<PAGE>

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                       ----------------------------------
                                  FORM 10-K/A

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

     FOR THE FISCAL YEAR ENDED: MAY 31, 2001
                                ------------

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     FOR THE TRANSITION PERIOD FROM ________ TO ________

                           Commission File No. 1-13436
                       ----------------------------------
                         TELETOUCH COMMUNICATIONS, INC.
                       (Name of registrant in its charter)

                  Delaware                           75-2556090
         (State or other jurisdiction              (IRS Employer
       of incorporation or organization)       Identification Number)

          110 N. College, Suite 200, Tyler, Texas 75702 (903) 595-8800
          (Address and telephone number of principal executive offices)
                       ----------------------------------

Securities registered pursuant to Section 12(b) of the Exchange Act: Common
Stock, $0.001 par value, listed on the American Stock Exchange.

Securities registered pursuant to Section 12(g) of the Exchange Act: None.

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

     As of August 31, 2001, the aggregate market value of the voting stock held
by non-affiliates of the registrant, based on the closing price on that date,
was approximately $1,056,273. As of August 31, 2001, the registrant had
outstanding 4,926,189 shares of Common Stock, 15,000 shares of Series A
Preferred Stock, and 85,354 shares of Series B Preferred Stock.
<PAGE>

                               INDEX TO FORM 10-K
                                       of
                         TELETOUCH COMMUNICATIONS, INC.

<TABLE>
<CAPTION>
                                                                                 PAGE NO.
                                                                                 --------
<S>                                                                                 <C>
PART I   .............................................................................3
 Item 1.  Business ...................................................................3
 Item 2.  Description of Property ....................................................9
 Item 3.  Legal Proceedings ..........................................................9
 Item 4.  Submission of Matters to a Vote of Security Holders ........................9

PART II  ............................................................................10
 Item 5.  Market for Registrant's Common Equity and Related Shareholder Matters .....10
 Item 6.  Selected Financial Data ...................................................10
 Item 7.  Management's Discussion and Analysis of Results of Operations and Financial
          Condition                                                                  12
 Item 7a. Quantitative and Qualitative Disclosures about Market Risk ................16
 Item 8.  Financial Statement and Supplementary Data ................................16
 Item 9.  Changes In and Disagreements with Accountants On Accounting and Financial
          Disclosure.................................................................16

PART III ............................................................................16
 Item 10. Directors and Executive Officers of the Registrant ........................16
 Item 11. Executive Compensation ....................................................19
 Item 12. Security Ownership of Certain Beneficial Owners and Management ............22
 Item 13. Certain Relationships and Related Transactions ............................23

PART IV  ............................................................................25
 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ..........25
</TABLE>

     Statements contained or incorporated by reference in this document that are
not based on historical fact are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements may be identified by use of forward-looking terminology such as
"may", "will", "expect", "estimate", "anticipate", "continue", or similar terms,
variations of those terms or the negative of those terms. Forward-looking
statements are based upon numerous assumptions about future conditions that
could prove not to be accurate. Actual events, transactions and results may
differ materially from the anticipated events, transactions and results
described in such statements. The Company's ability to consummate such
transactions and achieve such events or results is subject to certain risks and
uncertainties.

                                       2
<PAGE>

                                     PART I

Item 1.  Business

General

     Teletouch Communications, Inc. ("Teletouch" or the "Company") was
incorporated under the laws of the State of Delaware in July 1994 and is
headquartered in Tyler, Texas.  Teletouch, or one of its several predecessors,
has operated two-way mobile communications services and telemessaging services
in East Texas for over 30 years. References to Teletouch or the Company as used
throughout this document means Teletouch Communications, Inc. or Teletouch
Communications, Inc. and its subsidiaries, as the context requires.

     Teletouch provides telecommunications services in non-major metropolitan
areas and communities. Currently the Company provides services in Alabama,
Arkansas, Louisiana, Mississippi, Missouri, Oklahoma, Texas, Tennessee and
Florida. The Company has 61 sales offices in those states. Through inter-
carrier arrangements, Teletouch also provides nationwide and expanded regional
coverage.

     Teletouch has experienced a substantial decline in the paging business over
the last year which is partially offset by the growth in other communications
services offered. At May 31, 2001 the Company had approximately 354,700 pagers
in service as compared to approximately 411,700 and 394,200 at May 31, 2000 and
1999, respectively. For fiscal year 2001 the Company had total revenues of $56.3
million as compared to $56.6 million and $51.1 million in fiscal years 2000 and
1999, respectively.

     Teletouch's primary focus has been on pursuing a recapitalization of its
debt and certain equity securities. The Company is currently unable to comply
with the terms of its Credit Agreement which could allow the lender to terminate
the commitment and declare the borrowings totaling $57.3 million due and
payable. Further, due to the inability to comply with the terms of the Credit
Agreement the lenders of the Junior Subordinated Notes could declare these
borrowings of $23.3 million to be due and payable. These events would result in
the Company's inability to meet the repayment obligations, causing the Company
to seek protection from creditors. The Company's management believes it will be
successful in recapitalizing its debt and certain equity equity securities and
continues to follow its overall business strategy of minimizing the level of
customer attrition while continuing to add new products within all of its
distribution channels to minimize the impact of the loss in recurring revenues
from its paging subscribers. While the Company continues to have discussions
with the lenders, no assurances can be given that the Company will be able to
negotiate satisfactory terms. The Company's management believes that it will be
successful in recapitalizing its debt and certain equity securities which will
help generate sufficient future cash flows to meet the Company's capital needs.
If the Company is successful in recapitalizing its debt and certain equity
securities, it would consider acquisitions of paging companies that cover larger
metropolitan areas provided that those companies also service markets that are
strategically located near the Company's existing markets. Teletouch believes
its current markets continue to offer significant growth potential for other
wireless services. During the next two years, the Company intends to focus most
of its efforts on developing its existing sales offices and broadening its range
of products sold. By reducing overhead costs and focusing on customer service,
the Company believes that it can minimize the impact on operating margins while
it develops additional products and services with recurring revenue streams to
replace the losses from paging service revenue. Additionally, if the opportunity
to acquire other regional paging companies arises, the Company believes it can
achieve better operating results than those achieved by the businesses
separately by consolidating administrative functions, taking advantage of
economies of scale, and sharing common frequencies to offer existing customers a
wider area of paging coverage.

                                       3
<PAGE>

Paging Industry Background

     In 1949 the Federal Communications Commission ("FCC") allocated a group of
radio frequencies for use in providing one-way and two-way mobile communications
services, effectively creating the paging industry. Since 1949, the paging
industry has been characterized by consolidation, substantial growth, and
technological change. In the early years, the paging industry was highly
fragmented, with a large number of small, local operators. Many of the firms
that entered the paging business during the first two decades of the industry
did so as a complement to their existing telephone answering service or two-way
radio communications sales and service businesses. The industry grew slowly as
the quality and reliability of equipment gradually improved and consumers began
to perceive the benefits of mobile communications. Further improvements in
equipment reliability and cost-effective technological innovations accelerated
the use of paging services in the 1970s.

     Some of the paging industry's most significant technological developments
occurred in the 1980s. The digital display (numeric) pager was introduced and
quickly replaced tone and voice pagers as the most popular paging product. In
1982, the FCC allocated additional frequencies which expanded coverage areas and
introduced competition into the market. More significant technological
developments occurred in the 1990s, including the advent of two-way paging
capabilities that do not require the use of traditional or cellular telephones
to return a page and cellular telephones that incorporate paging capability.

     Although the one-way paging industry's growth rate is difficult to
determine precisely, sources estimate that pagers in service grew at an annual
rate of between 20% and 30% for much of the early 1990s. At the end of 1996,
approximately 42 million pagers were in service in the United States and
approximately 6 million net new subscribers were added during 1997, resulting in
a growth rate of a much lower 14%. Since 1997 growth rates have declined and are
currently flat to slightly negative. Growth rates in the one-way paging industry
are expected to decline further as the number of pagers in service continues to
decline. Factors contributing to the paging industry's negative growth include:
(i) expanding coverage of other mobile communications networks; (ii) an
increased consumer demand for products capable of two-way mobile communications;
(iii) the rapidly declining costs of other mobile communications services such
as cellular telephone service; and (iv) technological advances in cellular
equipment and services.

     Three types of carriers have emerged in the paging industry: (i) large,
national paging companies; (ii) regional carriers, including Teletouch, that
operate in regional markets in the U.S. that can also offer service outside of
their home regions through a network of interconnections between their own
systems, a national firm, and/or other regional providers; and (iii) small,
single market operators.

The Company's Products and Markets

     Paging Operations

     Teletouch's paging network provides a one-way communications link to its
subscribers within a specified coverage area. Each subscriber is assigned a
distinct telephone number or personal identification number that a caller dials
to activate the subscriber's pager. When one of the Company's paging terminals
receives a telephone call for a subscriber, a radio signal is transmitted to the
subscriber's pager that then causes the pager to emit a tone, a vibration, or a
voice signal to alert the subscriber. Depending on the type of pager used, the
subscriber may respond directly to the caller using information displayed on the
pager or by calling a designated location or voice mail system to retrieve the
message. The advantage of paging over conventional telephone service is that a
pager's reception is not restricted to a single location. The advantage over
cellular telephones is that pagers are smaller, have a longer battery life, and
are substantially less expensive to use. Pagers may also be used in areas where
cellular telephone use is prohibited, such as hospitals, due to interference
with sensitive monitoring equipment. Some cellular subscribers use a pager along
with their cellular telephone to screen incoming calls and to lower the expense
of their cellular telephone service.

                                       4
<PAGE>

     Teletouch currently provides four basic types of paging services: numeric,
alphanumeric, tone-only, and tone-plus-voice. Subscribers carry a pocket-sized
radio receiver (a pager) that is preset to monitor a designated radio frequency
and is activated by radio signals emitted from a transmitter when a call is
received. Numeric pagers display a caller's message that may consist of an area
code and telephone number or up to 12 digits of other numeric information.
Alphanumeric pagers allow subscribers to receive and store messages consisting
of both numbers and letters. With tone-only service, the subscriber's pager
produces an audible "beep" or vibration when activated, and tone-plus-voice
service causes a subscriber's pager to beep and then play a brief voice message.
Subscribers may be paged using traditional or cellular telephones, computer
software, alpha entry devices, or over the Internet from the Company's web page.
Teletouch is licensed by the FCC to transmit numeric, alphanumeric, tone, and
voice messages to pagers it either sells or leases to customers.

     Numeric and alphanumeric paging services have almost completely replaced
Teletouch's tone-only or tone-plus-voice services. Today over half of the
Company's pagers in service are numeric pagers. Alphanumeric pagers, which were
introduced in the mid-1980s, constitute a smaller but increasing percentage of
the Company's subscriber base.

     In March 2000, Teletouch signed a five-year agreement to market two-way
paging services through WebLink Wireless, Inc.'s nationwide network. This
agreement provides the Company with a broad suite of advanced messaging
services, such as Internet-based messaging and the transmission of two-way
wireless data to market to its customers.

     Teletouch also offers its paging subscribers voice mail messaging and
Smartpager(R) services. When a subscriber uses voice mail in conjunction with
paging service and a caller leaves the subscriber a recorded message, the
subscriber is automatically paged. Voice mail employs sophisticated computer
technology that allows a subscriber to retrieve digitally recorded voice
messages 24 hours a day from any location by accessing the voice mail system
using a touch-tone telephone. The Company's voice mail systems provide complete
message privacy, allow for personalized message greetings, and enable voice
messages to be sent to a large group of people simultaneously.

     Teletouch's Smartpager(R) service allows individuals to send an
alphanumeric page to a subscriber without any special software or equipment.
Subscribers are assigned a toll free number to give to friends, family, and
associates who can then call and leave messages with a Teletouch operator.
Operators, available 24 hours a day, immediately transmit these messages to
subscribers.

     Paging companies traditionally distributed their services through direct
marketing and sales activities. In recent years additional distribution channels
evolved including: (i) carrier-operated stores; (ii) resellers, who purchase
paging services on a wholesale basis from carriers and resell those services on
a retail basis to their own customers; (iii) agents who solicit customers for
carriers and are compensated on a commission basis; and (iv) retail outlets that
often sell a variety of merchandise, including pagers and other
telecommunications equipment. Historically, most paging subscribers were
business users. However, pager use among retail consumers has increased
significantly in recent years. Increasingly, paging subscribers choose to
purchase rather than lease their pagers as equipment costs have decline. The
Company expects such trends to continue.

     Teletouch's paging customers include various-sized companies with field
sales and service operations, individuals in occupations requiring substantial
mobility and the need to receive timely information, and a rapidly expanding
base of individual consumers who use pagers to stay in touch with friends and
family. Some of the Company's customers even use pagers rather than home
telephones as their primary means of communication. These customers respond to
pages using pay phones or the telephones of friends and family. Teletouch is not
dependent upon any single or small group of customers for a material part of its
overall business.

                                       5
<PAGE>

     Teletouch's sales strategy is to concentrate on business accounts and on
individuals who value continuity, quality, and personal service. Historically,
the Company leased pagers to a large percent of its business accounts. As the
price of pagers declined, the Company has increasingly emphasized pager sales
over rentals. Teletouch offers its subscribers a high level of technical support
and provides a full range of dependable communications devices and services.

     The Company now markets all its products and services under the Teletouch
name. In order to access the broadest possible market, the Company uses multiple
paging distribution channels. These channels include (i) Company- operated sales
offices, including mall and other shopping center locations, that sell pagers to
the consumer market; (ii) a direct sales staff that concentrates on business
accounts; (iii) resellers, who purchase pagers and paging services in bulk and
resell them to their own subscribers; and (iv) the resale of other paging
carriers' services when customers require coverage outside Teletouch coverage
areas.

     Cellular Operations

     In December 1998, Teletouch launched its own brand of prepaid cellular
telephone service, utilizing the resale of telecommunication service which it
buys at wholesale prices. The company also offers PCS cellular service as an
agent for other PCS carriers, including AT&T Wireless Services Inc., Cingular
Wireless, Verizon Communications Inc., Sprint Corporation and Voicestream
Wireless Corporation in all of its markets. In May 2001, the Company decided to
discontinue sales of its own brand of prepaid cellular service and transition
all customers to alternative celluar service under one of the Company's existing
agent agreements by January 2002. At year-end the Company continued to offer its
prepaid cellular service in 37 of its stores and PCS service in all of its sales
offices. In April 2000, Teletouch became an agent for Leap Wireless
International Inc. ("Cricket Communications"), a company that provides unlimited
local wireless service for a flat monthly fee. Cricket currently offers its
service in several major metropolitan areas in Tennessee, Arkansas and Oklahoma
and plans to offer the service in other markets in which Teletouch has retail
locations.

     To complement its cellular products and services, Teletouch began offering
prepaid long distance cards in April 2000. The Company offers its cellular
products and services through all its sales channels. As with pagers, Teletouch
focuses on selling rather than leasing its cellular products.


     Two-Way Radio Operations

     Since 1963, Teletouch has been an authorized Motorola two-way radio dealer
in the East Texas area. The Company has locations in both Tyler and Longview and
services most of the law enforcement and public safety agencies as well as other
industries in a ten-county area. Teletouch is currently a member of Motorola's
Pinnacle Club, a group of 700 preferred Motorola dealers.

     On March 29, 2000, Teletouch acquired Eastex Communications, Inc., a
privately held company headquartered in Nacogdoches, Texas. Eastex is also an
authorized Motorola two-way radio dealer and provides two-way radio services in
Nacogdoches, Lufkin, Livingston, and Huntsville, Texas.

     The acquisition of Eastex will allow Teletouch to launch 450 MHz Logic
Trunked Radio ("LTR") Passport-enabled service, a "Nextel-type" radio service,
in eastern Texas. Shortly before acquiring Eastex, Teletouch launched this
service in its Tyler and Longview markets.

