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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 August 31, 2005



OR



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



For the transition period from
 to



Commission File Number 1-13436



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)



---



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 ̈No x



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



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



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



Common Stock, $.001 par value  48,796,667 shares outstanding as of November 9, 2005



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##### Table of Contents



TELETOUCH COMMUNICATIONS,
INC.



TABLE OF CONTENTS



|                              |  |                                                                                                            |  |         
|----------------------------- |  | ---------------------------------------------------------------------------------------------------------- |  | --------
|                              |  |                                                                                                            |  | Page No.
|Part I. Financial Information |  |                                                                                                           
|                              |  |                                                                                                           
|Item 1.                       |  | Financial Statements - Teletouch Communications, Inc.                                                      |  | 4       
|                              |  |                                                                                                           
|                              |  | Consolidated Balance Sheets as of August 31, 2005 (Unaudited) and May 31, 2005 (Unaudited)                 |  | 4       
|                              |  |                                                                                                           
|                              |  | Consolidated Statements of Operations - Three Months Ended August 31, 2005 and August 31, 2004 (Unaudited) |  | 6       
|                              |  |                                                                                                           
|                              |  | Consolidated Statements of Cash Flows - Three Months Ended August 31, 2005 and August 31, 2004 (Unaudited) |  | 7       
|                              |  |                                                                                                           
|                              |  | Notes to Consolidated Financial Statements                                                                 |  | 8       
|                              |  |                                                                                                           
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                      |  | 21      
|                              |  |                                                                                                           
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                 |  | 41      
|                              |  |                                                                                                           
|Item 4.                       |  | Controls and Procedures                                                                                    |  | 41      
|                              | 
|Part II. Other Information    |  |                                                                                                           
|                              |  |                                                                                                           
|Item 1.                       |  | Legal Proceedings                                                                                          |  | 42      
|                              |  |                                                                                                           
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                |  | 42      
|                              |  |                                                                                                           
|Item 3.                       |  | Defaults Upon Senior Securities                                                                            |  | 42      
|                              |  |                                                                                                           
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                        |  | 42      
|                              |  |                                                                                                           
|Item 5.                       |  | Other Information                                                                                          |  | 42      
|                              |  |                                                                                                           
|Item 6.                       |  | Exhibits                                                                                                   |  | 43      
|                              |  |                                                                                                           
|                              |  | Signatures                                                                                                 |  | 44      



2



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Forward-Looking Statements



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



3



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PART 1  FINANCIAL
INFORMATION



|Item 1. | Financial Statements
|------- | --------------------



TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except
share data)



|                                                                                                                    |  |                |        |   |             |   |        |  
|------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | - | ----------- | - | ------ | -
|                                                                                                                    |  | August 31,2005 |        |   | May 31,2005 |  
|ASSETS                                                                                                              |  |                |        |   |             |   |        |  
|CURRENT ASSETS:                                                                                                     |  |                |        |   |             |   |        |  
|Cash and cash equivalents                                                                                           |  | $              | 1,172  |   |             | $ | 1,283  |  
|Accounts receivable, net of allowance of $112 in fiscal 2006 and $106 in fiscal 2005                                |  |                | 1,342  |   |             |   | 1,265  |  
|Inventories, net of reserve of $183 in fiscal 2006 and $105 in fiscal 2005                                          |  |                | 869    |   |             |   | 906    |  
|Current income tax receivable                                                                                       |  |                | 652    |   |             |   | 689    |  
|Deferred income tax assets                                                                                          |  |                | 77     |   |             |   | 52     |  
|Prepaid expenses and other current assets                                                                           |  |                | 302    |   |             |   | 247    |  
|                                                                                                                    |  |                |        |   |             |   |        |  
|Total Current Assets                                                                                                |  |                | 4,414  |   |             |   | 4,442  |  
|                                                                                                                    |  |                |        |   |             |   |        |  
|PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $15,846 in fiscal 2006 and $15,609 in fiscal 2005 |  |                | 5,102  |   |             |   | 5,660  |  
|                                                                                                                    |  |                |        |   |             |   |        |  
|GOODWILL                                                                                                            |  |                | 343    |   |             |   | 343    |  
|                                                                                                                    |  |                |        |   |             |   |        |  
|                                                                                                                    |  |               
|OTHER INTANGIBLE ASSETS:                                                                                            |  |                |        |   |             |   |        |  
|Subscriber bases                                                                                                    |  |                | 226    |   |             |   | 226    |  
|FCC licenses                                                                                                        |  |                | 103    |   |             |   | 103    |  
|Non-compete agreements                                                                                              |  |                | 95     |   |             |   | 95     |  
|Internally-developed software                                                                                       |  |                | 149    |   |             |   | 149    |  
|Accumulated amortization                                                                                            |  |                | (296   | ) |             |   | (269   | )
|                                                                                                                    |  |                |        |   |             |   |        |  
|Total Other Intangible Assets                                                                                       |  |                | 277    |   |             |   | 304    |  
|                                                                                                                    |  |                |        |   |             |   |        |  
|DEFERRED INCOME TAXES                                                                                               |  |                | 98     |   |             |   | 86     |  
|                                                                                                                    |  |                |        |   |             |   |        |  
|TOTAL ASSETS                                                                                                        |  | $              | 10,234 |   |             | $ | 10,835 |  
|                                                                                                                    |  |                |        |   |             |   |        |  



See Accompanying Notes
to Consolidated Financial Statements



4



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TELETOUCH COMMUNICATIONS,
INC. AND SUBSIDIARIES

Consolidated Balance Sheet

(unaudited)

(in thousands, except share data)



|                                                                                                                                                              |  |                |         |   |             |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ----------- | - | ------- | -
|                                                                                                                                                              |  | August 31,2005 |         |   | May 31,2005 |  
|                                                                                                                                                              |  | (unaudited)    |         |   |             |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                          |  |                |         |   |             |   |         |  
|CURRENT LIABILITIES:                                                                                                                                          |  |                |         |   |             |   |         |  
|Accounts payable                                                                                                                                              |  | $              | 1,090   |   |             | $ | 1,038   |  
|Accrued Expenses and other current liabilities                                                                                                                |  |                | 1,706   |   |             |   | 2,131   |  
|Current portion of long-term debt                                                                                                                             |  |                | 86      |   |             |   | 74      |  
|Current portion of redeemable common stock payable                                                                                                            |  |                | 266     |   |             |   | 352     |  
|Current portion of unearned sale/leaseback profit                                                                                                             |  |                | 418     |   |             |   | 418     |  
|Deferred revenue                                                                                                                                              |  |                | 838     |   |             |   | 595     |  
|                                                                                                                                                              |  |                |         |   |             |   |         |  
|Total Current Liabilities                                                                                                                                     |  |                | 4,404   |   |             |   | 4,608   |  
|                                                                                                                                                              |  |                |         |   |             |   |         |  
|LONG-TERM LIABILITIES:                                                                                                                                        |  |                |         |   |             |   |         |  
|Long-term debt, net of current portion                                                                                                                        |  |                | 108     |   |             |   | 102     |  
|Redeemable common stock purchase warrants                                                                                                                     |  |                | 2,196   |   |             |   | 2,100   |  
|Redeemable common stock payable, net of current portion                                                                                                       |  |                | 64      |   |             |   | 88      |  
|Unearned sale/leaseback profit, net of current portion                                                                                                        |  |                | 534     |   |             |   | 640     |  
|                                                                                                                                                              |  |                |         |   |             |   |         |  
|Total long-term liabilities                                                                                                                                   |  |                | 2,902   |   |             |   | 2,930   |  
|                                                                                                                                                              |  |                |         |   |             |   |         |  
|TOTAL LIABILITIES                                                                                                                                             |  |                | 7,306   |   |             |   | 7,538   |  
|                                                                                                                                                              |  |                |         |   |             |   |         |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                 |  |                |         |   |             |   |         |  
|                                                                                                                                                              |  |               
|SHAREHOLDERS EQUITY :                                                                                                                                        |  |                |         |   |             |   |         |  
|Series A cumulative convertible preferred stock, $.001 par value, 15,000 shares authorized and 0 shares issued and outstanding in fiscal 2006
and fiscal 2005 |  |                |        |   |             |   |        |  
|Series B convertible preferred stock, $.001 par value, 411,457 shares authorized 0 shares issued and outstanding in fiscal 2006 and fiscal
2005               |  |                |        |   |             |   |        |  
|Series C convertible preferred stock, $.001 par value, 1,000,000 shares authorized, issued and outstanding in fiscal 2006 and fiscal
2005                     |  |                | 1       |   |             |   | 1       |  
|Common stock, $.001 par value, 70,000,000 shares authorized and 5,416,189 shares issued in fiscal 2006 and fiscal 2005                                        |  |                | 5       |   |             |   | 5       |  
|Additional paid-in capital                                                                                                                                    |  |                | 31,977  |   |             |   | 31,915  |  
|Treasury Stock, 537,959 shares held in fiscal 2006 and 429,209 shares held in fiscal 2005                                                                     |  |                | (185    | ) |             |   | (185    | )
|Accumulated deficit                                                                                                                                           |  |                | (28,870 | ) |             |   | (28,439 | )
|                                                                                                                                                              |  |                |         |   |             |   |         |  
|Total Shareholders Equity                                                                                                                                    |  |                | 2,928   |   |             |   | 3,297   |  
|                                                                                                                                                              |  |                |         |   |             |   |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                    |  | $              | 10,234  |   |             | $ | 10,835  |  
|                                                                                                                                                              |  |                |         |   |             |   |         |  



See Accompanying Notes
to Consolidated Financial Statements



5



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TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except
shares and per share amounts)



|                                                                                                        |  |                               |           |   |      |   |           |  
|------------------------------------------------------------------------------------------------------- |  | ----------------------------- | --------- | - | ---- | - | --------- | -
|                                                                                                        |  | Three Months Ended August 31, |          
|                                                                                                        |  | 2005                          |           |   | 2004 |  
|Operating revenues:                                                                                     |  |                               |           |   |      |   |           |  
|Service, rent, and maintenance revenue                                                                  |  | $                             | 4,579     |   |      | $ | 5,342     |  
|Product sales revenue                                                                                   |  |                               | 919       |   |      |   | 1,103     |  
|                                                                                                        |  |                               |           |   |      |   |           |  
|Total operating revenues                                                                                |  |                               | 5,498     |   |      |   | 6,445     |  
|                                                                                                        |  |                               |           |   |      |   |           |  
|Operating expenses:                                                                                     |  |                               |           |   |      |   |           |  
|Cost of service, rent and maintenance (exclusive of depreciation and amortization included below)       |  |                               | 2,651     |   |      |   | 2,782     |  
|Cost of products sold                                                                                   |  |                               | 673       |   |      |   | 998       |  
|Selling and general and administrative                                                                  |  |                               | 1,730     |   |      |   | 1,971     |  
|Depreciation and amortization                                                                           |  |                               | 761       |   |      |   | 905       |  
|Gain on disposal of assets                                                                              |  |                               | (1        | ) |      |   | (54       | )
|                                                                                                        |  |                               |           |   |      |   |           |  
|Total operating expenses                                                                                |  |                               | 5,814     |   |      |   | 6,602     |  
|                                                                                                        |  |                               |           |   |      |   |           |  
|Operating loss                                                                                          |  |                               | (316      | ) |      |   | (157      | )
|                                                                                                        |  |                              
|Interest expense, net                                                                                   |  |                               | (115      | ) |      |   | (103      | )
|                                                                                                        |  |                               |           |   |      |   |           |  
|Loss before income tax benefit                                                                          |  |                               | (431      | ) |      |   | (260      | )
|Income tax expense benefit                                                                              |  |                               |          |   |      |   | (38       | )
|                                                                                                        |  |                               |           |   |      |   |           |  
|Net loss                                                                                                |  | $                             | (431      | ) |      | $ | (222      | )
|                                                                                                        |  |                               |           |   |      |   |           |  
|Basic and diluted loss per share                                                                        |  | $                             | (0.09     | ) |      | $ | (0.05     | )
|                                                                                                        |  |                               |           |   |      |   |           |  
|Denominator for basic and diluted loss per share - weighted average number of common shares outstanding |  |                               | 4,880,558 |   |      |   | 4,546,980 |  
|                                                                                                        |  |                               |           |   |      |   |           |  



