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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q/A

(Amendment No. 1)



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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, 2006

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.)

5718 Airport Freeway, Fort Worth, Texas 76117 (800) 232-3888

Internet Website: www.teletouch.com

(Address and telephone number of principal executive offices)



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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.



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

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

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

Common Stock, $.001 par value  48,689,616 shares outstanding as of April 10, 2006



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EXPLANATORY NOTE

Teletouch Communications, Inc. (the Company) is filing this Amendment No. 1 (this Amendment) to its Quarterly Report on Form 10-Q for the quarter ended February 28, 2006 (the
Form 10-Q) which was originally filed on April 13, 2006. This Form 10-Q/A is being filed to reflect the restatement of the Companys consolidated balance sheet, consolidated statements of operations, and consolidated statements
of cash flows as a result of an analysis of the fiscal year end tax and accounting consequences of the November 2005 conversion by TLL Partners, LLC of all of its shares of the Companys Series C preferred stock into 43,500,000 shares of the
Companys common stock (the Conversion), which resulted in TLL Partners owning a controlling interest at approximately 88% of the Company.

TLL Partners, LLC (TLLP), is a Delaware limited liability company owned by Progressive Concepts Communications, Inc. (PCCI). Prior to November 2005, PCCI has filed a consolidated return with
its wholly-owned subsidiaries, Progressive Concepts, Inc. (PCI), State Hawk Security, Inc. (SHS) and TLLP. Effective November 1, 2005, the Company became a member of the PCCI tax group, as PCCI gained voting control of
the Company through the Conversion. In accordance with the related IRS rules and regulations, members of an affiliated corporate group with greater than 80% voting control must be included in a consolidated tax return.

In preparing the financial statements for the quarter-ended February 28, 2006, the Company prepared its financial statements without considering
that the Conversion of the preferred stock by TLLP had triggered the consolidated tax return requirements with PCCI. The Company instead evaluated its tax position and projected that Teletouch would incur a net tax loss in 2006 that would be carried
back and applied against its 2004 taxable income and result in a cash refund of taxes paid in 2004. Further, the Companys projections anticipated net losses in the future without a change in the business that could not be justified in its
projections at that point. The Company accounts for its taxes under Statement of Financial Accounting Standard 109 (SFAS 109) which resulted in the Company recording a net deferred tax asset as of February 28, 2006 based upon being
a stand alone tax paying entity. In accordance with SFAS 109, the recoverability of this asset was evaluated and given the projected net losses, the Company recorded a valuation allowance that reduced the net deferred tax asset by $176,000.

Since Teletouchs tax year actually ended in November 2005 due to becoming part of the PCCI affiliated group for consolidated tax
purposes, Teletouch should have evaluated its deferred tax assets based on the refunds that it could get related to the loss through November 2005. The Company estimated that year-to-date through November 2005 it actually had a small taxable income,
therefore it would not be able to carryback any losses and recover the taxes paid in 2004. As a result, the Company should have recorded an additional valuation allowance against its deferred tax asset in its 3rd fiscal quarter ended
February 28, 2006 that would have the effect of reducing the assets of the Company by $176,000 at February 28, 2006. The $34,000 and $176,000 adjustment for the three and nine month periods, respectively, has the result of reducing the
reported Net Income of $19,000 to a Net Loss of $15,000 for the three months ended February 28, 2006 and increasing the reported Net Loss for the nine months ended February 28, 2006 from $534,000 to $710,000. There was no impact on the
loss per share for the three months ended February 28, 2006 and an increase from $0.02 to $0.03 on the loss per share for the nine months ended February 28, 2006 as a result of the restatement.

Except for Items 1 and 2 of Part I no other information included in the Form 10-Q is being amended by this Amendment. The remaining Items contained
within this Amendment consist of all other Items originally contained in the Form 10-Q. This Amendment No. 1 continues to speak as of the date of the original Form 10-Q for the three and nine months ended February 28, 2006 and we have not
updated or amended the disclosures contained herein to reflect events that have occurred since the filing of the original Form 10-Q, or modified or updated those disclosures in any way other than described in the preceding paragraphs. Accordingly,
this Amendment No. 1 should be read in conjunction with our filings made with the SEC subsequent to the filing of the original Form 10-Q on April 13, 2006.



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##### Table of Contents

TELETOUCH COMMUNICATIONS, INC.

TABLE OF CONTENTS



|        |  |                                                                                                                         |  |         
|------- |  | ----------------------------------------------------------------------------------------------------------------------- |  | --------
|        |  |                                                                                                                         |  | Page No.
|        |  | Part I. Financial Information                                                                                           |  |         
|        |  |                                                                                                                        
|Item 1. |  | Financial Statements - Teletouch Communications, Inc. .                                                                 |  | 5       
|        |  | Consolidated Balance Sheets as of February 28, 2006 (Unaudited) and May 31, 2005 (Unaudited)                            |  | 5       
|        |  |                                                                                                                        
|        |  | Consolidated Statements of Operations - Three and Nine Months Ended February 28, 2006 and February 28, 2005 (Unaudited) |  | 7       
|        |  |                                                                                                                        
|        |  | Consolidated Statements of Cash Flows - Nine Months Ended February 28, 2006 and February 28, 2005 (Unaudited)           |  | 8       
|        |  |                                                                                                                        
|        |  | Notes to Consolidated Financial Statements                                                                              |  | 9       
|        |  |                                                                                                                        
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                   |  | 27      
|        |  |                                                                                                                        
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                                                              |  | 51      
|        |  |                                                                                                                        
|Item 4. |  | Controls and Procedures                                                                                                 |  | 51      
|        |  |                                                                                                                        
|        |  | Part II. Other Information                                                                                              |  |         
|        |  |                                                                                                                        
|Item 1. |  | Legal Proceedings                                                                                                       |  | 52      
|        |  |                                                                                                                        
|Item 2. |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                             |  | 52      
|        |  |                                                                                                                        
|Item 3. |  | Defaults Upon Senior Securities                                                                                         |  | 52      
|        |  |                                                                                                                        
|Item 4. |  | Submission of Matters to a Vote of Security Holders                                                                     |  | 52      
|        |  |                                                                                                                        
|Item 5. |  | Other Information                                                                                                       |  | 52      
|        |  |                                                                                                                        
|Item 6. |  | Exhibits                                                                                                                |  | 53      
|        |  |                                                                                                                        
|        |  | Signatures                                                                                                              |  | 54      



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Forward-Looking Statements

This Quarterly Report on Form 10-Q/A contains forward-looking statements and information relating to Teletouch Communications, Inc. and its subsidiaries that are based on managements beliefs as well as
assumptions made by and information currently available to management. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend
upon or refer to future events or conditions, or that include words such as anticipate, believe, estimate, expect, intend and similar expressions, as they relate to Teletouch
Communications, Inc. or its management, are forward-looking statements. Although these statements are based upon assumptions management considers reasonable, they are subject to certain risks, uncertainties and assumptions, including, but not
limited to, those factors set forth below under the captions Business, Managements Discussion and Analysis of Financial Condition and Results of Operations and Additional Factors That Affect Our Business, Future
Operating Results, and Financial Condition. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein as
anticipated, believed, estimated, expected or intended. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their respective dates. We undertake no obligation to update or revise any
forward-looking statements. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the discussion under Additional Factors That Affect Our
Business, Future Operating Results, and Financial Condition.



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PART 1  FINANCIAL INFORMATION

Item 1. Financial Statements

TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except
share data)



|                                                                                                                    |  |                  |       |   |             |   |        |  
|------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ----- | - | ----------- | - | ------ | -
|                                                                                                                    |  | February 28,2006 |       |   | May 31,2005 |  
|                                                                                                                    |  | (Restated)       |       |   |             |  
|ASSETS                                                                                                              |  |                  |       |   |             |   |        |  
|CURRENT ASSETS:                                                                                                     |  |                  |       |   |             |   |        |  
|Cash and cash equivalents                                                                                           |  | $                | 1,804 |   |             | $ | 1,283  |  
|Accounts receivable, net of allowance of $112 in fiscal 2006 and $106 in fiscal 2005                                |  |                  | 1,494 |   |             |   | 1,265  |  
|Inventories, net of reserve of $117 in fiscal 2006 and $105 in fiscal 2005                                          |  |                  | 639   |   |             |   | 906    |  
|Current income tax receivable                                                                                       |  |                  |      |   |             |   | 689    |  
|Deferred income tax assets                                                                                          |  |                  |      |   |             |   | 52     |  
|Prepaid expenses and other current assets                                                                           |  |                  | 209   |   |             |   | 247    |  
|                                                                                                                    |  |                  |       |   |             |   |        |  
|Total Current Assets                                                                                                |  |                  | 4,146 |   |             |   | 4,442  |  
|                                                                                                                    |  |                  |       |   |             |   |        |  
|PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $15,623 in fiscal 2006 and $15,609 in fiscal 2005 |  |                  | 4,554 |   |             |   | 5,660  |  
|                                                                                                                    |  |                  |       |   |             |   |        |  
|GOODWILL                                                                                                            |  |                  | 343   |   |             |   | 343    |  
|                                                                                                                    |  |                  |       |   |             |   |        |  
|OTHER INTANGIBLE ASSETS:                                                                                            |  |                  |       |   |             |   |        |  
|Subscriber bases                                                                                                    |  |                  | 226   |   |             |   | 226    |  
|FCC licenses                                                                                                        |  |                  | 103   |   |             |   | 103    |  
|Non-compete agreements                                                                                              |  |                  | 95    |   |             |   | 95     |  
|Internally-developed software                                                                                       |  |                  | 149   |   |             |   | 149    |  
|Accumulated amortization                                                                                            |  |                  | (347  | ) |             |   | (269   | )
|                                                                                                                    |  |                  |       |   |             |   |        |  
|Total Other Intangible Assets                                                                                       |  |                  | 226   |   |             |   | 304    |  
|                                                                                                                    |  |                  |       |   |             |   |        |  
|DEFERRED INCOME TAXES                                                                                               |  |                  |      |   |             |   | 86     |  
|                                                                                                                    |  |                  |       |   |             |   |        |  
|TOTAL ASSETS                                                                                                        |  | $                | 9,269 |   |             | $ | 10,835 |  
|                                                                                                                    |  |                  |       |   |             |   |        |  

See Accompanying Notes to Consolidated Financial Statements



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TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

Consolidated Balance Sheet

(unaudited)

(in thousands, except share data)

LIABILITIES AND SHAREHOLDERS EQUITY



|                                                                                                                                                                                                          |  |                  |         |   |             |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ----------- | - | ------- | -
|                                                                                                                                                                                                          |  | February 28,2006 |         |   | May 31,2005 |  
|                                                                                                                                                                                                          |  | (Restated)       |         |   |             |  
|CURRENT LIABILITIES:                                                                                                                                                                                      |  |                  |         |   |             |   |         |  
|Accounts payable                                                                                                                                                                                          |  | $                | 870     |   |             | $ | 1,038   |  
|Accrued expenses and other current liabilities                                                                                                                                                            |  |                  | 1,605   |   |             |   | 2,131   |  
|Current portion of long-term debt                                                                                                                                                                         |  |                  | 108     |   |             |   | 74      |  
|Current portion of redeemable common stock payable                                                                                                                                                        |  |                  | 188     |   |             |   | 352     |  
|Current portion of unearned sale/leaseback profit                                                                                                                                                         |  |                  | 418     |   |             |   | 418     |  
|Deferred revenue                                                                                                                                                                                          |  |                  | 635     |   |             |   | 595     |  
|                                                                                                                                                                                                          |  |                  |         |   |             |   |         |  
|Total Current Liabilities                                                                                                                                                                                 |  |                  | 3,824   |   |             |   | 4,608   |  
|                                                                                                                                                                                                          |  |                  |         |   |             |   |         |  
|LONG-TERM LIABILITIES:                                                                                                                                                                                    |  |                  |         |   |             |   |         |  
|Long-term debt, net of current portion                                                                                                                                                                    |  |                  | 55      |   |             |   | 102     |  
|Redeemable common stock purchase warrants                                                                                                                                                                 |  |                  | 2,401   |   |             |   | 2,100   |  
|Redeemable common stock payable, net of current portion                                                                                                                                                   |  |                  |        |   |             |   | 88      |  
|Unearned sale/leaseback profit, net of current portion                                                                                                                                                    |  |                  | 323     |   |             |   | 640     |  
|                                                                                                                                                                                                          |  |                  |         |   |             |   |         |  
|Total long-term liabilities                                                                                                                                                                               |  |                  | 2,779   |   |             |   | 2,930   |  
|                                                                                                                                                                                                          |  |                  |         |   |             |   |         |  
|TOTAL LIABILITIES                                                                                                                                                                                         |  |                  | 6,603   |   |             |   | 7,538   |  
|                                                                                                                                                                                                          |  |                  |         |   |             |   |         |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                                             |  |                  |         |   |             |   |         |  
|                                                                                                                                                                                                          |  |                 
|SHAREHOLDERS EQUITY :                                                                                                                                                                                    |  |                  |         |   |             |   |         |  
|Series A cumulative convertible preferred stock, $.001 par value, 15,000 shares authorized, 0 shares issued and outstanding in fiscal 2006 and
fiscal 2005                                                |  |                  |        |   |             |   |        |  
|Series B convertible preferred stock, $.001 par value, 411,457 shares authorized, 0 shares issued and outstanding in fiscal 2006 and fiscal
2005                                                          |  |                  |        |   |             |   |        |  
|Series C convertible preferred stock, $.001 par value, 1,000,000 shares authorized, 0 shares issued and outstanding in fiscal 2006 and
1,000,000 shares authorized, issued and outstanding in fiscal 2005 |  |                  |        |   |             |   | 1       |  
|Common stock, $.001 par value, 70,000,000 shares authorized, 49,416,189 shares issued in fiscal 2006 and 5,411,189 shares issued in fiscal
2005                                                           |  |                  | 49      |   |             |   | 5       |  
|Additional paid-in capital                                                                                                                                                                                |  |                  | 31,951  |   |             |   | 31,915  |  
|Treasury stock, 680,694 shares held in fiscal 2006 and 429,209 shares held in fiscal 2005                                                                                                                 |  |                  | (185    | ) |             |   | (185    | )
|Accumulated deficit                                                                                                                                                                                       |  |                  | (29,149 | ) |             |   | (28,439 | )
|                                                                                                                                                                                                          |  |                  |         |   |             |   |         |  
|Total Shareholders Equity                                                                                                                                                                                |  |                  | 2,666   |   |             |   | 3,297   |  
|                                                                                                                                                                                                          |  |                  |         |   |             |   |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                |  | $                | 9,269   |   |             | $ | 10,835  |  
|                                                                                                                                                                                                          |  |                  |         |   |             |   |         |  



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TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except
shares and per share amounts)



|                                                                                                        |  |                                |            |   |                               |   |           |            |  |   |            |   |  |   |           |  
|------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ---------- | - | ----------------------------- | - | --------- | ---------- |  | - | ---------- | - |  | - | --------- | -
|                                                                                                        |  | Three Months EndedFebruary 28, |            |   | Nine Months EndedFebruary 28, |  
|                                                                                                        |  | 2006                           |            |   | 2005                          |   |           | 2006       |  |   | 2005       |  
|                                                                                                        |  | (Restated)                     |            |   |                               |   |           | (Restated) |  |   |            |  
|Operating revenues:                                                                                     |  |                                |            |   |                               |   |           |            |  |   |            |   |  |   |           |  
|Service, rent, and maintenance revenue                                                                  |  | $                              | 4,054      |   |                               | $ | 4,795     |            |  | $ | 12,874     |   |  | $ | 15,231    |  
|Product sales revenue                                                                                   |  |                                | 967        |   |                               |   | 1,073     |            |  |   | 3,072      |   |  |   | 3,455     |  
|                                                                                                        |  |                                |            |   |                               |   |           |            |  |   |            |   |  |   |           |  
|Total operating revenues                                                                                |  |                                | 5,021      |   |                               |   | 5,868     |            |  |   | 15,946     |   |  |   | 18,686    |  
|                                                                                                        |  |                                |            |   |                               |   |           |            |  |   |            |   |  |   |           |  
|Operating expenses:                                                                                     |  |                                |            |   |                               |   |           |            |  |   |            |   |  |   |           |  
|Cost of service, rent and maintenance (exclusive of depreciation and amortization included below)       |  |                                | 2,319      |   |                               |   | 2,690     |            |  |   | 7,331      |   |  |   | 8,209     |  
|Cost of products sold                                                                                   |  |                                | 529        |   |                               |   | 917       |            |  |   | 1,970      |   |  |   | 3,120     |  
|Selling and general and administrative                                                                  |  |                                | 1,588      |   |                               |   | 2,125     |            |  |   | 5,136      |   |  |   | 6,152     |  
|Depreciation and amortization                                                                           |  |                                | 443        |   |                               |   | 784       |            |  |   | 1,707      |   |  |   | 2,518     |  
|Loss (gain) on disposal of assets                                                                       |  |                                | 10         |   |                               |   | 21        |            |  |   | 8          |   |  |   | (30       | )
|                                                                                                        |  |                                |            |   |                               |   |           |            |  |   |            |   |  |   |           |  
|Total operating expenses                                                                                |  |                                | 4,889      |   |                               |   | 6,537     |            |  |   | 16,152     |   |  |   | 19,969    |  
|                                                                                                        |  |                                |            |   |                               |   |           |            |  |   |            |   |  |   |           |  
|Operating income (loss)                                                                                 |  |                                | 132        |   |                               |   | (669      | )          |  |   | (206       | ) |  |   | (1,283    | )
|Interest expense, net                                                                                   |  |                                | (113       | ) |                               |   | (121      | )          |  |   | (328       | ) |  |   | (332      | )
|                                                                                                        |  |                                |            |   |                               |   |           |            |  |   |            |   |  |   |           |  
|Income (loss) before income tax expense (benefit)                                                       |  |                                | 19         |   |                               |   | (790      | )          |  |   | (534       | ) |  |   | (1,615    | )
|Income tax expense (benefit)                                                                            |  |                                | 34         |   |                               |   | (253      | )          |  |   | 176        |   |  |   | (492      | )
|                                                                                                        |  |                                |            |   |                               |   |           |            |  |   |            |   |  |   |           |  
|Net loss                                                                                                |  | $                              | (15        | ) |                               | $ | (537      | )          |  | $ | (710       | ) |  | $ | (1,123    | )
|                                                                                                        |  |                                |            |   |                               |   |           |            |  |   |            |   |  |   |           |  
|Basic and diluted loss per share                                                                        |  | $                              |           |   |                               | $ | (0.12     | )          |  | $ | (0.03      | ) |  | $ | (0.25     | )
|                                                                                                        |  |                                |            |   |                               |   |           |            |  |   |            |   |  |   |           |  
|Denominator for basic and diluted loss per share - weighted average number of common shares outstanding |  |                                | 48,740,163 |   |                               |   | 4,546,980 |            |  |   | 23,994,432 |   |  |   | 4,546,980 |  
|                                                                                                        |  |                                |            |   |                               |   |           |            |  |   |            |   |  |   |           |  