     LTR radio service is licensed for the 450 MHz spectrum and includes voice,
data, and voice mail capabilities. The LTR Passport-enabled service includes
"follow-me-roaming" features that are similar to the automatic handoff of radio
signals characteristic of cellular radio systems. The market for LTR radio
service includes customers desiring an upgrade in features and extended roaming
compared with traditional two-way

                                       6
<PAGE>

radio service. LTR radio service is also a cost-efficient communications
alternative to cellular telephones since LTR service is based on a fixed monthly
fee per-radio versus per-minute cellular charges.

Financial Information about Industry Segments

     Teletouch operates in the wireless telecommunications industry, providing
paging and messaging, cellular, and two-way radio services to a diversified
customer base. Teletouch's cellular and two-way radio operations represent less
than 10% individually and in the aggregate of operating income and assets of the
Company. Cellular and two-way radio operations represent approximately 18% in
the aggregate of the Company's revenue. Cellular and two-way revenues for fiscal
2001 were $6.6 million and $3.7 million, respectively. The Company had no
foreign operations.

Sources of System Equipment and Inventory

     Teletouch does not manufacture its paging network equipment, including but
not limited to antennas, transmitters, and paging terminals, nor does it
manufacture any of the pagers, cellular telephones, or two-way radios it sells
or leases. This equipment is available for purchase from multiple sources, and
the Company anticipates that such equipment will continue to be available in the
foreseeable future, consistent with normal manufacturing and delivery lead
times. Because of the high degree of compatibility among different models of
transmitters, computers and other paging and voice mail equipment manufactured
by its suppliers, Teletouch's paging network is not dependent upon any single
source of such equipment. The Company currently purchases pagers and
transmitters from several competing sources. Until this year, the Company
purchased its paging terminals from Glenayre Technologies Inc., a leading
manufacturer of mobile communications equipment. During the year, Glenayre
announced that it would discontinue manufacturing paging terminals but would
continue to provide technical support for the foreseeable future. Teletouch does
not anticipate that the decision by Glenayre will impact its operations as such
terminal equipment is readily available in the used market. Cellular telephones
and two-way radios are available from several sources.

     Teletouch continually evaluates potential products to offer in its sales
offices since those offices primarily target the consumer market, and consumers
have consistently requested other telecommunication products in addition to
paging, voice mail, and cellular services. Services such as internet access,
local telephone service, printing services and security services are currently
being investigated. Teletouch plans to continue introducing new products and
services to its customers as viable ones are identified.

Competition

     Competition for subscribers is based primarily on the price and quality of
services offered and the geographic area covered. Teletouch has one or more
direct competitors in all its markets, some of which have greater financial
resources than Teletouch. The Company believes, however, that the price and
quality of its services and its geographic coverage areas within its markets
compare favorably with those of its competitors.

     Although some competitors are small, privately owned companies serving only
one market area, others are subsidiaries or divisions of larger companies, such
as telephone companies, which provide paging and other telecommunications
services in multiple market areas. Among the Company's competitors are Arch
Wireless Inc, Metrocall Inc., and Cingular Wireless.

     Companies offering wireless two-way communications services, including 800
MHz cellular service, 1900 MHz wireless personal communications service ("PCS"),
and specialized mobile radio services ("SMR"), continues to compete with
Teletouch's paging services. Cellular and PCS services are generally more
expensive than paging services. Where price is a consideration or access to
fixed wire communications (such as ordinary telephones) is available, paging can
compete successfully with or be an adjunct to cellular and PCS systems. However,
the price of cellular and PCS services continue to decline and are quickly
approaching the higher end pricing on some paging services. Therefore, the
Company has aggressively

                                       7
<PAGE>

partnered with cellular and PCS providers and continues to work to develop
services that will sustain the Company in this competitive environment. Future
technological advances and associated regulatory changes in the industry could
also result in new products and services that would either put Teletouch at a
competitive advantage or disadvantage with other companies. If the pricing on
cellular and PCS services continues to decline, the viability of the paging
industry in general and of the Company in particular could be adversely
affected.

Patents and Trademarks

     In fiscal year 1999, Teletouch registered the trademark for its
Smartpager(R) service, a service that allows individuals to send an alphanumeric
page to a subscriber without any special software or equipment. The Company
considers this registered trademark to be beneficial and will consider
registering trademarks or service marks for future services it may provide.

Regulation

     The FCC regulates Teletouch's paging operations under the Communications
Act of 1934, as amended (the "Communications Act"), by granting the Company
licenses to use radio frequencies. These licenses also set forth the technical
parameters, such as location, maximum power, and antenna height, under which the
Company is permitted to use those frequencies.

     In 1996, the FCC implemented rules that revised the classification of most
private-carrier paging licensees. Traditionally, the FCC has classified licenses
as either Radio Common Carrier licenses ("RCC") or Private Carrier Paging
("PCP") licenses. Now all licenses are classified either as Commercial Mobile
Radio Service ("CMRS") or Private Mobile Radio Service ("PMRS"). Carriers like
Teletouch and its competitors, who make service available to the public on a
for-profit basis through interconnections with the public switched telephone
network, are classified as CMRS licensees. Until recently, Teletouch's RCC
licenses were subject to rate and entry regulations in states that chose to
impose tariff and certification obligations, whereas PCP licenses were not
subject to such regulations. As a result of Congressional legislation, the state
regulatory differences between RCCs and PCPs have been eliminated.

     The FCC also adopted rules that license paging channels in the UHF and VHF
bands, as well as in the 929 and 931 MHz bands, on a geographic area basis.
These geographic area licenses are awarded through public auctions. The 929 and
931 MHz bands were auctioned in February 2000. The Company acquired 32 licenses
in the 931 MHz band in these auctions. Incumbent licensees, such as Teletouch,
will retain their exclusivity under the FCC's new rules. The Company also
operates paging systems utilizing shared, non-exclusive frequencies below 929
MHz.

     The FCC grants radio licenses for varying terms of up to 10 years, and the
FCC must approve renewal applications. In the past, FCC renewal applications
have been more or less routinely granted. Although there can be no assurance the
FCC will approve or act upon Teletouch's future applications in a timely manner,
the Company believes that such applications will continue to be approved with
minimal difficulties.

     Teletouch regularly applies to the FCC for authority to use additional
frequencies and to add additional transmitter sites to expand coverage on
existing frequencies. Under current FCC guidelines, the Company can expand its
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. The
Communications Act also requires prior FCC approval 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. Although there
can be no assurance the FCC will approve or act upon Teletouch's future
applications in a timely manner, the Company knows of no reason why such
applications would not be approved or granted. The FCC has also determined that
all major modification and expansion

                                       8
<PAGE>

applications will be subject to competitive bidding ("auction") procedures.
Teletouch cannot predict the impact of these procedures on its licensing
practices.

     The Communications Act requires the FCC to limit foreign ownership of
licenses. These foreign ownership restrictions limit the percentage of company
stock that may be owned or voted, directly or indirectly, by aliens or their
representatives, a foreign government or its representatives, or a foreign
corporation. The FCC also has the authority to restrict the operation of
licensed radio facilities or to revoke or modify such licenses. The FCC may
adopt changes to its radio licensing rules at any time, subject to following
certain administrative procedures. The FCC may also impose fines for violations
of its rules. Under certain circumstances, Teletouch's license applications may
be deemed "mutually exclusive" with those of other paging companies, in which
case the FCC would select between the mutually exclusive applicants. The FCC has
previously used lottery procedures to select between mutually exclusive paging
applications; however, in response to a Congressional mandate, the FCC adopted
rules to grant mutually exclusive CMRS paging applications through the auction
process.

     The FCC could change its rules or policies in a manner that could have a
material adverse effect on the Company's business by limiting the scope and
manner of Teletouch's services or by increasing competition in the paging
industry. Beginning in 1994, the FCC was ordered by Congress to hold auctions to
award licenses for new personal communications services. These PCS and other new
mobile services could enable other service providers to compete directly or
indirectly with the Company. In addition, from time to time, federal and state
legislators propose and enact legislation that could affect the Company's
business either beneficially or adversely. Teletouch cannot predict the impact
of such legislative actions on its operations.

     The foregoing description of certain regulatory factors does not purport to
be a complete summary of all the present and proposed legislation and
regulations pertaining to the Company's operations.

Employees

     At May 31, 2001, Teletouch employed 402 people, of which 313 were employed
full-time and 89 were employed on a part-time or temporary basis. Most of these
employees performed sales, operations support, and clerical roles. The Company
considers its relationships with its employees to be satisfactory and is not a
party to any collective bargaining agreement.

Item 2.  Description of Property

     Teletouch owns an office building and one transmitter site, along with the
broadcast tower on that site. In addition, the Company currently leases 88
retail and office locations in its market areas, including its executive offices
in Tyler, Texas. Teletouch also leases transmitter sites on commercial towers,
buildings, and other fixed structures in approximately 388 locations. The
Company's leases are for various terms and provide for monthly rental payments
at various rates. Teletouch is obligated to make total lease payments of
approximately $3.0 million under its office facility and tower site leases for
fiscal year 2002. See Note H in the Notes to Consolidated Financial Statements.

     The Company believes that its facilities are adequate for its current needs
and that it will be able to obtain additional space as needed at reasonable
cost.

Item 3.  Legal Proceedings

     Teletouch is party 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 will result in a material adverse effect
on its results of operations or financial condition.

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

                                       9
<PAGE>

     No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 2001.


                                     PART II


Item 5.  Market for Registrant's Common Equity and Related Shareholder Matters

     On April 6, 1998, Teletouch's securities began trading on the American
Stock Exchange ("AMEX") under the symbol TLL and ceased trading on The Nasdaq
Small Cap Market(TM) ("NASDAQ"). Also on April 6, 1998, the Company terminated
its Boston Stock Exchange listing.

     The following table lists, for the periods indicated, the reported high and
low transaction prices for Teletouch Common Stock. Such prices reflect inter-
dealer prices, but do not include retail mark-ups, markdowns, or commissions and
may not necessarily represent actual transactions.

<TABLE>
<CAPTION>
                                            Common Stock
                                        --------------------
                                          High        Low
                                        --------   ---------
     <S>                                <C>        <C>
     Fiscal Year 2000
     ----------------
       1/st/ Quarter                      1-9/16       13/16
       2/nd/ Quarter                       1-1/8         3/8
       3/rd/ Quarter                      8-7/16         5/8
       4/th/ Quarter                     7-15/16       1-5/8
     Fiscal Year 2001
     ----------------
       1/st/ Quarter                     3-15/16       1-5/8
       2/nd/ Quarter                           3           1
       3/rd/ Quarter                        1.25         .50
       4/th/ Quarter                         .98         .31
</TABLE>

---------------------

     As of August 31, 2001, 4,926,189 shares of common stock, 15,000 shares of
Series A preferred stock, 85,394 shares of Series B preferred stock,
approximately 3,794,000 Common Stock Purchase Warrants and Options and 324,173
Series B Preferred Stock Purchase Warrants were issued and outstanding. Also as
of August 31, 2000, there were 43 holders of record of the Company's Common
Stock based upon information furnished by Continental Stock Transfer & Trust
Company, New York, New York, the Company's transfer agent. The number of holders
of record does not reflect the number of beneficial holders, estimated to be in
excess of 800, of Teletouch's Common Stock for whom shares and warrants are held
by banks, brokerage firms, and other entities.

     Teletouch has never paid and does not anticipate paying any cash dividends
on its Common Stock in the foreseeable future. Dividends on the Series A
Preferred Stock accrue at 14% per annum compounded quarterly and may be paid in
kind by issuing additional securities. Cash dividends on the Company's Common
Stock or Preferred Stock, and the redemption of the Preferred Stock, are
prohibited so long as the Credit Agreement (discussed in footnotes B and F in
the Notes to the Consolidated Financial Statements) is in effect.

Item 6.  Selected Financial Data

     The following table represents certain items from the Company's
consolidated statements of operations and certain other information for the
periods indicated.

                                       10
<PAGE>

<TABLE>
<CAPTION>
                                            (In Thousands, except Per Share Data, Pagers in Service and
                                                                    ARPU)
                                                  2001         2000         1999         1998         1997
                                             ---------    ---------    ---------    ---------    ---------
<S>                                          <C>          <C>          <C>          <C>          <C>
Service, rent, and maintenance revenue ...   $  42,929    $  45,164    $  42,792    $  38,831    $  35,478
Product sales  revenue ...................      13,366       11,427        8,346        6,328        5,911
                                             ---------    ---------    ---------    ---------    ---------
  Total revenues .........................      56,295       56,591       51,138       45,159       41,389
Net book value of products sold ..........     (13,405)     (11,211)      (8,000)      (6,634)      (6,506)
                                             ---------    ---------    ---------    ---------    ---------
                                             $  42,890    $  45,380    $  43,138    $  38,525    $  34,883
Operating expenses (5) ...................      79,337       43,650       42,678       38,329       36,212
                                             ---------    ---------    ---------    ---------    ---------
Operating income .........................     (36,447)       1,730          460          196       (1,329)
Interest expense, net ....................      (8,775)      (7,908)      (7,823)      (8,535)      (8,177)

Loss on investments ......................        (356)           -            -            -            -
                                             ---------    ---------    ---------    ---------    ---------
Gain (loss) on disposal of assets ........        (237)         155           23        4,171            -
                                             ---------    ---------    ---------    ---------    ---------
Loss before income taxes .................     (45,815)      (6,023)      (7,340)      (4,168)      (9,506)
Income tax expense/(benefit) .............           -            -            -           48         (476)
                                             ---------    ---------    ---------    ---------    ---------
Loss before extraordinary item ...........     (45,815)      (6,023)      (7,340)      (4,216)      (9,030)
Extraordinary item .......................           -            -            -            -       (3,389)
                                             ---------    ---------    ---------    ---------    ---------
Net loss before preferred stock dividends.   $ (45,815)   $  (6,023)   $  (7,340)   $  (4,216)   $ (12,419)
                                             =========    =========    =========    =========    =========

Loss per share applicable to common stock:
------------------------------------------
Loss before extraordinary item ...........   $  (10.65)   $   (2.29)   $   (2.52)   $   (1.66)   $   (2.72)
Extraordinary item .......................           -            -            -            -        (0.80)
                                             =========    =========    =========    =========    =========
Net loss .................................   $  (10.65)   $   (2.29)   $   (2.52)   $   (1.66)   $   (3.52)
                                             =========    =========    =========    =========    =========

EBITDA (1)(2)(3)(4) ......................   $  11,292    $  14,827    $  15,508    $  14,316    $  12,402
                                             =========    =========    =========    =========    =========
Pagers in service at end of period .......     354,700      411,700      394,200      349,700      321,100
                                             =========    =========    =========    =========    =========
Average revenue per unit ("ARPU") ........   $    8.78    $    8.98    $    9.25    $    9.33    $   10.02
                                             =========    =========    =========    =========    =========
Total assets (5) .........................   $  31,445    $  77,693    $  81,256    $  87,194    $  92,173
                                             =========    =========    =========    =========    =========
Long-term debt, net of current portion (6)   $       -    $  71,927    $  75,944    $  74,487    $  79,824
                                             =========    =========    =========    =========    =========
</TABLE>
---------------------------
(1)  EBITDA represents earnings before interest, taxes, depreciation, and
     amortization (and certain non-recurring income and expenses, such as the
     gain on sale of assets). EBITDA is a standard measure of financial
     performance in the paging industry. However, EBITDA is not a measure
     defined in generally accepted accounting principles ("GAAP") and should not
     be construed as an alternative to operating income or cash flows from
     operating activities as determined in accordance with GAAP. EBITDA is,
     however, one of the primary financial measures by which the Company's
     compliance with contractual covenants is calculated under its debt
     agreements.
(2)  In January 2001, Teletouch restructured certain retail operations and
     product lines. In May 2001 Teletouch decided to discontinue its own branded
     prepaid cellular product line. These actions resulted in non-recurring
     costs that have been included in operating expenses and net book value of
     products sold. The EBITDA shown above for fiscal 2001 excludes $959,000 of
     non-recurring costs associated with these activities, consisting primarily
     of severance expenses, lease payments for unoccupied space and impairment
     of cellular phone inventory. Additionally, the EBITDA shown above for
     fiscal 2001 excludes $356,000 of losses on stock held for investment and
     $255,000 on impairment of certain fixed assets related to Teletouch's
     prepaid cellular product line. EBITDA shown above also excludes the
     impairment charges of $36,589,000 recorded in the three month period ended
     May 31, 2001.
(3)  In May 1999, Teletouch restructured certain administrative activities,
     resulting in non-recurring costs that have been included in operating
     expenses. The EBITDA shown above for fiscal 1999 excludes the $275,000 of
     non-recurring costs associated with the restructure, consisting primarily
     of personnel severance and rent on leases for unoccupied space.
(4)  In May 1998, Teletouch and Premier Paging, Inc. ("Premier") reached a
     settlement with regard to the termination of the proposed acquisition of
     Premier. The EBITDA shown above for fiscal 1998 excludes $837,000 of non-
     recurring costs associated with this settlement.
(5)  Includes the impairment charges recorded in the three month period ended
     May 31, 2001.
(6)  $66,935,000 of long-term debt has been classified as a current liability.

