TELETOUCH COMMUNICATIONS INC - 10-K Annual Report

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

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

FOR THE FISCAL YEAR ENDED: MAY 31, 2000
------------

[_] 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 23, 2000, 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 $4,841,260. As of August 23, 2000, the registrant had
outstanding 4,948,132 shares of Common Stock, 15,000 shares of Series A
Preferred Stock, and 87,286 shares of Series B Preferred Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement for the 2000 Annual Meeting of
Shareholders of the registrant to be held on November 9, 2000 are incorporated
by reference into Part III.

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

PAGE NO.
--------

PART I

Item 1. Business 1

Item 2. Description of Property 7

Item 3. Legal Proceedings 8

Item 4. Submission of Matters to a Vote of Security Holders 8

PART II

Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 8

Item 6. Selected Financial Data 9

Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition 10

Item 8. Financial Statements and Supplementary Data 14

Item 9. Changes In and Disagreements with Accountants On Accounting
and Financial Disclosure 14

PART III

Item 10 Directors and Executive Officers of the Registrant 14

Item 11 Executive Compensation 14

Item 12 Security Ownership of Certain Beneficial Owners and Management 14

Item 13 Certain Relationships and Related Transactions 14

PART IV

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

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.

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 67 sales offices in those states. Through inter-carrier
arrangements, Teletouch also provides nationwide and expanded regional coverage.

Teletouch has experienced substantial internal and external growth in the
past few years. At May 31, 2000 the Company had approximately 411,700 pagers in
service as compared to approximately 394,200 and 349,700 at May 31, 1999 and
1998, respectively. For fiscal year 2000 the Company had total revenues of $56.6
million as compared to $51.1 million and $45.2 million in fiscal years 1999 and
1998, respectively.

Teletouch's overall business strategy is to continue growing in its
existing markets as well as to enter similar, adjacent markets by opening new
sales offices or acquiring other regional paging companies. This strategy will
be facilitated by Teletouch's recent purchases of 32 licenses in the 900 MHz
spectrum. These licenses will provide significant capacity for the Company's
markets on a common frequency. The Company 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 paging and other wireless services. During the next two
years, the Company intends to focus most of its expansion efforts on opening new
sales offices in targeted market areas already serviced by its existing paging
system and broadening its range of products sold. By reducing overhead costs,
expanding sales and marketing efforts, and focusing on customer service, the
Company believes that it can improve its operating margins while achieving
continued pager unit and revenue growth. 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.

1

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 then 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 have also 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%. As the industry continues to mature, these
growth rates are expected to decline further with the number of pagers in
service peaking as early as 2002. Factors contributing to the industry's growth
include: (i) the increased mobility of the general population; (ii) a continued
movement towards a service-based economy; (iii) an increased awareness of the
benefits of mobile communications; (iv) the relatively high costs of other
mobile communications services such as cellular telephone service; and (v)
technological advances in paging equipment and services. In addition to the
projected general industry growth, there is opportunity for Teletouch to gain
greater market share by offering quality products and services at competitive
prices with outstanding customer service.

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. Some cellular subscribers use a pager

2

along with their cellular telephone to screen incoming calls and to lower the
expense of their cellular telephone service.

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 these 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 have traditionally distributed their services through
direct marketing and sales activities. In recent years, though, additional
distribution channels have evolved. These channels include (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 have been business users. However, pager
use among retail consumers has increased significantly in recent years. In
addition, paging subscribers have increasingly chosen to purchase rather than
lease their pagers as equipment costs have declined. 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

3

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.

Teletouch's sales strategy is to concentrate on business accounts and on
individuals who value continuity, quality, and personal service. Historically,
the Company has leased pagers to a large percent of its business accounts. As
the price of pagers has dropped, the Company has begun increasingly to emphasize
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 in several of its markets. At year-end the Company
was offering prepaid cellular service in 50 of its stores and PCS service in 23
of its sales offices. In April 2000, Teletouch became an agent for 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 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.

Teletouch began offering these cellular services as a convenience to
existing customers who wished to purchase cellular service in addition to paging
service. However, Teletouch focuses on other factors in addition to convenience
in its prepaid cellular and Cricket strategies. The Company currently targets
those customers who wish to have cellular service and be able to better control
their monthly cellular telephone expense or who have difficulty getting credit
approval with traditional cellular companies.

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 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.

4

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 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. As of and for the years ending May 31, 2000, 1999, and 1998, the
Company had no foreign operations.

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 10% in the
aggregate of the Company's revenue. Cellular and two-way revenues for fiscal
2000 were $3.6 million and $2.2 million, respectively.

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 and its paging terminals from
Glenayre, a leading manufacturer of mobile communications equipment. Cellular
telephones used in the Company's prepaid cellular business are presently
available from a limited number of suppliers, but additional suppliers are
actively being sought. Two-way radios are also 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 and
local telephone service 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 whom 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 AirTouch
Paging, Arch Paging, Beepers Unlimited, Metrocall, Mobilemedia Communications,
Inc., and Southwestern Bell.

5

Companies offering wireless two-way communications services, including
cellular, PCS, and specialized mobile radio services ("SMR"), also compete to a
certain extent with Teletouch's paging services. Cellular and PCS service is
generally more expensive than paging services and 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. In addition, by offering its own cellular and PCS products and
services, Teletouch hopes to compete even more effectively with these other
providers. Future technological advances and associated regulatory changes in
the industry could also create new products and services that would either put
Teletouch at a competitive advantage or disadvantage with other companies.