See Accompanying Notes
to Consolidated Financial Statements



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TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)



|                                                                  |  |                               |       |   |      |   |      |  
|----------------------------------------------------------------- |  | ----------------------------- | ----- | - | ---- | - | ---- | -
|                                                                  |  | Three Months Ended August 31, |      
|                                                                  |  | 2005                          |       |   | 2004 |  
|Operating Activities:                                             |  |                               |       |   |      |   |      |  
|Net loss                                                          |  | $                             | (431  | ) |      | $ | (222 | )
|Depreciation and amortization                                     |  |                               | 761   |   |      |   | 905  |  
|Non-cash compensation expense                                     |  |                               | 62    |   |      |   | (42  | )
|Non-cash interest expense                                         |  |                               | 100   |   |      |   | 84   |  
|Provision for losses on accounts receivable                       |  |                               | 10    |   |      |   | 36   |  
|Provision for inventory obsolescence                              |  |                               | 46    |   |      |   | 230  |  
|Gain on disposal of assets                                        |  |                               | (1    | ) |      |   | (54  | )
|Amortization of unearned sale/leaseback profit                    |  |                               | (106  | ) |      |   | (106 | )
|Deferred income taxes                                             |  |                               | (37   | ) |      |   | (13  | )
|Changes in operating assets and liabilities, net of acquisitions: |  |                               |       |   |      |   |      |  
|Accounts receivable, net                                          |  |                               | (87   | ) |      |   | 120  |  
|Inventories                                                       |  |                               | 14    |   |      |   | 7    |  
|Prepaid expenses and other assets                                 |  |                               | (55   | ) |      |   | (6   | )
|Accounts payable                                                  |  |                               | 52    |   |      |   | (422 | )
|Accrued Expenses and other current liabilities                    |  |                               | (388  | ) |      |   | 97   |  
|Deferred revenue                                                  |  |                               | 243   |   |      |   | 261  |  
|                                                                  |  |                               |       |   |      |   |      |  
|Net cash provided by operating activities                         |  |                               | 183   |   |      |   | 875  |  
|                                                                  |  |                               |       |   |      |   |      |  
|Investing Activities:                                             |  |                               |       |   |      |   |      |  
|Capital expenditures, including pagers                            |  |                               | (207  | ) |      |   | (439 | )
|Intangible assets                                                 |  |                               |      |   |      |   | (3   | )
|Proceeds from sale of assets                                      |  |                               | 40    |   |      |   | 66   |  
|                                                                  |  |                               |       |   |      |   |      |  
|Net cash used for investing activities                            |  |                               | (167  | ) |      |   | (376 | )
|                                                                  |  |                               |       |   |      |   |      |  
|Financing Activities:                                             |  |                               |       |   |      |   |      |  
|Proceeds from borrowings                                          |  |                               |      |   |      |   | 10   |  
|Payments on long-term debt and redeemable common stock            |  |                               | (127  | ) |      |   | (6   | )
|                                                                  |  |                               |       |   |      |   |      |  
|Net cash provided by (used) for financing activities              |  |                               | (127  | ) |      |   | 4    |  
|                                                                  |  |                               |       |   |      |   |      |  
|Net increase (decrease) in cash and cash equivalents              |  |                               | (111  | ) |      |   | 503  |  
|Cash and cash equivalents at beginning of period                  |  |                               | 1,283 |   |      |   | 72   |  
|                                                                  |  |                               |       |   |      |   |      |  
|Cash and cash equivalents at end of period                        |  | $                             | 1,172 |   |      | $ | 575  |  
|                                                                  |  |                               |       |   |      |   |      |  
|Supplemental Cash Flow Data:                                      |  |                               |       |   |      |   |      |  
|Cash payments for interest                                        |  | $                             | 15    |   |      | $ | 19   |  
|                                                                  |  |                               |       |   |      |   |      |  
|Non-Cash Transactions:                                            |  |                               |       |   |      |   |      |  
|Purchase Price Adjustment-Delta Communications, Inc.              |  | $                             |      |   |      | $ | 43   |  
|                                                                  |  |                               |       |   |      |   |      |  
|Exchange of Note Receivable for Note Payable                      |  | $                             |      |   |      | $ | 258  |  
|                                                                  |  |                               |       |   |      |   |      |  
|Transfer of pager inventory to fixed assets                       |  | $                             | 21    |   |      | $ | 141  |  
|                                                                  |  |                               |       |   |      |   |      |  
|Purchase of vehicles with bank financing                          |  | $                             | 31    |   |      | $ |     |  
|                                                                  |  |                               |       |   |      |   |      |  



See Accompanying Notes
to Consolidated Financial Statements



7



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##### Table of Contents

TELETOUCH COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



NOTE 1  BASIS OF PRESENTATION



The accompanying unaudited interim consolidated financial statements included herein have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission (SEC). The interim condensed consolidated financial statements include the consolidated accounts of Teletouch Communications, Inc. and our wholly-owned subsidiaries (collectively, the
Company or Teletouch). In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of financial position, results of operations and cash flows for the interim
periods presented have been made. The results of operations for the three months ended August 31, 2005, are not necessarily indicative of the results to be expected for the full year.



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



Financial Condition and Going Concern: As of
August 31, 2005, the Companys consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company incurred net losses of $431,000 and $222,000 in the quarters ended August 31,
2005 and 2004, respectively as a result of continued declines in its paging revenues. As of August 31, 2005, the Company had a working capital surplus of only $10,000. The Company has sustained its operations primarily through continuous cost
reductions. During 2005, the Company attempted to secure additional debt financing to fund a potential acquisition and provide additional working capital to the Company but was unable to do so due to the declining performance of the Companys
paging business. As a result of the continued deterioration of the Companys financial position and its operating results, the Company now plans to sell substantially all of the assets of the Company (see Note 11 to the Consolidated Financial
Statements). The sale of the Companys core businesses, combined with additional financing, is expected to generate sufficient cash to enable the Company to acquire a profitable and growing business that would offset the embedded overhead costs
of being a public company and return the Company to a state of profitability. There can be no assurance, however, that we will be successful in selling the assets related to the paging and two way businesses, or that we will be able to complete any
additional debt or equity financing on favorable terms.



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



8



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##### Table of Contents

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



NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



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



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



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



|                                                                                                                  |  |                               |       |   |      |   |       |  
|----------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ----- | - | ---- | - | ----- | -
|                                                                                                                  |  | Three months ended August 31, |      
|                                                                                                                  |  | 2005                          |       |   | 2004 |  
|Net loss applicable to common shareholders as reported                                                            |  | $                             | (431  | ) |      | $ | (222  | )
|Plus stock-based employee compensation expense included in reported net loss, net of related tax effects          |  |                               | 62    |   |      |   | (27   | )
|Less total stock-based employee compensation determined under fair-value-based method, net of related tax effects |  |                               | (31   | ) |      |   | (5    | )
|                                                                                                                  |  |                               |       |   |      |   |       |  
|Pro forma net loss                                                                                                |  | $                             | (400  | ) |      | $ | (254  | )
|                                                                                                                  |  |                               |       |   |      |   |       |  
|Loss per share - basic:                                                                                           |  |                               |       |   |      |   |       |  
|As reported                                                                                                       |  | $                             | (0.09 | ) |      | $ | (0.05 | )
|                                                                                                                  |  |                               |       |   |      |   |       |  
|Pro forma                                                                                                         |  | $                             | (0.08 | ) |      | $ | (0.06 | )
|                                                                                                                  |  |                               |       |   |      |   |       |  
|Loss per share - diluted:                                                                                         |  |                               |       |   |      |   |       |  
|As reported                                                                                                       |  | $                             | (0.09 | ) |      | $ | (0.05 | )
|                                                                                                                  |  |                               |       |   |      |   |       |  
|Pro forma                                                                                                         |  | $                             | (0.08 | ) |      |   | 0.06  |  
|                                                                                                                  |  |                               |       |   |      |   |       |  



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



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



At August 31, 2005 and 2004, the following securities were outstanding but were not included in the computation of diluted earnings per share due to
their antidilutive effect (in thousands):



|                               |  |                |  |               
|------------------------------ |  | -------------- |  | --------------
|                               |  | August 31,2005 |  | August 31,2004
|Common stock options           |  | 1,879          |  | 1,442         
|Common stock purchase warrants |  | 6,000          |  | 6,000         
|Series C Preferred Stock       |  | 44,000         |  | 44,000        
|                               |  |                |  |               
|                               |  | 51,879         |  | 51,442        
|                               |  |                |  |               



NOTE 3  INVENTORY



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



|                                      |  |                 |       |         |              |      |           |  |   |      |   |         |   |       |           |   |      |   |  |   |     |  
|------------------------------------- |  | --------------- | ----- | ------- | ------------ | ---- | --------- |  | - | ---- | - | ------- | - | ----- | --------- | - | ---- | - |  | - | --- | -
|                                      |  | August 31, 2005 |       |         | May 31, 2005 |     
|                                      |  | Cost            |       | Reserve |              |      | Net Value |  |   | Cost |   | Reserve |   |       | Net Value |  
|Pagers and parts                      |  | $               | 370   |         | $            | (52  | )         |  | $ | 318  |   |         | $ | 383   |           | $ | (38  | ) |  | $ | 345 |  
|Two Way radios and parts              |  |                 | 407   |         |              | (18  | )         |  |   | 389  |   |         |   | 390   |           |   | (16  | ) |  |   | 374 |  
|Telemetry devices and parts           |  |                 | 275   |         |              | (65  | )         |  |   | 210  |   |         |   | 238   |           |   | (11  | ) |  |   | 227 |  
|                                      |  |                 |       |         |              |      |           |  |   |      |   |         |   |       |           |   |      |   |  |   |     |  
|Total inventory and specific reserves |  | $               | 1,052 |         | $            | (135 | )         |  | $ | 917  |   |         | $ | 1,011 |           | $ | (65  | ) |  | $ | 946 |  
|                                      |  |                 |       |         |              |     
|General obsolescence reserve          |  |                 |      |         |              | (48  | )         |  |   | (48  | ) |         |   |      |           |   | (40  | ) |  |   | (40 | )
|                                      |  |                 |       |         |              |      |           |  |   |      |   |         |   |       |           |   |      |   |  |   |     |  
|Total inventory and reserves          |  | $               | 1,052 |         | $            | (183 | )         |  | $ | 869  |   |         | $ | 1,011 |           | $ | (105 | ) |  | $ | 906 |  
|                                      |  |                 |       |         |              |      |           |  |   |      |   |         |   |       |           |   |      |   |  |   |     |  



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NOTE 4  PROPERTY, PLANT AND EQUIPMENT



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



|                           |  |                |         |   |             |   |         |  
|-------------------------- |  | -------------- | ------- | - | ----------- | - | ------- | -
|                           |  | August 31,2005 |         |   | May 31,2005 |  
|Leased pagers and radios   |  | $              | 2,493   |   |             | $ | 2,671   |  
|Paging infrastructure      |  |                | 16,017  |   |             |   | 16,176  |  
|Buildings and improvements |  |                | 386     |   |             |   | 386     |  
|Other equipment            |  |                | 2,052   |   |             |   | 2,036   |  
|                           |  |                |         |   |             |   |         |  
|                           |  |                | 20,948  |   |             |   | 21,269  |  
|Accumulated depreciation   |  |                | (15,846 | ) |             |   | (15,609 | )
|                           |  |                |         |   |             |   |         |  
|                           |  | $              | 5,102   |   |             | $ | 5,660   |  
|                           |  |                |         |   |             |   |         |  



Depreciation expense
was $735,200 million and $875,600 million for the quarters ended August 31, 2005 and August 31, 2004, respectively.



Property, plant and equipment is recorded at cost. Depreciation is computed using the straight-line method. The following table contains the property,
plant and equipment by estimated useful life, net of accumulated depreciation as of August 31, 2005 (in thousands):



|                       |  |                  |     |             |   |             |  |               |     |               |   |         |  |                |       |  |   |    |  |   |      
|---------------------- |  | ---------------- | --- | ----------- | - | ----------- |  | ------------- | --- | ------------- | - | ------- |  | -------------- | ----- |  | - | -- |  | - | -----
|                       |  | Less than3 years |     | 3 to 4years |   | 5 to 9years |  | 10 to 14years |     | 15 to 19years |   | 20years |  | Total NetValue
|Buildings              |  | $                |    |             | $ |            |  | $             |    |               | $ |        |  | $              | 4     |  | $ | 9  |  | $ | 13   
|LAN & Other Computers  |  |                  |    |             |   | 207         |  |               | 28  |               |   |        |  |                |      |  |   |   |  |   | 235  
|Equipment              |  |                  |    |             |   | 25          |  |               | 3   |               |   | 3       |  |                |      |  |   |   |  |   | 31   
|Furniture & Fixtures   |  |                  |    |             |   | 31          |  |               |    |               |   | 25      |  |                |      |  |   |   |  |   | 56   
|Leasehold Improvements |  |                  | 74  |             |   | 2           |  |               | 1   |               |   |        |  |                |      |  |   |   |  |   | 77   
|Office Equipment       |  |                  |    |             |   | 4           |  |               | 5   |               |   | 1       |  |                |      |  |   |   |  |   | 10   
|Paging Infrastructure  |  |                  |    |             |   | 14          |  |               | 288 |               |   | 110     |  |                | 2,274 |  |   | 3  |  |   | 2,689
|Vehicles               |  |                  |    |             |   |            |  |               | 240 |               |   |        |  |                |      |  |   |   |  |   | 240  
|Pager Fleet            |  |                  |    |             |   | 1,638       |  |               |    |               |   |        |  |                |      |  |   |   |  |   | 1,638
|Radio Fleet            |  |                  |    |             |   | 7           |  |               |    |               |   |        |  |                |      |  |   |   |  |   | 7    
|Assets Not In Service  |  |                  | 106 |             |   |            |  |               |    |               |   |        |  |                |      |  |   |   |  |   | 106  
|                       |  |                  |     |             |   |             |  |               |     |               |   |         |  |                |       |  |   |    |  |   |      
|                       |  | $                | 180 |             | $ | 1,928       |  | $             | 565 |               | $ | 139     |  | $              | 2,278 |  | $ | 12 |  | $ | 5,102
|                       |  |                  |     |             |   |             |  |               |     |               |   |         |  |                |       |  |   |    |  |   |      



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NOTE 5  GOODWILL AND OTHER INTANGIBLE ASSETS



Intangible Assets with Indefinite Lives: In accordance with SFAS No. 142,Goodwill and Other Intangible
Assets, the Company performs an annual impairment test of goodwill. The changes in the carrying amount of intangible assets with indefinite lives for the year ended August 31, 2005 are as follows (in thousands):



|                                                                        |  |          |      |  
|----------------------------------------------------------------------- |  | -------- | ---- | -
|                                                                        |  | Goodwill |     
|Balance at May 31, 2004                                                 |  | $        | 883  |  
|Purchase price adjustments related to acquisition in 2004 (see note 17) |  |          | 11   |  
|Impairment charges in fourth quarter 2005                               |  |          | (551 | )
|                                                                        |  |          |      |  
|Balance at May 31, 2005                                                 |  | $        | 343  |  
|                                                                        |  |          |      |  
|Impairment charges in first quarter 2006                                |  |          |     |  
|                                                                        |  |          |      |  
|Balance at August 31, 2006                                              |  | $        | 343  |  
|                                                                        |  |          |      |  



The reported goodwill
of the Company at August 31, 2005 and May 31, 2005 relates entirely to the two way radio segment and was purchased in the acquisition of the two way radio assets of Delta Communications and Electronics, Inc. which was completed in January
2004.



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



|                                   |  |                     |     |                         |   |      |                  |  |                     |     |                         |   |     |                  |   |      |   |  |   |    
|---------------------------------- |  | ------------------- | --- | ----------------------- | - | ---- | ---------------- |  | ------------------- | --- | ----------------------- | - | --- | ---------------- | - | ---- | - |  | - | ---
|                                   |  | August 31, 2005     |     | May 31, 2005           
|                                   |  | GrossCarryingAmount |     | AccumulatedAmortization |   |      | NetCarryingValue |  | GrossCarryingAmount |     | AccumulatedAmortization |   |     | NetCarryingValue
|Business combinations:             |  |                     |     |                         |   |      |                  |  |                     |     |                         |   |     |                  |   |      |   |  |   |    
|Subscriber bases                   |  | $                   | 226 |                         | $ | (149 | )                |  | $                   | 77  |                         | $ | 226 |                  | $ | (143 | ) |  | $ | 83 
|FCC licenses                       |  |                     | 103 |                         |   | (18  | )                |  |                     | 85  |                         |   | 103 |                  |   | (15  | ) |  |   | 88 
|Non-compete agreements             |  |                     | 95  |                         |   | (30  | )                |  |                     | 65  |                         |   | 95  |                  |   | (25  | ) |  |   | 70 
|                                   |  |                     |     |                         |   |      |                  |  |                     |     |                         |   |     |                  |   |      |   |  |   |    
|                                   |  | $                   | 424 |                         | $ | (197 | )                |  | $                   | 227 |                         | $ | 424 |                  | $ | (183 | ) |  | $ | 241
|Internally developed assets:       |  |                     |     |                         |   |      |                  |  |                     |     |                         |   |     |                  |   |      |   |  |   |    
|Software                           |  |                     | 149 |                         |   | (99  | )                |  |                     | 50  |                         |   | 149 |                  |   | (86  | ) |  |   | 63 
|                                   |  |                     |     |                         |   |      |                  |  |                     |     |                         |   |     |                  |   |      |   |  |   |    
|Balance at August and May 31, 2005 |  | $                   | 573 |                         | $ | (296 | )                |  | $                   | 277 |                         | $ | 573 |                  | $ | (269 | ) |  | $ | 304
|                                   |  |                     |     |                         |   |      |                  |  |                     |     |                         |   |     |                  |   |      |   |  |   |    



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



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



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



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Total amortization expense for the first three months ended August 31, 2005 and 2004 was
approximately $26,000 and $29,000, respectively.



NOTE 6  ACCRUED
EXPENSES AND OTHER CURRENT LIABILITIES



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



|                                            |  |                |       |             |   |      
|------------------------------------------- |  | -------------- | ----- | ----------- | - | -----
|                                            |  | August 31,2005 |       | May 31,2005
|Accrued payroll and other personnel expense |  | $              | 612   |             | $ | 999  
|Accrued state and local taxes               |  |                | 286   |             |   | 221  
|Unvouchered accounts payable                |  |                | 647   |             |   | 589  
|Customer deposits payable                   |  |                | 56    |             |   | 118  
|Other                                       |  |                | 105   |             |   | 204  
|                                            |  |                |       |             |   |      
|Total                                       |  | $              | 1,706 |             | $ | 2,131
|                                            |  |                |       |             |   |      



NOTE 7  INCOME TAXES



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



Significant components of
the Companys deferred taxes as of August 31, 2005 and May 31, 2005 are as follows (in thousands):



|                                      |  |                |       |   |             |   |       |  
|------------------------------------- |  | -------------- | ----- | - | ----------- | - | ----- | -
|                                      |  | August 31,2005 |       |   | May 31,2005 |  
|Current Deferred Tax Assets:          |  |                |       |   |             |   |       |  
|Accrued liabilities                   |  | $              | 35    |   |             | $ | 32    |  
|Inventory reserves                    |  |                | 26    |   |             |   |      |  
|Deferred revenue                      |  |                | 40    |   |             |   | 39    |  
|Bad debt reserve                      |  |                | 33    |   |             |   | 31    |  
|                                      |  |                |       |   |             |   |       |  
|                                      |  |                | 134   |   |             |   | 102   |  
|Valuation Allowance                   |  |                | (50   | ) |             |   | (32   | )
|                                      |  |                |       |   |             |   |       |  
|Net Current Deferred Tax Assets       |  |                | 84    |   |             |   | 70    |  
|Non-Current Deferred Tax Assets:      |  |                |       |   |             |   |       |  
|Unrecognized gain                     |  |                | 324   |   |             |   | 360   |  
|Intangible assets                     |  |                | 1,484 |   |             |   | 1,541 |  
|                                      |  |                |       |   |             |   |       |  
|                                      |  |                | 1,808 |   |             |   | 1,901 |  
|Valuation Allowance                   |  |                | (680  | ) |             |   | (589  | )
|                                      |  |                |       |   |             |   |       |  
|Net Non-Current Deferred Tax Assets   |  |                | 1,128 |   |             |   | 1,312 |  
|                                      |  |                |       |   |             |   |       |  
|                                      |  |               
|Deferred Tax Liabilities:             |  |                |       |   |             |   |       |  
|Current Deferred Tax Liabilities:     |  |                |       |   |             |   |       |  
|Other                                 |  |                | 7     |   |             |   | 18    |  
|                                      |  |                |       |   |             |   |       |  
|Non-Current Deferred Tax Liabilities: |  |                |       |   |             |   |       |  
|Depreciation methods                  |  |                | 1,030 |   |             |   | 1,226 |  
|                                      |  |                |       |   |             |   |       |  
|Net Current Deferred Tax Asset        |  | $              | 77    |   |             | $ | 52    |  
|                                      |  |                |       |   |             |   |       |  
|Net Non-Current Deferred Tax Asset    |  | $              | 98    |   |             | $ | 86    |  
|                                      |  |                |       |   |             |   |       |  



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NOTE 8  RELATED PARTY TRANSACTIONS



The Company had certain related party sales, purchases and incurred certain expenses during the three months ended
August 31, 2005 and August 31, 2004 with Progressive Concepts, Inc. (PCI) a company controlled by Robert McMurrey, Teletouchs Chairman.



