The following discussion and analysis of the results of operations and financial condition of the Company should be read in conjunction with the consolidated financial statements and the related notes and the discussions under "Application of Critical Accounting Policies," which describes key estimates and assumptions we make in the preparation of our financial statements. The reader should pay particular attention to the discussion below under "Significant Change in the Operations of Teletouch" below as well as the discussions under "Acquisition of Progressive Concepts, Inc." and "Sale of Paging Business" included in Part I - Item 1 - "Business," which discusses Teletouch's acquisition of its sister company, Progressive Concepts, Inc. and the subsequent sale of all of the assets and operations related to its paging business while reading the discussion and analysis of the results of operations and financial condition of the Company. These transactions resulted in a significant change to our business in 2007 and 2008. We believe that in light of these changes, the 2007 results are not indicative of our performance and results of operations going forward.

Significant Change in the Operations of Teletouch

As discussed under Item 1 "Business," during the fiscal year ended May 31, 2007, Teletouch finalized two significant transactions, which resulted in the August 11, 2006 acquisition of Progressive Concepts, Inc., a cellular service and equipment provider operating under several master distributor agreements with AT&T (formerly Cingular and its predecessors), and the sale of Teletouch's legacy paging business and all of the related network infrastructure on August 14, 2006. Historically, the paging business represented substantially all of Teletouch's operations. However, after the completion of the transactions described above, the primary business of Teletouch is providing cellular services and equipment through its recently acquired subsidiary, PCI. The completion of these transactions resulted in Teletouch's operations being entirely located in Texas as compared to previously maintaining operations in 10 states throughout the southern United States where its paging services were provided. Although the legacy paging operations and the newly acquired cellular operations are both communications related, the significance of these transactions to Teletouch's operations effectively created a "new" company. As a paging carrier, Teletouch owned and maintained the network infrastructure required to provide the paging services over a large geographic territory covering 10 states. As a master distributor for AT&T wireless services, Teletouch's operations are now all located in Texas with distribution of these services limited to parts of Texas and Arkansas. As discussed throughout this Report, immediately prior to the acquisition, PCI was owned by TLL Partners, LLC, a Delaware LLC ("TLLP"), which also owns approximately 80% of the outstanding common stock of Teletouch. TLLP is also controlled

by Robert McMurrey, Chairman and Chief Executive Officer of Teletouch. The common ownership of PCI and Teletouch resulted in accounting treatment whereby the financials of PCI and those of Teletouch were consolidated for all historical periods as if Teletouch had always owned PCI. Further, the sale of the paging business, representing substantially all of the operations of "old" Teletouch, are reported as discontinued operations in the financial reports for all periods presented. This presentation method is required by Generally Accepted Accounting Principles ("GAAP") but does create some challenges in reconciling the previously filed reports on Teletouch with the information contained herein. Because of the significance of these transactions to the Company's business during 2007 and the continuing efforts to restructure the new business for future growth, the 2007 results may not be indicative of our performance and results of operations going forward.

Due to the common ownership of Teletouch and PCI, the acquisition of PCI was accounted for as a reorganization of entities under common control, which requires that the acquisition be accounted for in a manner similar to a "pooling of interests." The impact of the pooling of interests was to consolidate the historical basis of PCI's net assets and the operating results of PCI with those of Teletouch for all periods presented in this report. Therefore, the historical balance sheet and statement of operations amounts of Teletouch discussed in this discussion and analysis of Teletouch have been restated to include the net assets and liabilities and the operating results of PCI as if Teletouch had always owned PCI. Upon the completion of the acquisition in August 2006, PCI adopted Teletouch's May fiscal year end. For reporting and combination purposes, PCI's financials were prepared on Teletouch's fiscal year basis for the year ended May 31, 2006. To effect the pooling of interest combination, PCI's balance sheets and income statements as of and for the years ending December 31, 2005, May 31, 2006 and May 31, 2007 were consolidated with the balance sheets and income statements of Teletouch as of and for the years ended May 31, 2005, 2006 and 2007, respectively. This consolidation method results in an overlap of PCI's results of continuing operations for the period June 1, 2005 through December 31, 2005 whereby these same results are included in the Teletouch's May 31, 2005 and the May 31, 2006 consolidated statements of operations. See further discussion of the accounting treatment for the acquisition of PCI in Note 1 included in Part II - Item 8 - "Consolidated Financial Statements and Supplementary Data."

Overview

Teletouch has been a provider of telecommunications services for over 40 years, providing two-way radio services in Texas, GPS-telemetry and public safety/emergency response vehicle products and services throughout the U.S. Until the sale of its paging business in August 2006, Teletouch also provided paging services in non-major metropolitan areas and communities in the southeast United States. The Company provided paging services in Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, Missouri, Oklahoma, Texas and Tennessee. Late in 2007, Teletouch began selling safety/emergency response vehicle products and services business under the brand Teletouch EVP. The EVP business is a complementary offering to the Company's existing two-way radio business, and through 2008, the Company has continued to expand its product lines to include light bars, sirens and other accessories used in or on emergency response vehicles through a number of distribution agreements with manufacturers of these products.

Following the sale of the paging business and the acquisition of PCI in August 2006, Teletouch's core-business has been acquiring, billing and supporting cellular subscribers under a recurring revenue relationship with AT&T Wireless. The original distribution agreement between PCI and AT&T had been in place for more than 20 years. Teletouch, through it subsidiary, PCI, is a leading provider of AT&T cellular services (voice, data and entertainment), as well as other mobile, portable and personal electronics products and services to individuals, businesses and government agencies. The Company operates a chain of retail stores and sells under the "Hawk Electronics" brand, through Hawk-branded sub-agents and its own direct sales

force and through the Internet at various web sites. As a master distributor for AT&T, the Company controls the entire customer relationship, including initiating and maintaining the cellular service agreements, rating the cellular plans, providing complete customer care, underwriting new account acquisitions and providing multi-service billing, collections and account maintenance. Also acquired as part of the PCI acquisition, Teletouch now operates a national wholesale distribution business, known as PCI Wholesale that serves smaller cellular and automotive retailers, car dealers and rural cellular carriers throughout the country.

Results of Operations for the fiscal years ended May 31, 2007, 2006 and 2005

Operating revenues are primarily generated from the Company's cellular, wholesale and two-way radio operations and are comprised of a mix of service, rent and maintenance revenues as well as product revenues. Service, rent and maintenance revenues are generated primarily from the Company's cellular and two-way radio operations. Within the cellular operations, the primary service revenues are generated from the sale of recurring cellular subscription services under a master distributor agreement with AT&T. Within the two-way radio operations, service revenues are generated by the sale of subscription radio services on the Company's owned radio network as well as from the sale of maintenance services on customer owned radio equipment. The Company generates other service revenues from some of its ancillary and smaller operations, including telemetry services, landline telephone services, internet services and satellite television services.

The majority of the Company's product sales are generated within its wholesale operations and is comprised of cellular telephones, cellular accessories and 12 volt mobile electronics, which are sold to smaller dealers and carriers throughout the United States. Within the cellular operations of the Company, product sales are comprised primarily of cellular telephones and accessories sold through retail stores, outside salespeople and agents to generate recurring cellular subscription revenues. Two-way radio operations' products are comprised of radios and service parts for radio communication systems.

Service, rent and maintenance revenues and related costs are recognized during the period in which the service is rendered. Associated acquisition costs are expensed as incurred. For the Company's product sales, revenue is recognized when delivery occurs, the customer takes title and assumes risk of loss, terms are fixed and determinable and collectibility is reasonably assured. The Company does not generally grant rights of return. However, late in the fourth quarter of 2005, PCI rolled out a 30 day return / exchange program for new cellular subscribers in order to match programs put in place by most of the other cellular carriers. During the 30 days, a customer may return all cellular equipment and cancel service with no penalty. Reserves for returns, price discounts and rebates are estimated using historical averages, open return requests, recent product sell-through activity and market conditions. No reserves have been recorded for the 30 day cellular return program since only a very small number of customers utilize this return program and many fail to meet all of the requirements of the program, which include returning the phone equipment in new condition with no visible damage.

Since 1987, the Company has held agreements with AT&T, which allowed the Company to offer cellular service and customer service to AT&T customers in exchange for certain compensation and fees. The Company is responsible for the billing and collection of cellular charges from these customers and remits a percentage of the cellular billings generated to AT&T. Based on its relationship with AT&T, the Company has evaluated its reporting of revenues, under Emerging Issues Task Force Issue 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent," ("EITF 99-19") associated with its services attached to the AT&T agreements.

Based on its assessment of the indicators listed in EITF 99-19, the Company has concluded that the AT&T services provided by the Company should be reported on a net basis. The Company does bill and assume the collections risk on 100% of the cellular services used by its customers. However, under a net basis of reporting these revenues, only the excess of the gross customer billings over the contractual percentage of these billed amounts paid to AT&T is reported as revenue on the Company's financials.

Cost of providing service, rent and maintenance consists primarily of costs related to supporting the Company's cellular subscriber base under the master distributor agreement with AT&T including:

• Costs of recurring revenue features that are added to the cellular subscribers' accounts by the Company which are not subject to the revenue sharing arrangement with AT&T; such features include roadside and emergency assistance programs and handset and accessory warranty programs.

• Cost of third-party roaming charges that are passed through to the Company by AT&T. Roaming charges are incurred when a cellular subscriber leaves the designated calling area and utilizes a carrier, other than AT&T, to complete the cellular call. The Company is charged by AT&T 100% of these charges incurred by its customer base.

• Costs to operate and maintain our customer service department to provide billing support and facilitate account changes for cellular service subscribers. These costs primarily include the related payroll and benefits costs as well as telecommunication charges for inbound toll-free numbers and outbound long distance.

Cost of products sold consists of the net book value of items sold from the Company's operating segments, which are cellular telephones, accessories, two-way radio and 12 volt mobile electronics and their related accessories as well as the expenses and write-downs of equipment and accessory inventory for shrinkage and obsolescence. We recognize cost of products sold, other than costs related to write-downs of equipment and accessory inventory for shrinkage and obsolescence, when title passes to the customer. In the Company's wholesale operations, products and accessories are sold to customers at pricing above the Company's cost. However, the Company will generally sell cellular telephones below cost to customers as an inducement to customers to agree to one-year and two-year subscription contracts, to upgrade service and extend existing subscription contracts or in connection with other promotions. The resulting equipment subsidy to the majority of the Company's cellular customers is fairly standard in the cellular industry and is treated as an acquisition cost of the related recurring cellular subscription revenues. This acquisition cost is expensed by the Company when the cellular equipment is sold with the expectation that the subsidy will be recovered through margins on the cellular subscription revenues over the contract term with the customer.

Selling and general and administrative costs primarily consist of customer acquisition costs, including the costs of our retail stores, sales commissions paid to internal salespeople and agents, payroll costs associated with our retail and direct sales force, billing costs, information technology operations, bad debt expense and back office support activities, including customer retention, legal, finance, marketing, human resources, strategic planning and technology and product development, along with the related payroll and facilities costs. Also included in selling and general and administrative costs are the ongoing costs of maintaining Teletouch as a public company, which include audit, legal and other professional and regulatory fees.

Service, Rent and Maintenance Revenue for fiscal years ended May 31, 2007, 2006 and 2005

The service, rent and maintenance revenues shown below have been grouped and are discussed by the Company's reportable operating segments as defined under GAAP. These operating segments represent the major business units that are regularly evaluated by management and for which separate financial records are

maintained. The other category includes the service revenues generated by the remaining operations of the Company that individually do not meet the quantitative requirements for reporting separately under GAAP, including car dealer installation, telemetry, satellite television and landline telephone services.

                                                                   Year Ended May 31,                                       2007 vs 2006               2006 vs 2005
                                                      % of                       % of                       % of
(dollars in thousands)                  2007        Oper Rev       2006        Oper Rev       2005        Oper Rev     $ Change      % Change     $ Change      % Change
Service, rent, and maintenance
revenue
Cellular operations
Gross cellular subscription
billings                              $  60,329                  $  57,778                  $  56,935                  $   2,551            4 %   $     843            1 %
Net revenue adjustment (revenue
share due AT&T)                         (36,219 )                  (34,772 )                  (34,068 )                   (1,447 )          4 %        (704 )          2 %

Net revenue reported from cellular
subscription billings                    24,110           43 %      23,006           39 %      22,867           37 %       1,104            5 %         139            1 %
Other service revenue                       735            1 %         885            1 %         839            1 %        (150 )        -17 %          46            5 %

Cellular operations total service
revenues:                                24,845           44 %      23,891           40 %      23,706           38 %         954            4 %         185            1 %
Two-way radio operations                  1,697            3 %       1,877            3 %       1,732            3 %        (180 )        -10 %         145            8 %
Other operations                          1,006            2 %       1,582            2 %       1,934            3 %        (576 )        -36 %        (352 )        -18 %

Service, rent, and maintenance
revenue                               $  27,548           49 %   $  27,350           45 %   $  27,372           44 %   $     198            1 %   $     (22 )          0 %

Total operating revenues              $  56,244                  $  59,643                  $  61,561                  $  (3,399 )         -6 %   $  (1,918 )         -3 %

Gross cellular subscription billings - are measured as the total recurring monthly cellular service charges invoiced to the Company's AT&T wireless subscribers for which a fixed percentage of the dollars invoiced are retained by the Company as compensation for the services it provides to these subscribers and for which the Company takes full (100%) accounts receivable risk before deducting certain revenue sharing amounts that are payable to AT&T under the Company's current billing and customer service agreements. The Company uses the calculation of gross billings to measure the Company's overall growth rate, as well as common industry metrics of Average Revenue Per Unit ("ARPU"), Cash Cost Per User ("CCPU") and Cost Per Gross Add ("CPGA"), each of which are also considered non-GAAP performance measures.

Service, Rent and Maintenance Revenue Discussion for fiscal years ended May 31, 2007 and 2006

The 4% increase in the cellular segment gross subscriptions billings for fiscal year ended May 31, 2007 compared to fiscal year ended May 31, 2006 resulted primarily from a change in the usage patterns of the Company's cellular subscribers. During 2007, the Company experienced a transition in the equipment purchased within the customer base from standard mobile units to an increase in purchases of Personal Data Assistants ("PDAs'), resulting in an increase in data usage from the cellular customer base. For fiscal year ended May 31, 2007, the Company billed approximately $4.8 million in data revenues on a gross basis compared to $2.7 million for the fiscal year ended May 31, 2006. On a net revenue basis, these additional gross billings contributed approximately $535,000 in net revenues to the Company during 2007. This increase was offset by a decline in activations year after year. Beginning in 2006, activations began to level off from previous years as the market has become saturated. The Company had approximately 16,000 and 14,000 activations during the fiscal years ended May 31, 2005 and 2006, respectively. In 2007, activations dropped to approximately 11,000 for the Company.

The decrease in other service revenue within the cellular segment for the fiscal year ended May 31, 2007 compared to fiscal year ended May 31, 2006 is attributable to less labor revenues recorded due to a decrease in installation work for area automotive dealerships as well as a decrease in DISH and DirectTV satellite installations in the Dallas / Forth Worth area.

The 10% decrease in two-way service revenue for fiscal year ended May 31, 2007 compared to the fiscal year ended May 31, 2006 is attributable to a loss of LTR radio subscribers in the Dallas / Fort Worth market through fiscal 2006 due to a combination of ongoing system issues experienced after the acquisition of this network from Delta Communications, Inc. in January 2004 and service issues. At May 2005, the Company

had 2,191 LTR subscribers in the DFW market and by May 2006 this subscriber base had declined to 1,721 (approximately 21% decline in subscribers) which resulted in monthly recurring service revenues in the DFW market to decline from approximately $41,000 per month in May 2005 to $29,000 per month in May 2006. Through 2007, the Company was able to stabilize its networks in the DFW market, resulting in a slight growth in this customer base and its related recurring revenues. As of May 2007, there were 1,776 LTR subscribers in the DFW market with monthly recurring billings totaling approximately $31,000.

The decline in service revenues from the Company's other operations in fiscal year ended May 31, 2007 compared to fiscal year ended May 31, 2006 was primarily due to the shutdown of the Company's answering service operations in the spring of 2006. The Company provided answering services and call center support for external customers and for its own security monitoring operations. In September 2005, the Company sold all of its security monitoring operations and thereafter found it difficult to justify the ongoing operating costs of maintaining the answering service operations and decided to exit this business in 2006. Following the sale of the Company's security monitoring operations, the Company made the decision to shutdown its security related service department operations, which provided services including pre-wiring of residential homes for security systems and service and repair of existing security systems. The Company concluded the service operations were not profitable enough to maintain on a stand-alone basis following the sale of the security operations. During fiscal year 2006, the service department revenues were approximately $387,000 with no similar revenues in fiscal year 2007. Other business operations showed declines in service revenue for the fiscal year ended May 31, 2007 compared to fiscal year May 31, 2006 including pager and landline services due to declining subscriber bases.

Service, Rent and Maintenance Revenue Discussion for fiscal years ended May 31, 2006 and 2005

Fiscal year ended May 31, 2006 revenues for the cellular subscription billings remained relatively flat compared the same revenues for the fiscal year ended May 31, 2005. Although activations were down year after year, approximately 16,000 for the period ended May 31, 2005 compared to approximately 14,000 for the same period ended 2006, the Company experienced an increase in revenues for other features added to customers' cellular bills for which no revenues are shared with AT&T, such as "Hawk Promise," a company managed cellular accessory warranty program, roadside and emergency assistance programs and cellular handset replacement insurance.

The increase in other service revenue within the cellular segment for fiscal year ended May 31, 2006 compared to fiscal year ended May 31, 2005 is primarily due to the phase out of billing discounts granted to customers who purchased multiple services from the Company on a monthly basis including cellular, landline, security and pager services.

The $145,000 increase in two-way service revenue for fiscal year ended May 31, 2006 compared to fiscal year ended May 31, 2005 is due primarily to acquiring new maintenance and repair contract customers as well as upgrading existing service contract customers with additional radios to their fleet resulting in increased service billings for Teletouch.

Cost of Service, Rent and Maintenance for fiscal years ended May 31, 2007, 2006 and 2005

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

                                             Year Ended May 31,              2007 vs 2006               2006 vs 2005
(dollars in thousands)                   2007       2006       2005      $ Change      % Change      $ Change    % Change
Cost of service, rent and
maintenance
Cellular operations                    $  9,947   $  9,882   $  9,477   $       65            1 %   $      405          4 %
Two-way operations                        1,983      1,982      1,484            1            0 %          498         34 %
Other operations                          1,215      2,107      1,969         (892 )        -42 %          138          7 %

Total cost of service, rent and
maintenance                            $ 13,145   $ 13,971   $ 12,930   $     (826 )         -6 %   $    1,041          8 %

Cost of Service, Rent and Maintenance Discussion for fiscal years ended May 31, 2007 and May 31, 2006

The decline in cost of service, rent and maintenance from the Company's other operations for fiscal year ended May 31, 2007 compared to fiscal year ended May 31, 2006 is primarily due to the shutdown of the Company's answering service operations in the spring of 2006 and cost of services related to the telemetry business. In fiscal year 2007, the Company decided not to expand the telemetry business due to a competitive service market and the Company's lack of infrastructure to support the telemetry products and customers. The Company also experienced a decline in paging and landline cost of services due to declining subscriber bases.

Cost of Service, Rent and Maintenance Discussion for fiscal years ended May 31, 2006 and May 31, 2005

The cellular segment cost of service, rent and maintenance consisted of the following significant costs for fiscal years ended May 31, 2006 and May 31, 2005:

                                                  Year Ended May 31,              2006 vs 2005
(dollars in thousands)                            2006          2005         $ Change       % Change
Cellular cost of service, rent and
maintenance
Third-party cost of recurring cellular
revenues                                       $    4,970    $     5,115    $     (145 )          -3 %
Salaries and other personnel expenses               3,180          3,062           118             4 %
Billing expenses                                      770            786           (16 )          -2 %
. . .