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 servicemarks 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 has 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 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
renewal applications must be approved by the FCC. 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

6

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 to believe such
applications would not be approved or granted. The FCC has also determined that
all major modification and expansion 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. Such actions could affect the
scope and manner of Teletouch's services, or could lead to increased 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
and other new mobile services could compete directly or indirectly with the
Company. In addition, from time to time, federal and state legislators propose
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, 2000, Teletouch employed 422 people, of which 356 were full-
time. Most of these individuals were in 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 1 transmitter site, along with the
broadcast tower on that site. In addition, the Company currently leases 75
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 344 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 $2.8 million under its office facility and tower site leases for
fiscal year 2001. 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.

7

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

No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 2000.

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 presents, 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. All share
prices have been adjusted to give effect to the two-for-three reverse stock
split that took effect June 25, 1998.

Common Stock
------------
High Low
---- ---
Fiscal Year 1999
1st Quarter 5-7/16 3-1/16
2nd Quarter 3-1/8 2-1/2
3rd Quarter 3-1/16 1-13/16
4th Quarter 2 1-1/8
Fiscal Year 2000
1st Quarter 1-9/16 13/16
2nd Quarter 1-1/8 3/8
3rd Quarter 8-7/16 5/8
4th Quarter 7-15/16 1-5/8
- --------------------------

As of August 23, 2000, 4,948,132 shares of common stock, 15,000 shares of
Series A preferred stock, 87,286 shares of Series B preferred stock, 2,660,840
Common Stock Purchase Warrants, and 324,171 Series B Preferred Stock Purchase
Warrants were outstanding. Also as of August 23, 2000, there were 49 holders of
record of the Common Stock based upon information furnished by Continental Stock
Transfer & Trust Company, New York, New York, the transfer agent for the Common
Stock. 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 others.

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

8

as the Credit Agreement (discussed in Note F in the Notes to the Consolidated
Financial Statements) is outstanding.

Item 6. Selected Financial Data

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

(In Thousands, except Per Share Data)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----

Service, rent, and maintenance revenue ... $ 45,164 $ 42,792 $ 38,831 $ 35,478 $ 26,854
Product sales revenue .................... 11,427 8,346 6,328 5,911 4,871
--------- --------- --------- --------- ---------
Total revenues ........................ 56,591 51,138 45,159 41,389 31,725
Net book value of products sold .......... (11,211) (8,000) (6,634) (6,506) (5,165)
--------- --------- --------- --------- ---------
$ 45,380 $ 43,138 $ 38,525 $ 34,883 $ 26,560
Operating expenses ....................... 43,650 42,678 38,329 36,212 27,160
--------- --------- --------- --------- ---------
Operating income ......................... 1,730 460 196 (1,329) (600)
Interest expense, net .................... (7,908) (7,823) (8,535) (8,177) (6,421)
Gain on sale of assets.................... 155 23 4,171 -- --
--------- --------- --------- --------- ---------
Loss before income taxes ................. (6,023) (7,340) (4,168) (9,506) (7,021)
Income tax expense/(benefit) ............. -- -- 48 (476) (2,201)
--------- --------- --------- --------- ---------
Loss before extraordinary item ........... (6,023) (7,340) (4,216) (9,030) (4,820)
Extraordinary item ....................... -- -- -- (3,389) --
--------- --------- --------- --------- ---------
Net loss before preferred stock dividends. $ (6,023) $ (7,340) $ (4,216) $ (12,419) $ (4,820)
========= ========= ========= ========= =========

Loss per share applicable to common stock:
- -----------------------------------------
Loss before extraordinary item ........... $ (2.29) $ (2.52) $ (1.66) $ (2.72) $ (1.72)
Extraordinary item ....................... -- -- -- (0.80) --
--------- --------- --------- --------- ---------
Net loss ................................. $ (2.29) $ (2.52) $ (1.66) $ (3.52) $ (1.72)
========= ========= ========= ========= =========

EBITDA (1)(2)(3)(4) ...................... $ 14,827 $ 15,508 $ 14,316 $ 12,402 $ 9,337
========= ========= ========= ========= =========
Pagers in service at end of period ....... 411,700 394,200 349,700 321,100 195,500
========= ========= ========= ========= =========
Average revenue per unit ("ARPU") ........ $ 8.98 $ 9.25 $ 9.33 $ 10.02 $ 13.56
========= ========= ========= ========= =========
Total assets ............................. $ 77,693 $ 81,256 $ 87,194 $ 92,173 $ 83,962
========= ========= ========= ========= =========
Long-term debt, net of current portion ... $ 71,927 $ 75,944 $ 74,487 $ 79,824 $ 60,115
========= ========= ========= ========= =========

- -------------------------------
(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
covenants are calculated under its debt agreements.

(2) 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.

(3) 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.

(4) In July 1996, Teletouch and ProNet, Inc. mutually agreed to terminate a
previously announced agreement to merge the Company with a subsidiary of
ProNet. The EBITDA shown above for fiscal

9

1997 excludes $527,000 of non-recurring costs associated with the ProNet
agreement incurred in fiscal 1997.

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, 2000, the Company had approximately
411,700 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 the growth 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 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 immaterial to consolidated operations, are included with that of the
Company from the date of closing.