The Company primarily purchases call center services from PCI to support the Companys existing answering service accounts within the paging segment
of its business and to support a monitoring contract that the Company has with an unrelated telemetry provider. The call center services are $30,000 per month to support Teletouchs current answering service accounts plus an additional monthly
charge based on the call volume and number of subscribers being serviced related to the telemetry monitoring contract. The telemetry monitoring contract was executed by the Company during the first quarter of fiscal 2006. During the three months
ended August 31, 2005, the Company incurred $141,000 in call center charges to PCI as compared to $90,000 in the same three months of the prior year.



NOTE 9  SHAREHOLDERS EQUITY



Common Stock Purchase Warrants: At August 31, 2005, the Company has 6,000,000 issued and outstanding warrants (the GM Warrants) to
purchase shares of Teletouch Common Stock. The GM Warrants will be exercisable beginning in December of 2005, terminating in December of 2010. In December of 2007 or earlier upon specific events, the holder of the GM Warrants may require the Company
to redeem the warrants at $0.50 per warrant. Because of this mandatory redemption feature, the Company has recorded the estimated fair value of the GM Warrants as a long-term liability on its consolidated balance sheet, and will adjust the amount to
reflect changes in the fair value of the warrants, including accretion in value due to the passage of time, with such changes charged or credited to interest expense.



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



|     |  |                              |    
|---- |  | ---------------------------- | ---
|     |  | Interest Expense($ in 000s)
|2006 |  | $                            | 410
|2007 |  | $                            | 490



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



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



|                                               |  |           |      |        |        
|---------------------------------------------- |  | --------- | ---- | ------ | -------
|Date in Which Stock Can be Put Back to Company |  | Put Price |      | Shares
|September 1, 2005 - November 30, 2005          |  | $         | 1.05 |        | 142,735
|December 1, 2005 - November 30, 2006           |  | $         | 1.10 |        | 183,515
|December 1, 2006 - November 30, 2007           |  | $         | 1.15 |        |        
|                                               |  |           |      |        |        
|                                               |  |           |      |        | 326,250
|                                               |  |           |      |        |        



The following table
provides a rollforward of the redeemable common stock held by Delta through August 31, 2005 (dollars in thousands):



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



On September 29,
2005 Delta put back an additional 81,563 shares of its redeemable common stock at $1.05 per share receiving a cash payment of $85,641 from the Company.



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



Series C Preferred Stock: At August 31,
2005, 1,000,000 shares of Series C Preferred Stock with a par value of $0.001 are issued and outstanding.



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



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On November 1, 2005, 1,000,000 shares of Series C Preferred Stock were converted into 44,000,000
shares of Common Stock.



NOTE 10  SEGMENT INFORMATION



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



The following summarizes the Companys financial results for each segment for the three months ended August 31, 2005 and August 31, 2004 (in thousands):



|                                            |  |                              |       |      |   |      
|------------------------------------------- |  | ---------------------------- | ----- | ---- | - | -----
|                                            |  | Three Months EndedAugust 31,
|                                            |  | 2005                         |       | 2004
|Service, rent and maintenance revenue       |  |                              |       |      |   |      
|Paging                                      |  | $                            | 4,047 |      | $ | 4,836
|Two Way                                     |  |                              | 489   |      |   | 472  
|Other                                       |  |                              | 43    |      |   | 34   
|                                            |  |                              |       |      |   |      
|Total service, rent and maintenance revenue |  | $                            | 4,579 |      | $ | 5,342
|                                            |  |                              |       |      |   |      
|Product sales revenue                       |  |                              |       |      |   |      
|Paging                                      |  | $                            | 116   |      | $ | 188  
|Two Way                                     |  |                              | 754   |      |   | 774  
|Other                                       |  |                              | 49    |      |   | 141  
|                                            |  |                              |       |      |   |      
|Total product sales revenue                 |  | $                            | 919   |      | $ | 1,103
|                                            |  |                              |       |      |   |      
|Operating revenue                           |  | $                            | 5,498 |      | $ | 6,445
|                                            |  |                              |       |      |   |      



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Reconciliation of adjusted EBITDA to net income (loss):



|                                          |  |                              |        |   |      |   |        |  
|----------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                          |  | Three Months EndedAugust 31, |       
|(dollars in thousands)                    |  | 2005                         |        |   | 2004 |  
|Adjusted EBITDA                           |  |                              |        |   |      |   |        |  
|Paging                                    |  | $                            | 2,653  |   |      | $ | 2,649  |  
|Two Way                                   |  |                              | 46     |   |      |   | 184    |  
|Corporate Overhead                        |  |                              | (1,912 | ) |      |   | (2,031 | )
|Other                                     |  |                              | (280   | ) |      |   | (160   | )
|                                          |  |                              |        |   |      |   |        |  
|Total adjusted EBITDA                     |  | $                            | 507    |   |      | $ | 642    |  
|                                          |  |                              |        |   |      |   |        |  
|Less non-recurring and non-cash expenses: |  |                              |        |   |      |   |        |  
|Restructure expense                       |  | $                            | 1      |   |      | $ | (10    | )
|Compensation Exp-Stock Options            |  |                              | 62     |   |      |   | (42    | )
|                                          |  |                              |        |   |      |   |        |  
|                                          |  | $                            | 63     |   |      | $ | (52    | )
|                                          |  |                              |        |   |      |   |        |  
|Less:                                     |  |                              |        |   |      |   |        |  
|Depreciation and amortization             |  | $                            | 761    |   |      | $ | 905    |  
|Interest expense, net                     |  |                              | 115    |   |      |   | 103    |  
|Gain on disposal of assets                |  |                              | (1     | ) |      |   | (54    | )
|Federal income tax                        |  |                              |       |   |      |   | (38    | )
|                                          |  |                              |        |   |      |   |        |  
|                                          |  | $                            | 875    |   |      | $ | 916    |  
|                                          |  |                              |        |   |      |   |        |  
|Net loss                                  |  | $                            | (431   | ) |      | $ | (222   | )
|                                          |  |                              |        |   |      |   |        |  



The Company measures
accounts receivable, inventory and property, plant and equipment by segments. A component of corporate assets is cash in the amount of $1.2 million and $1.3 million as of August 31, 2005 and May 31, 2005, respectively. Also, included in
corporate assets is related party accounts receivable, deferred income taxes, prepaid expenses and property, plant and equipment.



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



|             |  |                |        |             |   |       
|------------ |  | -------------- | ------ | ----------- | - | ------
|             |  | August 31,2005 |        | May 31,2005
|Assets       |  |                |        |             |   |       
|Paging       |  | $              | 4,929  |             | $ | 5,517 
|Two Way      |  |                | 2,632  |             |   | 2,520 
|Corporate    |  |                | 2,264  |             |   | 2,421 
|Other        |  |                | 409    |             |   | 377   
|             |  |                |        |             |   |       
|Total Assets |  | $              | 10,234 |             | $ | 10,835
|             |  |                |        |             |   |       



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.



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NOTE 11  SUBSEQUENT EVENTS



Sale of Businesses



On July 7, 2005, the Board of Directors of the Company (the Board) met and reviewed a proposal made by management to sell the
Companys core paging and two-way radio businesses to raise the necessary cash to acquire unidentified high growth businesses in the future. Prior to this meeting, management had obtained a draft letter of intent from a prospective buyer of the
paging business, which was presented to the Board at this meeting. After review of the information presented by management, which included the future business direction of the Company, its ability to continue to operate as a going concern and the
estimated value of its paging and two-way radio business units, the Board met on July 10, 2005 and authorized the Companys management to continue negotiations with the prospective buyer of the paging business. Additionally, the Board
authorized the Company to solicit offers on the two-way radio business and considered an offer from J. Kernan Crotty, the President and CFO of the Company, to buy the Companys two-way radio business. These and other matters are described
below.



Sale of Paging Business



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



The assets included in the asset sale transaction include
substantially all of the designated assets of the paging business (the Acquired Assets) with a net carrying value at August 31, 2005 of approximately $4.0 million.



The Buyers aggregate consideration for the Acquired Assets was originally contemplated to be approximately $5.25
million as of August 31, 2005 and will be payable as follows: (i) $4,000,000 less the cumulative cash flows attributable to the paging business from September 1, 2005 through the closing date to be payable in cash to the Company on
the closing date, (ii) $1,200,000 non-interest bearing note payable to the Company due in 12 monthly payments of $100,000 each beginning the earlier of the date that Buyer has satisfied its obligations under its senior borrowings or
August 31, 2007 and (iii) the assumption of approximately $50,000 notes payable related to vehicles being sold (collectively, the Purchase Price). Because the transaction is not expected to close before January 16, 2006, the
consideration received by the Company for the sale will be reduced by an estimated $2.0 million which approximated the operating cash flow of the paging business from September 1, 2005 through January 16, 2006. Further delays in closing this
transaction will reduce the purchase price by approximately $0.4 million per month. The $1.2 million promissory note payable to the Company will be secured by a lien on the assets subject to customary subordination provisions required by the
Buyers senior lender. The Company has concluded that the collectibility of the $1.2 million note from the Buyer which is dependent on the future earnings of the paging business cannot be assured at this time. Therefore, in accordance with
Staff Accounting Bulletin (SAB) Topic 5E, the Company has decided to defer the gain on the transaction and record the $1.2 million note as it is paid. Although the $1.2 million note is secured by the assets being sold, the Company
believes that recording the note upon the closing of the transaction would not be proper and should be treated as contingent consideration paid for the paging business since the promissory note is subordinate to the Buyers senior lender and no
payments can be made until the senior lender is paid in full, its repayment is dependent on the future cash flows of the newly formed Buyer and the paging business being sold has been declining for some time and its future cash flows are
questionable.



The Purchase Price is subject to adjustment
based on the Companys net working capital, as defined in the APA, at closing and the value of any excess net working capital transferred will be paid to the



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Company by the Buyer within 45 days of closing. As of August 31, 2005, approximately $81,000 in excess working capital, as defined in the APA, is
related to the paging business and would be transferred to the Buyer if the transaction were to have closed at that date. Because the levels of working capital change monthly, there is no way to estimate the balance that will exist as of closing.