                                       11
<PAGE>

Item 7.  Management's Discussion and Analysis of Results of Operations and
Financial Condition

     Certain statements contained herein are not based on historical facts, but
are forward-looking statements that are based upon numerous assumptions about
future conditions that could prove not to be accurate. Actual events,
transactions and results may materially differ from the anticipated events,
transactions or results described in such statements. The Company's ability to
consummate such transactions and achieve such events or results is subject to
certain risks and uncertainties. Such risks and uncertainties include, but are
not limited to, the existence of demand for and acceptance of the Company's
products and services, regulatory approvals and developments, economic
conditions, the impact of competition and pricing, results of financing efforts
and other factors affecting the Company's business that are beyond the Company's
control. The Company undertakes no obligation and does not intend to update,
revise, or otherwise publicly release the results of any revisions to these
forward-looking statements that may be made to reflect future events or
circumstances.

     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 notes thereto included elsewhere in this
report.

Overview

     Teletouch is a leading provider of wireless telecommunications services,
primarily paging services, in non-major metropolitan areas and communities in
the southeast United States. As of May 31, 2001, the Company had approximately
354,700 pagers in service. The Company derives the majority of its revenues from
fixed, periodic fees, not dependent on usage, charged to subscribers for paging
services. As long as a subscriber remains on service, operating results benefit
from the recurring payments of the fixed, periodic fees without incurring
additional selling expenses or other fixed costs. Due to growth resulting from
the completion of acquisitions in previous years, Teletouch's results of
operations for prior periods may not be indicative of future performance.

Acquisitions and Disposals

     On September 1, 2000, Teletouch acquired substantially all of the assets of
Snider Communications Corporation ("Snider"), a corporation headquartered in
Little Rock, Arkansas, which provides statewide wireless messaging coverage in
Arkansas. As part of the purchase, Teletouch acquired approximately 13,000
additional paging subscribers. The total purchase price for Snider was
approximately $1.7 million which consisted of 600,000 shares of Teletouch's
common stock valued at $1.5 million and approximately $0.2 million in other cash
expenditures related to closing. The acquisition was accounted for using the
purchase method of accounting and the total purchase price was allocated as
follows: $1,000,000 to property, plant and equipment, $650,000 to subscriber
bases, $150,000 to FCC licenses, $10,000 to a non-compete agreement, $7,000 to
inventory, and $115,000 to certain liabilities. The results of operations of the
acquisition, which are immaterial to the consolidated operations, are included
with that of the Company from the date of closing.

     On March 31, 2000, Teletouch acquired substantially all the assets of
EASTEX Communications, Inc. for consideration of approximately $485,000. An
initial payment of approximately $277,000 was paid in cash, and the remaining
consideration will be paid in equal monthly installments over the next two
years. The acquisition was accounted for using the purchase method of
accounting, and the total purchase price was allocated as follows: $40,000 to
property, plant, and equipment; $20,000 to inventory; $181,000 to FCC licenses;
$151,000 to subscriber bases; $5,000 to a non-compete agreement; and the
remaining $88,000 to goodwill. The results of operations of the acquisition,
which are immaterial to consolidated operations, are included with that of the
Company from the date of closing.

                                       12
<PAGE>

Results of Operations for the fiscal years ended May 31, 2001, 2000, and 1999

     Total revenue: Teletouch's total revenue decreased to $56.3 million in
     -------------
fiscal year 2001 from $56.6 million in fiscal year 2000 and increased from $51.1
million in fiscal year 1999, respectively. The fiscal year 2001 total revenue
decrease from fiscal 2000 was due to a loss of approximately $4.6 million
revenues from pager sales and paging services due to a continuing decline in
demand for one-way paging service. This decrease in revenues was partially
offset by an increase in two-way revenues of $1.5 million due in part to the
acquisition of Eastex Communications in April 2000 and to an increase in
cellular revenues of $3.0 million due to internal growth. The fiscal year 2000
increase over fiscal 1999 was a combination of approximately $3.6 million in
additional revenues from cellular products and an increase in pager service
revenue resulting from internal growth. Pagers in service declined to 354,700 at
May 31, 2001 as compared to 411,700 and 394,200 at May 31, 2000 and 1999,
respectively.

     The negative impact on total revenue of the decrease in pagers in service
is compounded by the decline in average revenue per unit ("ARPU"). ARPU for the
year ended May 31, 2001 was $8.78 as compared to $8.98 and $9.25 for the years
ended May 31, 2000 and May 31, 1999, respectively. The decrease in ARPU is
primarily due to increased competition in the Company's markets and to a lesser
extent to an increase in the percentage of the Company's subscriber base
represented by resellers. Resellers are businesses that buy airtime at wholesale
prices from Teletouch and sell the service to end users. While the wholesale
price to a reseller is lower than the price the Company charges to its other
customers, a reseller bears the cost of acquiring, billing, collecting and
servicing its subscribers. At May 31, 2001 approximately 42% of the Company's
subscriber base was represented by resellers as opposed to 41% at May 31, 2000
and 39% at May 31, 1999. As competitors continue to pursue Teletouch's customers
in the marketplace, as the percentage of its subscriber base represented by
resellers increases, and as the paging industry fully matures, ARPU is expected
to continue to decline. Teletouch expects that the introduction of new products
and services will only partially offset any decline in ARPU or paging
subscribers and will result in a decrease in total revenue during the next year.

     Operating expenses, excluding depreciation and amortization:  Operating
     -----------------------------------------------------------
expenses, excluding depreciation and amortization, were $32.5 million, or 58% of
total revenue (excluding the impairment charges of $36.6 million) for fiscal
year 2001 as compared to $30.6 million, or 54% of total revenue and $27.9
million, or 55% of total revenue for the fiscal years 2000 and 1999,
respectively. Costs increased in fiscal 2001 over fiscal 2000 due to new retail
store openings, particularly in the areas of payroll, rent, and advertising
expenses and due to non-recurring charges of $0.5 million associated with retail
store closings. Costs increased in fiscal 2000 over fiscal 1999 primarily
because of new retail store openings, particularly in the areas of payroll,
rent, and advertising expenses. Additionally, due to the restructure of certain
administrative collection functions in May 1999 and due to the increase in the
churn rate for the Company's retail customers, bad debt losses for fiscal 2000
were $1.4 million as compared to $0.8 million for fiscal 1999. Operating costs
as a percentage of total revenue have either increased or remained flat while
the Company's paging subscriber base continues to decline. The Company expects
operating expenses to decline during the next year as unprofitable products and
/or locations are eliminated, however, it cannot be certain that operating costs
will decline in proportion to revenue.

     Depreciation and amortization:  Depreciation and amortization expense
     -----------------------------
decreased to $10.2 million in fiscal year 2001 from $13.1 million and $14.8
million in fiscal years 2000 and 1999, respectively. The decrease in
depreciation and amortization expense in fiscal 2001 was due primarily to the
expiration of amortization on certain acquired intangible assets late in fiscal
2000 resulting in a $3.4 million decrease in amortization expense partially
offset by an increase in deprecation expense related to fixed assets used
opening new retail stores in fiscal 2000 and 2001. A decrease in amortization
expense in fiscal 2000 of approximately $0.9 million due to the expiration of
amortization on certain acquired intangible assets and a decrease in additional
depreciation recorded on returned lease pagers of approximately $1.0 million,
partially offset by an increase in depreciation on other assets of $0.2 million,
accounted for the decrease from fiscal 1999.

     Interest expense: Net interest expense increased to $8.8 million in fiscal
     ----------------
year 2001 from $7.9 million in fiscal 2000, which decreased from $7.8 million in
fiscal 1999. Interest expense increased in fiscal 2001 over

                                       13
<PAGE>

fiscal 2000 primarily due to increases in the variable interest rates on the
Credit Agreement as well as increased compound interest associated with the
Junior Subordinated Notes (discussed below under "Financial Condition"). A
component of the interest rate on the Credit Agreement is determined by the
Company's leverage ratio at each fiscal quarter. During fiscal 2001, the Company
operated at a leverage ratio that resulted in a variable interest rate higher
than in fiscal 2000. This increase in interest expense was offset slightly by
principal payments on the Credit Agreement totaling $2.4 million in fiscal 2001.
Interest expense increased in fiscal 2000 over fiscal 1999 primarily due to an
increase in interest charges associated with the Junior Subordinated Notes,
partially offset by a decrease in the amortization of debt issue costs.

     Income tax benefit:  At May 31, 2001, Teletouch had a net operating loss
     ------------------
carryforward of approximately $29.5 million that will begin to expire in fiscal
2012. For fiscal year 2002, the Company estimates that no tax benefit will be
recorded. A valuation allowance has been recorded against deferred tax assets
that are not likely to be realized. Specifically, the Company's carry forwards
expire at specific future dates, and utilization of certain carry forwards is
limited to specific amounts each year. However, due to the uncertain nature of
their ultimate realization, Teletouch has established a valuation allowance
against these carry forward benefits and will recognize benefits only as
reassessment demonstrates they are realizable. Realization is entirely dependent
upon future earnings in specific tax jurisdictions. While the need for this
valuation allowance is subject to periodic review, if the allowance is reduced,
the tax benefit of the carry forwards will be recorded in future operations as a
reduction of the Company's income tax expense.

     EBITDA:  EBITDA decreased to $11.3 million, or 20% of total revenue ($9.7
     ------
million, or 17% of total revenue, including the $0.4 million loss on investment
and $1.2 million in other costs associated with the restructuring activities) as
compared to $14.8 million, or 26% of total revenue in fiscal year 2000 and
compared to $15.5 million, or 30% of total revenue ($15.2 million, or 30% of
total revenue, including the $0.3 million of costs associated with the
restructuring) in fiscal year 1999. The decrease in fiscal 2001 EBITDA as a
percentage of total revenue is due primarily to losses in paging service revenue
of approximately $2.5 million due a continued decline in ARPU and number of
pagers in service. Contributing to the decline in EBITDA during fiscal 2001 were
lower than anticipated revenues from new retail stores opened in fiscal 2000 and
fiscal 2001 for which the operations expenses are basically fixed. The decrease
in fiscal 2000 EBITDA as a percentage of total revenue from fiscal 1999 is
primarily due to new retail store openings and increased bad debt losses, as
previously discussed.

Financial Condition

     Teletouch's cash balance was $4.0 million at May 31, 2001 as compared to
$6.8 million at May 31, 2000. Cash provided by operating activities decreased to
$5.6 million in fiscal year 2001 from $9.4 million and $10.5 million in fiscal
year 2000 and fiscal year 1999, respectively. The Company expects that cash flow
provided from operations will be sufficient to fund its working capital needs in
the near term, provided that the Company is successful in reorganizing its debt
obligations, which is discussed in greater detail below. In the absence of such
a reorganization and additional financing, the Company may be forced to
terminate its operations.

     Teletouch's operations require capital investment to purchase pagers for
lease to customers and to acquire paging infrastructure equipment to support the
Company's existing subscribers. Net capital expenditures, including pagers,
amounted to $6.5 million, $7.8 million and $7.6 million for fiscal 2001, 2000,
and 1999, respectively. The decrease in fiscal 2001 from fiscal 2000 was due to
less capital spending on opening new retail stores as well as the Company's
ability to continue to purchase lower cost pagers to lease to customers. The
increases in fiscal 2000 over fiscal 1999 was due primarily to capital
investments in new retail stores, leased pagers, and the addition of new
transmitter sites. Teletouch anticipates capital expenditures will decline in
fiscal 2002 as the Company plans to only replace necessary equipment to maintain
the paging infrastructure while continuing to purchase an adequate supply of
pagers to lease to customers. Teletouch will pay for these expenditures with
cash generated from operations.

                                       14
<PAGE>

     The Company's Credit Agreement provides for loans in an amount not to
exceed $70 million. As of May 31, 2001, $57.3 million of the Credit Agreement
was funded. Direct costs incurred in connection with obtaining the Credit
Agreement of approximately $4.1 million have been deferred and are being
amortized, using the effective interest rate method, over the term of the
existing loans.

     The Credit Agreement bears interest, at the Company's designation, at a
floating rate equal to either the prime rate plus 1% to 2% or to LIBOR plus 2%
to 3%. These rates vary depending on the leverage ratio of the Company. The
Credit Agreement is secured by substantially all of the assets of Teletouch and
its subsidiaries. Borrowings under the Credit Agreement require the principal be
repaid in escalating quarterly installments through November 2005. For fiscal
2001, the weighted-average interest rate on the Credit Agreement was 8.8%.

  The Credit Agreement also requires the maintenance of certain financial and
operating covenants, and prohibits any payments on the Junior Subordinated Notes
and the payment of dividends. These covenants were amended as of the end of each
of the first three quarters of the fiscal year, which allowed the Company to
meet its financial covenant and principal repayment terms. As of August 24,
2001, the Company has been unable to negotiate new terms under the Credit
Agreement, which would allow the Company to remain in compliance with its terms
as of May 31, 2001, and for subsequent periods. Failure to comply with the terms
of the agreement results in an Event of Default under the Credit Agreement which
in turn allows the lender to terminate the commitment and to declare the
borrowings totaling $57.3 million to be due and payable. The Company is in
default of its payment obligations under the Credit Agreement as well as under
various financial covenants. The Lenders have refused to waive the Events of
Default, and are in the process of assessing their alternatives. In any event,
no additional borrowings will be available to the Company under the Credit
Agreement.

  The terms of the Subordinated Notes require the maintenance of certain
financial and operating covenants and restrict future acquisitions. Based on the
terms of the Junior Subordinated Note agreement, if the lender declared the
Company not in compliance with the terms of the Credit Agreement discussed
above, then by definition it would not be in compliance with the terms of the
Junior Subordinated Note Agreement resulting in an additional $22.3 million
becoming due and payable.

  The Company is pursuing a recapitalization of its debt and certain equity
securities. Although the Company's management believes it will successfully
recapitalize the Company in a timely fashion, there can be no assurance that
payment under the Credit Agreement and Junior Subordinated Notes will not be
declared due and payable which would likely result in the Company's inability to
meet the repayment obligations, causing the Company to seek protection from
creditors.

  If the Company is able to obtain the required financing to remain in business,
future operating results depend on successful implementation of our strategy to
develop customer retention programs and expand existing product lines to
minimize the impact of the level of customer attrition. The sales and marketing
expenses and other costs associated with attracting new subscribers are
substantial and there is no guarantee that our future efforts in this area will
improve subscriber growth and retention.

New Accounting Pronouncements

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting guidelines for derivatives and requires
companies to record all derivatives as assets or liabilities on the balance
sheet at fair value. Additionally, this statement establishes accounting
treatment for three types of hedges: hedges of changes in the fair value of
assets, liabilities or firm commitments; hedges of the variable cash flows of
forecasted transactions; and hedges of foreign currency exposures of net
investments in foreign operations. Any derivative that qualifies as a hedge,
depending upon the nature of that hedge, will either be offset against the
change in fair value of the hedged assets, liabilities or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. SFAS No. 133 is effective for years

                                       15
<PAGE>

beginning after June 15, 2000. Teletouch does not anticipate that the adoption
of this statement will have a material impact on its consolidated balance
sheets, statements of operations, or cash flows.