On December 31, 1997, Teletouch concluded its purchase of certain FCC
licenses from GTE for consideration of $0.9 million. Total purchase price was
$1.0 million.

On January 28, 1998, Teletouch sold substantially all of its communications
towers for approximately $8.7 million. The proceeds from the sale were used to
reduce the outstanding debt under the Credit Agreement. Concurrent with the
sale, the Company leased space on the towers sold for a period of ten years for
approximately $0.6 million per year. Teletouch recognized a $4.1 million gain
related to the sale of the towers in fiscal 1998 and deferred the remaining $4.0
million gain, which is being amortized into income over the period of the lease.

10

Results of Operations for the fiscal years ended May 31, 2000, 1999, and 1998

Total revenue: Teletouch's total revenue increased to $56.6 million in
-------------
fiscal year 2000 from $51.1 million and $45.2 million in fiscal years 1999 and
1998, respectively. The fiscal year 2000 total revenue increase was due to
approximately $3.6 million additional revenues from cellular products and an
increase in paging service revenue resulting from internal growth. The fiscal
year 1999 increase over fiscal 1998 was a combination of approximately $0.5
million in additional revenues from cellular products, $0.2 million in
additional revenues from one-time two-way radio contracts, and the remainder
from an increase in pagers in service resulting from internal growth. Pagers in
service increased to 411,700 at May 31, 2000 as compared to 394,200 and 349,700
at May 31, 1999 and 1998, respectively.

The positive impact on total revenue of the increase in pagers in service
is partially offset by the decline in average revenue per unit ("ARPU"). ARPU
for the year ended May 31, 2000 was $8.98 as compared to $9.25 and $9.33 for the
years ended May 31, 1999 and May 31, 1998, respectively. The decrease in ARPU is
primarily due to increased competition in the Company's markets and 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,
2000 approximately 41% of the Company's subscriber base was represented by
resellers as opposed to 39% at May 31, 1999 and 36% at May 31, 1998. As
competitors continue to pursue its customers in the marketplace and as the
percentage of its subscriber base represented by resellers increases, ARPU will
continue to decline. Nevertheless, Teletouch expects that the growth of paging
units in service and the introduction of new products and services will increase
sufficiently to offset any decline in ARPU and not result in a decrease in total
revenue.

Operating expenses, excluding depreciation and amortization: Operating
-----------------------------------------------------------
expenses, excluding depreciation and amortization, were $30.6 million, 54% of
total revenue, for fiscal year 2000 as compared to $27.9 million, 55% of total
revenue, and $25.0 million, 55% of total revenue, for the fiscal years 1999 and
1998, respectively. 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. These costs are expected to decrease as a
percentage of sales as the new stores begin to experience positive operating
results. However, as long as the Company continues to open new stores, operating
expenses may increase slightly as a percent of sales. Additionally, due to the
restructure of certain administrative collection functions in May 1999, bad debt
losses for fiscal 2000 were $1.4 million as compared to $0.8 million for fiscal
1999. However, the Company has implemented new procedures that have lowered bad
debt losses for the last half of fiscal 2000. Costs increased in fiscal 1999
over fiscal 1998 primarily because of new retail store openings, tower lease
expenses related to the sale of previously-owned towers, and the cost of
restructuring that occurred in May 1999, resulting in $0.3 million of non-
recurring costs. Payroll expenses, sales commissions, office and tower leases,
and network costs represented the most significant line item increases in fiscal
1999. Operating costs as a percentage of total revenue have either decreased or
remained flat as the Company's customer base has grown sufficiently to generate
revenues at rates that have absorbed the increased costs.

Depreciation and amortization: Depreciation and amortization expense
-----------------------------
decreased to $13.1 million in fiscal year 2000 from $14.8 million and $13.3
million in fiscal years 1999 and 1998, respectively. 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. Additional depreciation recorded on
returned lease pagers accounted for most of the increase in fiscal 1999 over
fiscal 1998. Teletouch's emphasis on selling rather than leasing pagers has
stabilized this expense.

Interest expense: Net interest expense increased to $7.9 million in fiscal
----------------
year 2000 from $7.8 million in fiscal 1999, which decreased from $8.5 million in
fiscal 1998. Interest expense increased in fiscal 2000

11

over fiscal 1999 primarily due to an increase in interest charges associated
with the Junior Subordinated Notes (discussed below under "Financial
Condition"), partially offset by a decrease in the amortization of debt issue
costs. The decrease in long-term debt under the Credit Agreement (also discussed
below under "Financial Condition") combined with lower interest rates were the
primary factors contributing to lower interest costs in fiscal 1999 over fiscal
1998. These factors, however, were partially offset by increased amortization of
financing costs associated with the Credit Agreement.

Income tax benefit: At May 31, 2000 Teletouch had a net operating loss
------------------
carryforward of approximately $19.4 million that will begin to expire in fiscal
2012. For fiscal year 2001 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 carryforwards
expire at specific future dates, and utilization of certain carryforwards 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 carryforward 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 carryforwards will be recorded in future operations as a
reduction of the Company's income tax expense.

EBITDA: EBITDA decreased to $14.8 million, 26% of total revenue in fiscal
------
year 2000 as compared to $15.5 million, 30% of total revenue ($15.2 million, 30%
of total revenue, including the $0.3 million of costs associated with the
restructuring), in fiscal year 1999 and $14.3 million, 32% of total revenue
($13.5 million, 30% of total revenue, including the $0.8 million of costs
associated with a terminated acquisition), in fiscal year 1998. 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. As a percentage of total revenue, EBITDA did not increase
in fiscal 1999 because new retail store openings, increased tower lease expenses
due to the sale/leaseback transaction, and restructuring costs caused expenses
to grow slightly faster than revenues.

Financial Condition

Teletouch's cash balance was $6.8 million at May 31, 2000 as compared to
$5.8 million at May 31, 1999. Cash provided by operating activities decreased to
$9.4 million in fiscal year 2000 from $10.5 million in fiscal 1999, which
increased from $8.4 million in fiscal year 1998. The Company expects that cash
flow provided from operations will be sufficient to fund its working capital
needs in the near term. Teletouch may, however, use funds available under the
Credit Agreement (discussed below) to fund future acquisitions, if any.

On January 28, 1998, Teletouch sold substantially all of its communications
towers for approximately $8.7 million. The proceeds from the sale were used to
reduce the outstanding debt under the Credit Agreement. Concurrent with the
sale, the Company leased space on the towers sold for a period of ten years for
approximately $0.6 million per year. Teletouch recognized a $4.1 million gain
related to the sale of the towers in fiscal 1998 and deferred the remaining $4.0
million gain, which is being amortized into income on a straight-line basis over
the period of the lease.

Teletouch's operations require capital investment to purchase pagers for
lease to customers and to acquire paging infrastructure equipment to support the
Company's growth. Net capital expenditures, including pagers, amounted to $7.8
million, $7.6 million and $5.8 million for fiscal 2000, 1999, and 1998,
respectively. The increases in both fiscal years were primarily in capital
investments in new retail stores, leased pagers, and the addition of new
transmitter sites. Teletouch anticipates capital expenditures will be flat in
fiscal 2001 as the Company continues to open new retail stores, improve its
infrastructure, and meet its subscribers' pager needs. Teletouch will pay for
these expenditures with cash generated from operations and, if necessary,
borrowings under the unused portion of the Credit Agreement (discussed below).

12

The Company's Credit Agreement provides for loans in an amount not to
exceed $70 million. As of May 31, 2000, $59,750,000 of the Credit Agreement was
funded, and $10 million is available for future funding. 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 the prime rate plus 1% to 2% or 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 beginning in August 2000 and ending in
November 2005. For fiscal 2000, the weighted-average interest rate on the Credit
Agreement was 8.1%. The Credit Agreement also requires the maintenance of
specified financial and operating covenants, with which Teletouch is in
compliance at May 31, 2000, and prohibits any payments on the Junior
Subordinated Notes and the payment of dividends.

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 is currently analyzing the implementation
requirements and 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.

In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements". This SAB provides additional guidance on the accounting for revenue
recognition, including both broad conceptual discussions as well as certain
industry-specific guidance. The guidance is effective for the Company in the
fourth quarter of fiscal 2001. While Teletouch does not expect SAB No. 101 to
have a material impact on its results of operations upon adoption, the SEC is
expected to issue further guidance regarding the implementation of SAB No. 101
which could affect the Company's estimates of its expected impact.

Impact of Year 2000

Teletouch has experienced no significant issues with respect to Year 2000.
However, the Company is continuing to monitor its systems to insure that any
issues that might arise are addressed immediately.

Item 7a. Quantitative and Qualitative Disclosures about Market Risk

The risk inherent in Teletouch's market risk sensitive instruments 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 76% of its total long-term obligations as of May 31, 2000. If
interest rates average one percent more in fiscal 2001 than they did during
fiscal 2000, 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, 2000. The preceding sensitivity
analysis does not, however, consider the effects that such

13

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 and Executive Officers of the Registrant

Teletouch incorporates by reference information regarding directors and
executive officers from the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held November 9, 2000.

Item 11. Executive Compensation

Teletouch incorporates by reference information regarding executive
compensation from the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held November 9, 2000.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

Teletouch incorporates by reference information regarding security
ownership of certain beneficial owners and management from the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held November 9, 2000.

Item 13. Certain Relationships and Related Transactions.

Teletouch incorporates by reference information regarding certain
relationships and related transactions from the Company's Proxy Statement for
the Annual Meeting of Shareholders to be held November 9, 2000.

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, 2000 and 1999

Consolidated Statements of Operations for Each of the Three Years in
the Period Ended May 31, 2000

Consolidated Statements of Cash Flows for Each of the Three Years in
the Period Ended May 31, 2000

Consolidated Statements of Shareholders' Equity for Each of the Three
Years in the Period Ended May 31, 2000

14

Notes to Consolidated Financial Statements

Report of Independent Auditors

(a) (2) Financial Statement Schedules.

Schedules 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.

(a) (3) Exhibits.

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

21 Subsidiaries
27 Financial Data Schedule

(b) Reports on Form 8-K

Teletouch filed no reports on Form 8-K during the fourth quarter of
Fiscal 2000.

15

Index to Consolidated Financial Statements

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...........................F-6

Notes to Consolidated Financial Statements................................F-7

F-1

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, 2000 and 1999, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended May 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended May 31, 2000, in conformity with accounting
principles generally accepted in the United States.