The APA does not contemplate any termination or breakup fees
or penalties. The APA also contains representations and warranties, indemnification and other provisions customary for agreements of this nature. Closing of the APA is contingent upon obtaining the approval of the Companys shareholders as well
as approvals from federal regulators and other customary closing conditions. The absence of these approvals at this stage presents transaction risks. The transaction is expected to close within ten days following the receipt of the required
shareholder approval. The Company is preparing proxy solicitation materials in connection with a special meeting of the shareholders of the Company to be held to vote on this proposed asset sale transaction. However, the special meeting of the
Companys shareholders is not expected to occur before November 30, 2005 due to certain delays encountered in the filing of the Companys Annual Report on Form 10-K for the year ended May 31, 2005 which delay, in turn, is causing
a delay in the Companys filing of its proxy statement for this special meeting.



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



Possible Sale of Two-Way Radio Business



As of the date of this filing, the Company has not
identified a buyer for its two-way radio business. On July 22, 2005, the Company received a letter of intent from J. Kernan Crotty, President and CFO of Teletouch, to purchase the assets of the two-way radio business for $1.05 million less an
allowance for deferred revenue. The Board considered the terms and provisions of this offer. However, the letter of intent expired as of August 31, 2005 in accordance with its terms and provisions. No further action has been taken with regard
to the letter of intent. Because of the effort involved in completing the sale transaction of the Companys paging business and the delays anticipated in closing that transaction, the Company has delayed its consideration of the offer on the
two-way business. While the Company is continuing to solicit other offers in connection with the possible sale of its two-way radio business, it does not preclude the possibility of extending Mr. Crottys letter of intent. As of the date
hereof, no such extension has been executed.



The assets to be
included in the asset sale transaction include substantially all of the designated assets of the two-way radio business with a net carrying value at August 31, 2005 of approximately $1.0 million.



Redemption of Common Stock Purchase Warrants



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



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Company is trying to negotiate a reduction in the amount due to the Warrant Holders upon the closing of the sale transaction and believes if it is
unsuccessful in reaching terms on this obligation the warrant holders may vote against the sale of the paging business.



If the Company is unsuccessful in negotiating a settlement or alternative arrangement with the holders of the GM Warrants and continues with the sale of
the paging business, the Company may be obligated to redeem the GM Warrants for $3,000,000 shortly after the closing on the sale of the paging business. As of August 31, 2005, the Company has recorded this as a long-term liability at its fair
value of $2,195,995. The GM Warrants are being accreted in value over time to their settlement value of $3,000,000 in May 2007 according to their original terms. If the Company is unsuccessful in negotiating a settlement or alternative arrangement
with the holders of the GM Warrants and continues with the sale of the paging business, the Company will record a charge to net income equal to the difference in the carrying value of the GM Warrants at that date and $3,000,000 and this amount will
be classified as a current liability which may be paid after the closing on the sale of the paging business. Further, under rights included in the GM Warrants, the warrant holders may be permitted to vote separately as a class on matters involving
the sale of substantially all of the assets of the Company. This right applies to the sale of the Companys paging business (discussed above) and the approval of this transaction may be dependent on receiving an affirmative vote from the
holders of the GM Warrants.



AMEX Listing Matters



On September 2, 2005, the American Stock Exchange (AMEX)
notified the Company that as a result of the Companys failure to file its Annual Report on Form 10-K for the fiscal year ended May 31, 2005 within the prescribed timeframe, the Company was not in compliance with the currency in public
reporting continued listing requirement under the AMEX Company Guide. On November 8, 2005, the Company filed its Annual Report on Form 10-K but by that date it had become delinquent on its filing of this Form 10-Q. The filing of this Form 10-Q,
restores the Companys compliance with the AMEX currency requirements.



Conversion of Series C Preferred Stock



On
September 30, 2005, the Company received notice from TLL Partners, a company controlled by Robert McMurrey, Chairman of the Board, of its intent to convert all of its 1,000,000 shares Series C Preferred Stock into shares of common stock of the
Company. Under the terms of the Series C Preferred Stock, each share of Series C Preferred Stock is convertible into 44 shares of common stock. The conversion of 1,000,000 shares of Series C Preferred Stock results in the issuance of 44,000,000
shares of common stock by the Company. Prior to the conversion, 1,000,000 shares of Series C Preferred Stock were held of record by TLL Partners, Inc., a wholly-owned subsidiary of Progressive Concepts Communications Inc. (PCCI)
(TLL). Mr. McMurrey is the controlling person of PCCI by virtue of his being its majority shareholder. At the Annual Meeting of the Companys shareholders held on November 7, 2002, the shareholders voted to approve, among
other things, the issuance by the Company of 1,000,000 shares of Series C Preferred Stock to TLL Partners, Inc. The terms of Series C Preferred Stock stated that the shares could not be exercised or converted into the common shares until
May 15, 2005.



Upon receipt of the AMEX approval of the
common stock issuance, on November 1, 2005 the Company issued 44,000,000 shares of its common stock to TLL Partners to redeem the outstanding 1,000,000 shares of Series C Preferred Stock.



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



Overview



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



Teletouch is a leading provider of wireless telecommunications services, primarily paging services, in non-major
metropolitan areas and communities in the southeast United States. For the first quarter ending August 31, 2005, the Company had total revenues of $5.5 million as compared to $6.4 million for the first quarter ending August 31, 2004. As of
August 31, 2005, the Company had approximately 131,700 pagers in service as compared to 179,200 pagers in service at August 31, 2004. Teletouch has experienced a substantial decline in the paging business over the last several years and
expects that net subscriber deletions will continue as the demand for one way paging continues to decline. The Company derives the majority of its revenues from fixed, periodic fees, not dependent on usage, charged to subscribers for paging
services. As long as a subscriber remains on service, operating results benefit from the recurring payments of the fixed, periodic fees without incurring additional selling expenses or other fixed costs.



Proposed Sale of Paging and Two Way Radio Businesses



On July 7, 2005, the Board of Directors of the Company (the
Board) met and reviewed a proposal made by management to sell the Companys core paging and two-way radio businesses to raise the necessary cash to acquire unidentified high growth businesses in the future. Prior to this meeting,
management had obtained a draft letter of intent from a prospective buyer of the paging business which was presented to the Board at this meeting. After review of the information presented by management, which included the future business direction
of the Company, its ability to continue to operate as a going concern and the estimated value of its paging and two-way radio business units, the Board met on July 10, 2005 and authorized the Companys management to continue negotiations
with the prospective buyer of the paging business. Additionally, the Board authorized the Company to solicit offers on the two-way radio business and considered an offer from J. Kernan Crotty, the President and CFO of the Company, to buy the
Companys two-way radio business. These and other matters are described below.



On August 22, 2005 the Company entered into an Asset Purchase Agreement dated as of August 22, 2005 to sell substantially all of the assets of its paging business to Teletouch Paging, LP (Buyer),
a newly formed and non-affiliated limited partnership, wholly-owned by a private Fort Worth, Texas investment group. The transaction is expected to close approximately ten days after shareholder approval is obtained. The Buyers aggregate
consideration for the Acquired Assets was originally contemplated to be approximately $5.25 million as of August 31, 2005 and will be payable as follows: (i) $4,000,000 less the cumulative cash flows attributable to the paging business
from September 1, 2005 through the closing date to be payable in cash to the Company on the closing date, (ii) $1,200,000 non-interest bearing note payable to the Company due in 12 monthly payments of $100,000 each beginning the earlier of
the date that Buyer has satisfied its obligations under its senior borrowings or August 31, 2007 and (iii) the assumption of approximately $50,000 notes payable related to vehicles being sold (collectively, the Purchase Price).
Because the transaction is not expected to close before January 15, 2006, the consideration received by the Company for the sale will be reduced by an estimated $2.0 million which approximates the operating cash flow of the paging business from
September 1, 2005 through January 15, 2006. Further delays in closing this transaction will reduce the purchase price by approximately $0.4 million per month. The $1.2



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million promissory note payable to the Company will be secured by a lien on the assets subject to customary subordination provisions required by the
Buyers senior lender. The Purchase Price is subject to adjustment based on the Companys net working capital, as defined in the APA, at closing and the value of any excess net working capital transferred will be paid to the Company by the
Buyer within 45 days of closing.



As a result of certain rights
contained in 6,000,000 redeemable common stock warrants issued by the Company as part of its debt and equity restructuring in 2002, the holders of these warrants (Warrant Holders) may have a right to vote separately as a class on the
sale of the paging business since these rights are triggered upon a sale of substantially all of the assets of the Company, as defined in the warrant agreement. Further, on September 19, 2005, the Warrant Holders notified the
Company of their intent to accelerate the redemption of the warrants based on the same trigger event that may allow them voting rights causing the $3,000,000 redemption value to become due and payable upon the closing of this sale. Under the basic
terms of the warrant agreement the redeemable common stock warrants could not be redeemed until December 2007. The Company is currently negotiating for a reduction in the amount due to the Warrant Holders upon the closing of the sale transaction and
believes if it is unsuccessful in reaching terms on this obligation the warrant holders may vote against the sale of the paging business and block this transaction. Robert M. McMurrey, Chairman of Teletouch and controlling person of TLL Partners
LLC, an entity that owns approximately 89.2% of the outstanding common stock of Teletouch as of the date hereof, has agreed to vote in favor of the transaction unless an agreement cannot be reached with the Companys warrant holders which
reduces the amount payable as a result of the acceleration of the redemption feature of the warrants. The transaction is expected to close within ten days following the receipt of the required shareholder approval. The Company is preparing proxy
solicitation materials in connection with a special meeting of the shareholders of the Company to be held to vote on this proposed asset sale transaction.



As of the date of this filing, the Company has not identified a buyer for its two-way radio business. On July 22, 2005, the Company received a letter
of intent from J. Kernan Crotty, President and CFO of Teletouch, to purchase the assets of the two-way radio business. The Board considered the terms and provisions of this offer. However, the letter of intent expired as of August 31, 2005 in
accordance with its terms and provisions. No further action has been taken with regard to the letter of intent. Because of the effort involved in completing the sale transaction of the Companys paging business and the delays anticipated in
closing that transaction, the Company has delayed its consideration of the offer on the two-way business. While the Company is continuing to solicit other offers in connection with the possible sale of its two-way radio business, it does not
preclude the possibility of extending Mr. Crottys letter of intent. As of the date hereof, no such extension has been executed.



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



2006 Business Strategy



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



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



Three years ago, the Company recognized the trends in its core businesses and began to develop a telemetry business. To date revenues from the telemetry
business have been insignificant. The market for telemetry products is large and relatively new but continued technical issues with our telemetry products have prohibited the Company from growing this business. In October 2005 the Company decided to
restructure its telemetry operations by the end of November 2005. This restructuring will result in changes to the existing telemetry product lines and disposition of certain assets related to the business, however, the Company will retain ownership
of all intellectual property related to this business. The Company will be attempting to sell part of its telemetry customer base that uses products that the Company no longer plans to support as well as dispose of certain finished goods inventory
and fixed assets not directly utilized in supporting the intellectual property or the ongoing product lines. The sale of these assets is planned to occur immediately following the restructuring of the telemetry sales and support functions
anticipated late November 2005.



