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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the Quarterly Period Ended February 28, 2005

OR

For the transition period from              to             

Commission File Number 1-13436

TELETOUCH COMMUNICATIONS, INC.

(Name of registrant in its charter)

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

Internet Website: www.teletouch.com

(Address and telephone number of principal executive offices)

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

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

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

Common Stock, $.001 par value – 4,981,980 shares outstanding as of April 15, 2005

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TELETOUCH COMMUNICATIONS, INC.

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PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements

TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

ASSETS

See Accompanying Notes to Consolidated Financial Statements

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TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS – (Continued)

(In thousands, except share data)

LIABILITIES AND SHAREHOLDERS’ EQUITY

See Accompanying Notes to Consolidated Financial Statements

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TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except shares and per share amounts)

(Unaudited)

See Accompanying Notes to Consolidated Financial Statements

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TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See Accompanying Notes to Consolidated Financial Statements

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TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In thousands)

(Unaudited)

See Accompanying Notes to Consolidated Financial Statements

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TELETOUCH COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE A – BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements included herein have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). The interim condensed consolidated financial statements include the consolidated accounts of Teletouch Communications, Inc. and our wholly-owned subsidiaries (collectively, the “Company” or “Teletouch”). In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of financial position, results of operations and cash flows for the interim periods presented have been made. The results of operations for the three and nine months ended February 28, 2005, are not necessarily indicative of the results to be expected for the full year.

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

Reclassifications: Certain reclassifications were made to the prior period financial statements to conform to the current period financial statement presentation. Loss on disposal of assets was reclassed from other expense to costs and expenses in the consolidated statements of operations for all periods presented. Cost of products sold was reclassed from the gross margin section to operating expenses in the consolidated statements of operations for all periods resented. Previously reported operating expenses have been retitled to cost of service, rent and maintenance to more accurately reflect the nature of these expenses in the consolidated statements of operations. These reclassifications did not have an impact on the Company’s previously reported financial position or net loss applicable to common shareholders.

NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

Property, Plant and Equipment: Property, plant and equipment is recorded at cost. Depreciation is computed using the straight-line method. The following table contains the property, plant and equipment by estimated useful life, net of accumulated depreciation as of February 28, 2005 (in thousands):

Recent Accounting Pronouncements:

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

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

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

NOTE C – LOSS PER SHARE

Basic earnings per share (“EPS”) is generally calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted EPS is generally calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding and potential shares outstanding. However, the Company has 1,000,000 shares of Series C Preferred Stock and 6,000,000 GM Warrants outstanding which are convertible into 44,000,000 and 6,000,000 shares of common stock, respectively. These securities are considered to be “Participating Securities” under Financial Accounting Standards No. 128 (“FAS 128”) for EPS calculations. Both the Series C Preferred Stock and the GM Warrants are considered participating securities because the common stock underlying these securities participates in dividends (if declared) at the same rate as the common stockholders. Emerging Issues Task Force (“EITF”) Topic 03-06 requires that Participating Securities be included in the computation of basic EPS using the two-class method, if the effect would be dilutive to EPS. Although these securities meet the definition of Participating Securities since they participate in dividends, in light of the losses and the fact that there is no contractual obligation for the security holders to share in losses of the Company, they have not been included in the basic and diluted earnings per share calculations.

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The following table provides a reconciliation of the numerators and the denominators used to calculate basic and diluted loss per share as disclosed in our Consolidated Statement of Operations for the three and nine months ended February 28, 2005 and February 29, 2004 (in thousands except per share amounts):

The total number of equivalent shares of common stock outstanding as of February 28, 2005 and February 29, 2004 are as follows:

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The common stock warrants, common stock options, redeemable common stock and Series C preferred stock listed in the table above were outstanding but were not included in the calculation of basic or diluted EPS due to their antidilutive effect.

NOTE D – LIQUIDITY, RISKS AND FINANCIAL CONDITION

Based on current and anticipated levels of operations, the Company’s management anticipates that net cash provided by operating activities including the effects of planned restructuring activities, if successful, together with the $1.1 million of cash on hand will be adequate to meet its anticipated cash requirements for the next twelve months. Revenues from the Company’s telemetry product lines have continued to be insignificant during the three and nine months ended February 28, 2005 and management expects that revenues from the telemetry product line will continue to be insignificant through at least the fourth quarter of fiscal 2005 due to the level of activity and qualified sales leads as well as the progress of the various customer evaluations that are underway. New telemetry products and channels continue to be developed but are being developed slowly due to the capital requirements of this activity. The Company introduced three new telemetry devices during the third quarter of 2005 and anticipates generating limited revenues from these products during the fourth quarter.