/s/ Ernst & Young LLP

Dallas, Texas
August 11, 2000

F-2

TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, except share data)

May 31, 2000 May 31, 1999
------------ ------------

ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................... $ 6,828 $ 5,787
Accounts receivable, net of allowance of $213 in 2000 and $167 in 1999...... 2,083 1,788
Inventory................................................................... 5,337 4,936
Deferred income tax assets.................................................. 56 56
Note receivable............................................................. 515 500
Certificates of deposit, restricted as to use............................... 750 725
Prepaid expenses and other current assets................................... 1,842 1,099
-------- --------
17,411 14,891

PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation of $13,633 in 2000 and $10,671 in 1999............. 19,117 18,733

GOODWILL, INTANGIBLES, AND OTHER ASSETS:
Goodwill.................................................................... 24,892 24,786
Subscriber bases............................................................ 28,421 28,225
FCC licenses................................................................ 22,036 21,741
Non-compete agreements...................................................... 705 700
Debt issue costs............................................................ 4,100 4,100
Other....................................................................... 304 150
Accumulated amortization.................................................... (39,293) (32,070)
-------- --------
41,165 47,632
-------- --------
$ 77,693 $ 81,256
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses....................................... $ 4,796 $ 4,711
Current portion of long-term debt........................................... 6,608 --
Current portion of unearned sale/leaseback profit........................... 418 405
Deferred revenue............................................................ 1,593 1,514
-------- --------
13,415 6,630

LONG-TERM LIABILITIES:
Long term debt, net of current portion...................................... 71,927 75,944
Unearned sale/leaseback profit, net of current portion...................... 2,747 3,102
-------- --------
74,674 79,046
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 2000 and
1999........................................................................ -- --

Series B convertible preferred stock, $.001 par value, 411,457 shares
authorized, 87,286 shares issued and outstanding in 2000 and
1999........................................................................ -- --
Common stock, $.001 par value, 25,000,000 shares authorized, 4,298,192
shares issued and outstanding in 2000 and 4,235,527 in 1999................. 4 4
Additional paid-in capital.................................................. 24,863 24,816
Accumulated deficit......................................................... (36,305) (30,282)
-------- --------
(11,438) (5,462)
-------- --------
$ 77,693 $ 81,256
======== ========

See Accompanying Notes to Financial Statements

F-3

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

Year ended May 31,
------------------------------------------------------
2000 1999 1998
---------------- ----------------- -----------------

Service, rent, and maintenance revenue .............. $ 45,164 $ 42,792 $ 38,831
Product sales revenue ............................... 11,427 8,346 6,328
----------- ----------- -----------
Total revenues ................................... 56,591 51,138 45,159
Net book value of products sold ..................... (11,211) (8,000) (6,634)
----------- ----------- -----------
45,380 43,138 38,525
Costs and expenses:
Operating ..................................... 14,636 13,370 12,110
Selling ....................................... 8,281 5,657 4,190
General and administrative .................... 7,636 8,878 7,909
Depreciation and amortization ................. 13,097 14,773 13,283
Merger termination charges .................... -- -- 837
----------- ----------- -----------
Total costs and expenses ............................ 43,650 42,678 38,329
----------- ----------- -----------
Operating income .................................... 1,730 460 196

Gain on sale of assets .............................. 155 23 4,171

Interest expense, net ............................... (7,908) (7,823) (8,535)
----------- ----------- -----------

Loss before income taxes ............................ (6,023) (7,340) (4,168)

Income tax expense .................................. -- -- 48
----------- ----------- -----------

Net loss ............................................ (6,023) (7,340) (4,216)
Preferred stock dividends ........................... (3,718) (3,325) (2,824)
----------- ----------- -----------

Loss applicable to common stockholders .............. $ (9,741) $ (10,665) $ (7,040)
=========== =========== ===========

Loss per share - basic and diluted .................. $ (2.29) $ (2.52) $ (1.66)
=========== =========== ===========

Weighted Avg Shares Outstanding-Basic and Diluted.... 4,256,359 4,235,527 4,235,611
=========== =========== ===========

See Accompanying Notes to Financial Statements

F-4

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

Year Ended May 31,
----------------------------------------------------
2000 1999 1998
--------------- --------------- ----------------

Operating Activities:
Net loss ..................................... $ (6,023) $ (7,340) $ (4,216)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization ................ 13,097 14,773 13,283
Non cash consulting expense .................. -- 55 --
Non cash interest expense .................... 3,123 3,032 2,738
Provision for losses on accounts receivable .. 1,443 779 745
Gain on sale of assets ....................... (155) (23) (4,171)
Amortization of unearned sale/leaseback profit (418) (405) (135)
Deferred income taxes ........................ -- --
(37)

Changes in operating assets and liabilities:

Accounts receivable, net ................. (1,738) (936) (805)
Inventories .............................. 735 417 (117)
Prepaid expenses and other assets ........ (857) (95) 353
Accounts payable and accrued expenses .... 86 (54) 405
Deferred revenue ......................... 79 337 385
-------- -------- --------
Net cash provided by operating activities .......... 9,372 10,540 8,428

Investing Activities:
Capital expenditures, including pagers ....... (7,836) (7,642) (5,821)
Acquisitions, net of cash acquired ........... (547) -- (900)
Deferred costs associated with acquisitions .. (170) (2) --
Redemption of certificates of deposit ........ 725 -- --
Purchase of certificates of deposit .......... (750) (725) --
Net proceeds from sale of assets ............. 254 49 7,511
-------- -------- --------
Net cash provided by (used for) investing activities (8,324) (8,320) 790