Item 7a.  Quantitative and Qualitative Disclosures about Market Risk

     The risk inherent in Teletouch's market risk sensitive instruments, such as
the Credit Agreement is the potential loss arising from adverse changes in
interest rates. The Company's earnings are affected by changes in interest rates
due to the impact those changes have on its variable-rate debt obligations,
which represented approximately 71% of its total long-term obligations as of May
31, 2001. If interest rates average one percent more in fiscal 2002 than they
did during fiscal 2001, the Company's interest expense would increase by
approximately $0.6 million. The impact of an increase in interest rates was
determined based on the impact of the hypothetical change in interest rates on
the Company's variable-rate long-term obligations as of May 31, 2001. The
preceding sensitivity analysis does not, however, consider the effects that such
changes in interest rates may have on overall economic activity, nor does it
consider additional actions the Company may take to mitigate its exposure to
such changes. Actual results may differ from the above analysis.

Item 8.   Financial Statements and Supplementary Data

     The financial statements required by this item are included in this report
beginning on page F-1.

Item 9.   Changes In and Disagreements with Accountants On Accounting and
          Financial Disclosure

     None.

                                    PART III

Item 10.  Directors,Executive Officers, Promoters, and Control Persons;
          Compliance with Section 16(a) of the Exchange Act.


     As of August 31, 2001, the board of directors consisted of four members:
two Class I Directors (Messrs. McMurrey and McFarland), one Class II Director
(Mr. Crotty), and one Class III Director (Mr. Green). Messrs. McMurrey and
McFarland, the Class I directors will stand for election for a three-year term
at the next annual meeting.  The Class II Director, Mr. Crotty will stand for
re-election in 2002. Our By-Laws provide that the board of directors is divided
into three classes and that each director shall serve a term of three years and
that the total number of directors shall consist of no fewer than three and no
more than twelve members.

     Biographical information with respect to the present executive officers and
directors of Teletouch are set forth below. There are no family relationships
between any present executive officers or directors.

<TABLE>
<CAPTION>
Name                               Age (1)                              Title
---------------------------   ----------------    -------------------------------------------------
<S>                           <C>                 <C>
Robert M. McMurrey                 55               Chairman of the Board of Directors and Chief
                                                    Executive Officer
Clifford E. McFarland              45               Director
Charles C. Green III               55               Director
J. Kernan Crotty                   57               Director, President, Chief Operating Officer,
                                                    Chief Financial Officer and Assistant Secretary
J. Richard Carlson                 39               Director, President, Chief Executive Officer
                                                    and Chief Operating Officer
</TABLE>

                                       16
<PAGE>

<TABLE>
<CAPTION>
Name                              Age (1)           Title
---------------------------   ----------------      ----------------------------
<S>                           <C>                   <C>
Marcus D. Wedner                    38              Director
Thomas E. Van Pelt, Jr.             37              Director
Thomas E. Gage                      50              Director
</TABLE>

_______________________________
(1) As of August 31, 2001.

     Robert M. McMurrey, Chairman of the Board of Directors and Chief Executive
Officer, has been a director of Teletouch since 1984. He served as Chief
Executive Officer until February 2000 and was re-elected to that position in May
2001.  He is also the President, Chief Executive Officer, a director and the
sole stockholder of Rainbow Resources.  Through Rainbow Resources, Mr. McMurrey
acquired a controlling interest in Teletouch in 1984.  Mr. McMurrey is the sole
stockholder of Progressive Concepts Communications, Inc. ("PCCI") which is in
turn the sole stockholder of Progressive Concepts, Inc. ("PCI"), a Texas
corporation, a provider of radio communications, telephone and telecommunication
equipment, accessories and supplies.  Mr. McMurrey is also both an officer and
director of PCI.  Mr. McMurrey was active in the oil and gas industry for over
30 years.  Mr. McMurrey received a B.S. Degree in Petroleum Engineering from the
University of Texas in 1971.

     Clifford E. McFarland has been a director of Teletouch since May 1995. In
1991 Mr. McFarland co-founded McFarland, Grossman & Company ("MGC"), an
investment bank in Houston, Texas.  Mr. McFarland has served as the President
and a Managing Director of MGC since its inception.  From time to time, MGC has
rendered investment banking services to Teletouch, and to certain affiliates of
Teletouch.  See "Compensation of Directors and Executive Officers--Consulting
and Other Arrangements."

     Charles C. Green III has been a director of Teletouch since May 1995. In
September 1997, he became Executive Vice President and Chief Financial Officer
of Castle Tower Holding Corporation, a telecommunications holding company, and
he continues to be associated with Castle in that capacity. During 1997 he was
Executive Vice President, Chief Financial Officer and a director of Bellweather
Exploration Company, an independent oil and gas company in Houston.

     J. Kernan Crotty joined Teletouch as Executive Vice President and Chief
Financial Officer in November 1998. In May 2001 he was promoted to President and
Chief Operating Officer in addition to his other duties.  From 1995 to 1998, Mr.
Crotty was founder and a principal of Latah Creek Investment Company, a
manufacturer and importer of home furnishings, as well as a principal and Vice
President of Courtside Products, Inc., a manufacturer and importer of sporting
goods. Mr. Crotty holds an MBA degree from New York University and is a
Certified Public Accountant.

     J. Richard Carlson served as President and Chief Operating Officer of
Teletouch from August 1997 through May 2001. As a result of a vacancy on the
board of directors, he was appointed and served as a director of Teletouch from
November 1998 through May 2001. Mr. Carlson also served as Chief Executive
Officer from February 2000 through May 2001. . Mr. Carlson resigned from all
positions held at Teletouch, including his directorship, effective May 31, 2001.

     Thomas E. Gage served a director of Teletouch from March 1998 until his
resignation from the board of directors on July 12, 2001. Since 1996, Mr. Gage
has been Chairman and owner of Marconi Pacific, LLC, a Bethesda, Maryland
consulting firm. From time to time, Marconi Pacific provides consulting services
to Teletouch. See "Compensation of Directors and Executive Officers-- Consulting
and Other Arrangements."

     Marcus D. Wedner served as a director of Teletouch from August 1995 until
his resignat ion from the board of directors on August 28, 2001. Since 1992, Mr.
Wedner has been a Managing Director of CIVC, a venture capital investing
company. Mr. Wedner is also a director of TransWestern Publishing Company, L.P.,
the holding company of an independent publisher of yellow pages directories.

                                       17
<PAGE>

     Thomas E. Van Pelt, Jr. served as a director of Teletouch from March 1998
until his resignation from the board of directors on August 31, 2001. From
January 2000, Mr. Van Pelt was a general partner of Talon Equity Partners, LLC,
a private equity firm. From 1994 to 2000, Mr. Van Pelt has been a Managing
Director of CIVC.

     Each officer of Teletouch is appointed by the board of directors and holds
his office(s) at the pleasure and direction of the board to serve in such
capacities until the next annual meeting of the board of directors.

     There are no material proceedings to which any director, officer or
affiliate of Teletouch, any owner of record or beneficially of more than five
percent of any class of voting securities of Teletouch, or any associate of any
such director, officer, affiliate of Teletouch or security holder is a party
adverse to Teletouch or any of its subsidiaries or has a material interest
adverse to Teletouch or any of its subsidiaries.

     No director, officer or affiliate of Teletouch, any owner of record or
beneficially of more than five percent of any class of voting securities of
Teletouch during the last five years (a) has been convicted of any criminal
proceeding (excluding traffic violations or similar misdemeanors) or (b) has
been a party to a civil proceeding of a judicial or administrative body of
competent jurisdiction and as a result of such proceeding was or is subject to a
judgment, decree or final order enjoining future violations of, or prohibiting
or mandating activities subject to, United States federal or state securities
laws or finding any violations with respect to such laws.

Committees of the Board of Directors

     The Committees of the Board of Directors are as follows:

The board of directors has established three standing committees, namely, an
Audit Committee, a Compensation Committee and an Executive Committee. The board
of directors does not have a standing nominating committee or any committee
serving a similar function.

     Audit Committee. The duties and responsibilities of the Audit Committee are
to recommend the selection of the independent public accountants for Teletouch
to the board of directors, to review the scope and cost of the audit, to review
the performance and procedures of the auditors, to review the final report of
the independent auditors, to be available for consultation with the independent
auditors, to review with the Teletouch Chief Financial Officer and independent
auditors corporate accounting practices and policies and financial controls, and
to perform all other duties as the Board of directors may from time to time
designate. Mr. McFarland is currently the sole member of the Audit Committee
subsequent to the resignation of Thomas E. Gage and Thomas E. Van Pelt from the
board of directors effective July 12, 2001 and August 31, 2001 respectively.
During the fiscal year ended May 31, 2001, the Audit Committee held three
meetings.

     Compensation Committee. The duties and responsibilities of the Compensation
Committee are to review periodically the compensation of executive officers and
other key employees, to make recommendations as to bonuses and salaries, and to
perform all other duties as the board of directors may from time to time
designate. Charles C. Green III is currently the sole member of the Compensation
Committee subsequent to the resignation of Marcus D. Wedner from the board of
directors effective August 28, 2001. During the fiscal year ended May 31, 2001,
the Compensation Committee held one meeting.

     Executive Committee. The duties and responsibilities of the Executive
Committee are to exercise the powers and authority of the board of directors in
the management of the business and affairs of Teletouch, to the extent not
assigned to other committees of the board of directors and to the extent
permitted by Delaware law and the By-Laws of Teletouch. Robert M. McMurrey is
the sole member of the Executive Committee subsequent to the resignation of
Marcus D. Wedner from the board of directors effective August 28, 2001. During
the fiscal year ended May 31, 2001, the Executive Committee held no meetings.

                                       18
<PAGE>

     We do not have a nominating committee or any committee serving a similar
function.

Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the Securities Exchange Act of 1934, as amended (the
Exchange Act) requires our officers and directors, and persons who own more than
ten percent of a registered class of our equity securities, to file reports of
ownership and changes in ownership of equity securities of Teletouch with the
Securities and Exchange Commission (SEC). Officers, directors, and greater than
ten percent shareholders are required by SEC regulation to furnish us with
copies of all Section 16(a) forms that they file.

     Based solely upon a review of Forms 3 and Forms 4 furnished to us pursuant
to Rule 16a-3 under the Exchange Act during our most recent fiscal year and
Forms 5 with respect to our most recent fiscal year, we believe that all such
forms required to be filed pursuant to Section 16(a) of the Exchange Act were
timely filed, as necessary, by the officers, directors, and security holders
required to file the same during the fiscal year ended May 31, 2001.


Item 11.  Executive Compensation

     The following table sets forth the aggregate cash compensation paid for
services rendered to Teletouch during the last three years by each person
serving as Teletouch's Chief Executive Officer and Teletouch's most highly
compensated executive officers serving as such as of May 31, 2001 whose
compensation was in excess of $100,000.

<TABLE>
<CAPTION>
                                                                       Long-Term Compensation
                                                                       ----------------------------------

                        Annual Compensation                            Awards
                        ---------------------------------------------  ------------------------------------


                                                                       Securities
                                                      Other            Restricted     Underlying
     Name and                               Bonus($)  Annual           Stock          Options/
     Principal Position  Year    Salary($)  (1)       Compensation($)  Awards($) (2)  SARs(#)
     ------------------ ------   ---------  --------  ---------------  -------------  ---------- ----------
     <S>                 <C>     <C>         <C>      <C>              <C>            <C>        <C>
     Robert M            2001    175,000     80,000                 -              -           -
     McMurrey;           2000    175,000     40,000                 -              -           -
     Chairman of the     1999    175,000                            -              -           -
     Board (3)

     J. Richard          2001    177,000     13,500                 -              -           -
     Carlson;            2000    193,987    140,000                 -              -     166,667
     President, CEO and  1999    175,000     65,000                 -              -           -
     COO (4)

     J. Kernan Crotty    2001    130,192     80,000                 -        100,000           -
     Executive Vice      2000    125,000     45,000                 -              -           -
     President and CFO   1999     66,018     41,500                 -         50,000           -
     -----------------
     (5)
     ---

     Nancy Andersen      2001     95,000     25,000                 -              -           -
     Vice President      2000     88,346      7,885                 -              -           -
                         1999     83,077      7,200                 -              -           -
</TABLE>

(1)  Unless otherwise indicated, bonuses shown were paid in the fiscal year
     following the year in which services were provided.
(2)  The number and value of the aggregate restricted stock beneficial holdings
     for the named executives at the end of the last fiscal year, based on the
     closing price of the common stock on May 31, 2001, were as follows (without
     giving effect to the consideration paid for the securities held):  Mr.
     McMurrey: 1,200,000 shares, with a value of $960,000; Mr. Carlson: 15,566
     shares, with a value of $12,453, and Mr. Crotty, no shares.
(3)  Mr. McMurrey was also Chief Executive Officer of Teletouch until February
     2000 and was reappointed to that position in May 2001. He currently holds
     options to purchase 16,666 shares issued in 1995.
(4)  Mr. Carlson resigned as President and Chief Executive Officer in May 2001.
     The bonus amount reported for Mr. Carlson for fiscal year 2000 includes
     $100,000 paid upon renewal of his employment agreement in June 2000. The
     bonus amount reported for fiscal year 2001 includes $87,500 paid to him
     upon his resignation from his positions as CEO, COO and President of the
     Company in May 2001.

                                       19
<PAGE>

(5)  Mr. Crotty became an employee of Teletouch during fiscal year 1999;
     consequently the fiscal 1999 salary figure is for an abbreviated period.
     Mr. Crotty became President, Chief Operating Officer, and Chief Financial
     Officer in May 2001 at an annual salary of $175,000. The bonus shown for
     Mr. Crotty for fiscal year 1999 includes $10,000 paid upon joining the
     Company.

Option/SAR Grants in Last Fiscal Year (2001)

     The following table sets forth certain information with respect to options
granted during the fiscal year ended May 31, 2001 for persons named in the
Summary Compensation Table.

<TABLE>
<CAPTION>
                               Number of Securities          Percent of Total         Exercise or
                                    Underlying            Options/SARs Granted to      Base Price     Grant Date    Expiration
     Name                    Options/SARs Granted (#)    Employees in Fiscal Year      ($/Share)        Value          Date
     ----------------------  ------------------------    -------------------------    ------------    ----------    ----------
     <S>                      <C>                         <C>                          <C>              <C>          <C>
     Robert M. McMurrey                             -                           -                -            ??          -

     J. Richard Carlson (2)                         -                           -                -            ??          -

     J. Kernan Crotty                         100,000                          97%     $      1.00            ??       11/30/10

     Nancy Anderson                                 -                           -                -            ??          -
</TABLE>

Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values

     The following table sets forth certain information with respect to: (i)
options exercised during the fiscal year ended May 31, 2001 by named executive
officers and with respect to unexercised options held by such persons at the end
of the fiscal year ended May 31, 2001.


<TABLE>
<CAPTION>

                                Shares                         Number of Securities            Value of Unexercised in the
                                Acquired on     Value          Underlying Unexercised          Money Options/SARs at
     Name                       Exercise (#)    Realized ($)   Options/SARs at FY-End (#)      FY-End ($)
     -----------------------   -------------   -------------   --------------------------      ---------------------------
                                                               Exercisable      Unexercisable  Exercisable  Unexercisable
                                                               ---------------  -------------  -----------  --------------
     <S>                       <C>              <C>             <C>             <C>            <C>          <C>
     Robert M. McMurrey                    -               -         16,666 (1)             0            0               0

     J. Richard Carlson (2)                -               -        344,757           156,243            0               0

     J. Kernan Crotty                      -               -         56,759            93,241            0               0

     Nancy Anderson                        -               -         13,333                 -            0               0
</TABLE>
-----------------
(1)  Options to exercise an option to purchase 66,666 shares expired
     unexercised subsequent to the fiscal year ended May 31, 1999.
(2)  Mr. Carlson resigned effective May 31, 2001. His options expired
     unexercised on August 31, 2001.

