |   |      |  
|Total cost of service, rent and maintenance |  | $                | 8,209 |                  | $ | 8,284                    |  | $ | (75  | )
|                                            |  |                  |       |                  |   |                          |  |   |      |  



Explanations for
changes in expenses greater that $100,000 are provided below:



Cost of Service, Rent and Maintenance Discussion for the Three Months Ended February 28, 2005 and February 29, 2004



| |  |  | The increase in tower lease expense for the three months ended February 28, 2005 is primarily the result of additional tower leases entered into or assumed by the Company as a
result of the acquisition of substantially all the assets of Delta Communications, Inc., in January 2004, and Preferred Networks, Inc., in May 2004. In addition, an internal review of the companys existing tower leases was initiated during the
quarter ended February 28, 2005, which resulted in the discovery of an expired lease which contained a holdover penalty clause in the event the lease was carried on a month-to-month basis. This lease expired December 31, 1999 and an accrual of
$89,000 additional expense has been recorded to account for the difference between the holdover penalty and the amounts invoiced and paid through February 28, 2005. A new lease is currently being negotiated with the lessor. Additionally, $10,000 has
been estimated and accrued for similar liabilities related to other tower leases reviewed.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decrease in salaries and other personnel expense for the three months ended February 28, 2005 is due to a reduction in customer service personnel, 81 employees as of February
29, 2004 as compare to 76 employees as of February 28, 2005 as well as severance benefits paid to terminated employees in the third quarter of fiscal year 2004.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





26



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##### Table of Contents

Cost of Service, Rent and Maintenance Discussion for the Nine Months Ended February 28, 2005 and
February 29, 2004



| |  |  | The increase in tower lease expense for the nine months ended February 28, 2005 is primarily the result of additional tower leases entered into or assumed by the Company as a result
of the acquisition of substantially all the assets of Delta Communications, Inc., in January 2004, and Preferred Networks, Inc., in May 2004. In addition, an internal review of the companys existing tower leases was initiated during the
quarter ended February 28, 2005, which resulted in the discovery of an expired lease which contained a holdover penalty clause in the event the lease was carried on a month-to-month basis. This lease expired December 31, 1999 and an accrual of
$89,000 additional expense has been recorded to account for the difference between the holdover penalty and the amounts invoiced and paid through February 28, 2005. A new lease is currently being negotiated with the lessor. Additionally, $10,000 has
been estimated and accrued for similar liabilities related to other tower leases reviewed.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decrease in third party airtime and network wireline and wireless circuit costs, for the nine months ended February 28, 2005 from the same period in the prior year, is due
primarily to a reduction in paging subscribers with coverage on other affiliates paging networks and to better telecommunication rates negotiated by the Company.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decline in office expense for the nine months ended February 28, 2005 reflects the effects of closing the Companys remaining retail store in June 2004 and reducing the
number of service center locations as well are relocating most of the remaining 18 service center locations to lower cost lease space in fiscal 2004 and fiscal 2005.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decline in other expenses for the nine months February 28, 2005 reflects reductions in travel and postage costs primarily due to fewer service center locations and employees as
well as the Companys implementation of a formalized travel approval policy at the beginning of fiscal 2005.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Sales Revenue and Cost of Products Sold for the Three and Nine Months ended February 28, 2005 and February 29,
2004