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



RESULTS OF OPERATIONS



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



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



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



| |  |  | Fixed and variable telecommunication costs, the fixed component of which consists of monthly flat-rate fees for facilities leased from local exchange carriers based
on the
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | number of transmitter sites and switches in service in a particular period and the related equipment installed at each site, and the variable component of
which generally consists of per-minute use fees charged by wireline providers for long distance charges related to customer use of toll free numbers;
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



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Service, Rent and Maintenance Revenue and Cost of Service, Rent and Maintenance for the Three Months ended
August 31, 2005 and August 31, 2004



|                                       |  |                |       |              |    |         |                |   |              |  |    |                           |  |   |      |   |  |     |  
|-------------------------------------- |  | -------------- | ----- | ------------ | -- | ------- | -------------- | - | ------------ |  | -- | ------------------------- |  | - | ---- | - |  | --- | -
|                                       |  |                |       |              |    |         |                |   |              |  |    | Change from Previous Year | 
|                                       |  | August 31,2005 |       | % of OperRev |    |         | August 31,2004 |   | % of OperRev |  |   
|(dollars in thousands)                 |  |                |       |              |    | Dollars |                |   | %            | 
|Service, rent, and maintenance revenue |  |                |       |              |    |         |                |   |              |  |    |                           |  |   |      |   |  |     |  
|Paging                                 |  | $              | 4,047 |              | 74 | %       |                | $ | 4,836        |  | 75 | %                         |  | $ | (789 | ) |  | -16 | %
|Two way radio                          |  |                | 489   |              | 9  | %       |                |   | 472          |  | 7  | %                         |  |   | 17   |   |  | 4   | %
|Telemetry                              |  |                | 43    |              | 1  | %       |                |   | 34           |  | 1  | %                         |  |   | 9    |   |  | 26  | %
|                                       |  |                |       |              |    |         |                |   |              |  |    |                           |  |   |      |   |  |     |  
|Service, rent, and maintenance revenue |  | $              | 4,579 |              | 83 | %       |                | $ | 5,342        |  | 83 | %                         |  | $ | (763 | ) |  | -14 | %
|                                       |  |                |       |              |    |         |                |   |              |  |    |                           |  |   |      |   |  |     |  



Service, Rent
and Maintenance Revenue Discussion for the Three Months Ended August 31, 2005 and August 31, 2004



The 16% decline in paging service revenue for the three months ended August 31, 2005 resulted primarily from fewer pagers in service. Pagers in
service decreased to approximately 131,700 as of August 31, 2005 as compared to approximately 179,200 as of August 31, 2004, due to a continuing decline in the demand for one-way paging service and the completion of the sale of
approximately 15,000 subscribers in the Georgia market to Satellink Communications, Inc. in July, 2005. Paging subscriber loss rates as a percentage of total paging subscribers has remained flat from year to year, however, as the subscriber base
continues to shrink the impact on revenues of these subscriber losses continues to decline. Teletouch anticipates that the demand for one way paging services will continue to decline for the foreseeable future, which will result in reductions in
service, rent and maintenance revenues due to the lower volume of subscribers.



The 26% increase in telemetry service revenue for the three months ended August 31, 2005 is primarily due to the Company beginning to recognize limited sales success in the VisionTrax product line as a
result of the resolution of many of the technical issues experienced with these products in the prior year. A portion of the increase is also attributable to the Company introducing three new telemetry product lines in the last quarter of Fiscal
2005. The primary source of revenue during the quarter ended August 31, 2005 was from services provided for the VisionTrax product which is used to track trailers and rail cars as well as other mobile assets.



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##### Table of Contents

Cost of Service, Rent and Maintenance for the Three Months Ended August 31, 2005 and August 31, 2004



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



|                                            |  |                |       |                |   |                          |  |   |      |  
|------------------------------------------- |  | -------------- | ----- | -------------- | - | ------------------------ |  | - | ---- | -
|(dollars in thousands)                      |  | August 31,2005 |       | August 31,2004 |   | Change fromPrevious Year | 
|Cost of service, rent and maintenance       |  |                |       |                |   |                          |  |   |      |  
|Tower lease expense                         |  | $              | 665   |                | $ | 733                      |  | $ | (68  | )
|Third party airtime and network telco costs |  |                | 685   |                |   | 765                      |  |   | (80  | )
|Salaries and other personnel expense        |  |                | 1,001 |                |   | 976                      |  |   | 25   |  
|Office expense                              |  |                | 162   |                |   | 217                      |  |   | (55  | )
|Other expenses                              |  |                | 138   |                |   | 91                       |  |   | 47   |  
|                                            |  |                |       |                |   |                          |  |   |      |  
|Total cost of service, rent and maintenance |  | $              | 2,651 |                | $ | 2,782                    |  | $ | (131 | )
|                                            |  |                |       |                |   |                          |  |   |      |  



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



Cost of Service, Rent and Maintenance Discussion for the Three Months Ended August 31, 2005 and August 31, 2004



| |  |  | The decrease in tower lease expense for the three months ended August 31, 2005 is primarily due to the sale of the PNI paging network in July 2005 which resulted in a reduction
of tower leases compared with the same period from the prior year.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decrease in third party airtime and network telco costs for the three months ended August 31, 2005 is due to the continued decline in the paging subscriber base as well as
a reduction in paging subscribers with coverage on other affiliates paging network.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A decrease in office expense is attributable to a reduction in the number of service centers and two way locations combined with office re-locations which resulted in lower lease
payments. The Company had 17 paging service center locations and 5 two way locations as of August 31, 2005, as compared to 20 paging service center locations and 6 two way locations as of August 31, 2004.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Sales Revenue and Cost of Products Sold for the Three Months ended August 31, 2005
and August 31, 2004



|                                  |  |                |     |              |    |         |                |   |              |  |    |                           |  |   |      |   |  |     |  
|--------------------------------- |  | -------------- | --- | ------------ | -- | ------- | -------------- | - | ------------ |  | -- | ------------------------- |  | - | ---- | - |  | --- | -
|                                  |  |                |     |              |    |         |                |   |              |  |    | Change from Previous Year | 
|                                  |  | August 31,2005 |     | % of OperRev |    |         | August 31,2004 |   | % of OperRev |  |   
|(dollars in thousands)            |  |                |     |              |    | Dollars |                |   | %            | 
|Product Sales Revenue             |  |                |     |              |    |         |                |   |              |  |    |                           |  |   |      |   |  |     |  
|Pagers and accessories            |  | $              | 116 |              | 2  | %       |                | $ | 188          |  | 3  | %                         |  | $ | (72  | ) |  | -38 | %
|Two way radios and parts          |  |                | 754 |              | 14 | %       |                |   | 774          |  | 12 | %                         |  |   | (20  | ) |  | -3  | %
|Telemetry devices and accessories |  |                | 35  |              | 1  | %       |                |   | 106          |  | 2  | %                         |  |   | (71  | ) |  | -67 | %
|Other                             |  |                | 14  |              | 0  | %       |                |   | 35           |  | 1  | %                         |  |   | (21  | ) |  | -60 | %
|                                  |  |                |     |              |    |         |                |   |              |  |    |                           |  |   |      |   |  |     |  
|Total product sales revenue       |  | $              | 919 |              | 17 | %       |                | $ | 1,103        |  | 17 | %                         |  | $ | (184 | ) |  | -17 | %
|                                  |  |                |     |              |    |         |                |   |              |  |    |                           |  |   |      |   |  |     |  
|Cost of products sold             |  | $              | 673 |              | 12 | %       |                | $ | 998          |  | 15 | %                         |  | $ | (325 | ) |  | -33 | %
|                                  |  |                |     |              |    |         |                |   |              |  |    |                           |  |   |      |   |  |     |  



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##### Table of Contents

Sales Revenue and Cost of Products Sold Discussion for the Three Months Ended August 31, 2005
and August 31, 2004



Product sales revenue:



The 38% decrease in paging sales revenue for the three
months ended August 31, 2005 is attributable primarily to a continuing decline in the paging subscriber base particularly within the wholesale distribution channel which has historically accounted for the largest percentage of the pager
equipment sales while the business customers primarily lease their paging equipment from the Company.



The 67% decrease in telemetry sales revenue is primarily due to the discontinuation of the fixed application product line in fiscal 2005. The fixed
application telemetry devices had relatively high sales prices with low margins but were sold to generate the related recurring revenues. The Companys decision to exit this product line was primarily due to the ongoing service issues with the
products and the inability to generate higher profit margins on the sales due to the competitive market.



Cost of products sold:



The 33% decrease in cost of products sold for the three months ended August 31, 2005 is largely due to the decrease in inventory obsolescence expense
as well as a decline in product sales. Inventory obsolescence expense was $46,000 for the three months ended August 31, 2005 as compared to $230,000 for the three months ended August 31, 2004. The inventory write-offs in the first quarter
of fiscal 2005 were related to slow moving paging inventory and identifying obsolete two way radio and cellular inventory. A portion of the write offs were attributable to the impairment of the majority of the fixed monitoring telemetry devices in
stock after the Company made a decision to withdraw from this product line. The inventory obsolescence expense for the three months ended August 31, 2005 is primarily due to the impairment of the aging VisionTrax and Panther product line.