Director Compensation

     Each director of Teletouch who is not a salaried officer or employee of
Teletouch or of a subsidiary of Teletouch receives compensation for serving as a
director and fees for attendance at meetings of the board of directors or of any
committee appointed by the board of directors as determined by the board from
time to time. The directors are also eligible to receive options under our stock
option plans at the discretion of the board of directors. Historically, non-
employee directors received a one-time grant of options to purchase 6,666 shares
of common stock upon election as a director; and all non-employee non-affiliate
directors received a grant of options to purchase 666 shares of common stock on
the first business day of each calendar year. All directors are entitled to
reimbursement of reasonable travel and lodging expenses related to attending
meetings of the board of directors.

     Teletouch's policy is that every non-employee, non-affiliate director of
Teletouch shall be paid $500 for attendance at meetings of the board of
directors ($100 for telephonic attendance). Such amount is in

                                       20
<PAGE>

addition to reimbursement to such directors for out-of-pocket expenses related
to meeting attendance.

Employment Contracts and Termination of Employment and Change-in-Control
Arrangements

     In August 1995, Teletouch entered into an employment agreement with Mr.
McMurrey, Chairman of the Board and then Chief Executive Officer. Pursuant to
the employment agreement, Mr. McMurrey was employed at a base salary of $175,000
per annum for the three years ending August 1998, and was entitled to bonuses
based on a performance formula. Pursuant to the agreement, Teletouch issued to
Mr. McMurrey options to purchase 16,666 shares of common stock, which are vested
in full. Mr. McMurrey's employment agreement was extended for an additional
one-year period, according to its terms.

     In July 1997, Teletouch entered into an employment agreement with J.
Richard Carlson, President, Chief Executive Officer and Chief Operating Officer.
Pursuant to the agreement, Mr. Carlson was employed at a base salary of $175,000
per annum for the first two years ending August 4, 1999, and was entitled to
bonuses based on a performance formula. Teletouch issued to Mr. Carlson options
to purchase 333,333 shares of common stock, exercisable at $.87 per share,
vesting in five equal annual installments over five years. Mr. Carlson's
employment agreement was renewed on June 25, 2000 for a term ending in May 2001,
at an annual salary of $200,000. Subsequently, Mr. Carlson voluntarily reduced
his salary to the previous year's level, $175,000. The new employment agreement
entitled him to bonuses based on a performance formula. Under the renewed
agreement, Teletouch issued to Mr. Carlson options to purchase 166,667 shares of
common stock, exercisable at $2.225 per share, which vested ratably over a two-
year period. The exercise price of these options was subsequently reduced to
$0.87. Teletouch also paid Mr. Carlson a $100,000 signing bonus upon his renewal
of the employment agreement. The agreement also contains confidentiality and
non-competition provisions. In addition, the agreement provides for death
benefits and disability benefits and provide for the payment by Teletouch of any
expenses of the employee incurred in any successful proceeding to enforce
provisions of his employment agreement. Mr. Carlson resigned as an officer and
director of the Company in May 2001, and his employment agreement is no longer
in effect.

     Teletouch has no employment agreement with Mr. Crotty as of the date of
this report.

Consulting and Other Arrangements

     Thomas E. Gage served as a director of Teletouch until his resignation from
the board of directors on July 12, 2001. He is the Chairman of Marconi Pacific
LLC, a company which provides consulting services to Teletouch on an as-needed
basis. During the fiscal year ended May 31, 2001, the Company paid Marconi
Pacific $35,357 for services rendered to Teletouch.

     Clifford E. McFarland, a director of Teletouch, is President and a Managing
Director of McFarland, Grossman & Company. During the fiscal year ended May 31,
2001, Teletouch paid $314 to Mr. McFarland's firm for consulting services. In
addition, Mr. McFarland's firm has provided services to TLL, LLC, an affiliate
of Mr. McMurrey, in connection with TLL's attempts to renegotiate and/or
purchase the Company's institutional debt. See Item 12, Security Ownership of
Certain Beneficial Owners and Management.

Compensation Committee Interlocks and Insider Participation

     Mr. Green is the sole member of the Compensation Committee.  Mr. Green is a
non-employee director of the Company.  Mr. Wedner, who served on the
Compensation Committee until his resignation from the board of directors, was a
non-employee director of Teletouch, and was affiliated with CIVC throughout his
tenure as a director.   See Item 12, Security Ownership of Certain Beneficial
Owners and Management.

                                       21
<PAGE>

Stock Option Plan

     Under the Teletouch Communications, Inc. 1994 Stock Option and Appreciation
Rights Plan (the "Stock Option Plan"), directors of Teletouch who are not also
employees may participate in the Stock Option Plan only to the extent of grants
of Non-Qualified Options on a non-discretionary basis pursuant to a formula set
forth in the Stock Option Plan to the effect that on the date of election to the
Board, each non-employee director shall receive a Non-Qualified Option to
purchase 6,666 shares of common stock at an exercise price equal to the fair
market value per share of the common stock on that date. Each such option shall
vest and become exercisable one year from the date of grant thereof.

          Messrs. Green, McFarland and Gage were each granted options upon their
joining the board of directors. In addition, the board of directors has adopted
a policy providing that each non-employee, non-affiliate director shall receive
a non-discretionary Non-Qualified Option pursuant to the Stock Option Plan to
purchase 666 shares of common stock effective as of June 1, 1998 and
subsequently on the first business day of January each year beginning in January
1999. Each option will be exercisable at a price equal to the closing market
price on the date of grant, and will vest in full one year from the date of
grant. Messrs. Gage, Green and McFarland were each granted options to purchase
666 shares effective June 1, 1998, January 4, 1999, January 3, 2000 and January
2, 2001, respectively.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

     The following table shows beneficial ownership of (1) each executive
officer and director individually; (2) all executive officers and directors of
Teletouch as a group; and (3) all persons known by Teletouch to be the
beneficial owners of five percent or more of Teletouch common stock as of the
close of business on August 31, 2001. As of August 31, 2001, there were issued
and outstanding the following: _4,926,179 shares of common stock, 15,000 shares
of Series A Preferred Stock, 85,394 shares of Series B Preferred Stock,
approximately 3,794,000 common stock options and warrants and 324,173 Series B
warrants.

<TABLE>
<CAPTION>
Name and Address of Beneficial                       Number of Shares     % of Common Stock
Owner (1)                           Title of Class   Beneficially Owned   Beneficially Owned
---------------------------------   --------------   ------------------   ------------------
<S>                                 <C>              <C>                    <C>

Robert M. McMurrey                   common stock             6,341,649                 64.9%
110 N. College, Suite 200
Tyler, TX  75702 (2)(3)(4)(5)(13)

Clifford E. McFarland (3)(6)         common stock                14,665                   *
McFarland, Grossman & Company
9821 Katy Freeway, Suite 500
----------------------------
Houston, TX  77024
                                     common stock                 8,664                   *
Charles C. Green III (3)(7)
Castle Tower Holding Corporation
510 Bering, Suite 310
Houston, TX  77057

Continental Illinois Venture         common stock             5,307,404                 54.0%
Corporation (8)(14)
231 South La Salle Street
Chicago, IL  60697

J. Kernan Crotty (2)(3)(9)           common stock                59,692                  1.2%
110 N. College, Suite 200
Tyler, TX  75702
----------------

CIVC Partners I (10) (14)            common stock               511,763                 10.0%
c/o Continental Illinois Venture
Corporation
231 South La Salle Street
Chicago, IL  60697
</TABLE>

                                       22
<PAGE>

<TABLE>
<CAPTION>
Name and Address of Beneficial                       Number of Shares     % of Common Stock
Owner (1)                           Title of Class   Beneficially Owned   Beneficially Owned
---------------------------------   --------------   ------------------   ------------------
<S>                                 <C>              <C>                    <C>
GM Holdings, L.L.C. (11)             common stock               701,526                 13.4%
201 Fourth Avenue North, 11th
Floor
Nashville, TN  37219

TLL Partners, L.L.C. (5)(13)         common stock             5,117,641                 52.5%
110 N. College, Suite 200
Tyler, TX  75702

Rainbow Resources, Inc. (13)         common stock             1,200,000                 24.4%
110 N. College, Suite 200
Tyler, TX  75702

All Executive Officers & Directors   common stock             6,424,670                 65.2%
as a Group (4 Persons) (12)
</TABLE>
---------------
* Indicates less than 1.0%.
(1)  Unless otherwise noted, Teletouch believes that all shares referenced in
     this table are owned of record by each individual named as beneficial owner
     and that each individual has sole voting and dispositive power with respect
     to the shares of common stock owned by each of them. In accordance with
     Rule 13d-3, each person's percentage ownership is determined by assuming
     that the options or convertible securities that are held by that person,
     and which are exercisable within 60 days from the date hereof, have been
     exercised or converted, as the case may be.
(2)  Executive Officer.
(3)  Director.
(4)  Includes 1,200,000 shares of common stock owned by of Rainbow Resources,
     Inc., a Texas corporation (RRI).  Mr. McMurrey is the sole director and
     shareholder of RRI.  Includes 16,666 shares underlying options issued to
     Mr. McMurrey.  By virtue of Mr. McMurrey's sole ownership of RRI, he may be
     deemed to be a "parent" of Teletouch pursuant to the Securities Exchange
     Act.   The principal business of RRI is the ownership and operation of oil
     and gas properties and the ownership of Teletouch securities.
(5)  Includes 5,117,641 additional common shares purchased by TLL Partners,
     L.L.C., a Delaware limited liability company (TLL), upon exercise of the
     option (defined below). TLL has executed a certain Option and Securities
     Purchase Agreement pursuant to which TLL purchased an option (the Option)
     to acquire from CIVC Partners I and Continental Illinois Venture
     Corporation all of their shares of Teletouch common stock, Common Stock
     Warrants, shares of Series B Preferred Stock together with the Series B
     Warrants, and shares of Series A Preferred Stock. If TLL exercises the
     Option and converts all related securities into Common Stock, it will
     acquire direct ownership of 5,117,641 additional Common Shares. The
     principal business of TLL is to act as a holding company for Mr. McMurrey's
     investment in Teletouch securities. Mr. McMurrey is the sole member and
     sole officer of TLL.
(6)  Includes 14,665 shares underlying stock options granted to Mr. McFarland.
(7)  Represents shares underlying stock options granted to Mr. Green.
(8)  Includes 2,660,840 shares of common stock underlying a warrant issued to
     Continental Illinois Venture Corporation (CIVC) and 1,945,038 shares of
     common stock underlying warrants to purchase 324,173 shares of non-voting
     Series B Preferred Stock (each share of Series B Preferred Stock is
     convertible into six shares of common stock). Also includes 405,276 shares
     of common stock issued, and 296,250 shares of common stock issuable, for
     which CIVC holds the voting rights. CIVC may be deemed to be the beneficial
     owner of such additional shares pursuant to the rules of attribution of
     beneficial ownership set forth in Rule 13d-3 under the Securities Exchange
     Act. Does not include liquidation value of $11,818,000 (or 11,818 shares)
     of non-voting Series A Preferred Stock issued to CIVC. CIVC may be deemed
     to be a "parent" of Teletouch pursuant to the Securities Exchange Act.
(9)  Represents shares underlying stock options granted to Mr. Crotty.
(10) Includes 216,114 shares of common stock, which may be acquired upon
     conversion of 36,019 shares of non-voting Series B Preferred Stock. Does
     not include liquidation value of $1,313,000 (or 1,313 shares) of Series A
     Preferred Stock issued to CIVC Partners I.
(11) Includes 296,250 shares of common stock, which may be acquired upon
     conversion of 49,375 shares of non-voting Series B Preferred Stock. All of
     such shares are also included in the figure reported for CIVC in this table
     because CIVC holds the voting power, but not the dispositive power, for
     such shares. See Footnote 8. Does not include liquidation value of
     $1,800,000 (or 1,800 shares) of Series A Preferred Stock issued to GM
     Holdings, L.L.C.
(12) Includes 1,207,342 shares of common stock issued and outstanding and
     5,134,307 shares of common stock underlying exercisable warrants, options
     and convertible preferred shares.
(13) Based upon information set forth in the Schedule 13D filed by Robert
     McMurrey, RRI and TLL with the SEC on August 28, 20001. Teletouch has not
     made independent inquiry into the information recited therein. Mr. McMurrey
     has voting and dispositive power over all Teletouch securities owned by RRI
     and TLL.
(14) Based upon information set forth in the Schedule 13D filed by Continental
     Illinois Venture Corporation with the SEC on August 28, 2001. Teletouch has
     not made independent inquiry into the information recited therein.


Item 13.  Certain Relationships and Related Transactions

                                       23
<PAGE>

Transactions with Management and Others

     See Item 11 above for descriptions of the terms of employment and
consulting agreements between Teletouch and certain officers, directors and
other related parties.

     The following information is based upon information set forth in the
Schedule 13D filed by Robert McMurrey, Rainbow Resources, Inc. (RRI) and TLL
Partners, L.L.C. (TLL) with the SEC on August 28, 2001 and in the Schedule 13D
filed by Bank of America Corporation, Bank of America, National Association,
Continental Illinois Venture Corporation, CIVC Partners I, NB Holdings
Corporation, Marcus D. Wedner, Daniel G. Helle, Sue C. Rushmore, Thomas E. Van
Pelt, Jr. and Christopher J. Perry with the on August 28, 2001.  Teletouch has
not made an independent inquiry into the information recited in that Schedule
13D.

Option and Securities Purchase Agreement

     Robert M. McMurrey is the founder and the Chairman of the Board of
Teletouch.  Mr. McMurrey's investments in Teletouch are made through TLL and
RRI.  RRI is a Texas corporation of which Robert M. McMurrey is the sole
director and shareholder.  The principal business of RRI is the ownership and
operation of oil and gas properties and the ownership of Teletouch securities.
TLL is a Delaware limited liability company of which Robert M. McMurrey is the
sole member and sole officer. The principal business of TLL is to act as a
holding company for Mr. McMurrey's investment in Teletouch securities.  Mr.
McMurrey, RRI and TLL are collectively referred to below as the Reporting
Persons.

     TLL executed a certain Option and Securities Purchase Agreement (the
Agreement), dated August 24, 2001 and effective August 28, 2001, by and among
TLL, CIVC Partners I, a Delaware limited partnership (Partners), and Continental
Illinois Venture Corporation, a Delaware corporation (CIVC, and, together with
Partners, the Sellers). Pursuant to the Agreement, TLL paid $50,000 for an
option (the Option) to purchase from the Sellers: (i) 295,649 shares, (ii)
warrants (the Common Stock Warrants), which are immediately exercisable, to
purchase 2,660,840 shares, (iii) 36,019 shares of Series B Preferred Stock (the
Series B Shares), which are immediately convertible into 216,114 shares; (iv)
warrants (the Series B Warrants), which are immediately exercisable, to purchase
324,173 Series B Shares, which are immediately convertible into 1,945,038
shares; and (v) 13,131 shares of Series A Preferred Stock, which are convertible
from and after August 3, 2003 into a number of shares to be determined on the
date of conversion. TLL used $50,000, which had been loaned to it by Mr.
McMurrey, to fund the purchase of the Option. TLL may exercise the Option at any
time on or before May 24, 2002, though it must pay an additional $50,000 (the
Option Extension Premium) to extend the Option beyond November 23, 2001. Upon
the exercise of the Option, TLL must pay the Sellers an aggregate amount of
$795,818, less the amount of any payments already received by the Sellers. The
Agreement also provides that certain other stockholders may, and any transferee
of the Sellers or such other stockholders must, adopt the Agreement.

     The Reporting Persons state that they beneficially own their shares (i) for
investment purposes, (ii) for the exercise of control of Teletouch, and (iii) in
order to attempt to restructure the debt and equity of Teletouch and thereby
improve its financial condition. The Agreement provides that CIVC shall cause
each member of the Board of Directors of Teletouch who is a CIVC or Partners
designee to resign within seven days of the date of the Agreement and shall not
designate a replacement unless approved in writing by TLL. Messrs., Van Pelt,
and Wedner respectively resigned on August 31, 2001 and August 28, 2001 pursuant
to the Agreement.