|                                  |  |                  |       |   |                       |    |   |                  |   |       |                       |  |    |                          |  |   |       |   |  |     |   
|--------------------------------- |  | ---------------- | ----- | - | --------------------- | -- | - | ---------------- | - | ----- | --------------------- |  | -- | ------------------------ |  | - | ----- | - |  | --- | --
|(dollars in thousands)            |  | February 28,2005 |       |   | % ofOperatingRevenues |    |   | February 29,2004 |   |       | % ofOperatingRevenues |  |    | Change fromPrevious Year | 
|                                  |  |                  |       |   | Dollars               |    |   | %                |  
|Three Months ended                |  |                  |       |   |                       |    |   |                  |   |       |                       |  |    |                          |  |   |       |   |  |     |   
|                                  |  |                  |       |   |                       |   
|Product sales revenue             |  |                  |       |   |                       |    |   |                  |   |       |                       |  |    |                          |  |   |       |   |  |     |   
|Pagers and accessories            |  | $                | 149   |   |                       | 3  | % |                  | $ | 200   |                       |  | 3  | %                        |  | $ | (51   | ) |  | (26 | )%
|Two way radios and parts          |  |                  | 904   |   |                       | 15 | % |                  |   | 492   |                       |  | 8  | %                        |  |   | 412   |   |  | 84  | % 
|Telemetry devices and accessories |  |                  | 5     |   |                       | 0  | % |                  |   | 60    |                       |  | 1  | %                        |  |   | (55   | ) |  | (92 | )%
|Other                             |  |                  | 15    |   |                       | 0  | % |                  |   | 17    |                       |  | 0  | %                        |  |   | (2    | ) |  | (12 | )%
|                                  |  |                  |       |   |                       |    |   |                  |   |       |                       |  |    |                          |  |   |       |   |  |     |   
|Total product sales revenue       |  |                  | 1,073 |   |                       | 18 | % |                  |   | 769   |                       |  | 12 | %                        |  |   | 304   |   |  | 40  | % 
|Cost of products sold             |  |                  | 917   |   |                       | 16 | % |                  |   | 691   |                       |  | 11 | %                        |  |   | 226   |   |  | 33  | % 
|                                  |  |                  |       |   |                       |    |   |                  |   |       |                       |  |    |                          |  |   |       |   |  |     |   
|Product gross margin              |  | $                | 156   |   |                       |    |   |                  | $ | 78    |                       |  |    |                          |  | $ | 78    |   |  |     |   
|                                  |  |                  |       |   |                       |    |   |                  |   |       |                       |  |    |                          |  |   |       |   |  |     |   
|Product gross margin percentage   |  |                  | 15    | % |                       |    |   |                  |   | 10    | %                     |  |    |                          |  |   |       |   |  |     |   
|                                  |  |                  |       |   |                       |    |   |                  |   |       |                       |  |    |                          |  |   |       |   |  |     |   
|Nine Months ended                 |  |                  |       |   |                       |    |   |                  |   |       |                       |  |    |                          |  |   |       |   |  |     |   
|                                  |  |                  |       |   |                       |   
|Product sales revenue             |  |                  |       |   |                       |    |   |                  |   |       |                       |  |    |                          |  |   |       |   |  |     |   
|Pagers and accessories            |  | $                | 506   |   |                       | 3  | % |                  | $ | 688   |                       |  | 3  | %                        |  | $ | (182  | ) |  | (26 | )%
|Two way radios and parts          |  |                  | 2,707 |   |                       | 14 | % |                  |   | 1,180 |                       |  | 6  | %                        |  |   | 1,527 |   |  | 129 | % 
|Telemetry devices and accessories |  |                  | 179   |   |                       | 1  | % |                  |   | 151   |                       |  | 1  | %                        |  |   | 28    |   |  | 19  | % 
|Other                             |  |                  | 63    |   |                       | 0  | % |                  |   | 221   |                       |  | 1  | %                        |  |   | (158  | ) |  | (71 | )%
|                                  |  |                  |       |   |                       |    |   |                  |   |       |                       |  |    |                          |  |   |       |   |  |     |   
|Total product sales revenue       |  |                  | 3,455 |   |                       | 18 | % |                  |   | 2,240 |                       |  | 11 | %                        |  |   | 1,215 |   |  | 54  | % 
|Cost of products sold             |  |                  | 3,120 |   |                       | 17 | % |                  |   | 1,885 |                       |  | 9  | %                        |  |   | 1,235 |   |  | 66  | % 
|                                  |  |                  |       |   |                       |    |   |                  |   |       |                       |  |    |                          |  |   |       |   |  |     |   
|Product gross margin              |  | $                | 335   |   |                       |    |   |                  | $ | 355   |                       |  |    |                          |  | $ | (20   | ) |  |     |   
|                                  |  |                  |       |   |                       |    |   |                  |   |       |                       |  |    |                          |  |   |       |   |  |     |   
|Product gross margin percentage   |  |                  | 10    | % |                       |    |   |                  |   | 16    | %                     |  |    |                          |  |   |       |   |  |     |   
|                                  |  |                  |       |   |                       |    |   |                  |   |       |                       |  |    |                          |  |   |       |   |  |     |   



Sales Revenue
and Cost of Products Sold Discussion for the Three Months Ended February 28, 2005 and February 29, 2004



Product sales revenue: The 84% increase in two-way product sales revenue for the three months ended February 28, 2005 is attributable primarily to
certain sales contracts received as a result of the release of federal grant monies under the Homeland Security programs which allow city, county, and local emergency response entities to upgrade their communications equipment.