Because the Company’s new revenue initiatives have been slow to develop, management is currently executing a restructuring of its operations to eliminate certain expenses to help the Company meet its cash requirements for the remainder of fiscal 2005. In December 2004, the Company relocated its corporate offices and eliminated headcount from its field operations and its corporate office. The relocation allowed the Company to bring all of its corporate functions together in one facility further improving the efficiency of its operations. During the third quarter, management developed a new compensation program for its two way business to emphasize sales on its Logic Trunked Radio (“LTR”) system. Additionally, during the third quarter, the Company has neared the completion of exiting one of its paging systems in Arkansas by migrating those subscribers to another of its existing paging systems. The Company is currently in discussions with another paging carrier to exchange certain systems that are more geographically beneficial to both parties and would likely result in cost savings for both. Continued cost saving and revenue generating activities are planned during the fourth quarter which are designed to further improve cash flow and operating efficiency. The Company can provide no assurances that reductions in its operating costs or its revenue growth initiatives will be sufficient to generate positive cash flows or that additional financing would be available or, if available, offered on acceptable terms.

Teletouch believes that future fluctuations in its revenues and operating results may occur due to many factors, particularly the decreased demand for its messaging services. If the rate of decline of messaging units in service exceeds the Company’s expectations, its revenues will be negatively impacted, and such impact could be material. The Company’s plan to reduce operating expenses may also negatively impact revenues as customers may experience a reduction in the level of customer service in certain areas, although cost saving measures taken over the past several years have had a minimal impact on revenues as a result of decreased customer services. The Company may be unable to adjust spending in a timely manner to compensate for any future revenue shortfall. It is possible that, due to these fluctuations, Teletouch’s revenue or operating results may not meet the expectations of investors and creditors, which could impair the value of its equity securities.

As of February 28, 2005, the Company has no borrowings outstanding under its $2.2 million promissory note with TLL Partners, a company controlled by Robert McMurrey, Chairman of the Board of Teletouch. Any borrowings under this arrangement are subject to the approval of the Progressive Concepts Communications, Inc. (“PCCI”) Board of Directors and availability of funds. TLL Partners is a wholly owned subsidiary of PCCI. The Company has had limited borrowings under this agreement in the past and has been given no assurances from TLL Partners or PCCI that the necessary approval would be given by the PCCI Board of Directors to fund any future operating or capital needs of Teletouch. The Company’s

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management does not anticipate that the necessary approvals would be granted by the PCCI Board of Directors, therefore, it is operating under the assumption that there are no available borrowings under this agreement.

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

NOTE E – INVENTORY

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

NOTE F – NOTE RECEIVABLE

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

NOTE G – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

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

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NOTE H – SHORT-TERM DEBT

In February 2005, the Company cancelled its Multiple Advance Promissory Note (“MAP Note”) with First Community Financial Corporation (“FCFC”). The Company initiated the early termination of the MAP Note because it had not needed to access this line of credit for the past several quarters and the continuance of this agreement created unnecessary administration functions and their related costs within the Company. Under the terms of the MAP Note, the Company was required to comply with certain financial covenants on a monthly basis. Failure to maintain compliance with these covenants is an event of default as defined under FCFC Security Agreement. During the first and second quarters of fiscal 2005, the Company was unable to maintain compliance with certain financial covenants in the MAP Note. The Company did receive a waiver of these covenants which allowed the Company to remain in good standing under the terms of the MAP Note for the quarters ending August 31, 2004 and November 30, 2004.

NOTE I – PROVISION FOR LEASE ABANDONMENT AND OTHER COSTS

The following table provides a rollforward of the Company’s liability for future lease payments related to previously closed stores for the three and nine months ended February 28, 2005 (in thousands):

The provision for lease abandonment and other costs is included in accrued expenses and other liabilities on the Consolidated Balance Sheet. As of February 28, 2005, the remaining amount of $33,000 is expected to be paid through 2005. The $33,000 balance remaining in this provision relates to one remaining retail facility in Waco, Texas. This lease on the Waco building will expire in August 2005. Although the Company does not anticipate significant changes, the actual costs may differ from these estimates.

NOTE J – RELATED PARTY TRANSACTIONS

The Company had certain related party sales, purchases and incurred certain expenses during the three and nine months ended February 28, 2005 and February 29, 2004 with Progressive Concepts, Inc. (PCI) a company controlled by Robert McMurrey, Teletouch’s Chairman, as follows: