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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the Quarterly Period Ended August 31, 2008

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from              to

Commission File Number 1-13436





TELETOUCH COMMUNICATIONS, INC.

(Exact name of registrant in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 75-2556090                          
|(State or other jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)

5718 Airport Freeway, Fort Worth, Texas 76117 (800) 232-3888

(Address and telephone number of principal executive offices)





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ̈    No  x

Indicate by check mark whether the registrant is
a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule
12b-2 of the Exchange Act.



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈ |  | Accelerated filer         |  |  ̈
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller reporting company |  | x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).    Yes   ̈    No  x

Indicate the number of shares outstanding of each of the Registrants classes of Common Stock, as of the latest practicable date: Common Stock, $0.001 par value, 49,051,980 shares at February 28, 2009.









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TELETOUCH COMMUNICATIONS, INC.

TABLE OF CONTENTS



|         |  |                                                                                                                         |  |         
|-------- |  | ----------------------------------------------------------------------------------------------------------------------- |  | --------
|         |  |                                                                                                                         |  | Page No.
|         |  | Part I. Financial Information                                                                                           |  |         
|         |  |                                                                                                                        
|Item 1.  |  | Financial Statements - Teletouch Communications, Inc.                                                                   |  | 4       
|         |  |                                                                                                                        
|         |  | Consolidated Balance Sheets as of August 31, 2008 (unaudited) and May 31, 2008 (unaudited)                              |  | 4       
|         |  |                                                                                                                        
|         |  | Consolidated Statements of Operations  Three Months Ended August 31, 2008 (unaudited) and August 
31, 2007 (unaudited) |  | 6       
|         |  |                                                                                                                        
|         |  | Consolidated Statements of Cash Flows - Three Months Ended August 31, 2008 (unaudited) and August 
31, 2007 (unaudited) |  | 7       
|         |  |                                                                                                                        
|         |  | Notes to Consolidated Financial Statements (unaudited)                                                                  |  | 8       
|         |  |                                                                                                                        
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                   |  | 30      
|         |  |                                                                                                                        
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                              |  | 47      
|         |  |                                                                                                                        
|Item 4.  |  | Controls and Procedures                                                                                                 |  | 47      
|         |  |                                                                                                                        
|         |  | Part II. Other Information                                                                                              |  |         
|         |  |                                                                                                                        
|Item 1.  |  | Legal Proceedings                                                                                                       |  | 50      
|         |  |                                                                                                                        
|Item 1A. |  | Risk Factors                                                                                                            |  | 50      
|         |  |                                                                                                                        
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                             |  | 57      
|         |  |                                                                                                                        
|Item 3.  |  | Defaults Upon Senior Securities                                                                                         |  | 57      
|         |  |                                                                                                                        
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                                     |  | 57      
|         |  |                                                                                                                        
|Item 5.  |  | Other Information                                                                                                       |  | 57      
|         |  |                                                                                                                        
|Item 6.  |  | Exhibits                                                                                                                |  | 57      
|         |  |                                                                                                                        
|         |  | Signatures                                                                                                              |  | 58      



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Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements and information relating to Teletouch Communications, Inc. and its subsidiaries that are based on managements beliefs as well as assumptions made by and
information currently available to management. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend upon or refer to future
events or conditions, or that include words such as anticipate, believe, estimate, expect, intend and similar expressions, as they relate to Teletouch Communications, Inc. or its
management, are forward-looking statements. Although these statements are based upon assumptions management considers reasonable, they are subject to certain risks, uncertainties and assumptions, including, but not limited to, those factors set
forth below under the captions Managements Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors. Should one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results or outcomes may vary materially from those described herein as anticipated, believed, estimated, expected or intended. Investors are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their respective dates. We undertake no obligation to update or revise any forward-looking statements. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the discussion under Risk Factors.



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PART 1  FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

TELETOUCH COMMUNICATIONS, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except
share data)

ASSETS



|                                                                                                                       |  |                |        |             |   |       
|---------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | ----------- | - | ------
|                                                                                                                       |  | August 31,2008 |        | May 31,2008
|CURRENT ASSETS:                                                                                                        |  |                |        |             |   |       
|                                                                                                                       |  |               
|Cash                                                                                                                   |  | $              | 4,466  |             | $ | 4,729 
|Certificates of deposit-restricted                                                                                     |  |                | 400    |             |   | 400   
|Accounts receivable, net of allowance of $734 at August 31, 2008 and $480 at May 31, 2008                              |  |                | 7,660  |             |   | 8,185 
|Unbilled accounts receivable                                                                                           |  |                | 3,152  |             |   | 3,135 
|Inventories, net of reserve of $260 at August 31, 2008 and $263 at May 31, 2008                                        |  |                | 2,220  |             |   | 2,401 
|Notes receivable                                                                                                       |  |                | 13     |             |   |      
|Prepaid expenses and other current assets                                                                              |  |                | 793    |             |   | 829   
|                                                                                                                       |  |                |        |             |   |       
|Total Current Assets                                                                                                   |  |                | 18,704 |             |   | 19,679
|                                                                                                                       |  |                |        |             |   |       
|                                                                                                                       |  |               
|LONG-TERM RECEIVABLE -RELATED PARTY                                                                                    |  |                | 250    |             |   | 250   
|                                                                                                                       |  |               
|PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $7,366 at August 31, 2008 and $7,253 at May 31,
2008 |  |                | 3,189  |             |   | 3,210 
|                                                                                                                       |  |               
|GOODWILL                                                                                                               |  |                | 343    |             |   | 343   
|                                                                                                                       |  |               
|INTANGIBLE ASSETS, net of accumulated amortization of $7,407 at August 31, 2008 and $7,169 at May 31, 2008             |  |                | 4,849  |             |   | 5,087 
|                                                                                                                       |  |                |        |             |   |       
|                                                                                                                       |  |               
|TOTAL ASSETS                                                                                                           |  | $              | 27,335 |             | $ | 28,569
|                                                                                                                       |  |                |        |             |   |       

See Accompanying Notes to Consolidated Financial Statements



4



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TELETOUCH COMMUNICATIONS, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except share data)

LIABILITIES AND SHAREHOLDERS DEFICIT



|                                                                                                                                                            |  |                |         |   |             |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ----------- | - | ------- | -
|                                                                                                                                                            |  | August 31,2008 |         |   | May 31,2008 |  
|CURRENT LIABILITIES:                                                                                                                                        |  |                |         |   |             |   |         |  
|                                                                                                                                                            |  |               
|Accounts payable                                                                                                                                            |  | $              | 11,038  |   |             | $ | 10,156  |  
|Accounts payable-related party                                                                                                                              |  |                | 32      |   |             |   | 62      |  
|Accrued expenses and other current liabilities                                                                                                              |  |                | 6,362   |   |             |   | 6,547   |  
|Current portion of long-term debt                                                                                                                           |  |                | 10,145  |   |             |   | 9,727   |  
|Deferred revenue                                                                                                                                            |  |                | 386     |   |             |   | 400     |  
|Current portion of redeemable common stock purchase warrants                                                                                                |  |                |        |   |             |   | 1,800   |  
|                                                                                                                                                            |  |                |         |   |             |   |         |  
|Total Current Liabilities                                                                                                                                   |  |                | 27,963  |   |             |   | 28,692  |  
|                                                                                                                                                            |  |                |         |   |             |   |         |  
|                                                                                                                                                            |  |               
|LONG-TERM LIABILITIES:                                                                                                                                      |  |                |         |   |             |   |         |  
|Long-term debt, net of current portion                                                                                                                      |  |                | 8,528   |   |             |   | 7,429   |  
|Redeemable common stock purchase warrants                                                                                                                   |  |                |        |   |             |   | 1,200   |  
|                                                                                                                                                            |  |                |         |   |             |   |         |  
|Total Long Term Liabilities                                                                                                                                 |  |                | 8,528   |   |             |   | 8,629   |  
|                                                                                                                                                            |  |                |         |   |             |   |         |  
|TOTAL LIABILITIES                                                                                                                                           |  |                | 36,491  |   |             |   | 37,321  |  
|                                                                                                                                                            |  |                |         |   |             |   |         |  
|                                                                                                                                                            |  |               
|COMMITMENTS AND CONTINGENCIES                                                                                                                               |  |                |        |   |             |   |        |  
|                                                                                                                                                            |  |               
|SHAREHOLDERS DEFICIT:                                                                                                                                      |  |                |         |   |             |   |         |  
|Common stock, $.001 par value, 70,000,000 shares authorized, 49,916,189 shares issued and 49,051,980 shares outstanding at August 31,
2008 and May 31, 2008 |  |                | 50      |   |             |   | 50      |  
|Additional paid-in capital                                                                                                                                  |  |                | 50,766  |   |             |   | 50,724  |  
|Treasury stock, 864,209 shares held at August 31, 2008 and May 31, 2008                                                                                     |  |                | (185    | ) |             |   | (185    | )
|Accumulated deficit                                                                                                                                         |  |                | (59,787 | ) |             |   | (59,341 | )
|                                                                                                                                                            |  |                |         |   |             |   |         |  
|Total Shareholders Deficit                                                                                                                                 |  |                | (9,156  | ) |             |   | (8,752  | )
|                                                                                                                                                            |  |                |         |   |             |   |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS DEFICIT                                                                                                                 |  | $              | 27,335  |   |             | $ | 28,569  |  
|                                                                                                                                                            |  |                |         |   |             |   |         |  

See Accompanying Notes to Consolidated Financial Statements



5



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TELETOUCH COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except shares and per share amounts)

(unaudited)



|                                                                                                  |  |                              |            |   |      |   |            |  
|------------------------------------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                  |  | Three Months EndedAugust 31, |           
|                                                                                                  |  | 2008                         |            |   | 2007 |  
|Operating revenues:                                                                               |  |                              |            |   |      |   |            |  
|Service, rent, and maintenance revenue                                                            |  | $                            | 7,001      |   |      | $ | 7,457      |  
|Product sales revenue                                                                             |  |                              | 5,885      |   |      |   | 7,448      |  
|                                                                                                  |  |                              |            |   |      |   |            |  
|Total operating revenues                                                                          |  |                              | 12,886     |   |      |   | 14,905     |  
|                                                                                                  |  |                              |            |   |      |   |            |  
|                                                                                                  |  |                             
|Operating expenses:                                                                               |  |                              |            |   |      |   |            |  
|Cost of service, rent and maintenance (exclusive of depreciation and amortization included below) |  |                              | 2,435      |   |      |   | 2,956      |  
|Cost of products sold                                                                             |  |                              | 5,303      |   |      |   | 6,514      |  
|Selling and general and administrative                                                            |  |                              | 4,504      |   |      |   | 5,677      |  
|Depreciation and amortization                                                                     |  |                              | 374        |   |      |   | 417        |  
|Gain on forgiveness of trade payable obligation to AT&T                                           |  |                              |           |   |      |   | (3,824     | )
|Gain on disposal of assets                                                                        |  |                              |           |   |      |   | (16        | )
|                                                                                                  |  |                              |            |   |      |   |            |  
|Total operating expenses                                                                          |  |                              | 12,616     |   |      |   | 11,724     |  
|                                                                                                  |  |                              |            |   |      |   |            |  
|Operating income                                                                                  |  |                              | 270        |   |      |   | 3,181      |  
|                                                                                                  |  |                             
|Interest expense, net                                                                             |  |                              | (635       | ) |      |   | (1,030     | )
|                                                                                                  |  |                              |            |   |      |   |            |  
|                                                                                                  |  |                             
|Income (loss) before income tax expense                                                           |  |                              | (365       | ) |      |   | 2,151      |  
|Income tax expense                                                                                |  |                              | 81         |   |      |   | 60         |  
|                                                                                                  |  |                              |            |   |      |   |            |  
|Net income (loss)                                                                                 |  | $                            | (446       | ) |      | $ | 2,091      |  
|                                                                                                  |  |                             
|Participation rights of common stock purchase warrants in undistributed earnings                  |  |                              |           |   |      |   | (224       | )
|                                                                                                  |  |                              |            |   |      |   |            |  
|Net income (loss) applicable to common shareholders                                               |  | $                            | (446       | ) |      | $ | 1,867      |  
|                                                                                                  |  |                              |            |   |      |   |            |  
|                                                                                                  |  |                             
|Income (loss) per share applicable to common shareholders:                                        |  |                              |            |   |      |   |            |  
|Basic                                                                                             |  | $                            | (0.01      | ) |      | $ | 0.04       |  
|                                                                                                  |  |                              |            |   |      |   |            |  
|Diluted                                                                                           |  | $                            | (0.01      | ) |      | $ | 0.03       |  
|                                                                                                  |  |                              |            |   |      |   |            |  
|                                                                                                  |  |                             
|Weighted average shares outstanding:                                                              |  |                              |            |   |      |   |            |  
|Basic                                                                                             |  |                              | 49,051,980 |   |      |   | 48,571,545 |  
|                                                                                                  |  |                              |            |   |      |   |            |  
|Diluted                                                                                           |  |                              | 49,051,980 |   |      |   | 55,095,315 |  
|                                                                                                  |  |                              |            |   |      |   |            |  

See Accompanying Notes to Consolidated Financial Statements



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TELETOUCH COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                          |  |                              |        |   |      |   |        |  
|----------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                          |  | Three Months EndedAugust 31, |       
|                                                                                          |  | 2008                         |        |   | 2007 |  
|Operating Activities:                                                                     |  |                              |        |   |      |   |        |  
|Net income (loss)                                                                         |  | $                            | (446   | ) |      | $ | 2,091  |  
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                              |        |   |      |   |        |  
|Depreciation and amortization                                                             |  |                              | 374    |   |      |   | 417    |  
|Non-cash compensation expense                                                             |  |                              | 42     |   |      |   | 30     |  
|Non-cash interest expense                                                                 |  |                              | 38     |   |      |   | 424    |  
|Non-cash gain on forgiveness of a trade payable obligation to AT&T                        |  |                              |       |   |      |   | (3,824 | )
|Provision for losses on accounts receivable                                               |  |                              | 266    |   |      |   | 243    |  
|Provision for inventory obsolescence                                                      |  |                              | 53     |   |      |   | (28    | )
|Gain on disposal of assets                                                                |  |                              |       |   |      |   | (16    | )
|Changes in operating assets and liabilities, net of acquisitions:                         |  |                              |        |   |      |   |        |  
|                                                                                          |  |                             
|Accounts receivable, net                                                                  |  |                              | 242    |   |      |   | (711   | )
|Inventories                                                                               |  |                              | 128    |   |      |   | (10    | )
|Prepaid expenses and other assets                                                         |  |                              | 36     |   |      |   | (12    | )
|Accounts payable                                                                          |  |                              | 852    |   |      |   | (5,037 | )
|Accrued Expenses and other current liabilities                                            |  |                              | (223   | ) |      |   | 1,540  |  
|Deferred revenue                                                                          |  |                              | (14    | ) |      |   | (10    | )
|                                                                                          |  |                              |        |   |      |   |        |  
|Net cash provided by (used in) operating activities                                       |  |                              | 1,348  |   |      |   | (4,903 | )
|                                                                                          |  |                              |        |   |      |   |        |  
|                                                                                          |  |                             
|Investing Activities:                                                                     |  |                              |        |   |      |   |        |  
|Purchases of property and equipment                                                       |  |                              | (115   | ) |      |   | (117   | )
|Net proceeds from sale of assets                                                          |  |                              |       |   |      |   | 14     |  
|Issuance of notes receivable                                                              |  |                              | (13    | ) |      |   |       |  
|                                                                                          |  |                              |        |   |      |   |        |  
|Net cash used in investing activities                                                     |  |                              | (128   | ) |      |   | (103   | )
|                                                                                          |  |                              |        |   |      |   |        |  
|                                                                                          |  |                             
|Financing Activities:                                                                     |  |                              |        |   |      |   |        |  
|Net (payments on) proceeds from borrowings                                                |  |                              | (132   | ) |      |   | 386    |  
|Proceeds from long-term debt                                                              |  |                              | 250    |   |      |   |       |  
|Payments on short-term debt                                                               |  |                              | (3     | ) |      |   | (4     | )
|Payments on long-term debt                                                                |  |                              | (98    | ) |      |   | (32    | )
|Payments on redeemable common stock purchase warrants                                     |  |                              | (1,500 | ) |      |   |       |  
|                                                                                          |  |                              |        |   |      |   |        |  
|Net cash provided by (used in) financing activities                                       |  |                              | (1,483 | ) |      |   | 350    |  
|                                                                                          |  |                              |        |   |      |   |        |  
|                                                                                          |  |                             
|Net decrease in cash                                                                      |  |                              | (263   | ) |      |   | (4,656 | )
|Cash at beginning of period                                                               |  |                              | 4,729  |   |      |   | 7,824  |  
|                                                                                          |  |                              |        |   |      |   |        |  
|                                                                                          |  |                             
|Cash at end of period                                                                     |  | $                            | 4,466  |   |      | $ | 3,168  |  
|                                                                                          |  |                              |        |   |      |   |        |  
|Supplemental Cash Flow Data:                                                              |  |                              |        |   |      |   |        |  
|Cash payments for interest                                                                |  | $                            | 602    |   |      | $ | 606    |  
|                                                                                          |  |                              |        |   |      |   |        |  

See Accompanying Notes to Consolidated Financial Statements



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TELETOUCH COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1  BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements included herein as of August 31, 2008 and for each of the three months ended August 31, 2008 and 2007, have been prepared by the Company
without an audit, pursuant to accounting principles generally accepted in the United States of America and 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). Teletouch Communications, Inc. owns all of the shares of
Progressive Concepts, Inc., a Texas corporation (PCI), Teletouch Licenses, Inc., a Delaware corporation (TLI), Visao Systems, Inc., a Delaware corporation (Visao) and TLL Georgia, Inc., a Delaware corporation
(TLLG). 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 months ended August 31, 2008, are not necessarily indicative of the results which will be realized for the year ending May 31, 2009.