Cost of products sold: The 33% increase in cost of products sold for
the three months ended February 28, 2005 is attributable primarily to two-way sales revenues.



Sales Revenue and Cost of Products Sold Discussion for the Nine Months Ended February 28, 2005 and February 29, 2004



Product sales revenue: The increase in two-way product sales revenue for the nine months ended February 28, 2005 is
attributable primarily to certain sales contracts received as a result of the release of federal grant monies under the Homeland Security programs which allow city, county, and local emergency response entities to upgrade their communications
equipment. Additionally, the acquisition of Delta Communications, Inc. in January 2004 allowed the Company to expand its two way business into the Dallas/Fort Worth market and added additional product sales revenue to the Company.



28



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##### Table of Contents

Cost of products sold: The 66% increase in cost of products sold for the nine months ended
February 28, 2005 is attributable primarily to certain two-way sales contracts received as a result of the release of federal grant monies under the Homeland Security programs which allow city, county, and local emergency response entities to
upgrade their communications equipment. In addition, inventory obsolescence expense increased $236,000 as the Company continues to identify and record obsolete and slow moving products. For the nine months ended February 28, 2005, inventory
obsolescence expense totaled $731,000, or 23% of cost of products sold, which primarily related to additional obsolete pager, two-way radio, and telemetry inventory and parts identified in fiscal 2005.



Selling and General and Administrative Expenses for the Three and Nine Months ended
February 28, 2005 and February 29, 2004



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



|                                                      |  |                  |       |                  |   |       |                          |  |   |      |  
|----------------------------------------------------- |  | ---------------- | ----- | ---------------- | - | ----- | ------------------------ |  | - | ---- | -
|(dollars in thousands)                                |  | February 28,2005 |       | February 29,2004 |   |       | Change fromPrevious Year | 
|Three Months ended                                    |  |                  |       |                  |   |       |                          |  |   |      |  
|                                                      |  |                  |      
|Selling and general and administrative expenses       |  |                  |       |                  |   |       |                          |  |   |      |  
|Salaries and other personnel expense                  |  | $                | 1,246 |                  | $ | 1,432 |                          |  | $ | (186 | )
|Office expense                                        |  |                  | 170   |                  |   | 140   |                          |  |   | 30   |  
|Advertising expense                                   |  |                  | 24    |                  |   | 71    |                          |  |   | (47  | )
|Professional fees                                     |  |                  | 255   |                  |   | 179   |                          |  |   | 76   |  
|Taxes and licenses fees                               |  |                  | 139   |                  |   | 249   |                          |  |   | (110 | )
|Stock-based compensation expense                      |  |                  | 5     |                  |   | (16   | )                        |  |   | 21   |  
|Other expenses                                        |  |                  | 286   |                  |   | 324   |                          |  |   | (38  | )
|                                                      |  |                  |       |                  |   |       |                          |  |   |      |  
|Total selling, general and administrative expenses    |  | $                | 2,125 |                  | $ | 2,379 |                          |  | $ | (254 | )
|                                                      |  |                  |       |                  |   |       |                          |  |   |      |  
|Nine Months ended                                     |  |                  |       |                  |   |       |                          |  |   |      |  
|                                                      |  |                  |      
|Selling and general and administrative expenses       |  |                  |       |                  |   |       |                          |  |   |      |  
|Salaries and other personnel expense                  |  | $                | 3,432 |                  | $ | 3,861 |                          |  | $ | (429 | )
|Office expense                                        |  |                  | 449   |                  |   | 395   |                          |  |   | 54   |  
|Advertising expense                                   |  |                  | 127   |                  |   | 220   |                          |  |   | (93  | )
|Professional fees                                     |  |                  | 738   |                  |   | 731   |                          |  |   | 7    |  
|Taxes and licenses fees                               |  |                  | 474   |                  |   | 549   |                          |  |   | (75  | )
|Stock-based compensation expense                      |  |                  | 5     |                  |   | 132   |                          |  |   | (127 | )
|Other expenses                                        |  |                  | 927   |                  |   | 961   |                          |  |   | (34  | )
|                                                      |  |                  |       |                  |   |       |                          |  |   |      |  
|Total selling and general and administrative expenses |  | $                | 6,152 |                  | $ | 6,849 |                          |  | $ | (697 | )
|                                                      |  |                  |       |                  |   |       |                          |  |   |      |  



Explanations for
changes in expenses greater than $100,000 are provided below:



Selling and General and Administrative Expenses Discussion for the Three Months Ended February 28, 2005 and February 29, 2004



| |  |  | The decrease in salaries and other personnel expense for the three months ended February 28, 2005 is due to a reduction in the number of selling and general and administrative
employees, 62 employees as of February 29, 2004 as compared to 52 employees as of February 28, 2005, as well as to severance benefits paid to terminated employees in the third quarter of fiscal year 2004. This decrease in salaries was partially
offset by the Companys hiring of Thomas A. Hyde, Jr. as Chief Executive Officer in October 2004. and the additional personnel added as a result of acquiring Delta Communications, Inc. in January 2004 and acquiring Preferred Networks, Inc. in
May 2004.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | The reduction in taxes and license fees for the three months ended February 28, 2005 is primarily due to overaccrual of franchise tax in the prior year.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



Selling and General and Administrative Expenses Discussion for the Nine
Months Ended February 28, 2005 and February 29, 2004



| |  |  | The decrease in salaries and other personnel expense for the nine months ended February 28, 2005 is due to a reduction in the number of selling and general and administrative
employees, 62 employees as of February 29, 2004 as compared to 52 employees as of February 28, 2005, as well as to severance benefits paid to terminated employees in the third quarter of fiscal year 2004. This decrease in salaries was partially
offset by the Companys hiring of Thomas A. Hyde, Jr. as Chief Executive Officer in October 2004 and the additional personnel added as a result of acquiring Delta Communications, Inc. in January 2004 and acquiring Preferred Networks, Inc. in
May 2004. See Note M to the financial statements (Acquisitions) for discussion of the acquisition of Preferred Networks, Inc.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Stock-based compensation expense for the nine months ended February 28, 2005 declined due to a decrease in the market price of the Companys stock. The Company records
compensation expense and reduction of previously recorded compensation expense associated with some repriced options in accordance with the Financial Accounting Standards Board Interpretation No. 44, Accounting for Certain Transactions
Involving Stock Compensation.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Other Operating Expenses
for the Three and Nine Months Ended February 28, 2005 and February 29, 2004



|                               |  |                  |       |   |                  |   |                          |  |   |      |  
|------------------------------ |  | ---------------- | ----- | - | ---------------- | - | ------------------------ |  | - | ---- | -
|(dollars in thousands)         |  | February 28,2005 |       |   | February 29,2004 |   | Change fromPrevious Year | 
|Three Months ended             |  |                  |       |   |                  |   |                          |  |   |      |  
|                               |  |                  |      
|Depreciation and amortization  |  | $                | 784   |   |                  | $ | 904                      |  | $ | (120 | )
|Loss (gain) on sale of assets  |  |                  | 21    |   |                  |   | 298                      |  |   | (277 | )
|                               |  |                  |       |   |                  |   |                          |  |   |      |  
|Total other operating expenses |  | $                | 805   |   |                  | $ | 1,202                    |  | $ | (397 | )
|                               |  |                  |       |   |                  |   |                          |  |   |      |  
|Nine Months ended              |  |                  |       |   |                  |   |                          |  |   |      |  
|                               |  |                  |      
|Depreciation and amortization  |  | $                | 2,518 |   |                  | $ | 2,858                    |  | $ | (340 | )
|Loss (gain) on sale of assets  |  |                  | (30   | ) |                  |   | 365                      |  |   | (395 | )
|                               |  |                  |       |   |                  |   |                          |  |   |      |  
|Total other operating expenses |  | $                | 2,488 |   |                  | $ | 3,223                    |  | $ | (735 | )
|                               |  |                  |       |   |                  |   |                          |  |   |      |  



Other Operating
Expenses Discussion for the Three and Nine Months Ended February 28, 2005 and February 29, 2004



Depreciation and amortization: The decline in depreciation and amortization expense is due the continued effort of the Company to purchase
equipment only as necessary to maintain the paging infrastructure and an adequate supply of pagers to lease to customers as well as the aging of the existing capital assets.



Loss (gain) on sale of assets: The decrease 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.



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Interest Expense, Net of Interest Income for the Three and Nine Months Ended February 28, 2005 and February 29,
2004



Interest expense, net of interest income primarily
consists of the accretion of the redeemable common stock purchase warrants and common stock payable, interest expense related to a line of credit with First Community Financial Corporation (FCFC) and the interest related to various
automobile notes. During February 2005, the Company terminated the line of credit with FCFC and paid an additional $10,000 in interest to FCFC related to the minimum interest charge due under the agreement of $5,000 per month through the original
expiration of the agreement.