Selling and General and Administrative Expenses for the Three Months ended
August 31, 2005 and August 31, 2004



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



|                                                    |  |                |       |                |   |       |                          |  |   |      |  
|--------------------------------------------------- |  | -------------- | ----- | -------------- | - | ----- | ------------------------ |  | - | ---- | -
|(dollars in thousands)                              |  | August 31,2005 |       | August 31,2004 |   |       | Change fromPrevious Year | 
|Selling and general and administrative expenses     |  |                |       |                |   |       |                          |  |   |      |  
|Salaries and other personnel expenses               |  | $              | 941   |                | $ | 1,062 |                          |  | $ | (121 | )
|Office expense                                      |  |                | 67    |                |   | 95    |                          |  |   | (28  | )
|Advertising expense                                 |  |                | 18    |                |   | 46    |                          |  |   | (28  | )
|Professional fees                                   |  |                | 186   |                |   | 234   |                          |  |   | (48  | )
|Taxes and Licenses fees                             |  |                | 105   |                |   | 163   |                          |  |   | (58  | )
|Stock-based compensation expense                    |  |                | 62    |                |   | (42   | )                        |  |   | 104  |  
|Other expenses                                      |  |                | 351   |                |   | 413   |                          |  |   | (62  | )
|                                                    |  |                |       |                |   |       |                          |  |   |      |  
|Total selling, general, and administrative expenses |  | $              | 1,730 |                | $ | 1,971 |                          |  | $ | (241 | )
|                                                    |  |                |       |                |   |       |                          |  |   |      |  



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##### Table of Contents

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



Selling and General and Administrative Expenses Discussion for the
Three Months Ended August 31, 2005 and August 31, 2004



| |  |  | The decrease in salaries and other personnel expense for the three months ended August 31, 2005 is due to a reduction in the number of selling and general and administrative
employees, 28 employees as of August 31, 2005 as compared to 57 employees as of August 31, 2004. A portion of the decrease in personnel expenses is attributable to a reduction in management bonus expense expected for 2006.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decrease in taxes and licenses fees for the first three months ended August 31, 2005 compared with the same period from the prior year is primarily due to a $42,300
franchise tax refund accrual due to a Tennessee franchise tax overpayment. The decrease is also attributable to a reduction in ad valorem taxes from lower inventory levels and a reduced number of fixed assets. The decrease in taxes is partially
offset by a $ 50,000 estimated sales tax liability in the first quarter of fiscal 2006 due to a Texas sales tax audit.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The increase in stock-based compensation expense is attributable to an increase in the market price of the Companys stock for the three months ended August 31, 2005 when
compared to the same period from the prior year.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decrease in other expenses for the three months ended August 31, 2005 as compared to August 31, 2004 is attributable to fewer bank and credit card charges due to
reduced number of bank accounts as well as a reduction in bad debt due to greater collection efforts. The decrease is also attributable to lower non-personnel insurance premiums.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Other Operating Expenses for the Three Months Ended
August 31, 2005 and August 31, 2004



|                               |  |                |     |   |                |   |     |                          |  |   |      |  
|------------------------------ |  | -------------- | --- | - | -------------- | - | --- | ------------------------ |  | - | ---- | -
|(dollars in thousands)         |  | August 31,2005 |     |   | August 31,2004 |   |     | Change fromPrevious Year | 
|Depreciation and amortization  |  | $              | 761 |   |                | $ | 905 |                          |  | $ | (144 | )
|Gain on sale of assets         |  |                | (1  | ) |                |   | (54 | )                        |  |   | 53   |  
|                               |  |                |     |   |                |   |     |                          |  |   |      |  
|Total other operating expenses |  | $              | 760 |   |                | $ | 851 |                          |  | $ | (91  | )
|                               |  |                |     |   |                |   |     |                          |  |   |      |  



Other Operating
Expenses Discussion for the Three Months Ended August 31, 2005 and August 31, 2004



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



Gain on sale of assets: The Company recorded a gain of $25,000 on the sale of its network assets in Georgia to
Satellink Communications, Inc. in July 2005. This gain was offset by losses on other paging network assets abandoned during the first quarter of fiscal 2006 due to the Companys efforts to streamline its network and reduce costs. During the
first quarter of fiscal 2005, the Company recognized a gain on the sales of excess network equipment it had purchased from Preferred Networks, Inc. in May 2005.



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##### Table of Contents

Interest Expense, Net of Interest Income for the Three Months Ended August 31,
2005 and August 31, 2004



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



Income Tax Expense (Benefit) for the Three Months Ended
August 31, 2005 and August 31, 2004



The
effective benefit tax rate was 25% prior to a valuation allowance of approximately $109,000 recorded against deferred tax assets resulting in tax expense of $0 for the three months ended August 31, 2005. For the three months ended
August 31, 2004, the Companys effective tax benefit rate was 15%. The difference in the effective benefit rate and the statutory rate is due primarily to interest expense related to the redeemable common stock warrants being
non-deductible for tax purposes.



FINANCIAL CONDITION



|                                      |  |                |      |   |                |   |      |        |  |   |      |  
|------------------------------------- |  | -------------- | ---- | - | -------------- | - | ---- | ------ |  | - | ---- | -
|(dollars in thousands)                |  | August 31,2005 |      |   | August 31,2004 |   |      | Change | 
|Cash provided by operating activities |  | $              | 183  |   |                | $ | 875  |        |  | $ | (692 | )
|Cash used in investing activities     |  |                | (167 | ) |                |   | (376 | )      |  |   | 209  |  
|Cash used in financing activities     |  |                | (127 | ) |                |   | 4    |        |  |   | (131 | )
|                                      |  |                |      |   |                |   |      |        |  |   |      |  
|Net increase (decrease) in cash       |  | $              | (111 | ) |                | $ | 503  |        |  | $ | (614 | )
|                                      |  |                |      |   |                |   |      |        |  |   |      |  



Operating Activities



Teletouchs cash balance was $1.2 million as of
August 31, 2005 as compared to $1.3 million at May 31, 2005. The decrease in cash provided by operations during the three months ended August 31, 2005 over the same period in the prior year is primarily due to a $789,000 reduction in
paging service revenues because of the continuing decline in paging subscribers which contributed to the $272,000 increased net loss as compared to the same quarter in the prior year and the payment of approximately $531,000 in previously accrued
management bonuses related to fiscal 2005. The decrease in cash provided by operations is also due to an increase in accounts receivable by a net amount of $207,000 during the three months ended August 31, 2005 over the same period in the prior
year.



Investing Activities



Cash used by investing activities decreased during the three months ended
August 31, 2005 as compared to the same period in the prior year due to a $201,000 reduction in capital expenditures, primarily related to leased pagers.



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 $238,000 and $439,000 for the first three months of fiscal years 2006 and 2005, respectively. Teletouch anticipates capital expenditures to continue to
decline during the remainder of fiscal 2006 due primarily to the continuing decline in the number of leased pagers in service, which will result in total capital expenditures declining as compared to fiscal 2005. Additionally, the Company plans to
replace only necessary equipment to maintain the paging infrastructure. If the sale of the paging business discussed above does not occur, Teletouch expects to pay for these expenditures with cash generated from operations.



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##### Table of Contents

Financing Activities



The increase in cash used by financing activities for the three months ended August 31, 2005 as compared to the same period in the prior year was
primarily due to the $114,000 payment for the redeemable common stock payable in the first quarter of fiscal 2006.



Current Position/Future Requirements



In order for the Company to continue to generate sufficient cash flow going forward, it will become necessary to exit its core paging and two way radio
businesses in 2006. This decision was made by the Companys Board of directors in July 2005 and the Company has located a buyer for its paging business. The Company has struggled for the past several years to minimize the costs of operating its
paging business in a time of declining revenues. With paging revenues expected to continue declining for the foreseeable future and a relatively fixed cost structure of maintaining the paging network and infrastructure, it has become increasingly
difficult to project being able to maintain a positive cash flow from the paging business. The two way radio business has had some limited revenue growth over the past year due to homeland security grants being made available to local public safety
entities to upgrade their communications systems. We believe these revenue opportunities will extend for the next two years at which time many of these customers utilizing homeland security grant monies today will have limited needs for replacement
or upgrades of their radio systems in future years which will result in a decline in revenues for Teletouch. The two way radio business also operates a radio system on which it sells subscription services. This business has been declining over the
past year as customers migrate to newer technologies including cellular telephones. The Company does not believe the two way radio business is a growth business, although it has been a stable business for the Company for many years. Three years ago,
the Company recognized the trends in its core businesses and began to develop a telemetry business. To date revenues from the telemetry business have been insignificant. The market for telemetry products is large and relatively new but continued
technical issues with our telemetry products have prohibited the Company from growing this business.



The current prospects of the Companys core paging and two way radio business units coupled with the lack of success in the telemetry business led
the Company to look to a strategy that allow the Company to grow the business again in the future. The only solution apparent was to divest the current businesses and buy another business with revenue prospects that could carry the Company forward.
After selling the paging and two way radio business units, the Company plans to acquire one or more growth companies and integrate them into the existing infrastructure at Teletouch. The Company believes that the sale of its core businesses is
necessary at this point while there is still value in these businesses and has currently identified and is in negotiations with several target companies for acquisition. In the interim period after the sale and through the time a new company is
acquired, Teletouch will continue to operate as a publicly traded company and restructure its existing telemetry business to reduce the losses being generated by this business. The Company anticipates integrating its ongoing telemetry operations
with one of the potential acquisition targets. Subsequent to the successful sale of the paging and two way radio business, most of the Companys efforts over the coming months will focus on minimizing expenses of the remaining operations while
securing additional financing to complete an acquisition.



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



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As of August 31, 2005, the Company has no borrowings outstanding under its $2.2 million promissory
note with TLL Partners. Any borrowings under this arrangement are subject to the approval of the PCCI Board of Directors and availability of funds. TLL Partners is a wholly owned subsidiary of PCCI. The Company has had limited borrowings under this
agreement in the past and has been given no assurances from TLL Partners or PCCI that the necessary approval would be given by the PCCI Board of Directors to fund any future operating or capital needs of Teletouch. The Companys management does
not anticipate that the necessary approvals would be granted by the PCCI Board of Directors; therefore, it is operating under the assumption that there are no available borrowings under this agreement.



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 the sale of the two way radio business or complete any acquisitions it is evaluating. If a combination of these events does not occur the Company
may not have sufficient cash to operate the business over the next year from the proceeds of the sale of the paging business alone. The sale of the paging business is contingent on shareholder approval. As a result of the certain rights contained in
6,000,000 redeemable common stock warrants issued by the Company as part of its debt and equity restructuring in 2002, the holders of these warrants (Warrant Holders) have a right to vote separately as a class on the sale of the paging
business since these rights are triggered upon a sale of substantially all of the assets of the Company, as defined in the warrant agreement. Further, on September 19, 2005, the Warrant Holders notified the Company of their intent
to accelerate the redemption of the warrants based on the same trigger event that allows them voting rights causing the $3,000,000 redemption value to become due and payable upon the closing of this sale. Under the basic terms of the warrant
agreement the redeemable common stock warrants could not be redeemed until December 2007. The Company is currently negotiating a reduction in the amount due to the Warrant Holders upon the closing of the sale transaction and believes if it is
unsuccessful in reaching terms on this obligation the warrant holders may vote against the sale of the paging business and therefore block the contemplated asset sale transactions. Robert M. McMurrey, Chairman of Teletouch and controlling person of
TLL Partners LLC, an entity that owns approximately 89.2% of the outstanding common stock of Teletouch as of the date hereof, has agreed to vote in favor of the transaction unless an agreement cannot be reached with the Companys warrant
holders which reduces the amount payable as a result of the acceleration of the redemption feature of the warrants. A special shareholders meeting is planned shortly after the filing of the report to seek approval for the sale of the paging
business.



Going Concern Matters



Based on current and anticipated levels of operations, the Companys
management anticipates that net cash provided by the sale of the paging and two way businesses, if the Company is successful in closing these sales, together with the $1.2 million of cash on hand will be adequate to meet its anticipated cash
requirements for the next twelve months although additional financing will likely be necessary to complete any acquisitions during this period. During the next twelve months, management estimates that it will need approximately $2.2 million to
maintain the administrative and corporate functions of the Company and between $1.0 million and $1.5 million to settle its obligations under its redeemable common stock warrants if the Company is successful in closing on the sale of its paging
business and the warrant holders are successful in accelerating their redemption rights. There can be no assurance, however, that we will be successful in selling the assets related to the paging and two way businesses or that we will be able to
secure the necessary shareholder approvals of these proposed transactions. Further, there can be no assurance that the Company will be able to complete any additional debt or equity financing on favorable terms. If these sale transactions are
unsuccessful, there is substantial doubt about the Companys ability to continue as a going concern.