See Accompanying Notes to Consolidated Financial Statements



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TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)



|                                                                  |  |                               |       |   |      |   |        |  
|----------------------------------------------------------------- |  | ----------------------------- | ----- | - | ---- | - | ------ | -
|                                                                  |  | Nine Months EndedFebruary 28, |      
|                                                                  |  | 2006                          |       |   | 2005 |  
|                                                                  |  | (Restated)                    |       |   |      |  
|Operating Activities:                                             |  |                               |       |   |      |   |        |  
|Net loss                                                          |  | $                             | (710  | ) |      | $ | (1,123 | )
|Depreciation and amortization                                     |  |                               | 1,707 |   |      |   | 2,518  |  
|Non-cash compensation expense                                     |  |                               | 78    |   |      |   | 5      |  
|Non-cash interest expense                                         |  |                               | 307   |   |      |   | 259    |  
|Provision for losses on accounts receivable                       |  |                               | 54    |   |      |   | 147    |  
|Provision for inventory obsolescence                              |  |                               | 80    |   |      |   | 731    |  
|Loss/(gain) on disposal of assets                                 |  |                               | 8     |   |      |   | (30    | )
|Amortization of unearned sale/leaseback profit                    |  |                               | (317  | ) |      |   | (318   | )
|Deferred income taxes                                             |  |                               | 138   |   |      |   | (260   | )
|Changes in operating assets and liabilities, net of acquisitions: |  |                               |       |   |      |   |        |  
|Accounts receivable, net                                          |  |                               | (284  | ) |      |   | 87     |  
|Inventories                                                       |  |                               | 273   |   |      |   | 478    |  
|Current income tax receivable                                     |  |                               | 689   |   |      |   | (237   | )
|Prepaid expenses and other assets                                 |  |                               | 37    |   |      |   | 147    |  
|Accounts payable                                                  |  |                               | (168  | ) |      |   | (250   | )
|Accrued Expenses and other current liabilities                    |  |                               | (526  | ) |      |   | 61     |  
|Deferred revenue                                                  |  |                               | 41    |   |      |   | 39     |  
|                                                                  |  |                               |       |   |      |   |        |  
|Net cash provided by operating activities                         |  |                               | 1,407 |   |      |   | 2,254  |  
|                                                                  |  |                               |       |   |      |   |        |  
|Investing Activities:                                             |  |                               |       |   |      |   |        |  
|Capital expenditures, including pagers                            |  |                               | (661  | ) |      |   | (1,192 | )
|Intangible assets                                                 |  |                               |      |   |      |   | (4     | )
|Acquisitions, net of cash acquired                                |  |                               |      |   |      |   | (1     | )
|Proceeds from sale of assets                                      |  |                               | 76    |   |      |   | 79     |  
|                                                                  |  |                               |       |   |      |   |        |  
|Net cash used for investing activities                            |  |                               | (585  | ) |      |   | (1,118 | )
|                                                                  |  |                               |       |   |      |   |        |  
|Financing Activities:                                             |  |                               |       |   |      |   |        |  
|Proceeds from borrowings                                          |  |                               |      |   |      |   | 62     |  
|Payments on long-term debt and redeemable common stock            |  |                               | (302  | ) |      |   | (141   | )
|Proceeds from exercise of employee stock options                  |  |                               | 1     |   |      |   |       |  
|                                                                  |  |                               |       |   |      |   |        |  
|Net cash used for financing activities                            |  |                               | (301  | ) |      |   | (79    | )
|                                                                  |  |                               |       |   |      |   |        |  
|Net increase in cash and cash equivalents                         |  |                               | 521   |   |      |   | 1,057  |  
|Cash and cash equivalents at beginning of period                  |  |                               | 1,283 |   |      |   | 72     |  
|                                                                  |  |                               |       |   |      |   |        |  
|Cash and cash equivalents at end of period                        |  | $                             | 1,804 |   |      | $ | 1,129  |  
|                                                                  |  |                               |       |   |      |   |        |  
|Supplemental Cash Flow Data:                                      |  |                               |       |   |      |   |        |  
|Cash payments for interest                                        |  | $                             | 21    |   |      | $ | 82     |  
|                                                                  |  |                               |       |   |      |   |        |  
|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                       |  | $                             | 86    |   |      | $ | 297    |  
|                                                                  |  |                               |       |   |      |   |        |  
|Purchase of vehicles with bank financing                          |  | $                             | 31    |   |      | $ | 90     |  
|                                                                  |  |                               |       |   |      |   |        |  

See Accompanying Notes to Consolidated Financial Statements



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TELETOUCH COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1  BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements included herein have been prepared in accordance with the rules
and regulations of the Securities and Exchange Commission (SEC). The interim condensed consolidated financial statements include the consolidated accounts of Teletouch Communications, Inc. and our wholly-owned subsidiaries (collectively,
the Company or Teletouch). In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of financial position, results of operations and cash flows for the interim
periods presented have been made. The results of operations for the three and nine months ended February 28, 2006, are not necessarily indicative of the results to be expected for the full year.

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

Financial Condition and Going Concern:As of February 28, 2006, the Companys consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The
Company incurred a net loss of $15,000 and $710,000 for the three and nine months ended February 28, 2006, respectively. Teletouch estimates that it will incur a net loss during the fourth quarter as a result of continued declines in revenues
and additional costs expected related to planned office relocations and continued professional fees related to the finalizing a contemplated sale of the Companys paging business. In the comparable period of the prior year, the Company incurred
a net loss of $537,000 and $1,123,000 for the three and nine months ended February 28, 2005, respectively. As of February 28, 2006, the Company had working capital of $322,000. The Company has sustained its operations primarily through
continuous cost reductions. During 2005 and into 2006, the Company attempted to secure additional debt financing to fund potential acquisitions and provide additional working capital to the Company but has been unable to do so due to the declining
performance of the Companys paging business. As a result of the continued deterioration of the Companys financial position and its operating results, the Company entered into an agreement in August 2005 to sell substantially all of the
assets related to the paging business (see Note 4 to the Consolidated Financial Statements) and this transaction is targeted to close on or about June 30, 2006. The expected closing of this transaction continues to be delayed due to
difficulties encountered gaining approval from the Securities and Exchange Commission (SEC) to hold a shareholders meeting to approve the transaction. The Company filed a preliminary proxy statement for a special meeting of its
shareholders to approve among other proposals, this transaction in January 2006. The Company received SEC staff comments on this filing and is presently continuing to prepare responses to comments received on this proxy statement. The Company is
exploring an alternate merger transaction that, if completed prior to the sale of the paging business, may allow the Company to sell its paging business without seeking shareholder approval. The sale of the Companys core paging business,
combined with additional financing, is expected to generate sufficient cash to enable the Company to acquire a profitable and growing business that could support the embedded overhead costs of remaining a public company and return the Company to
profitability. There can be no assurance, however, that we will be successful in selling the assets related to the paging business, or that we will be able to complete any additional debt or equity financing on favorable terms.



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##### Table of Contents

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

NOTE 2  RESTATEMENT

The Companys determination to restate the results for the quarter ended February 28, 2006 was a result of an analysis of the tax and accounting
consequences of the November 2005 conversion by TLL Partners, LLC of all of its shares of the Companys Series C preferred stock into 43,500,000 shares of the Companys common stock (the Conversion), which resulted in TLL
Partners owning a controlling interest at approximately 88% of the Company.

TLL Partners, LLC (TLLP), is a Delaware limited
liability company owned by Progressive Concepts Communications, Inc. (PCCI). Prior to November 2005, PCCI has filed a consolidated return with its wholly-owned subsidiaries, Progressive Concepts, Inc. (PCI) and State Hawk
Security, Inc. (SHS) and TLLP. Effective November 1, 2005, the Company became a member of the PCCI tax group, as PCCI gained voting control of the Company through the Conversion. In accordance with the related IRS rules and
regulations, members of an affiliated corporate group with greater than 80% voting control must be included in a consolidated tax return.

In preparing the financial statements for the quarter-ended February 28, 2006, the Company prepared its financial statements without considering the Conversion of the preferred stock by TLLP had triggered the consolidated tax return
requirements with PCCI. The Company instead evaluated its tax position and projected that Teletouch would incur a net tax loss in 2006 that would be carried back and applied against its 2004 taxable income and result in a cash refund of taxes paid
in 2004. Further, the Companys projections anticipated net losses in the future without a change in the business that could not be justified in its projections at that point. The Company accounts for its taxes under Statement of Financial
Accounting Standard 109 (SFAS 109) which resulted in the Company recording a net deferred tax asset as of February 28, 2006 based upon being a stand alone tax paying entity. In accordance with SFAS 109, the recoverability of this
asset was evaluated and given the projected net losses, the Company recorded a valuation allowance that reduced the net deferred tax asset by $176,000.

Since Teletouchs tax year actually ended in November 2005 due to becoming part of the PCCI affiliated group for consolidated tax purposes, Teletouch should have evaluated its deferred tax assets based on the
refunds that it could get related to the loss through November 2005. The Company estimated that year-to-date through November 2005 it actually had a small taxable income, therefore it would not be able to carryback any losses and recover the taxes
paid in 2004. As a result, the Company should have recorded an additional valuation allowance against its deferred tax asset in its 3rd fiscal quarter ended February 28, 2006 that would have the effect of reducing the assets of the Company by
$176,000 at February 28, 2006. The $34,000 and $176,000 adjustment for the three and nine month periods, respectively, has the result of reducing the reported Net Income of $19,000 to a Net Loss of $15,000 for the three months ended
February 28, 2006 and increasing the reported Net Loss for the nine months ended February 28, 2006 from $534,000 to $710,000. There was no impact on the loss per share for the three months ended February 28, 2006 and an increase from
$0.02 to $0.03 on the loss per share for the nine months ended February 28, 2006 as a result of the restatement.

The following
consolidated balance sheet, statements of operations and statements of cash flows reconcile the previously reported and restated financial information. The effect of this restatement has also been reflected in footnote disclosures containing
financial condition and going concern (Note 1), net loss and loss per share (Note 3), income taxes (Note 9), and segment information (Note 12).



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TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except for share data)



|                                                                                                                                                                                                          |  |                             |         |   |                        |   |      |                          |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---------------------- | - | ---- | ------------------------ |  | - | ------- | -
|                                                                                                                                                                                                          |  | As ReportedFebruary 28,2006 |         |   | RestatementAdjustments |   |      | RestatedFebruary 28,2006 | 
|CURRENT ASSETS:                                                                                                                                                                                           |  |                             |         |   |                        |   |      |                          |  |   |         |  
|Cash and cash equivalents                                                                                                                                                                                 |  | $                           | 1,804   |   |                        |   |      |                          |  | $ | 1,804   |  
|Accounts receivable, net of allowance of $112 in fiscal 2006 and $106 in fiscal 2005                                                                                                                      |  |                             | 1,494   |   |                        |   |      |                          |  |   | 1,494   |  
|                                                                                                                                                                                                          |  |                             |        
|Inventories, net of reserve of $187 in fiscal 2006 and $105 in fiscal 2005                                                                                                                                |  |                             | 639     |   |                        |   |      |                          |  |   | 639     |  
|Current income tax receivable                                                                                                                                                                             |  |                             |        |   |                        |   |      |                          |  |   |        |  
|Deferred income tax assets                                                                                                                                                                                |  |                             | 50      |   |                        |   | (50  | )                        |  |   |        |  
|Prepaid expenses and other current assets                                                                                                                                                                 |  |                             | 209     |   |                        |   |      |                          |  |   | 209     |  
|                                                                                                                                                                                                          |  |                             |         |   |                        |   |      |                          |  |   |         |  
|Total Current Assets                                                                                                                                                                                      |  |                             | 4,196   |   |                        |   | (50  | )                        |  |   | 4,146   |  
|                                                                                                                                                                                                          |  |                             |         |   |                        |   |      |                          |  |   |         |  
|PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $15,480 in fiscal 2006 and $15,609 in fiscal 2005                                                                                       |  |                             | 4,554   |   |                        |   |      |                          |  |   | 4,554   |  
|                                                                                                                                                                                                          |  |                             |        
|GOODWILL                                                                                                                                                                                                  |  |                             | 343     |   |                        |   |      |                          |  |   | 343     |  
|OTHER INTANGIBLE ASSETS:                                                                                                                                                                                  |  |                             |         |   |                        |   |      |                          |  |   |         |  
|Subscriber bases                                                                                                                                                                                          |  |                             | 226     |   |                        |   |      |                          |  |   | 226     |  
|FCC licenses                                                                                                                                                                                              |  |                             | 103     |   |                        |   |      |                          |  |   | 103     |  
|Non-compete agreements                                                                                                                                                                                    |  |                             | 95      |   |                        |   |      |                          |  |   | 95      |  
|Internally-developed software                                                                                                                                                                             |  |                             | 149     |   |                        |   |      |                          |  |   | 149     |  
|Accumulated amortization                                                                                                                                                                                  |  |                             | (347    | ) |                        |   |      |                          |  |   | (347    | )
|                                                                                                                                                                                                          |  |                             |         |   |                        |   |      |                          |  |   |         |  
|Total Other Intangible Assets                                                                                                                                                                             |  |                             | 226     |   |                        |   |      |                          |  |   | 226     |  
|                                                                                                                                                                                                          |  |                             |         |   |                        |   |      |                          |  |   |         |  
|DEFERRED INCOME TAXES                                                                                                                                                                                     |  |                             | 126     |   |                        |   | (126 | )                        |  |   |        |  
|                                                                                                                                                                                                          |  |                             |         |   |                        |   |      |                          |  |   |         |  
|TOTAL ASSETS                                                                                                                                                                                              |  | $                           | 9,445   |   |                        | $ | (176 | )                        |  | $ | 9,269   |  
|                                                                                                                                                                                                          |  |                             |         |   |                        |   |      |                          |  |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                      |  |                             |         |   |                        |   |      |                          |  |   |         |  
|                                                                                                                                                                                                          |  |                             |        
|CURRENT LIABILITIES:                                                                                                                                                                                      |  |                             |         |   |                        |   |      |                          |  |   |         |  
|Accounts payable                                                                                                                                                                                          |  | $                           | 870     |   |                        |   |      |                          |  | $ | 870     |  
|Accrued Expenses and other current liabilities                                                                                                                                                            |  |                             | 1,605   |   |                        |   |      |                          |  |   | 1,605   |  
|Current portion of long-term debt                                                                                                                                                                         |  |                             | 108     |   |                        |   |      |                          |  |   | 108     |  
|Current portion of redeemable common stock payable                                                                                                                                                        |  |                             | 188     |   |                        |   |      |                          |  |   | 188     |  
|Current portion of unearned sale/leaseback profit                                                                                                                                                         |  |                             | 418     |   |                        |   |      |                          |  |   | 418     |  
|Deferred revenue                                                                                                                                                                                          |  |                             | 635     |   |                        |   |      |                          |  |   | 635     |  
|                                                                                                                                                                                                          |  |                             |         |   |                        |   |      |                          |  |   |         |  
|Total Current Liabilities                                                                                                                                                                                 |  |                             | 3,824   |   |                        |   |     |                          |  |   | 3,824   |  
|                                                                                                                                                                                                          |  |                             |         |   |                        |   |      |                          |  |   |         |  
|LONG-TERM LIABILITIES:                                                                                                                                                                                    |  |                             |         |   |                        |   |      |                          |  |   |         |  
|Long-term debt, net of current portion                                                                                                                                                                    |  |                             | 55      |   |                        |   |      |                          |  |   | 55      |  
|Redeemable common stock purchase warrants                                                                                                                                                                 |  |                             | 2,401   |   |                        |   |      |                          |  |   | 2,401   |  
|Unearned sale/leaseback profit, net of current portion                                                                                                                                                    |  |                             | 323     |   |                        |   |      |                          |  |   | 323     |  
|                                                                                                                                                                                                          |  |                             |         |   |                        |   |      |                          |  |   |         |  
|Total Long-Term liabilities                                                                                                                                                                               |  |                             | 2,779   |   |                        |   |     |                          |  |   | 2,779   |  
|                                                                                                                                                                                                          |  |                             |         |   |                        |   |      |                          |  |   |         |  
|TOTAL LIABILITIES                                                                                                                                                                                         |  |                             | 6,603   |   |                        |   |     |                          |  |   | 6,603   |  
|                                                                                                                                                                                                          |  |                             |         |   |                        |   |      |                          |  |   |         |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                                             |  |                             |         |   |                        |   |      |                          |  |   |         |  
|                                                                                                                                                                                                          |  |                             |        
|SHAREHOLDERS EQUITY :                                                                                                                                                                                    |  |                             |         |   |                        |   |      |                          |  |   |         |  
|Series A cumulative convertible preferred stock, $.001 par value, 15,000 shares authorized, 0 shares issued and outstanding in fiscal 2006 and
fiscal 2005                                                |  |                             |        |   |                        |   |      |                          |  |   |        |  
|Series B convertible preferred stock, $.001 par value, 411,457 shares authorized, 0 shares issued and outstanding in fiscal 2006 and fiscal
2005                                                          |  |                             |        |   |                        |   |      |                          |  |   |        |  
|Series C convertible preferred stock, $.001 par value, 1,000,000 shares authorized, 0 shares issued and outstanding in fiscal 2006 and
1,000,000 shares authorized, issued and outstanding in fiscal 2005 |  |                             |        |   |                        |   |      |                          |  |   |        |  
|Common stock, $.001 par value, 70,000,000 shares authorized, 49,416,189 shares issued in fiscal 2006 and 5,416,189 shares issued in fiscal
2005                                                           |  |                             |         |   |                        |   |      |                          |  |   |         |  
|                                                                                                                                                                                                          |  |                             | 49      |   |                        |   |      |                          |  |   | 49      |  
|Additional paid-in capital                                                                                                                                                                                |  |                             | 31,951  |   |                        |   |      |                          |  |   | 31,951  |  
|Treasury Stock, 619,522 shares held in fiscal 2006 and 429,209 shares held in fiscal 2005                                                                                                                 |  |                             | (185    | ) |                        |   |      |                          |  |   | (185    | )
|Accumulated deficit                                                                                                                                                                                       |  |                             | (28,973 | ) |                        |   | (176 | )                        |  |   | (29,149 | )
|                                                                                                                                                                                                          |  |                             |         |   |                        |   |      |                          |  |   |         |  
|Total Shareholders Equity                                                                                                                                                                                |  |                             | 2,842   |   |                        |   | (176 | )                        |  |   | 2,666   |  
|                                                                                                                                                                                                          |  |                             |         |   |                        |   |      |                          |  |   |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                |  | $                           | 9,445   |   |                        | $ | (176 | )                        |  | $ | 9,269   |  
|                                                                                                                                                                                                          |  |                             |         |   |                        |   |      |                          |  |   |         |  



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TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except shares and per share amounts)