Income Tax Benefit for the Three and Nine
Months Ended February 28, 2005 and February 29, 2004



The
effective benefit tax rate is 31% for the nine months ended February 28, 2005 as compared to 17% for the same period in the prior year. The difference in the effective benefit rate and the statutory rate is due primarily to interest expense related
to the redeemable common stock warrants being non-deductible for tax purposes.



FINANCIAL CONDITION



|                                      |                  |                   |        |                  |        |   |        |   |  |   |       |  
|------------------------------------- | ---------------- | ----------------- | ------ | ---------------- | ------ | - | ------ | - |  | - | ----- | -
|(in thousands)                        |                  | Nine Months Ended |        |                  | Change |  
|                                      | February 28,2005 |                   |        | February 29,2004 |        |  
|Cash provided by operating activities |                  | $                 | 2,254  |                  |        | $ | 2,873  |   |  | $ | (619  | )
|Cash used in investing activities     |                  |                   | (1,118 | )                |        |   | (2,854 | ) |  |   | 1,736 |  
|Cash used in financing activities     |                  |                   | (79    | )                |        |   | (416   | ) |  |   | 337   |  
|                                      |                  |                   |        |                  |        |   |        |   |  |   |       |  
|Net increase (decrease) in cash       |                  | $                 | 1,057  |                  |        | $ | (397   | ) |  | $ | 1,454 |  
|                                      |                  |                   |        |                  |        |   |        |   |  |   |       |  



Operating Activities



Teletouchs cash balance was $1.1 million as of
February 28, 2005 as compared to $0.1 million at May 31, 2004. The decrease in cash provided by operations during the nine months ended February 28, 2005 over the same period in the prior year is primarily due to $739,000 additional net loss
resulting from the continued decline in paging service revenue. The decrease in cash provided by operations is partially offset by the reduction of the Companys levels of inventories accomplished by decreasing its purchasing during the current
year which contributed cash to the business. A large portion of the net loss recognized this year resulted from inventory obsolescence of $731,000 as compared to inventory obsolescence of $495,000 during the same period in the prior year. The
inventory obsolescence expense relates primarily to certain paging and telemetry inventory that became obsolete due to changes in the Companys product lines or its channels of distribution.



Investing Activities



Cash used by investing activities decreased during the nine months ended February 28, 2005 as compared to the same period in
the prior year due to a $558,000 reduction in capital expenditures, primarily related to leased pagers. Additionally, during the prior year, the Company funded a note receivable to Streamwaves.com, Inc. in the amount of $250,000 and acquired certain
long lived and intangible assets from Delta Communications, Inc. for which there were no similar transactions in the current year.



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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 existing subscribers. Net capital expenditures, including pagers, were $1.2 million and $1.8 million for the first nine months of fiscal years 2005 and 2004, respectively.
Teletouch anticipates capital expenditures to continue to decline during the remainder of fiscal 2005 due primarily to the continuing decline in the number of leased pagers in service, which will result in total capital expenditures declining as
compared to fiscal 2004. Additionally, the Company plans to replace only necessary equipment to maintain the paging infrastructure. Teletouch expects to pay for these expenditures with cash generated from operations.



Financing Activities



The decrease in cash used by financing activities for the nine months ended February 28, 2005 as compared to the same period
in the prior year was due primarily to approximately $350,000 less in principal payments made on the Companys credit agreement with TLL Partners (TLL Note).



Current Position/Future Requirements



Based on current and anticipated levels of operations, the Companys management anticipates that net cash provided by operating activities including
the effects of planned restructuring activities, if successful, together with the $1.1 million of cash on hand will be adequate to meet its anticipated cash requirements for the next twelve months. Revenues from the Companys telemetry product
lines have grown but continue to be insignificant during the three and nine months ended February 28, 2005 and management expects that revenues from the telemetry product line will continue to be insignificant through the remainder of fiscal 2005 as
customer evaluations continue to take longer than originally expected. New telemetry products and channels continue to be developed but are being developed slowly due to the capital requirements of this activity.



Because the Companys new revenue initiatives have been slow to develop,
management is currently executing a restructuring of its operations to eliminate certain expenses to help the Company meet its cash requirements for the remainder of fiscal 2005. Sales, operational and organizational changes have been planned as the
Company moves forward which are designed to improve cash flow and operating efficiency. Certain of the restructuring plans could be altered if the Company is successful in generating additional new revenues or is successful in completing the
acquisition and integration of the security businesses.



