##### Table of Contents

---



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-Q



---



x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended November 30, 2004



OR



 ̈TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from
             to



Commission File Number 1-13436



---



TELETOUCH COMMUNICATIONS, INC.

(Name of registrant in its charter)



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



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

Internet Website: www.teletouch.com

(Address and telephone number of principal executive offices)



110 North College, Ste. 200, Tyler, Texas 75702

(Address of former principal executive offices)



---



Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes  x    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).

Yes ̈No   x



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



Common Stock, $.001 par value  4,546,980 shares outstanding as of January 6, 2005



---



---

##### Table of Contents

TELETOUCH COMMUNICATIONS, INC.



TABLE OF
CONTENTS



|                              |  |                                                                                                                     |  |         
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------- |  | --------
|                              |  |                                                                                                                     |  | Page No.
|                              | 
|Part I. Financial Information |  |                                                                                                                    
|                              |  |                                                                                                                    
|Item 1.                       |  | Financial StatementsTeletouch Communications, Inc .                                                                |  | 3       
|                              |  |                                                                                                                    
|                              |  | Consolidated Balance Sheets as of November 30, 2004 (Unaudited)and May 31, 2004                                     |  | 3       
|                              |  |                                                                                                                    
|                              |  | Consolidated Statements of OperationsThree and Six MonthsEnded November 30, 2004 and November 30, 2003 (Unaudited) |  | 5       
|                              |  |                                                                                                                    
|                              |  | Consolidated Statements of Cash FlowsSix Months EndedNovember 30, 2004 and November 30, 2003 (Unaudited)           |  | 6       
|                              |  |                                                                                                                    
|                              |  | Notes to Consolidated Financial Statements                                                                          |  | 8       
|                              |  |                                                                                                                    
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                               |  | 19      
|                              |  |                                                                                                                    
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                          |  | 36      
|                              |  |                                                                                                                    
|Item 4.                       |  | Controls and Procedures                                                                                             |  | 36      
|                              | 
|Part II. Other Information    |  |                                                                                                                    
|                              |  |                                                                                                                    
|Item 1.                       |  | Legal Proceedings                                                                                                   |  | 37      
|                              |  |                                                                                                                    
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                         |  | 37      
|                              |  |                                                                                                                    
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                     |  | 37      
|                              |  |                                                                                                                    
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                 |  | 37      
|                              |  |                                                                                                                    
|Item 5.                       |  | Other Information                                                                                                   |  | 37      
|                              |  |                                                                                                                    
|Item 6.                       |  | Exhibits                                                                                                            |  | 38      
|                              |  |                                                                                                                    
|                              |  | Signatures                                                                                                          |  | 39      



2



---

##### Table of Contents

PART 1  FINANCIAL INFORMATION



Item 1. Financial Statements



TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



ASSETS



|                                                                                                                   |  |                  |        |   |             |   |        |  
|------------------------------------------------------------------------------------------------------------------ |  | ---------------- | ------ | - | ----------- | - | ------ | -
|                                                                                                                   |  | November 30,2004 |        |   | May 31,2004 |  
|                                                                                                                   |  | (unaudited)      |        |   | (audited)   |  
|CURRENT ASSETS:                                                                                                    |  |                  |        |   |             |   |        |  
|Cash and cash equivalents                                                                                          |  | $                | 1,259  |   |             | $ | 72     |  
|Accounts receivable, net of allowance of $235 in fiscal 2005 and $180 in fiscal 2004                               |  |                  | 1,204  |   |             |   | 1,585  |  
|Accounts receivable  related party                                                                                |  |                  | 5      |   |             |   | 5      |  
|Inventories, net of reserve of $588 in fiscal 2005 and $421 in fiscal 2004                                         |  |                  | 1,584  |   |             |   | 2,273  |  
|Deferred income tax assets                                                                                         |  |                  | 282    |   |             |   | 174    |  
|Note receivable                                                                                                    |  |                  |       |   |             |   | 256    |  
|Prepaid expenses and other current assets                                                                          |  |                  | 364    |   |             |   | 402    |  
|                                                                                                                   |  |                  |        |   |             |   |        |  
|                                                                                                                   |  |                  | 4,698  |   |             |   | 4,767  |  
|                                                                                                                   |  |                  |        |   |             |   |        |  
|PROPERTY, PLANT AND EQUIPMENT, net ofaccumulated depreciation of $15,639 in fiscal 2005 and $14,976 in fiscal 2004 |  |                  | 7,571  |   |             |   | 8,622  |  
|                                                                                                                   |  |                  |        |   |             |   |        |  
|GOODWILL, INTANGIBLES AND OTHER ASSETS:                                                                            |  |                  |        |   |             |   |        |  
|Goodwill.                                                                                                          |  |                  | 921    |   |             |   | 883    |  
|Subscriber bases.                                                                                                  |  |                  | 226    |   |             |   | 225    |  
|FCC licenses.                                                                                                      |  |                  | 103    |   |             |   | 103    |  
|Non-compete agreements.                                                                                            |  |                  | 95     |   |             |   | 95     |  
|Internally developed software                                                                                      |  |                  | 188    |   |             |   | 185    |  
|Accumulated amortization                                                                                           |  |                  | (233   | ) |             |   | (176   | )
|                                                                                                                   |  |                  |        |   |             |   |        |  
|                                                                                                                   |  |                  | 1,300  |   |             |   | 1,315  |  
|                                                                                                                   |  |                  |        |   |             |   |        |  
|DEFERRED INCOME TAXES                                                                                              |  |                  | 82     |   |             |   |       |  
|                                                                                                                   |  |                  |        |   |             |   |        |  
|                                                                                                                   |  | $                | 13,651 |   |             | $ | 14,704 |  
|                                                                                                                   |  |                  |        |   |             |   |        |  



See Accompanying Notes
to Consolidated Financial Statements



3



---

##### Table of Contents

TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS  (Continued)

(In thousands, except share data)



LIABILITIES AND SHAREHOLDERS EQUITY



|                                                                                                                                                             |  |                  |         |   |              |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------- | ------- | - | ------------ | - | ------- | -
|                                                                                                                                                             |  | November 30,2004 |         |   | May 31, 2004 |  
|                                                                                                                                                             |  | (unaudited)      |         |   | (audited)    |  
|CURRENT LIABILITIES:                                                                                                                                         |  |                  |         |   |              |   |         |  
|Accounts payable                                                                                                                                             |  | $                | 767     |   |              | $ | 978     |  
|Accounts payable  related party                                                                                                                             |  |                  | 1       |   |              |   | 5       |  
|Accrued expenses and other current liabilities                                                                                                               |  |                  | 1,838   |   |              |   | 1,881   |  
|Current portion of long-term debt                                                                                                                            |  |                  | 75      |   |              |   | 45      |  
|Current portion of redeemable common stock payable                                                                                                           |  |                  | 436     |   |              |   | 280     |  
|Current portion of unearned sale/leaseback profit                                                                                                            |  |                  | 418     |   |              |   | 418     |  
|Deferred revenue                                                                                                                                             |  |                  | 801     |   |              |   | 678     |  
|                                                                                                                                                             |  |                  |         |   |              |   |         |  
|                                                                                                                                                             |  |                  | 4,336   |   |              |   | 4,285   |  
|                                                                                                                                                             |  |                  |         |   |              |   |         |  
|LONG-TERM LIABILITIES:                                                                                                                                       |  |                  |         |   |              |   |         |  
|Long-term debt, net of current portion                                                                                                                       |  |                  | 149     |   |              |   | 448     |  
|Redeemable common stock purchase warrants                                                                                                                    |  |                  | 1,921   |   |              |   | 1,757   |  
|Redeemable common stock payable, net of current portion                                                                                                      |  |                  | 177     |   |              |   | 326     |  
|Unearned sale/leaseback profit, net of current portion                                                                                                       |  |                  | 852     |   |              |   | 1,064   |  
|Deferred income taxes                                                                                                                                        |  |                  |        |   |              |   | 22      |  
|                                                                                                                                                             |  |                  |         |   |              |   |         |  
|                                                                                                                                                             |  |                  | 3,099   |   |              |   | 3,617   |  
|                                                                                                                                                             |  |                  |         |   |              |   |         |  
|                                                                                                                                                             |  |                 
|TOTAL LIABILITIES                                                                                                                                            |  |                  | 7,435   |   |              |   | 7,902   |  
|                                                                                                                                                             |  |                  |         |   |              |   |         |  
|                                                                                                                                                             |  |                 
|COMMITMENTS AND CONTINGENCIES                                                                                                                                |  |                  |         |   |              |   |         |  
|                                                                                                                                                             |  |                 
|SHAREHOLDERS EQUITY:                                                                                                                                        |  |                  |         |   |              |   |         |  
|Series A cumulative convertible preferred stock, $.001 par value, 15,000 sharesauthorized and 0 shares issued and outstanding in fiscal
2005 and fiscal 2004 |  |                  |        |   |              |   |        |  
|Series B convertible preferred stock, $.001 par value, 411,457 shares authorizedand 0 shares issued and outstanding in fiscal 2005 and
fiscal 2004           |  |                  |        |   |              |   |        |  
|Series C convertible preferred stock, $.001 par value, 1,000,000 shares authorized,issued and outstanding in fiscal 2005 and fiscal
2004                     |  |                  | 1       |   |              |   | 1       |  
|Common stock, $.001 par value, 70,000,000 shares authorized, 4,976,189 sharesissued in fiscal 2005 and fiscal 2004                                           |  |                  | 5       |   |              |   | 5       |  
|Treasury stock, 429,209 shares held in fiscal 2005 and fiscal 2004                                                                                           |  |                  | (185    | ) |              |   | (185    | )
|Additional paid-in capital                                                                                                                                   |  |                  | 26,902  |   |              |   | 26,902  |  
|Accumulated deficit                                                                                                                                          |  |                  | (20,507 | ) |              |   | (19,921 | )
|                                                                                                                                                             |  |                  |         |   |              |   |         |  
|                                                                                                                                                             |  |                  | 6,216   |   |              |   | 6,802   |  
|                                                                                                                                                             |  |                  |         |   |              |   |         |  
|                                                                                                                                                             |  | $                | 13,651  |   |              | $ | 14,704  |  
|                                                                                                                                                             |  |                  |         |   |              |   |         |  