(Unaudited)



|                                                                                                          |  |                                   |            |   |                                  |   |            |                                       |  |   |                                       |   |  |                                   |      |   |                                  |   |            |   |  |   |            |  
|--------------------------------------------------------------------------------------------------------- |  | --------------------------------- | ---------- | - | -------------------------------- | - | ---------- | ------------------------------------- |  | - | ------------------------------------- | - |  | --------------------------------- | ---- | - | -------------------------------- | - | ---------- | - |  | - | ---------- | -
|                                                                                                          |  | As Reported                       |            |   | Three MonthsEnded                |   |            | Nine MonthsEnded                      |  |   | Restated                              |  
|                                                                                                          |  | Three MonthsEndedFebruary 28,2006 |            |   | Nine MonthsEndedFebruary 28,2006 |   |            | February 28,2006RestatementAdjustment |  |   | February 28,2006RestatementAdjustment |   |  | Three MonthsEndedFebruary 28,2006 |      |   | Nine MonthsEndedFebruary 28,2006 |  
|Operating revenues:                                                                                       |  |                                   |            |   |                                  |   |            |                                       |  |   |                                       |   |  |                                   |      |   |                                  |   |            |   |  |   |            |  
|Service, rent, and maintenance revenue                                                                    |  | $                                 | 4,054      |   |                                  | $ | 12,874     |                                       |  |   |                                       |   |  |                                   |      |   |                                  | $ | 4,054      |   |  | $ | 12,874     |  
|Product sales revenue                                                                                     |  |                                   | 967        |   |                                  |   | 3,072      |                                       |  |   |                                       |   |  |                                   |      |   |                                  |   | 967        |   |  |   | 3,072      |  
|                                                                                                          |  |                                   |            |   |                                  |   |            |                                       |  |   |                                       |   |  |                                   |      |   |                                  |   |            |   |  |   |            |  
|Total operating revenues                                                                                  |  |                                   | 5,021      |   |                                  |   | 15,946     |                                       |  |   |                                      |   |  |                                   |     |   |                                  |   | 5,021      |   |  |   | 15,946     |  
|                                                                                                          |  |                                   |            |   |                                  |   |            |                                       |  |   |                                       |   |  |                                   |      |   |                                  |   |            |   |  |   |            |  
|Operating expenses:                                                                                       |  |                                   |            |   |                                  |   |            |                                       |  |   |                                       |   |  |                                   |      |   |                                  |   |            |   |  |   |            |  
|Cost of service, rent and maintenance (exclusive of depreciation and amortization shown separately below) |  |                                   | 2,319      |   |                                  |   | 7,331      |                                       |  |   |                                       |   |  |                                   |      |   |                                  |   | 2,319      |   |  |   | 7,331      |  
|Cost of products sold                                                                                     |  |                                   | 529        |   |                                  |   | 1,970      |                                       |  |   |                                       |   |  |                                   |      |   |                                  |   | 529        |   |  |   | 1,970      |  
|Selling and general and administrative                                                                    |  |                                   | 1,588      |   |                                  |   | 5,136      |                                       |  |   |                                       |   |  |                                   |      |   |                                  |   | 1,588      |   |  |   | 5,136      |  
|Depreciation and amortization                                                                             |  |                                   | 443        |   |                                  |   | 1,707      |                                       |  |   |                                       |   |  |                                   |      |   |                                  |   | 443        |   |  |   | 1,707      |  
|Loss (Gain) on sale of assets                                                                             |  |                                   | 10         |   |                                  |   | 8          |                                       |  |   |                                       |   |  |                                   |      |   |                                  |   | 10         |   |  |   | 8          |  
|                                                                                                          |  |                                   |            |   |                                  |   |            |                                       |  |   |                                       |   |  |                                   |      |   |                                  |   |            |   |  |   |            |  
|Total operating expenses                                                                                  |  |                                   | 4,889      |   |                                  |   | 16,152     |                                       |  |   |                                      |   |  |                                   |     |   |                                  |   | 4,889      |   |  |   | 16,152     |  
|                                                                                                          |  |                                   |            |   |                                  |   |            |                                       |  |   |                                       |   |  |                                   |      |   |                                  |   |            |   |  |   |            |  
|Operating income (loss)                                                                                   |  |                                   | 132        |   |                                  |   | (206       | )                                     |  |   |                                      |   |  |                                   |     |   |                                  |   | 132        |   |  |   | (206       | )
|Interest expense, net                                                                                     |  |                                   | (113       | ) |                                  |   | (328       | )                                     |  |   |                                       |   |  |                                   |      |   |                                  |   | (113       | ) |  |   | (328       | )
|                                                                                                          |  |                                   |            |   |                                  |   |            |                                       |  |   |                                       |   |  |                                   |      |   |                                  |   |            |   |  |   |            |  
|Income (loss) before income tax expense (benefit)                                                         |  |                                   | 19         |   |                                  |   | (534       | )                                     |  |   |                                      |   |  |                                   |     |   |                                  |   | 19         |   |  |   | (534       | )
|Income tax expense (benefit)                                                                              |  |                                   |           |   |                                  |   |           |                                       |  |   | 34                                    |   |  |                                   | 176  |   |                                  |   | 34         |   |  |   | 176        |  
|                                                                                                          |  |                                   |            |   |                                  |   |            |                                       |  |   |                                       |   |  |                                   |      |   |                                  |   |            |   |  |   |            |  
|Net income (loss)                                                                                         |  | $                                 | 19         |   |                                  | $ | (534       | )                                     |  | $ | (34                                   | ) |  | $                                 | (176 | ) |                                  | $ | (15        | ) |  | $ | (710       | )
|                                                                                                          |  |                                   |            |   |                                  |   |            |                                       |  |   |                                       |   |  |                                   |      |   |                                  |   |            |   |  |   |            |  
|Basic and diluted loss per share                                                                          |  | $                                 |           |   |                                  | $ | (0.02      | )                                     |  | $ |                                      |   |  | $                                 |     |   |                                  | $ |           |   |  | $ | (0.03      | )
|                                                                                                          |  |                                   |            |   |                                  |   |            |                                       |  |   |                                       |   |  |                                   |      |   |                                  |   |            |   |  |   |            |  
|Denominator for basic and diluted loss per share - weighted average number of common shares outstanding   |  |                                   | 48,740,163 |   |                                  |   | 23,994,432 |                                       |  |   |                                       |   |  |                                   |      |   |                                  |   | 48,740,163 |   |  |   | 23,994,432 |  
|                                                                                                          |  |                                   |            |   |                                  |   |            |                                       |  |   |                                       |   |  |                                   |      |   |                                  |   |            |   |  |   |            |  



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TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)



|                                                                  |  |                                               |       |   |                        |   |      |                                            |  |   |       |  
|----------------------------------------------------------------- |  | --------------------------------------------- | ----- | - | ---------------------- | - | ---- | ------------------------------------------ |  | - | ----- | -
|                                                                  |  | As
ReportedNine Months EndedFebruary 28, 2006 |       |   | RestatementAdjustments |   |      | Restated
NineMonths EndedFebruary 28, 2006 | 
|Operating Activities:                                             |  |                                               |       |   |                        |   |      |                                            |  |   |       |  
|Net loss                                                          |  | $                                             | (534  | ) |                        | $ | (176 | )                                          |  | $ | (710  | )
|Depreciation and amortization                                     |  |                                               | 1,707 |   |                        |   |      |                                            |  |   | 1,707 |  
|Non-cash compensation expense                                     |  |                                               | 78    |   |                        |   |      |                                            |  |   | 78    |  
|Non-cash interest expense                                         |  |                                               | 307   |   |                        |   |      |                                            |  |   | 307   |  
|Provision for losses on accounts receivable                       |  |                                               | 54    |   |                        |   |      |                                            |  |   | 54    |  
|Provision for inventory obsolescence                              |  |                                               | 80    |   |                        |   |      |                                            |  |   | 80    |  
|Loss on disposal of assets                                        |  |                                               | 8     |   |                        |   |      |                                            |  |   | 8     |  
|Amortization of unearned sale/leaseback profit                    |  |                                               | (317  | ) |                        |   |      |                                            |  |   | (317  | )
|Deferred income taxes                                             |  |                                               | (38   | ) |                        |   | 176  |                                            |  |   | 138   |  
|Changes in operating assets and liabilities, net of acquisitions: |  |                                               |       |   |                        |   |      |                                            |  |   |      |  
|Accounts receivable, net                                          |  |                                               | (284  | ) |                        |   |      |                                            |  |   | (284  | )
|Inventories                                                       |  |                                               | 273   |   |                        |   |      |                                            |  |   | 273   |  
|Current income tax receivable                                     |  |                                               | 689   |   |                        |   |      |                                            |  |   | 689   |  
|Prepaid expenses and other assets                                 |  |                                               | 37    |   |                        |   |      |                                            |  |   | 37    |  
|Accounts payable                                                  |  |                                               | (168  | ) |                        |   |      |                                            |  |   | (168  | )
|Accrued Expenses and other current liabilities                    |  |                                               | (526  | ) |                        |   |      |                                            |  |   | (526  | )
|Deferred revenue                                                  |  |                                               | 41    |   |                        |   |      |                                            |  |   | 41    |  
|                                                                  |  |                                               |       |   |                        |   |      |                                            |  |   |       |  
|Net cash provided by operating activities                         |  |                                               | 1,407 |   |                        |   |     |                                            |  |   | 1,407 |  
|                                                                  |  |                                               |       |   |                        |   |      |                                            |  |   |       |  
|Investing Activities:                                             |  |                                               |       |   |                        |   |      |                                            |  |   |       |  
|Capital expenditures, including pagers                            |  |                                               | (661  | ) |                        |   |      |                                            |  |   | (661  | )
|Intangible assets                                                 |  |                                               |      |   |                        |   |      |                                            |  |   |      |  
|Acquisitions, net of cash acquired                                |  |                                               |      |   |                        |   |      |                                            |  |   |      |  
|Proceeds from sale of assets                                      |  |                                               | 76    |   |                        |   |      |                                            |  |   | 76    |  
|                                                                  |  |                                               |       |   |                        |   |      |                                            |  |   |       |  
|Net cash used for investing activities                            |  |                                               | (585  | ) |                        |   |     |                                            |  |   | (585  | )
|                                                                  |  |                                               |       |   |                        |   |      |                                            |  |   |       |  
|Financing Activities:                                             |  |                                               |       |   |                        |   |      |                                            |  |   |       |  
|Proceeds from borrowings                                          |  |                                               |      |   |                        |   |      |                                            |  |   |      |  
|Payments on long-term debt and redeemable common stock            |  |                                               | (302  | ) |                        |   |      |                                            |  |   | (302  | )
|Proceeds from exercise of employee stock options                  |  |                                               | 1     |   |                        |   |      |                                            |  |   | 1     |  
|                                                                  |  |                                               |       |   |                        |   |      |                                            |  |   |       |  
|Net cash used for financing activities                            |  |                                               | (301  | ) |                        |   |     |                                            |  |   | (301  | )
|                                                                  |  |                                               |       |   |                        |   |      |                                            |  |   |       |  
|Net increase (decrease) in cash and cash equivalents              |  |                                               | 521   |   |                        |   |     |                                            |  |   | 521   |  
|Cash and cash equivalents at beginning of period                  |  |                                               | 1,283 |   |                        |   |      |                                            |  |   | 1,283 |  
|                                                                  |  |                                               |       |   |                        |   |      |                                            |  |   |       |  
|Cash and cash equivalents at end of period                        |  | $                                             | 1,804 |   |                        | $ |     |                                            |  | $ | 1,804 |  
|                                                                  |  |                                               |       |   |                        |   |      |                                            |  |   |       |  



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NOTE 3  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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



|                                                                                                                  |  |                                |     |   |                               |   |       |      |  |   |       |   |  |   |        |  
|----------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | --- | - | ----------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ------ | -
|                                                                                                                  |  | Three months endedFebruary 28, |     |   | Nine months endedFebruary 28, |  
|                                                                                                                  |  | 2006                           |     |   | 2005                          |   |       | 2006 |  |   | 2005  |  
|Net income (loss) applicable to common sharesholders as reported                                                  |  | $                              | (15 | ) |                               | $ | (537  | )    |  | $ | (710  | ) |  | $ | (1,123 | )
|Plus stock-based employee compensation expense included in reported net loss, net of related tax effects          |  |                                | 78  |   |                               |   | 5     |      |  |   | 78    |   |  |   | 5      |  
|Less total stock-based employee compensation determined under fair-value-based method, net of related tax effects |  |                                | (40 | ) |                               |   | (32   | )    |  |   | (106  | ) |  |   | (167   | )
|                                                                                                                  |  |                                |     |   |                               |   |       |      |  |   |       |   |  |   |        |  
|Pro forma net income (loss)                                                                                       |  | $                              | 23  |   |                               | $ | (564  | )    |  | $ | (738  | ) |  | $ | (1,285 | )
|                                                                                                                  |  |                                |     |   |                               |   |       |      |  |   |       |   |  |   |        |  
|Basic earnings (loss) per share:                                                                                  |  |                                |     |   |                               |   |       |      |  |   |       |   |  |   |        |  
|As reported                                                                                                       |  | $                              |    |   |                               | $ | (0.12 | )    |  | $ | (0.03 | ) |  | $ | (0.25  | )
|                                                                                                                  |  |                                |     |   |                               |   |       |      |  |   |       |   |  |   |        |  
|Pro forma                                                                                                         |  | $                              |    |   |                               | $ | (0.12 | )    |  | $ | (0.03 | ) |  | $ | (0.28  | )
|                                                                                                                  |  |                                |     |   |                               |   |       |      |  |   |       |   |  |   |        |  
|Diluted earnings (loss) per share:                                                                                |  |                                |     |   |                               |   |       |      |  |   |       |   |  |   |        |  
|As reported                                                                                                       |  | $                              |    |   |                               | $ | (0.12 | )    |  | $ | (0.03 | ) |  | $ | (0.25  | )
|                                                                                                                  |  |                                |     |   |                               |   |       |      |  |   |       |   |  |   |        |  
|Pro forma                                                                                                         |  | $                              |    |   |                               | $ | (0.12 | )    |  | $ | (0.03 | ) |  | $ | (0.28  | )
|                                                                                                                  |  |                                |     |   |                               |   |       |      |  |   |       |   |  |   |        |  

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



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and 6,000,000 shares of common stock, respectively. On November 1, 2005, the 1,000,000 shares of Series C Preferred Stock were converted into 44,000,000
shares of common stock. These securities, prior to their conversion, are considered to be Participating Securities under Financial Accounting Standards No. 128 (FAS 128) for EPS calculations. The Series C Preferred Stock and
the GM Warrants are considered Participating Securities because the common stock underlying these securities participates in dividends (if declared) at the same rate as the common shareholders. Emerging Issues Task Force (EITF) Topic
03-06 requires that Participating Securities be included in the computation of basic EPS using the two-class method, if the effect would be dilutive to EPS. Although both of these securities, prior to their conversion into common stock, 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 (loss) per share calculations for the nine months ended February 28, 2006 and the three and nine months ended February 28, 2005. Because the Company reported a net income in the current quarter, a portion of the net income
has been allocated to the participating GM Warrants as if dividends were declared leaving net income applicable to common shareholder for the computation of basic EPS.

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



|                               |  |                    |  |                   |  |                  |  |                 
|------------------------------ |  | ------------------ |  | ----------------- |  | ---------------- |  | ----------------
|                               |  | Three Months Ended |  | Nine Months Ended
|                               |  | February 28,2006   |  | February 28,2005  |  | February 28,2006 |  | February 28,2005
|Common stock options           |  | 1,803              |  | 1,982             |  | 1,803            |  | 1,982           
|Common stock purchase warrants |  | 6,000              |  | 6,000             |  | 6,000            |  | 6,000           
|Series C Preferred Stock       |  |                   |  | 44,000            |  |                 |  | 44,000          
|                               |  |                    |  |                   |  |                  |  |                 
|                               |  | 7,803              |  | 51,982            |  | 7,803            |  | 51,982          
|                               |  |                    |  |                   |  |                  |  |                 

Income Taxes:The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard 109 (SFAS 109), Accounting for Income Taxes, using the asset and liability approach, which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary
differences between the carrying amounts and the tax basis of such assets and liabilities. This method utilizes enacted statutory tax rates in effect for the year in which the temporary differences are expected to reverse and gives immediate effect
to changes in income tax rates upon enactment. Deferred tax assets are recognized, net of any valuation allowance, for temporary differences and net operating loss and tax credit carry forwards. Deferred income tax expense represents the change in
net deferred assets and liability balances. Deferred income taxes result from temporary differences between the basis of assets and liabilities recognized for differences between the financial statement and tax basis thereon, and for the expected
future tax benefits to be derived from net operating losses and tax credit carry forwards. A valuation allowance is recorded when it is more likely than not that deferred tax assets will be unrealizable in future periods. As of February 28, 2006,
the Company has recorded a valuation allowance against the full amount of its net deferred tax assets since it does not forecast taxable income for fiscal 2006 nor is the Company able to reasonably forecast taxable income beyond next year. The
inability to foresee taxable income in future years makes it more likely than not that the Company will not realize its recorded deferred tax assets in future periods. On November 1, 2005, the Company became a member of the consolidated tax group of
Progressive Concepts Communications, Inc. (PCCI) as a result of PCCI gaining control of over 80% of the outstanding common stock of Teletouch on that date. PCCI gained control of Teletouchs common stock through the conversion by
TLL Partners, LLC (TLLP), PCCIs wholly owned subsidiary, of all of its shares of the Companys outstanding Series C Preferred Stock into 43,500,000 share of common stock on November 1, 2005. As of November 1, 2005, TLLP was a
disregarded entity for federal tax purposes since it was at that time a single member limited liability company (LLC).Therefore,



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the parent for federal tax purposes was deemed to be PCCI. The Company continued to account for its taxes under SFAS 109 and record its deferred taxes on a
stand-alone basis while part of PCCIs consolidated tax group.

In preparing the financial statements for the quarter-ended
February 28, 2006, the Company prepared its financial statements without considering the Conversion of the preferred stock by TLLP had triggered the consolidated tax return requirements with PCCI. The Company instead evaluated its tax position
and projected that Teletouch would incur a net tax loss in 2006 that would be carried back and applied against its 2004 taxable income and result in a cash refund of taxes paid in 2004. Further, the Companys projections anticipated net losses
in the future without a change in the business that could not be justified in its projections at that point. The Company accounts for its taxes under SFAS 109 which resulted in the Company recording a net deferred tax asset as of February 28,
2006 based upon being a stand alone tax paying entity. In accordance with SFAS 109, the recoverability of this asset was evaluated and given the projected net losses, the Company recorded a valuation allowance that reduced the net deferred tax asset
by $176,000.

Since Teletouchs tax year actually ended in November 2005 due to becoming part of the PCCI affiliated group for
consolidated tax purposes, Teletouch should have evaluated its deferred tax assets based on the refunds that it could get related to the loss through November 2005. The Company estimated that year-to-date through November 2005 it actually had a
small taxable income, therefore it would not be able to carryback any losses and recover the taxes paid in 2004. As a result, the Company should have recorded an additional valuation allowance against its deferred tax asset in its 3rd fiscal quarter
ended February 28, 2006 that would have the effect of reducing the assets of the Company by $176,000 at February 28, 2006.

NOTE 4 
PROPOSED SALE OF PAGING BUSINESS

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

Sale of Paging Business

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

The assets included in the asset sale transaction include substantially all of the designated assets of
the paging business (the Acquired Assets) with a net carrying value at February 28, 2006 of approximately $3.5 million.

The Buyers aggregate consideration for the Acquired Assets was originally contemplated to be



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approximately $5.25 million as of August 31, 2005 and would have been payable as follows: (i) $4,000,000 less the cumulative earnings before
interest, taxes, depreciation and amortization (EBITDA) attributable to the paging business from September 1, 2005 through the closing date to be payable in cash to the Company on the closing date, (ii) $1,200,000 non-interest
bearing note payable to the Company due in 12 monthly payments of $100,000 each beginning the earlier of the date that Buyer has satisfied its obligations under its senior borrowings or August 31, 2007 and (iii) the assumption of
approximately $50,000 notes payable related to vehicles being sold (collectively, the Purchase Price). The $1.2 million promissory note payable to the Company was to be secured by a lien on the assets subject to customary subordination
provisions required by the Buyers senior lender. On December 30, 2005, the First Amendment to the APA was executed under which the payment terms of the APA were amended to limit the reductions that can be taken against the cash portion of
the consideration so that in no event would such amount be more or less than $2.2 million. Additionally, the First Amendment to the APA provided that the $1.2 million promissory note will be prepaid at closing. In March 2006, the Second Amendment to
the APA was executed which amended the payment terms of the APA due to the continued delays in closing the sale of the paging business as discussed below. The Second Amendment to the APA maintains the cash portion of the consideration at $2.2
million, but re-establishes the adjustments to the final cash payment due at closing during the period from April 1, 2006 through the closing date. During the period between April 1, 2006 and the closing date, the cash payment will be
reduced by the EBITDA of the paging business, reduced by interest charges incurred by the Buyer and increased by any approved capital expenditures related to the paging business. The Second Amendment to the APA also contains the provision that the
$1.2 million promissory note will be prepaid at closing. Additionally, the Second Amendment allows for either the Company or the Buyer to terminate the agreement at anytime after June 30, 2006. Therefore, the total cash consideration payable to
the Company if the closing takes place on or about June 30, 2006 is estimated to be between $2.4 and $2.7 million and the promissory note will be cancelled.

The Purchase Price is subject to adjustment based on the Companys net working capital, as defined in the APA, at closing and the value of any excess net working capital transferred will be paid to the Company by
the Buyer within 45 days of closing. As of February 28, 2006, approximately $368,000 in excess working capital, as defined in the APA, is related to the paging business and would be transferred to the Buyer if the transaction were to have
closed at that date. Because the levels of working capital change monthly, there is no way to estimate the balance that will exist as of closing.

The APA also contains representations and warranties, indemnification and other provisions customary for agreements of this nature. Closing of the APA is contingent upon obtaining the approval of the Companys shareholders as well as
approvals from federal regulators and other customary closing conditions. The absence of these approvals at this stage presents transaction risks.

The expected closing of this transaction continues to be delayed due to difficulties encountered gaining approval from the SEC to hold a shareholders meeting to approve the transaction. The Company filed a preliminary proxy statement
for a special meeting of its shareholders to approve among other proposals, this transaction in January 2006. The Company received SEC staff comments on the filing and is presently continuing to prepare responses to comments received on this proxy
statement. The Company is exploring an alternate merger transaction that, if completed prior to the sale of the paging business, may allow the Company to sell its paging business without seeking shareholder approval.

The parties to the APA have also entered into a Management Agreement (MA), to facilitate a smooth transition of the paging business
operations from Teletouch to the Buyer. In the MA, the Buyer has the authority, on a limited basis consistent with the effective regulations of the FCC, to implement operational policies and to provide general management services with respect to the
day-to-day operations of TLLs paging operations, subject to reporting to and approval of the Chief Executive Officer of Teletouch and its Board. As its compensation for the management services provided under the MSA, the Buyer shall



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be entitled to a flat fee each month during the period before the closing date, payable in two equal installments per month, beginning September 2, and
16, 2005, respectively. The term of the MSA will be from September 1, 2005 to the earlier of: (i) the APA final closing date, or (ii) the termination of the APA. In March 2006, the MSA was amended to increase the management fee from
$50,000 to $100,000 per month beginning April 1, 2006 through the end of the term of the MSA. The management fees paid to the Buyer are charged against the EBITDA of the paging business resulting in a reduced offset to be taken by the Buyer
against the cash consideration paid under the terms of the APA. If the Company closes on the sale of its paging business as anticipated it will recover all management fees paid to the Buyer through the cash consideration received at closing.

Redemption of Common Stock Purchase Warrants

On September 19, 2005 the Company received notice from the holders of the 6,000,000 GM Warrants of their intent to redeem these warrants upon the sale of the paging business. Under the terms of the GM Warrants, the holder may
accelerate the redemption of the warrants upon the sale of substantially all of the Companys assets. Under the initial terms of the GM Warrants, they could be redeemed at $0.50 per warrant, at the option of the holder in December 2007. The
holders of the GM Warrants have claimed that the sale of the paging business represents substantially all of the Companys assets. The Company is trying to negotiate a reduction in the amount due to the Warrant Holders upon the closing of the
sale transaction and believes if it is unsuccessful in reaching terms on this obligation, the warrant holders may vote against the sale of the paging business. The Company is also exploring a merger transaction which, if completed prior to the sale
of the paging business, may allow the Company to complete the paging business sale without seeking shareholder approval since the paging business would no longer represent substantially all of the Companys assets if the merger is successful.
The potential merger negotiations are early in the process but the Company believes this transaction may be the most expedient manner in which to complete the sale of its paging business without triggering the accelerated redemption of the GM
Warrants.

If the Company is unable to complete the contemplated merger transaction and if the Company is unsuccessful in negotiating a
settlement or alternative arrangement with the holders of the GM Warrants and receives shareholder approval to continue with the sale of the paging business, the Company may be obligated to redeem the GM Warrants for $3,000,000 shortly after the
closing on the sale of the paging business. As of February 28, 2006, the Company has recorded this as a long-term liability at its fair value of $2,401,000. The GM Warrants are being accreted in value over time to their settlement value of
$3,000,000 in December 2007 according to their original terms. If the redemption rights contained in the GM Warrants are accelerated the Company will record a charge to net income equal to the difference in the carrying value of the GM Warrants at
that date and $3,000,000 and this amount will be classified as a current liability during any period these rights are triggered. Further, under rights included in the GM Warrants, the warrant holders will be permitted to vote separately as a class
on matters involving the sale of substantially all of the assets of the Company. This right applies to the sale of the Companys paging business (discussed above) and the approval of this transaction is dependent on receiving an affirmative
vote from the holders of the GM Warrants unless the Company can complete an alternate transaction prior to the sale of its paging business that results in paging business no longer representing substantially all of the assets of the Company.



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NOTE 5  INVENTORY

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



|                                      |  |                   |     |         |              |      |           |  |   |      |   |         |   |       |           |   |      |   |  |   |     |  
|------------------------------------- |  | ----------------- | --- | ------- | ------------ | ---- | --------- |  | - | ---- | - | ------- | - | ----- | --------- | - | ---- | - |  | - | --- | -
|                                      |  | February 28, 2006 |     |         | May 31, 2005 |     
|                                      |  | Cost              |     | Reserve |              |      | Net Value |  |   | Cost |   | Reserve |   |       | Net Value |  
|Pagers and parts                      |  | $                 | 353 |         | $            |     |           |  | $ | 353  |   |         | $ | 383   |           | $ | (38  | ) |  | $ | 345 |  
|Two-Way radios and parts              |  |                   | 270 |         |              | (20  | )         |  |   | 250  |   |         |   | 390   |           |   | (16  | ) |  |   | 374 |  
|Telemetry devices and parts           |  |                   | 133 |         |              | (72  | )         |  |   | 61   |   |         |   | 238   |           |   | (11  | ) |  |   | 227 |  
|                                      |  |                   |     |         |              |      |           |  |   |      |   |         |   |       |           |   |      |   |  |   |     |  
|Total inventory and specific reserves |  | $                 | 756 |         | $            | (92  | )         |  | $ | 664  |   |         | $ | 1,011 |           | $ | (65  | ) |  | $ | 946 |  
|General obsolescence reserve          |  |                   |    |         |              | (25  | )         |  |   | (25  | ) |         |   |      |           |   | (40  | ) |  |   | (40 | )
|                                      |  |                   |     |         |              |      |           |  |   |      |   |         |   |       |           |   |      |   |  |   |     |  
|Total inventory and reserves          |  | $                 | 756 |         | $            | (117 | )         |  | $ | 639  |   |         | $ | 1,011 |           | $ | (105 | ) |  | $ | 906 |  
|                                      |  |                   |     |         |              |      |           |  |   |      |   |         |   |       |           |   |      |   |  |   |     |  

NOTE 6  PROPERTY, PLANT AND EQUIPMENT

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



|                           |  |                   |         |   |              |   |         |  
|-------------------------- |  | ----------------- | ------- | - | ------------ | - | ------- | -
|                           |  | February 28, 2006 |         |   | May 31, 2005 |  
|Leased pagers and radios   |  | $                 | 2,306   |   |              | $ | 2,671   |  
|Paging infrastructure      |  |                   | 15,437  |   |              |   | 16,176  |  
|Buildings and improvements |  |                   | 386     |   |              |   | 386     |  
|Other equipment            |  |                   | 2,048   |   |              |   | 2,036   |  
|                           |  |                   |         |   |              |   |         |  
|                           |  |                   | 20,177  |   |              |   | 21,269  |  
|Accumulated depreciation   |  |                   | (15,623 | ) |              |   | (15,609 | )
|                           |  |                   |         |   |              |   |         |  
|                           |  | $                 | 4,554   |   |              | $ | 5,660   |  
|                           |  |                   |         |   |              |   |         |  

Depreciation expense was approximately $418,000 and $754,000 for the three months ended
February 28, 2006 and 2005, respectively, and $1,630,000 and $2,430,000 for the nine months ended February 28, 2006 and 2005, respectively.

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, 2006 (in thousands):



|                       |  |                  |     |             |   |             |  |               |     |               |   |         |  |                |       |  |   |    |  |   |      
|---------------------- |  | ---------------- | --- | ----------- | - | ----------- |  | ------------- | --- | ------------- | - | ------- |  | -------------- | ----- |  | - | -- |  | - | -----
|                       |  | Less than3 years |     | 3 to 4years |   | 5 to 9years |  | 10 to 14years |     | 15 to 19years |   | 20years |  | Total NetValue
|Buildings              |  | $                |    |             | $ |            |  | $             |    |               | $ |        |  | $              | 4     |  | $ | 8  |  | $ | 12   
|LAN & Other Computers  |  |                  |    |             |   | 150         |  |               | 16  |               |   |        |  |                |      |  |   |   |  |   | 166  
|Equipment              |  |                  |    |             |   | 32          |  |               | 3   |               |   | 2       |  |                |      |  |   |   |  |   | 37   
|Furniture & Fixtures   |  |                  |    |             |   | 23          |  |               |    |               |   | 19      |  |                |      |  |   |   |  |   | 42   
|Leasehold Improvements |  |                  | 27  |             |   | 2           |  |               | 1   |               |   |        |  |                |      |  |   |   |  |   | 30   
|Office Equipment       |  |                  |    |             |   | 2           |  |               | 4   |               |   | 1       |  |                |      |  |   |   |  |   | 7    
|Paging Infrastructure  |  |                  |    |             |   | 1           |  |               | 258 |               |   | 87      |  |                | 2,092 |  |   | 3  |  |   | 2,441
|Vehicles               |  |                  |    |             |   |            |  |               | 206 |               |   |        |  |                |      |  |   |   |  |   | 206  
|Pager Fleet            |  |                  |    |             |   | 1,475       |  |               |    |               |   |        |  |                |      |  |   |   |  |   | 1,475
|Radio Fleet            |  |                  |    |             |   | 15          |  |               |    |               |   |        |  |                |      |  |   |   |  |   | 15   
|Assets Not In Service  |  |                  | 123 |             |   |            |  |               |    |               |   |        |  |                |      |  |   |   |  |   | 123  
|                       |  |                  |     |             |   |             |  |               |     |               |   |         |  |                |       |  |   |    |  |   |      
|                       |  | $                | 150 |             | $ | 1,700       |  | $             | 488 |               | $ | 109     |  | $              | 2,096 |  | $ | 11 |  | $ | 4,554
|                       |  |                  |     |             |   |             |  |               |     |               |   |         |  |                |       |  |   |    |  |   |      



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NOTE 7  GOODWILL AND OTHER INTANGIBLE ASSETS

Intangible Assets with Indefinite Lives: In accordance with SFAS No. 142,Goodwill and Other Intangible Assets, the Company
performs an annual impairment test of goodwill as well as evaluates this goodwill for recoverability upon any significant change in the business. There were no changes in the carrying amount of intangible assets with indefinite lives for the three
or nine months ended February 28, 2006.

The reported goodwill of the Company at February 28, 2006 and May 31, 2005 relates
entirely to the two-way radio segment and was purchased in the acquisition of the assets of Delta Communications and Electronics, Inc. which was completed in January 2004. The Company evaluates the recoverability of this goodwill at least once
annually on March 1st of each year. There have been no changes in the two-way radio segment during the current quarter that would indicate to the Company that the carrying value of its goodwill may have been impaired during the period.

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



|                                              |  |                     |     |                         |   |      |                  |  |                     |     |                         |   |     |                  |   |      |   |  |   |    
|--------------------------------------------- |  | ------------------- | --- | ----------------------- | - | ---- | ---------------- |  | ------------------- | --- | ----------------------- | - | --- | ---------------- | - | ---- | - |  | - | ---
|                                              |  | February 28, 2006   |     | May 31, 2005           
|                                              |  | GrossCarryingAmount |     | AccumulatedAmortization |   |      | NetCarryingValue |  | GrossCarryingAmount |     | AccumulatedAmortization |   |     | NetCarryingValue
|Business combinations:                        |  |                     |     |                         |   |      |                  |  |                     |     |                         |   |     |                  |   |      |   |  |   |    
|Subscriber bases                              |  | $                   | 226 |                         | $ | (160 | )                |  | $                   | 66  |                         | $ | 226 |                  | $ | (143 | ) |  | $ | 83 
|FCC licenses                                  |  |                     | 103 |                         |   | (24  | )                |  |                     | 79  |                         |   | 103 |                  |   | (15  | ) |  |   | 88 
|Non-compete agreements                        |  |                     | 95  |                         |   | (40  | )                |  |                     | 55  |                         |   | 95  |                  |   | (25  | ) |  |   | 70 
|                                              |  |                     |     |                         |   |      |                  |  |                     |     |                         |   |     |                  |   |      |   |  |   |    
|                                              |  | $                   | 424 |                         | $ | (224 | )                |  | $                   | 200 |                         | $ | 424 |                  | $ | (183 | ) |  | $ | 241
|Internally developed assets:                  |  |                     |     |                         |   |      |                  |  |                     |     |                         |   |     |                  |   |      |   |  |   |    
|Software                                      |  |                     | 149 |                         |   | (123 | )                |  |                     | 26  |                         |   | 149 |                  |   | (86  | ) |  |   | 63 
|                                              |  |                     |     |                         |   |      |                  |  |                     |     |                         |   |     |                  |   |      |   |  |   |    
|Balance at February 28, 2006 and May 31, 2005 |  | $                   | 573 |                         | $ | (347 | )                |  | $                   | 226 |                         | $ | 573 |                  | $ | (269 | ) |  | $ | 304
|                                              |  |                     |     |                         |   |      |                  |  |                     |     |                         |   |     |                  |   |      |   |  |   |    

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



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

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

Total amortization expense for the three months ended February 28, 2006 and 2005 was approximately $25,000 and $30,000, respectively and $77,000 and
$88,000 for the nine months ended February 28, 2006 and 2005 respectively.



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NOTE 8  ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

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



|                                            |  |                  |       |             |   |      
|------------------------------------------- |  | ---------------- | ----- | ----------- | - | -----
|                                            |  | February 28,2006 |       | May 31,2005
|Accrued payroll and other personnel expense |  | $                | 608   |             | $ | 999  
|Accrued state and local taxes               |  |                  | 174   |             |   | 221  
|Unvouchered accounts payable                |  |                  | 598   |             |   | 589  
|Customer deposits payable                   |  |                  | 55    |             |   | 118  
|Other                                       |  |                  | 170   |             |   | 204  
|                                            |  |                  |       |             |   |      
|Total                                       |  | $                | 1,605 |             | $ | 2,131
|                                            |  |                  |       |             |   |      

NOTE 9 - INCOME TAXES

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

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



|                                                            |  |                   |       |   |              |   |       |  
|----------------------------------------------------------- |  | ----------------- | ----- | - | ------------ | - | ----- | -
|                                                            |  | February 28, 2006 |       |   | May 31, 2005 |  
|Deferred Tax Assets:                                        |  |                   |       |   |              |   |       |  
|Current Deferred Tax Assets:                                |  |                   |       |   |              |   |       |  
|Accrued liabilities                                         |  | $                 | 36    |   |              | $ | 32    |  
|Inventory reserves                                          |  |                   | 4     |   |              |   |      |  
|Deferred revenue                                            |  |                   | 38    |   |              |   | 39    |  
|Bad debt reserve                                            |  |                   | 33    |   |              |   | 31    |  
|                                                            |  |                   |       |   |              |   |       |  
|                                                            |  |                   | 111   |   |              |   | 102   |  
|Valuation Allowance                                         |  |                   | (98   | ) |              |   | (32   | )
|                                                            |  |                   |       |   |              |   |       |  
|Current Deferred Tax Assets, net of valuation allowance     |  |                   | 13    |   |              |   | 70    |  
|                                                            |  |                  
|Non-Current Deferred Tax Assets:                            |  |                   |       |   |              |   |       |  
|Unrecognized gain                                           |  |                   | 252   |   |              |   | 360   |  
|Intangible assets                                           |  |                   | 1,359 |   |              |   | 1,541 |  
|                                                            |  |                   |       |   |              |   |       |  
|                                                            |  |                   | 1,611 |   |              |   | 1,901 |  
|Valuation Allowance                                         |  |                   | (773  | ) |              |   | (589  | )
|                                                            |  |                   |       |   |              |   |       |  
|Non-Current Deferred Tax Assets, net of valuation allowance |  |                   | 838   |   |              |   | 1,312 |  
|                                                            |  |                   |       |   |              |   |       |  
|Deferred Tax Liabilities:                                   |  |                   |       |   |              |   |       |  
|Current Deferred Tax Liabilities:                           |  |                   |       |   |              |   |       |  
|Other                                                       |  |                   | 13    |   |              |   | 18    |  
|                                                            |  |                   |       |   |              |   |       |  
|Non-Current Deferred Tax Liabilities:                       |  |                   |       |   |              |   |       |  
|Depreciation methods                                        |  |                   | 838   |   |              |   | 1,226 |  
|                                                            |  |                   |       |   |              |   |       |  
|Net Current Deferred Tax Asset                              |  | $                 |      |   |              | $ | 52    |  
|                                                            |  |                   |       |   |              |   |       |  
|Net Non-Current Deferred Tax Asset                          |  | $                 |      |   |              | $ | 86    |  
|                                                            |  |                   |       |   |              |   |       |  

The Companys determination to restate the results for the quarter ended February 28, 2006
was a result of an analysis of the tax and accounting consequences of the November 2005 conversion by TLL



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Partners, LLC of all of its shares of the Companys Series C preferred stock into 43,500,000 shares of the Companys common stock (the
Conversion), which resulted in TLL Partners owning a controlling interest at approximately 88% of the Company.

TLL Partners,
LLC (TLLP), is a Delaware limited liability company owned by Progressive Concepts Communications, Inc. (PCCI). Prior to November 2005, PCCI has filed a consolidated return with its wholly-owned subsidiaries, Progressive
Concepts, Inc. (PCI) and State Hawk Security, Inc. (SHS) and TLLP. Effective November 1, 2005, the Company became a member of the PCCI tax group, as PCCI gained voting control of the Company through the Conversion. In
accordance with the related IRS rules and regulations, members of an affiliated corporate group with greater than 80% voting control must be included in a consolidated tax return.