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 2008 Annual Report on Form 10-K.

Financial
Condition and Going Concern: The Company had a working capital deficit of approximately $9,259,000 and $9,013,000 at August 31, 2008 and May 31, 2008, respectively, and a shareholders deficit of approximately $9,156,000 and
$8,752,000 at August 31, 2008 and May 31, 2008, respectively. The Companys factoring debt obligation with Thermo has been presented as a current liability on the Companys consolidated balance sheet at August 31, 2008 and
May 31, 2008, in accordance with EITF 95-22, because the factoring agreement requires a lockbox agreement under which customer payments on accounts are directed to a lockbox controlled by Thermo and because certain subjective acceleration
rights are retained by Thermo under the agreement. However, the stated maturity date of the obligation is February 2010. The factoring debt obligations at August 31, 2008 and May 31, 2008, were approximately $8,959,000 and $9,091,000,
respectively. In May 2008, the Company was able to secure an additional $5,000,000 asset based revolving credit facility with Thermo Credit, LLC (Thermo), with the proceeds used primarily to pay $2,000,000 to PCIs former senior
lender to have the liens on the assets of PCI fully and permanently released, and $1,500,000 was used to make an initial payment to the holders of certain long-standing redeemable common stock warrants that became due in December 2007. Even upon the
Companys completion of the restructuring of its debt obligations in May 2008, and increasing its debt facility, the Company has only been able to partially improve its working capital deficit and shareholders equity deficit. The Company
is continuing to seek additional debt and equity financing to ensure it is able to meet its remaining trade and debt obligations in the event that there are changes to its existing credit arrangements as well as provide sufficient working capital to
expand its operations. If it is unsuccessful in its efforts to secure additional financing and the Companys current credit arrangements are accelerated, the Company may be unable to meet its obligations and might be forced to seek protection
from its creditors.



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##### Table of Contents

During fiscal 2008 and continuing into fiscal 2009, the Company has been focusing on evaluating the operations of its PCI
subsidiary. The results of these efforts have been successful in eliminating certain unnecessary operating expenses and in increasing margins on product and service revenues by implementing improved controls over pricing and inventory management.
The settlement of the dispute with AT&T in June 2007 has resulted in a significant increase in margins on the cellular service billing revenues during both fiscal years 2008 and 2009 as a result of no longer having to pay for certain charges
billed by AT&T when customers roamed on networks owned by AT&T (see further discussion under Settlement of Dispute with AT&T in Note 3). In addition, the Company has achieved some success in developing new service revenues
that have been successful in partially offsetting the declines in service revenues caused by customer attrition. Since June 2007, the Company has experienced higher than normal cellular subscriber attrition due primarily to the launch of the iPhone.
Although the iPhone is offered to customers by AT&T, PCI has been denied the approval to sell or activate the iPhone for customers by AT&T. The Company reviews its staffing levels on a quarterly basis and continues to seek ways to
consolidate and automate necessary functions in order to control personnel costs. However, as of the date of this Report, the Company believes that its efforts to reduce it operating expenses have been successful and is concerned that further
reductions in these expenses would have a negative impact on revenues. Current efforts are focused on seeking additional distribution for existing products lines, including an emphasis on internet marketing. The Company has also 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. (T-Mobile) and in February 2009 opened 5 retail locations in Oklahoma selling T-Mobile cellular
services. There can be no assurance that the current efforts to increase revenues through new distribution channels will be successful, nor is there any assurance that the trade credit that is currently extended to the Company will be maintained or
expanded for fiscal 2009 to facilitate this growth.

In the second half of fiscal year 2009, the Company began aggressively monitoring its credit policies
and procedures due to the current negative economic outlook for many individuals and businesses. As of the date of this Report, the Company has seen an increase in the number of uncollectible accounts but believes the number of uncollectible
accounts and the related bad debt expense will continue to increase through the remainder of fiscal year 2009 and through the first half of fiscal year 2010, given current economic conditions in the United States and Southwest region in particular.
Because the Company continues to incur credit risk through the extension of credit to its customers, the Company will continue to tighten its credit standards which could impair the Companys ability to increase revenues during the remainder of
fiscal year 2009 and continuing into 2010.

As a result of the above conditions, there exists substantial doubt about the Companys ability to
continue as a going concern. No adjustments have been made to the Companys financial statements as a result of this uncertainty.

NOTE 2 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates:The consolidated financial statements have been prepared using the accrual basis of
accounting in accordance with accounting principles generally accepted in the United States of America. Preparing financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make
estimates and assumptions. Those assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could materially differ from those estimates.

Cash:We deposit our cash with high credit quality institutions.
Periodically, such balances may exceed applicable FDIC insurance limits. Management has assessed the financial condition of these institutions and believes the possibility of credit loss is minimal.



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Certificates of Deposit-Restricted: From time to time, the Company is required to issue standby letters of credit
to it suppliers to secure purchases made under the credit terms provided by these suppliers. The Company deposits funds into a certificate of deposit and instructs that bank to issue the standby letter of credit to the benefit of the supplier. All
such funds are reported as restricted funds until such time as the supplier releases the letter of credit requirement. As of August 31, 2008 and May 31, 2008, the Company had $400,000, of cash certificates of deposit securing two standby
letters of credit with its suppliers.

Allowance for Doubtful Accounts: The Company performs periodic credit evaluations of its customer base and
extends credit to virtually all of its customers on an uncollateralized basis.

In determining the adequacy of the allowance for doubtful accounts,
management considers a number of factors, including historical collections experience, aging of the receivable portfolio, financial condition of the customer and industry conditions. The Company considers an account receivable past due when
customers exceed the terms of payment granted to them by the Company. The Company writes-off its fully reserved accounts receivable when it has exhausted all collection efforts.

Accounts receivable are presented net of an allowance for doubtful accounts of $734,000 and $480,000 at August 31, 2008 and May 31, 2008, respectively. Based on the information available to the Company,
management believes the allowance for doubtful accounts as of those periods are adequate. However, actual write-offs may exceed the recorded allowance.

The Company evaluates its write-offs on an annual basis. In the first quarter of each calendar year, the Company determines which accounts are uncollectible and those balances are written-off against the Companys allowance for
doubtful accounts balance.

Reserve for Inventory Obsolescence:Inventories are stated at the lower of cost (primarily on a moving average basis),
which approximates actual cost determined on a first-in, first-out (FIFO) basis, or fair market value and are comprised of finished goods. In determining the adequacy of the reserve for inventory obsolescence, management considers a
number of factors including recent sales trends, industry market conditions and economic conditions. In assessing the reserve, management also considers price protection credits the Company has received from the vendor. In addition, management
establishes specific valuation allowances for discontinued inventory based on its prior experience liquidating this type of inventory. Through the Companys wholesale distribution channel, it is successful in liquidating the majority of any
inventory that becomes obsolete. The Company has many different electronics suppliers, all of which provide reasonable notification of model changes, which allows the Company to minimize its level of discontinued or obsolete inventory. Inventories
are stated on the Companys consolidated balance sheet net of a reserve for obsolescence of $260,000 and $263,000 at August 31, 2008 and May 31, 2008, respectively. Actual results could differ from those estimates.

Property, Plant and Equipment: Property and equipment is recorded at cost. Depreciation is computed using the straight-line method. Expenditures for major
renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Upon the sale or abandonment of an asset, the cost and related accumulated
depreciation are removed from the Companys balance sheet, and any gains or losses on those assets are reflected in the accompanying consolidated statement of operations of the respective period. The straight-line method estimated useful lives
are as follows:



|                           |  |                                                 
|-------------------------- |  | ------------------------------------------------
|Buildings and improvements |  | 5-30 years                                      
|Two-way infrastructure     |  | 5-15 years                                      
|Vehicles                   |  | 5 years                                         
|Signs and displays         |  | 5-10 years                                      
|Other equipment            |  | 3-5 years                                       
|Leasehold improvements     |  | Shorter of estimated usefullife or term of lease



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Intangible Assets:Intangible assets are comprised of certain definite lived assets as well as a single indefinite
lived asset which is goodwill. Indefinite lived intangible assets are not amortized but evaluated annually (or more frequently) for impairment under Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets (SFAS 142). Definite lived intangible assets, including capitalized loan origination costs, wireless contract acquisition costs and FCC license acquisition costs, are amortized over the estimated useful life
of the asset and reviewed for impairment upon any triggering event that gives rise to any question as to the assets ultimate recoverability as prescribed under SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(SFAS 144).

Indefinite Lived Intangible Assets: The Company only has one
category of indefinite lived intangible asset, which is goodwill. Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a business combination and determined to have an
indefinite useful life are not amortized but instead tested for impairment at least annually in accordance with the provisions of SFAS 142. The SFAS 142 goodwill impairment model is a two-step process. The first step compares the fair value of a
reporting unit that has goodwill assigned to its carrying value. The fair value of a reporting unit using discounted cash flow analysis is estimated. If the fair value of the reporting unit is determined to be less than its carrying value, a second
step is performed to compute the amount of goodwill impairment, if any. Step two allocates the fair value of the reporting unit to the reporting units net assets other than goodwill. The excess of the reporting units fair value over the
amounts assigned to its net assets other than goodwill is considered the implied fair value of the reporting units goodwill. The implied fair value of the reporting units goodwill is then compared to the carrying value of its goodwill.
Any shortfall represents the amount of goodwill impairment. Under the guidance of SFAS 142, companies are required to test for impairment of intangible assets with indefinite lives at least annually. Teletouchs only intangible asset with an
indefinite life is goodwill, which was acquired in January 2004 as part of the purchase of the two-way radio assets of Delta Communications, Inc. The Company tests this goodwill annually on March 1st, the first day of its fourth fiscal quarter, of each year unless an event occurs that would cause the Company to believe the value is impaired at an interim date.

Definite Lived Intangible Assets: Definite lived intangible assets consist of the contracts with the Companys cellular carrier, subscriber bases, FCC
licenses, internally developed software and loan origination costs, several of which were recorded at the date of acquisition (during 2001) of PCI by its former parent, Progressive Concepts Communications, Inc. (PCCI), a Delaware
corporation and a company controlled by Robert McMurrey, Chairman and Chief Executive Officer of Teletouch. The Company does not capitalize customer acquisition costs in the normal course of business but would capitalize the purchase costs of
acquiring customers from a third party. Intangible assets are carried at cost less accumulated amortization. Amortization on the wireless contracts is computed using the straight-line method over the contracts life. The estimated useful lives
for the intangible assets are as follows:



|                                        |  |           
|--------------------------------------- |  | ----------
|Wireless contracts and subscriber bases |  | 1-13 years
|FCC licenses                            |  | 9 years   
|Non-compete agreements                  |  | 5 years   
|Internally developed software           |  | 3 years   

The Company defers certain direct costs in obtaining loans and amortizes such amounts using the straight-line
method over the expected life of the loan, which approximates the effective interest method as follows:



|                       |  |          
|---------------------- |  | ---------
|Loan origination costs |  | 2-5 years



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The wireless contract intangible assets represent certain contracts that the Company has with its cellular carrier,
AT&T, under which the Company is allowed to provide cellular services to its customers. Although the Company has sustained losses over the past several years, management has evaluated this asset in light of the fair value of each of the cellular
subscribers that the Company services. Included in the provisions of the primary contract with AT&T (Dallas / Fort Worth market) is a buy-back / penalty provision, which quantifies a value of the subscriber base as if AT&T were to terminate
the contracts with the Company and buy back the subscribers from PCI. Under the terms of the Dallas / Fort Worth market distribution agreement with AT&T, at the expiration of the agreement (currently September 2009), AT&T must continue to
provide airtime to the Company as long as the subscribers choose to remain on service, or at AT&Ts option, AT&T can buy-back the subscribers from the Company for $1,000 per subscriber line. This buy-back value contained in the contract
significantly exceeds the carrying value of the asset at all periods presented herein. Additionally, in August 2007 the Company obtained an independent valuation of the customer base, which also exceeds the carrying value of this asset at all
periods presented herein.

Amortization of subscriber bases wireless contracts, FCC licenses and internally developed software is considered operating
expense and included in Depreciation and Amortization in the accompanying consolidated statements of operations. The Company periodically reviews the estimated useful lives of its identifiable intangible assets, taking into consideration
any events or circumstances that might result in a lack of recoverability or revised useful life.

Impairment of Long-lived Assets: In accordance
with SFAS 144, the Company evaluates the recoverability of the carrying value of its long-lived assets based on estimated undiscounted cash flows to be generated from such assets. If the undiscounted cash flows indicate an impairment, then the
carrying value of the assets evaluated is written-down to the estimated fair value of those assets. In assessing the recoverability of these assets, the Company must project estimated cash flows, which are based on various operating assumptions,
such as average revenue per unit in service, disconnect rates, sales productivity ratios and expenses. Management develops these cash flow projections on a periodic basis and reviews the projections based on actual operating trends. The projections
assume that general economic conditions will continue unchanged throughout the projection period and that their potential impact on capital spending and revenues will not fluctuate. Projected revenues are based on the Companys estimate of
units in service and average revenue per unit as well as revenue from various new product initiatives. Projected revenues assume a stable to slightly declining cellular service revenue while projected operating expenses are based upon historic
experience and expected market conditions adjusted to reflect an expected decrease in expenses resulting from cost saving initiatives.

The most
significant long-lived tangible asset owned by the Company is the Fort Worth, Texas corporate office building and the associated land. The Company has received periodic appraisals of the fair value of this property and in each instance the appraised
value continues to exceed the carrying value of the property.

Provision for Income Taxes:The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes, using the asset and liability approach, which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the
carrying amounts and the tax basis of such assets and liabilities. This method utilizes enacted statutory tax rates in effect for the year in which the temporary differences are expected to reverse and gives immediate effect to changes in income tax
rates upon enactment. Deferred tax assets are recognized, net of any valuation allowance, for temporary differences, net operating loss and tax credit carry forwards. Deferred income tax expense represents the change in net deferred assets and
liability balances. Deferred income taxes result from temporary differences between the basis of assets and liabilities recognized for differences between the financial statement and tax basis thereon and for the expected future tax benefits to



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be derived from net operating losses and tax credit carry forwards. A valuation allowance is recorded when it is more likely than not that deferred tax
assets will be unrealizable in future periods. As of August 31, 2008 and May 31, 2008, the Company has recorded a valuation allowance against the full amount of its net deferred tax assets since it does not forecast taxable income for
fiscal year 2009, nor is the Company able to reasonably forecast taxable income beyond next year. The inability to foresee taxable income in future years makes it more likely than not that the Company will not realize its recorded deferred tax
assets in future periods.

The Company adopted the provisions of Financial Standards Accounting Board Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48) an interpretation SFAS No. 109, on June 1, 2007. No material adjustment in the liability for unrecognized income tax benefits was recognized as a result of the adoption of FIN 48. At
August 31, 2008 and May 31, 2008 the Companys unrecognized income tax benefits, primarily the result of loss carryforwards, had a full valuation allowance.

On November 1, 2005, the Company became a member of the consolidated tax group of PCCI as a result of PCCI gaining control of over 80% of the outstanding common stock of Teletouch on that date. PCCI gained
control of Teletouchs common stock through the conversion by TLLP, PCCIs wholly owned subsidiary, of all of its shares of the Companys outstanding Series C Preferred Stock into 43,500,000 shares of common stock on November 1,
2005. As of November 1, 2005, TLLP was a disregarded entity for federal tax purposes since it was at that time a single member limited liability company (LLC). Therefore, the parent of Teletouch for federal tax purposes was deemed
to be PCCI. The Company continued to account for its taxes under SFAS 109 and record its deferred taxes on a stand-alone basis while part of PCCIs consolidated tax group. In August 2006, as a result of certain debt restructuring activities
involving TLLP, Teletouchs direct parent and PCCIs wholly owned subsidiary, the Company broke from the PCCI tax group due to new TLLP shares that were issued as part of this restructuring, which resulted in TLLP no longer being
disregarded for tax purposes. Beginning in August 2006 and through the date of this Report, TLLP is taxed as a partnership and the Company is again separately liable for its federal income taxes.

Revenue Recognition:Teletouch recognizes revenue over the period the service is performed in accordance with SEC Staff Accounting Bulletin No. 104,
Revenue Recognition in Financial Statements (SAB 104). SAB 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists, (2) delivery has
occurred or services rendered, (3) the fee is fixed and determinable and (4) collectibility is reasonably assured. Teletouch believes, relative to sales of products, that all of these conditions are met; therefore, product revenue is
recognized at the time of shipment.