The
Company is seeking financing to complete the security business acquisitions previously discussed as well provide additional working capital to fund the Companys operations. From May 2002 through the first quarter of fiscal 2005, the Company
had available borrowings under a credit facility with TLL Partners, a company controlled by Robert McMurrey, Chairman of the Board of Teletouch, and under a separate credit facility with FCFC. During the quarter ended November 30, 2004, the Company
was notified by both lenders of restrictions placed on the availability of these borrowings.



As of February 28, 2005, the Company has no borrowings outstanding under its $2.2 million promissory note with TLL Partners. Any borrowings under this arrangement are subject to the approval of the PCCI Board of
Directors and availability of funds. TLL Partners is a wholly owned subsidiary of PCCI. The Company has had limited borrowings under this agreement in the past and has been given no assurances from TLL Partners or PCCI that the necessary approval
would be given by the PCCI Board of Directors to fund any future operating or capital needs of Teletouch. The Companys management does not anticipate that the necessary approvals would be granted by the PCCI Board of Directors, therefore, it
is operating under the assumption that there are no available borrowings under this agreement.



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In February 2005, the Company cancelled its Multiple Advance Promissory Note (MAP Note) with
First Community Financial Corporation (FCFC). The Company initiated the early termination of the MAP Note because it had not had to access this line of credit for the past several quarters and the continuance of this agreement created
unnecessary administration functions and their related costs within the Company. Under the terms of the MAP Note, the Company was 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 first and second quarters of fiscal 2005, the Company was unable to maintain compliance with certain financial covenants in the MAP Note. The Company did receive a
waiver of these covenants which allowed the Company to remain in good standing under the terms of the MAP Note for the quarters ending August 31, 2004 and November 30, 2004.



There is no assurance that the Company will be able to improve its cash flow from operations, obtain additional third party
financing, generate additional new revenues, complete any acquisitions it is evaluating or successfully complete its planned restructuring activities. If a combination of these events does not occur the Company may not have sufficient cash to
operate the business over the next year. These matters raise substantial doubt about the Companys ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible
future effects on the recoverability of assets and liquidation of liabilities that may result from this uncertainty.



Obligations and Commitments



As of February 28, 2005, our contractual payment obligations under our long-term debt agreements and operating leases for office and transmitter locations
are indicated in the table below. For purposes of the table below, purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding and that specify significant terms, including: fixed or minimum
quantities to be purchased, minimum pricing and the approximate timing of transactions. Teletouch has no such purchase obligations at February 28, 2005. Other long-term liabilities is comprised of certain redeemable common stock warrants issued in
conjunction with the Companys debt restructuring in May 2002 and certain shares of Teletouch Common Stock which were due to be issued in February 2005 in conjunction with the purchase of certain assets from Delta Communications, Inc.



|                                               |  |       |       |                 |   |           |  |           |       |                  |   |     |  |   |   
|---------------------------------------------- |  | ----- | ----- | --------------- | - | --------- |  | --------- | ----- | ---------------- | - | --- |  | - | --
|(in thousands)                                 |  | Total |       | Less than1 Year |   | 1-3 Years |  | 3-5 Years |       | More than5 Years
|Contractual Obligations                        |  |       |       |                 |   |           |  |           |       |                  |   |     |  |   |   
|                                               |  |       |       |                 |  
|Debt obligations                               |  | $     | 187   |                 | $ | 72        |  | $         | 113   |                  | $ | 2   |  | $ |  
|Operating lease obligations                    |  |       | 4,354 |                 |   | 1,899     |  |           | 2,304 |                  |   | 137 |  |   | 14
|Purchase obligations                           |  |       |      |                 |   |          |  |           |      |                  |   |    |  |   |  
|Other long-term liabilities                    |  |       | 3,648 |                 |   | 489       |  |           | 3,159 |                  |   |    |  |   |  
|                                               |  |       |       |                 |   |           |  |           |       |                  |   |     |  |   |   
|Total significant contractual cash obligations |  | $     | 8,189 |                 | $ | 2,460     |  | $         | 5,576 |                  | $ | 139 |  | $ | 14
|                                               |  |       |       |                 |   |           |  |           |       |                  |   |     |  |   |   



Application of Critical Accounting
Policies



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



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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
$228,000 as of February 28, 2005. Based on the information available to the Company, management believes the allowance for doubtful accounts as of February 28, 2005 was adequate. However, actual write-offs might exceed the recorded allowance.