See Accompanying Notes
to Consolidated Financial Statements



4



---

##### Table of Contents

TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except shares and per share amounts)

(Unaudited)



|                                              |  |                                |           |   |                               |   |           |      |  |   |           |   |  |   |            |  
|--------------------------------------------- |  | ------------------------------ | --------- | - | ----------------------------- | - | --------- | ---- |  | - | --------- | - |  | - | ---------- | -
|                                              |  | Three Months EndedNovember 30, |           |   | Six Months Ended November 30, |  
|                                              |  | 2004                           |           |   | 2003                          |   |           | 2004 |  |   | 2003      |  
|Service, rent and maintenance revenue         |  | $                              | 5,094     |   |                               | $ | 5,856     |      |  | $ | 10,436    |   |  | $ | 12,033     |  
|Product sales revenue                         |  |                                | 1,279     |   |                               |   | 699       |      |  |   | 2,382     |   |  |   | 1,471      |  
|                                              |  |                                |           |   |                               |   |           |      |  |   |           |   |  |   |            |  
|Total revenues                                |  |                                | 6,373     |   |                               |   | 6,555     |      |  |   | 12,818    |   |  |   | 13,504     |  
|Net book value of products sold               |  |                                | (1,205    | ) |                               |   | (583      | )    |  |   | (2,203    | ) |  |   | (1,194     | )
|                                              |  |                                |           |   |                               |   |           |      |  |   |           |   |  |   |            |  
|                                              |  |                                | 5,168     |   |                               |   | 5,972     |      |  |   | 10,615    |   |  |   | 12,310     |  
|                                              |  |                                |           |   |                               |   |           |      |  |   |           |   |  |   |            |  
|Costs and expenses:                           |  |                                |           |   |                               |   |           |      |  |   |           |   |  |   |            |  
|Operating                                     |  |                                | 2,737     |   |                               |   | 2,702     |      |  |   | 5,519     |   |  |   | 5,512      |  
|Selling                                       |  |                                | 505       |   |                               |   | 514       |      |  |   | 994       |   |  |   | 1,057      |  
|General and administrative                    |  |                                | 1,551     |   |                               |   | 1,690     |      |  |   | 3,033     |   |  |   | 3,413      |  
|Depreciation and amortization                 |  |                                | 829       |   |                               |   | 959       |      |  |   | 1,734     |   |  |   | 1,954      |  
|Loss (gain) on disposal of assets             |  |                                | 3         |   |                               |   | 55        |      |  |   | (51       | ) |  |   | 67         |  
|                                              |  |                                |           |   |                               |   |           |      |  |   |           |   |  |   |            |  
|Total costs and expenses                      |  |                                | 5,625     |   |                               |   | 5,920     |      |  |   | 11,229    |   |  |   | 12,003     |  
|                                              |  |                                |           |   |                               |   |           |      |  |   |           |   |  |   |            |  
|Operating income (loss)                       |  |                                | (457      | ) |                               |   | 52        |      |  |   | (614      | ) |  |   | 307        |  
|Interest expense, net                         |  |                                | (108      | ) |                               |   | (91       | )    |  |   | (211      | ) |  |   | (185       | )
|                                              |  |                                |           |   |                               |   |           |      |  |   |           |   |  |   |            |  
|Net income (loss) before income taxes         |  |                                | (565      | ) |                               |   | (39       | )    |  |   | (825      | ) |  |   | 122        |  
|Income tax expense (benefit)                  |  |                                | (201      | ) |                               |   | 14        |      |  |   | (239      | ) |  |   | 71         |  
|                                              |  |                                |           |   |                               |   |           |      |  |   |           |   |  |   |            |  
|Net income (loss)                             |  | $                              | (364      | ) |                               | $ | (53       | )    |  | $ | (586      | ) |  | $ | 51         |  
|                                              |  |                                |           |   |                               |   |           |      |  |   |           |   |  |   |            |  
|Earnings (loss) per share  basic             |  | $                              | (0.08     | ) |                               | $ | (0.01     | )    |  | $ | (0.13     | ) |  | $ | 0.00       |  
|                                              |  |                                |           |   |                               |   |           |      |  |   |           |   |  |   |            |  
|Earnings (loss) per share  diluted           |  | $                              | (0.08     | ) |                               | $ | (0.01     | )    |  | $ | (0.13     | ) |  | $ | 0.00       |  
|                                              |  |                                |           |   |                               |   |           |      |  |   |           |   |  |   |            |  
|Weighted average shares outstanding  basic   |  |                                | 4,546,980 |   |                               |   | 4,546,980 |      |  |   | 4,546,980 |   |  |   | 44,546,980 |  
|                                              |  |                                |           |   |                               |   |           |      |  |   |           |   |  |   |            |  
|Weighted average shares outstanding  diluted |  |                                | 4,546,980 |   |                               |   | 4,546,980 |      |  |   | 4,546,980 |   |  |   | 55,182,448 |  
|                                              |  |                                |           |   |                               |   |           |      |  |   |           |   |  |   |            |  



See Accompanying Notes
to Consolidated Financial Statements



5



---

##### Table of Contents

TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                         |  |                  |       |   |                  |   |        |  
|---------------------------------------------------------------------------------------- |  | ---------------- | ----- | - | ---------------- | - | ------ | -
|                                                                                         |  | Six Months Ended |      
|                                                                                         |  | November 30,2004 |       |   | November 30,2003 |  
|Operating Activities:                                                                    |  |                  |       |   |                  |   |        |  
|Net income (loss)                                                                        |  | $                | (586  | ) |                  | $ | 51     |  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                  |       |   |                  |   |        |  
|Depreciation and amortization                                                            |  |                  | 1,734 |   |                  |   | 1,954  |  
|Non-cash compensation expense                                                            |  |                  |      |   |                  |   | 148    |  
|Non-cash interest expense                                                                |  |                  | 170   |   |                  |   | 136    |  
|Provision for losses on accounts receivable                                              |  |                  | 121   |   |                  |   | 109    |  
|Provision for inventory obsolescence                                                     |  |                  | 562   |   |                  |   | 314    |  
|(Gain)/loss on disposal of assets                                                        |  |                  | (51   | ) |                  |   | 67     |  
|Amortization of unearned sale/leaseback profit                                           |  |                  | (212  | ) |                  |   | (212   | )
|Deferred income taxes                                                                    |  |                  | (212  | ) |                  |   | (150   | )
|Changes in operating assets and liabilities:                                             |  |                  |       |   |                  |   |        |  
|Accounts receivable                                                                      |  |                  | 250   |   |                  |   | 185    |  
|Inventories                                                                              |  |                  | 357   |   |                  |   | 110    |  
|Prepaid expenses and other assets                                                        |  |                  | 38    |   |                  |   | (297   | )
|Accounts payable                                                                         |  |                  | (211  | ) |                  |   | 157    |  
|Accrued expenses and other current liabilities                                           |  |                  | (43   | ) |                  |   | (1,073 | )
|Deferred revenue                                                                         |  |                  | 123   |   |                  |   | 55     |  
|                                                                                         |  |                  |       |   |                  |   |        |  
|Net cash provided by operating activities                                                |  |                  | 2,040 |   |                  |   | 1,554  |  
|                                                                                         |  |                  |       |   |                  |   |        |  
|Investing Activities:                                                                    |  |                  |       |   |                  |   |        |  
|Capital expenditures, including pagers                                                   |  |                  | (879  | ) |                  |   | (1,126 | )
|Redemption of certificates of deposit                                                    |  |                  |      |   |                  |   | 10     |  
|Intangible assets                                                                        |  |                  | (4    | ) |                  |   |       |  
|Acquisitions, net of cash acquired                                                       |  |                  | (1    | ) |                  |   |       |  
|Net proceeds from sale of assets                                                         |  |                  | 75    |   |                  |   | 45     |  
|Issuance of notes receivable                                                             |  |                  |      |   |                  |   | (250   | )
|                                                                                         |  |                  |       |   |                  |   |        |  
|Net cash used in investing activities                                                    |  |                  | (809  | ) |                  |   | (1,321 | )
|                                                                                         |  |                  |       |   |                  |   |        |  
|Financing Activities:                                                                    |  |                  |       |   |                  |   |        |  
|Increase (decrease) in short-term debt, net                                              |  |                  |      |   |                  |   | (109   | )
|Proceeds from borrowings                                                                 |  |                  | 62    |   |                  |   | 100    |  
|Payments on long-term debt                                                               |  |                  | (106  | ) |                  |   | (453   | )
|                                                                                         |  |                  |       |   |                  |   |        |  
|Net cash used in financing activities                                                    |  |                  | (44   | ) |                  |   | (462   | )
|                                                                                         |  |                  |       |   |                  |   |        |  
|Net increase (decrease) in cash and cash equivalents                                     |  |                  | 1,187 |   |                  |   | (229   | )
|Cash and cash equivalents at beginning of period                                         |  |                  | 72    |   |                  |   | 688    |  
|                                                                                         |  |                  |       |   |                  |   |        |  
|Cash and cash equivalents at end of period                                               |  | $                | 1,259 |   |                  | $ | 459    |  
|                                                                                         |  |                  |       |   |                  |   |        |  



See Accompanying Notes
to Consolidated Financial Statements



6



---

##### Table of Contents

TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In thousands)

(Unaudited)



|                                                       |  |                  |     |                  |   |    
|------------------------------------------------------ |  | ---------------- | --- | ---------------- | - | ---
|                                                       |  | Six Months Ended
|                                                       |  | November 30,2004 |     | November 30,2003
|Supplemental Cash Flow Data:                           |  |                  |     |                  |   |    
|Cash payments for interest                             |  | $                | 42  |                  | $ | 50 
|                                                       |  |                  |     |                  |   |    
|Cash payments for income taxes                         |  | $                | 5   |                  | $ | 714
|                                                       |  |                  |     |                  |   |    
|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.           |  | $                | 230 |                  | $ | 362
|                                                       |  |                  |     |                  |   |    



See Accompanying Notes
to Consolidated Financial Statements



7



---

##### Table of Contents

TELETOUCH COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



NOTE A  BASIS OF PRESENTATION



The accompanying unaudited interim consolidated financial statements included herein have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission (SEC). The interim condensed consolidated financial statements include the consolidated accounts of Teletouch Communications, Inc. and our wholly-owned subsidiaries (collectively, the Company or
Teletouch). In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of financial position, results of operations and cash flows for the interim periods presented have been
made. The results of operations for the three and six-months ended November 30, 2004, are not necessarily indicative of the results to be expected for the full year.