     Mr. McMurrey beneficially owns 6,341,649 shares. They include 16,666 shares
issuable upon the exercise of an option granted by the Board of Directors of
Teletouch pursuant to his Employment Agreement, the 1,200,000 shares owned by
RRI, which is owned and controlled by Mr. McMurrey, and the shares purchasable
upon exercise of the Option owned by TLL, which in turn is also owned by Mr.
McMurrey. The 6,341,649 shares beneficially owned by Mr. McMurrey represent
64.9% of the outstanding shares, based upon (i) the number of shares outstanding
as of the most recent practicable date and (ii) the number of

                                       24
<PAGE>

additional shares that will be outstanding upon the exercise of the Option and
the conversion into, or exercise for, shares of any securities purchased upon
the exercise of the Option, pursuant to Rule 13d-3(d)(1)(i).

     TLL beneficially owns 5,117,641 shares as follows: TLL has a right to
acquire (i) 295,649 shares upon the exercise of the Option; (ii) 2,660,840
shares upon the exercise of the Common Stock Warrants acquired upon the exercise
of the Option; (iii) 216,114 shares upon the conversion of the Series B Shares
acquired upon the exercise of the Option; and (iv) 1,945,038 shares upon the
conversion of the Series B Shares acquired upon the exercise of the Series B
Warrant acquired upon the exercise of the Option. The 5,117,641 shares that TLL
beneficially owns represent 52.5% of the outstanding shares, based upon (i) the
number of shares outstanding as of the most recent practicable date and (ii) the
number of additional shares that will be outstanding upon the exercise of the
Option and the conversion into, or exercise for, shares of any securities
purchased upon the exercise of the Option, pursuant to Rule 13d-3(d)(1)(i).

     RRI beneficially owns 1,200,000 shares.

Stockholders Agreement

     Teletouch, RRI, Mr. McMurrey, the Sellers and certain other stockholders of
the Company are parties to a Stockholders Agreement, dated August 3, 1995 (the
Stockholders Agreement), which governs certain rights and obligations regarding
the voting and disposition of the shares held by the respective parties. The
Agreement provides that the termination of the Stockholders Agreement is a
condition to the exercise of the Option by TLL. A copy of the Stockholders
Agreement was filed by Teletouch with the SEC on August 18, 1995, as an exhibit
to the Company's Current Report on Form 8-K and is incorporated herein by
reference.


                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)  (1)  Financial Statements.

          Consolidated Balance Sheets as of May 31, 2001 and 2000

          Consolidated Statements of Operations for Each of the Three Years in
          the Period Ended May 31, 2001

          Consolidated Statements of Cash Flows for Each of the Three Years in
          the Period Ended May 31, 2001

Consolidated Statements of Shareholders' Equity (Deficit) for Each of the Three
Years in the Period Ended May 31, 2001

          Notes to Consolidated Financial Statements

          Report of Independent Auditors

(a)  (2)  Financial Statement Schedules.

          Schedule II - Valuation and Qualifying Accounts and Reserves

Schedules, other than those referred to above, have been omitted because they
are not required or are not applicable or because the information required to be
set forth therein either is not material or is in included in the financial
statements or notes thereto.

                                       25
<PAGE>

(a)  (3)  Exhibits.

          Exhibit
          Number    Title of Exhibit
          ------    ----------------

          21        Subsidiaries


(b)  Reports on Form 8-K

     Teletouch filed no reports on Form 8-K during the fourth quarter of Fiscal
     2001.

                                       26
<PAGE>

                   Index to Consolidated Financial Statements

<TABLE>
<S>                                                          <C>

Report of Independent Auditors...............................F-2

Consolidated Balance Sheets..................................F-3

Consolidated Statements of Operations........................F-4

Consolidated Statements of Cash Flows........................F-5

Consolidated Statements of Shareholders' Equity (Deficit)....F-6

Notes to Consolidated Financial Statements.................  F-7
</TABLE>

                                      F-1
<PAGE>

                Report of Ernst & Young LLP, Independent Auditors

We have audited the accompanying consolidated balance sheets of Teletouch
Communications, Inc. and subsidiaries as of May 31, 2001 and 2000, and the
related consolidated statements of operations, shareholders' equity (deficit),
and cash flows for each of the three years in the period ended May 31, 2001. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Teletouch
Communications, Inc. and subsidiaries at May 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended May 31, 2001, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.

As discussed in Note B to the consolidated financial statements, the Company's
failure to comply with certain terms of the Credit Agreement results in Events
of Default, as defined, which allows the lender to terminate the Credit
Agreement and declare the borrowings to be due and payable. The Events of
Default also allow the lenders of the Junior Subordinated Notes to declare these
borrowings to be due and payable. These factors raise substantial doubt about
the Company's ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.

                                    /s/ Ernst & Young LLP

Dallas, Texas
August 22, 2001

                                      F-2
<PAGE>

                TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                       (in thousands, except share data)
<TABLE>
<CAPTION>

                                                                                                     May 31, 2001   May 31, 2000
                                                                                                     ------------   ------------
<S>        <C>                                                                                       <C>            <C>
ASSETS
CURRENT ASSETS:

           Cash and cash equivalents...................................................................  $  3,999       $  6,828
           Accounts receivable, net of allowance of $238 in 2001 and $213 in 2000......................     2,351          2,262
           Inventory...................................................................................     4,552          5,337
           Deferred income tax assets..................................................................        56             56
           Note receivable.............................................................................         -            515
           Certificates of deposit, restricted as to use...............................................       101            750
           Prepaid expenses and other current assets...................................................       532          1,663
                                                                                                         --------       --------
                                                                                                           11,591         17,411

PROPERTY, PLANT AND EQUIPMENT, net of
           Accumulated depreciation of $16,591 in 2001 and $13,633 in 2000.............................    18,484         19,117

GOODWILL, INTANGIBLES, AND OTHER ASSETS:
           Goodwill....................................................................................         -         24,892
           Subscriber bases............................................................................         -         28,421
           FCC licenses................................................................................         -         22,036
           Non-compete agreements......................................................................         -            705
           Debt issue costs............................................................................     4,100          4,100
           Other.......................................................................................         -            304
           Accumulated amortization....................................................................    (2,730)       (39,293)
                                                                                                         --------       --------
                                                                                                            1,370         41,165
                                                                                                         --------       --------
                                                                                                         $ 31,445       $ 77,693
                                                                                                         ========       ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
           Accounts payable and accrued expenses.......................................................  $  3,029       $  4,796
           Current portion of long-term debt...........................................................    12,196          6,608
           Long-term debt classified as current........................................................    66,935              -
           Current portion of unearned sale/leaseback profit...........................................       418            418
           Deferred revenue............................................................................     1,312          1,593
                                                                                                         --------       --------
                                                                                                           83,890         13,415
LONG-TERM LIABILITIES:
           Long term debt, net of current portion......................................................         -         71,927
           Unearned sale/leaseback profit, net of current portion......................................     2,327          2,747
                                                                                                         --------       --------
                                                                                                            2,327         74,674
COMMITMENTS AND CONTINGENCIES..........................................................................         -              -
DEFERRED INCOME TAXES..................................................................................     1,042          1,042
SHAREHOLDERS' EQUITY (DEFICIT):
           Series A cumulative convertible preferred stock, $.001 par value, 15,000 shares
              authorized, issued, and outstanding in 2001 and 2000.....................................         -              -
           Series B convertible preferred stock, $.001 par value, 411,457 shares authorized, 86,025 and
              87,286 shares issued and outstanding in 2001 and 2000,  respectively.....................         -              -
           Common stock, $.001 par value, 25,000,000 shares authorized, 4,926,210 shares
              issued in 2001 and 4,298,192 issued and outstanding in 2000..............................         5              4
           Treasury Stock, 49,400 shares...............................................................       (62)             -
           Additional paid-in capital..................................................................    26,363         24,863
           Accumulated deficit.........................................................................   (82,120)       (36,305)

                                                                                                         --------       --------
                                                                                                          (55,814)       (11,438)
                                                                                                         --------       --------
                                                                                                         $ 31,445       $ 77,693
                                                                                                         ========       ========
</TABLE>

                 See Accompanying Notes to Financial Statements

                                      F-3
<PAGE>

                 TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
               (in thousands, except shares and per share amounts)

<TABLE>
<CAPTION>
                                                                    Year ended May 31,
                                                        -----------------------------------------
                                                            2001           2000           1999
                                                        -----------    -----------    -----------

<S>                                                     <C>            <C>            <C>
Service, rent, and maintenance revenue ..............   $    42,929    $    45,164    $    42,792
Product sales revenue ...............................        13,366         11,427          8,346
                                                        -----------    -----------    -----------
   Total revenues ...................................        56,295         56,591         51,138
Net book value of products sold .....................       (13,405)       (11,211)        (8,000)
                                                        -----------    -----------    -----------
                                                             42,890         45,380         43,138
Costs and expenses:
      Operating .....................................        15,881         14,636         13,370
      Selling .......................................         8,961          8,281          5,657
      General and administrative ....................         7,710          7,636          8,878
      Depreciation and amortization .................        10,196         13,097         14,773
      Impairment charges ............................        36,589              -              -
                                                                                      -----------
                                                        -----------    -----------    -----------
Total costs and expenses ............................        79,337         43,650         42,678
                                                        -----------    -----------    -----------
Operating income ....................................       (36,447)         1,730            460

Gain (loss) on disposal of assets ...................          (237)           155             23

Loss on investments .................................          (356)             -              -

Interest expense, net
                                                             (8,775)        (7,908)        (7,823)
                                                        -----------    -----------    -----------

Net loss.............................................       (45,815)        (6,023)        (7,340)
Preferred stock dividends ...........................        (4,302)        (3,718)        (3,325)
                                                        -----------    -----------    -----------

Loss applicable to common stockholders ..............   $   (50,117)   $    (9,741)   $   (10,665)
                                                        ===========    ===========    ===========

Loss per share - basic and diluted ..................   $    (10.65)   $     (2.29)   $     (2.52)
                                                        ===========    ===========    ===========

Weighted Average Shares Outstanding-Basic and Diluted     4,706,393      4,256,359      4,235,527
                                                        ===========    ===========    ===========
</TABLE>

                 See Accompanying Notes to Financial Statements

                                      F-4
<PAGE>

                 TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                Year Ended May 31,
                                                       --------------------------------
                                                         2001        2000        1999
                                                       --------    --------    --------
<S>                                                    <C>         <C>         <C>
Operating Activities:
      Net loss .....................................   $(45,815)   $ (6,023)   $ (7,340)
      Adjustments to reconcile net loss to net cash
        provided by operating activities:
      Depreciation and amortization ................     10,196      13,097      14,773
      Impairment charges ...........................     36,589           -           -
      Non-cash consulting expense ..................          -           -          55
      Non cash interest expense ....................      3,600       3,123       3,032
      Provision for inventory impairment ...........        474           -           -
      Provision for losses on accounts receivable ..      1,647       1,443         779
      (Gain) loss on disposal of assets ............        237        (155)        (23)
      Amortization of unearned sale/leaseback profit       (420)       (418)       (405)
      Loss on investments ..........................        356           -           -
      Changes in operating assets and liabilities:
          Accounts receivable, net .................     (1,735)     (1,738)       (936)
          Inventories ..............................      1,555         735         417
          Prepaid expenses and other assets ........      1,131        (857)        (95)
          Accounts payable and accrued expenses ....     (1,766)         86         (54)
          Deferred revenue .........................       (397)         79         337
                                                       --------    --------    --------
Net cash provided by operating activities ..........      5,652       9,372      10,540

Investing Activities:
      Capital expenditures, including pagers .......     (6,479)     (7,836)     (7,642)
      Acquisitions, net of cash acquired ...........       (239)       (547)          -
      Deferred costs associated with acquisitions ..         46        (170)         (2)
      Redemption of certificates of deposit ........        649         725           -
      Purchase of certificates of deposit ..........          -        (750)       (725)
      Net proceeds from sale of assets .............        132         254          49
                                                       --------    --------    --------
Net cash used for investing activities .............     (5,891)     (8,324)     (8,320)

Financing Activities:
      Debt incurred in connection with acquisitions           -         208           -
      Purchase of treasury stock ...................        (62)          -           -
      Payments on long-term debt ...................     (2,528)       (262)     (1,000)
      Net proceeds from exercise of
          common stock warrants ....................          -          47           -
                                                       --------    --------    --------

Net cash used for financing activities .............     (2,590)         (7)     (1,000)
                                                       --------    --------    --------

Net increase (decrease) in cash and cash equivalents     (2,829)      1,041       1,220
Cash and cash equivalents at beginning of period ...      6,828       5,787       4,567
                                                       --------    --------    --------

Cash and cash equivalents at end of period .........   $  3,999    $  6,828    $  5,787
                                                       ========    ========    ========
</TABLE>

                 See Accompanying Notes to Financial Statements

                                      F-5
<PAGE>

                 TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                     (In Thousands Except Number of Shares)

<TABLE>
<CAPTION>
                                             Preferred Stock                                  Additional                 Accumulated
                                             ---------------
                                       Series A          Series B           Common Stock       Paid-In   Treasury Stock    Earnings
                                       --------          --------           ------------                 --------------
                                    Shares  Amount   Shares    Amount     Shares     Amount    Capital   Shares   Amount   (Deficit)
                                    ------  ------   ------   --------   ---------   ------    --------  ------   ------   --------

                                 <C>      <C>     <C>      <C>        <C>         <C>       <C>       <C>      <C>      <C>
Balance at May 31, 1998 .........   15,000  $    -   87,287   $      -   4,235,611   $    4    $ 24,761       -   $    -   $(22,942)

    Net loss ....................        -       -        -          -           -        -           -       -        -     (7,340)
    Other .......................        -       -       (1)         -         (84)       -          55       -        -
                                    ------  ------   ------   --------   ---------   ------    --------  ------   ------   --------

Balance at May 31, 1999 .........   15,000  $    -   87,286   $      -   4,235,527   $    4    $ 24,816       -   $    -   $(30,282)

    Net loss ....................        -       -        -          -           -        -           -       -        -     (6,023)
    Exercise of warrants ........        -       -        -          -      62,665        -          47       -        -
                                    ------  ------   ------   --------   ---------   ------    --------  ------   ------   --------


Balance at May 31, 2000 .........   15,000  $    -   87,286   $      -   4,298,192   $    4    $ 24,863       -   $    -   $(36,305)


    Net loss ....................        -       -        -          -           -        -           -       -        -    (45,815)
    Acquisition of business .....        -       -        -                600,000        1       1,500       -        -          -
    Conversion of preferred stock        -       -   (1,261)                11,352        -           -       -        -          -
    Exercise of warrants ........        -       -        -          -      16,666        -           -       -        -          -
    Purchase of Treasury Stock ..        -       -        -          -           -        -           -  49,400      (62)         -
                                    ------  ------   ------   --------   ---------   ------    --------  ------   ------   --------


Balance at May 31, 2001 .........   15,000  $    -   86,025   $      -   4,926,210   $    5    $ 26,363  49,400   $  (62)  $(82,120)
                                    ======  ======   ======   ========   =========   ======    ========  ======   ======   ========
</TABLE>
                 See Accompanying Notes to Financial Statements

                                      F-6
<PAGE>

                 TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A - SIGNIFICANT ACCOUNTING POLICIES

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

         Principles of  Consolidation:  The  consolidated  financial  statements
include the accounts of Teletouch Communications, Inc. and its wholly-owned
subsidiaries (together, "Teletouch" or "the Company"). All significant
intercompany accounts and transactions have been eliminated in consolidation.

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

     Cash Equivalents: Cash equivalents are recorded at cost, which approximates
market, and include investments in financial instruments with maturities of
three months or less at the time of purchase.

     Inventories: Inventories are carried at the lower of cost or market using
the first-in, first-out method. The Company's inventories consist of pagers,
cellular telephones, prepaid cellular and long distance phone cards, two-way
radios, accessories, and spare parts held for sale.

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

<TABLE>
                <S>                                                               <C>
                Pagers..........................................................        3 years
                Paging infrastructure...........................................     5-15 years
                Building and improvements.......................................    10-20 years
                Other equipment.................................................     5-10 years
                Leasehold improvements..........................................   Shorter of estimated useful
                                                                                   life or term of lease
</TABLE>

     Intangible Assets: Except for debt issue costs, Teletouch's intangible
assets are recorded at cost and are amortized, using the straight-line method,
over the following periods:

<TABLE>
                  <S>                                                               <C>
                  Goodwill                                                             25 years
                  Subscriber bases                                                      5 years
                  FCC licenses                                                         25 years
                  Non-compete agreements                                              2-5 years
</TABLE>

         The Company defers costs incurred in obtaining debt and amortizes these
costs as additional interest expense over the term of the related debt using the
effective interest method. The carrying value of intangible assets is reviewed
if the facts and circumstances suggest that they may be permanently impaired. If
the review indicates that the intangible assets will not be recoverable, as
determined by the undiscounted cash flow method, the asset will be reduced to
its estimated recoverable value.

                                      F-7
<PAGE>

         Impairment of Long-lived Assets: The carrying amount of long-lived
assets including goodwill is reviewed if facts and circumstances suggest that
they may be impaired. If the review indicates that long-lived assets will not be
recoverable, as determined by the undiscounted cash flow method, the asset will
be reduced to its estimated recoverable value through a charge to operations.

         As discussed in footnotes B and F, the Company's Credit Agreement
requires, among other things, the maintenance of certain financial and operating
covenants and prohibits any payments on the Junior Subordinated Notes and the
payment of dividends. These covenants were amended as of the end of each of the
first three quarters of the fiscal year, which enabled the Company to meet its
financial covenant and principal repayment terms. As of May 31, 2001, the
Company has been unable to negotiate new terms under the Credit Agreement which
would enable the Company to remain in compliance therewith and thereunder as of
May 31, 2001, and for subsequent periods. The resulting inability to comply with
the terms of the Credit Agreement resulted in the occurrence of an Event of
Default under the Credit Agreement which permits the lender to declare the
borrowings to be due and payable. The Company has not been successful in its
efforts to recapitalize the Company. During the fourth quarter, because of the
continued default under the Credit Agreement, the continued decline in cash flow
and the on-going financial and operating difficulties faced by companies in the
wireless telecommunications services industry, the Company determined that the
remaining net book value of its long-lived assets were substantially impaired
and the recovery of such amounts through future operations or disposition was
unlikely. Accordingly, management estimated the future undiscounted cash flows
and determined the goodwill and FCC licenses were significantly impaired and
therefore recorded a charge equal to remaining net book value of these assets of
$ 36.6 million.

         Revenue Recognition: Revenue is recognized as services are provided or
the product is delivered to customers. Billings for services in advance are
deferred and recognized as revenue as services are provided. During the fourth
quarter of fiscal 2001, the Company adopted Staff Accounting Bulletin (SAB)
Number 101, "Revenue Recognition in Financial Statements". The adoption did not
have a material impact on the Company's results of operations.

     Advertising Costs: All costs related to advertising activities begun during
the fiscal year are expensed when incurred. Advertising costs were $2.0 million,
$1.8 million, and $1.2 million in fiscal 2001, 2000, and 1999, respectively.

     Loss Per Share: Loss per share is computed using the weighted-average
number of common shares outstanding during the period. Potentially dilutive
securities have not been considered in the computation because the effect would
be antidilutive.

         Sources of System Equipment and Inventory: Teletouch does not
manufacture its paging network equipment, including but not limited to antennas,
transmitters, and paging terminals, nor does it manufacture any of the pagers,
cellular telephones, or two-way radios it sells or leases. This equipment is
available for purchase from multiple sources, and the Company anticipates that
such equipment will continue to be available in the foreseeable future,
consistent with normal manufacturing and delivery lead times. Because of the
high degree of compatibility among different models of transmitters, computers
and other paging and voice mail equipment manufactured by its suppliers,
Teletouch's paging network is not dependent upon any single source of such
equipment. The Company currently purchases pagers and transmitters from several
competing sources. Until this year, the Company purchased its paging terminals
from Glenayre, a leading manufacturer of mobile communications equipment. During
the year, Glenayre announced that they will discontinue manufacturing paging
terminals but would continue to provide technical support for the foreseeable
future. Teletouch does not anticipate that the decision by Glenayre will impact
its operations as such terminal equipment is readily available in the used
market. Cellular telephones and two-way radios are available from several
sources.

     Concentration of Credit Risk: Teletouch provides paging and other wireless
telecommunications services to a diversified customer base of businesses and
individual consumers, primarily in non-metropolitan areas and communities in the
southeast United States. As a result, no significant concentration of credit
risk exists. The Company performs periodic

                                      F-8
<PAGE>

credit evaluations of its customers to determine individual customer credit
risks and promptly terminates services for nonpayment. Credit losses have been
within management's expectations.

     Financial Instruments: With the exception of its Junior Subordinated Notes,
management believes that the carrying value of its financial instruments
approximates fair value. It is not practicable to estimate the fair value of the
Junior Subordinated Notes given their unique characteristics and the complexity
involved in estimating their fair value.

     Reclassification: Certain  reclassifications have been made in the fiscal
2000 and 1999 financial statements to conform to the fiscal year 2001
presentation.

         New Accounting Pronouncements: In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement establishes accounting and reporting
guidelines for derivatives and requires companies to record all derivatives as
assets or liabilities on the balance sheet at fair value. Additionally, this
statement establishes accounting treatment for three types of hedges: hedges of
changes in the fair value of assets, liabilities or firm commitments; hedges of
the variable cash flows of forecasted transactions; and hedges of foreign
currency exposures of net investments in foreign operations. Any derivative that
qualifies as a hedge, depending upon the nature of that hedge, will either be
offset against the change in fair value of the hedged assets, liabilities or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. SFAS No. 133 is effective for
years beginning after June 15, 2000. Teletouch does not anticipate that the
adoption of this statement will have a material impact on its consolidated
balance sheets, statements of operations, or cash flows.

NOTE B - BASIS OF PRESENTATION

         The consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As discussed in footnote F, the
Company's Credit Agreement requires, among other things, the maintenance of
certain financial and operating covenants and prohibits any payments on the
Junior Subordinated Notes and the payment of dividends. These covenants were
amended by the lenders and the Company as of the end of each of the first three
quarters of the fiscal year, which allowed the Company to meet its financial
covenant and principal repayment terms. However, as of May 31, 2001, the Company
has been unable to amend or negotiate new terms under the Credit Agreement,
which would enable the Company to remain in compliance therewith and thereunder
as of May 31, 2001, and for subsequent periods. The resulting inability to
comply with the terms of the Credit Agreement resulted in the occurrence of an
Event of Default under the Credit Agreement which permits the lender to
terminate the commitment and to declare the borrowings totaling $57.3 million to
be due and payable. Also, based on the terms of the Junior Subordinated Note
agreement, if the lender declared the Company not in compliance with the terms
of the Credit Agreement, then by definition it would not be in compliance with
the terms of the Junior Subordinated Note Agreement resulting in an additional
$22.3 million becoming due and payable. While the Company continues to have
discussions with the lenders, no assurances can be given that the Company will
be able to successfully negotiate satisfactory terms. The default under the
Credit Agreement and Junior Subordinated Notes, the continued decline in cash
flow from operations, and the on-going operating difficulties faced by companies
in the wireless telecommunications services industry indicate that the Company
may be unable to continue as a going concern.

         At May 31, 2001, the Company had 4,876,810 shares of common stock
outstanding. On an "if-converted" basis, the Company would have approximately
54.1 million shares of common stock outstanding assuming the conversion and
exercise of all outstanding Series A Preferred Stock, including dividends in
arrears payable in kind, Series B Preferred Stock, Common Stock Purchase
Warrants, and all other warrants and options to purchase common stock.

         The Company is pursuing a recapitalization of its debt and certain
equity securities. Although the Company's management believes it will
successfully recapitalize the Company in a timely fashion, there can be no
assurance that

                                      F-9
<PAGE>

payment under the Credit Agreement and Junior Subordinated Notes will not be
declared due and payable which would likely result in the Company's inability to
meet the repayment obligations, causing the Company to seek protection from
creditors.

         If the Company is able to obtain the required financing to avoid
seeking protection from creditors, future operating results depend on successful
implementation of our strategy to develop customer retention programs and expand
existing product lines to minimize the impact of the level of customer
attrition. The sales and marketing expenses and other costs associated with
attracting new subscribers are substantial and there is no guarantee that our
future efforts in this area will improve subscriber growth and retention or
provide sufficient revenue for us to continue to meet our operating and
financial obligations.

NOTE C - ACQUISITIONS

         On September 1, 2000, Teletouch acquired substantially all of the
assets of Snider Communications Corporation ("Snider"), a corporation
headquartered in Little Rock, Arkansas, which provides statewide wireless
messaging coverage in Arkansas. As part of the purchase, Teletouch acquired
approximately 13,000 additional paging subscribers. The total purchase price for
Snider was approximately $1.7 million which consisted of 600,000 shares of
Teletouch's common stock valued at $1.5 million and approximately $0.2 million
in other cash expenditures related to closing. The acquisition was accounted for
using the purchase method of accounting and the total purchase price was
allocated as follows: $1,000,000 to property, plant and equipment, $650,000 to
subscriber bases, $150,000 to FCC licenses, $10,000 to a non-compete agreement,
$7,000 to inventory, and $115,000 to certain liabilities. The results of
operations of the acquisition, which are not material to the consolidated
operations, are included with that of the Company from the date of closing.

           On March 31, 2000, Teletouch acquired substantially all the assets of
EASTEX Communications, Inc. for consideration of approximately $485,000. An
initial payment of approximately $277,000 was paid in cash, and the remaining
consideration will be paid in equal monthly installments over the next two
years. The acquisition was accounted for using the purchase method of
accounting, and the total purchase price was allocated as follows: $40,000 to
property, plant, and equipment; $20,000 to inventory; $181,000 to FCC licenses;
$151,000 to subscriber bases; $5,000 to a non-compete agreement; and the
remaining amount to goodwill. The results of operations of the acquisition,
which are not material to consolidated operations, are included with that of the
Company from the date of closing.

NOTE D - CERTIFICATES OF DEPOSIT

As of May 31, 2001 and 2000, Teletouch had deposited $101,000 and $725,000 into
one-year certificates of deposits with banks to support letters of credit issued
to cellular service and paging equipment providers.

                                      F-10
<PAGE>

NOTE E - PROPERTY, PLANT AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                                                2001                2000
                                                                                ----                ----
<S>                                                                        <C>                  <C>
         Land...................................................           $       -            $     46
         Leased pagers..........................................               5,900               6,949
         Paging infrastructure..................................              19,757              18,293
         Buildings and improvements.............................               2,185               1,631
         Other equipment........................................               7,233               5,831
                                                                           ---------            --------
                                                                              35,075              32,750
         Accumulated depreciation...............................             (16,591)            (13,633)
                                                                           ---------            --------
                                                                           $  18,484            $ 19,117
                                                                           =========            ========
</TABLE>

         Depreciation expense was $6.8 million, $6.4 million and $7.1 million in
fiscal 2001, 2000, and 1999, respectively.

NOTE F - LONG-TERM DEBT

         Long-term debt consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                2001                2000
                                                                                ----                ----
<S>                                                                        <C>                  <C>
         Notes payable..........................................           $  57,322            $ 59,750
         Junior subordinated notes..............................              21,713              18,589
         Other..................................................                  96                 196
                                                                           ---------            --------
                                                                              79,131              78,535
         Less current portion.....................................            12,196                   -
         Less long-term debt classified as current..............              66,935               6,608
                                                                           ---------            --------
                                                                           $       -            $ 71,927
                                                                           =========            ========
</TABLE>

      Notes Payable: The Company's Credit Agreement provides for loans in an
amount not to exceed $70 million. As of May 31, 2001, $57.3 million of the
Credit Agreement was funded. Direct costs incurred in connection with obtaining
the Credit Agreement of approximately $4.1 million have been deferred and are
being amortized, using the effective interest rate method, over the term of the
existing loans.

         The Credit Agreement bears interest, at the Company's designation, at a
floating rate of either the prime rate plus 1% to 2% or at LIBOR plus 2% to 3%.
These rates vary depending on the leverage ratio of the Company. The Credit
Agreement is secured by substantially all of the assets of Teletouch and its
subsidiaries. Borrowings under the Credit Agreement require the principal be
repaid in escalating quarterly installments through November 2005. For fiscal
2001, the weighted-average interest rate on the Credit Agreement was 8.8%.

    The Credit Agreement also requires the maintenance of certain financial and
operating covenants (see Note B), and prohibits any payments on the Junior
Subordinated Notes and the payment of dividends. These covenants were amended as
of the end of each of the first three quarters of the fiscal year, which allowed
the Company to meet its financial covenant and principal repayment terms. As of
May 31, 2001, the Company has been unable to negotiate new terms under the
Credit Agreement, which would allow the Company to remain in compliance with its
terms as of May 31, 2001, and for subsequent periods. Failure to comply with the
terms of the agreement results in an Event of Default under the Credit Agreement
which in turn allows the lender to terminate the commitment and to declare the
borrowings totaling $57.3 million to be due and payable. The Company is in
default of its payment obligations under the Credit Agreement as well as under
various financial covenants. The Lenders have refused to waive the Events of
Default, and are in the process of assessing their alternatives. In any event,
no additional borrowings will be available to the Company under the Credit
Agreement.

                                      F-11
<PAGE>

         Junior Subordinated Notes: In August 1995, in connection with the
acquisition of Dial-A-Page, Inc., Teletouch borrowed $10 million from
Continental Illinois Venture Corporation ("CIVC") and certain other parties both
related and unrelated to CIVC (together with CIVC, the "CIVC Investors") in
exchange for which Teletouch issued 14% Junior Subordinated Notes to the CIVC
Investors. The Subordinated Notes are ("the Subordinated Notes") due in August
2003. The Subordinated Notes were initially recorded, for financial reporting
purposes, at approximately $8 million. The effective interest rate on the
Subordinated Notes during fiscal 2001 was 16.0%. Included in the Subordinated
Note balance was accrued interest of $12.3 million and $9.4 million at May 31,
2001 and May 31, 2000, respectively. See Note I below.

         The terms of the Subordinated Notes require the maintenance of certain
financial and operating covenants and restrict future acquisitions. Pursuant to
the Junior Subordinated Note Agreement, if the lender declared the Company not
in compliance with the terms of the Credit Agreement, then the Company would not
be in compliance with the terms of the Junior Subordinated Note Agreement. The
resulting inability to comply with the terms of the Junior Subordinated Note
Agreement would cause an additional $22.3 million to become due and payable;
therefore, Teletouch has classified the amount outstanding under the
Subordinated Notes as a current liability as of May 31, 2001.

         The Company is pursuing a recapitalization of its debt and certain
equity securities. Although the Company's management believes it will
successfully recapitalize the Company in a timely fashion, there can be no
assurance that payment under the Credit Agreement and Junior Subordinated Notes
will not be declared due and payable which would likely result in the Company's
inability to meet the repayment obligations, causing the Company to seek
protection from creditors (see Note B).

         Maturities: Scheduled maturities of debt outstanding at May 31, 2001
are as follows(see Note B): 2002 - $12.2 million; 2003 - $9.5 million; 2004 -
$27.3 million; 2005 - $3.5 million; 2006 - $27.5 million.

         Interest: Cash paid for interest during 2001, 2000, and 1999 was
approximately $5.4 million, $4.7 million, and $5.3 million, respectively.

NOTE G - INCOME TAXES

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

         The Company made no cash payments for federal income taxes in fiscal
2001, 2000 and 1999. Teletouch currently has a net operating loss carry forward
of approximately $29.5 million that is available to reduce future taxable income
and will expire beginning in fiscal 2012.

         The Company's carry forwards expire at specific future dates and
utilization of certain carry forwards is limited to specific amounts each year.
However, due to the uncertain nature of their ultimate realization, the Company
has established a valuation allowance against these carry forward benefits and
will recognize benefits only as reassessment demonstrates they are realizable.
Realization is entirely dependent upon future earnings in specific tax
jurisdictions. While the need for this valuation allowance is subject to
periodic review, if the allowance is reduced, the tax benefits of the carry
forwards will be recorded in future statements of operations as a reduction of
the Company's income tax expense.

                                      F-12
<PAGE>

         Significant components of Teletouch's deferred income tax liabilities
and assets as of May 31, 2001 and 2000 follow (in thousands):

<TABLE>
<CAPTION>
                                                                        2001         2000
                                                                        ----         ----
<S>                                                                   <C>         <C>
Deferred income tax liabilities:
   Depreciation methods ...........................................   $  2,192    $  2,119
   Other ..........................................................        100         100
Total deferred income tax liabilities .............................   $  2,292    $  2,219
Deferred income tax assets:
   Intangible assets ..............................................     11,396       2,401
   Allowance for doubtful accounts ................................         88          55
   Unrecognized gain ..............................................        933       1,089
   Alternative minimum tax credit carry forward ...................         85          85
   Net operating loss carry forward ...............................     10,030       6,591
   Valuation allowance ............................................    (21,226)     (8,988)
                                                                      --------    --------
Total deferred income tax assets ..................................      1,306       1,233
                                                                      --------    --------
Net deferred income tax liability .................................   $    986    $    986
                                                                      ========    ========
</TABLE>

A reconciliation from the federal statutory income tax rate to the effective
income tax rate for the fiscal years 2001, 2000, and 1999 follows:

<TABLE>
<CAPTION>
                                                         2000    1999     1998
                                                         ----    ----     ----
<S>                                                    <C>      <C>      <C>
Statutory income tax rate (benefit) ...............    (34.0)%  (34.0)%  (34.0)%
Change in valuation allowance .....................     26.9%    30.7%    30.9%
Expenses not deductible for tax purposes, primarily
   Amortization of intangible assets ..............      7.2%     3.3%     2.7%
Other .............................................     (0.1)%      -      0.4%
                                                        ----     ----    ------
Effective income tax rate .........................        -        -        -
                                                        ====     ====    ======
</TABLE>


NOTE H - COMMITMENTS AND CONTINGENCIES

         Teletouch leases buildings, transmission towers, and equipment under
non-cancelable operating leases. These leases contain various renewal terms and
restrictions as to use of the property, and some leases have built-in escalation
clauses. Rent expense (in thousands) was $3,855, $3,234, and $2,850 in fiscal
2001, 2000, and 1999, respectively. Future minimum rental commitments under
non-cancelable leases are as follows (in thousands):

<TABLE>
         <S>                                                            <C>
         2002..................................................         $ 3,046
         2003..................................................          2,363
         2004..................................................          1,789
         2005..................................................          1,208
         2006..................................................            796
         2007 and thereafter...................................          1,659
                                                                       -------
                                                                       $10,861
                                                                       -------
</TABLE>

         Teletouch is party 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 will result in a material adverse effect
on its results of operations or financial condition.

NOTE I - SHAREHOLDERS' EQUITY

                                      F-13
<PAGE>

         Capital Structure: Teletouch's authorized capital structure allows for
the issuance of 25,000,000 shares of common stock with a $0.001 par value and
5,000,000 shares of preferred stock with a $0.001 par value.

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

         In connection with the acquisition of Dial-A-Page, Inc. (see Note G),
Teletouch designated 15,000 shares of authorized preferred stock as "Series A
14% Cumulative Preferred Stock" (the "Series A Preferred Stock") and 411,457
shares as "Series B Preferred Stock". The CIVC Investors purchased the 15,000
shares, with an initial liquidation value of $15 million ($33.5 million at May
31, 2001), of the Series A Preferred Stock as well as the Subordinated Notes
(see Note F). Dividends on the Series A Preferred Stock accrue at the rate of
14% per annum and compound on a quarterly basis. Each share of Series A
Preferred Stock, as well as dividends in arrears, are convertible after August
3, 2003 into common stock, at the option of the Series A Preferred Shareholder,
based on a stated formula. As of May 31, 2001, the conversion of Series A
Preferred Stock would result in an estimated issuance of 2.9 million shares of
common stock (6.4 million shares of common stock if dividends in arrears are
paid "in kind") using the conversion price stated in the agreement. However, the
agreement states that the conversion price will in no event be more than the
market price of the Company's common stock. Based on the closing market price of
the Company's stock on May 31, 2001, the conversion of Series A Preferred Stock
would result in an estimated issuance of 18.8 million shares of common stock
(41.8 million shares of common stock if dividends in arrears are paid "in
kind").

         The CIVC Investors also received warrants, exercisable at a nominal
price, to purchase 3,377,301 shares of Teletouch common stock (the "Common Stock
Purchase Warrants") and 411,457 shares of Series B Preferred Stock (the "Series
B Preferred Stock Purchase Warrants"). Each share of Series B Preferred Stock is
convertible into nine shares of Common Stock. CIVC has the right to require that
its securities be registered for public sale two years after the conversion into
common stock.

         As of May 31, 2001, holders have exercised an aggregate of 716,461
Common Stock Purchase Warrants and 87,286 Series B Preferred Stock Purchase
Warrants. The Series A Preferred Stock and the Series B Preferred Stock are
non-voting except as to the merger or consolidation with another entity or
entities, or the sale of substantially all of the assets of the Company.

         As discussed in Note F, the Credit Agreement prohibits the payment of
dividends on the Series A Preferred Stock. At May 31, 2001, approximately $18.5
million of dividends ($1,231.00 per share) were in arrears (or 3.5 million
shares of common stock if paid "in kind" using the conversion price stated in
the agreement and 23.1 million shares of common stock if paid "in kind" using
the closing market price of the Company's common stock on May 31, 2001, as
previously discussed). Dividends earned per share in fiscal years 2001, 2000,
and 1999 were $286.81, $247.92 and $221.66, respectively.

         Common stock reserved: The following represents the shares of common
stock to be issued on an "if-converted" basis at May 31, 2001, (in thousands):

<TABLE>
        <S>                                                                     <C>
        Conversion of Series A Preferred Stock                                   41,831
        Common Stock Purchase Warrants                                            2,661
        Conversion of Series B Preferred Stock                                    3,692
        Consultant Warrants                                                         200
        1994 Stock Option and Stock Appreciation Rights Plan                      1,000
        Other options                                                               117
                                                                                 ------
                                                                                 49,501
                                                                                 ======
</TABLE>

*using the conversion price as of May 31, 2001 and including dividends payable
in common stock

                                      F-14
<PAGE>

NOTE J - STOCK OPTIONS

         Teletouch's 1994 Stock Option and Stock Appreciation Rights Plan (the
"1994 Plan") was adopted in July 1994 and provides for the granting of incentive
and non-incentive stock options and stock appreciation rights to officers,
directors, employees and consultants to purchase not more than an aggregate of
1,000,000 shares of Common Stock. The Compensation Committee of the Board of
Directors administers the Plan and has authority to determine the optionees to
whom awards will be made, the terms of vesting and forfeiture, the amount of the
awards, and other terms. Under the terms of the Plan, the option price approved
by the Board of Directors shall not be less than the fair market value of the
common stock at date of grant. Exercise prices in the following table have been
adjusted to give effect to the repricing that took effect in December 1999
(discussed below).


<TABLE>
<CAPTION>
                                                                                                    Weighted
Stock option activity has been as follows:                                                           Average
                                                            Number of      Exercise Price     Exercise Price
                                                               Shares           Per Share          Per Share
                                                            ---------       -------------     --------------
<S>                                                         <C>             <C>                <C>
Options outstanding at May 31, 1998 .......................   662,662       $0.87 - $6.00              $1.98

    Options granted to officers and management ............    50,000               $0.87              $0.87
    Options granted to directors ..........................     3,996               $0.87              $0.87
    Options forfeited .....................................   (16,666)              $2.44              $2.44
                                                            ---------       -------------     --------------
Options outstanding at May 31, 1999 .......................   663,992       $0.87 - $6.00              $1.88
                                                            ---------       -------------     --------------

    Options granted to officers and management ............   105,000       $0.69 - $1.88              $1.22
    Options granted to directors ..........................     2,664               $0.81              $0.81
    Options forfeited .....................................  (156,664)      $3.56 - $6.00              $4.42
                                                            ---------       -------------     --------------
Options outstanding at May 31, 2000 .......................   614,992       $0.69 - $3.38              $1.12
                                                            ---------       -------------     --------------

    Options granted to officers and management ............   167,667               $2.26              $2.26
    Options forfeited .....................................   (65,000)      $0.69 - $1.88              $1.43
                                                            ---------       -------------     --------------
Options outstanding at May 31, 2001 .......................   717,659       $0.69 - $3.38              $1.36
                                                            ---------       -------------     --------------

Exercisable at May 31, 2001 ...............................   443,392                                  $1.37
                                                            ---------                         --------------
Exercisable at May 31, 2000 ...............................   277,677                                  $1.30
                                                            ---------                         --------------
Exercisable at May 31, 1999 ...............................   298,978                                  $2.73
                                                            ---------                         --------------
</TABLE>

<TABLE>
<S>                                                           <C>
Weighted-average fair value of options
          granted during 2001 .............................   $1.51
                                                            ---------
Weighted-average fair value of options
          granted during 2000 .............................   $0.62
                                                            ---------
Weighted-average fair value of options
          granted during 1999 .............................   $1.81
                                                            ---------
Weighted-average remaining
          contractual life ................................   7.0 years
</TABLE>

         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. The fair value for these
options was estimated at the date of grant using a binomial option pricing model
with the following weighted-average assumptions for 2001, 2000, and 1999,
respectively: risk-free interest rates of 5.50%, 6.50%, and 5.75%;

                                      F-15
<PAGE>

dividend yields of 0% for all years; volatility factors of the expected market
price of the Company's common stock of 1.33 in 2001, .70 in 2000, and .63 in
1999, and a weighted-average expected life of the option of 2 to 5 years.

         Binomial 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. Because Teletouch's
stock options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its stock
options.

         For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense on a straight-line basis over the options'
vesting period. The pro forma effects on net income for fiscal 2001, 2000, and
1999 are not representative of the pro forma effect on net income in future
years because they do not take into consideration pro forma compensation expense
related to grants made prior to 1995. The Company's pro forma information
follows (in thousands, except per share information):

<TABLE>
<CAPTION>
                                                                      2000          1999          2001
                                                                  --------       -------      --------
<S>                                                               <C>            <C>          <C>
         Pro forma net loss applicable to common stockholders     $(50,293)      $(9,895)     $(10,798)

         Pro forma loss per share                                 $ (10.69)      $ (2.32)     $  (2.55)
</TABLE>

         In December 1999, the Company reduced the exercise price of all
outstanding employee and director owned stock options to $0.87, which was equal
to the average of the closing price of the Company's common stock for the
20-trading days prior to December 1, 1999. Compensation expense associated with
these repriced options will be measured and recognized in accordance with the
recently issued Financial Accounting Standards Board Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation". No
compensation expense was recorded for these options during fiscal years 2001 and
2000.

         Under the terms of a contractual agreement, Teletouch granted options
to acquire 50,000 shares of common stock, exercisable at a price of $9.00, to a
company that provided investor and public relations services. In addition,
options to acquire 66,666 shares of common stock, exercisable at a price of
$7.56, were granted to an officer of that company.

NOTE K - RETIREMENT PLAN

         Effective October 1995, Teletouch began sponsoring a defined
contribution retirement plan covering substantially all of its employees.
Employees who are at least 21 years of age are eligible to participate. Eligible
employees may contribute up to a maximum of 16% of their earnings. The Company
pays the administrative fees of the plan and began matching 75% of the first 6%
of employees' contributions in October 1998. Contributions of approximately
$265,000, $220,000 and $120,000 were made in fiscal years 2001, 2000, and 1999,
respectively.

NOTE L - NOTE RECEIVABLE

         At May 31, 2000, the Company had a note receivable of $515,000 from a
supplier. In June 2000, the note was exchanged for 150,000 shares of restricted
common stock of the supplier and software. There was no gain or loss associated
with this transaction. Due to the decline in the market value of the common
stock, which was considered other than temporary, and the impairment of the
software, during the fourth quarter of fiscal 2001, the Company recorded a
charge of approximately $468,000 to write off the common stock and the remaining
net book value of the software.

                                      F-16
<PAGE>

NOTE M - SELECTED QUARTERLY FINANCIAL DATA

         Summarized quarterly financial data for the years ended May 31, 2001
and 2000 are set forth below (in thousands except per share amounts):


<TABLE>
<CAPTION>
                                                                       Three Months Ended
                                                    --------------------------------------------------------
                    Fiscal 2001                     August 31,    November 30,     February 28,      May 31,
                    -----------
                                                       2000          2000              2001           2001
                                                    ----------    ------------     ------------     --------
<S>                                                 <C>           <C>              <C>              <C>
Service, rent, and maintenance revenue              $   11,223    $     11,205     $     10,636     $  9,865
Product sales revenue                                    2,994           3,070            4,037        3,265
                                                    ----------    ------------     ------------     --------
     Total Revenues                                     14,217          14,275           14,673       13,130
Net book value of products sold                         (2,877)         (3,509)          (3,707)      (3,313)
                                                    ----------    ------------     ------------     --------
                                                        11,340          10,766           10,966        9,817
Operating income (loss) (1)                                186             625             (318)     (36,940)
Net loss (1)                                            (2,031)         (1,604)          (2,568)     (39,612)
Loss per share - basic and diluted (1)                   (0.71)          (0.56)           (0.74)       (8.11)

                                                                       Three Months Ended
                                                    --------------------------------------------------------
                    Fiscal 2001                     August 31,    November 30,     February 28,      May 31,
                    -----------
                                                       2000          2000              2001           2001
                                                    ----------    ------------     ------------     --------
Service, rent, and maintenance revenue                  11,123    $     11,156     $     11,383     $ 11,502
Product sales revenue                                    2,307           2,579            3,011        3,530
                                                    ----------    ------------     ------------     --------
     Total Revenues                                     13,430          13,735           14,394       15,032
Net book value of products sold                         (2,121)         (2,497)          (2,893)      (3,700)
                                                    ----------    ------------     ------------     --------
                                                        11,309          11,238           11,501       11,332
Operating income (loss)                                    358               2              771          599
Net loss                                                (1,333)         (2,117)          (1,295)      (1,278)
Loss per share - basic and diluted                       (0.53)          (0.72)           (0.53)       (0.52)
</TABLE>

(1)  Includes the impairment charges recorded in the three month period ended
     May 31, 2001.   See Note B.

                                      F-17
<PAGE>

                                   SCHEDULE II
                         TELETOUCH COMMUNICATIONS, INC.


                 Valuation and Qualifying Accounts and Reserves
                                 (in thousands)


<TABLE>
<CAPTION>
                                                                Year Ended
Allowance for Doubtful Accounts                     May 31,       May 31,     May 31,
                                                     1999          2000        2001
<S>                                                <C>           <C>         <C>
Balance at beginning of year                       $    167      $    167    $     213
     Additions charged to income                        779          1393        1,647
     Balances written off, net of recoveries           (779)       (1,347)      (1,622)
                                                   --------      --------    ---------
Balance at end of year                             $    167      $    213    $     238
                                                   ========      ========    =========
</TABLE>



===============================================================================


                                      F-18
<PAGE>

                                   SIGNATURES

         In accordance with Section 13 or 15(d) 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, on August 29, 2001.

                         TELETOUCH COMMUNICATIONS, INC.

                           By:   /s/ Robert M. McMurrey
                                 ----------------------
                                 Robert M. McMurrey
                                 Chairman

         In accordance with the Securities Exchange Act of 1934, this report has
been signed by the following persons on behalf of the Registrant, in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature                                          Title                                       Date
---------                                          -----                                       ----
<S>                                           <C>                                         <C>
 /s/ Robert M. McMurrey                       Chairman,                                   August 29, 2001
------------------------------
Robert M. McMurrey                            Chief Executive Officer

 /s/ J. Kernan Crotty                         President,                                  August 29, 2001
---------------------------
J. Kernan Crotty                              Chief Financial Officer

                                              Director                                    August 29, 2001
---------------------------------
Charles C. Green III

 /s/ Clifford E. McFarland                    Director                                    August 29, 2001
----------------------------------
Clifford E. McFarland
</TABLE>

                                       27