Reserve for Inventory Obsolescence: Reserves for
inventory obsolescence are computed using estimates that are based on sales trends, a ratio of inventory to sales, and a review of specific categories of inventory. In establishing its reserve, Teletouch reviews historic inventory obsolescence
experience including comparisons of previous write-offs to provision for inventory obsolescence and the inventory count compared to recent sales trends. Prior to fiscal 2004, inventory obsolescence has been within our expectations and the provision
established. During fiscal 2004 and the first quarter of fiscal 2005, the Company recorded additional reserves for inventory obsolescence to recognize the deterioration in the market value of certain pager, cellular and electronics and telemetry
inventory. Pager inventory was impaired primarily due to a decline in market value of certain damaged pagers that are repaired by the Company. Cellular and electronic inventory became impaired after many months of attempting to sell off this excess
equipment and the Company recorded a reserve equaling the total value of this inventory. Certain telemetry inventory, primarily related to the Companys fixed monitoring product line, was impaired subsequent to the Company exiting this business
line. Other telemetry inventory became impaired due to technical problems that were not corrected by the Companys vendors. Teletouch management cannot guarantee that the Company 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. The reserve for inventory obsolescence was $551,000 at February 28, 2005.



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



Recent Accounting Pronouncements



In November 2004, the FASB issued SFAS No. 151 Inventory Costs, an amendment of ARB No. 43, Chapter 4. The amendments made by Statement 151 clarify
that abnormal amounts of idle facility



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expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and
require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. The Company has evaluated SFAS No. 151 and it will have no impact on the Companys overall results of operations or financial position.



In December 2004, the FASB issued SFAS No.153, Exchanges
of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions. The amendments made by Statement 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value
of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance.
Previously, Opinion 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset
relinquished. Opinion 29 provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. The Board believes that exception required that some nonmonetary exchanges, although commercially substantive,
be recorded on a carryover basis. By focusing the exception on exchanges that lack commercial substance, the Board believes this Statement produces financial reporting that more faithfully represents the economics of the transactions. The Statement
is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date of issuance. The provisions
of this Statement shall be applied prospectively. The Company does not anticipate that the adoption of SFAS 153 will have a significant impact on the Companys overall results of operations or financial position.



In December 2004, the FASB issued SFAS No.123 (revised 2004),
Share-Based Payment. Statement 123(R) will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment
transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. Statement 123(R) covers a wide range of share-based compensation arrangements including share
options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities
the option of continuing to apply the guidance in Opinion 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. Public entities (other than those filing
as small business issuers) will be required to apply Statement 123(R) as of the first interim or annual reporting period that begins after June 15, 2005. The Company does not anticipate that the adoption of SFAS 123 (R) will have a significant
impact on the Companys overall results of operations or financial position.



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.



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Operational Risks



Arch Wireless and Metrocall Wireless merger could result in increased attrition of Teletouch Subscribers.



The merger of Arch Wireless and Metrocall Wireless, the paging
industrys two largest carriers and direct competitors of Teletouch, could result in further deterioration in market pricing of paging services, and increased competition from this newly combined entity in rural markets in which Teletouch
operates could result in increased attrition of Teletouch subscribers.



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



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



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



Teletouchs future revenue growth is not dependent on any single or
small group subscriber base, but will continue to concentrate on business accounts and on individuals interested in continuity, quality and personal service. As of the quarter ended February 28, 2005, Teletouch had approximately 162,300 pagers in
service as compared to approximately 190,400 pagers in service at February 29, 2004. Teletouch must minimize the reduction in its subscriber base and expand its product offerings to generate revenues to offset the losses in its paging service
revenues. There is no guarantee that our future efforts in this area will decrease subscriber attrition.



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



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



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



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



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



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



Teletouchs products are inherently complex; therefore, it is possible that any defects contained therein may only be detectable once the product is in use. Given the critical services our products provide, these
defects could have a serious adverse impact on our customers, which could damage our reputation, harm customer relations and expose us to liability. Furthermore, any product defects could require significant recalls, which may not be covered by
warranty reserves. Resolving product defects could consume significant financial and engineering resources, which could adversely affect the development and release of future products. Any product defect could result in shipment delays and a
decreased demand for our products, which could reduce our revenues and adversely affect our level of profitability.



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



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



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



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



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



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



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



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



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



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



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



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



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



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Industry Risks



Our products are subject to government regulation.



