Overview

Teletouch has been a provider of telecommunications products and services for over 40 years. Teletouch offers a comprehensive suite of telecommunications products and services including cellular services under the AT&T Mobility® and T-Mobile® retail brands, two-way radio, GPS-telemetry, wireless messaging and public safety/emergency response vehicle products and services throughout the United States. Teletouch's core-business is acquiring, billing and supporting cellular subscribers under a long-term recurring revenue relationship with AT&T Mobility ("AT&T"). The original distribution agreements between PCI and AT&T have been in place for more than twenty-five years. Through its subsidiary, Progressive Concepts Inc, ("PCI"), the Company 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. PCI 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. PCI also 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. Teletouch's original business continues to provide two-way radio products and services on its own network in North and East Texas. In late 2007, Teletouch began selling safety and emergency response vehicle products and services business under the brand Teletouch EVP ("Emergency Vehicle Products"). 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. Teletouch and its affiliates also hold equity stakes in various cellular-related technology companies, including the mobile applications developer and provider, Mobui Corporation, a Redmond, Washington based corporation.

2009 Business Strategy

Since the August 2006 acquisition of PCI, many personnel and process changes have been completed to allow for and promote organic growth in its current business units. In order to realize this organic growth, the Company has added additional sales personnel and locations, increased its internet marketing activities and enhanced its systems and processes to allow for the timely integration on new product lines and expects

to realize returns on these investments during 2009. In addition, several acquisition targets have been identified, which would be complementary to the business. Upon completing and filing all of its delinquent financial reports in calendar year 2009, the Company is hopeful that it will secure the necessary financing to complete one or more of these acquisitions. There is no assurance that any of the acquisitions will be concluded or that the Company will be able to complete and file all of its delinquent financial reports.

As of the date of filing this Report, the core business of Teletouch is providing cellular services to customers through PCI's distribution agreements with AT&T. The primary distribution agreement with AT&T expires in September 2009, with certain service provisions and other revenue-generating obligations continuing for many years thereafter. The Company has been notified the primary distribution agreement will not be renewed by AT&T and is currently in discussions with AT&T to negotiate a new distribution agreement. Upon expiration of the current distribution agreement, the Company will be allowed to continue to provide services to its existing subscribers until these subscribers terminate service with the Company. As a result, the Company could experience accelerated reductions in its cellular service revenues beginning in September 2009, due to its inability to replace customers that disconnect service in the normal course of business. Because of the potential change in the Company's cellular services business, the Company is aggressively working to develop its other business units as well as evaluating its alternatives to maintain the recurring revenues generated by its current cellular subscriber base. The Company has begun to expand its cellular carrier relationships beyond AT&T. In January 2009 the Company entered into a new distribution agreement with T-Mobile USA, Inc. and in February 2009 opened 5 retail locations in Oklahoma selling T-Mobile branded cellular services. Based on its current discussions with T-Mobile, the Company plans to open additional retail locations in various markets, including those that are now exclusive to AT&T, but no longer require exclusivity as of September 2, 2009. The Company is also currently in discussions with other top cellular carriers to facilitate its efforts to expand its cellular operations both in and outside of its current markets.

Beginning with the year ending May 31, 2008, the Company's management was required to internally assess and report on its internal controls over financial reporting under the rules of Section 404 of the Sarbanes-Oxley Act of 2002. Due to the variety of integration and audit issues experienced in 2008, the Company was unable to complete this assessment by May 31, 2008 and subsequently hired outside consultants to assist with the completion of this assessment. In June 2008, the SEC granted another extension for non-accelerated companies, including Teletouch, to file an attestation report of their independent auditors on the internal controls over financial reporting. Under this latest extension, Teletouch will have to provide the auditor's report on its internal controls for its year ended May 31, 2010.

For fiscal year 2009, a large part of Teletouch's efforts will be completing and filing all of its delinquent financial reports as well as remediating the deficiencies identified in its internal controls over financial reporting, as defined in Section 404 of the Sarbanes-Oxley Act of 2002. The current delinquency in the Company's financial reporting was caused primarily by the acquisition of PCI in August 2006. Since that time its inability to complete its audits and file the required financials has hindered the Company's ability to secure additional financing to grow the business. Through 2008, the Company managed closely its operating expenses and implemented several restructurings to improve profitability but in fiscal year 2009 will focus more on new business development across all of its business units while continuing to maintain control of its operating expenses.

RESULTS OF OPERATIONS

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 by PCI

from the sale of recurring cellular subscription services under several master distributor agreements 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 internet services and satellite television services.

The majority of the Company's product sales is generated by PCI's 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 PCI's and Teletouch's 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. 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, PCI offers customers a 30 day return / exchange program for new cellular subscribers in order to match programs 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's subsidiary, PCI, has held agreements with AT&T, which allowed PCI to offer cellular service and customer service to AT&T customers in exchange for certain compensation and fees. PCI 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 PCI's 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 PCI should be reported on a net basis. PCI 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 consolidated financials.

Cost of providing service, rent and maintenance consists primarily of costs related to supporting the PCI'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 PCI 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 PCI 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. PCI is charged by AT&T 100% of these charges incurred by its customer base.

• Costs to operate and maintain PCI's 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 PCI's wholesale operations, products and accessories are sold to customers at pricing above PCI's cost. However, PCI will generally sell cellular telephones below cost to new and existing cellular service subscribers 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 PCI's cellular customers is consistent with 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, other professional and regulatory fees.

Service, Rent and Maintenance Revenue for the Three and Nine Months Ended February 28, 2009 and 2008

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. 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, satellite television and dial up internet services.

(dollars in thousands)                                  February 28,                           2009 vs 2008
                                                       % of                     % of
                                                       Oper                     Oper
                                          2009         Rev         2008         Rev       $ Change       % Change
Three Months Ended
Service, rent, and maintenance
revenue
Cellular operations
Gross cellular subscription billings    $  14,810                $  15,713                $    (903 )          -6 %
Net revenue adjustment (revenue share
due AT&T)                                  (8,520 )                 (9,079 )                    559            -6 %

Net revenue reported from cellular
subscription billings                       6,290        57 %        6,634        50 %         (344 )          -5 %
Other service revenue                          -          0 %           -          0 %           -              0 %

Cellular operations total service
revenues:                                   6,290        57 %        6,634        50 %         (344 )          -5 %

Two-way radio operations                      458         4 %          526         4 %          (68 )         -13 %
Other operations                               30         0 %           94         0 %          (64 )         -68 %


Service, rent, and maintenance
revenue                                 $   6,778        61 %    $   7,254        54 %    $    (476 )          -7 %


Total operating revenues                $  11,048                $  13,370                $  (2,322 )         -17 %

Nine Months Ended
Service, rent, and maintenance
revenue
Cellular operations
Gross cellular subscription billings    $  45,173                $  47,319                $  (2,146 )          -5 %
Net revenue adjustment (revenue share
due AT&T)                                 (26,036 )                (27,270 )                  1,234            -5 %

Net revenue reported from cellular
subscription billings                      19,137        54 %       20,049        48 %         (912 )          -5 %
Other service revenue                          -          0 %          159         1 %         (159 )        -100 %

Cellular operations total service
revenues:                                  19,137        54 %       20,208        49 %       (1,071 )          -5 %

Two-way radio operations                    1,246         4 %        1,410         3 %         (164 )         -12 %
Other operations                              141         0 %          376         1 %         (235 )         -63 %


Service, rent, and maintenance
revenue                                 $  20,524        58 %    $  21,994        53 %    $  (1,470 )          -7 %


Total operating revenues                $  35,127                $  41,469                $  (6,342 )         -15 %

Gross cellular subscription billings are measured as the total recurring monthly cellular service charges invoiced to PCI's wireless subscribers for which a fixed percentage of the dollars invoiced are retained by PCI as compensation for the services it provides to these subscribers and for which PCI takes full (100%) accounts receivable risk before deducting certain revenue sharing amounts that are payable to AT&T under PCI's master distributor agreements with AT&T. The Company uses the calculation of gross cellular subscription billings to measure the Company's overall growth rate, as well as to compute the 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 the Three and Nine Months Ended February 28, 2009 and 2008

The decrease in the cellular operations' gross cellular subscriptions billings resulted primarily from a decrease in monthly access charges of $712,000 and $1,809,000 for the three and nine months ended February 28, 2009, respectively, compared to the same periods in the prior fiscal year. This reduction is primarily attributable to a decline in the Company's cellular subscriber base. The Company had 74,000 cellular subscribers as of February 28, 2009 compared to 80,000 cellular subscribers as of February 29, 2008. In addition the cellular operations experienced a decrease in billings for peak time charges of $57,000, roamer, toll charges of $357,000 and assessment charges of $341,000, quarter over quarter. For the nine months ended February 28, 2009, the cellular operations experienced a decrease in billings for peak time charges of $400,000, roamer and toll charges of $1,032,000, and assessments charges of $747,000 as

compared to the same period from the prior fiscal year. An increase in billings for data charges offset the other billing decreases in the three and nine months ended February 28, 2009 compared to the same periods in fiscal year 2008. This is a result of the continued migration of PCI's subscribers to incur wireless data charges which provide the Company with premium revenues. Billings for data charges increased by approximately $602,000 and $2,126,000 for the three and nine months ended February 28, 2009, respectively, compared to the same periods in fiscal year 2008.

The decrease in other services from cellular operations for the nine months ended February 28, 2009 compared to the same period in fiscal year 2008 is a direct result of centralizing the installation revenues from the sale of automotive audio equipment into one single business unit during the restructuring of the Company's business units in the first quarter of fiscal year 2008.

The decrease in service, rent and maintenance revenue related to the Company's two-way radio operations for the three and nine months ended February 28, 2009 compared to the same periods in fiscal year 2008, is due to a continued decrease in service revenues generated from Teletouch's telemetry business as well as a decrease in radio repair revenues. In fiscal year 2007, the Company decided not to actively support expanding the telemetry operations due to market competition and product development costs. Subsequently, the service revenues from these operations have decreased from a continued decline in the number of telemetry subscribers.

The decrease in service, rent, and maintenance revenue related to the Company's other operations for the three and nine months ended February 28, 2009 compared to the same periods in fiscal year 2008, is directly related to a decrease in installation revenues due to a decline in the demand for aftermarket automotive audio equipment and accessories. In addition a continued decline in the Company's subscriber bases for internet services and local and long distance phone services also contributed to the decrease in revenues. The Company has decided not to actively expand these subscriber bases and has discontinued offering these services to any of its new customers. A portion of the decrease in revenues for the nine months ended February 28, 2009 compared to the same period from the prior fiscal year is attributable to the disposal of PCI's paging operations in the first quarter of fiscal year 2008.

Cost of Service, Rent and Maintenance for the Three and Nine Months Ended
February 28, 2009 and 2008

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



 (dollars in thousands)                          February 28,           2009 vs 2008
                                                2009      2008      Change       % Change
 Three Months Ended
 Cost of service, rent and maintenance
 Cellular operations                           $ 1,763   $ 1,982   $   (219 )         -11 %
 Two-way operations                                435       463        (28 )          -6 %
 Other operations                                   28        51        (23 )         -45 %


 Total cost of service, rent and maintenance   $ 2,226   $ 2,496   $   (270 )         -11 %


 Nine Months Ended
 Cost of service, rent and maintenance
 Cellular operations                           $ 5,516   $ 6,528   $ (1,012 )         -16 %
 Two-way operations                              1,313     1,443       (130 )          -9 %
 Other operations                                  105       241       (136 )         -56 %


 Total cost of service, rent and maintenance   $ 6,934   $ 8,212   $ (1,278 )         -16 %

Cost of Service, Rent and Maintenance Discussion for the Three and Nine Months Ended February 28, 2009 and 2008

The decrease in cost of service, rent and maintenance related to the Company's cellular operations for the three and nine months ended February 28, 2009 compared to the same periods in fiscal year 2008 is directly related to the corresponding decrease in cellular service roamer revenue as well as a decrease in custom feature costs due to the Company changing service providers for the roadside assistance program. The decrease is also related to a reduction in personnel costs due to the restructuring of the Company's business units in the first quarter of fiscal year 2008. The employee headcount in the cellular customer service department was 66 employees as of February 28, 2009 compared to 74 employees as of February 29, 2008.

The decrease in cost of service, rent and maintenance related to the Company's two-way operations for the three and nine months ended February 28, 2009 compared to the same periods in fiscal year 2008, is primarily due to the restructuring of the Company's business units in the first quarter of fiscal year 2008 and the continued reduction in the costs associated with the telemetry business. The two-way operations had a $33,000 reduction in personnel expenses for the nine months ending February 28, 2009 compared to the same period in fiscal year 2008. The decline in network costs associated with the Teletouch telemetry business accounted for an additional $9,000 and $43,000 reduction in the two-way service costs for the three and nine months ended February 28, 2009, respectively, compared to the three and nine months ended February 29, 2008. The decrease in telemetry costs is directly related to a decrease in service revenues generated from the telemetry business due to a decline in the subscriber base. Two-way network repair costs also contributed to the decrease in cost of service, rent and maintenance for the three and nine months ended February 28, 2009 compared to the same periods in fiscal year 2008. The reduction in these costs are directly associated with the decrease in radio repair revenues. Network repair costs decreased by $13,000 and $26,000 for the three and nine months ended February 28, 2009, respectively, compared to the same periods in fiscal year 2008.

The decrease in cost of service, rent and maintenance related to the Company's other operations for the three and nine months ended February 28, 2009 compared to the same periods in fiscal year 2008 is due to a continued decline in the subscriber bases for internet services and local and long distance phone services. The Company has decided not to actively expand its subscriber base and has discontinued offering these services to any of its new customers. In addition the Company's other operations experienced a decrease in personnel expenses due to the restructuring the Company's business units in August 2007. The Company's other operations had 19 employees as of February 28, 2009 compared to 26 employees as of February 29, 2008.

Sales Revenue and Cost of Products Sold for the Three and Nine Months ended
February 28, 2009 and 2008



(dollars in thousands)                    February 28,                       2009 vs 2008
                                         % of                 % of
                                         Oper                 Oper
                                2009     Rev         2008     Rev       $ Change       % Change
Three Months Ended
Product Sales Revenue
Cellular                      $  1,774     16 %    $  1,915     15 %    $    (141 )          -7 %
Wholesale                        1,870     17 %       3,200     24 %       (1,330 )         -42 %
Two-Way                            542      5 %         562      4 %          (20 )          -4 %
Other                               84      1 %         439      3 %         (355 )         -81 %
. . .