In preparing the financial statements for the quarter-ended February 28, 2006, the Company prepared its financial statements without considering the
Conversion of the preferred stock by TLLP had triggered the consolidated tax return requirements with PCCI. The Company instead evaluated its tax position and projected that Teletouch would incur a net tax loss in 2006 that would be carried back and
applied against its 2004 taxable income and result in a cash refund of taxes paid in 2004. Further, the Companys projections anticipated net losses in the future without a change in the business that could not be justified in its projections
at that point. The Company accounts for its taxes under SFAS 109 which resulted in the Company recording a net deferred tax asset as of February 28, 2006 based upon being a stand alone tax paying entity. In accordance with SFAS 109, the
recoverability of this asset was evaluated and given the projected net losses, the Company recorded a valuation allowance that reduced the net deferred tax asset by $176,000.

Since Teletouchs tax year actually ended in November 2005 due to becoming part of the PCCI affiliated group for consolidated tax purposes,
Teletouch should have evaluated its deferred tax assets based on the refunds that it could get related to the loss through November 2005. The Company estimated that year-to-date through November 2005 it actually had a small taxable income, therefore
it would not be able to carryback any losses and recover the taxes paid in 2004. As a result, the Company should have recorded an additional valuation allowance against its deferred tax asset in its 3rd fiscal quarter ended February 28, 2006
that would have the effect of reducing the assets of the Company by $176,000 at February 28, 2006.

NOTE 10  RELATED PARTY TRANSACTIONS

The Company had certain related party sales and purchases and incurred certain expenses during the three and nine months ended
February 28, 2006 and 2005 with Progressive Concepts, Inc. (PCI) a company controlled by Robert McMurrey, Teletouchs Chairman.

The Company primarily purchases call center services from PCI to support the Companys existing answering service accounts within the paging segment of its business and to support a monitoring contract that the Company has with GPSi,
LLC (Guidepoint Systems). The call center services to support Teletouchs answering service accounts were billed by PCI at $30,000 per month through August 2005 and beginning in September 2005 these fees were raised to $35,000 per
month. Teletouch is charged an additional monthly charge based on the call volume and number of subscribers being serviced related to the telemetry monitoring contract. The telemetry monitoring contract was executed by the Company during the first
quarter of fiscal 2006. During the three months ended February 28, 2006, the Company incurred $126,000 in total call center charges to PCI as compared to $90,000 in the same three months of the prior year. During the nine months ended
February 28, 2006, the Company incurred $412,000 in total call center charges to PCI as compared to $270,000 in the same nine months of the prior year.

In March 2006, the Company received a notification from Guidepoint Systems exercising its 60 day



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termination rights under its monitoring contract with Teletouch. Additionally, in March 2006, the Company executed an agreement to exchange its answering
service accounts with a third party for a paging network and customer base. Beginning in May 2006, Teletouch will no longer be contracting call center services with PCI as a result of the subsequent events discussed above.

NOTE 11  SHAREHOLDERS EQUITY

Common
Stock Purchase Warrants: At February 28, 2006, the Company has 6,000,000 issued and outstanding warrants (the GM Warrants) to purchase shares of Teletouch Common Stock. The GM Warrants will be exercisable beginning in December
of 2005 and terminating in December of 2010. In December of 2007 or earlier upon specific events, the holder of the GM Warrants may require the Company to redeem the warrants at $0.50 per warrant. Because of this mandatory redemption feature, the
Company has recorded the estimated fair value of the GM Warrants as a long-term liability on its consolidated balance sheet and will adjust the amount to reflect changes in the fair value of the warrants, including accretion in value due to the
passage of time, with such changes charged or credited to interest expense.

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



|                             |  |                  |    
|---------------------------- |  | ---------------- | ---
|                             |  | Interest Expense
|March 1, 2006 - May 31, 2006 |  | $                | 109
|June 1, 2006 - May 31, 2007  |  | $                | 490

As a result of the proposed sale of the paging business, the redemption of the GM Warrants could
be accelerated upon the closing of this transaction. The Company is currently negotiating with the holders of the GM Warrants for a reduced amount payable upon the closing of the sale transaction as well as exploring an alternate transaction that
may allow the sale of the paging business to be completed without accelerating the redemption of the GM Warrants (see Note 4 for further discussion).

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



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



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The following table provides a rollforward of the redeemable common stock held by Delta through
February 28, 2006 (dollars in thousands):



|                             |  |          |   |  |                  |      |  
|---------------------------- |  | -------- | - |  | ---------------- | ---- | -
|                             |  | Shares   |   |  | Redemption Value |     
|Balance at May 31, 2005      |  | 435,000  |   |  | $                | 440  |  
|Less: Redemption of shares   |  | (108,750 | ) |  |                  | (114 | )
|Add: Accretion               |  |         |   |  |                  | 4    |  
|                             |  |          |   |  |                  |      |  
|Balance at August 31, 2005   |  | 326,250  |   |  | $                | 330  |  
|Less: Redemption of shares   |  | (81,563  | ) |  |                  | (86  | )
|Add: Accretion               |  |         |   |  |                  | 4    |  
|                             |  |          |   |  |                  |      |  
|Balance at November 30, 2005 |  | 244,687  |   |  | $                | 248  |  
|Less: Redemption of shares   |  | (61,172  | ) |  |                  | (64  | )
|Add: Accretion               |  |         |   |  |                  | 4    |  
|                             |  |          |   |  |                  |      |  
|Balance at February 28, 2006 |  | 183,515  |   |  | $                | 188  |  
|                             |  |          |   |  |                  |      |  

On March 2, 2006 Delta redeemed 45,879 shares of its redeemable common stock at $1.10 per
share receiving a cash payment of $50,467 from the Company.

Because of this mandatory redemption feature, the Company has recorded the
estimated fair value of the Redeemable Common Stock Payable as both a current and long-term liability on its consolidated balance sheet, and will adjust the amount to reflect changes in the fair value of the obligation, including accretion in value
due to the passage of time, with such changes charged or credited to interest expense. As of February 28, 2006, the entire obligation under the Redeemable Common Stock Payable is recorded as a current liability on the consolidated balance sheet
since the holder can redeem all of these shares within the next twelve months at the holders option.

Series C Preferred
Stock: At February 28, 2006, no shares of Series C Preferred Stock with a par value of $0.001 are issued and outstanding. On November 1, 2005, 1,000,000 shares of Series C Preferred Stock were converted into 44,000,000 shares of Common
Stock resulting in the retirement of all of the outstanding shares of Series C Preferred Stock.

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

NOTE 12  SEGMENT INFORMATION

The
Companys consolidated financial statements include two reportable segments: Paging Services and Two-Way Radio Services. The Company determines its reportable segments based on the aggregation criteria of Financial Accounting Standards
No. 131 Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131). Paging and messaging services represent paging



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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.

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



|                                            |  |                                |       |                               |   |       |  |      |        |  |   |       
|------------------------------------------- |  | ------------------------------ | ----- | ----------------------------- | - | ----- |  | ---- | ------ |  | - | ------
|                                            |  | Three Months EndedFebruary 28, |       | Nine Months EndedFebruary 28,
|                                            |  | 2006                           |       | 2005                          |   | 2006  |  | 2005
|Service, rent and maintenance revenue       |  |                                |       |                               |   |       |  |      |        |  |   |       
|Paging                                      |  | $                              | 3,552 |                               | $ | 4,364 |  | $    | 11,313 |  | $ | 13,800
|Two-Way Radio                               |  |                                | 446   |                               |   | 394   |  |      | 1,411  |  |   | 1,318 
|Other                                       |  |                                | 56    |                               |   | 37    |  |      | 150    |  |   | 113   
|                                            |  |                                |       |                               |   |       |  |      |        |  |   |       
|Total service, rent and maintenance revenue |  | $                              | 4,054 |                               | $ | 4,795 |  | $    | 12,874 |  | $ | 15,231
|                                            |  |                                |       |                               |   |       |  |      |        |  |   |       
|Product sales revenue                       |  |                                |       |                               |   |       |  |      |        |  |   |       
|Paging                                      |  | $                              | 140   |                               | $ | 160   |  | $    | 377    |  | $ | 506   
|Two-Way Radio                               |  |                                | 735   |                               |   | 903   |  |      | 2,454  |  |   | 2,707 
|Other                                       |  |                                | 92    |                               |   | 10    |  |      | 241    |  |   | 242   
|                                            |  |                                |       |                               |   |       |  |      |        |  |   |       
|Total product sales revenue                 |  | $                              | 967   |                               | $ | 1,073 |  | $    | 3,072  |  | $ | 3,455 
|                                            |  |                                |       |                               |   |       |  |      |        |  |   |       
|Operating Revenue                           |  | $                              | 5,021 |                               | $ | 5,868 |  | $    | 15,946 |  | $ | 18,686
|                                            |  |                                |       |                               |   |       |  |      |        |  |   |       

Reconciliation of adjusted EBITDA to net income (loss):



|                                         |  |                                |       |   |                               |   |        |      |  |   |        |   |  |   |        |  
|---------------------------------------- |  | ------------------------------ | ----- | - | ----------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                         |  | Three Months EndedFebruary 28, |       |   | Nine Months EndedFebruary 28, |  
|                                         |  | 2006                           |       |   | 2005                          |   |        | 2006 |  |   | 2005   |  
|Adjusted EBITDA                          |  |                                |       |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Paging                                   |  | $                              | 1,281 |   |                               | $ | 2,388  |      |  | $ | 5,130  |   |  | $ | 7,530  |  
|Two-Way Radio                            |  |                                | 52    |   |                               |   | 104    |      |  |   | 213    |   |  |   | 421    |  
|Corporate Overhead                       |  |                                | (645  | ) |                               |   | (2,181 | )    |  |   | (3,338 | ) |  |   | (6,253 | )
|Other                                    |  |                                | (25   | ) |                               |   | (168   | )    |  |   | (422   | ) |  |   | (505   | )
|                                         |  |                                |       |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Total adjusted EBITDA                    |  |                                | 663   |   |                               |   | 143    |      |  |   | 1,583  |   |  |   | 1,193  |  
|                                         |  |                                |       |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Less non-recurring and non-cash expenses |  |                                |       |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Restructure Expense                      |  |                                |      |   |                               |   | 2      |      |  |   | (4     | ) |  |   | (17    | )
|Compensation Exp-Stock Options           |  |                                | 78    |   |                               |   | 5      |      |  |   | 78     |   |  |   | 5      |  
|                                         |  |                                |       |   |                               |   |        |      |  |   |        |   |  |   |        |  
|                                         |  |                                | 78    |   |                               |   | 7      |      |  |   | 74     |   |  |   | (12    | )
|                                         |  |                                |       |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Less:                                    |  |                                |       |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Depreciation and amortization            |  |                                | 443   |   |                               |   | 784    |      |  |   | 1,707  |   |  |   | 2,518  |  
|Interest expense, net                    |  |                                | 113   |   |                               |   | 121    |      |  |   | 328    |   |  |   | 332    |  
|Loss (gain) on disposal of assets        |  |                                | 10    |   |                               |   | 21     |      |  |   | 8      |   |  |   | (30    | )
|Income tax expense (benefit)             |  |                                | 34    |   |                               |   | (253   | )    |  |   | 176    |   |  |   | (492   | )
|                                         |  |                                |       |   |                               |   |        |      |  |   |        |   |  |   |        |  
|                                         |  |                                | 600   |   |                               |   | 673    |      |  |   | 2,219  |   |  |   | 2,328  |  
|                                         |  |                                |       |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss)                        |  | $                              | (15   | ) |                               | $ | (537   | )    |  | $ | (710   | ) |  | $ | (1,123 | )
|                                         |  |                                |       |   |                               |   |        |      |  |   |        |   |  |   |        |  

The Company measures accounts receivable, inventory and property, plant and equipment by segments.
A component of corporate assets is cash in the amount of $1.8 million and $1.3 million as of February 28, 2006 and May 31, 2005, respectively. Also, included in corporate assets is related party accounts receivable, deferred income taxes,
prepaid expenses and property, plant and equipment.



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



|             |  |                  |       |             |   |       
|------------ |  | ---------------- | ----- | ----------- | - | ------
|             |  | February 28,2006 |       | May 31,2005
|Assets       |  |                  |       |             |   |       
|Paging       |  | $                | 4,533 |             | $ | 5,420 
|Two-Way      |  |                  | 2,364 |             |   | 2,346 
|Corporate    |  |                  | 2,092 |             |   | 2,588 
|Other        |  |                  | 280   |             |   | 481   
|             |  |                  |       |             |   |       
|Total Assets |  | $                | 9,269 |             | $ | 10,835
|             |  |                  |       |             |   |       

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

NOTE 13  SUBSEQUENT EVENTS

AMEX Listing
Matters

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

The AMEX Staff reviewed
Teletouchs plan of compliance as submitted by the Company on January 17, 2006 and supplemented on February 8, 2006 (the Plan), and concluded that the Plan made a reasonable demonstration of the Companys ability to
regain compliance with the listing requirements. As a result, AMEX Staff granted a listing extension of the Companys securities on the AMEX through November 30, 2006, provided that the Company met certain interim disclosure and
performance milestones through the period. Specifically, and for example, on or before March 27, 2006, the Company is required to provide additional financial and other documentation supporting the Plan presented. In addition, the Company will
be required to provide periodic updates to the Staff in connection with the Plan. The Company can provide no assurance that it will be able to satisfy the terms of the Staffs extension or that it will execute upon the Plan as submitted to the
Staff. Failure to make progress consistent with the Plan or regain compliance with the continued listing standards by the end of the extension period could result in the Company being delisted from the AMEX.

The Companys stock trading symbol was modified to include the .BC indicator to denote its continued listing noncompliance five
days after the initial notification from the AMEX Staff. The trading symbol will bear the foregoing indicator until the Company regains its compliance with the AMEX continued listing requirements.

The Company made a timely submission of the requested financial and other documentation supporting the Plan on March 27, 2006 and as of the date
hereof the Company has received no further information requests from the AMEX Staff.



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##### Table of Contents

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

Overview

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

Teletouch is a provider of wireless telecommunications services, primarily paging services, in non-major metropolitan areas and communities in the
southeast United States. For the three and nine months ended February 28, 2006, the Company had total revenues of $5.0 million and $15.9 million, respectively as compared to $5.9 million and $18.7 million for the three and nine months ended
February 28, 2005. As of February 28, 2006, the Company had approximately 121,800 pagers in service as compared to 162,300 pagers in service at February 28, 2005. Teletouch has experienced a substantial decline in the paging business
over the last several years and expects that net subscriber deletions will continue as the demand for one way paging continues to decline. The Company derives the majority of its revenues from fixed, periodic fees, not dependent on usage, charged to
subscribers for paging services. As long as a subscriber remains on service, operating results benefit from the recurring payments of the fixed, periodic fees without incurring additional selling expenses or other fixed costs.

Proposed Sale of Paging Business

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

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

The assets included in the asset sale transaction include substantially all of the designated assets of the paging business (the Acquired
Assets) with a net carrying value at February 28, 2006 of approximately $3.5 million.

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



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the paging business from September 1, 2005 through the closing date to be payable in cash to the Company on the closing date, (ii) $1,200,000
non-interest bearing note payable to the Company due in 12 monthly payments of $100,000 each beginning the earlier of the date that Buyer has satisfied its obligations under its senior borrowings or August 31, 2007 and (iii) the assumption
of approximately $50,000 notes payable related to vehicles being sold (collectively, the Purchase Price). The $1.2 million promissory note payable to the Company was to be secured by a lien on the assets subject to customary
subordination provisions required by the Buyers senior lender. On December 30, 2005, the First Amendment to the APA was executed under which the payment terms of the APA were amended to limit the reductions that can be taken against the
cash portion of the consideration so that in no event would such amount be more or less than $2.2 million. Additionally, the First Amendment to the APA provided that the $1.2 million promissory note will be prepaid at closing. In March 2006, the
Second Amendment to the APA was executed which amended the payment terms of the APA due to the continued delays in closing the sale of the paging business as discussed below. The Second Amendment to the APA maintains the cash portion of the
consideration at $2.2 million, but re-establishes the adjustments to the final cash payment due at closing during the period from April 1, 2006 through the closing date. During the period between April 1, 2006 and the closing date, the
cash payment will be reduced by the EBITDA of the paging business, reduced by interest charges incurred by the Buyer and increased by any approved capital expenditures related to the paging business. The Second Amendment to the APA also contains the
provision that the $1.2 million promissory note will be prepaid at closing. Additionally, the Second Amendment allows for either the Company or the Buyer to terminate the agreement at anytime after June 30, 2006. Therefore, the total cash
consideration payable to the Company if the closing takes place on or about June 30, 2006 is estimated to be between $2.4 and $2.7 million and the promissory note will be cancelled.

The Purchase Price is subject to adjustment based on the Companys net working capital, as defined in the APA, at closing and the value of any
excess net working capital transferred will be paid to the Company by the Buyer within 45 days of closing. As of February 28, 2006, approximately $368,000 in excess working capital, as defined in the APA, is related to the paging business and
would be transferred to the Buyer if the transaction were to have closed at that date. Because the levels of working capital change monthly, there is no way to estimate the balance that will exist as of closing.

The APA also contains representations and warranties, indemnification and other provisions customary for agreements of this nature. Closing of the APA is
contingent upon obtaining the approval of the Companys shareholders as well as approvals from federal regulators and other customary closing conditions. The absence of these approvals at this stage presents transaction risks.

The expected closing of this transaction continues to be delayed due to difficulties encountered gaining approval from the Securities and Exchange
Commission (SEC) to hold a shareholders meeting to approve the transaction. The Company filed a preliminary proxy statement for a special meeting of its shareholders to approve among other proposals, this transaction in January
2006. The Company received SEC staff comments on the filing and is presently continuing to prepare responses to comments received on this proxy statement. The Company is exploring an alternate merger transaction that, if completed prior to the sale
of the paging business, may allow the Company to sell its paging business without seeking shareholder approval.

The parties to the APA
have also entered into a Management Agreement (MA), to facilitate a smooth transition of the paging business operations from Teletouch to the Buyer. In the MA, the Buyer has the authority, on a limited basis consistent with the effective
regulations of the FCC, to implement operational policies and to provide general management services with respect to the day-to-day operations of TLLs paging operations, subject to reporting to and approval of the Chief Executive Officer of
Teletouch and its Board. As its compensation for the management services provided under the MSA, the Buyer shall be entitled to a flat fee each month during the period before the closing date, payable in two equal



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installments per month, beginning September 2, and 16, 2005, respectively. The term of the MSA will be from September 1, 2005 to the earlier of:
(i) the APA final closing date, or (ii) the termination of the APA. In March 2006, the MSA was amended to increase the management fee from $50,000 to $100,000 per month beginning April 1, 2006 through the end of the term of the MSA.
The management fees paid to the Buyer are charged against the EBITDA of the paging business resulting in a reduced offset to be taken by the Buyer against the cash consideration paid under the terms of the APA. If the Company closes on the sale of
its paging business as anticipated it will recover all management fees paid to the Buyer through the cash consideration received at closing.