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



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



The FCC
grants radio licenses for varying terms of up to 10 years, and the FCC must approve renewal applications. In the past, the FCC renewal applications have been more or less routinely granted. However, there can be no assurance that the FCC will
approve or act upon Teletouchs future applications in a timely manner. Delays in or denial of our renewal applications could adversely affect our business operations, which could reduce our revenues and decrease our level of profitability.



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



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



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



The telecommunications market is volatile.



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



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



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



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Item 3. Quantitative and Qualitative Disclosures About Market Risk



We did not have any foreign currency hedges or other derivative financial instruments as of February 28, 2005. We do not enter into financial instruments
for trading or speculative purposes and do not currently utilize derivative financial instruments. Our operations are conducted primarily in the United States and as such are not subject to material foreign currency exchange rate risk.



Item 4. Controls and Procedures



As of the end of the period covered by this quarterly report, the Chief Executive Officer and Chief Financial Officer of the Company (the Certifying Officers) conducted evaluations of the Companys disclosure controls and
procedures. As defined under Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act), the term disclosure controls and procedures means controls and other procedures of an issuer
that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the
Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the issuers management, including the Certifying Officers, to allow timely decisions regarding required disclosure. Based on this evaluation, the Certifying Officers have concluded that the
Companys disclosure controls and procedures were effective to ensure that material information is recorded, processed, summarized and reported by management of the Company on a timely basis in order to comply with the Companys disclosure
obligations under the Exchange Act, and the rules and regulations promulgated thereunder.



There were no changes in the Companys internal control over financial reporting during the fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys
internal control over financial reporting.



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Part II. Other Information



Item 1. Legal Proceedings



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. Unregistered Sales of Equity Securities and Use of Proceeds



None



Item 3. Defaults Upon Senior Securities



None



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



None



Item 5. Other Information



The
Company received a comment letter from the Securities and Exchange Commission (the SEC) relating to the accounting treatment of certain transactions reported in its prior period financial statements, including the accounting treatment of
its 2002 debt restructuring (the Comment Letter) in February 2005 to which it responded in March 2005. Subsequently the Company received an additional comment letter dated April 8, 2005 following up on the Companys responses
(collectively, the Comment Letters). Based on the Companys initial review of the Comment Letters, in conjunction with its independent auditors, the Company believes that the issues raised in the Comment Letters will not materially
impact the financial statements to be filed with its Quarterly Report on Form 10-Q for the period ended February 28, 2005 and that the Quarterly Report will be filed within the timeframe prescribed under the filing extension. However, the Company is
in the process of assessing the impact, if any, the Comment Letters may have on its prior period financial statements. As of the date hereof, it has not reached a conclusion concerning such impact, if any.



On February 25, 2005, the Company filed a preliminary proxy statement in
connection with its 2004 Annual Stockholder Meeting which was scheduled to take place on March 25, 2005 (the Annual Meeting). The Record Date for the Annual Meeting was set at January 26, 2005. However, in light of the above-referenced
SEC comment process, the Company suspended its proxy solicitation efforts pending the clearance of all SEC comments and the SECs review of the preliminary proxy disclosures. Consequently, the Company will set new meeting and record dates for
the Annual Report as soon as it receives such clearance. As of the date hereof, the Companys Board of Directors has not set such dates as the Company is in the process of responding to SEC comments set forth in the Comment Letter.



In February 2005, the Company cancelled its Multiple Advance Promissory
Note (MAP Note) with First Community Financial Corporation (FCFC). The Company initiated the early termination of the MAP Note because it had not had to access this line of credit for the past several quarters and the
continuance of this agreement created unnecessary administration functions and their related costs within the Company. Because the Company had not relied on the availability of funds under this agreement, its was not considered a material contract
at the time of its cancellation.



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Item 6. Exhibits



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



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SIGNATURES



Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                     |  |                                |  |                                                                                                                                       
|-------------------- |  | ------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------
|Date: April 19, 2005 |  | TELETOUCH COMMUNICATIONS, INC.
|                     |  | Registrant                    
|                     |  |                               
|                     |  | By:                            |  | /s/ Thomas A. Hyde, Jr.                                                                                                               
|                     |  |                                |  | Thomas A. Hyde, Jr. Chief Executive Officer                                                                                           
|                     |  |                                |  | (Principal Executive Officer)                                                                                                         
|                     |  |                               
|                     |  | By:                            |  | /s/ J. Kernan Crotty                                                                                                                  
|                     |  |                                |  | J. Kernan Crotty President, Chief Operating Officer, Chief Financial Officer and Director (Principal Financial and Accounting Officer)





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