The Company primarily generates revenues by providing billing services and through product sales. Billing services
include customer billings for cellular airtime and other recurring services under a master distributor agreement with AT&T. Product sales include sales of cellular telephones, accessories, and car and home audio products through the
Companys retail and wholesale operations.

Revenues and related costs generated through the Companys billing services 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 at the time of shipment, 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 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.



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Since 1987, the Company, through its subsidiary, PCI, has held agreements with AT&T, which allowed PCI to offer
cellular service and provide the billing and customer services to AT&T subscribers. PCI is compensated for the services it provides based upon sharing a portion of the monthly billings revenues with AT&T. 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 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 PCI should be reported on a net basis.

Deferred revenue represents prepaid monthly
service fees paid by customers.

Concentration of Credit Risk: Teletouch provides cellular and other wireless telecommunications services to a
diversified customer base of mid-size to small businesses and individual consumers, primarily in the Dallas / Fort Worth and San Antonio markets in Texas. In addition, the Company sells cellular equipment and consumer electronics products to large
base of small to mid size cellular carriers, agents and resellers as well as a large group of smaller electronics and car audio dealers throughout the United States. As a result, no significant concentration of credit risk exists. The Company
performs periodic credit evaluations of its customers to determine individual customer credit risks and promptly terminates services for nonpayment. Credit losses have been within managements expectations and continue to decline as the
Companys higher credit risk individual customer base continues to decline. However, due to the current economic environment in the United States, management expects credit losses to increase.

Financial Instruments: The Companys financial instruments consists of certificates of deposit-restricted, accounts receivable, accounts payable, debt and
redeemable common stock purchase warrants. Management believes the carrying value of its financial instruments approximates fair value due to the short maturity of the current assets and liability and the reasonableness of the interest rates on the
Companys debt.

Advertising and Pre-opening Costs:Labor costs, costs of hiring and training personnel and certain other costs relating to the
opening of new retail locations are expensed as incurred. Additionally, advertising costs are expensed as incurred although the Company is partially reimbursed based on various vendor agreements.

Stock-based Compensation:At August 31, 2008 the Company had two stock-based compensation plans for employees and nonemployee directors, which
authorize the granting of various equity-based incentives including stock options and stock appreciation rights.

On June 1, 2006, the Company
adopted the provisions of SFAS 123(R), Share Based Payment (SFAS 123(R)) using the modified prospective transition method. SFAS 123(R) requires companies to measure and recognize the cost of employee services received in
exchange for awards of equity instruments based on the grant date fair value of those awards. For share option instruments issued subsequent to the adoption of SFAS 123(R), compensation cost is recognized ratably using the straight-line method over
the expected vesting period. For equity options issued prior to the adoption of SFAS 123(R), compensation cost is recognized using a graded vesting method. In addition, pursuant to SFAS 123(R), the Company is required to estimate the amount of
expected forfeitures when calculating compensation costs instead of accounting for forfeitures as incurred, which was the previous method. Prior periods are not restated under this transition method. Options previously awarded and classified as
equity instruments continue to maintain their equity classification under SFAS 123(R).



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SFAS No. 123(R) requires cash flows resulting from excess tax benefits to be classified as a financing activity.
Excess tax benefits are realized from tax deductions for exercised options in excess of the deferred tax asset attributable to stock compensation costs for such options. The Company did not record any excess tax benefits as a result of adopting SFAS
123(R) in the three months ended August 31, 2008 and 2007 because the Company provided for a full valuation on future tax benefits realized in the United States for both years until it can sustain a level of profitability that demonstrates its
ability to utilize the assets.

SFAS No. 123(R) requires the use of a valuation model to calculate the fair value of stock-based awards. For the three
months ended August 31, 2008 the Company has elected to use the Black-Scholes option-pricing model, which incorporates various assumptions including volatility, expected life and interest rates. The Company did not grant options in the three
months ended August 31, 2007. The Company is required to make various assumptions in the application of the Black-Scholes option pricing model. The Company has determined that the best measure of expected volatility is based on the historical
daily volatility of the Companys common stock. Historical volatility factors utilized in the Companys Black-Scholes computations for options issued in the three months ended August 31, 2008 ranged from 172.6% to 173.7%. The Company
has elected to estimate the expected life of an award based upon the SEC approved simplified method noted under the provisions of Staff Accounting Bulletin No. 107 with the continued use of this method extended under the provisions
of Staff Accounting Bulletin No. 110. Under this formula, the expected term is equal to: ((weighted-average vesting term + original contractual term)/2). The expected term used by the Company as computed by this method for options issued in the
three months ended August 31, 2008 range from 5.0 years to 6.0 years. The interest rate used is the risk free interest rate and is based upon U.S. Treasury rates appropriate for the expected term. Interest rates used in the Companys
Black-Scholes calculations for options issued in the three months ended August 31, 2008 range from 3.39% to 3.54%. Dividend yield is zero for these options as the Company does not expect to declare any dividends on its common shares in the
foreseeable future.

In addition to the key assumptions used in the Black-Scholes model, the estimated forfeiture rate at the time of valuation is a
critical assumption. The Company has estimated an annualized forfeiture rate of 0.0% for the stock options granted to senior management and the Companys directors in the three months ended August 31, 2008. The Company reviews the
expected forfeiture rate annually to determine if that percent is still reasonable based on historical experience.

Options exercisable at August 31,
2008 and May 31, 2008 totaled 1,171,658 and 1,078,656, respectively. The weighted-average exercise price per share of options exercisable at August 31, 2008 and May 31, 2008 was $0.38 and $0.41, respectively, with remaining
weighted-average contractual terms of approximately 6.7 years and 6.5 years, respectively.

The weighted-average grant date fair value of options granted
during the three months ended August 31, 2008 was $0.19.

At August 31, 2008, the total remaining unrecognized compensation cost related to
unvested stock options amounted to approximately $329,000, which will be amortized over the weighted-average remaining requisite service period of 2.57 years.

Income (loss) Per Share:Basic income (loss) per share (EPS) is calculated by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding. Diluted EPS is
calculated by dividing net income (loss) available to common shareholders by the weighted average number of shares outstanding and potential shares outstanding. During 2002, the Company issued 6,000,000 redeemable common stock purchase warrants,
which remained outstanding through June 2008 (see Note 11 Shareholders Equity for discussion of the May 2008 agreement to redeem common stock purchase warrants and redemption in June 2008). These securities, prior to their
conversion, are considered to be Participating Securities under SFAS No. 128, Earnings Per Share(SFAS 128) for EPS calculations.



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The redeemable common stock purchase warrants are considered Participating Securities because the common stock underlying
these securities participates in dividends (if declared) at the same rate as the common shareholders. Because the Company reported a net income in the first quarter of fiscal year 2008, a portion of the net income has been allocated to the
participating warrants as if dividends were declared leaving net income applicable to common shareholders for the computation of basic EPS. Due to the fact there is no contractual obligation for the security holders of the warrants to share in
losses of the Company and since the warrants were redeemed and converted to long-term debt in the first quarter of fiscal year 2009, they have not been included in the basic loss per share calculations for the three months ended August 31,
2008.

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 months ended August 31, 2008 and 2007 (in thousands per share amounts):



|                                                                                                                                   |  |                              |        |   |      |   |        |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                                                   |  | Three Months EndedAugust 31, |       
|                                                                                                                                   |  | 2008                         |        |   | 2007 |  
|Numerator:                                                                                                                         |  |                              |        |   |      |   |        |  
|Net income (loss)                                                                                                                  |  | $                            | (446   | ) |      | $ | 2,091  |  
|                                                                                                                                   |  |                             
|Participation rights of preferred stock in undistributed earnings (see percentage calculation below)                               |  |                              |       |   |      |   | (224   | )
|                                                                                                                                   |  |                              |        |   |      |   |        |  
|                                                                                                                                   |  |                             
|Numerator for basic net income (loss) per common shareincome (loss) available to common shareholders under the two-class
method   |  | $                            | (446   | ) |      | $ | 1,867  |  
|                                                                                                                                   |  |                             
|Participation rights of preferred stock in undistributed earnings                                                                  |  |                              |       |   |      |   | 224    |  
|                                                                                                                                   |  |                              |        |   |      |   |        |  
|                                                                                                                                   |  |                             
|Numerator for diluted net income (loss) per common shareincome (loss) available to common shareholders under the two-class
method |  | $                            | (446   | ) |      | $ | 2,091  |  
|                                                                                                                                   |  |                              |        |   |      |   |        |  
|                                                                                                                                   |  |                             
|Denominator:                                                                                                                       |  |                              |        |   |      |   |        |  
|Denominator for basic net income (loss) per common shareweighted-average shares                                                   |  |                              | 49,052 |   |      |   | 48,572 |  
|Effect of dilution due to common stock purchase warrants                                                                           |  |                              |       |   |      |   | 5,825  |  
|                                                                                                                                   |  |                              |        |   |      |   |        |  
|Subtotal                                                                                                                           |  |                              | 49,052 |   |      |   | 54,397 |  
|                                                                                                                                   |  |                             
|Percentage of undistributed earnings allocated to common stock purchase warrants                                                   |  |                              | 0.0    | % |      |   | 10.7   | %
|                                                                                                                                   |  |                             
|Effect of dilution due to stock options                                                                                            |  |                              |       |   |      |   | 698    |  
|                                                                                                                                   |  |                              |        |   |      |   |        |  
|                                                                                                                                   |  |                             
|Denominator for diluted net income (loss) per common shareadjusted weighted-average shares                                        |  |                              | 49,052 |   |      |   | 55,095 |  
|                                                                                                                                   |  |                              |        |   |      |   |        |  
|                                                                                                                                   |  |                             
|Net income (loss) per common share:                                                                                                |  |                              |        |   |      |   |        |  
|Basic                                                                                                                              |  | $                            | (0.01  | ) |      | $ | 0.04   |  
|                                                                                                                                   |  |                              |        |   |      |   |        |  
|Diluted                                                                                                                            |  | $                            | (0.01  | ) |      | $ | 0.04   |  
|                                                                                                                                   |  |                              |        |   |      |   |        |  

The following securities were outstanding but were not included in the computation of diluted earnings per share
due to their antidilutive effect (in thousands):



|                     |  |                |  |               
|-------------------- |  | -------------- |  | --------------
|                     |  | August 31,2008 |  | August 31,2007
|Common stock options |  | 3,911          |  | 2,580         

Recently Issued Accounting Pronouncements Not Yet Effective

In September 2006, FASB issued SFAS 157, Fair Value Measurements (SFAS 157). This Statement defines fair value and provides guidance for how
to measure fair value. SFAS 157 applies to assets and liabilities required or permitted to be measured at fair value under other accounting pronouncements; however, this statement does not provide guidance whether assets and liabilities



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are required or permitted to be measured at fair value. The provisions of SFAS 157 went into effect for the Company on June 1, 2008. The adoption of
SFAS 157 did not have a material impact on the Companys financial position, results of operations or cash flows.

In December 2007, the FASB
issued SFAS 141(R). This statement amends SFAS 141, Business Combinations, and provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed, and any noncontrolling interest in the
acquiree. It also provides disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The provisions of SFAS 141(R) are effective for the Company on June 1,
2009. The Company does not expect the adoption of SFAS 141(R) to have a material impact on its financial statements.

In December 2007, the FASB
issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements  An Amendment of ARB No. 51. This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The
provisions of SFAS 160 are effective for the Company on June 1, 2009. The Company does not expect the adoption of SFAS 160 to have a material impact on its financial statements.

NOTE 3  RELATIONSHIP WITH CELLULAR CARRIER

The Company is party to 6 distribution agreements with AT&T
Mobility, its successors and assigns, which provide for the Company to distribute AT&T wireless services, on an exclusive basis, in major markets in Texas and Arkansas, including the Dallas-Fort Worth, Texas Metropolitan Statistical Area
(MSA), San Antonio, Texas MSA, Austin, Texas MSA, Houston, Texas MSA, East Texas Regional MSA and Arkansas, including primarily the Little Rock, Arkansas MSA. The distribution agreements permit the Company to offer AT&T cellular
phone service with identical pricing characteristics and provide billing customer services to its customers on behalf of AT&T in exchange for certain compensation and fees, which are primarily in the form of a revenue sharing of the core
wireless services the Company bills on behalf of AT&T. In addition the Company bills the same subscribers additional features and products it offers and retains all revenues related to those certain services and products. The Company is
responsible for all of the billing and collection of cellular charges from its customers and remains liable to AT&T for a set percentage of all AT&T related cellular service customer billings. Because of the volume of business transacted
with AT&T as well as the revenue generated from AT&T services, there is a significant concentration of credit and business risk involved with having AT&T as a primary vendor. The Companys largest distribution agreement with
AT&T for the Dallas/Fort Worth, Texas MSA was amended effective September 1, 1999 with an initial term of 10 years (the DFW Agreement). The DFW Agreement provides for two 5 year extensions unless either party provides written
notice to the other party at least 6 months prior to the expiration of the initial term or the additional renewal term, although certain billing services and other obligations continue for many years after the initial term expires. Specifically,
under the terms of its distribution agreement with AT&T, the Company is allowed to continue to service its existing subscriber base until these subscribers terminate service with the Company. The initial term of the DFW Agreement will expire in
September 2009 and the Company received the required 6 month notice from AT&T in February 2009, stating they will not extend the DFW Agreement with the Company beyond the expiration date. As a result of the natural expiration of the DFW
Agreement, the exclusivity requirements under this agreement will terminate in August 2009, which will allow the Company to expand its cellular offerings in the previously AT&T exclusive areas, under new agreements with one or more carriers.
However, AT&T has indicated to the Company they would like to maintain a long-term relationship with the Company, under new agreements that would, at a minimum, maintain the Companys exclusivity with AT&T in all of the markets the
Company currently serves under its various



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AT&T agreements. The Company and AT&T are currently in discussions on how to structure such new agreements. With respect to the Companys
primary distribution agreement with AT&T, management believes there will be no material affect on these revenues for the foreseeable future above the impact on revenues already being recognized as a result of customer attrition. Since the launch
of the iPhone in the summer of 2007, the Company has experienced higher subscriber attrition rates due to customers wanting to acquire the iPhone. AT&T has prohibited the Company from selling the iPhone or servicing any subscribers with an
iPhone and has required any of the Companys customers desiring an iPhone to move their Company provided service to AT&Ts billing services platform. The Company believes these restrictions on the Company and the requirement to make
the Companys customers change their billing services provider are in direct violation of its agreements with AT&T, including specifically the bilateral non-solicitation provision contained in such agreements which provides for a $1,000 per
subscriber penalty for these actions. The Company is currently in discussions with AT&T on a resolution to this issue, including appropriate compensation for such customer attrition. The remaining distribution agreements with AT&T have
varying expiration dates through October 31, 2012. The Company reports its revenues related to the AT&T services on a net basis in accordance with Emerging Issues Task Force Issue 99-19, Reporting Revenue Gross as a Principal versus
Net as an Agent (EITF 99-19) as follows (in thousands):



|                                             |  |                              |        |   |      |   |        |  
|-------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                             |  | Three Months EndedAugust 31, |       
|                                             |  | 2008                         |        |   | 2007 |  
|Gross service, rent and maintenance billings |  | $                            | 15,867 |   |      | $ | 16,545 |  
|Less: Direct costs paid to AT&T              |  |                              | (8,866 | ) |      |   | (9,088 | )
|                                             |  |                              |        |   |      |   |        |  
|Net service, rent and maintenance revenue    |  | $                            | 7,001  |   |      | $ | 7,457  |  
|                                             |  |                              |        |   |      |   |        |  

Gross service, rent and maintenance billings include gross cellular subscription billings, which 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 current billing and customer service agreements with AT&T.

Settlement of Dispute with AT&T

On June 1, 2007, the
Company entered into a Compromise Settlement and Release Agreement (the Settlement) with New Cingular Wireless PCS, LLC (successor in interest to Southwestern Bell Wireless Inc.) as General Partner of the Houston Cellular Telephone
Company L.P., successor to Dallas SMSA Limited Partnership (referred to as AT&T).

In the Settlement the Company had asserted that it had
incurred damages in connection with alleged actions of AT&T in connection with the Distribution Agreement between both parties effective September 1, 1999, as amended by the Amendment to Distribution Agreement effective November 12,
1999 (the DFW Agreement). The Companys claims related to the recovery of amounts previously remitted and/or owed to AT&T with respect to intracompany roaming costs and /or charges. These intracompany roaming charges were being
assessed as the Companys customers were traveling outside their home calling area but still remained in an area covered by cellular systems owned by AT&T. In connection with the allegation, the Company had asserted claims with regard to
reimbursement of amounts previously remitted and disputed the amounts owed with respect to such intracompany roaming costs and/or charges. In addition to the claims related to intracompany roaming costs and/or charges, the Company had asserted
claims related to various other actions, including but not limited to equipment and availability, rate plan disclosures, additional distribution,



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the provisions of billing and usage information, claims related to the customers billed by the Company, along with other dealings and transactions between
both parties and those arising out of and in connections with the DFW Agreement (the Dispute). Also in the Settlement, AT&T denied liability with respect to the Dispute.