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



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



The Company issued 1,000,000 shares of Series C Preferred Stock and 6,000,000 warrants to purchase common stock in November 2002 as an exchange for the
outstanding Series A and B Preferred Stock. The Series C Preferred stock was included in the dilutive earnings per share calculation in 2003. Per the Series C Preferred Stock agreement the holders have the right to participate with common
stockholders on an as-if converted basis. As such, the Company should have included the dilutive common shares underlying the Series C Preferred Stock in the basic earnings per share calculation for the three and six months ended November 30, 2003
in accordance with EITF Topic D-95. The effect of this change reduced basic earnings per share from $0.01 to $0.00 for the six months ended November 30, 2003.



These reclassifications did not have an impact on the Companys previously reported financial position or net income (loss) applicable to common
shareholders.



NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



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



8



---

##### Table of Contents

market price of the underlying Common Stock on the date of grant, generally no compensation expense is recognized.



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



|                                                                                                                |  |                                 |       |   |                               |   |       |      |  |   |       |   |  |   |      |  
|--------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ----- | - | ----------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ---- | -
|                                                                                                                |  | Three Months Ended November 30, |       |   | Six Months Ended November 30, |  
|                                                                                                                |  | 2004                            |       |   | 2003                          |   |       | 2004 |  |   | 2003  |  
|Net income (loss)                                                                                               |  | $                               | (364  | ) |                               | $ | (53   | )    |  | $ | (586  | ) |  | $ | 51   |  
|Plus stock-based employee compensation expenseincluded in reported net income, net of related taxeffects        |  |                                 | 27    |   |                               |   | 25    |      |  |   |      |   |  |   | 92   |  
|Less total stock-based employee compensationdetermined under fair-value-based method, net ofrelated tax effects |  |                                 | (5    | ) |                               |   | (5    | )    |  |   | (10   | ) |  |   | (18  | )
|                                                                                                                |  |                                 |       |   |                               |   |       |      |  |   |       |   |  |   |      |  
|Pro forma net income (loss)                                                                                     |  | $                               | (342  | ) |                               | $ | (33   | )    |  | $ | (596  | ) |  | $ | 125  |  
|                                                                                                                |  |                                 |       |   |                               |   |       |      |  |   |       |   |  |   |      |  
|Pro forma earnings (loss) per share:                                                                            |  |                                 |       |   |                               |   |       |      |  |   |       |   |  |   |      |  
|Basic                                                                                                           |  | $                               | (0.08 | ) |                               | $ | (0.01 | )    |  | $ | (0.13 | ) |  | $ | 0.00 |  
|                                                                                                                |  |                                 |       |   |                               |   |       |      |  |   |       |   |  |   |      |  
|Diluted                                                                                                         |  | $                               | (0.08 | ) |                               | $ | (0.01 | )    |  | $ | (0.13 | ) |  | $ | 0.00 |  
|                                                                                                                |  |                                 |       |   |                               |   |       |      |  |   |       |   |  |   |      |  



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



|                       |  |                    |     |               |   |               |  |                 |     |                 |   |           |  |                |       |  |   |    |  |   |      
|---------------------- |  | ------------------ | --- | ------------- | - | ------------- |  | --------------- | --- | --------------- | - | --------- |  | -------------- | ----- |  | - | -- |  | - | -----
|                       |  | Less than  3 years |     | 3 to 4  years |   | 5 to 9  years |  | 10 to 14  years |     | 15 to 19  years |   | 20  years |  | Total NetValue
|Buildings              |  | $                  |    |               | $ |              |  | $               |    |                 | $ | 1         |  | $              | 4     |  | $ | 10 |  | $ | 15   
|LAN & Other Computers  |  |                    |    |               |   | 304           |  |                 | 225 |                 |   |          |  |                |      |  |   |   |  |   | 529  
|Equipment              |  |                    |    |               |   |              |  |                 | 92  |                 |   | 4         |  |                | 9     |  |   |   |  |   | 105  
|Furniture & Fixtures   |  |                    |    |               |   | 24            |  |                 | 3   |                 |   | 61        |  |                |      |  |   |   |  |   | 88   
|Leasehold Improvements |  |                    | 1   |               |   | 5             |  |                 | 3   |                 |   |          |  |                |      |  |   | 3  |  |   | 12   
|Office Equipment       |  |                    |    |               |   | 3             |  |                 | 6   |                 |   | 1         |  |                |      |  |   |   |  |   | 10   
|Paging Infrastructure  |  |                    |    |               |   |              |  |                 | 186 |                 |   | 769       |  |                | 3,336 |  |   | 3  |  |   | 4,294
|Vehicles               |  |                    |    |               |   | 3             |  |                 | 247 |                 |   |          |  |                |      |  |   |   |  |   | 250  
|Pager Fleet            |  |                    |    |               |   | 2,105         |  |                 |    |                 |   |          |  |                |      |  |   |   |  |   | 2,105
|Radio Fleet            |  |                    |    |               |   | 2             |  |                 |    |                 |   |          |  |                |      |  |   |   |  |   | 2    
|Assets Not In Service  |  |                    | 161 |               |   |              |  |                 |    |                 |   |          |  |                |      |  |   |   |  |   | 161  
|                       |  |                    |     |               |   |               |  |                 |     |                 |   |           |  |                |       |  |   |    |  |   |      
|                       |  | $                  | 162 |               | $ | 2,446         |  | $               | 762 |                 | $ | 836       |  | $              | 3,349 |  | $ | 16 |  | $ | 7,571
|                       |  |                    |     |               |   |               |  |                 |     |                 |   |           |  |                |       |  |   |    |  |   |      



Recent Accounting Pronouncements:



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



9



---

##### Table of Contents

years beginning after November 23, 2004. The Company has evaluated SFAS No. 151 and it will have no impact on the Companys overall results of
operations or financial position.



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



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



NOTE C  EARNINGS PER SHARE



Basic earnings (loss) per share is determined by dividing net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss)
per share amounts are similarly computed, but include the effect, when dilutive, of the Companys weighted average number of stock options outstanding and the average number of common shares that would be issuable upon conversion of the
Companys convertible preferred securities and the exercise of the Companys common stock purchase warrants. Potentially dilutive securities have not been considered in the computation of loss per share for the three and six months ended
November 30, 2004 because the effect would be antidilutive.



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



10



---

##### Table of Contents

|                                                              |  |                                |       |   |                              |   |       |      |  |   |       |   |  |   |       
|------------------------------------------------------------- |  | ------------------------------ | ----- | - | ---------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ------
|                                                              |  | Three Months EndedNovember 30, |       |   | Six Months EndedNovember 30,
|                                                              |  | 2004                           |       |   | 2003                         |   |       | 2004 |  |   | 2003 
|Net income (loss) applicable to common shareholders  basic   |  | $                              | (364  | ) |                              | $ | (53   | )    |  | $ | (586  | ) |  | $ | 51    
|Plus accretion on redeemable common stock purchase warrants   |  |                                |      |   |                              |   |      |      |  |   |      |   |  |   | 137   
|                                                              |  |                                |       |   |                              |   |       |      |  |   |       |   |  |   |       
|Net income (loss) applicable to common shareholders  diluted |  | $                              | (364  | ) |                              | $ | (53   | )    |  | $ | (586  | ) |  | $ | 188   
|                                                              |  |                                |       |   |                              |   |       |      |  |   |       |   |  |   |       
|                                                              |  |                                |       |  
|Average shares outstanding:                                   |  |                                |       |   |                              |   |       |      |  |   |       |   |  |   |       
|Common stock                                                  |  |                                | 4,547 |   |                              |   | 4,547 |      |  |   | 4,547 |   |  |   | 4,547 
|Series C Preferred Stock                                      |  |                                |      |   |                              |   |      |      |  |   |      |   |  |   | 44,000
|                                                              |  |                                |       |   |                              |   |       |      |  |   |       |   |  |   |       
|                                                              |  |                                |       |  
|Basic shares outstanding                                      |  |                                | 4,547 |   |                              |   | 4,547 |      |  |   | 4,547 |   |  |   | 48,547
|Effect of dilutive securities:                                |  |                                |       |   |                              |   |       |      |  |   |       |   |  |   |       
|Stock options                                                 |  |                                |      |   |                              |   |      |      |  |   |      |   |  |   | 632   
|Common stock purchase warrants                                |  |                                |      |   |                              |   |      |      |  |   |      |   |  |   | 6,003 
|                                                              |  |                                |       |   |                              |   |       |      |  |   |       |   |  |   |       
|                                                              |  |                                |       |  
|Diluted shares outstanding                                    |  |                                | 4,547 |   |                              |   | 4,547 |      |  |   | 4,547 |   |  |   | 55,182
|                                                              |  |                                |       |   |                              |   |       |      |  |   |       |   |  |   |       
|                                                              |  |                                |       |  
|Earnings (loss) per share:                                    |  |                                |       |   |                              |   |       |      |  |   |       |   |  |   |       
|Basic                                                         |  | $                              | (0.08 | ) |                              | $ | (0.01 | )    |  | $ | (0.13 | ) |  | $ | 0.00  
|                                                              |  |                                |       |   |                              |   |       |      |  |   |       |   |  |   |       
|Diluted                                                       |  | $                              | (0.08 | ) |                              | $ | (0.01 | )    |  | $ | (0.13 | ) |  | $ | 0.00  
|                                                              |  |                                |       |   |                              |   |       |      |  |   |       |   |  |   |       



The Company issued
1,000,000 shares of Series C Preferred Stock and 6,000,000 warrants to purchase common stock in November 2002 as an exchange for the outstanding Series A and B Preferred Stock. The Series C Preferred Stock was included in the dilutive earnings per
share calculation in 2003. Per the Series C Preferred Stock agreement the holders have the right to participate with common stockholders on an as-if converted basis. As such, the Company should have included the dilutive common shares underlying the
Series C Preferred Stock in the basic earnings per share calculation for the three and six months ended November 30, 2003 in accordance with EITF Topic D-95. The effect of this change reduced basic earnings per share from $0.01 to $0.00 for the six
months ended November 30, 2003.