The holders of 6,000,000 redeemable common stock warrants issued by the Company as part of its debt and equity restructuring in 2002 (the GM Warrants), have a right to vote separately as a class on the sale of the paging
business since these rights are triggered upon a sale of substantially all of the assets of the Company. On September 19, 2005, the Company received notice from the GM Warrant holders of their intent to redeem these warrants upon
the sale of the paging business. Under the terms of the GM Warrants, the holder may accelerate the redemption of the warrants upon the sale of substantially all of the Companys assets. Under the initial terms of the GM Warrants, they could be
redeemed at $0.50 per warrant, at the option of the holder in December 2007. The holders of the GM Warrants have claimed that the sale of the paging business represents substantially all of the Companys assets. The Company is trying to
negotiate a reduction in the amount due to the Warrant Holders upon the closing of the sale transaction and believes if it is unsuccessful in reaching terms on this obligation, the warrant holders may vote against the sale of the paging business.
The Company is also exploring a merger transaction which, if completed prior to the sale of the paging business, may allow the Company to complete the paging business sale without seeking shareholder approval since the paging business would no
longer represent substantially all of the Companys assets. The potential merger negotiations are early in the process but the Company believes this transaction may be the most expedient manner in which to complete the sale of its paging
business without triggering the accelerated redemption of the GM Warrants.

If the Company is unable to complete the contemplated merger
transaction and if the Company is unsuccessful in negotiating a settlement or alternative arrangement with the holders of the GM Warrants and receives shareholder approval of the sale of the paging business, the Company may be obligated to redeem
the GM Warrants for $3,000,000 shortly after the closing on the sale of the paging business. As of February 28, 2006, the Company has recorded this as a long-term liability at its fair value of $2,401,000. The GM Warrants are being accreted in
value over time to their settlement value of $3,000,000 in December 2007 according to their original terms. If the redemption rights contained in the GM Warrants are accelerated the Company will record a charge to net income equal to the difference
in the carrying value of the GM Warrants at that date and $3,000,000 and this amount will be classified as a current liability during any period these rights are triggered. Further, under rights included in the GM Warrants, the warrant holders will
be permitted to vote separately as a class on matters involving the sale of substantially all of the assets of the Company. This right applies to the sale of the Companys paging business (discussed above) and the approval of this transaction
is dependent on receiving an affirmative vote from the holders of the GM Warrants unless the Company can complete an alternate transaction prior to the sale of its paging business that results in paging business no longer representing substantially
all of the assets of the Company.

The proceeds expected from the paging business sale transaction are planned to be used to acquire a
growth business for the Company. The Company has identified and is in negotiations with a number of target companies available for acquisition. The Company plans to remain in the two-way radio and telemetry business after the sale transaction is
complete although the current telemetry business has been restructured to provide primarily data hosting services to other telemetry solution providers and is planned for integration with one of the companies targeted for acquisition. Readers of
this Form 10-Q should consider these proposed transactions and their impact on the Company as it is presented in this filing.



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AMEX Listing Matters

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

The AMEX Staff reviewed Teletouchs plan of compliance as submitted on January 17, 2006 and
supplemented on February 8, 2006 (the Plan), and concluded that the Plan made a reasonable demonstration of the Companys ability to regain compliance with the listing requirements. As a result, AMEX Staff granted a listing
extension of the Companys securities on the AMEX through November 30, 2006, provided that the Company met certain interim disclosure and performance milestones through the period. Specifically, on or before March 27, 2006, the
Company was required to provide additional financial and other documentation supporting the Plan presented. In addition, the Company will be required to provide periodic updates to the AMEX in connection with the Plan. The Company can provide no
assurance that it will be able to satisfy the terms of the extension or that it will execute upon the Plan as submitted to the Staff. Failure to make progress consistent with the Plan or regain compliance with the continued listing standards by the
end of the extension period could result in the Company being delisted from the AMEX which in turn could adversely affect the liquidity and value of our common stock.

The Companys stock trading symbol was modified to include the .BC indicator to denote its continued listing noncompliance five days after the initial notification from the AMEX Staff. The
trading symbol will bear the foregoing indicator until the Company regains its compliance with the AMEX continued listing requirements.

The Company made a timely submission of the requested financial and other documentation supporting the Plan on March 27, 2006 and as of the date hereof the Company has received no further information requests from the AMEX Staff.

2006 Business Strategy

The Company
believes it necessary to sell its core paging business in 2006 to raise sufficient cash to purchase one or more growing businesses in order to continue to generate sufficient cash flow going forward. This decision was made by the Companys
Board of Directors in July 2005, and the Company has located a buyer for its paging business. The Company has struggled for the past several years to minimize the costs of operating its paging business in a time of declining revenues. With paging
revenues expected to continue declining for the foreseeable future and a relatively fixed cost structure of maintaining the paging network and infrastructure, it has become increasingly difficult to maintain a positive cash flow from the paging
business. The two-way radio business experienced some revenue growth in 2005 and has stabilized at this level to date in fiscal 2006 due to homeland security grants being made available to local public safety entities to upgrade their communications
systems. We believe these revenue opportunities will extend for the next few years at which time some of these customers utilizing homeland security grant monies today may have limited needs for replacement or upgrades of their radio systems in
future years which could result in a decline in future revenues for the two-way radio segment of the Company. The two-way radio business also operates a radio system on which it sells subscription services. The subscription portion of the two-way
radio business had experienced declines through the second quarter of the current year, as compared to the prior year resulting from customers migrating to competitive service providers.



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During the current quarter, the decline in two-way radio subscription business has slowed due to the Companys
success migrating several accounts from its competitors over to Teletouchs system. Customers originally lured away from Teletouch by pricing have recently started returning to Teletouch because of the stability of Teletouchs two-way
radio network. Many of Teletouchs competitors in the two-way radio business have not been able to maintain the level of customer service provided by Teletouch nor have their networks proven as reliable as Teletouchs. The Company believes
that it will experience growth for the remainder of the year in its two-way radio subscription accounts as customers existing contracts with other providers expire and they migrate to Teletouch. The Company is also looking at certain acquisitions
that would enhance it two-way radio networks and is currently in negotiations to purchase a network in the Dallas / Fort Worth market that is complementary to the Companys existing system in that market. The Company does not believe the
two-way radio business is a high growth business, although it has been a stable business for the Company for many years and is expected to achieve limited growth over the next couple of years.

Three years ago, the Company recognized the trends in its core paging and two-way radio businesses and began to develop a telemetry business. To date
revenues from the telemetry business have been insignificant. The market for telemetry products is large and relatively new but continued technical issues with our telemetry products have prohibited the Company from growing this business. In October
2005 the Company decided to restructure its telemetry operations. Although certain operational aspects and personnel have been changed in the telemetry business as of the end of December 2005, the restructuring efforts were slightly delayed as a
result of the resignation of J. Kernan Crotty, the Companys President, on December 19, 2005. Mr. Crotty was directly responsible for the operations of the Companys telemetry business while he was with Teletouch. As of February
2006, the Company has begun to execute a strategy to limit its involvement in the telemetry business to that of being a network services provider utilizing its proprietary GeoFleet software package. The Company has made the decision to exit the
hardware portion of the telemetry business and is currently working to liquidate its remaining inventory. The Company expects that it will be able to completely liquidate its existing hardware inventory by May 2006 thereby generating additional cash
to invest in future operations of the Company. Teletouch will continue to provide network services and data hosting for its current customer base as well as seek out other telemetry solution providers that are in need of back-end data hosting and
network services. This strategy focuses on the software development strengths of the Company rather than continuing to attempt to develop the internal engineering expertise that was required to develop hardware solutions for its customers.
Additionally, the Company is continuing with negotiations to purchase one or more telemetry related companies which it believes would be enhance with the integration of it GeoFleet software.

After selling the paging business, the Company plans to acquire one or more growth companies and integrate them into the existing infrastructure at
Teletouch. The Company believes that the sale of its paging business is necessary at this point while there is still value in this business and has currently identified and is in negotiations with several target companies for acquisition. In the
interim period after the sale and through the time a new company is acquired, Teletouch will continue to operate as a publicly traded company in the two-way radio and telemetry business. Most of the efforts over the coming months will be focused on
a potential merger opportunity that has been identified by the Company. The merger would allow the Company to significantly improve its financial position and if completed quickly would expedite the completion of the sale of Teletouchs paging
business. The Company continues to focus on minimizing expenses of the remaining operations as demonstrate by the move of its back-office accounting functions to a company owned facility in March 2006 which resulted in a savings of approximately
$75,000 annually in facilities cost. Other expense reduction initiatives have been implemented in all of the operating segments of the business. Many of these benefits are being realized currently, but the full impact of certain personnel changes
will not be realized until later in the fourth quarter after severance payments end.



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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 due to shrinkage and obsolescence, when title passes to the customer.

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

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

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

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



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Service, Rent and Maintenance Revenue for the Three and Nine Months ended
February 28, 2006 and 2005



|                                       |  |                  |        |              |         |   |                  |   |              |  |    |                          |  |   |        |   |  |     |  
|-------------------------------------- |  | ---------------- | ------ | ------------ | ------- | - | ---------------- | - | ------------ |  | -- | ------------------------ |  | - | ------ | - |  | --- | -
|(dollars in thousands)                 |  |                  |        |              |         |   |                  |   |              |  |    |                          |  |   |        |  
|                                       |  | February 28,2006 |        | % of OperRev |         |   | February 28,2005 |   | % of OperRev |  |    | Change fromPrevious Year | 
|                                       |  |                  |        |              | Dollars |   |                  | % |             
|Three Months Ended                     |  |                  |        |              |         |   |                  |   |              |  |    |                          |  |   |        |   |  |     |  
|                                       |  |                  |        |              |         |  
|Service, rent, and maintenance revenue |  |                  |        |              |         |   |                  |   |              |  |    |                          |  |   |        |   |  |     |  
|Paging                                 |  | $                | 3,552  |              | 71      | % |                  | $ | 4,364        |  | 74 | %                        |  | $ | (812   | ) |  | -19 | %
|Two-way radio                          |  |                  | 446    |              | 9       | % |                  |   | 394          |  | 7  | %                        |  |   | 52     |   |  | 13  | %
|Telemetry                              |  |                  | 56     |              | 1       | % |                  |   | 37           |  | 1  | %                        |  |   | 19     |   |  | 51  | %
|                                       |  |                  |        |              |         |   |                  |   |              |  |    |                          |  |   |        |   |  |     |  
|Service, rent, and maintenance revenue |  | $                | 4,054  |              | 81      | % |                  | $ | 4,795        |  | 82 | %                        |  | $ | (741   | ) |  | -15 | %
|                                       |  |                  |        |              |         |   |                  |   |              |  |    |                          |  |   |        |   |  |     |  
|Nine Months Ended                      |  |                  |        |              |         |   |                  |   |              |  |    |                          |  |   |        |   |  |     |  
|                                       |  |                  |        |              |         |  
|Service, rent, and maintenance revenue |  |                  |        |              |         |   |                  |   |              |  |    |                          |  |   |        |   |  |     |  
|Paging                                 |  | $                | 11,313 |              | 71      | % |                  | $ | 13,800       |  | 74 | %                        |  | $ | (2,487 | ) |  | -18 | %
|Two-way radio                          |  |                  | 1,411  |              | 9       | % |                  |   | 1,318        |  | 7  | %                        |  |   | 93     |   |  | 7   | %
|Telemetry                              |  |                  | 150    |              | 1       | % |                  |   | 113          |  | 1  | %                        |  |   | 37     |   |  | 33  | %
|                                       |  |                  |        |              |         |   |                  |   |              |  |    |                          |  |   |        |   |  |     |  
|Service, rent, and maintenance revenue |  | $                | 12,874 |              | 81      | % |                  | $ | 15,231       |  | 82 | %                        |  | $ | (2,357 | ) |  | -15 | %
|                                       |  |                  |        |              |         |   |                  |   |              |  |    |                          |  |   |        |   |  |     |  

Service, Rent and Maintenance Revenue Discussion for the Three and Nine Months Ended
February 28, 2006 and 2005

The decline in paging service revenue for the three and nine months ended February 28, 2006
resulted primarily from fewer pagers in service. Pagers in service decreased to approximately 121,800 as of February 28, 2006 as compared to approximately 162,300 as of February 28, 2005, due to the completion of the sale of approximately
15,000 subscribers in the Georgia market to Satellink Communications, Inc. in July, 2005 as well as to the forecast continued decline in the demand for one-way paging service. Paging subscriber loss rates as a percentage of total paging subscribers
(commonly called Churn Rate) has remained relatively flat from year to year; however, a stable Churn Rate on a declining base of subscribers results in a declining loss of gross subscribers each period, which results in a declining loss
of service revenues. Teletouch anticipates that the demand for one way paging services will continue to decline for the foreseeable future, which will result in reductions in service, rent and maintenance revenues due to the lower volume of
subscribers.

The increase in telemetry service revenue for the three and nine months ended February 28, 2006 is primarily related to
changes in customer rate plans as well as increased customer activations of the VisionTrax product.



33



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##### Table of Contents

Cost of Service, Rent and Maintenance for the Three and Nine Months Ended
February 28, 2006 and 2005

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



|                                            |  |                  |       |                  |   |                          |  |   |      |  
|------------------------------------------- |  | ---------------- | ----- | ---------------- | - | ------------------------ |  | - | ---- | -
|(dollars in thousands)                      |  |                  |       |                  |   |                          | 
|                                            |  | February 28,2006 |       | February 28,2005 |   | Change fromPrevious Year | 
|Three Months Ended                          |  |                  |       |                  |   |                          |  |   |      |  
|                                            |  |                  |      
|Cost of service, rent and maintenance       |  |                  |       |                  |   |                          |  |   |      |  
|Tower lease expense                         |  | $                | 576   |                  | $ | 815                      |  | $ | (239 | )
|Third party airtime and network telco costs |  |                  | 487   |                  |   | 750                      |  |   | (263 | )
|Salaries and other personnel expense        |  |                  | 985   |                  |   | 905                      |  |   | 80   |  
|Office expense                              |  |                  | 195   |                  |   | 155                      |  |   | 40   |  
|Other expenses                              |  |                  | 76    |                  |   | 65                       |  |   | 11   |  
|                                            |  |                  |       |                  |   |                          |  |   |      |  
|Total cost of service, rent and maintenance |  | $                | 2,319 |                  | $ | 2,690                    |  | $ | (371 | )
|                                            |  |                  |       |                  |   |                          |  |   |      |  
|Nine Months Ended                           |  |                  |       |                  |   |                          |  |   |      |  
|                                            |  |                  |      
|Cost of service, rent and maintenance       |  |                  |       |                  |   |                          |  |   |      |  
|Tower lease expense                         |  | $                | 1,821 |                  | $ | 2,246                    |  | $ | (425 | )
|Third party airtime and network telco costs |  |                  | 1,800 |                  |   | 2,386                    |  |   | (586 | )
|Salaries and other personnel expense        |  |                  | 2,932 |                  |   | 2,806                    |  |   | 126  |  
|Office expense                              |  |                  | 568   |                  |   | 552                      |  |   | 16   |  
|Other expenses                              |  |                  | 210   |                  |   | 219                      |  |   | (9   | )
|                                            |  |                  |       |                  |   |                          |  |   |      |  
|Total cost of service, rent and maintenance |  | $                | 7,331 |                  | $ | 8,209                    |  | $ | (878 | )
|                                            |  |                  |       |                  |   |                          |  |   |      |  

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

Cost of Service, Rent and Maintenance Discussion for the Three and Nine Months Ended February 28, 2006 and 2005



| |  |  | The decrease in tower lease expense for the three and nine months ended February 28, 2006 is attributable to the sale of the PNI paging network in July 2005, shutting down the
0AT paging network in Arkansas in August 2005 and an internal audit of the Companys tower leases which resulted in the cancellation or modification of several paging related tower leases resulting in reduced lease expense as compared with the
same periods from the prior year.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decrease in third party airtime and network telco costs for the three and nine months ended February 28, 2006 is due primarily to the continued decline in the paging
subscriber base and shutting down the 0AT frequency in August 2005 as well as a reduction in paging subscribers with coverage on other affiliates paging network. The decrease is also attributable to an internal audit of the Companys
telephone circuits which resulted in disconnecting unnecessary phone lines, trunks and telephone services.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The increase in salaries and other personnel expense for the three and nine months ended February 28, 2006 is primarily attributable to the re-classification of paging
personnel and related employee insurance from selling and general and administrative departments to the paging overhead service department. This change related to these personnel resulted from the internal moving of personnel and the re-defining of
job responsibilities in preparation of the anticipated sale of the Companys paging business. These personnel changes were started in September 2005 when the sale of the paging business was originally expected to be complete and have continue
through today as the Company is continuing to strive to get the sale transaction closed.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Sales Revenue and Cost of Products Sold for the Three and Nine Months ended
February 28, 2006 and 2005



|                                  |  |                  |       |               |         |   |                  |   |               |  |    |                          |  |   |        |   |  |      |  
|--------------------------------- |  | ---------------- | ----- | ------------- | ------- | - | ---------------- | - | ------------- |  | -- | ------------------------ |  | - | ------ | - |  | ---- | -
|(dollars in thousands)            |  |                  |       |               |         |   |                  |   |               |  |    |                          |  |   |        |  
|                                  |  | February 28,2006 |       | % of Oper Rev |         |   | February 28,2005 |   | % of Oper Rev |  |    | Change fromPrevious Year | 
|                                  |  |                  |       |               | Dollars |   |                  | % |              
|Three Months Ended                |  |                  |       |               |         |   |                  |   |               |  |    |                          |  |   |        |   |  |      |  
|                                  |  |                  |       |               |         |  
|Product sales revenue             |  |                  |       |               |         |   |                  |   |               |  |    |                          |  |   |        |   |  |      |  
|Pagers and accessories            |  | $                | 140   |               | 3       | % |                  | $ | 160           |  | 3  | %                        |  | $ | (20    | ) |  | -13  | %
|Two-way radios and parts          |  |                  | 735   |               | 15      | % |                  |   | 903           |  | 15 | %                        |  |   | (168   | ) |  | -19  | %
|Telemetry devices and accessories |  |                  | 79    |               | 2       | % |                  |   | 6             |  | 0  | %                        |  |   | 73     |   |  | 1217 | %
|Other                             |  |                  | 13    |               | 0       | % |                  |   | 4             |  | 0  | %                        |  |   | 9      |   |  | 225  | %
|                                  |  |                  |       |               |         |   |                  |   |               |  |    |                          |  |   |        |   |  |      |  
|Total product sales revenue       |  | $                | 967   |               | 19      | % |                  | $ | 1,073         |  | 18 | %                        |  | $ | (106   | ) |  | -10  | %
|                                  |  |                  |       |               |         |   |                  |   |               |  |    |                          |  |   |        |   |  |      |  
|Cost of products sold             |  | $                | 529   |               | 11      | % |                  | $ | 917           |  | 16 | %                        |  | $ | (388   | ) |  | -42  | %
|                                  |  |                  |       |               |         |   |                  |   |               |  |    |                          |  |   |        |   |  |      |  
|Nine Months Ended                 |  |                  |       |               |         |   |                  |   |               |  |    |                          |  |   |        |   |  |      |  
|                                  |  |                  |       |               |         |  
|Product sales revenue             |  |                  |       |               |         |   |                  |   |               |  |    |                          |  |   |        |   |  |      |  
|Pagers and accessories            |  |                  | 377   |               | 2       | % |                  |   | 506           |  | 3  | %                        |  |   | (129   | ) |  | -25  | %
|Two-way radios and parts          |  |                  | 2,454 |               | 15      | % |                  |   | 2,707         |  | 14 | %                        |  |   | (253   | ) |  | -9   | %
|Telemetry devices and accessories |  |                  | 207   |               | 1       | % |                  |   | 179           |  | 1  | %                        |  |   | 28     |   |  | 16   | %
|Other                             |  |                  | 34    |               | 0       | % |                  |   | 63            |  | 0  | %                        |  |   | (29    | ) |  | -46  | %
|                                  |  |                  |       |               |         |   |                  |   |               |  |    |                          |  |   |        |   |  |      |  
|Total product sales revenue       |  | $                | 3,072 |               | 19      | % |                  | $ | 3,455         |  | 18 | %                        |  | $ | (383   | ) |  | -11  | %
|                                  |  |                  |       |               |         |   |                  |   |               |  |    |                          |  |   |        |   |  |      |  
|Cost of products sold             |  | $                | 1,970 |               | 12      | % |                  | $ | 3,120         |  | 17 | %                        |  | $ | (1,150 | ) |  | -37  | %
|                                  |  |                  |       |               |         |   |                  |   |               |  |    |                          |  |   |        |   |  |      |  

Sales Revenue and Cost of Products Sold Discussion for the Three and Nine Months Ended
February 28, 2006 and 2005

Product sales revenue:

The decrease in paging sales revenue for the three and nine months ended February 28, 2006 is attributable primarily to a continuing decline in
paging subscriber base particularly within the wholesale distribution channel which has historically accounted for the largest percentage of the pager equipment sales. Teletouchs current business customers that purchase paging services
primarily lease their paging equipment from the Company.

The decrease in two-way radios and parts sales revenue for the three and nine
months ended February 28, 2006 is due primarily to a decline in sales contracts to entities utilizing federal grant monies under the Homeland Security programs. A portion of this decrease is attributable to the change in the administration of
the grant monies from an agency within the Texas A&M University system to the Governors office of Emergency Management (GOEM), which was an agency created by the governor of Texas. The Company is currently seeing an increase in
the availability of these grant monies and expects that the fourth quarter sales revenues will recover to the levels achieved in the prior year.

The increase in telemetry devices and accessories for the three and nine months ended February 28, 2006 is attributable to increased sales from the VisionTrax product line due to the resolution of technical issues experienced in
the prior year as well as sales from the DMR product line, a satellite based tracking device, which was introduced in the later part of Fiscal 2005. Additionally, as discussed earlier, the Company has made the decision to exit the hardware sales
portion of its telemetry business and focus on being a network services and data hosting provider. This decision was reached in January 2006 and a portion of the increased sales in the third quarter are attributable to the Companys efforts to
liquidate its remaining hardware inventory. The Company expects that it will have its entire telemetry hardware inventory liquidated by May 2006.



35



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##### Table of Contents

Cost of products sold:

The decrease in cost of products sold for the three and nine months ended February 28, 2006 is primarily due to the decrease in inventory
obsolescence expense as well as a decline in product sales. Inventory obsolescence expense was $18,000 for the three months ended February 28, 2006 as compared to $125,000 for the three months ended February 28, 2005 and $80,000 for the
nine months ended February 28, 2006 as compared to $731,000 for the nine months ended February 28, 2005. The inventory write-offs in the first nine months of fiscal 2005 were related to slow moving paging inventory and identifying obsolete
two-way radios, pager parts and cellular inventory. A portion of the write offs were attributable to the impairment of the majority of the fixed monitoring product line as well as impairing a portion of VisionTrax telemetry devices due to
technical issues. During the current year, the Company has maintained a much lower level of inventory within all of its businesses and has focused on purchasing only inventory that has been requested by customers versus purchasing larger quantities
of inventory to achieve volume pricing. The internal preparations for the sale of the Companys paging business has also placed much more scrutiny on the levels and condition of the pager inventory resulting in lower obsolescence expense
related to this inventory.

Selling and General and Administrative Expenses for the Three and Nine Months ended February 28, 2006
and 2005

Selling and general and administrative expenses consist of the following significant components:



|                                                   |  |                  |       |                  |   |                          |  |   |        |  
|-------------------------------------------------- |  | ---------------- | ----- | ---------------- | - | ------------------------ |  | - | ------ | -
|(dollars in thousands)                             |  |                  |       |                  |   |                          | 
|                                                   |  | February 28,2006 |       | February 28,2005 |   | Change fromPrevious Year | 
|Three Months Ended                                 |  |                  |       |                  |   |                          |  |   |        |  
|                                                   |  |                  |      
|Selling and general and administrative expenses    |  |                  |       |                  |   |                          |  |   |        |  
|Salaries and other personnel expenses              |  | $                | 737   |                  | $ | 1,246                    |  | $ | (509   | )
|Office expense                                     |  |                  | 51    |                  |   | 170                      |  |   | (119   | )
|Advertising expense                                |  |                  | 10    |                  |   | 24                       |  |   | (14    | )
|Professional fees                                  |  |                  | 441   |                  |   | 255                      |  |   | 186    |  
|Taxes and licenses fees                            |  |                  | 104   |                  |   | 139                      |  |   | (35    | )
|Stock-based compensation expense                   |  |                  | 78    |                  |   | 5                        |  |   | 73     |  
|Other expenses                                     |  |                  | 167   |                  |   | 286                      |  |   | (119   | )
|                                                   |  |                  |       |                  |   |                          |  |   |        |  
|Total selling, general and administrative expenses |  | $                | 1,588 |                  | $ | 2,125                    |  | $ | (537   | )
|                                                   |  |                  |       |                  |   |                          |  |   |        |  
|Nine Months Ended                                  |  |                  |       |                  |   |                          |  |   |        |  
|                                                   |  |                  |      
|Selling and general and administrative expenses    |  |                  |       |                  |   |                          |  |   |        |  
|Salaries and other personnel expenses              |  | $                | 2,518 |                  | $ | 3,432                    |  | $ | (914   | )
|Office expense                                     |  |                  | 234   |                  |   | 449                      |  |   | (215   | )
|Advertising expense                                |  |                  | 49    |                  |   | 127                      |  |   | (78    | )
|Professional fees                                  |  |                  | 1,323 |                  |   | 738                      |  |   | 585    |  
|Taxes and licenses fees                            |  |                  | 314   |                  |   | 474                      |  |   | (160   | )
|Stock-based compensation expense                   |  |                  | 78    |                  |   | 5                        |  |   | 73     |  
|Other expenses                                     |  |                  | 620   |                  |   | 927                      |  |   | (307   | )
|                                                   |  |                  |       |                  |   |                          |  |   |        |  
|Total selling, general and administrative expenses |  | $                | 5,136 |                  | $ | 6,152                    |  | $ | (1,016 | )
|                                                   |  |                  |       |                  |   |                          |  |   |        |  

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

Selling and General and Administrative Expenses Discussion for the Three and Nine Months Ended February 28, 2006 and 2005



| |  |  | The decrease in salaries and other personnel expense for the three and nine months ended February 28, 2006 is due to a reduction in the number of selling and
general and administrative employees, 24 employees as of February 28, 2006 as compared to 53 employees as of February 28, 2005. As discussed earlier, many of the personnel related to the paging business have been
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| | assigned new job responsibilities in preparation for the sale of this business and their related expense has been reclassified to Cost of Service expense.
Other reductions in salaries expense have resulted from corporate office headcount reductions including the resignation of the Companys president in December 2005.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decrease in office expense for the three and nine months ended February 28, 2006 is primarily due to the relocation of the corporate office in December 2004 which resulted
in a monthly lease expense savings of approximately $10,000. A portion of the reduction in office expense is due to the relocation of paging service centers which resulted in lower monthly lease payments as well as the closure of four paging service
center locations and one two way location in fiscal 2006.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decrease in advertising expense for the nine months ended February 28, 2006 is primarily due to the Companys decision to discontinue the majority of its marketing
efforts related to the telemetry product line during the first quarter of fiscal 2006.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The increase in professional fees for the three and nine months ended February 28, 2006 is due partially to additional accounting and legal fees related to the preparation of
the Companys response to a comment letter received from the Securities and Exchange Commission related to the Companys Form 10-K for the year ended May 31, 2004. Additional professional fees were incurred during this period related
to the negotiation of an asset purchase agreement for the proposed sale of the paging business as well as certain management fees in the amount of $50,000 per month paid to the prospective buyer of the Companys paging business which began
September 1, 2005. Beginning in April 2006, the management fees to be paid under the terms of asset purchase agreement will be increased to $100,000 per month and will continue through the closing of this transaction. The management fees being
paid by the Company are for services provided by the buyer related to managing the day to day operations of the paging business subsequent to the execution of the asset purchase agreement.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decrease in taxes and licenses fees for the nine months ended February 28, 2006 compared with the same period from the prior year is primarily due to a reduction in
franchise tax, state income tax and ad valorem taxes as a result of lower revenues, lower inventory levels and a reduced value of fixed assets. Additionally, fees paid to the Federal Communications Commission related to maintaining the
Companys paging licenses were reduced during this period resulting from decreased revenues.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The increase in stock-based compensation expense for the three and nine months ended February 28, 2006 is attributable to the modification of the Companys former
Presidents stock options in the third quarter of fiscal 2006 upon his resignation in December 2005.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decrease in other expenses for the three and nine months ended February 28, 2006 as compared to same period from the prior year is attributable to fewer bank and credit
card charges due to reduced number of bank accounts as well as a reduction in bad debt due to improved collection efforts. In December 2005, the Company eliminated its bank lockbox payment processing service related to its paging business which
resulted in a savings of approximately $5,000 per month in bank charges. The decrease is also attributable to lower non-personnel insurance premiums, particularly related to the renewal of the Companys directors and officers liability policy.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



37



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##### Table of Contents

Other Operating Expenses for the Three and Nine Months Ended February 28, 2006
and 2005



|                               |  |                  |       |                  |   |       |                          |  |   |      |  
|------------------------------ |  | ---------------- | ----- | ---------------- | - | ----- | ------------------------ |  | - | ---- | -
|(dollars in thousands)         |  | February 28,2006 |       | February 28,2005 |   |       | Change fromPrevious Year | 
|Three months ended             |  |                  |       |                  |   |       |                          |  |   |      |  
|                               |  |                  |      
|Depreciation and amortization  |  | $                | 443   |                  | $ | 784   |                          |  | $ | (341 | )
|Loss on sale of assets         |  |                  | 10    |                  |   | 21    |                          |  |   | (11  | )
|                               |  |                  |       |                  |   |       |                          |  |   |      |  
|Total other operating expenses |  | $                | 453   |                  | $ | 805   |                          |  | $ | (352 | )
|                               |  |                  |       |                  |   |       |                          |  |   |      |  
|Nine months ended              |  |                  |       |                  |   |       |                          |  |   |      |  
|                               |  |                  |      
|Depreciation and amortization  |  | $                | 1,707 |                  | $ | 2,518 |                          |  | $ | (811 | )
|Loss (gain) on sale of assets  |  |                  | 8     |                  |   | (30   | )                        |  |   | 38   |  
|                               |  |                  |       |                  |   |       |                          |  |   |      |  
|Total other operating expenses |  | $                | 1,715 |                  | $ | 2,488 |                          |  | $ | (773 | )
|                               |  |                  |       |                  |   |       |                          |  |   |      |  

Other Operating Expenses Discussion for the Three and Nine Months Ended February 28,
2006 and 2005

Depreciation and amortization: The decline in depreciation and amortization expense is due to the continued
effort of the Company to purchase equipment only as necessary to maintain the paging infrastructure and an adequate supply of pagers to lease to customers as well as the aging of the existing capital assets that have been fully depreciated. For the
three months ended February 28, 2006, depreciation expense declined approximately $102,000 as a result of the reduction of the Companys leased pager fleet and $236,000 due to paging infrastructure assets that were fully depreciated as
compared to the same period from the prior year. For the nine months ended February 28, 2006, depreciation expense declined approximately $347,000 as a result of the reduction of the Companys leased pager fleet and $451,000 due to paging
infrastructure assets that were fully depreciated as compared to the same period from the prior year. Many of the Companys paging infrastructure assets acquired in 1995, during the time the Companys major paging business expansion
through acquisition, became fully depreciated late in the first quarter of fiscal 2006.

Interest Expense, Net of
Interest Income for the Three and Nine Months Ended February 28, 2006 and 2005

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

Income Tax Expense (Benefit) for the Nine Months Ended February 28, 2006 and 2005

For the nine
months ended February 28, 2006, the Company had income tax expense of $176,000 which was primarily the result of a valuation allowance of approximately $250,000 recorded against deferred tax assets. The Company has recorded a valuation
allowance against the full amount of its net deferred tax assets since it does not forecast taxable income for fiscal 2006 nor is the Company able to reasonably forecast taxable income beyond next year. The inability to foresee taxable income in
future years makes it more likely than not that the Company will not realize its recorded deferred tax assets in future periods. For the nine months ended February 28, 2005, the Companys effective tax benefit rate was 31%. 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.

The Companys determination to restate the results for the quarter ended February 28, 2006 was a result of an analysis of the tax and
accounting consequences of the November 2005 conversion by TLL Partners, LLC of all of its shares of the Companys Series C preferred stock into 43,500,000 shares of the Companys common stock (the Conversion), which resulted
in TLL Partners owning a controlling interest at approximately 88% of the Company.



38



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##### Table of Contents

TLL Partners, LLC (TLLP), is a Delaware limited liability company owned by Progressive
Concepts Communications, Inc. (PCCI). Prior to November 2005, PCCI has filed a consolidated return with its wholly-owned subsidiaries, Progressive Concepts, Inc. (PCI) and State Hawk Security, Inc. (SHS) and TLLP.
Effective November 1, 2005, the Company became a member of the PCCI tax group, as PCCI gained voting control of the Company through the Conversion. In accordance with the related IRS rules and regulations, members of an affiliated corporate
group with greater than 80% voting control must be included in a consolidated tax return.

In preparing the financial statements for the
quarter-ended February 28, 2006, the Company prepared its financial statements without considering the Conversion of the preferred stock by TLLP had triggered the consolidated tax return requirements with PCCI. The Company instead evaluated its
tax position and projected that Teletouch would incur a net tax loss in 2006 that would be carried back and applied against its 2004 taxable income and result in a cash refund of taxes paid in 2004. Further, the Companys projections
anticipated net losses in the future without a change in the business that could not be justified in its projections at that point. The Company accounts for its taxes under Statement of Financial Accounting Standard 109 (SFAS 109) which
resulted in the Company recording a net deferred tax asset as of February 28, 2006 based upon being a stand alone tax paying entity. In accordance with SFAS 109, the recoverability of this asset was evaluated and given the projected net losses,
the Company recorded a valuation allowance that reduced the net deferred tax asset by $176,000.

Since Teletouchs tax year actually
ended in November 2005 due to becoming part of the PCCI affiliated group for consolidated tax purposes, Teletouch should have evaluated its deferred tax assets based on the refunds that it could get related to the loss through November 2005. The
Company estimated that year-to-date through November 2005 it actually had a small taxable income, therefore it would not be able to carryback any losses and recover the taxes paid in 2004. As a result, the Company should have recorded an additional
valuation allowance against its deferred tax asset in its 3rd fiscal quarter ended February 28, 2006 that would have the effect of reducing the assets of the Company by $176,000 at February 28, 2006.

FINANCIAL CONDITION



|                                          |  |                  |       |   |                  |   |        |        |  |   |      |  
|----------------------------------------- |  | ---------------- | ----- | - | ---------------- | - | ------ | ------ |  | - | ---- | -
|(dollars in thousands)                    |  | February 28,2006 |       |   | February 28,2005 |   |        | Change | 
|Cash provided by operating activities     |  | $                | 1,407 |   |                  | $ | 2,254  |        |  | $ | (847 | )
|Cash used in investing activities         |  |                  | (585  | ) |                  |   | (1,118 | )      |  |   | 533  |  
|Cash used in financing activities         |  |                  | (301  | ) |                  |   | (79    | )      |  |   | (222 | )
|                                          |  |                  |       |   |                  |   |        |        |  |   |      |  
|Net increase in cash and cash equivalents |  | $                | 521   |   |                  | $ | 1,057  |        |  | $ | (536 | )
|                                          |  |                  |       |   |                  |   |        |        |  |   |      |  

Operating Activities

Teletouchs cash balance was $1.8 million as of February 28, 2006 as compared to $1.3 million at May 31, 2005. The decrease in cash provided by operations during the nine months ended February 28, 2006 over the
same period in the prior year is primarily due to increased losses in paging business primarily due to $2,487,000 reduction in paging service revenues resulting from the continuing decline in paging subscribers. Additionally, during the first
quarter of fiscal 2006, the Company paid approximately $531,000 in previously accrued management bonuses related to fiscal 2005. The decrease in cash provided by operations is also due to an increase in accounts receivable of $284,000 during the
nine months ended February 28, 2006 as compared to May 31, 2005 versus enhanced collections in accounts receivable of $87,000 for the nine months ended February 28, 2005. The growth in accounts receivable from May 2005 to February 2006



39



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##### Table of Contents

relates primarily to certain receivables within the two-way radio segment that are due from local entities waiting on federal funding. The decrease in cash
provided by operations during the nine months ended February 28, 2006 is partially offset by the receipt of prior years federal income tax refunds of approximately $675,000.

Investing Activities

Cash used by investing activities decreased during the nine months ended
February 28, 2006 as compared to the same period in the prior year due to a $531,000 reduction in capital expenditures, of which approximately $220,000 related to reduced spending on leased pagers, $105,000 in reduced computer equipment and
software purchases and $73,000 in reduced vehicle purchases, all of which relate to continued declines in the paging business and reduced operations within the Company.

Teletouchs operations require capital investment to purchase inventory for lease to customers and to acquire paging infrastructure equipment to support the Companys existing subscribers. Net capital
expenditures, including pagers, were $661,000 and $1,192,000 for the first nine months of fiscal years 2006 and 2005, respectively. Teletouch anticipates capital expenditures to continue to decline during the remainder of fiscal 2006 due primarily
to the continuing decline in the number of leased pagers in service, which will result in total capital expenditures declining as compared to fiscal 2005. Additionally, the Company plans to replace only necessary equipment to maintain the paging
infrastructure. If the sale of the paging business discussed above does not occur, Teletouch expects to pay for these expenditures with cash generated from operations.

Financing Activities

The increase in cash used by financing activities for the nine months ended
February 28, 2006 as compared to the same period in the prior year was primarily due to payments of $264,000 for the redeemable common stock payable in the first nine months of fiscal 2006.

Current Position/Future Requirements

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

After selling the
paging business, the Company plans to acquire one or more growth companies and integrate them into the existing infrastructure at Teletouch. The Company believes that the sale of its paging business is necessary at this point while there is still
value in this business and has currently identified and is



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in negotiations with several target companies for acquisition. In the interim period after the sale and through the time a new company is acquired, Teletouch
will continue to operate as a publicly traded company in the two-way radio and telemetry business. Most of the efforts over the coming months will be focused on a potential merger opportunity that has been identified by the Company. The merger would
allow the Company to significantly improve its financial position and if completed quickly would expedite the completion of the sale of Teletouchs paging business. The Company continues to focus on minimizing expenses of the remaining
operations as demonstrate by the move of its back-office accounting functions to a company owned facility in March 2006 which resulted in a savings of approximately $75,000 annually in facilities cost. Other expense reduction initiatives have been
implemented in all of the operating segments of the business. Many of these benefits are being realized currently, but the full cash impact of certain personnel changes will not be realized until later in the fourth quarter after severance payments
end.

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.

There is no assurance that the Company will be able to improve its cash flow from operations,
obtain additional third party financing, generate additional new revenues, or complete any acquisitions it is evaluating. If a combination of these events does not occur, the Company may not have sufficient cash to operate the business over the next
year from the proceeds of the sale of the paging business alone. The sale of the paging business is contingent on shareholder approval or contingent upon the completion of an alternate acquisition or merger in advance of the sale that would create
sufficient assets and revenues for Teletouch that the sale of its paging business would no longer be subject to shareholder approval.

The
holders of 6,000,000 redeemable common stock warrants issued by the Company as part of its debt and equity restructuring in 2002 (the GM Warrants), may have a right to vote separately as a class on the sale of the paging business since
these rights are triggered upon a sale of substantially all of the assets of the Company. On September 19, 2005, the Company received notice from the GM Warrant holders of their intent to redeem these warrants upon the sale of the
paging business. Under the terms of the GM Warrants, the holder may accelerate the redemption of the warrants upon the sale of substantially all of the Companys assets. Under the initial terms of the GM Warrants, they could be redeemed at
$0.50 per warrant, at the option of the holder in December 2007. The holders of the GM Warrants have claimed that the sale of the paging business represents substantially all of the Companys assets. The Company is trying to negotiate a
reduction in the amount due to the Warrant Holders upon the closing of the sale transaction and believes if it is unsuccessful in reaching terms on this obligation, the warrant holders may vote against the sale of the paging business. The Company is
also exploring a merger transaction which, if completed prior to the sale of the paging business, may allow the Company to complete the paging business sale without seeking shareholder approval since the paging business would no longer represent
substantially all of the Companys assets. The potential merger negotiations are early in the process but the Company believes this transaction may be the most expedient manner in which to complete the sale of its paging business without
triggering the accelerated redemption of the GM Warrants.

Based on current and anticipated levels of operations, the Companys
management anticipates that net cash provided by the sale of the paging business, if the Company is successful in closing this sale, together with the $1.8 million of cash on hand will be adequate to meet its anticipated cash requirements for the
next twelve months if the Company is successful in its negotiations to reduce the amount due under the GM Warrants upon the sale of the paging business or is able to complete the sale of the paging business without triggering the acceleration of the
GM Warrants redemption as discussed above. Additional financing will likely be necessary to complete any acquisitions during this period. During the next twelve



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months, management estimates that it will need approximately $1.6 million to maintain the administrative and corporate functions of the Company and between
$0.5 million and $1.5 million to settle its obligations under its redeemable common stock warrants if the Company is successful in closing on the sale of its paging business and the warrant holders are successful in accelerating their redemption
rights.

Going Concern Matters

As of
February 28, 2006, the Companys consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company incurred a net loss of $15,000 and $710,000 for the three and nine months ended
February 28, 2006, respectively. Teletouch estimates that it will incur a net loss during the fourth quarter as a result of continued declines in revenues and additional costs expected related to planned office relocations and continued
professional fees related to the finalizing a contemplated sale of the Companys paging business. In the comparable period of the prior year, the Company incurred a net loss of $537,000 and $1,123,000 for the three and nine months ended
February 28, 2005, respectively. As of February 28, 2006, the Company had working capital of $322,000. The Company has sustained its operations primarily through continuous cost reductions. During 2005 and into 2006, the Company attempted
to secure additional debt financing to fund potential acquisitions and provide additional working capital to the Company but has been unable to do so due to the declining performance of the Companys paging business. As a result of the
continued deterioration of the Companys financial position and its operating results, the Company entered into an agreement in August 2005 to sell substantially all of the assets related to the paging business (see Note 4 to the Consolidated
Financial Statements) and this transaction is targeted to close in June 2006. The expected closing of this transaction continues to be delayed due to difficulties encountered gaining approval from the Securities and Exchange Commission
(SEC) to hold a shareholders meeting to approve the transaction. The Company filed a preliminary proxy statement for a special meeting of its shareholders to approve among other proposals, this transaction in January 2006. The
Company received SEC staff comments on this filing and is presently continuing to prepare responses to comments received on this proxy statement. The Company is exploring an alternate merger transaction that, if completed prior to the sale of the
paging business, may allow the Company to sell its paging business without seeking shareholder approval. The sale of the Companys core paging business, combined with additional financing, is expected to generate sufficient cash to enable the
Company to acquire a profitable and growing business that could support the embedded overhead costs of remaining a public company and return the Company to profitability. There can be no assurance, however, that we will be successful in selling the
assets related to the paging business, or that we will be able to complete any additional debt or equity financing on favorable terms.

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

Obligations and Commitments

As of February 28,
2006, our contractual payment obligations under our long-term debt agreements and operating leases for office and transmitter locations are indicated in the table below. 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s redeemable common stock which were issued in February 2005 in conjunction with the purchase of certain assets from Delta
Communications, Inc.



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|                                               |  |                                   |       |      |   |       |  |      |       |      |   |            |  |   |     |  |   |   
|---------------------------------------------- |  | --------------------------------- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ---------- |  | - | --- |  | - | --
|(in thousands)                                 |  | Twelve Months Ending February 28,
|Significant Contractual Obligations            |  | Total                             |       | 2007 |   | 2008  |  | 2009 |       | 2010 |   | Thereafter
|Debt obligations                               |  | $                                 | 166   |      | $ | 111   |  | $    | 48    |      | $ | 7          |  | $ |    |  | $ |  
|Operating lease obligations                    |  |                                   | 4,406 |      |   | 2,154 |  |      | 1,078 |      |   | 752        |  |   | 379 |  |   | 43
|Other long-term liabilities                    |  |                                   | 3,202 |      |   | 202   |  |      | 3,000 |      |   |           |  |   |    |  |   |  
|                                               |  |                                   |       |      |   |       |  |      |       |      |   |            |  |   |     |  |   |   
|Total significant contractual cash obligations |  | $                                 | 7,774 |      | $ | 2,467 |  | $    | 4,126 |      | $ | 759        |  | $ | 379 |  | $ | 43
|                                               |  |                                   |       |      |   |       |  |      |       |      |   |            |  |   |     |  |   |   

Redemption of Common Stock Purchase Warrants:On September 19, 2005 the Company
received notice from the holders of the 6,000,000 GM Warrants of their intent to redeem these warrants upon the sale of the paging business. Under the terms of the GM Warrants, the holder may accelerate the redemption of the warrants upon the sale
of substantially all of the Companys assets. Under the initial terms of the GM Warrants, they could be redeemed at $0.50 per warrant, at the option of the holder in December 2007. The holders of the GM Warrants have claimed that the sale of
the paging business represents substantially all of the Companys assets. The Company is trying to negotiate a reduction in the amount due to the Warrant Holders upon the closing of the sale transaction and believes if it is unsuccessful in
reaching terms on this obligation, the warrant holders may vote against the sale of the paging business. The Company is also exploring a merger transaction which, if completed prior to the sale of the paging business, may allow the Company to
complete the sale without seeking shareholder approval since the paging business would no longer represent substantially all of the Companys assets if the merger is successful. The potential merger negotiations are early in the process but the
Company believes this transaction may be the most expedient manner in which to complete the sale of its paging business without triggering the accelerated redemption of the GM Warrants.

If the Company is unable to complete the contemplated merger transaction and if the Company is unsuccessful in negotiating a settlement or alternative
arrangement with the holders of the GM Warrants and receives shareholder approval to continue with the sale of the paging business, the Company may be obligated to redeem the GM Warrants for $3,000,000 shortly after the closing on the sale of the
paging business. As of February 28, 2006, the Company has recorded this as a long-term liability at its fair value of $2,401,000. The GM Warrants are being accreted in value over time to their settlement value of $3,000,000 in December 2007
according to their original terms. If the redemption rights contained in the GM Warrants are accelerated the Company will record a charge to net income equal to the difference in the carrying value of the GM Warrants at that date and $3,000,000 and
this amount will be classified as a current liability during any period these rights are triggered. Further, under rights included in the GM Warrants, the warrant holders will be permitted to vote separately as a class on matters involving the sale
of substantially all of the assets of the Company. This right applies to the sale of the Companys paging business (discussed above) and the approval of this transaction is dependent on receiving an affirmative vote from the holders of the GM
Warrants unless the Company can complete an alternate transaction prior to the sale of its paging business that results in paging business no longer representing substantially all of the assets of the Company.

Redeemable Common Stock Payable:On January 29, 2004, Teletouch acquired substantially all of the two-way radio assets of DCAE, Inc.
d/b/a Delta Communications, Inc. (Delta), and in conjunction, the Company deferred the issuance of 640,000 shares of Teletouchs common stock subject to certain reductions specified in the asset purchase agreement between Teletouch
and Delta that could not exceed 100,000 shares of common stock. This obligation was payable on February 15, 2005 but due to certain negotiations with Delta regarding certain share reductions allowable under the purchase agreement, the Company did
not issue



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any of these securities until March 2005. During March 2005, the Company and Delta agreed to a net number of shares to be issued of 580,000 shares of
Teletouch common stock. Before the issuance of this common stock, Delta notified the Company of its intention to immediately redeem 25% of these securities in accordance with the purchase agreement, therefore, in March 2005, the Company issued
435,000 shares of its common stock to Delta and a payment of $152,250 for the redemption of the remaining 145,000 shares of common stock that Delta chose to redeem.

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



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

On March 2, 2006 Delta redeemed 45,879 shares of its redeemable common stock at $1.10 per
share receiving a cash payment of $50,467 from the Company.

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

Application of Critical Accounting Policies

The preceding discussion and analysis of financial condition and results of operations are based upon Teletouchs consolidated financial statements,
which have been prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, expenses and related disclosures. On an on-going basis, Teletouch evaluates its estimates and assumptions, including but not limited to those related to the impairment of long-lived assets, reserves for doubtful accounts,
provision for income taxes, revenue recognition and certain accrued liabilities. Teletouch bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Allowance for Doubtful Accounts: Estimates are used in determining the allowance for doubtful accounts and are based on historic collection
experience, current trends and a percentage of the accounts receivable aging categories. In determining these percentages Teletouch reviews historical write-offs, including comparisons of write-offs to provisions for doubtful accounts and as a
percentage of revenues; Teletouch compares the ratio of the allowance for doubtful accounts to gross receivables to historic levels and Teletouch monitors collections amounts and statistics. Teletouchs allowance for doubtful accounts is
approximately $112,000 as of February 28, 2006. Based on the information available to the Company, management believes the allowance for doubtful accounts as of February 28, 2006 was adequate. However, actual write-offs might exceed the
recorded allowance.

Reserve for Inventory Obsolescence: Reserves for inventory obsolescence are computed using estimates
that are based on sales trends, a ratio of inventory to sales, and a review of specific categories of inventory. In establishing its reserve, Teletouch reviews historic inventory obsolescence experience including comparisons of previous write-offs
to provision for inventory obsolescence and the inventory count compared to recent sales trends. The Company recorded additional telemetry inventory reserves of approximately



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$54,000 in the first quarter and $18,000 in the third quarter of fiscal 2006 related to the impairment of the aging telemetry product lines. A reduction to
the general obsolescence of $23,000 was recorded in the third quarter of fiscal 2006 related to the reduction in inventory stocking levels. In addition, the Company reduced the pager inventory reserves by $52,000 after a thorough evaluation of its
pager inventory in anticipation of the proposed sale of the paging business. Teletouch management cannot guarantee that the Company will experience better obsolescence rates than it has in the past which could result in material differences in the
reserve for inventory obsolescence and the related inventory write-offs. The reserve for inventory obsolescence is approximately $117,000 at February 28, 2006.

Income Taxes:The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, using the asset and liability approach, which requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of such assets and liabilities. This method utilizes enacted statutory tax rates in effect for the year in which
the temporary differences are expected to reverse and gives immediate effect to changes in income tax rates upon enactment. Deferred tax assets are recognized, net of any valuation allowance, for temporary differences and net operating loss and tax
credit carry forwards. Deferred income tax expense represents the change in net deferred assets and liability balances. Deferred income taxes result from temporary differences between the basis of assets and liabilities recognized for differences
between the financial statement and tax basis thereon, and for the expected future tax benefits to be derived from net operating losses and tax credit carry forwards. A valuation allowance is recorded when it is more likely than not that deferred
tax assets will be unrealizable in future periods. As of February 28, 2006, the Company has recorded a valuation allowance, of approximately $871,000, against the full amount of its net deferred tax assets since it does not forecast taxable
income for fiscal 2006 nor is the Company able to reasonably forecast taxable income beyond next year. The inability to foresee taxable income in future years makes it more likely than not that the Company will not realize its recorded deferred tax
assets in future periods. On November 1, 2005, the Company became a member of the consolidated tax group of Progressive Concepts Communications, Inc. (PCCI) as a result of PCCI gaining control of over 80% of the outstanding common
stock of Teletouch on that date. PCCI gained control of Teletouchs common stock through the conversion by TLL Partners, LLC (TLLP), PCCIs wholly owned subsidiary, of all of its shares of the Companys outstanding Series
C Preferred Stock into 43,500,000 share of common stock on November 1, 2005. As of November 1, 2005, TLLP was a disregarded entity for federal tax purposes since it was at that time a single member limited liability company
(LLC). Therefore, the parent for federal tax purposes was deemed to be PCCI. The Company continued to account for its taxes under SFAS 109 and record its deferred taxes on a stand-alone basis while part of PCCIs consolidated tax
group.

In preparing the financial statements for the quarter-ended February 28, 2006, the Company prepared its financial statements
without considering the Conversion of the preferred stock by TLLP had triggered the consolidated tax return requirements with PCCI. The Company instead evaluated its tax position and projected that Teletouch would incur a net tax loss in 2006 that
would be carried back and applied against its 2004 taxable income and result in a cash refund of taxes paid in 2004. Further, the Companys projections anticipated net losses in the future without a change in the business that could not be
justified in its projections at that point. The Company accounts for its taxes under Statement of Financial Accounting Standard 109 (SFAS 109) which resulted in the Company recording a net deferred tax asset as of February 28, 2006
based upon being a stand alone tax paying entity. In accordance with SFAS 109, the recoverability of this asset was evaluated and given the projected net losses, the Company recorded a valuation allowance that reduced the net deferred tax asset by
$176,000.

Since Teletouchs tax year actually ended in November 2005 due to becoming part of the PCCI affiliated group for
consolidated tax purposes, Teletouch should have evaluated its deferred tax assets based on the refunds that it could get related to the loss through November 2005. The Company estimated that year-to-date through November 2005 it actually had a
small taxable income, therefore it would not be able to



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carryback any losses and recover the taxes paid in 2004. As a result, the Company should have recorded an additional valuation allowance against its deferred
tax asset in its 3rd fiscal quarter ended February 28, 2006 that would have the effect of reducing the assets of the Company by $176,000 at February 28, 2006.

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.

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

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

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



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



| |  |  | The sale of the paging business will trigger an acceleration of amounts due under the Companys redeemable common stock warrants unless the Company is successful in completing
an acquisition or merger transaction in advance of the sale of its paging business that would make the sale of paging less than substantially all of the assets of Teletouch. If the redemption rights are accelerated, the amount that will become due
immediately upon the sale of the business could equal the full redemption value of the warrants which is $3,000,000 unless the Company is successful in negotiating a lesser payment with the holder of the warrants.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Although the holders of the redeemable common stock warrants may be able to block the sale transaction through the exercise of their voting rights as discussed above, Robert
McMurrey, Chairman of Teletouch, controls approximately 92% of the voting rights of the outstanding common stock and has expressed his intent block the sale transaction if the Company is unable successfully negotiate a significantly reduced amount
payable to warrant holders upon the completion of this transaction thereby allowing Teletouch to re-invest the majority of the cash proceeds from this sale transaction into the business.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

Operational Risks

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

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

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 February 28, 2006, Teletouch had approximately 121,800 pagers in service as compared to approximately 162,300 pagers
in service as of February 28, 2005. Teletouch must minimize the reduction in its subscriber base and expand its product offerings to generate revenues to offset the losses in its paging service revenues. There is no guarantee that our future
efforts in this area will decrease subscriber attrition.

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

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

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

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

The existing market for wireless and
mobile data solutions for the transportation industry is competitive. Competition is vigorous for fleet owners, which is a customer segment we seek to serve. We expect competition to increase further as companies develop new products and/or modify
their existing



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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.

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.



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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 2005 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 which in turn could adversely affect shareholder and investor confidence in the Company which may
have and adverse effect on our stock price.



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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.

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



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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.

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, 2006. We do not enter into financial instruments for trading or speculative purposes and do not currently utilize derivative financial instruments. Our operations are conducted
primarily in the United States and as such are not subject to material foreign currency exchange rate risk.

Item 4. Controls and Procedures

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

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



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Part II. Other Information

Item 1. Legal Proceedings

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

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

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

Summary of Stock Repurchases

(unaudited)



|                                      |  |                                 |  |                        |      |                                                                              |        |                                                                             |        
|------------------------------------- |  | ------------------------------- |  | ---------------------- | ---- | ---------------------------------------------------------------------------- | ------ | --------------------------------------------------------------------------- | -------
|                                      |  | Total Number ofShares Purchased |  | Average Price PerShare |      | Total Number ofShares Purchased asPart of PubliclyAnnounced Plans orPrograms |        | Maximum Number ofShares that May YetBe Purchased Under thePlans or Programs
|December 1, 2005 to December 31, 2005 |  | 61,172                          |  |                        | 1.05 |                                                                              | 61,172 |                                                                             | 183,515
|January 1, 2006 to January 31, 2006   |  |                                |  |                        |     |                                                                              |       |                                                                             | 183,515
|February 1, 2006 to February 28, 2006 |  |                                |  |                        |     |                                                                              |       |                                                                             | 183,515
|                                      |  |                                 |  |                        |      |                                                                              |        |                                                                             |        
|Total                                 |  | 61,172                          |  | $                      | 1.05 |                                                                              | 61,172 |                                                                             | 183,515

All shares detailed above were repurchases related to certain redeemable shares of common stock
issued by the Company in March 2004 to purchase the two-way radio assets of DCAE, Inc. d/b/a Delta Communications. For a description of these redeemable shares of common stock, see Note 11 to the consolidated financial statements Redeemable
Common Stock Payable.

Item 3. Defaults Upon Senior Securities

None

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

None

Item 5. Other Information

None



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Item 6. Exhibits



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



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SIGNATURES

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



|                      |  |                                           |  |                                                                                              
|--------------------- |  | ----------------------------------------- |  | ---------------------------------------------------------------------------------------------
|Date: October 4, 2006 |  | TELETOUCH COMMUNICATIONS, INC. Registrant
|                      |  |                                          
|                      |  | By:                                       |  | /s/ Thomas A. Hyde, Jr.                                                                      
|                      |  |                                           |  | Thomas A. Hyde, Jr. Chief Executive Officer                                                  
|                      |  |                                           |  | (Principal Executive Officer)                                                                
|                      |  |                                          
|                      |  | By:                                       |  | /s/ Douglas E. Sloan                                                                         
|                      |  |                                           |  | Douglas E. Sloan Interim Chief Financial Officer (Principal Financial and Accounting Officer)



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