As part of the Settlement, both parties agreed to compromise and settle all disputes, claims or causes of action of any kind asserted or which could have been asserted regarding the Dispute, each without admitting any
liability to the other.

The parties agreed to the following:



|(1) | Upon execution of the Settlement, both parties entered into a Second Amendment to the Distribution Agreement dated June 1, 2007 (the Second Amendment).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | As part of the terms of the Second Amendment, AT&T agreed to apply certain sections as identified in the Second Amendment that relate to amounts to be remitted to AT&T for
intracompany roamer airtime retroactively back to November 1, 2005.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | The parties agreed that upon payment of approximately $4,661,000 by the Company to AT&T on or before June 8, 2007 to settle outstanding payables owed by the Company, net of
what the Company had previously made deductions from remittances with respect to certain amounts previously remitted to AT&T, no further amount will be due by either party to the other with respect to such intracompany roaming costs or other
charges for the period up to the effective date of the Settlement, except for payments due by the Company for April and May 2007 billing cycles, which were calculated and remitted in accordance with the Second Amendment.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a result, the Company recognized a gain of $3,824,000 in June 2007 associated with the reversal of previously recognized accrued liabilities. The gain is recorded
separately as an offset to Operating Expenses and reported on the Companys Consolidated Statement of Operations as Gain on forgiveness of trade payable obligation to AT&T in the Companys consolidated statements of
operations.

The Settlement also contained other provisions customary for agreements of this nature.

NOTE 4  INVENTORY

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



|                               |  |                 |       |         |              |      |           |  |   |       |   |         |   |       |           |   |      |   |  |   |       |  
|------------------------------ |  | --------------- | ----- | ------- | ------------ | ---- | --------- |  | - | ----- | - | ------- | - | ----- | --------- | - | ---- | - |  | - | ----- | -
|                               |  | August 31, 2008 |       |         | May 31, 2008 |     
|                               |  | Cost            |       | Reserve |              |      | Net Value |  |   | Cost  |   | Reserve |   |       | Net Value |  
|Phones and related accessories |  | $               | 1,119 |         | $            |     |           |  | $ | 1,119 |   |         | $ | 1,262 |           | $ |     |   |  | $ | 1,262 |  
|Automotive products            |  |                 | 659   |         |              |     |           |  |   | 659   |   |         |   | 621   |           |   |     |   |  |   | 621   |  
|Satellite products             |  |                 | 33    |         |              |     |           |  |   | 33    |   |         |   | 29    |           |   |     |   |  |   | 29    |  
|Two-way products               |  |                 | 632   |         |              | (39  | )         |  |   | 593   |   |         |   | 563   |           |   | (39  | ) |  |   | 524   |  
|Other                          |  |                 | 37    |         |              |     |           |  |   | 37    |   |         |   | 189   |           |   |     |   |  |   | 189   |  
|                               |  |                 |       |         |              |      |           |  |   |       |   |         |   |       |           |   |      |   |  |   |       |  
|Total inventory and reserves   |  | $               | 2,480 |         | $            | (39  | )         |  | $ | 2,441 |   |         | $ | 2,664 |           | $ | (39  | ) |  | $ | 2,625 |  
|                               |  |                 |       |         |              |     
|General obsolescence reserve   |  |                 |      |         |              | (221 | )         |  |   | (221  | ) |         |   |      |           |   | (224 | ) |  |   | (224  | )
|                               |  |                 |       |         |              |      |           |  |   |       |   |         |   |       |           |   |      |   |  |   |       |  
|Total inventory and reserves   |  | $               | 2,480 |         | $            | (260 | )         |  | $ | 2,220 |   |         | $ | 2,664 |           | $ | (263 | ) |  | $ | 2,401 |  
|                               |  |                 |       |         |              |      |           |  |   |       |   |         |   |       |           |   |      |   |  |   |       |  



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NOTE 5  PROPERTY, PLANT AND EQUIPMENT

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



|                                     |  |                 |        |   |              |   |        |  
|------------------------------------ |  | --------------- | ------ | - | ------------ | - | ------ | -
|                                     |  | August 31, 2008 |        |   | May 31, 2008 |  
|Land                                 |  | $               | 774    |   |              | $ | 774    |  
|Buildings and leasehold improvements |  |                 | 3,157  |   |              |   | 3,168  |  
|Two-way network infrastructure       |  |                 | 1,177  |   |              |   | 1,177  |  
|Office and computer equipment        |  |                 | 3,227  |   |              |   | 3,197  |  
|Signs and displays                   |  |                 | 1,737  |   |              |   | 1,737  |  
|Other                                |  |                 | 483    |   |              |   | 410    |  
|                                     |  |                 |        |   |              |   |        |  
|                                     |  | $               | 10,555 |   |              | $ | 10,463 |  
|Accumulated depreciation             |  |                 | (7,366 | ) |              |   | (7,253 | )
|                                     |  |                 |        |   |              |   |        |  
|                                     |  | $               | 3,189  |   |              | $ | 3,210  |  
|                                     |  |                 |        |   |              |   |        |  

Depreciation expense was approximately $136,000 and $197,000 for the three months ended August 31, 2008 and
2007, respectively.

Property, plant and equipment are 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 August 31, 2008 (in thousands):



|                                     |  |                  |     |             |   |             |  |               |     |               |   |                     |  |                |    |  |   |       |  |   |      
|------------------------------------ |  | ---------------- | --- | ----------- | - | ----------- |  | ------------- | --- | ------------- | - | ------------------- |  | -------------- | -- |  | - | ----- |  | - | -----
|                                     |  | Less than3 years |     | 3 to 4years |   | 5 to 9years |  | 10 to 14years |     | 15 to 19years |   | 20 yearsand greater |  | Total NetValue
|Buildings and leasehold improvements |  | $                | 120 |             | $ | 14          |  | $             | 176 |               | $ |                    |  | $              | 11 |  | $ | 1,284 |  | $ | 1,605
|Office and computer equipment        |  |                  | 102 |             |   | 86          |  |               | 51  |               |   |                    |  |                |   |  |   |      |  |   | 239  
|Two-way network infrastructure       |  |                  | 75  |             |   | 43          |  |               | 261 |               |   |                    |  |                |   |  |   |      |  |   | 379  
|Signs & displays                     |  |                  | 87  |             |   | 21          |  |               |    |               |   |                    |  |                |   |  |   |      |  |   | 108  
|Other                                |  |                  | 51  |             |   | 33          |  |               |    |               |   |                    |  |                |   |  |   |      |  |   | 84   
|Land                                 |  |                  |    |             |   |            |  |               |    |               |   |                    |  |                |   |  |   | 774   |  |   | 774  
|                                     |  |                  |     |             |   |             |  |               |     |               |   |                     |  |                |    |  |   |       |  |   |      
|                                     |  | $                | 435 |             | $ | 197         |  | $             | 488 |               | $ |                    |  | $              | 11 |  | $ | 2,058 |  | $ | 3,189
|                                     |  |                  |     |             |   |             |  |               |     |               |   |                     |  |                |    |  |   |       |  |   |      

NOTE 6  GOODWILL AND OTHER INTANGIBLE ASSETS

Intangible Assets with Indefinite Lives: In accordance with SFAS No. 142,Goodwill and Other Intangible Assets, the Company performs an annual
impairment test of goodwill as well as evaluates this goodwill for recoverability upon any significant change in the business. There were no changes in the carrying amount of intangible assets with indefinite lives for the three months ended
August 31, 2008.

The reported goodwill of the Company at August 31, 2008 and May 31, 2008 relates entirely to the two-way radio segment and
was purchased in the acquisition of the assets of Delta Communications and Electronics, Inc. which was completed in January 2004. The Company evaluates the recoverability of this goodwill at least once annually on March 1st of each year. There
have been no changes in the two-way radio segment during the current quarter that would indicate to the Company that the carrying value of its goodwill may have been impaired during the period.



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Intangible Assets with Definite Lives:The following is a summary of the Companys intangible assets that are
subject to amortization (in thousands):



|                                            |  |                     |        |                         |   |        |                  |  |                     |       |                         |   |        |                  |   |        |   |  |   |      
|------------------------------------------- |  | ------------------- | ------ | ----------------------- | - | ------ | ---------------- |  | ------------------- | ----- | ----------------------- | - | ------ | ---------------- | - | ------ | - |  | - | -----
|                                            |  | August 31, 2008     |        | May 31, 2008           
|                                            |  | GrossCarryingAmount |        | AccumulatedAmortization |   |        | NetCarryingValue |  | GrossCarryingAmount |       | AccumulatedAmortization |   |        | NetCarryingValue
|Wireless contracts and subscriber bases     |  | $                   | 10,258 |                         | $ | (5,742 | )                |  | $                   | 4,516 |                         | $ | 10,258 |                  | $ | (5,546 | ) |  | $ | 4,712
|FCC licenses                                |  |                     | 104    |                         |   | (53    | )                |  |                     | 51    |                         |   | 104    |                  |   | (50    | ) |  |   | 54   
|Wholesale customer list                     |  |                     | 1,235  |                         |   | (1,235 | )                |  |                     |      |                         |   | 1,235  |                  |   | (1,235 | ) |  |   |     
|Loan origination fees                       |  |                     | 394    |                         |   | (120   | )                |  |                     | 274   |                         |   | 394    |                  |   | (86    | ) |  |   | 308  
|Non-compete agreements                      |  |                     | 95     |                         |   | (87    | )                |  |                     | 8     |                         |   | 95     |                  |   | (82    | ) |  |   | 13   
|Internally-developed software               |  |                     | 170    |                         |   | (170   | )                |  |                     |      |                         |   | 170    |                  |   | (170   | ) |  |   |     
|                                            |  |                     |        |                         |   |        |                  |  |                     |       |                         |   |        |                  |   |        |   |  |   |      
|                                            |  |                     |        |                         |   |       
|Balance at August 31, 2008 and May 31, 2008 |  | $                   | 12,256 |                         | $ | (7,407 | )                |  | $                   | 4,849 |                         | $ | 12,256 |                  | $ | (7,169 | ) |  | $ | 5,087
|                                            |  |                     |        |                         |   |        |                  |  |                     |       |                         |   |        |                  |   |        |   |  |   |      

Amortization is computed using the straight-line method based on the following estimated useful lives:



|                                        |  |           
|--------------------------------------- |  | ----------
|Wireless contracts and subscriber bases |  | 1-13 years
|FCC licenses                            |  | 9 years   
|Loan origination fees                   |  | 2-5 years 
|Non-competition agreements              |  | 5 years   
|Internally-developed software           |  | 3 years   

Total amortization expense for the three months ended August 31, 2008 and 2007 was approximately $238,000 and
$220,000, respectively.

NOTE 7  ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

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



|                                            |  |                |       |             |   |      
|------------------------------------------- |  | -------------- | ----- | ----------- | - | -----
|                                            |  | August 31,2008 |       | May 31,2008
|Accrued payroll and other personnel expense |  | $              | 1,380 |             | $ | 1,743
|Accrued state and local taxes               |  |                | 1,002 |             |   | 872  
|Unvouchered accounts payable                |  |                | 2,616 |             |   | 2,407
|Customer deposits payable                   |  |                | 681   |             |   | 679  
|Other                                       |  |                | 683   |             |   | 846  
|                                            |  |                |       |             |   |      
|Total                                       |  | $              | 6,362 |             | $ | 6,547
|                                            |  |                |       |             |   |      

NOTE 8  LONG-TERM DEBT

Long-term debt at August 31, 2008 and May 31, 2008 consists of the following (in thousands):



|                                      |  |                |         |   |             |   |        |  
|------------------------------------- |  | -------------- | ------- | - | ----------- | - | ------ | -
|                                      |  | August 31,2008 |         |   | May 31,2008 |  
|Vehicle notes                         |  |                | 3       |   |             |   | 7      |  
|Thermo revolver                       |  |                | 5,113   |   |             |   | 4,863  |  
|United Commercial Bank debt           |  |                | 2,532   |   |             |   | 2,552  |  
|Jardine Capital Corporation bank debt |  |                | 641     |   |             |   | 643    |  
|Thermo factoring debt                 |  |                | 8,959   |   |             |   | 9,091  |  
|Warrant redemption notes payable      |  |                | 1,425   |   |             |   |       |  
|                                      |  |                |         |   |             |   |        |  
|Total long-term debt                  |  |                | 18,673  |   |             |   | 17,156 |  
|Less: Current portion                 |  |                | (10,145 | ) |             |   | (9,727 | )
|                                      |  |                |         |   |             |   |        |  
|Long-term debt, net                   |  | $              | 8,528   |   |             | $ | 7,429  |  
|                                      |  |                |         |   |             |   |        |  



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Current portion of long-term debt at August 31, 2008 and May 31, 2008 consists of the following (in thousands):



|                                        |  |                |        |             |   |      
|--------------------------------------- |  | -------------- | ------ | ----------- | - | -----
|                                        |  | August 31,2008 |        | May 31,2008
|Vehicle notes                           |  |                | 3      |             |   | 6    
|Thermo revolver                         |  |                | 791    |             |   | 540  
|United Commercial Bank debt             |  |                | 83     |             |   | 82   
|Jardine Capital Corporation bank debt   |  |                | 9      |             |   | 8    
|Thermo factoring debt                   |  |                | 8,959  |             |   | 9,091
|Warrant redemption notes payable        |  |                | 300    |             |   |     
|                                        |  |                |        |             |   |      
|Total current portion of long-term debt |  | $              | 10,145 |             | $ | 9,727
|                                        |  |                |        |             |   |      

In August 2008 the Company amended its Loan and Security Agreement dated as of April 30, 2008 (the
Thermo Revolver), with Thermo Credit, LLC to increase its funding availability under the asset based revolving credit facility to $5,250,000. On August 29, 2008 the Company was funded an additional $250,000 under the credit facility
and as of August 31, 2008 approximately $5,113,000 has been advanced to the Company under this facility.

In June 2008 the Company redeemed the
6,000,000 outstanding GM Warrants and converted a portion of the obligation to long-term debt (see Note 11 Shareholders Equity for discussion of May 2008 agreement to redeem common stock purchase warrants and redemption in June
2008).

NOTE 9  INCOME TAXES

Teletouch uses the
liability method to account for income taxes. Under this method, deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates that are expected to be in effect when the differences reverse.

In June 2006, the FASB issued interpretation No. 48,
Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in
accounting for income taxes. In addition, FIN 48 provides guidance on derecognition, classification, interest and penalties and accounting in interim periods and requires expanded disclosures with respect to uncertainty in income taxes. The Company
adopted FIN 48 effective June 1, 2007.



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Significant components of the Companys deferred taxes are as follows (in thousands):



|                                                            |  |                |         |   |             |   |         |  
|----------------------------------------------------------- |  | -------------- | ------- | - | ----------- | - | ------- | -
|                                                            |  | August 31,2008 |         |   | May 31,2008 |  
|Deferred Tax Assets:                                        |  |                |         |   |             |   |         |  
|Current deferred tax assets:                                |  |                |         |   |             |   |         |  
|Accrued liabilities                                         |  | $              | 463     |   |             | $ | 433     |  
|Deferred revenue                                            |  |                | 33      |   |             |   | 34      |  
|Inventories                                                 |  |                | 85      |   |             |   | 87      |  
|Bad debt reserve                                            |  |                | 244     |   |             |   | 158     |  
|                                                            |  |                |         |   |             |   |         |  
|                                                            |  |                | 825     |   |             |   | 712     |  
|Valuation allowance                                         |  |                | (807    | ) |             |   | (689    | )
|                                                            |  |                |         |   |             |   |         |  
|Current deferred tax assets, net of valuation allowance     |  |                | 18      |   |             |   | 23      |  
|                                                            |  |               
|Non-current deferred tax assets:                            |  |                |         |   |             |   |         |  
|Net operating loss                                          |  |                | 11,164  |   |             |   | 11,157  |  
|Intangible assets                                           |  |                | 162     |   |             |   | 150     |  
|Fixed assets                                                |  |                | 291     |   |             |   | 288     |  
|Licenses                                                    |  |                | 20      |   |             |   | 21      |  
|Other                                                       |  |                | 2       |   |             |   | 2       |  
|                                                            |  |                |         |   |             |   |         |  
|                                                            |  |                | 11,639  |   |             |   | 11,618  |  
|Valuation allowance                                         |  |                | (11,559 | ) |             |   | (11,536 | )
|                                                            |  |                |         |   |             |   |         |  
|Non-current deferred tax assets, net of valuation allowance |  |                | 80      |   |             |   | 82      |  
|                                                            |  |                |         |   |             |   |         |  
|                                                            |  |               
|Deferred Tax Liabilities:                                   |  |                |         |   |             |   |         |  
|Current deferred tax liabilities:                           |  |                |         |   |             |   |         |  
|Other                                                       |  |                | 18      |   |             |   | 23      |  
|                                                            |  |                |         |   |             |   |         |  
|Non-current deferred tax liabilities:                       |  |                |         |   |             |   |         |  
|Fixed assets                                                |  |                | 80      |   |             |   | 82      |  
|                                                            |  |                |         |   |             |   |         |  
|                                                            |  |               
|Net Current Deferred Tax Asset                              |  | $              |        |   |             | $ |        |  
|                                                            |  |                |         |   |             |   |         |  
|                                                            |  |               
|Net Non-Current Deferred Tax Asset                          |  | $              |        |   |             | $ |        |  
|                                                            |  |                |         |   |             |   |         |  

NOTE 10  COMMITMENTS AND CONTINGENCIES

Teletouch leases office space, transmission towers, and equipment under non-cancelable operating leases ranging from one to ten years. These leases contain various renewal terms and restrictions as to use of the
property. Some of the leases contain provisions for future rent increases. The total amount of rental payments due over the lease terms is charged to rent expense on the straight-line method over the term of the leases. The difference between rent
expense recorded and the amount paid is recorded as deferred rental expense, which is included in accrued expenses and other liabilities in the accompanying consolidated balance sheets. Minimum rental commitments under non-cancelable leases are as
follows (in thousands):



|                 |  |                                 |       |      |   |      |  |      |     |      |   |            |  |   |     |  |   |      
|---------------- |  | ------------------------------- | ----- | ---- | - | ---- |  | ---- | --- | ---- | - | ---------- |  | - | --- |  | - | -----
|                 |  | Twelve Months Ending August 31,
|                 |  | Total                           |       | 2009 |   | 2010 |  | 2011 |     | 2012 |   | Thereafter
|Operating leases |  | $                               | 6,242 |      | $ | 975  |  | $    | 671 |      | $ | 484        |  | $ | 342 |  | $ | 3,770

Teletouch is party to various legal proceedings arising in the ordinary course of business. The Company believes
there is no proceeding, either threatened or pending, against it that will result in a material adverse effect on its results of operations or financial condition.

In addition to the contractual obligations mentioned above, the Company has the following contingencies:

Claim Asserted Against Use of Hawk
Electronics Name:In June 2008, the Company was notified of its alleged infringement on the trade name Hawk Electronics. The Company is currently in discussions with the other party and aggressively defending its position that its use of
the name in the markets in which it operates is proper. We cannot give any assurance that we will be



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successful in resolving this matter. If this matter results in litigation and an adverse determination, we may be forced to cease using the Hawk Electronics
name wholly or in some markets. Litigation to resolve the infringement claim could result in substantial costs and diversion of resources. Furthermore, an adverse result in an action against the Company may require that we pay substantial damages,
cease operating under the Hawk Electronics name and expend significant resources to either license the infringing brand name or develop a non-infringing brand name. Legal costs related to responding to this claim are being charged to expense as
incurred and as of the date of this Report, the outcome of this litigation cannot be predicted nor can any final cost to settle this matter be estimated so no accrual has been recorded.

Claim by Former Employee:In March 2008, the Company received a demand letter from Keith Cole, former CFO of PCI and General Counsel for the Company. Mr. Cole was terminated in January 2008. Mr. Cole
has made a demand for certain compensation that he believed was due prior to his termination. The basis for this claim is certain alleged verbal conversations with management of the Company. The total alleged unpaid compensation amount claimed by
Mr. Cole is approximately $455,000. As of the date of this Report, the Company has reached a preliminary agreement with Mr. Cole to settle this claim for a one time payment of $80,000 and is in the process of drafting the settlement and
release agreement that it will require from Mr. Cole in exchange for this payment.

NOTE 11  SHAREHOLDERS EQUITY

Common Stock Purchase Warrants: In November 2002, the Company issued 6,000,000 redeemable common stock purchase warrants as part of a debt restructuring
transaction completed in fiscal year 2003 (the GM Warrants). At May 31, 2008, the Company has 6,000,000 GM Warrants issued and outstanding. The GM Warrants were exercisable beginning in December of 2005 and terminating in December
of 2010. In December of 2007 or earlier upon specific events, the holder of the GM Warrants may require the Company to redeem the warrants at $0.50 per warrant. Because of this mandatory redemption feature, the Company initially recorded the
estimated fair value of the GM Warrants as a long-term liability on its consolidated balance sheet and adjusted the amount to reflect changes in the fair value of the warrants, including accretion in value due to the passage of time, with such
changes charged or credited to interest expense through the exercise date of the warrants.

As of December 12, 2007, the 12 holders of the collective
6,000,000 outstanding GM Warrants (collectively, the GM Warrant Holders) have had the right to redeem these warrants for an aggregate amount of $3,000,000 in cash or to convert these warrants into an aggregate amount of 6,000,000 shares
of Teletouchs common stock under the terms of their respective warrant agreements. In December 2007, the Company received redemption notices from all of the holders of the GM Warrants. On May 23, 2008, definitive agreements were executed
with each of the 12 holders of the GM Warrants (the Warrant Redemption Payment Agreements). The Warrant Redemption Payment provides for (i) an initial payment in the total amount of $1,500,000 payable on or before June 2,
2008, (ii) additional 17 equal monthly payments in the amount of $25,000 each, together with interest on the outstanding principal balance at an annual interest rate of 12% beginning July 1, 2008 and (iii) a final single payment in
the amount of $1,075,000 due December 1, 2009 (such payments collectively referred to as the Payments). The Payments will be divided among each of the GM Warrant Holders based on their proportionate ownership of the previously
outstanding GM Warrants. Teletouchs obligations to make such payments are evidenced by individual promissory notes (the GM Promissory Notes) to each of the GM Warrant Holders. In addition, Teletouch will be required to make
accelerated payments to the GM Warrant Holders in the event of (i) a sale of Teletouchs assets not in the ordinary course of its business or (ii) a change of control. The negotiated agreement also contains certain events of default,
mutual releases, covenants and other provisions, which are customary for agreements of this nature.



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As of May 31, 2008, following the execution of the Warrant Redemption Payment Agreements discussed above and in
accordance with SFAS No. 6, Classification of Short-Term Obligations Expected to be Refinanced, the Company has classified $1,200,000 of its $3,000,000 liability under the redeemable common warrants as a long-term liability (leaving
$1,800,000 reported as a current liability) to reflect the refinancing of this debt completed in June 2008 under the Warrant Redemption Payment Agreements. On June 2, 2008, the Company paid the $1,500,000 initial payment to the GM Warrant
Holders and executed the 12 promissory notes as contemplated under the Warrant Redemption Agreement discussed above.

NOTE 12  STOCK OPTIONS

Teletouchs 1994 Stock Option and Stock Appreciation Rights Plan (the 1994 Plan) was adopted in July 1994 and provides for the granting of
incentive and non-incentive stock options and stock appreciation rights to officers, directors, employees and consultants to purchase not more than an aggregate of 1,000,000 shares of common stock. The Compensation Committee or the Board of
Directors administers the 1994 Plan and has authority to determine the optionees to whom awards will be made, the terms of vesting and forfeiture, the amount of the awards, and other terms. Under the terms of the 1994 Plan, the option price approved
by the Board of Directors shall not be less than the fair market value of the common stock at date of grant. Exercise prices in the following table have been adjusted to give effect to the repricing that took effect in December 1999 and November
2001.

On November 7, 2002, the Companys common shareholders voted to adopt and ratify the Teletouch 2002 Stock Option and Appreciation Rights
Plan (the 2002 Plan). Under the 2002 Plan, Teletouch may issue options, which will result in the issuance of up to an aggregate of 10,000,000 shares of Teletouchs common stock. The 2002 Plan provides for options, which qualify as
incentive stock options (Incentive Options) under Section 422 of the Code, as well as the issuance of non-qualified options (Non-Qualified Options). The shares issued by Teletouch under the 2002 Plan may be either treasury shares or authorized
but unissued shares as Teletouchs Board of Directors may determine from time to time. Pursuant to the terms of the 2002 Plan, Teletouch may grant Non-Qualified Options and Stock Appreciation Rights (SARs) only to officers, directors, employees
and consultants of Teletouch or any of Teletouchs subsidiaries as selected by the Board of Directors or the Compensation Committee. The 2002 Plan also provides that the Incentive Options shall be available only to officers or employees of
Teletouch or any of Teletouchs subsidiaries as selected by the Board of Directors or Compensation Committee. The price at which shares of common stock covered by the option can be purchased is determined by Teletouchs Compensation
Committee or Board of Directors; however, in all instances the exercise price is never less than the fair market value of Teletouchs common stock on the date the option is granted. To the extent that an Incentive Option or Non-Qualified Option
is not exercised within the period in which it may be exercised in accordance with the terms and provisions of the 2002 Plan described above, the Incentive Option or Non-Qualified Option will expire as to the then unexercised portion. In addition,
employees that cease their services with the Company and hold vested options will have the ability to exercise their vested options for a period three months after their termination date with the Company.

As of August 31, 2008, approximately 29,327 Non-Qualified Options and 52,000 Incentive Options are outstanding under the 1994 Plan, and approximately 256,998
Non-Qualified Options and 3,573,156 Incentive Options are outstanding under the 2002 Plan.



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A summary of option activity for the three months ended August 31, 2008 is as follows:



|                                       |  |           |   |  |                              |      |                                         |      |                         |   |  
|-------------------------------------- |  | --------- | - |  | ---------------------------- | ---- | --------------------------------------- | ---- | ----------------------- | - | -
|                                       |  | Shares    |   |  | WeightedAverageExercisePrice |      | WeightedAverageRemainingContractualTerm |      | AggregateIntrinsicValue
|Outstanding at June 1, 2008            |  | 1,565,323 |   |  | $                            | 0.40 |                                         |     |                         |   |  
|Three months ended August 31, 2008     |  |           |   |  |                              |      |                                         |      |                         |   |  
|Granted                                |  | 2,398,156 |   |  |                              | 0.19 |                                         |     |                         |   |  
|Exercised                              |  |          |   |  |                              |     |                                         |     |                         |   |  
|Forfeited                              |  | (51,998   | ) |  |                              | 0.42 |                                         |     |                         |   |  
|                                       |  |           |   |  |                              |      |                                         |      |                         |   |  
|Outstanding at August 31, 2008         |  | 3,911,481 |   |  |                              | 0.27 |                                         | 8.74 |                         | $ | 
|                                       |  |           |   |  |                              |      |                                         |      |                         |   |  
|                                       |  |           |   | 
|Options exercisable at August 31, 2008 |  | 1,171,658 |   |  | $                            | 0.38 |                                         | 6.70 |                         | $ | 
|                                       |  |           |   |  |                              |      |                                         |      |                         |   |  

The following table summarizes the status of the Companys non-vested stock options since June 1, 2008:



|                              |  |                    |   |  |                            |     
|----------------------------- |  | ------------------ | - |  | -------------------------- | ----
|                              |  | Non-vested Options
|                              |  | Number ofShares    |   |  | Weighted-Average FairValue
|Non-vested at June 1, 2008    |  | 486,667            |   |  | $                          | 0.36
|Granted                       |  | 2,263,156          |   |  |                            | 0.18
|Vested                        |  |                   |   |  |                            |    
|Forfeited                     |  | (10,000            | ) |  |                            | 0.22
|                              |  |                    |   |  |                            |     
|Non-vested at August 31, 2008 |  | 2,739,823          |   |  | $                          | 0.22
|                              |  |                    |   |  |                            |     

Upon adoption of SFAS 123(R) on June 1, 2006, the Company began estimating the value of employee stock
options on the date of grant using the Black-Scholes model. Prior to the adoption of SFAS 123(R), the value of each employee stock option was estimated on the date of grant using the Black-Scholes model for the purpose of the pro forma financial
disclosure in accordance with SFAS 123. The determination of fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the stock price as well as assumptions regarding a number of highly complex and
subjective variables. These variables include, but are not limited to the expected stock price volatility over the term of the awards and the actual and projected employee stock option exercise behaviors. The Company has elected to estimate the
expected life of an award based on the SEC approved simplified method. The Company calculated its expected volatility assumption required in the Black-Scholes model based on the historical volatility of its stock. The Company recorded
approximately $42,000 and $30,000 in stock based compensation expense in the consolidated financial statements for the three months ended August 31, 2008 and 2007, respectively.

NOTE 13  RELATED PARTY TRANSACTIONS

The Company entered into certain related party transactions during the
fiscal years ended May 31, 2008 and 2007 with PCCI and TLLP, both companies controlled by Robert McMurrey, Chairman and Chief Executive Officer of Teletouch, as follows:

In June 2006, the Company loaned $250,000 to PCCI for the purpose of allowing PCCI to enter into an option agreement with Air-bank, Inc., a non-affiliated prepaid cellular technology company (Air-bank).
The $250,000 was to be used to secure a management and option agreement with Air-bank providing PCCI the option to acquire up to 55% interest in Air-bank. Beginning in June 2006 and through the date of this Report, the Company also provided certain
leased office space to Air-bank. In January 2009 PCCI contributed the receivable due from Air-bank to Teletouch which assigned all claims to the receivable to the Company to retire all of its intercompany obligations due to the Company. In addition
Air-Bank owed the Company other balances due to certain operating expenses paid by the Company on their behalf. In January 2009, the Company converted all amounts due from Air-bank into a single promissory note totaling approximately $434,000 as of
the date of this Report. The note has an annual interest rate of 15% and is secured by all of the assets of Air-Bank. The notes initial maturity date is March 31, 2009 with a $250,000 principal payment due at that date with any remaining
principal balance and all unpaid accrued interest due on June 30, 2009.



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In August 2006, TLLP paid certain legal fees on behalf of the Company related to the debt restructuring and the
reorganization of its commonly controlled companies. The Company recorded this $63,000 as a related party payable to TLLP. As of August 31, 2008, $32,000 remains payable to TLLP by the Company.

NOTE 14  SEGMENT INFORMATION

The Companys consolidated
financial statements include three reportable segments: cellular services, wholesale distribution and two-way radio services. The Company determines its reportable segments based on the aggregation criteria of Financial Accounting Standards
No. 131 Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131).

The Companys cellular
business segment represents its core business, which has been acquiring, billing, and supporting cellular subscribers under a revenue sharing relationship with AT&T for over 20 years. The consumer services and retail business within the cellular
segment is operated primarily under the Hawk Electronics brand name, with additional business and government sales provided by a direct sales group operating throughout all of the Companys markets. As a master distributor for AT&T wireless
services, the Company controls the entire customer experience, 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.

The Companys wholesale business segment represents its distribution of cellular
telephones, accessories, car audio and car security products to other third party customers and distributors.

Two-way radio services represent services
provided on the Companys Logic Trunked Radio (LTR) system and the related radio equipment sales as well as radio equipment sales to customers operating their own two-way radio system.

Corporate overhead is reported separate from the Companys identified segments and this indirect cost is not allocated to the operating segments. The Companys
corporate overhead costs have remained relatively flat for the core corporate functions with the exception of certain professional fees related to non-recurring transactions. The Companys rationale for not allocating corporate overhead costs
to the operating segments is based on its belief that the current overhead costs would remain relatively flat even upon a significant change in one or more of its operating segments due to many factors including the costs of being a publicly traded
entity and the fixed cost nature of providing the base level of corporate administrative functions to the Company. The significant overhead costs include expenses from the Companys cost centers for accounting, information technology, human
resources, marketing and office of the President.