For the three months and six
months ended November 30, 2004 and 2003, 1,000,000 shares of Series C preferred stock convertible into 44,000,000 shares of common stock, 6,000,000 common stock purchase warrants exercisable at $.01 and stock options to purchase 1,942,487 shares of
common stock at exercise prices ranging from $.18 to $3.375 per share were outstanding, but were not included in the computation of dilutive earnings per share due to their antidilutive effect. The total number of equivalent shares of common stock
outstanding as of November 30, 2004 are as follows:



|                                |  |                              |  |                                  
|------------------------------- |  | ---------------------------- |  | ---------------------------------
|                                |  | November 30, 2004           
|                                |  | # Shares /OptionsOutstanding |  | EquivalentCommonSharesOutstanding
|Common Stock                    |  | 4,546,980                    |  | 4,546,980                        
|Common Stock Warrants           |  | 6,000,000                    |  | 6,000,000                        
|Common Stock Options            |  | 1,942,487                    |  | 1,942,487                        
|Redeemable Common Stock Payable |  | 640,000                      |  | 640,000                          
|Series C Preferred Stock        |  | 1,000,000                    |  | 44,000,000                       
|                                |  |                              |  |                                  
|                                |  |                              |  | 57,129,467                       
|                                |  |                              |  |                                  



11



---

##### Table of Contents

NOTE D  LIQUIDITY, RISKS AND FINANCIAL CONDITION



Based on current and anticipated levels of operations, the Companys
management anticipates that net cash provided by operating activities including the effects of planned restructuring activities, together with the $1.3 million of cash on hand will be adequate to meet its anticipated cash requirements for the
foreseeable future. Revenues from the Companys telemetry product lines have continued to be insignificant during the three and six months ended November 30, 2004 and management expects that revenues from the telemetry product line will
continue to be insignificant through at least the third quarter of fiscal 2005 due to the level of activity and qualified sales leads as well as the progress of the various customer evaluations that are underway. New telemetry products and channels
continue to be developed but are being developed slowly due to the capital requirements of this activity. The Company expects to be rolling out at least two new telemetry devices during the third quarter of 2005.



Because the Companys new revenue initiatives have been slow to develop,
management is currently executing a restructuring of its operations to eliminate certain expenses to help the Company meet its cash requirements for the remainder of fiscal 2005. In December 2004, the Company relocated its corporate offices and
eliminated headcount from its field operations and its corporate office. The relocation allowed the Company to bring all of its corporate functions together in one facility further improving the efficiency of its operations. Other sales, operational
and organizational changes are planned during the third quarter which are designed to further improve cash flow and operating efficiency. The Company can provide no assurances that reductions in its operating costs or its revenue growth initiatives
will be sufficient to generate positive cash flows or that additional financing would be available or, if available, offered on acceptable terms.



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



As of November 30, 2004, the Company has no borrowings
outstanding under its $2.2 million promissory note with TLL Partners, a company controlled by Robert McMurrey, Chairman of the Board of Teletouch. Any borrowings under this arrangement are subject to the approval of the Progressive Concepts
Communications, Inc. (PCCI) Board of Directors and availability of funds. TLL Partners is a wholly owned subsidiary of PCCI. The Company has had limited borrowings under this agreement in the past and has been given no assurances from
TLL Partners or PCCI that the necessary approval would be given by the PCCI Board of Directors to fund any future operating or capital needs of Teletouch.



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



12



---

##### Table of Contents

NOTE E  INVENTORY



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



|                                      |  |                   |       |         |              |      |          |  |   |       |   |         |   |       |          |   |      |   |  |   |       |  
|------------------------------------- |  | ----------------- | ----- | ------- | ------------ | ---- | -------- |  | - | ----- | - | ------- | - | ----- | -------- | - | ---- | - |  | - | ----- | -
|                                      |  | November 30, 2004 |       |         | May 31, 2004 |     
|                                      |  | Cost              |       | Reserve |              |      | NetValue |  |   | Cost  |   | Reserve |   |       | NetValue |  
|Pagers and parts                      |  | $                 | 843   |         | $            | (195 | )        |  | $ | 648   |   |         | $ | 1,113 |          | $ | (129 | ) |  | $ | 984   |  
|Cellular phones and electronics       |  |                   | 56    |         |              | (56  | )        |  |   |      |   |         |   | 129   |          |   | (90  | ) |  |   | 39    |  
|Two-way radios and parts              |  |                   | 466   |         |              | (43  | )        |  |   | 423   |   |         |   | 601   |          |   |     |   |  |   | 601   |  
|Telemetry devices and parts           |  |                   | 807   |         |              | (213 | )        |  |   | 594   |   |         |   | 851   |          |   | (120 | ) |  |   | 731   |  
|                                      |  |                   |       |         |              |      |          |  |   |       |   |         |   |       |          |   |      |   |  |   |       |  
|Total inventory and specific reserves |  |                   | 2,172 |         |              | (507 | )        |  |   | 1,665 |   |         |   | 2,694 |          |   | (339 | ) |  |   | 2,355 |  
|                                      |  |                   |       |         |              |     
|General obsolescence reserve          |  |                   |      |         |              | (81  | )        |  |   | (81   | ) |         |   |      |          |   | (82  | ) |  |   | (82   | )
|                                      |  |                   |       |         |              |      |          |  |   |       |   |         |   |       |          |   |      |   |  |   |       |  
|Total inventory and reserves          |  | $                 | 2,172 |         | $            | (588 | )        |  | $ | 1,584 |   |         | $ | 2,694 |          | $ | (421 | ) |  | $ | 2,273 |  
|                                      |  |                   |       |         |              |      |          |  |   |       |   |         |   |       |          |   |      |   |  |   |       |  



NOTE F  NOTE RECEIVABLE



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



NOTE G  ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES



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



|                                            |  |                  |       |             |   |      
|------------------------------------------- |  | ---------------- | ----- | ----------- | - | -----
|                                            |  | November 30,2004 |       | May 31,2004
|Accrued payroll and other personnel expense |  | $                | 694   |             | $ | 711  
|Accrued state and local taxes               |  |                  | 296   |             |   | 203  
|Unvouchered accounts payable                |  |                  | 644   |             |   | 679  
|Customer deposits payable                   |  |                  | 139   |             |   | 145  
|Other                                       |  |                  | 65    |             |   | 143  
|                                            |  |                  |       |             |   |      
|Total                                       |  | $                | 1,838 |             | $ | 1,881
|                                            |  |                  |       |             |   |      



NOTE H  SHORT-TERM DEBT



The Company currently has no borrowings outstanding under
its Multiple Advance Promissory Note (MAP Note) with First Community Financial Corporation (FCFC). Under the terms of the MAP Note, the Company is required to comply with certain financial covenants on a monthly basis.
Failure to maintain compliance with these covenants is an event of default as defined under FCFC Security Agreement. During the first and second quarters of fiscal 2005, the Company was unable to maintain compliance with certain financial covenants
in the MAP Note. The Company did receive a waiver of these covenants which allowed the Company to remain in good standing under the terms of the MAP Note for the quarters ending August 31, 2004 and November 30, 2004. Under the Companys credit
agreement with FCFC, the Company has available



13



---

##### Table of Contents

borrowings of up to $2.0 million which is dependent on the Companys accounts receivable borrowing base. As of November 30, 2004, the Companys
allowable borrowings under the First Community Financial Corporation revolving line of credit were $0.3 million. Under this credit facility, $0.0 million was funded as of November 30, 2004. During the quarter ended November 30, 2004, FCFC has
advised the Company that it will not renew the MAP Note when it comes due on May 1, 2005 and that borrowings under it will be subject to specific approval while the Company is unable to meet certain financial covenants even if these violations are
waived by FCFC.



NOTE I  PROVISION FOR LEASE ABANDONMENT AND OTHER
COSTS



The following table provides a rollforward of the
Companys liability for future lease payments related to previously closed stores for the three and six months ended November 30, 2004 (in thousands):



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



As of November 30,
2004, the remaining amount of $48,000 is expected to be paid through 2005. Although the Company does not anticipate significant changes, the actual costs may differ from these estimates.



NOTE J  INCOME TAXES



The effective benefit tax rate is 29% for the six months ended November 30, 2004, primarily a result of the interest expense related to the
redeemable common stock warrants being non-deductible for tax purposes. The Company made a $5,000 cash payment for estimated federal income taxes during the quarter ended November 30, 2004.