As of August 31, 2005, the Companys consolidated financial statements have been prepared assuming that the Company will continue as a going
concern. The Company incurred net losses of $431,000



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##### Table of Contents

and $222,000 in the quarters ended August 31, 2005 and 2004, respectively as a result of continued declines in its paging revenues. As of
August 31, 2005, the Company had a working capital surplus of only $10,000. The Company has sustained its operations primarily through continuous cost reductions. During 2005, the Company attempted to secure additional debt financing to fund a
potential acquisition and provide additional working capital to the Company but was unable to do so due to the declining performance of the Companys paging business. As a result of the continued deterioration of the Companys financial
position and its operating results, the Company now plans to sell substantially all of the assets of the Company (see Note 11 to the Consolidated Financial Statements). The sale of the Companys core businesses, combined with additional
financing, is expected to generate sufficient cash to enable the Company to acquire a profitable and growing business that would offset the embedded overhead costs of being a public company and return the Company to a state of profitability. There
can be no assurance, however, that we will be successful in selling the assets related to the paging and two way businesses, or that we will be able to complete any additional debt or equity financing on favorable terms.



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



Obligations and Commitments



As of August 31, 2005, our contractual payment obligations under our long-term debt agreements and operating leases for office and transmitter
locations are indicated in the table below. For purposes of the table below, purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding and that specify significant terms, including: fixed
or minimum quantities to be purchased, minimum pricing and the approximate timing of transactions. Teletouch has no such purchase obligations at August 31, 2005. Other long-term liabilities is comprised of certain redeemable common stock
warrants issued in conjunction with the Companys debt restructuring in May 2002 and certain shares of Teletouch Common Stock which were issued in February 2005 in conjunction with the purchase of certain assets from Delta Communications, Inc.



|                                               |       |                                 |       |  |      |       |      |   |       |  |            |       |  |   |     |  |   |    
|---------------------------------------------- | ----- | ------------------------------- | ----- |  | ---- | ----- | ---- | - | ----- |  | ---------- | ----- |  | - | --- |  | - | ---
|(in thousands)                                 |       | Twelve Months Ending August 31,
|                                               | Total |                                 | 2006  |  | 2007 |       | 2008 |   | 2009  |  | Thereafter
|Significant Contractual Obligations            |       |                                 |       |  |      |       |      |   |       |  |            |       |  |   |     |  |   |    
|Debt obligations                               |       | $                               | 194   |  | $    | 86    |      | $ | 88    |  | $          | 20    |  | $ |    |  | $ |   
|Operating lease obligations                    |       | $                               | 5,335 |  |      | 2,403 |      |   | 1,432 |  |            | 840   |  |   | 483 |  |   | 177
|Other long-term liabilities                    |       | $                               | 3,352 |  |      | 267   |      |   | 85    |  |            | 3,000 |  |   |    |  |   |   
|                                               |       |                                 |       |  |      |       |      |   |       |  |            |       |  |   |     |  |   |    
|Total significant contractual cash obligations |       | $                               | 8,881 |  | $    | 2,756 |      | $ | 1,605 |  | $          | 3,860 |  | $ | 483 |  | $ | 177
|                                               |       |                                 |       |  |      |       |      |   |       |  |            |       |  |   |     |  |   |    



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



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holder in May 2007. The holders of the GM Warrants have claimed that the sale of the paging business represents significantly all of the Companys
assets. The Company is in the process of negotiating with the holders of the warrants an arrangement that will defer a portion of the redemption value of these warrants.



If the Company is unsuccessful in negotiating a settlement or alternative arrangement with the holders of the GM Warrants
and continues with the sale of the paging business, the Company would be obligated to redeem the GM Warrants for $3,000,000 shortly after the closing on the sale of the paging business. As of May 31, 2005, the Company has recorded this as a
long-term liability at its fair value of $2,100,274. The GM Warrants are being accreted in value over time to their redemption value of $3,000,000 in May 2007 according to their original terms. If the Company is unsuccessful in negotiating a
settlement or alternative arrangement with the holders of the GM Warrants and continues with the sale of the paging business, the Company will record a charge to net income equal to the difference in the carrying value of the GM Warrants at that
date and $3,000,000 and this amount will be classified as a current liability to be paid after the closing on the sale of the paging business. Additionally, under the rights of the GM Warrants, the holders are allowed to vote these shares as a
separate class on matters involving a sale of substantially all of the assets of the Company. The sale of the paging business triggers this voting right which requires their vote to complete the sale transaction. See Note 11 to the Consolidated
Financial Statements for additional information on the GM Warrants.



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



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



|                                               |  |           |      |        |        
|---------------------------------------------- |  | --------- | ---- | ------ | -------
|Date in Which Stock Can be Put Back to Company |  | Put Price |      | Shares
|September 1, 2005 - November 30, 2005          |  | $         | 1.05 |        | 142,735
|December 1, 2005 - November 30, 2006           |  | $         | 1.10 |        | 183,515
|December 1, 2006 - November 30, 2007           |  | $         | 1.15 |        |        
|                                               |  |           |      |        |        
|                                               |  |           |      |        | 326,250
|                                               |  |           |      |        |        



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.



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Application of Critical Accounting Policies



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



Allowance for Doubtful
Accounts: Estimates are used in determining the allowance for doubtful accounts and are based on historic collection experience, current trends and a percentage of the accounts receivable aging categories. In determining these percentages
Teletouch reviews historical write-offs, including comparisons of write-offs to provisions for doubtful accounts and as a percentage of revenues; Teletouch compares the ratio of the allowance for doubtful accounts to gross receivables to historic
levels and Teletouch monitors collections amounts and statistics. Teletouchs allowance for doubtful accounts was $111,900 as of August 31, 2005. Based on the information available to the Company, management believes the allowance for
doubtful accounts as of August 31, 2005 was adequate. However, actual write-offs might exceed the recorded allowance.



Reserve for Inventory Obsolescence:Reserves for inventory obsolescence are computed using estimates that are based on sales trends, a ratio
of inventory to sales, and a review of specific categories of inventory. In establishing its reserve, Teletouch reviews historic inventory obsolescence experience including comparisons of previous write-offs to provision for inventory obsolescence
and the inventory count compared to recent sales trends. Prior to fiscal 2004, inventory obsolescence has been within our expectations and the provision established. During fiscal 2004 and 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 and discontinued pager models. 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. The Company recorded additional telemetry inventory reserves in the first three months ended August 31, 2005 related to the impairment of the aging VisionTrax and Panther product line. Teletouch
management cannot guarantee that the Company will experience better obsolescence rates than it has in the past which could result in material differences in the reserve for inventory obsolescence and the related inventory write-offs. The reserve for
inventory obsolescence was $182,700 at August 31, 2005.



Provision for Income Taxes:The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, using the asset and liability approach, which requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of such assets and liabilities. This method utilizes enacted statutory tax rates in effect for the year in which
the temporary differences are expected to reverse and gives immediate effect to changes in income tax rates upon enactment. Deferred tax assets are recognized, net of any valuation allowance, for temporary differences and net operating loss and tax
credit carry forwards. Deferred income tax expense represents the change in net deferred assets and liability balances. Deferred income taxes result from temporary differences between the basis of assets and liabilities recognized for differences
between the financial statement and tax basis thereon, and for the expected future tax benefits to



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be derived from net operating losses and tax credit carry forwards. A valuation allowance is recorded when it is more likely than not that deferred tax
assets will be unrealizable in future periods.



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



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



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



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



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



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



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



| |  |  | The Company has not located a buyer of its two way radio business although it has considered an offer to purchase this business received from J. Kernan Crotty, the President of the
Company. The Company has not located any alternate buyers for this business and there can be no assurance that Mr. Crotty will be able to obtain the financing to complete this transaction.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



If the sale transactions are unable to be completed, the Company would be
faced with running the paging and two way business in an aggressive manner to generate sufficient cash to offset the cost of



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maintaining its status as a public company. This manner of reducing expenses to maximize cash flows would have a negative impact on revenues and limit the
viability of the Company going forward.



Operational Risks



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



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



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



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



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



Teletouchs future revenue growth is not dependent
on any single or small group subscriber base, but will continue to concentrate on business accounts and on individuals interested in continuity, quality and personal service. As of the quarter ended August 31, 2005, Teletouch had approximately
131,700 pagers in service as compared to approximately 179,200 pagers in service at August 31, 2004. Teletouch must minimize the reduction in its subscriber base and expand its product offerings to generate revenues to offset the losses in its
paging service revenues. There is no guarantee that our future efforts in this area will decrease subscriber attrition.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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disclosure) and governance practices. Our failure to meet these corporate governance requirements may result in delisting of our common stock from AMEX.



Industry Risks



Our products are subject to government regulation.



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



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



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



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



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



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



The telecommunications
market is volatile.



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



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



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



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



We did not have any foreign currency hedges or other derivative financial instruments as of August 31, 2005. We do not enter into financial
instruments for trading or speculative purposes and do not currently utilize derivative financial instruments. Our operations are conducted primarily in the United States and as such are not subject to material foreign currency exchange rate risk.



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



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



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



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Part II. Other Information



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



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



In October 2005, Teletouch filed suit in Federal court against Richard D. Fry, a former employee, and Locatient, Ltd., an Oklahoma limited liability
company, claiming copyright infringement and theft of trade secrets, among other things. The suit claims that Fry used Company trade secrets to develop a software package while he was working for Teletouch. The Company claims that the software
package Fry developed while working for the company is based on the same database structure and format that he developed while working at Teletouch. The suit seeks an injunction to prevent Fry from continuing to sell and market software based on the
Companys copyrighted work, and award of actual and exemplary damages.



|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



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|Item 6. | Exhibits
|------- | --------



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



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SIGNATURES



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



|                        |  |  |  |                                          |  |                            |  |                                             
|----------------------- |  |  |  | ---------------------------------------- |  | -------------------------- |  | --------------------------------------------
|Date: November 21, 2005 |  |  |  | TELETOUCH COMMUNICATIONS, INC.Registrant
|                        |  |  | 
|                        |  |  |  | By:                                      |  | /s/    THOMAS A. HYDE,
JR.
|                        |  |  |  |                                          |  |                            |  | Thomas A. Hyde, Jr.                         
|                        |  |  |  |                                          |  |                            |  | Chief Executive Officer                     
|                        |  |  |  |                                          |  |                            |  | (Principal Executive Officer)               
|                        |  |  | 
|                        |  |  |  | By:                                      |  | /s/    J. KERNAN
CROTTY   
|                        |  |  |  |                                          |  |                            |  | J. Kernan Crotty                            
|                        |  |  |  |                                          |  |                            |  | President, Chief Operating Officer,         
|                        |  |  |  |                                          |  |                            |  | Chief Financial Officer and Director        
|                        |  |  |  |                                          |  |                            |  | (Principal Financial and Accounting Officer)



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