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##### Table of Contents

The following tables summarize the Companys operating financial information by each segment for the three months
ended August 31, 2008 and 2007 (in thousands):



|                                                                                                  |  |                                    |       |           |   |         |  |   |           |   |  |       |        |   |       |   |      |   |  |   |        |  
|------------------------------------------------------------------------------------------------- |  | ---------------------------------- | ----- | --------- | - | ------- |  | - | --------- | - |  | ----- | ------ | - | ----- | - | ---- | - |  | - | ------ | -
|                                                                                                  |  | Three Months Ended August 31, 2008 |      
|                                                                                                  |  | Segments                           |      
|                                                                                                  |  | Cellular                           |       | Wholesale |   | Two-Way |  |   | Corporate |   |  | Other |        |   | Total |  
|Operating revenues:                                                                               |  |                                    |       |           |   |         |  |   |           |   |  |       |        |   |       |   |      |   |  |   |        |  
|Service, rent and maintenance revenue                                                             |  | $                                  | 6,508 |           | $ |        |  | $ | 411       |   |  | $     |       |   |       | $ | 82   |   |  | $ | 7,001  |  
|Product sales revenue                                                                             |  |                                    | 1,864 |           |   | 3,218   |  |   | 657       |   |  |       |       |   |       |   | 146  |   |  |   | 5,885  |  
|                                                                                                  |  |                                    |       |           |   |         |  |   |           |   |  |       |        |   |       |   |      |   |  |   |        |  
|Total operating revenues                                                                          |  |                                    | 8,372 |           |   | 3,218   |  |   | 1,068     |   |  |       |       |   |       |   | 228  |   |  |   | 12,886 |  
|                                                                                                  |  |                                    |       |           |   |         |  |   |           |   |  |       |        |   |       |   |      |   |  |   |        |  
|                                                                                                  |  |                                    |       |           |   |        
|Operating expenses:                                                                               |  |                                    |       |           |   |         |  |   |           |   |  |       |        |   |       |   |      |   |  |   |        |  
|Cost of service, rent and maintenance (exclusive of depreciation and amortization included below) |  |                                    | 1,941 |           |   | 8       |  |   | 455       |   |  |       |       |   |       |   | 31   |   |  |   | 2,435  |  
|Cost of products sold                                                                             |  |                                    | 1,910 |           |   | 2,845   |  |   | 440       |   |  |       | 1      |   |       |   | 107  |   |  |   | 5,303  |  
|Selling and general and administrative                                                            |  |                                    | 1,423 |           |   | 333     |  |   | 136       |   |  |       | 2,414  |   |       |   | 198  |   |  |   | 4,504  |  
|Depreciation and amortization                                                                     |  |                                    |      |           |   |        |  |   | 57        |   |  |       | 317    |   |       |   |     |   |  |   | 374    |  
|                                                                                                  |  |                                    |       |           |   |         |  |   |           |   |  |       |        |   |       |   |      |   |  |   |        |  
|                                                                                                  |  |                                    | 5,274 |           |   | 3,186   |  |   | 1,088     |   |  |       | 2,732  |   |       |   | 336  |   |  |   | 12,616 |  
|                                                                                                  |  |                                    |       |           |   |         |  |   |           |   |  |       |        |   |       |   |      |   |  |   |        |  
|                                                                                                  |  |                                    |       |           |   |        
|Operating income (loss)                                                                           |  |                                    | 3,098 |           |   | 32      |  |   | (20       | ) |  |       | (2,732 | ) |       |   | (108 | ) |  |   | 270    |  
|                                                                                                  |  |                                    |       |           |   |        
|Interest expense, net                                                                             |  |                                    |      |           |   |        |  |   |          |   |  |       | (635   | ) |       |   |     |   |  |   | (635   | )
|                                                                                                  |  |                                    |       |           |   |         |  |   |           |   |  |       |        |   |       |   |      |   |  |   |        |  
|Income (loss) before income tax expense                                                           |  |                                    | 3,098 |           |   | 32      |  |   | (20       | ) |  |       | (3,367 | ) |       |   | (108 | ) |  |   | (365   | )
|                                                                                                  |  |                                    |       |           |   |        
|Income tax expense                                                                                |  |                                    |      |           |   |        |  |   |          |   |  |       | 81     |   |       |   |     |   |  |   | 81     |  
|                                                                                                  |  |                                    |       |           |   |         |  |   |           |   |  |       |        |   |       |   |      |   |  |   |        |  
|                                                                                                  |  |                                    |       |           |   |        
|Net income (loss)                                                                                 |  | $                                  | 3,098 |           | $ | 32      |  | $ | (20       | ) |  | $     | (3,448 | ) |       | $ | (108 | ) |  | $ | (446   | )
|                                                                                                  |  |                                    |       |           |   |         |  |   |           |   |  |       |        |   |       |   |      |   |  |   |        |  
|                                                                                                  | 
|                                                                                                  |  | Three Months Ended August 31, 2007 |      
|                                                                                                  |  | Segments                           |      
|                                                                                                  |  | Cellular                           |       | Wholesale |   | Two-Way |  |   | Corporate |   |  | Other |        |   | Total |  
|Operating revenues:                                                                               |  |                                    |       |           |   |         |  |   |           |   |  |       |        |   |       |   |      |   |  |   |        |  
|Service, rent and maintenance revenue                                                             |  | $                                  | 6,842 |           | $ |        |  | $ | 446       |   |  | $     |       |   |       | $ | 169  |   |  | $ | 7,457  |  
|Product sales revenue                                                                             |  |                                    | 2,154 |           |   | 4,101   |  |   | 543       |   |  |       |       |   |       |   | 650  |   |  |   | 7,448  |  
|                                                                                                  |  |                                    |       |           |   |         |  |   |           |   |  |       |        |   |       |   |      |   |  |   |        |  
|Total operating revenues                                                                          |  |                                    | 8,996 |           |   | 4,101   |  |   | 989       |   |  |       |       |   |       |   | 819  |   |  |   | 14,905 |  
|                                                                                                  |  |                                    |       |           |   |         |  |   |           |   |  |       |        |   |       |   |      |   |  |   |        |  
|                                                                                                  |  |                                    |       |           |   |        
|Operating expenses:                                                                               |  |                                    |       |           |   |         |  |   |           |   |  |       |        |   |       |   |      |   |  |   |        |  
|Cost of service, rent and maintenance (exclusive of depreciation and amortization included below) |  |                                    | 2,321 |           |   | 27      |  |   | 531       |   |  |       |       |   |       |   | 77   |   |  |   | 2,956  |  
|Cost of products sold                                                                             |  |                                    | 2,108 |           |   | 3,590   |  |   | 370       |   |  |       |       |   |       |   | 446  |   |  |   | 6,514  |  
|Selling and general and administrative                                                            |  |                                    | 1,995 |           |   | 444     |  |   | 113       |   |  |       | 2,876  |   |       |   | 249  |   |  |   | 5,677  |  
|Depreciation and amortization                                                                     |  |                                    |      |           |   |        |  |   | 60        |   |  |       | 357    |   |       |   |     |   |  |   | 417    |  
|Gain on forgiveness of trade payable obligation to AT&T                                           |  |                                    |       |           |   |         |  |   |           |   |  |       | (3,824 | ) |       |   |      |   |  |   | (3,824 | )
|Gain On disposal of Assets                                                                        |  |                                    |       |           |   |         |  |   |          |   |  |       | (16    | ) |       |   |      |   |  |   | (16    | )
|                                                                                                  |  |                                    |       |           |   |         |  |   |           |   |  |       |        |   |       |   |      |   |  |   |        |  
|                                                                                                  |  |                                    | 6,424 |           |   | 4,061   |  |   | 1,074     |   |  |       | (607   | ) |       |   | 772  |   |  |   | 11,724 |  
|                                                                                                  |  |                                    |       |           |   |         |  |   |           |   |  |       |        |   |       |   |      |   |  |   |        |  
|Operating income (loss)                                                                           |  |                                    | 2,572 |           |   | 40      |  |   | (85       | ) |  |       | 607    |   |       |   | 47   |   |  |   | 3,181  |  
|                                                                                                  |  |                                    |       |           |   |        
|Interest expense, net                                                                             |  |                                    |      |           |   |        |  |   |          |   |  |       | (1,030 | ) |       |   |     |   |  |   | (1,030 | )
|                                                                                                  |  |                                    |       |           |   |         |  |   |           |   |  |       |        |   |       |   |      |   |  |   |        |  
|Income (loss) before income tax expense                                                           |  |                                    | 2,572 |           |   | 40      |  |   | (85       | ) |  |       | (423   | ) |       |   | 47   |   |  |   | 2,151  |  
|                                                                                                  |  |                                    |       |           |   |        
|Income tax expense                                                                                |  |                                    |      |           |   |        |  |   |          |   |  |       | 60     |   |       |   |     |   |  |   | 60     |  
|                                                                                                  |  |                                    |       |           |   |         |  |   |           |   |  |       |        |   |       |   |      |   |  |   |        |  
|Net income (loss)                                                                                 |  | $                                  | 2,572 |           | $ | 40      |  | $ | (85       | ) |  | $     | (483   | ) |       | $ | 47   |   |  | $ | 2,091  |  
|                                                                                                  |  |                                    |       |           |   |        
|Participation rights of common stock purchase warrants in undistributed earnings                  |  |                                    |      |           |   |        |  |   |          |   |  |       | (224   | ) |       |   |     |   |  |   | (224   | )
|                                                                                                  |  |                                    |       |           |   |         |  |   |           |   |  |       |        |   |       |   |      |   |  |   |        |  
|Net income (loss) applicable to common shareholders                                               |  | $                                  | 2,572 |           | $ | 40      |  | $ | (85       | ) |  | $     | (707   | ) |       | $ | 47   |   |  | $ | 1,867  |  
|                                                                                                  |  |                                    |       |           |   |         |  |   |           |   |  |       |        |   |       |   |      |   |  |   |        |  



28



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##### Table of Contents

The Company identifies its assets by segment. Significant assets of the Companys corporate offices include cash,
property and equipment and loan origination costs. The Companys assets by segment as of August 31, 2008 and May 31, 2008 are as follows:



|          |  |                 |        |                            |   |               |  |                       |     |             |   |                            |  |               |        |                       |   |       |  |   |     |  |   |      
|--------- |  | --------------- | ------ | -------------------------- | - | ------------- |  | --------------------- | --- | ----------- | - | -------------------------- |  | ------------- | ------ | --------------------- | - | ----- |  | - | --- |  | - | -----
|          |  | August 31, 2008 |        | May 31, 2008              
|          |  | TotalAssets     |        | Property andEquipment, net |   | Goodwill, net |  | Intangible Assets,net |     | TotalAssets |   | Property andEquipment, net |  | Goodwill, net |        | Intangible Assets,net
|Segment   |  |                 |        |                            |   |               |  |                       |     |             |   |                            |  |               |        |                       |   |       |  |   |     |  |   |      
|Cellular  |  | $               | 15,302 |                            | $ | 278           |  | $                     |    |             | $ | 4,386                      |  | $             | 15,938 |                       | $ | 325   |  | $ |    |  | $ | 4,698
|Two-way   |  |                 | 2,134  |                            |   | 554           |  |                       | 343 |             |   | 68                         |  |               | 2,160  |                       |   | 512   |  |   | 343 |  |   | 81   
|Wholesale |  |                 | 1,781  |                            |   |              |  |                       |    |             |   |                           |  |               | 2,043  |                       |   |      |  |   |    |  |   |     
|Corporate |  |                 | 7,889  |                            |   | 2,343         |  |                       |    |             |   | 395                        |  |               | 8,269  |                       |   | 2,354 |  |   |    |  |   | 308  
|Other     |  |                 | 229    |                            |   | 14            |  |                       |    |             |   |                           |  |               | 159    |                       |   | 19    |  |   |    |  |   |     
|          |  |                 |        |                            |   |               |  |                       |     |             |   |                            |  |               |        |                       |   |       |  |   |     |  |   |      
|Totals    |  | $               | 27,335 |                            | $ | 3,189         |  | $                     | 343 |             | $ | 4,849                      |  | $             | 28,569 |                       | $ | 3,210 |  | $ | 343 |  | $ | 5,087
|          |  |                 |        |                            |   |               |  |                       |     |             |   |                            |  |               |        |                       |   |       |  |   |     |  |   |      

During the three months ended August 31, 2008 and 2007, the Company did not have a single customer that
represented more than 10% of total segment revenues.

NOTE 15  SUBSEQUENT EVENTS

Note Receivable from Mobui Corporation

On October 3, 2008, Teletouch agreed to provide up to $250,000 in
financing to Mobui Corporation, a privately held Washington corporation (Mobui), in exchange for an equity position in Mobui and loaned an initial $60,000 in return for a promissory note payable bearing an annual interest rate of 14%
with all principal and accrued interest payable due upon demand of Teletouch anytime after November 2, 2008 (the Note). The Note was secured by substantially all of the assets of Mobui, excluding certain intellectual property, and
by personal guarantees from the founders of Mobui. Mobui was founded in July 2008 and is an advanced mobile applications development and content delivery company with a growing catalogue of proprietary mobile applications, content and delivery
platforms, including those for the Apple, Inc.s iPhone, Research In Motion Ltd.s Blackberry devices, the new Google, Inc. Android G1, among hundreds of other handset types from virtually all leading manufacturers.

Through October 30, 2008, Teletouch provided 3 additional rounds of financing for Mobui totaling $190,000 and the Note was amended each time to reflect the new
principal balance as of that funding. On October 30, 2008, Teletouch received the Third Amended Note from Mobui payable to Teletouch on demand after November 10, 2008 in the amount of $250,000 plus all accrued and unpaid interest. All
other terms contained in the Third Amended Note remained the same as the Note. On December 22, 2008, Teletouch agreed to a Fourth Amended Note under which the maturity date was extended to December 22, 2009 and the annual interest rate was
reduced to 12%. As an incentive for Teletouch to enter into the Fourth Amended Note, Mobui reimbursed all legal fees incurred by Teletouch in preparing these agreements by transferring title to certain computer assets to Teletouch and issued shares
of Mobui common stock to Teletouch. On January 6, 2009, Teletouch again amended the Note to reflect an additional funding of $105,000 to Mobui to provide for certain working capital needs by entering into a Fifth Amended Note in the revised
amount of $355,000. The terms of the Fifth Amended Note provide for the repayment of $105,000 in principal and any unpaid accrued interest by February 6, 2009 with the remaining principal and interest continuing to be due on December 22,
2009. To entice Teletouch to enter the Fifth Amended Note and provide the additional financing, Mobui issued additional shares of its common stock to Teletouch thereby increasing Teletouchs minority equity stake in Mobui. In addition, under
the modified terms of the Fifth Amended Note, Mobui was required to name Thomas A. Hyde, Jr., the Companys President and Chief Operating Officer to Mobuis Board of Directors and provide Teletouch control over Mobuis depository
accounts through the remaining term of the Fifth Amended Note. On January 15, 2009, Teletouch amended the Note once again to reflect an additional funding of $60,000 to Mobui. The Sixth Amended Note revised the total Note amount to $415,000 and
provided for the repayment of $165,000 in principal and any unpaid accrued interest by July 15, 2009. The remaining principal and interest continues to be due on December 22, 2009. Since Teletouch agreed to enter into a Sixth Amended Note,
Mobui again issued additional shares of its common stock to the Company which increased Teletouchs equity position in Mobui.



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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

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



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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 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.



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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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 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.



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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, 2008 and 2007

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)                                   |  | Three Months Ended August 31, |        |   | 2008 vs 2007 |   
|                                                         |  | 2008                          |        |   | % ofOperRev  |    |   | 2007 |   |        | % ofOperRev |  |    | $ Change |  |   | % Change |  
|Service, rent, and maintenance revenue                   |  |                               |        |   |              |    |   |      |   |        |             |  |    |          |  |   |          |   |  |      |  
|Cellular operations                                      |  |                               |        |   |              |    |   |      |   |        |             |  |    |          |  |   |          |   |  |      |  
|Gross cellular subscription billings                     |  | $                             | 15,374 |   |              |    |   |      | $ | 15,804 |             |  |    |          |  | $ | (430     | ) |  | -3   | %
|Net revenue adjustment (revenue share due AT&T)          |  |                               | (8,866 | ) |              |    |   |      |   | (9,088 | )           |  |    |          |  |   | 222      |   |  | -2   | %
|                                                         |  |                               |        |   |              |    |   |      |   |        |             |  |    |          |  |   |          |   |  |      |  
|Net revenue reported from cellular subscription billings |  |                               | 6,508  |   |              | 50 | % |      |   | 6,716  |             |  | 45 | %        |  |   | (208     | ) |  | -3   | %
|Other service revenue                                    |  |                               |       |   |              | 0  | % |      |   | 126    |             |  | 1  | %        |  |   | (126     | ) |  | -100 | %
|                                                         |  |                               |        |   |              |    |   |      |   |        |             |  |    |          |  |   |          |   |  |      |  
|Cellular operations total service revenues:              |  |                               | 6,508  |   |              | 50 | % |      |   | 6,842  |             |  | 46 | %        |  |   | (334     | ) |  | -5   | %
|                                                         |  |                               |        |   |              |   
|Two-way radio operations                                 |  |                               | 411    |   |              | 3  | % |      |   | 446    |             |  | 3  | %        |  |   | (35      | ) |  | -8   | %
|Other operations                                         |  |                               | 82     |   |              | 1  | % |      |   | 169    |             |  | 0  | %        |  |   | (87      | ) |  | -51  | %
|                                                         |  |                               |        |   |              |    |   |      |   |        |             |  |    |          |  |   |          |   |  |      |  
|                                                         |  |                               |        |   |              |   
|Service, rent, and maintenance revenue                   |  | $                             | 7,001  |   |              | 54 | % |      | $ | 7,457  |             |  | 49 | %        |  | $ | (456     | ) |  | -6   | %
|                                                         |  |                               |        |   |              |    |   |      |   |        |             |  |    |          |  |   |          |   |  |      |  
|                                                         |  |                               |        |   |              |   
|Total operating revenues                                 |  | $                             | 12,886 |   |              |    |   |      | $ | 14,905 |             |  |    |          |  | $ | (2,019   | ) |  | -14  | %

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 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.



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Service, Rent and Maintenance Revenue Discussion for the Three Months Ended August 31, 2008 and 2007

The 3% decrease in the cellular operations gross cellular subscriptions billings resulted primarily from a decrease in monthly access charges of
$540,000 quarter over quarter due to a decline in cellular subscribers. The Company had 77,795 cellular subscribers as of August 31, 2008 compared to 83,063 cellular subscribers as of August 31, 2007. In addition the cellular operations
experienced a decrease in billings for peak time charges of $199,000, roamer and toll charges of $326,000 and assessment charges $160,000, quarter over quarter. An increase in billings for data charges offset the other billing decreases in the first
quarter of fiscal year 2009 compared to the first quarter of 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 were $2,482,000 and $1,687,000 for the three months ended August 31, 2008 and 2007, respectively.

The 100% decrease in other services from
cellular operations 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 8% decline in service, rent and maintenance revenue related to the Companys two-way radio operations is primarily due to a decrease
in service revenues generated from Teletouchs telemetry business. 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 51% decrease in service, rent,
and maintenance revenue related to the Companys other operations 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 the decrease 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 Months Ended August 31, 2008 and 2007

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



|                                            |  |                               |       |              |   |        |  |   |          |   |  |     |  
|------------------------------------------- |  | ----------------------------- | ----- | ------------ | - | ------ |  | - | -------- | - |  | --- | -
|(dollars in thousands)                      |  | Three Months Ended August 31, |       | 2008 vs 2007 |  
|                                            |  | 2008                          |       | 2007         |   | Change |  |   | % Change |  
|Cost of service, rent and maintenance       |  |                               |       |              |   |        |  |   |          |   |  |     |  
|Cellular operations                         |  | $                             | 1,941 |              | $ | 2,321  |  | $ | (380     | ) |  | -16 | %
|Two-way operations                          |  |                               | 455   |              |   | 531    |  |   | (76      | ) |  | -14 | %
|Other operations                            |  |                               | 39    |              |   | 104    |  |   | (65      | ) |  | -63 | %
|                                            |  |                               |       |              |   |        |  |   |          |   |  |     |  
|                                            |  |                               |       |             
|Total cost of service, rent and maintenance |  | $                             | 2,435 |              | $ | 2,956  |  | $ | (521     | ) |  | -18 | %
|                                            |  |                               |       |              |   |        |  |   |          |   |  |     |  

Cost of Service, Rent and Maintenance Discussion for the Three Months Ended August 31, 2008 and 2007

The 16% decrease in cost of service, rent and maintenance related to the Companys cellular operations 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 84 employees as of August 31, 2008 compared to 107 employees as of
August 31, 2007.



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The 14% decrease in cost of service, rent and maintenance related to the Companys two-way operations is primarily
due to the restructuring of Company employees during the first quarter of fiscal year 2008. The Company recorded approximately $18,000 in severance expenses in the first quarter of fiscal year 2008 whereas no similar transactions occurred in the
first quarter of fiscal year 2009. The decline in network costs associated with the Teletouch telemetry business accounted for an additional $26,000 reduction in the two-way service costs. 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.

The 63% decrease in cost of service, rent and
maintenance related to the Companys other operations is due to a continued decline in the subscriber base for long-distance services as well as the disposal of PCIs paging operations in the first quarter of fiscal year 2008. The Company
has decided not to actively expand its long-distance subscriber base and has discontinued offering these services to any of its new customers.

Sales
Revenue and Cost of Products Sold for the Three Months ended August 31, 2008 and 2007



|                            |  |                               |        |             |              |   |      |   |             |  |    |          |  |   |          |   |  |     |  
|--------------------------- |  | ----------------------------- | ------ | ----------- | ------------ | - | ---- | - | ----------- |  | -- | -------- |  | - | -------- | - |  | --- | -
|(dollars in thousands)      |  | Three Months Ended August 31, |        |             | 2008 vs 2007 |  
|                            |  | 2008                          |        | % ofOperRev |              |   | 2007 |   | % ofOperRev |  |    | $ Change |  |   | % Change |  
|Product Sales Revenue       |  |                               |        |             |              |   |      |   |             |  |    |          |  |   |          |   |  |     |  
|Cellular operations         |  | $                             | 1,864  |             | 14           | % |      | $ | 2,154       |  | 14 | %        |  | $ | (290     | ) |  | -13 | %
|Wholesale operations        |  |                               | 3,218  |             | 25           | % |      |   | 4,101       |  | 28 | %        |  |   | (883     | ) |  | -22 | %
|Two-way radio operations    |  |                               | 657    |             | 5            | % |      |   | 543         |  | 4  | %        |  |   | 114      |   |  | 21  | %
|Other operations            |  |                               | 146    |             | 2            | % |      |   | 650         |  | 5  | %        |  |   | (504     | ) |  | -78 | %
|                            |  |                               |        |             |              |   |      |   |             |  |    |          |  |   |          |   |  |     |  
|                            |  |                               |        |             |              |  
|Total product sales revenue |  | $                             | 5,885  |             | 46           | % |      | $ | 7,448       |  | 51 | %        |  | $ | (1,563   | ) |  | -21 | %
|                            |  |                               |        |             |              |   |      |   |             |  |    |          |  |   |          |   |  |     |  
|                            |  |                               |        |             |              |  
|Cost of products sold       |  |                               |        |             |              |   |      |   |             |  |    |          |  |   |          |   |  |     |  
|Cellular operations         |  |                               | 1,910  |             |              |   |      |   | 2,108       |  |    |          |  |   | (198     | ) |  | -9  | %
|Wholesale operations        |  |                               | 2,845  |             |              |   |      |   | 3,590       |  |    |          |  |   | (745     | ) |  | -21 | %
|Two-way radio operations    |  |                               | 440    |             |              |   |      |   | 370         |  |    |          |  |   | 70       |   |  | 19  | %
|Other operations            |  |                               | 108    |             |              |   |      |   | 446         |  |    |          |  |   | (338     | ) |  | -76 | %
|                            |  |                               |        |             |              |   |      |   |             |  |    |          |  |   |          |   |  |     |  
|                            |  |                               |        |             |              |  
|Cost of products sold       |  | $                             | 5,303  |             |              |   |      | $ | 6,514       |  |    |          |  | $ | (1,211   | ) |  | -19 | %
|                            |  |                               |        |             |              |   |      |   |             |  |    |          |  |   |          |   |  |     |  
|                            |  |                               |        |             |              |  
|Total operating revenues    |  | $                             | 12,886 |             |              |   |      | $ | 14,905      |  |    |          |  | $ | (2,019   | ) |  | -14 | %

Sales Revenue and Cost of Products Sold Discussion for the Three Months Ended August 31, 2008 and 2007

Product sales revenue:The 13% decline in product sales from cellular operations is primarily due to a decline in the average selling price
of each activated phone and the corresponding cellular accessories. Although cellular phone activations were slightly higher in the first quarter of fiscal year 2009 compared to the first quarter of fiscal year 2008, cellular product revenues
continued their downward trend due to smaller product margins in exchange for customer activations and associated service revenues in a saturated cellular phone market.

The 22% decline in product sales from wholesale operations is attributable to fewer cellular handsets, cellular accessories and car audio equipment sales due to increased competition and lower demand for aftermarket
car audio equipment. The unavailability of certain wholesale cellular and audio equipment from certain vendors also contributed to the decline in the wholesale operations product revenue for the first quarter of fiscal year 2009 compared to the same
period in the prior year.



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The 21% increase in product sales related to the two-way radio operations is primarily due to a $43,000 increase in
emergency vehicle product sales quarter over quarter. In addition the two-way radio operations recorded $50,000 in commission revenue from Motorola due to the indirect purchasing of digital two-way equipment related to the City of Longview radio
rebanding project.

The 78% decrease in product sales related to the Companys other operations is due to a decreased demand in aftermarket audio and
video products as well as the loss of key sales staff in the Companys car dealer business.

Cost of products sold:The 19% decrease in total
cost of products sold is a direct result of a decrease in product sales revenues across all of the Companys operating segments.

Selling and
General and Administrative Expenses for the Three Months ended August 31, 2008 and 2007

Selling and general and administrative expenses consist of
the following significant components:



|                                             |  |                               |       |              |   |          |  |   |          |   |  |     |  
|-------------------------------------------- |  | ----------------------------- | ----- | ------------ | - | -------- |  | - | -------- | - |  | --- | -
|(dollars in thousands)                       |  | Three Months Ended August 31, |       | 2008 vs 2007 |  
|                                             |  | 2008                          |       | 2007         |   | $ Change |  |   | % Change |  
|Selling and general and administrative       |  |                               |       |              |   |          |  |   |          |   |  |     |  
|Salaries and other personnel expenses        |  | $                             | 2,883 |              | $ | 3,809    |  | $ | (926     | ) |  | -24 | %
|Office expense                               |  |                               | 526   |              |   | 507      |  |   | 19       |   |  | 4   | %
|Advertising expense                          |  |                               | 150   |              |   | 328      |  |   | (178     | ) |  | -54 | %
|Professional fees                            |  |                               | 405   |              |   | 361      |  |   | 44       |   |  | 12  | %
|Taxes and licenses fees                      |  |                               | 59    |              |   | 45       |  |   | 14       |   |  | 31  | %
|Stock-based compensation expense             |  |                               | 42    |              |   | 30       |  |   | 12       |   |  | 40  | %
|Other expenses                               |  |                               | 439   |              |   | 597      |  |   | (158     | ) |  | -26 | %
|                                             |  |                               |       |              |   |          |  |   |          |   |  |     |  
|                                             |  |                               |       |             
|Total selling and general and administrative |  | $                             | 4,504 |              | $ | 5,677    |  | $ | (1,173   | ) |  | -21 | %
|                                             |  |                               |       |              |   |          |  |   |          |   |  |     |  

Selling and General and Administrative Expenses Discussion for the Three Months Ended August 31, 2008
and 2007

The 24% decrease in salaries and other personnel expenses is primarily due to the restructuring of the Companys business units in
the first quarter of fiscal year 2008. The Company recorded approximately $34,000 in severance expenses in the first quarter of fiscal year 2009 compared to approximately $311,000 in the first quarter of fiscal year 2008. In addition the
Companys employee headcount contributed to the overall decrease quarter over quarter. The Company had 137 selling, general and administrative employees as of August 31, 2008 compared to182 employees as of August 31, 2007.

The 54% decrease in advertising expense is a direct result of the Companys shift from a print media driven marketing plan to sponsorships, community involvement
marketing programs and online advertising.

The 12% increase in professional fees is due to consulting fees incurred in the first quarter of fiscal year
2009 related to the financial reporting rules under Section 404 of the Sarbanes-Oxley Act of 2002.

The 31% increase in taxes and licenses fees is
attributable to a refund recorded in the first quarter of fiscal year 2008 related to overcharges associated with the Universal Service Fund billing. The billing for this program is based upon certain estimated service revenues for each calendar
year resulting in an annual billing or refund adjustment for the Company.

The 40% increase in stock-based compensation expense is due to an increase in
stock options granted to the Companys executive management. During the first quarter of fiscal year 2009, the Company granted an additional 2,353,156 in stock options which contributed to the increase in expense quarter over quarter.



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The 26% decrease is other expenses is primarily due to a $102,000 debt extension fee paid in the first quarter of fiscal
year 2008 related to extending the maturity date of PCIs former Senior Debt with no similar expense occurring in the first quarter of fiscal year 2009. The decrease in printing expenses quarter over quarter also contributed to the overall
decrease in other expenses. Beginning in fiscal year 2008, the Company reduced its practice of using of marketing inserts with the mailing of customer billing

Other Operating Expenses for the Three Months Ended August 31, 2008 and 2007



|                                                        |  |                               |     |      |              |        |          |  |   |          |   |  |      |  
|------------------------------------------------------- |  | ----------------------------- | --- | ---- | ------------ | ------ | -------- |  | - | -------- | - |  | ---- | -
|(dollars in thousands)                                  |  | Three Months Ended August 31, |     |      | 2008 vs 2007 |       
|                                                        |  | 2008                          |     | 2007 |              |        | $ Change |  |   | % Change |  
|Other Operating Expenses                                |  |                               |     |      |              |        |          |  |   |          |   |  |      |  
|Depreciation and amortization                           |  | $                             | 374 |      | $            | 417    |          |  | $ | (43      | ) |  | -10  | %
|Gain on forgiveness of trade payable obligation to AT&T |  |                               |    |      |              | (3,824 | )        |  |   | 3,824    |   |  | -100 | %
|Gain on disposal of assets                              |  |                               |    |      |              | (16    | )        |  |   | 16       |   |  | -100 | %
|                                                        |  |                               |     |      |              |        |          |  |   |          |   |  |      |  
|                                                        |  |                               |     |     
|Total other operating expenses                          |  | $                             | 374 |      | $            | (3,423 | )        |  | $ | 3,797    |   |  | -111 | %
|                                                        |  |                               |     |      |              |        |          |  |   |          |   |  |      |  

Depreciation and amortization: Depreciation and amortization expense as reported is comprised of the
following:



|                               |  |                               |     |              |   |          |  |   |          |   |  |     |  
|------------------------------ |  | ----------------------------- | --- | ------------ | - | -------- |  | - | -------- | - |  | --- | -
|(dollars in thousands)         |  | Three Months Ended August 31, |     | 2008 vs 2007 |  
|                               |  | 2008                          |     | 2007         |   | $ Change |  |   | % Change |  
|Other Operating Expenses       |  |                               |     |              |   |          |  |   |          |   |  |     |  
|Depreciation                   |  | $                             | 136 |              | $ | 197      |  | $ | (61      | ) |  | -31 | %
|Amortization                   |  |                               | 238 |              |   | 220      |  |   | 18       |   |  | 8   | %
|                               |  |                               |     |              |   |          |  |   |          |   |  |     |  
|                               |  |                               |     |             
|Total other operating expenses |  | $                             | 374 |              | $ | 417      |  | $ | (43      | ) |  | -10 | %
|                               |  |                               |     |              |   |          |  |   |          |   |  |     |  

The 31% decrease in depreciation expense is attributable to the Companys minimal purchases of fixed assets
for two-way infrastructure and computer equipment as well as the age of certain existing capital assets which have become fully depreciated quarter over quarter. The decrease in depreciation expense is offset by an 8% increase in amortization
expense related to loan origination costs associated with obtaining a revolving credit facility with Thermo Credit, LLC in May 2008.

Gain on
forgiveness of trade payable obligation to AT&T: On June 1, 2007, the Company entered into a Compromise Settlement and Release Agreement (the Settlement) with New Cingular Wireless PCS, LLC (successor in interest to
Southwestern Bell Wireless Inc.) as General Partner of the Houston Cellular Telephone Company L.P., successor to Dallas SMSA Limited Partnership (referred to as AT&T). In the Settlement the Company asserted it had incurred damages in
connection with alleged actions of AT&T in connection with the Distribution Agreement between both parties effective September 1, 1999, as amended by the Amendment to Distribution Agreement effective November 12, 1999 (the
Distribution Agreement). The Companys claims related to the recovery of amounts previously remitted and/or owed to AT&T with respect to intracompany roaming costs and /or charges. These intracompany roaming charges were being
assessed as the Companys customers were traveling outside their home calling area but still remained in an area covered by cellular systems owned by AT&T. In connection with the allegation, the Company asserted claims with regard to
reimbursement of amounts previously remitted and disputes the amounts owed with respect to such intracompany roaming costs and/or charges. In addition to the claims related to intracompany roaming costs and/or charges, the Company asserted claims
related to various other actions, including but not limited to equipment and availability, rate plan



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disclosures, additional distribution, the provisions of billing and usage information, claims related to the customers billed by the Company, along with
other dealings and transactions between both parties and those arising out of and in connections with the Distribution Agreement (the Dispute). Also in the Settlement, AT&T denied liability with respect to the Dispute.

As part of the Settlement, both parties agreed to compromise and settle all disputes, claims or causes of action of any kind asserted or which could have been asserted
regarding the Dispute, each without admitting any liability to the other.

The parties agreed to the following:



| | (1) | Upon execution of the Settlement, both parties entered into a Second Amendment to the Distribution Agreement dated June 1, 2007.
| | --- | --------------------------------------------------------------------------------------------------------------------------------



| | (2) | As part of the terms of the Second Amendment, AT&T agreed to apply certain sections as identified in the Second Amendment that relate to amounts to be remitted to AT&T for
intracompany roamer airtime retroactively back to November 1, 2005.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | The parties agreed that upon payment of $4,660,751 by the Company to AT&T on or before June 8, 2007 to settle outstanding payables owed by the Company, net of what the
Company had previously made deductions from remittances with respect to certain amounts previously remitted to AT&T, no further amount will be due by either party to the other with respect to such intracompany roaming costs or other charges for
the period up to the effective date of the Settlement, except for payments due by the Company for April and May 2007 billing cycles, which were calculated and remitted in accordance with the Second Amendment.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a result, the Company recognized a gain of $3,824,000 in June 2007. The material gain is recorded separately as an offset to Operating Expenses and reported on the
Companys Consolidated Statement of Operations as Gain on forgiveness of trade obligation in the Companys consolidated statements of operations.

Gain on disposal of assets: The Company recognized a gain on the disposal of assets in the first quarter of fiscal year 2008 due to the sale of discontinued video and sound displays which were once located in
the Hawk Electronics retail stores. No similar transactions occurred during the first quarter of fiscal year 2009.