14



---

##### Table of Contents

NOTE K  RELATED PARTY TRANSACTIONS



The Company had certain related party sales, purchases and incurred certain expenses during the three and six months ended
November 30, 2004 and 2003 with Progressive Concepts, Inc. (PCI) a company controlled by Robert McMurrey, Teletouchs Chairman, as follows:



|                         |  |                                |        |                              |   |        |  |      |         |  |   |        
|------------------------ |  | ------------------------------ | ------ | ---------------------------- | - | ------ |  | ---- | ------- |  | - | -------
|                         |  | Three Months EndedNovember 30, |        | Six Months EndedNovember 30,
|                         |  | 2004                           |        | 2003                         |   | 2004   |  | 2003
|Sales to PCI:            |  |                                |        |                              |   |        |  |      |         |  |   |        
|Pagers and pager service |  | $                              | 7,700  |                              | $ | 8,700  |  | $    | 15,200  |  | $ | 12,800 
|                         |  |                                |        |                             
|Gross margin on sales    |  |                                | 1,000  |                              |   | 2,300  |  |      | 1,000   |  |   | 3,500  
|                         |  |                                |        |                             
|Purchases from PCI:      |  |                                |        |                              |   |        |  |      |         |  |   |        
|Cellular phone equipment |  |                                | 3,200  |                              |   | 4,600  |  |      | 7,500   |  |   | 8,000  
|                         |  |                                |        |                             
|Expenses with PCI:       |  |                                |        |                              |   |        |  |      |         |  |   |        
|Answering services       |  |                                | 90,000 |                              |   | 90,000 |  |      | 180,000 |  |   | 180,000



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



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



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



15



---

##### Table of Contents

NOTE L  SHAREHOLDERS EQUITY



Redeemable Common Stock Payable:On January 29, 2004, Teletouch acquired substantially all of the two-way radio
assets of DCAE, Inc. d/b/a Delta Communications, Inc. (Delta), and in conjunction, the Company deferred the issuance of 640,000 shares of Teletouchs common stock subject to certain reductions specified in the asset purchase
agreement, between Teletouch and Delta, that cannot exceed 100,000 shares of common stock. This obligation is payable on February 15, 2005 at which time up to 640,000 restricted shares of common stock will be issued. The shares of common stock to be
issued contain a put option allowing the holder to sell 25% of the remaining shares held each quarter, beginning February 28, 2005, back to the company at a specified price as follows:



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



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



NOTE M  SEGMENT INFORMATION



The Companys consolidated financial statements include two reportable segments: Paging and Two Way. The Company determines its reportable segments
based on the aggregation criteria of the No. 131 Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131). Paging represents the Companys one-way communications link to its subscribers. Two Way
represents the Companys two way radio operations. The Company measures the operating performance of each segment based on adjusted EBITDA.



16



---

##### Table of Contents

The following summarizes the Companys financial results for each segment for the three and six
months ended November 30, 2004 and 2003 (in thousands):



|                                                        |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------- |  | ------------------------------ | ------ | - | ---------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                        |  | Three Months EndedNovember 30, |        |   | Six Months EndedNovember 30, |  
|                                                        |  | 2004                           |        |   | 2003                         |   |        | 2004 |  |   | 2003   |  
|Service, rent and maintenance revenue                   |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Paging                                                  |  | $                              | 4,486  |   |                              | $ | 5,366  |      |  | $ | 9,207  |   |  | $ | 11,026 |  
|Two Way                                                 |  |                                | 452    |   |                              |   | 305    |      |  |   | 924    |   |  |   | 652    |  
|Other                                                   |  |                                | 156    |   |                              |   | 185    |      |  |   | 305    |   |  |   | 355    |  
|                                                        |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Total service, rent and maintenance revenue             |  | $                              | 5,094  |   |                              | $ | 5,856  |      |  | $ | 10,436 |   |  | $ | 12,033 |  
|                                                        |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|                                                        |  |                                |        |  
|Product sales revenue                                   |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Paging                                                  |  | $                              | 166    |   |                              | $ | 234    |      |  | $ | 358    |   |  | $ | 484    |  
|Two Way                                                 |  |                                | 979    |   |                              |   | 344    |      |  |   | 1,690  |   |  |   | 688    |  
|Other                                                   |  |                                | 134    |   |                              |   | 121    |      |  |   | 334    |   |  |   | 299    |  
|                                                        |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Total product sales revenue                             |  | $                              | 1,279  |   |                              | $ | 699    |      |  | $ | 2,382  |   |  | $ | 1,471  |  
|                                                        |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|                                                        |  |                                |        |  
|Gross Revenue                                           |  | $                              | 6,373  |   |                              | $ | 6,555  |      |  | $ | 12,818 |   |  | $ | 13,504 |  
|                                                        |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|                                                        |  |                                |        |  
|Reconciliation of adjusted EBITDA to net income (loss): |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|                                                        |  |                                |        |  
|Adjusted EBITDA                                         |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Paging                                                  |  | $                              | 2,588  |   |                              | $ | 4,272  |      |  | $ | 5,439  |   |  | $ | 8,594  |  
|Two Way                                                 |  |                                | 133    |   |                              |   | (97    | )    |  |   | 317    |   |  |   | (43    | )
|Corporate Overhead                                      |  |                                | (2,046 | ) |                              |   | (3,155 | )    |  |   | (4,081 | ) |  |   | (6,207 | )
|Other                                                   |  |                                | (266   | ) |                              |   | 38     |      |  |   | (625   | ) |  |   | 72     |  
|                                                        |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Total adjusted EBITDA                                   |  |                                | 409    |   |                              |   | 1,058  |      |  |   | 1,050  |   |  |   | 2,416  |  
|                                                        |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|                                                        |  |                                |        |  
|Less non-recurring and non-cash expenses:               |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Restructure Expense                                     |  |                                | (7     | ) |                              |   | (45    | )    |  |   | (19    | ) |  |   | (60    | )
|Compensation ExpStock Options                          |  |                                | 41     |   |                              |   | 37     |      |  |   |       |   |  |   | 148    |  
|                                                        |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|                                                        |  |                                | 34     |   |                              |   | (8     | )    |  |   | (19    | ) |  |   | 88     |  
|                                                        |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|                                                        |  |                                |        |  
|Less:                                                   |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Amortization and depreciation                           |  |                                | 829    |   |                              |   | 959    |      |  |   | 1,734  |   |  |   | 1,954  |  
|Net interest expense                                    |  |                                | 108    |   |                              |   | 91     |      |  |   | 211    |   |  |   | 185    |  
|(Gain) Loss on Sale of Assets                           |  |                                | 3      |   |                              |   | 55     |      |  |   | (51    | ) |  |   | 67     |  
|Federal Income Tax                                      |  |                                | (201   | ) |                              |   | 14     |      |  |   | (239   | ) |  |   | 71     |  
|                                                        |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|                                                        |  |                                | 739    |   |                              |   | 1,119  |      |  |   | 1,655  |   |  |   | 2,277  |  
|                                                        |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|                                                        |  |                                |        |  
|Net income (loss)                                       |  | $                              | (364   | ) |                              | $ | (53    | )    |  | $ | (586   | ) |  | $ | 51     |  
|                                                        |  |                                |        |   |                              |   |        |      |  |   |        |   |  |   |        |  



17



---

##### Table of Contents

The Company only accounts for accounts receivable, inventories and property, plant and equipment
by segments. A component of corporate assets is cash in the amount of $1.3 million and $0.1 million as of November 30, 2004 and May 31, 2004, respectively. Also, included in corporate assets is related party accounts receivable, deferred income
taxes, prepaid expenses and property, plant and equipment.



The
Companys assets by segment as of November 30, 2004 and May 31, 2004 are as follows (in thousands):



|             |  |                  |        |             |   |       
|------------ |  | ---------------- | ------ | ----------- | - | ------
|             |  | November 30,2004 |        | May 31,2004
|Assets       |  |                  |        |             |   |       
|Paging       |  | $                | 8,030  |             | $ | 9,690 
|Two Way      |  |                  | 2,301  |             |   | 2,701 
|Corporate    |  |                  | 2,493  |             |   | 1,380 
|Other        |  |                  | 827    |             |   | 933   
|             |  |                  |        |             |   |       
|Total Assets |  | $                | 13,651 |             | $ | 14,704
|             |  |                  |        |             |   |       



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



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



NOTE N  ACQUISITIONS



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



18



---

##### Table of Contents

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



FORWARD-LOOKING STATEMENTS



Our disclosure and analysis in this document may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995 with respect to financial condition, results of operations, cash flows, financing plans, business strategies, operating efficiencies or synergies, capital and other expenditures, network upgrades, competitive positions, availability of capital,
growth opportunities for existing and new products and services, our acquisition and growth strategy, benefits from new technologies, availability and deployment of new technologies, plans and objectives of management, and other matters.



Statements in this document that are not historical facts are hereby
identified as forward-looking statements for the purpose of the safe harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words estimate,
project, intend, expect, believe, plan, and similar expressions are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this document. Any Form 10-K, Annual Report to Shareholders, Form 10-Q or Form 8-K of Teletouch may include forward-looking statements. In addition, other written or oral statements
which constitute forward-looking statements have been made and may in the future be made by or on behalf of Teletouch, including with respect to the matters referred to above. These forward-looking statements are necessarily estimates, reflecting
the best judgment of senior management that rely on a number of assumptions concerning future events, many of which are outside of our control, and involve a number of risks and uncertainties that could cause actual results to differ materially from
those suggested by the forward-looking statements. These forward-looking statements should, therefore, be considered in light of various important factors, including those set forth in this document. Important factors that could cause actual results
to differ materially from estimates or projections contained in the forward-looking statements include, without limitation:



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



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



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



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



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



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



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



19



---

##### Table of Contents

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



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



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



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



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



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



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



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



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



Overview



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



Teletouch is a leading provider of wireless telecommunications services,
primarily paging services, in non-major metropolitan areas and communities in the southeast United States. As of November 30, 2004, the Company had approximately 169,400 pagers in service. The Company derives the majority of its revenues from fixed,
periodic fees, not dependent on usage, charged to subscribers for paging services. As long as a subscriber remains on service, operating results benefit from the recurring payments of the fixed, periodic fees without incurring additional selling
expenses or other fixed costs.



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



20



---

##### Table of Contents

planned during the third quarter which are designed to further improve cash flow and operating efficiency. During the first six months of fiscal 2005,
revenues from the telemetry business were less than forecast. Currently, management is less than optimistic that the revenues from the telemetry business will meet expectations during the third quarter based on level of active and qualified sales
leads as well as the progress of the various customer evaluations that are underway. New telemetry products and sales channels continue to be developed. The Company expects to be rolling out at least two new telemetry devices during the third
quarter of 2005.



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



During the quarter ended November 30, 2004, the Company was notified by its
senior lender, First Community Financial Corporation (FCFC), of its intent not to renew the Multiple Advance Promissory note (MAP Note) when it expires on May 1, 2005 and that borrowings under it will be subject to specific
approval while the Company is in default. The Company has defaulted on certain financial covenants during the term of this agreement but has received waivers for all of these events of default. Availability of borrowings under this credit agreement
have allowed the Company to bridge the timing of the receipt of customer payments with its operating cash outflows. The Company has not needed to borrow against this facility during the previous quarter nor does it anticipate needing to borrow
against it through the remainder of its term. If the Company is unable to find another such lending facility, the Company could experience temporary cash shortages in future periods that could cause payments to vendors to be delayed.



