Overview

For over 40 years, Teletouch has offered a comprehensive suite of telecommunications products and services under the Teletouch, AT&T® and T-Mobile® brands, including cellular, two-way radio, GPS-telemetry, wireless messaging and public safety/emergency response products and services. Teletouch operates approximately 25 retail stores and service locations in Texas and Oklahoma. Locations include both "Teletouch" and "Hawk Electronics" branded in-line, kiosk and free-standing stores. Teletouch's core-business is acquiring, billing and supporting cellular subscribers under a long-term recurring revenue relationship with AT&T. The distribution agreements with AT&T have been in place for over 20 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, its own direct sales force and Internet. 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 major carrier agents, rural cellular carriers, smaller consumer and electronic retailers and automotive dealers 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 January 2009, Teletouch entered into an Exclusive Retailer Agreement with T-Mobile USA, Inc., the second largest GSM-network-based U.S. wireless carrier, a division of Deutsche Telekom AG, and the third largest wireless carrier provider in the world (just behind the two largest China-based carriers). The three-year agreement provides for Teletouch to open, operate and manage high-volume mall locations, with the Company's first locations opening in major markets in Oklahoma. In late 2007, Teletouch began selling safety and emergency response vehicle products and services 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 the Company has expanded 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 also holds an equity stake in Mobui Corporation, a Redmond, Washington based mobile applications developer and provider.

2010 Business Strategy

Summary

Most of the Company's efforts from August 2006 through fiscal 2009 were focused on the complex integration issues related to the acquisition of PCI, its subsequent reorganization activities, as well as on securing financing to grow its retail business and work to complete one or more acquisitions to provide new avenues of revenue growth for the Company. After rationalizing a number of business units and resizing the workforce over the past two years, Teletouch is better positioned to achieve its financing, retail expansion and acquisition goals. Key to this strategy is and has been leveraging the Company's various customer relationships, including PCI's nearly 70,000 cellular subscribers, which are comprised of individuals and businesses of higher than average credit worthiness (due to PCI's stringent credit standards). The Company believes that there are opportunities to grow revenues well in excess of its current cellular revenues with these monthly-billed customers.

The Company's primary business for over 35 years has been distributing AT&T cellular services under several exclusive master distributor agreements. As of the date of this Report, certain changes to the Company's relationship with AT&T have occurred, including the expiration of the exclusivity with AT&T under the primary Dallas/Fort Worth ("DFW") distribution agreement and the commencement of legal action against AT&T by the Company. Although neither of these events are expected to have any material impact on the Company's current subscriber base, the Company does anticipate changes in its cellular operations during the remainder of fiscal 2010 as it migrates into a multi-carrier environment and expands its market presence.

The Company experienced significant declines in revenues during the last year due to the migration of a large number of cellular subscribers to AT&T in order to purchase services and products directly from AT&T that the Company was not allowed to sell, macro-economic issues driving lower cellular and electronics sales in its wholesale business and budgetary constraints imposed on many governmental entities and commercial enterprises resulting in lower sales in the Company's two-way radio business. In spite of the loss of revenues, the Company was successful in improving its operating results during 2009 and continuing through the first quarter of fiscal 2010 through aggressive cost management and improved margins on the revenues it maintained. During the remainder of fiscal 2010, the Company will continue to manage its costs closely but will focus on developing new revenue streams for all of its business units. These new revenue streams will be driven by several anticipated distribution agreements and, potentially,

the acquisition of one or more complementary businesses. Following the acquisition of PCI in August 2006, the Company struggled to complete the required audits because of the condition of PCI's records. Because of the delays in completing these audits, the Company was unable to maintain a current standing with its regulatory reporting requirements. To date, the Company's inability to file the required financials has hindered the Company's ability to secure additional financing to grow the business or to complete any of the major acquisitions it has identified. Significant progress was made in 2009 by catching up on its delinquent financial statement audits and filings, and by December of 2010, the Company expects to have completed and filed all of its delinquent financial reports and is hopeful that it will secure the necessary financing to complete one or more of these acquisitions in 2010. 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.

Certain non-recurring expenses are expected to be incurred through the remainder of fiscal 2010 related to the arbitration proceeding against AT&T and the startup and expansion costs related to the new products and services. The Company believes that these non-recurring expenses will be manageable and will not materially impair its operating results during 2010. In addition, on October 2, 2009, the Securities and Exchange Commission, delayed the implementation of section 404(b) of the Sarbanes Oxley Act of 2002 for smaller reporting companies until fiscal years ending after June 15, 2010. The impact of this delay is that Teletouch will not have to get its independent auditors to attest to the effectiveness of its internal controls during fiscal 2010 which results in a further reduction of costs anticipated during 2010. Under the current guidance, Teletouch will have to have an independent audit of its internal controls as of its fiscal year ended May 31, 2011.

Cellular Services

In August 2009, the initial term the primary distribution agreement between Teletouch's subsidiary, PCI and AT&T expired. Under this agreement, PCI distributes AT&T cellular services in the DFW market. The primary impact of the expiration of this agreement is that the Company is no longer exclusive to AT&T in DFW, which allows the Company to expand it cellular service offerings in this market for the first time in over 35 years. The August 2009 expiration of the initial term of the DFW distribution agreement with AT&T removes the exclusivity provisions and restricts PCI from growing its subscriber base in DFW, but the majority of the provisions of the agreement remained in tact at the option of PCI, including the right for PCI to continue servicing its existing DFW subscribers until there are no more subscribers remaining as customers of PCI. Based on its current subscriber attrition rates, the Company estimates that it will maintain subscribers in DFW for the next eight years. The Company is party to five distribution agreements with AT&T in addition to the distribution agreement covering the DFW market discussed above. Under these other distribution agreements, the Company is allowed to distribute AT&T wireless services, on an exclusive basis, in certain major markets in Texas and Arkansas, including the San Antonio, Texas Metropolitan Statistical Area ("MSA"), Austin, Texas MSA, Houston, Texas MSA, East Texas Regional MSA and Arkansas, including primarily the Little Rock, Arkansas MSA. These distribution agreements have varying terms with the longest extending through October 2012.

On September 30, 2009, the Company commenced an arbitration proceeding against AT&T seeking at least $100 million in damages. The binding arbitration was commenced to seek relief for damages incurred as AT&T has prevented the Company from selling the popular iPhone and other "AT&T exclusive" products and services that PCI is and has been contractually entitled to provide to its customers under the distribution agreements. While PCI has attempted to negotiate with AT&T for the purpose of obviating the need for legal action, such attempts have failed. Accordingly, PCI has been forced to initiate this arbitration. The Company expects this arbitration process to take between nine and fourteen months before a final outcome is determined unless this matter is able to be settled sooner with AT&T outside of this venue.

With PCI's exclusivity to AT&T in the Dallas/Fort Worth market lifted in August 2009 and after being

unable to reach an alternate form of agreement with AT&T, the Company has begun actively negotiating final terms under a variety of new cellular carrier, WiFi, WiMax and related wireless communications relationships and expects to be launching these products and services beginning in its 2nd fiscal quarter and throughout the remainder of 2010. Teletouch's first new cellular carrier relationship outside of AT&T was formed during fiscal year 2009 that initially contemplates distribution in markets not protected under the exclusivity provisions granted to AT&T under the existing distribution agreements. To provide new and innovative cellular solutions, Teletouch entered into an Exclusive Retailer Agreement with T-Mobile USA, Inc., the second largest GSM-network-based U.S. wireless carrier, a division of Deutsche Telekom AG, and the third largest wireless carrier provider in the world (just behind the two largest China-based carriers). The three-year agreement provides for Teletouch to open, operate and manage high-volume mall locations, with the Company's first new locations having opened in major markets in Oklahoma.

During the remainder of fiscal 2010, the Company will focus on expanding distribution of existing products and services to its 70,000 cellular subscribers which primarily reside in the DFW and San Antonio markets in Texas. In addition, the Company will focus on developing the other markets covered by its existing AT&T distribution agreements, starting with the East Texas market where Teletouch currently has personnel and existing infrastructure in place. A primary focus of the Company will be on expanding its product and service offerings through a variety of new distribution agreements that are currently being negotiated. Through these new relationships, the Company will be able to offer its customers a choice in services and additional products and expects to be allowed to expedite expansion of its distribution to other markets.

Wholesale Business

During 2009, a large focus in the wholesale business was on the ongoing credit worthiness of our customers, pricing, margins and inventory turnover. The extensive re-evaluation of the wholesale business in 2009 resulted in certain sustainable operating changes to the business, including office staff reductions, new sales hiring, re-pricing of new and non-current inventory, as well as identified the necessity to grow market share and focus on more exclusive product offerings. The Company will continue to focus on expanding its distributor relationships and expand its product line with a focus on products that it can offer exclusively for wholesale distribution for the remainder of 2010 and expects revenues to improve with the slowly improving economic outlook for the country.

Two-Way Radio Operations

For 2010, the Company's two way division has secured a contract in support of the re-banding efforts being undertaken nationally to migrate public safety communications to frequencies that will not experience interference from certain radio channels operated by Nextel Communications. This project covers the East Texas market and is expected to generate up to $500,000 in revenues and profits during the next year. Teletouch's long-term relationships and reputation with the various governmental entities over its almost 44 year presence in East Texas has allowed the Company to procure this business to date. The Company believes it will be successful in procuring more of this business as a variety of sources of government funds are made available throughout 2010.

As a complement to and embedded in its two-way radio segment, the Company began selling emergency vehicle products in late 2007 under several master distributor agreements with its suppliers. The product lines include various aftermarket accessories that are added to vehicles in the public safety industry, but primarily includes light bars, sirens and computer equipment supports mounted in-vehicle. During 2010, the Company will be focusing on expanding the distribution of these product lines to other markets by cross-training of existing sales personnel in those other markets as well as by opening new distribution points in those markets. In addition, the Company is working with its manufacturers to secure approval to sell these products into other protected markets and to potentially acquire other existing distribution in these markets.

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 own 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 the car dealer expediter operations.

The majority of the Company's product sales are generated by PCI's wholesale operations and are 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 retail stores, outside salespeople and agents to generate recurring cellular subscription revenues. The two-way radio operations' products are comprised of radios and service parts for radio communication systems and safety and emergency response vehicle products.

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 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

• 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.

• Costs of the Company's retail stores including personnel, rents and utilities.

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, safety and emergency response products 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 Months Ended August 31, 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 expeditor and installation services.

                                                Three Months Ended August 31,                  2009 vs 2008
                                                        % of                    % of
                                                        Oper                    Oper
(dollars in thousands)                      2009        Rev         2008        Rev       $ Change       % Change

Service, rent, and maintenance revenue
Cellular operations
Gross cellular subscription billings      $ 13,932                $ 15,374                $  (1,442 )          -9 %
Net revenue adjustment (revenue share
due AT&T)                                   (7,737 )                (8,866 )                  1,129           -13 %

Cellular operations total service
revenues:                                    6,195        54 %       6,508        51 %         (313 )          -5 %


Two-way radio operations                       406         4 %         411         3 %           (5 )          -1 %
Other operations                                58         0 %          82         0 %          (24 )         -29 %


Service, rent, and maintenance revenue    $  6,659        58 %    $  7,001        54 %    $    (342 )          -5 %


Total operating revenues                  $ 11,459                $ 12,886                $  (1,427 )         -11 %

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 overall growth of its cellular business and to project its future cash receipts from the subscriber base.

Service, Rent and Maintenance Revenue Discussion for the Three Months Ended August 31, 2009 and 2008

The 9% decrease in the cellular operation's gross cellular subscriptions billings resulted primarily from a decrease in monthly access charges of $1,480,000 quarter over quarter due to a decline in cellular subscribers due primarily to a large number of subscribers leaving PCI and moving their services to AT&T in order to purchase the iPhone since PCI has not been allowed to offer the iPhone by AT&T. The Company had 69,757 cellular subscribers as of August 31, 2009 compared to 77,795 cellular subscribers as of August 31, 2008. In addition, the cellular operations experienced a decrease in billings for roamer, service and toll charges of approximately $535,000 and assessment charges of $214,000, quarter over quarter. The decreases in revenues were partially offset by an increase in billings for data charges of $310,000 as more customers migrate to cellular phones with internet connection capabilities. In addition, revenues generated from other PCI services such as product warranty revenues and paper bill fees generated an additional $477,000 in the first quarter of fiscal year 2010 compared to the first quarter of fiscal year 2009.

The 29% decrease in service, rent, and maintenance revenue related to the Company's other operations is directly related to a decrease in revenue for internet services. The Company eliminated its legacy dial-up internet services in the later part of fiscal year 2009 and discontinued offering these services to its customers.

Cost of Service, Rent and Maintenance for the Three Months Ended August 31, 2009 and 2008

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

                                            Three Months Ended August 31,              2009 vs 2008
(dollars in thousands)                        2009                 2008           Change         % Change

Cost of service, rent and
maintenance (exclusive of
depreciation and amortization)
Cellular operations                     $          1,555     $          1,941     $  (386 )           -20 %
Two-way radio operations                             402                  455         (53 )           -12 %
Other operations                                      10                   39         (29 )           -74 %


Total cost of service, rent and
maintenance                             $          1,967     $          2,435     $  (468 )           -19 %

Cost of Service, Rent and Maintenance Discussion for the Three Months Ended August 31, 2009 and 2008

The 20% decrease in cost of service, rent and maintenance related to the . . .