Financing Activities:
Debt incurred in connection with acquisitions 208 -- --
Payments on long-term debt ................... (262) (1,000) (7,500)
Debt issue costs ............................. -- -- (525)
Net proceeds from exercise of
common stock warrants .................... 47 -- 3
-------- -------- --------

Net cash used for financing activities .... (7) (1,000) (8,022)
-------- -------- --------

Net increase in cash and cash equivalents ......... 1,041 1,220 1,196
Cash and cash equivalents at beginning of period ... 5,787 4,567 3,371
-------- -------- --------

Cash and cash equivalents at end of period ......... $ 6,828 $ 5,787 $ 4,567
======== ======== ========

See Accompanying Notes to Financial Statements

F-5

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

Preferred Stock Additional Accumulated
---------------
Series A Series B Common Stock Paid-In Earnings
-------- -------- ------------
Shares Amount Shares Amount Shares Amount Capital (Deficit)
------ ------ ------ ------ ------ ------ ------- ---------

Balance at May 31, 1997 ........... 15,000 $ -- 130,930 $ -- 6,347,416 $ 6 $ 24,756 $ (18,726)

Net loss ...................... -- -- -- -- -- -- -- (4,216)
Exercise of warrants .......... -- -- -- -- 6,000 -- 3 --
Reverse stock split (2 for 3) . -- -- (43,643) -- (2,117,805) (2) 2 --
------ ------ ------- ------ --------- ------ -------- ----------
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)
====== ====== ====== ====== ========= ====== ======== ==========

See Accompanying Notes to Financial Statements

F-6

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

NOTE A - SIGNIFICANT ACCOUNTING POLICIES

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 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:

Pagers....................................... 3 years
Paging infrastructure........................ 5-20 years
Building and improvements.................... 10-20 years
Other equipment.............................. 5-10 years

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:

Goodwill 25 years
Subscriber bases 5 years
FCC licenses 25 years
Non-compete agreements 2-5 years

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.

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.

Advertising Costs: All costs related to advertising activities begun during
the fiscal year are expensed when incurred. Advertising costs were $1.8 million,
$1.2 million, and $0.7 million in fiscal 2000, 1999, and 1998, respectively.

F-7

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. 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 and
its paging terminals from Glenayre, a leading manufacturer of mobile
communications equipment. Cellular telephones used in the Company's prepaid
cellular business are presently available from a limited number of suppliers,
but additional suppliers are actively being sought. Two-way radios are also
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 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
1999 and 1998 financial statements to conform to the fiscal year 2000
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 is currently analyzing the
implementation requirements and 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.

In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements". This SAB provides additional guidance on the accounting for revenue
recognition, including both broad conceptual discussions as well as certain
industry-specific guidance. The guidance is effective for the Company in the
fourth quarter of fiscal 2001. While Teletouch does not expect SAB No. 101 to
have a material impact on its results of operations upon adoption, the SEC is
expected to issue further guidance regarding the implementation of SAB No. 101
which could affect the Company's estimates of its expected impact.

F-8

NOTE B - ACQUISITIONS

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 immaterial to consolidated operations, are included with that of the
Company from the date of closing.

NOTE C - SEGMENT INFORMATION

Teletouch operates in the wireless telecommunications industry, providing
paging and messaging, cellular, and two-way radio services to a diversified
customer base. As of and for the years ending May 31, 2000, 1999, and 1998, the
Company had no foreign operations.

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 10% in the
aggregate of the Company's revenue. Cellular and two-way revenues for fiscal
2000 were $3.6 million and $2.2 million, respectively.

NOTE D - CERTIFICATES OF DEPOSIT

As of May 31, 2000 and 1999, Teletouch had deposited $750,000 and $725,000
into one-year certificates of deposits with banks to support letters of credit
issued to cellular service and paging equipment providers.

NOTE E - PROPERTY, PLANT AND EQUIPMENT

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

2000 1999
---- ----

Land................................................... $ 46 $ 49
Leased pagers.......................................... 6,949 6,338
Paging infrastructure.................................. 18,293 17,779
Buildings and improvements............................. 1,631 813
Other equipment........................................ 5,831 4,425
---------- ---------
32,750 29,404
Accumulated depreciation............................... (13,633) (10,671)
--------- ---------
$ 19,117 $ 18,733
======== ========

Depreciation expense was $6.4 million, $7.1 million and $5.6 million in fiscal
2000, 1999, and 1998, respectively.

NOTE F - LONG-TERM DEBT

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

2000 1999
---- -------

Notes payable.......................................... $59,750 $60,000
Junior subordinated notes.............................. 18,589 15,944
Other.................................................. 196 --
---------- -----------
78,535 75,944
Less current portion................................... 6,608 --
--------- -----------
$ 71,927 $75,944
========= ===========

F-9

Notes Payable: The Company's Credit Agreement provides for loans in an
amount not to exceed $70 million. As of May 31, 2000, $59,750,000 of the Credit
Agreement was funded, and $10 million is available for future funding. 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 the prime rate plus 1% to 2% or 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 beginning in August 2000 and ending in
November 2005. For fiscal 2000, the weighted-average interest rate on the Credit
Agreement was 8.1%. The Credit Agreement also requires the maintenance of
specified financial and operating covenants, with which the Company is in
compliance, and prohibits any payments on the Junior Subordinated Notes and the
payment of dividends.

Junior Subordinated Notes: In August 1995, in connection with the
acquisition of Dial-A-Page, Inc., Teletouch borrowed $10 million of 14% Junior
Subordinated Notes ("the Subordinated Notes") due in August 2003 from
Continental Illinois Venture Corporation ("CIVC") and certain other parties both
related and unrelated to CIVC (together with CIVC, the "CIVC Investors"). The
Subordinated Notes were initially recorded, for financial reporting purposes, at
approximately $8 million. The terms of the Subordinated Notes require the
maintenance of certain financial and operating covenants and restrict future
acquisitions. The effective interest rate on the Subordinated Notes during
fiscal 2000 was 15.7%. Included in the Subordinated Note balance was accrued
interest of $9.4 million and $7.0 million at May 31, 2000 and May 31, 1999,
respectively. See Note I below.

Maturities: Maturities of debt outstanding at May 31, 2000 are as follows:
2001 - $6.6 million; 2002 - $8.1 million; 2003 - $9.5 million; 2004 - $23.6
million; 2005 - $3.4 million.

Interest: Cash paid for interest during 2000, 1999, and 1998 was
approximately $4.7 million, $5.3 million, and $6.5 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 2000
and 1999 and paid $85,000 in fiscal 1998. Teletouch currently has a net
operating loss carryforward of approximately $19.4 million that is available to
reduce future taxable income and will expire beginning in fiscal 2012.

The Company's carryforwards expire at specific future dates and utilization
of certain carryforwards 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 carryforward 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

F-10

the carryforwards will be recorded in future statements of operations as a
reduction of the Company's income tax expense.

Significant components of Teletouch's deferred income tax liabilities and
assets as of May 31, 2000 and 1999 follow (in thousands):

2000 1999
---- ----

Deferred income tax liabilities:
Depreciation methods .................................... $ 2,119 $ 2,198
Other ................................................... 100 100
------- -------
Total deferred income tax liabilities ...................... $ 2,219 $ 2,298
Deferred income tax assets:
Amortization methods .................................... 2,401 1,505
Allowance for doubtful accounts ......................... 55 57
Unrecognized gain ....................................... 1,089 1,192
Alternative minimum tax credit carryforward.............. 85 85
Net operating loss carryforward ......................... 6,591 5,611
Valuation allowance ..................................... (8,988) (7,138)
------ -------
Total deferred income tax assets ........................... 1,233 1,312
------- -------
Net deferred income tax liability .......................... $ 986 $ 986
======= =======

A reconciliation from the federal statutory income tax rate to the effective
income tax rate for the fiscal years 2000, 1999, and 1998 follows:

2000 1999 1998
---- ---- ----

Statutory income tax rate (benefit) ............... (34.0)% (34.0)% (34.0)%
Change in valuation allowance ..................... 30.7% 30.9% 29.0 %
Expenses not deductible for tax purposes, primarily
amortization of intangible assets .............. 3.3% 2.7% 5.1 %
Alternative minimum tax ........................... -- -- 2.3 %
Other ............................................. -- 0.4% (1.2)%
---- ---- ------
Effective income tax rate ......................... -- -- 1.2 %
==== ==== ======

Significant components of the provisions for income taxes are as follows:

2000 1999 1998
---- ---- ----

Current........................................... $ -- $ -- $ 85,000
Deferred.......................................... -- -- (37,000)
--------------- ------------- -------------
$ -- $ -- $ 48,000
=============== ============= =============

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 $3,234, $2,850, and $2,531 in fiscal
2000, 1999, and 1998, respectively. Future minimum rental commitments under
non-cancelable leases are as follows (in thousands):

F-11

2001.............................................. $ 2,838
2002.............................................. 2,391
2003.............................................. 1,943
2004.............................................. 1,561
2005.............................................. 1,214
2006 and thereafter............................... 2,459
-------
$12,406
=======

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

On June 25, 1998, the Company effected a two-for-three reverse stock split
of its common shares distributable to shareholders of record as of May 11, 1998.
The Company's shareholders received two shares of stock and cash resulting from
any fractional shares in exchange for each three previously outstanding shares.
All outstanding shares have been adjusted and per share amounts have been
adjusted for all periods presented as a result of the two-for-three reverse
split.

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.

The Company issued 1,533,333 Class A Warrants in connection with its
initial public offering. Each Class A Warrant carried the right to purchase a
share of common stock for $6.75 and was redeemable by the Company at $0.15 per
warrant if the closing bid price of the common stock had been at least $8.44 for
15 consecutive trading days. These warrants expired in December 1999. The
Company also issued to certain Underwriters, for nominal consideration, the
Underwriters' Warrants to purchase an aggregate of 133,333 shares of Common
Stock at an exercise price of $8.40 per share and warrants to purchase, at a
price of $0.15 per warrant, 133,333 warrants. Each warrant entitled the holder
to purchase one share of Common Stock on the same terms and conditions as the
Class A Warrants, except that the exercise price was $9.45 per share. The
Underwriters' Warrants also expired in December 1999. In addition, 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 F),
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 ($29.2 million at May
31, 2000), 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, 2000, the conversion of Series A
Preferred Stock would result in an estimated issuance of 2.9 million shares of
common stock (5.6 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, 2000, the conversion of Series A Preferred Stock
would result in an estimated issuance of 7.3 million shares of common stock
(14.1 million shares of common stock if dividends in arrears are paid "in
kind").

F-12

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 six 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, 2000, 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, 2000, approximately $14.2
million of dividends ($944.93 per share) were in arrears (or 2.7 million shares
of common stock if paid "in kind" using the conversion price stated in the
agreement and 6.8 million shares of common stock if paid "in kind" using the
closing market price of the Company's common stock on May 31, 2000, as
previously discussed). Dividends earned per share in fiscal years 2000, 1999,
and 1998 were $247.92, $221.66 and $188.24, respectively.

Common stock reserved: Approximately 9.3 million shares of common stock are
reserved for future issuance at May 31, 2000, as follows (in thousands):

Conversion of Series A Preferred Stock* 2,857
Common Stock Purchase Warrants 2,661
Conversion of Series B Preferred Stock 2,469
Consultant Warrants 200
1994 Stock Option and Stock Appreciation Rights Plan 1,000
Other options 117
-----
9,304
=====

*using the conversion price stated in the agreement

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).

F-13

Weighted
Stock option activity has been as follows: Average
Number of Exercise Price Exercise Price
Shares Per Share Per Share
---------- --------------- ---------------

Options outstanding at May 31, 1997.................. 203,333 $0.87-$6.00 $3.38
Options granted to officers and management....... 373,332 $0.87-$3.56 $1.15
Options granted to directors..................... 13,332 $0.87 $0.87
Options granted to others........................ 43,332 $2.46-$3.38 $3.21
Options forfeited................................ (6,667) $4.32 $4.32
---------- ------------ -----------
Options outstanding at May 31, 1998.................. 626,662 $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
---------- ------------ -----------

Exercisable at May 31, 2000.......................... 277,677 $1.30
---------- -----------
Exercisable at May 31, 1999.......................... 298,978 $2.73
---------- -----------
Exercisable at May 31, 1998.......................... 198,274 $3.50
---------- -----------

Weighted-average fair value of options
granted during 2000........................ $0.62
-----
Weighted-average fair value of options
granted during 1999........................ $1.81
-----
Weighted-average fair value of options
granted during 1998........................ $1.48
-----
Weighted-average remaining

contractual life........................... 7.6 years

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 2000, 1999, and 1998,
respectively: risk-free interest rates of 6.50%, 5.75%, and 6.25%; dividend
yields of 0% for all years; volatility factors of the expected market price of
the Company's common stock of .70 in 2000, .63 in 1999, and .53 in 1998, 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.

F-14

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 2000, 1999, and
1998 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):

2000 1999 1998
-------- --------- ---------

Pro forma net loss applicable to common stockholders $(9,895) $(10,798) $(7,214)

Pro forma loss per share $ (2.32) $(2.55) $(1.70)

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", beginning July 1, 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
$220,000 and $120,000 were made in fiscal years 2000 and 1999, respectively. No
contributions were made in fiscal 1998.

NOTE L - SALE - LEASEBACK TRANSACTION

On January 28, 1998, Teletouch sold substantially all of its communications
towers for approximately $8.7 million. The proceeds from the sale were used to
reduce the outstanding debt under the Credit Agreement (discussed in Note F).
Concurrent with the sale, the Company leased back space on the towers sold for a
period of ten years for approximately $.6 million per year. Teletouch recognized
a $4.1 million gain related to the sale of the towers in fiscal 1998 and
deferred the remaining $4.0 million gain, which is being amortized into income
over the period of the lease.

NOTE M - NOTE RECEIVABLE

At May 31, 2000 and 1999, the Company had a note receivable of $515,000 and
$500,000 from a supplier. Subsequent to May 31, 2000, the note was exchanged for
150,000 shares of restricted common stock of the supplier and certain intangible
assets. There was no gain or loss associated with this transaction.

NOTE N - SUBSEQUENT EVENT

In June 2000 Teletouch entered into an agreement to acquire the assets of
Snider Communications Corporation ("Snider"), an Arkansas corporation
headquartered in Little Rock, for 600,000 shares of Teletouch's common stock.
The estimated purchase price of the transaction is approximately $1.2 million
and will be accounted for as a purchase. Snider provides statewide wireless
messaging coverage in Arkansas.

F-15

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, 2000.

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.

Signature Title Date
- --------- ----- ----

/s/ Robert M. McMurrey Chairman August 29, 2000
- -----------------------------
Robert M. McMurrey

/s/ J. Richard Carlson President, August 29, 2000
- -----------------------------
J. Richard Carlson Chief Executive Officer,
Chief Operating Officer

/s/ J. Kernan Crotty Executive Vice President, August 29, 2000
- -----------------------------
J. Kernan Crotty Chief Financial Officer
Chief Accounting Officer

/s/ Charles C. Green III Director August 29, 2000
- -----------------------------
Charles C. Green III

/s/ Clifford E. McFarland Director August 29, 2000
- -----------------------------
Clifford E. McFarland

/s/ Marcus D. Wedner Director August 29, 2000
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Marcus D. Wedner

/s/ Thomas E. Van Pelt, Jr. Director August 29, 2000
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Thomas E. Van Pelt, Jr.

/s/ Thomas E. Gage Director August 29, 2000
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Thomas E. Gage