Security Business Potential Acquisitions



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



Hawk Security is an entity that originates security monitoring contracts and performs the customer installation and setup of
the systems. State Hawk is a special purpose entity that purchases security monitoring contracts, to-date, exclusively from Hawk Security. State Hawk finances these contract acquisitions through a revolving line of credit that it has secured from a
third party.



21



---

##### Table of Contents

RESULTS OF OPERATIONS



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



|                                                  |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------- |  | ------------------------------ | ------- | - | ---------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                  |  | Three Months EndedNovember 30, |         |   | Six Months EndedNovember 30, |  
|                                                  |  | 2004                           |         |   | 2003                         |   |         | 2004 |  |   | 2003    |  
|Service, rent and maintenance revenue             |  | $                              | 5,094   |   |                              | $ | 5,856   |      |  | $ | 10,436  |   |  | $ | 12,033  |  
|Product sales revenue                             |  |                                | 1,279   |   |                              |   | 699     |      |  |   | 2,382   |   |  |   | 1,471   |  
|                                                  |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Total revenue                                     |  | $                              | 6,373   |   |                              | $ | 6,555   |      |  | $ | 12,818  |   |  | $ | 13,504  |  
|Net book value of products sold                   |  |                                | (1,205  | ) |                              |   | (583    | )    |  |   | (2,203  | ) |  |   | (1,194  | )
|                                                  |  |                                |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|                                                  |  | $                              | 5,168   |   |                              | $ | 5,972   |      |  | $ | 10,615  |   |  | $ | 12,310  |  
|                                                  |  |                                |         |  
|Operating expenses                                |  | $                              | 5,625   |   |                              | $ | 5,920   |      |  | $ | 11,229  |   |  | $ | 12,003  |  
|                                                  |  |                                |         |  
|Operating income (loss)                           |  | $                              | (457    | ) |                              | $ | 52      |      |  | $ | (614    | ) |  | $ | 307     |  
|                                                  |  |                                |         |  
|Net income (loss)                                 |  | $                              | (364    | ) |                              | $ | (53     | )    |  | $ | (586    | ) |  | $ | 51      |  
|                                                  |  |                                |         |  
|Earnings (loss) applicable to common stockholders |  | $                              | (364    | ) |                              | $ | (53     | )    |  | $ | (586    | ) |  | $ | 51      |  
|                                                  |  |                                |         |  
|Earnings (loss) per share  basic                 |  | $                              | (0.08   | ) |                              | $ | (0.01   | )    |  | $ | (0.13   | ) |  | $ | 0.00    |  
|                                                  |  |                                |         |  
|Earnings (loss) per share  diluted               |  | $                              | (0.08   | ) |                              | $ | (0.01   | )    |  | $ | (0.13   | ) |  | $ | 0.00    |  
|                                                  |  |                                |         |  
|Pagers in service at end of period                |  |                                | 169,357 |   |                              |   | 198,949 |      |  |   | 169,357 |   |  |   | 198,949 |  



22



---

##### Table of Contents

Results of Operations for the Three and Six Months ended November 30, 2004 and 2003



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



|                                            |  |                                |       |      |                              |        |  |   |      |   |      |   |        |  |   |        |  |   |        |  
|------------------------------------------- |  | ------------------------------ | ----- | ---- | ---------------------------- | ------ |  | - | ---- | - | ---- | - | ------ |  | - | ------ |  | - | ------ | -
|                                            |  | Three Months EndedNovember 30, |       |      | Six Months EndedNovember 30, |       
|                                            |  | 2004                           |       | 2003 |                              | Change |  |   | 2004 |   | 2003 |   | Change | 
|Service, rent and maintenance revenue       |  |                                |       |      |                              |        |  |   |      |   |      |   |        |  |   |        |  |   |        |  
|Paging                                      |  | $                              | 4,486 |      | $                            | 5,366  |  | $ | (880 | ) |      | $ | 9,207  |  | $ | 11,026 |  | $ | (1,819 | )
|Two Way                                     |  |                                | 452   |      |                              | 305    |  |   | 147  |   |      |   | 924    |  |   | 652    |  |   | 272    |  
|Telemetry                                   |  |                                | 39    |      |                              | 18     |  |   | 21   |   |      |   | 74     |  |   | 30     |  |   | 44     |  
|Other                                       |  |                                | 117   |      |                              | 167    |  |   | (50  | ) |      |   | 231    |  |   | 325    |  |   | (94    | )
|                                            |  |                                |       |      |                              |        |  |   |      |   |      |   |        |  |   |        |  |   |        |  
|Total service, rent and maintenance revenue |  | $                              | 5,094 |      | $                            | 5,856  |  | $ | (762 | ) |      | $ | 10,436 |  | $ | 12,033 |  | $ | (1,597 | )
|                                            |  |                                |       |      |                              |        |  |   |      |   |      |   |        |  |   |        |  |   |        |  
|Product sales revenue                       |  |                                |       |      |                              |        |  |   |      |   |      |   |        |  |   |        |  |   |        |  
|Paging                                      |  | $                              | 166   |      | $                            | 234    |  | $ | (68  | ) |      | $ | 358    |  | $ | 484    |  | $ | (126   | )
|Two Way                                     |  |                                | 979   |      |                              | 344    |  |   | 635  |   |      |   | 1,690  |  |   | 688    |  |   | 1,002  |  
|Telemetry                                   |  |                                | 46    |      |                              | 65     |  |   | (19  | ) |      |   | 162    |  |   | 90     |  |   | 72     |  
|Other                                       |  |                                | 88    |      |                              | 56     |  |   | 32   |   |      |   | 172    |  |   | 209    |  |   | (37    | )
|                                            |  |                                |       |      |                              |        |  |   |      |   |      |   |        |  |   |        |  |   |        |  
|Total product sales revenue                 |  | $                              | 1,279 |      | $                            | 699    |  | $ | 580  |   |      | $ | 2,382  |  | $ | 1,471  |  | $ | 911    |  
|                                            |  |                                |       |      |                              |        |  |   |      |   |      |   |        |  |   |        |  |   |        |  
|Gross Revenue                               |  | $                              | 6,373 |      | $                            | 6,555  |  | $ | (182 | ) |      | $ | 12,818 |  | $ | 13,504 |  | $ | (686   | )
|                                            |  |                                |       |      |                              |        |  |   |      |   |      |   |        |  |   |        |  |   |        |  



Service, rent and
maintenance revenue: The decline in paging service revenues for the three and six months ended November 20, 2004 resulted from fewer pagers in service. Pagers in service decreased to approximately 169,400 as of November 30, 2004 as compared to
approximately 198,900 as of November 30, 2003, due to a continuing decline in the demand for one-way paging service. Paging subscriber loss rates as a percentage of total paging subscribers has remained flat from year to year, however, as the
subscriber base continues to shrink the impact on revenues of these subscriber losses continues to decline.



As discussed earlier, demand for one-way paging services has declined over the past several years and Teletouch anticipates that it will continue to
decline for the foreseeable future, which will result in reductions in service, rent and maintenance revenues due to the lower volume of subscribers.



The increases in two-way service revenues for the three and six months ended November 30, 2004 are due primarily to the acquisition of the customer base
from Delta Communications in the Dallas / Fort Worth, Texas market. The asset purchase transaction with Delta Communications was closed in January 2004.



Teletouch continues to strive to develop new products and services that could partially offset the loss in paging subscribers and the related recurring
revenues. To date, the revenues generated by the Companys new telemetry products have offset only an insignificant portion of the decline in paging revenues. The Company continues to be able to generate sufficient cash to operate the business
as a result of certain cost saving measures it has implemented over the past several years. The Company is currently executing a restructuring of its operations, including the relocation of its corporate offices, organizational changes and other
cost saving measures to offset some of the continuing paging revenue deterioration and ensure sufficient cash to operate the business during the remainder of fiscal 2005 and into fiscal 2006. The Company will be implementing certain programs during
fiscal 2005 in an attempt to stabilize its current paging subscriber base and reduce the



23



---

##### Table of Contents

cost of supporting these customers. Some areas of focus include: more aggressive customer retention efforts, pricing strategies to combat the increasingly
competitive paging market and locating strategic paging carrier partners to share in the relatively fixed network costs of the paging infrastructure.



Product sales revenue: The increase in two-way product sales revenue for the three and six months ended November 30, 2004 is attributable primarily
to certain sales contracts received as a result of the release of federal grant monies under the Homeland Security programs which allow city, county, and local emergency response entities to upgrade their communications equipment.



Total costs and expenses: The changes in Teletouchs total costs
and expenses are shown in the table below (in thousands):



|                                                          |  |                                 |       |   |                               |   |       |        |  |   |      |   |  |      |        |   |        |   |        |   |  |   |      |  
|--------------------------------------------------------- |  | ------------------------------- | ----- | - | ----------------------------- | - | ----- | ------ |  | - | ---- | - |  | ---- | ------ | - | ------ | - | ------ | - |  | - | ---- | -
|                                                          |  | Three Months Ended November 30, |       |   | Six Months Ended November 30, |  
|                                                          |  | 2004                            |       |   | 2003                          |   |       | Change |  |   | 2004 |   |  | 2003 |        |   | Change |  
|Operating expense                                         |  | $                               | 2,737 |   |                               | $ | 2,702 |        |  | $ | 35   |   |  | $    | 5,519  |   |        | $ | 5,512  |   |  | $ | 7    |  
|Selling expense                                           |  |                                 | 505   |   |                               |   | 514   |        |  |   | (9   | ) |  |      | 994    |   |        |   | 1,057  |   |  |   | (63  | )
|General and administrative expense                        |  |                                 | 1,551 |   |                               |   | 1,690 |        |  |   | (139 | ) |  |      | 3,033  |   |        |   | 3,413  |   |  |   | (380 | )
|                                                          |  |                                 |       |   |                               |   |       |        |  |   |      |   |  |      |        |   |        |   |        |   |  |   |      |  
|Operating, selling and general and administrative expense |  | $                               | 4,793 |   |                               | $ | 4,906 |        |  | $ | (113 | ) |  | $    | 9,546  |   |        | $ | 9,982  |   |  | $ | (436 | )
|                                                          |  |                                 |       |   |                               |  
|% of total revenue                                        |  |                                 | 75    | % |                               |   | 75    | %      |  |   |      |   |  |      | 74     | % |        |   | 74     | % |  |   |      |  
|                                                          |  |                                 |       |   |                               |  
|Depreciation and amortization                             |  |                                 | 829   |   |                               |   | 959   |        |  |   | (130 | ) |  |      | 1,734  |   |        |   | 1,954  |   |  |   | (220 | )
|(Gain) loss on disposal of assets                         |  |                                 | 3     |   |                               |   | 55    |        |  |   | (52  | ) |  |      | (51    | ) |        |   | 67     |   |  |   | (118 | )
|                                                          |  |                                 |       |   |                               |   |       |        |  |   |      |   |  |      |        |   |        |   |        |   |  |   |      |  
|Total costs and expenses                                  |  | $                               | 5,625 |   |                               | $ | 5,920 |        |  | $ | (295 | ) |  | $    | 11,229 |   |        | $ | 12,003 |   |  | $ | (774 | )
|                                                          |  |                                 |       |   |                               |   |       |        |  |   |      |   |  |      |        |   |        |   |        |   |  |   |      |  



Operating, selling
and general and administrative expenses:Operating, selling and general and administrative expense consist of the following significant items (in thousands):



|                                                          |  |                                |       |      |                              |        |  |   |      |   |      |   |        |  |   |       |  |   |      |  
|--------------------------------------------------------- |  | ------------------------------ | ----- | ---- | ---------------------------- | ------ |  | - | ---- | - | ---- | - | ------ |  | - | ----- |  | - | ---- | -
|                                                          |  | Three Months EndedNovember 30, |       |      | Six Months EndedNovember 30, |       
|                                                          |  | 2004                           |       | 2003 |                              | Change |  |   | 2004 |   | 2003 |   | Change | 
|Tower lease expense                                       |  | $                              | 694   |      | $                            | 571    |  | $ | 123  |   |      | $ | 1,426  |  | $ | 1,137 |  | $ | 289  |  
|Third party airtime and network telco costs               |  |                                | 867   |      |                              | 853    |  |   | 14   |   |      |   | 1,641  |  |   | 1,726 |  |   | (85  | )
|Salaries and other personnel expense                      |  |                                | 1,924 |      |                              | 2,028  |  |   | (104 | ) |      |   | 3,874  |  |   | 4,080 |  |   | (206 | )
|Office expense                                            |  |                                | 270   |      |                              | 353    |  |   | (83  | ) |      |   | 596    |  |   | 719   |  |   | (123 | )
|Professional fees                                         |  |                                | 206   |      |                              | 257    |  |   | (51  | ) |      |   | 482    |  |   | 552   |  |   | (70  | )
|Stock-based compensation expense                          |  |                                | 41    |      |                              | 37     |  |   | 4    |   |      |   |       |  |   | 148   |  |   | (148 | )
|Other expenses                                            |  |                                | 791   |      |                              | 807    |  |   | (16  | ) |      |   | 1,527  |  |   | 1,620 |  |   | (93  | )
|                                                          |  |                                |       |      |                              |        |  |   |      |   |      |   |        |  |   |       |  |   |      |  
|Operating, selling and general and administrative expense |  | $                              | 4,793 |      | $                            | 4,906  |  | $ | (113 | ) |      | $ | 9,546  |  | $ | 9,982 |  | $ | (436 | )
|                                                          |  |                                |       |      |                              |        |  |   |      |   |      |   |        |  |   |       |  |   |      |  



| |  | The increase in tower lease expense is primarily the result of additional tower leases entered into or assumed by the Company as a result of the acquisition of substantially all the
assets of Delta Communications, Inc. and Preferred Networks, Inc. in fiscal 2004.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



24



---

##### Table of Contents

| |  | The decrease in third party airtime and network telco costs, for the six months ended November 30, 2004 from the same period in the prior year, is due primarily to better rates
negotiated by the Company and to a lesser extent by a reduction in paging subscribers.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The decrease in salaries and other personnel expense and office expense reflects the effects of closing substantially all of the Companys retail stores during fiscal 2003 and
2004 and a reduction in the number of service centers remaining open. This decrease in salaries was partially offset by the Companys hiring of Thomas A. Hyde, Jr. as Chief Executive Officer during the second quarter of fiscal 2005.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



Operating costs as a percentage of total revenue
have remained constant while the Companys paging subscriber base continues to decline for the three and six months ended November 30, 2004 as compared to the same period in fiscal year 2004. Although, the Company has a relatively fixed cost
structure related to maintaining its paging network which includes rental of tower space or other fixed location space for its transmitting equipment, telecommunication charges to connect its paging network, and repair and maintenance costs, the
Company has been able to reduce its operating expenses over the past year at a rate relative to its losses in revenues. As the Company moves forward with the potential acquisitions of the security business its plan is to leverage the operations of
Teletouch to grow the new businesses. The new businesses may afford opportunities in geographic areas that are becoming difficult to justify for paging only operations. Therefore, it is likely that the Company will retain its infrastructure and the
related operating expenses in these geographic areas pending completion of the potential acquisitions on the expectation that the new revenue opportunities will justify the expenses. The retaining of certain operating expenses in anticipation of new
revenue opportunities coupled with a continuing decline in paging subscribers and the related recurring revenues will likely result in an increase in operating expenses as a percentage of total revenue until the Company is able to generate
sufficient new revenue growth.



In December 2004, the Company
relocated its corporate offices and implemented other cost savings measures. The relocation allowed the Company to bring all of its corporate functions together in one facility further improving the efficiency of its operations. Other sales,
operational and organizational changes are planned during the third quarter which will further improve cash flow and operating efficiency. Restructuring of the Companys paging operations will be difficult as the personnel and facilities costs
have been reduced to a level that the Companys management believes that further reductions in these areas may have some negative impact on revenues due to a potential impairment in Teletouchs ability to service its existing customers.
The Company is currently evaluating the profitability of each of its paging systems throughout the Southeast United States. If the revenues on a system were to decline to the point that the system was unprofitable, the Company would be forced to
consider its alternatives, which could include shutting that system down and forfeiting the revenues associated unless it is able to convert those customers to another compatible system. Currently, the Company has identified a few paging systems
that it operates that have suffered subscriber deterioration to a point that the system is currently unprofitable. Teletouch is currently evaluating the best way to reduce or eliminate these losses.



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



(Gain) loss on disposal of assets:The Company sold
certain excess paging infrastructure equipment acquired from an asset acquisition completed in May 2004 resulting in a gain for the six months ended November 30, 2004.



25



---

##### Table of Contents

Income taxes: The effective benefit tax rate is 29% for the six months ended November 30, 2004,
primarily a result of the interest expense related to the redeemable common stock warrants being non-deductible for tax purposes. The Company made a $5,000 cash payment for estimated federal income taxes during the quarter ended November 30, 2004.



FINANCIAL CONDITION



|                                      |  |                              |       |   |      |   |        |        |  |   |      
|------------------------------------- |  | ---------------------------- | ----- | - | ---- | - | ------ | ------ |  | - | -----
|                                      |  | Six Months EndedNovember 30, |       |   |     
|(in thousands)                        |  | 2004                         |       |   | 2003 |   |        | Change
|Cash provided by operating activities |  | $                            | 2,040 |   |      | $ | 1,554  |        |  | $ | 486  
|Cash used in investing activities     |  |                              | (809  | ) |      |   | (1,321 | )      |  |   | 512  
|Cash used in financing activities     |  |                              | (44   | ) |      |   | (462   | )      |  |   | 418  
|                                      |  |                              |       |   |      |   |        |        |  |   |      
|Net increase (decrease) in cash       |  | $                            | 1,187 |   |      | $ | (229   | )      |  | $ | 1,416
|                                      |  |                              |       |   |      |   |        |        |  |   |      



Operating Activities



Teletouchs cash balance was $1.3 million as of
November 30, 2004 as compared to $0.1 million at May 31, 2004. Cash provided by operating activities increased to $2.0 million for the six months ended November 30, 2004 from $1.6 million for the six months ended November 30, 2003. The increase in
cash provided by operations during the six months ended November 30, 2004 over the same period in the prior year is primarily due to $571,000 in federal income taxes paid in the prior year compared to only $5,000 in federal income taxes paid during
the current year. During the prior year the Company paid the income taxes for fiscal year 2002 which were unusually high due to certain earnings recognized on the forgiveness of some of the Companys debt obligations. Additionally, the Company
has reduced its level of inventories by decreasing its purchasing during the current year which contributed cash to the business. These improvements to cash provided by operating activities were offset by $637,000 less net income during the fiscal
2005 as compared to fiscal 2004. A large portion of the net loss recognized this year resulted from inventory write-offs of $562,000 as compared to inventory write-offs of $314,000 during the same period in the prior year. A small portion of these
inventory write-offs are a normal part of the business but the larger portion of the write-offs related to certain paging and telemetry inventory that became obsolete due to changes in the Companys product lines or its channels of
distribution.



The Company expects that cash flow provided from
operations, together with the Companys existing credit facilities, will be sufficient to fund its working capital needs during the remainder of fiscal 2005. The Company continually evaluates its operations in an attempt to reduce costs to help
ensure that it is able to meet its operating cash requirements during the remainder of the year. In December 2004, the Company relocated its corporate offices and eliminated headcount from its field operations and its corporate office. The
relocation allowed the Company to bring all of its corporate functions together in one facility further improving the efficiency of its operations. Other sales, operational and organizational changes are planned during the third quarter which will
further improve cash flow and operating efficiency.



Investing Activities



Cash used by investing activities decreased during the
six months ended November 30, 2004 as compared to the same period in the prior year due to a $247,000 reduction in capital expenditures, primarily pagers, and during the prior year, the Company funded a note receivable to Streamwaves.com, Inc. in
the amount of $250,000 for which there was no similar transaction in the current year.



26



---

##### Table of Contents

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 $0.9 million and $1.1 million for the first six months of fiscal years 2005 and 2004, respectively.
Teletouch anticipates capital expenditures to continue to decline during the remainder of fiscal 2005 due primarily to the continuing decline in the number of leased pagers in service, which will result in total capital expenditures declining as
compared to fiscal 2004. Additionally, the Company plans to replace only necessary equipment to maintain the paging infrastructure. Teletouch expects to pay for these expenditures with cash generated from operations.



Financing Activities



The decrease in cash used by financing activities for the six months ended November 30, 2004 as compared to the same period
in the prior year was due primarily to approximately $350,000 less in principal payments made on the Companys credit agreement with TLL Partners (TLL Note).



Current Position/Future Requirements



Based on current and anticipated levels of operations, the Companys management anticipates that net cash provided by operating activities including
the effects of planned restructuring activities, together with the $1.3 million of cash on hand will be adequate to meet its anticipated cash requirements for the foreseeable future. Revenues from the Companys telemetry product lines have
continued to be insignificant during the three and six months ended November 30, 2004 and management expects that revenues from the telemetry product line will continue to be insignificant through at least the third quarter of fiscal 2005 due to the
level of activity and qualified sales leads as well as the progress of the various customer evaluations that are underway. New telemetry products and channels continue to be developed but are being developed slowly due to the capital requirements of
this activity.



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



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



As of November 30, 2004, the Company has no borrowings outstanding under its $2.2 million promissory note with TLL Partners,. Any borrowings under this
arrangement are subject to the approval of the PCCI Board of Directors and availability of funds. TLL Partners is a wholly owned subsidiary of PCCI. The Company has had limited borrowings under this agreement in the past and has been given no
assurances from TLL Partners or PCCI that the necessary approval would be given by the PCCI Board of Directors to fund any future operating or capital needs of the Company.



27



---

##### Table of Contents

Under the Companys credit agreement with FCFC, the Company has available borrowings of up to $2.0
million which is dependent on the Companys accounts receivable borrowing base. As of November 30, 2004, the Companys allowable borrowings under the First Community Financial Corporation revolving line of credit were $0.3 million. Under
this credit facility, $0.0 million was funded as of November 30, 2004.



During the first and second quarter of fiscal 2005, the Company was unable to maintain compliance with certain financial covenants under the FCFC loan agreement but these covenants were waived by FCFC to allow the Company to remain in good
standing for these periods. The FCFC loan agreement is a revolving line of credit that the Company has utilized during the first quarter to bridge the timing of the receipt of customer payments with its operating cash outflows. Effective February 1,
2004, the Company negotiated an extension of its loan agreement with FCFC through May 1, 2005 which included modifications to certain of the financial covenants in the agreement. During the quarter ended November 30, 2004, FCFC has advised the
Company that it will not renew the MAP Note when it comes due on May 1, 2005 and that borrowings under it will be subject to specific approval while the Company is unable to meet certain financial covenants under the agreement even if those
violations would be waived by FCFC.



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



28



---

##### Table of Contents

Obligations and Commitments



As of November 30, 2004, our contractual payment obligations under our long-term debt agreements and operating leases for
office and transmitter locations are indicated in the table below. For purposes of the table below, purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding and that specify significant
terms, including: fixed or minimum quantities to be purchased, minimum pricing and the approximate timing of transactions. Teletouch has no such purchase obligations at November 30, 2004. Other long-term liabilities is comprised of certain
redeemable common stock warrants issued in conjunction with the Companys debt restructuring in May 2002 and certain shares of Teletouch Common Stock to be issued in February 2005 in conjunction with the purchase of certain assets from Delta
Communications, Inc.



|                                               |  |       |       |                 |   |          |  |          |       |                  |   |     |  |   |   
|---------------------------------------------- |  | ----- | ----- | --------------- | - | -------- |  | -------- | ----- | ---------------- | - | --- |  | - | --
|(in thousands)                                 |  | Total |       | Less than1 Year |   | 1-3Years |  | 3-5Years |       | More than5 Years
|Contractual Obligations                        |  |       |       |                 |   |          |  |          |       |                  |   |     |  |   |   
|Debt obligations                               |  | $     | 224   |                 | $ | 75       |  | $        | 145   |                  | $ | 4   |  | $ |  
|Operating lease obligations                    |  |       | 5,648 |                 |   | 2,344    |  |          | 2,607 |                  |   | 671 |  |   | 26
|Purchase obligations                           |  |       |      |                 |   |         |  |          |      |                  |   |    |  |   |  
|Other long-term liabilities                    |  |       | 3,648 |                 |   | 436      |  |          | 3,212 |                  |   |    |  |   |  
|                                               |  |       |       |                 |   |          |  |          |       |                  |   |     |  |   |   
|Total significant contractual cash obligations |  | $     | 9,520 |                 | $ | 2,855    |  | $        | 5,964 |                  | $ | 675 |  | $ | 26
|                                               |  |       |       |                 |   |          |  |          |       |                  |   |     |  |   |   



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, revenue recognition and certain accrued liabilities. Teletouch bases its estimates on historical experience and various other
assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.



Allowance for Doubtful Accounts: Estimates are used in determining the allowance for doubtful accounts and are based on historic collection experience, current trends and a percentage of the accounts receivable aging
categories. In determining these percentages Teletouch reviews historical write-offs, including comparisons of write-offs to provisions for doubtful accounts and as a percentage of revenues; Teletouch compares the ratio of the allowance for doubtful
accounts to gross receivables to historic levels and Teletouch monitors collections amounts and statistics. Teletouchs allowance for doubtful accounts was $235,000 as of November 30, 2004. Based on the information available to the Company,
management believes the allowance for doubtful accounts as of November 30, 2004 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



29



---

##### Table of Contents

comparisons of previous write-offs to provision for inventory obsolescence and the inventory count compared to recent sales trends. Prior to fiscal 2004,
inventory obsolescence has been within our expectations and the provision established. During fiscal 2004 and the first quarter of fiscal 2005, the Company recorded additional reserves for inventory obsolescence to recognize the deterioration in the
market value of certain pager, cellular and electronics and telemetry inventory. Pager inventory was impaired primarily due to a decline in market value of certain damaged pagers that are repaired by the Company. Cellular and electronic inventory
became impaired after many months of attempting to sell off this excess equipment and the Company recorded a reserve equaling the total value of this inventory. Certain telemetry inventory, primarily related to the Companys fixed monitoring
product line, was impaired subsequent to the Company exiting this business line. Other telemetry inventory became impaired due to technical problems that were not corrected by the Companys vendors. Teletouch management cannot guarantee that
the Company will continue to experience the same obsolescence rates that it has in the past which could result in material differences in the reserve for inventory obsolescence and the related inventory write-offs. The reserve for inventory
obsolescence was $588,000 at November 30, 2004.



Revenue
Recognition: Teletouchs revenue consists primarily of monthly service and lease revenues charged to customers on a monthly, quarterly, semi-annual or annual basis. Deferred revenue represents prepaid monthly service fees paid by
customers. Revenue also includes sales of messaging devices, two-way radios, telemetry devices and other products directly to customers and resellers. Teletouch recognizes revenue over the period the service is performed in accordance with SEC Staff
Accounting Bulletin No. 104, Revenue Recognition in Financial Statements (SAB 104). SAB 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists, (2)
delivery has occurred or services rendered, (3) the fee is fixed and determinable, and (4) collectibility is reasonably assured. Teletouch believes, relative to sales of one-way messaging equipment, that all of these conditions are met, therefore,
product revenue is recognized at the time of shipment. Revenue from sales of other products is recognized upon delivery.



Recent Accounting Pronouncements



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



In December 2004, the FASB issued SFAS No.153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions. The amendments made by Statement 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for
nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Previously, Opinion 29 required that the accounting for an exchange of a productive
asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. Opinion 29 provided an exception to its basic measurement principle (fair value)
for exchanges of similar productive assets. The Board believes that exception required that some nonmonetary exchanges, although commercially substantive, be recorded on a carryover basis. By focusing the exception on exchanges that lack commercial
substance, the Board believes this Statement produces financial reporting that more



30



---

##### Table of Contents

faithfully represents the economics of the transactions. The Statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date of issuance. The provisions of this Statement shall be applied prospectively. The Company does not anticipate
that the adoption of SFAS 153 will have a significant impact on the Companys overall results of operations or financial position.



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



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



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



Operational Risks



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



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



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



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



31



---

##### Table of Contents

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



Teletouchs future revenue growth is not dependent on any single or small group subscriber base, but will continue to concentrate on business accounts and on individuals interested in continuity, quality and personal service. As of the
quarter ended November 30, 2004, Teletouch had approximately 169,400 pagers in service as compared to approximately 198,900 pagers in service at November 30, 2003. 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 improve subscriber growth and retention.



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



Despite the Companys implementation of
preventative 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 affect on our financial condition.



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



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



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



32



---

##### Table of Contents

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.



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.



33



---

##### Table of Contents

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



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



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



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



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



Industry Risks



Our products are subject to
government regulation.



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



34



---

##### Table of Contents

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 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.



35



---

##### Table of Contents

|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------



The risk inherent in Teletouchs market risk sensitive instruments, such as its credit facilities is the potential loss arising from adverse changes
in interest rates. The credit facility with FCFC, comprised of the MAP Note is subject to a variable interest rate. The MAP Note is a short term revolving line of credit that is borrowed against and repaid as often as daily. Due to the revolving
nature of the MAP Note and the Companys ability to choose whether to obligate itself through borrowings, the inherent risk in the MAP Note is minimal related to changes in interest rates. As of November 30, 2004, the Company had no borrowings
outstanding under the MAP Note.



We did not have any foreign
currency hedges or other derivative financial instruments as of November 30, 2004. We do not enter into financial instruments for trading or speculative purposes and do not currently utilize derivative financial instruments. Our operations are
conducted primarily in the United States and as such are not subject to material foreign currency exchange rate risk.



|Item 4. | Controls and Procedures
|------- | -----------------------



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



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



36



---

##### Table of Contents

Part II. Other Information



|Item 1. | Legal Proceedings
|------- | -----------------



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



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



None



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------



None



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



None



|Item 5. | Other Information
|------- | -----------------



None



37



---

##### Table of Contents

|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



38



---

##### Table of Contents

SIGNATURES



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



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



39