Interest Expense, Net of Interest
Income for the Three Months Ended August 31, 2008 and 2007



|                                 |  |                               |     |   |              |   |       |          |  |   |          |   |  |      |  
|-------------------------------- |  | ----------------------------- | --- | - | ------------ | - | ----- | -------- |  | - | -------- | - |  | ---- | -
|(dollars in thousands)           |  | Three Months Ended August 31, |     |   | 2008 vs 2007 |  
|                                 |  | 2008                          |     |   | 2007         |   |       | $ Change |  |   | % Change |  
|Interest Expense                 |  |                               |     |   |              |   |       |          |  |   |          |   |  |      |  
|Senior debt                      |  | $                             |    |   |              | $ | 410   |          |  |   | (410     | ) |  | -100 | %
|Warrant redemption notes payable |  |                               | 44  |   |              |   |      |          |  |   | 44       |   |  | 100  | %
|Thermo factoring debt            |  |                               | 381 |   |              |   | 538   |          |  |   | (157     | ) |  | -29  | %
|Thermo revolving credit facility |  |                               | 159 |   |              |   |      |          |  |   | 159      |   |  | 100  | %
|Mortgage debt                    |  |                               | 53  |   |              |   | 85    |          |  |   | (32      | ) |  | -38  | %
|Other                            |  |                               | (2  | ) |              |   | (3    | )        |  |   | 1        |   |  | -33  | %
|                                 |  |                               |     |   |              |   |       |          |  |   |          |   |  |      |  
|Total interest expense           |  | $                             | 635 |   |              | $ | 1,030 |          |  | $ | (395     | ) |  |      |  
|                                 |  |                               |     |   |              |   |       |          |  |   |          |   |  |      |  

Interest expense recorded for all periods presented is a combination of cash interest and non-cash interest,
primarily related to the Companys debt facilities with Thermo Credit LLC and the prior senior debt of PCI with Fortress Credit Corp. (Fortress). In August 2006, PCI paid $10,000,000 of its $18,700,000 senior debt payable to
Fortress Credit Corp., and was conditionally released from the balance of this debt, and its assets were conditionally released from all related liens. The remaining $8,700,000 payable to Fortress was assumed by TLLP, the parent company of
Teletouch, with the common stock of Teletouch owned by TLLP pledged as



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collateral against the senior debt. Concurrent with the assumption of the senior debt by TLLP, PCI, Teletouch and Fortress entered into a Transaction Party
Agreement (TPA), which provided Fortress with certain control over the ongoing operations of Teletouch and PCI as well as provided for the contingent re-instatement of the liens on PCI assets if certain conditions were not maintained by
either Teletouch or PCI. Because of the conditional nature of the release, the debt payable to Fortress continued to be presented as an obligation of the Company subsequent to August 2006 and the related interest expense was recorded even though
TLLP assumed responsibility for all future cash payments on the senior debt in August 2006. In May 2008, the Company was successful in negotiating a full release from the TPA and has removed the Fortress debt obligation from its financials as of
that date.

In order to raise sufficient cash to make the $10,000,000 payment to Fortress, PCI entered into a new factoring facility with Thermo secured by
PCIs accounts receivable, which provided approximately up to $10,000,000 of available advances against PCIs accounts receivable (the Thermo Factoring Debt). On August 11, 2006 approximately $6,200,000 was advanced to PCI
under the factoring facility, which was

primarily used to make the required payment to Fortress. The Thermo Factoring Debt has been further amended in May
2007 and in February 2008 and as of the date of this Report, provides up to $15,000,000, depending on the amount of accounts receivable available to pledge to Thermo. The discount fees on each of the advanced fundings by Thermo are recorded as
interest expense on the Companys Consolidated Statement of Operations.

As a result of the above transactions, PCI recorded non-cash interest expense
of $410,000 in the first quarter of fiscal year 2008 related to the senior debt obligation with Fortress. No similar non-cash interest expense transactions occurred in the first quarter of fiscal year 2009 since the debt obligation with Fortress was
removed from the Companys financials in May 2008 due to a full release from the TPA.

In addition the Company recorded less interest expense in the
three months ended August 31, 2008 compared to the same period from the prior year due to monthly principal payments on bank debt used to refinance a term loan and various automobile notes. However, the Company began recording monthly cash
interest expense in the first quarter of fiscal year 2009 related to the Warrant Redemption Payment Agreements which were negotiated in May 2008 and effective in June 2008, with each of the 12 holders of the GM Warrants (see Note 11 
Shareholders Equity for additional information). The Company also began recording monthly cash interest expense associated with the Thermo revolving credit facility which was executed in May 2008.

Income Tax Expense for the Three Months Ended August 31, 2008 and 2007

In the three months ended August 31, 2008 and 2007, the Company recorded $81,000 and $60,000 in state tax expenses, respectively. Both of these periods include expenses related to the Texas margin tax, which was initially implemented
by the state for the Companys privilege to do business in Texas beginning January 1, 2008. The margin tax is calculated by using Companys gross receipts from business conducted in Texas each fiscal year less a cost of goods sold
deduction.

FINANCIAL CONDITION



|                                                |  |                              |        |   |              |   |        |          |  |   |        |  
|----------------------------------------------- |  | ---------------------------- | ------ | - | ------------ | - | ------ | -------- |  | - | ------ | -
|(dollars in thousands)                          |  | Three Months EndedAugust 31, |        |   | 2008 vs 2007 |  
|                                                |  | 2008                         |        |   | 2007         |   |        | $ Change | 
|Cash provided by (used in) operating activities |  | $                            | 1,348  |   |              | $ | (4,903 | )        |  | $ | 6,251  |  
|Cash used in investing activities               |  |                              | (128   | ) |              |   | (103   | )        |  |   | (25    | )
|Cash provided by (used in) financing activities |  |                              | (1,483 | ) |              |   | 350    |          |  |   | (1,833 | )
|                                                |  |                              |        |   |              |   |        |          |  |   |        |  
|Net decrease in cash                            |  | $                            | (263   | ) |              | $ | (4,656 | )        |  | $ | 4,393  |  
|                                                |  |                              |        |   |              |   |        |          |  |   |        |  



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Operating Activities

The increase in cash provided by operations during the three months ended August 31, 2008 as compared to the three months ended August 31, 2007 was primarily attributable to an increase in the change of the Companys accounts
payable balances. During the first quarter of fiscal year 2008, the Company recognized a $3,824,000 non-cash gain on forgiveness of a trade payable obligation to AT&T related to disputed intracompany roaming costs and/or charges by AT&T due
to a settlement agreement, which was executed between the Company and AT&T in June 2007. The agreement settled all claims against the Company related to the recovery of amounts previously remitted and/or owed to AT&T with respect to
intracompany roaming costs and/or charges. The Company continued to accrue for the monthly intracompany roaming costs and/or charges billed by AT&T in its Consolidated Statement of Operations but delayed the payment of other accounts payable due
to AT&T until final resolution of the dispute. As a result of the agreement, the Company was required to pay $4,661,000 of its past due accounts payable in June 2007 to settle outstanding payables owed to AT&T.

Investing Activities

The increase in cash used in investing
activities for the three months ended August 31, 2008 as compared to three months ended August 31, 2007 is due to the issuance of a $13,000 promissory note to a former agent of the Company for unpaid equipment purchases. The note is due in
full on December 1, 2009.

Financing Activities

The decrease in cash provided by financing activities for the three months ended August 31, 2008 as compared to the three months ended August 31, 2007 is attributable to a $1,500,000 cash payment to the 12 holders of the GM
Warrants on June 2, 2008. In May 2008 the Company negotiated a Warrant Redemption Payment Agreement with each holder which provided for an initial payment of $1,500,000 on or before June 2, 2008.

Current Position/Future Requirements

For 2009, a large part of
Teletouchs efforts will be on completing and filing all of its delinquent financial reports 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 deficiencies in the Companys financial reporting were 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 in an effort to improve profitability, but in fiscal year 2009 it
will focus more on new business development across all of its business units while continuing to maintain control of its operating expenses. 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 of 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 late fiscal 2009 or early fiscal 2010, the Company is hopeful that it will be able to 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.



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The core business of Teletouch continues to be providing cellular services to customers through PCIs distribution
agreements with AT&T. The primary distribution agreement with AT&T expires in September 2009. The Company has been notified the distribution agreement will not be renewed by AT&T and is currently in discussions with AT&T to negotiate
an alternate business relationship at the request of AT&T. 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.
Under this scenario the Company could experience accelerated reductions in its cellular service revenues beginning in September 2009 due to its potential 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 and in February 2009 opened 5 retail locations
in Oklahoma selling T-Mobile cellular services. The Company is also currently in discussions with other cellular carriers to facilitate its efforts to expand its cellular operations outside of its current markets.

Going Concern Matters

The Company had a working capital deficit of
approximately $9,259,000 and $9,013,000 at August 31, 2008 and May 31, 2008, respectively, and a shareholders deficit of approximately $9,156,000 and $8,752,000 at August 31, 2008 and May 31, 2008, respectively. The
Companys factoring debt obligation with Thermo has been presented as a current liability on the Companys consolidated balance sheet at August 31, 2008 and May 31, 2008, in accordance with EITF 95-22, because the factoring
agreement requires a lockbox agreement under which customer payments on accounts are directed to a lockbox controlled by Thermo and because certain subjective acceleration rights are retained by Thermo under the agreement. However, the stated
maturity date of the obligation is February 2010. The factoring debt obligations at August 31, 2008 and May 31, 2008, were approximately $8,959,000 and $9,091,000, respectively. In May 2008, the Company was able to secure an additional
$5,000,000 asset based revolving credit facility with Thermo Credit, LLC (Thermo), with the proceeds used primarily to pay $2,000,000 to PCIs former senior lender to have the liens on the assets of PCI fully and permanently
released, and $1,500,000 was used to make an initial payment to the holders of certain long-standing redeemable common stock warrants that became due in December 2007. Even upon the Companys completion of the restructuring of its debt
obligations in May 2008, and increasing its debt facility, the Company has only been able to partially improve its working capital deficit and shareholders equity deficit. The Company is continuing to seek additional debt and equity financing
to ensure it is able to meet its remaining trade and debt obligations in the event that there are changes to its existing credit arrangements as well as provide sufficient working capital to expand its operations. If it is unsuccessful in its
efforts to secure additional financing and the Companys current credit arrangements are accelerated, the Company may be unable to meet its obligations and might be forced to seek protection from its creditors.

During fiscal 2008 and continuing into fiscal 2009, the Company has been focusing on evaluating the operations of its PCI subsidiary. The results of these efforts have
been successful in eliminating certain unnecessary operating expenses and in increasing margins on product and service revenues by implementing improved controls over pricing and inventory management. The settlement of the dispute with AT&T in
June 2007 has resulted in a significant increase in margins on the cellular service billing revenues during both fiscal years 2008 and 2009 as a result of no longer having to pay for certain charges billed by AT&T when customers roamed on
networks owned by AT&T (see further discussion under Settlement of Dispute with AT&T in Note 3). In addition, the Company has achieved some success in developing new service revenues that have been successful in partially
offsetting the declines in service revenues caused by customer attrition. Since June 2007, the Company has experienced higher than normal cellular subscriber attrition due primarily to the launch of the iPhone. Although the iPhone is offered to
customers by AT&T, PCI has been denied the approval



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to sell or activate the iPhone for customers by AT&T. The Company reviews its staffing levels on a quarterly basis and continues to seek ways to
consolidate and automate necessary functions in order to control personnel costs. However, as of the date of this Report, the Company believes that its efforts to reduce it operating expenses have been successful and is concerned that further
reductions in these expenses would have a negative impact on revenues. Current efforts are focused on seeking additional distribution for existing products lines, including an emphasis on internet marketing. The Company has also 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. (T-Mobile) and in February 2009 opened 5 retail locations in Oklahoma selling T-Mobile cellular
services. There can be no assurance that the current efforts to increase revenues through new distribution channels will be successful, nor is there any assurance that the trade credit that is currently extended to the Company will be maintained or
expanded for fiscal 2009 to facilitate this growth.

In the second half of fiscal year 2009, the Company began aggressively monitoring its credit policies
and procedures due to the current negative economic outlook for many individuals and businesses. As of the date of this Report, the Company has seen an increase in the number of uncollectible accounts but believes the number of uncollectible
accounts and the related bad debt expense will continue to increase through the remainder of fiscal year 2009 and through the first half of fiscal year 2010, given current economic conditions in the United States and Southwest region in particular.
Because the Company continues to incur credit risk through the extension of credit to its customers, the Company will continue to tighten its credit standards which could impair the Companys ability to increase revenues during the remainder of
fiscal year 2009 and continuing into 2010.

As a result of the above conditions, there exists substantial doubt about the Companys ability to
continue as a going concern. No adjustments have been made to the Companys financial statements as a result of this uncertainty.

Obligations and
Commitments

Teletouch leases office space, transmission towers, and equipment under non-cancelable operating leases ranging from one to ten years.
These leases contain various renewal terms and restrictions as to use of the property. Some of the leases contain provisions for future rent increases. The total amount of rental payments due over the lease terms is charged to rent expense on the
straight-line method over the term of the leases. The difference between rent expense recorded and the amount paid is recorded as deferred rental expense, which is included in accrued expenses and other liabilities in the accompanying consolidated
balance sheets.

Off-Balance Sheet Transactions

The
Company does not engage in off-balance sheet transactions.

Application of Critical Accounting Policies

The preceding discussion and analysis of financial condition and results of operations are based upon Teletouchs consolidated financial statements, which have been
prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenues, expenses and related disclosures. On an on-going basis, Teletouch evaluates its estimates and assumptions, including but not limited to those related to the impairment of long-lived assets, reserves for doubtful accounts, provision for
income taxes, revenue recognition and certain accrued liabilities. Teletouch bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.



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Basis of Presentation and Accounting Treatment For The Acquisition of PCI by Teletouch: The consolidated
financial statements include the accounts of Teletouch Communications, Inc., a Delaware corporation and Progressive Concepts, Inc., its wholly owned subsidiary.

The acquisition of PCI was completed on August 11, 2006 through the contribution of the stock of PCI to Teletouch by TLL Partners, LLC, a Delaware LLC (TLLP). This transaction was considered a reorganization of entities
under common control since both PCI and Teletouch were under the common control of TLLP prior to the reorganization. Prior to the reorganization, TLLP controlled 100% of the outstanding common stock of PCI and approximately 80% of the outstanding
common stock of Teletouch. In accordance with the accounting guidance under Emerging Issues Task Force Issue No. 90-5, Exchanges of Ownership Interests Between Entities Under Common Control and Appendix D of Statement of Financial
Accounting Standards (SFAS) No. 141, Business Combinations, the PCI contribution is accounted for in a manner similar to a pooling of interests, which means that the historical basis of the net assets of PCI are combined
with those of Teletouch. As a result of this reorganization and because PCI is consolidated with Teletouch, PCIs year end was changed from a calendar year ending December 31 to a fiscal year ending May 31 for financial reporting
purposes.

Allowance for Doubtful Accounts: The Company performs periodic credit evaluations of its customer base and extends credit to
virtually all of its customers on an uncollateralized basis.

In determining the adequacy of the allowance for doubtful accounts, management considers a
number of factors including historical collections experience, aging of the receivable portfolio, financial condition of the customer and industry conditions. The Company considers an account receivable past due when customers exceed the terms of
payment granted to them by the Company. The Company writes off its fully reserved accounts receivable when it has exhausted all collection efforts.

Accounts receivable are presented net of an allowance for doubtful accounts of $734,000 and $480,000 at August 31, 2008 and May 31, 2008, respectively. Based on the information available to the Company, management believes the
allowance for doubtful accounts as of those periods are adequate. However, actual write-offs may exceed the recorded allowance.

The Company evaluates its
write-offs on an annual basis. In the first quarter of each calendar year, the Company determines which accounts are uncollectible and those balances are written-off against the Companys allowance for doubtful accounts balance.

Reserve for Inventory Obsolescence:Inventories are stated at the lower of cost (primarily on a moving average basis), which approximates
actual cost determined on a first-in, first-out (FIFO) basis, or fair market value and are comprised of finished goods. In determining the adequacy of the reserve for inventory obsolescence, management considers a number of factors,
including recent sales trends, industry market conditions and economic conditions. In assessing the reserve, management also considers price protection credits or other incentives, such as volume incentive rebates the Company has received from the
vendor. In addition, management established specific valuation allowances for discontinued inventory based on its prior experience liquidating this type of inventory. Through the Companys wholesale distribution channel, it is successful in
liquidating the majority of any inventory that becomes obsolete. The Company has many different electronics suppliers, all of which provide reasonable notification of model changes, which allows the Company to minimize its level of discontinued or
obsolete inventory. Actual results could differ from those estimates. Inventories are stated on the Companys consolidated balance sheet net of a reserve for obsolescence of $260,000 and $263,000 at August 31, 2008 and May 31, 2008,
respectively.



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Impairment of Long-Lived Assets:In accordance with SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (SFAS 144), the Company evaluates the recoverability of the carrying value of its long-lived assets based on estimated undiscounted cash flows to be generated from such assets. If the undiscounted
cash flows indicate an impairment, then the carrying value of the assets being evaluated is written-down to the estimated fair value of those assets. In assessing the recoverability of these assets, the Company must project estimated cash flows,
which are based on various operating assumptions, such as average revenue per unit in service, disconnect rates, sales productivity ratios and expenses. Management develops these cash flow projections on a periodic basis and reviews the projections
based on actual operating trends. The projections assume that general economic conditions will continue unchanged throughout the projection period and that their potential impact on capital spending and revenues will not fluctuate. Projected
revenues are based on the Companys estimate of units in service and average revenue per unit as well as revenue from various new product initiatives. Projected revenues assume a continued decline in cellular service revenue while projected
operating expenses are based upon historic experience and expected market conditions adjusted to reflect an expected decrease in expenses resulting from cost saving initiatives.

The Companys review of the carrying value of its tangible long-lived assets at May 31, 2008 indicated the carrying value of these assets were recoverable through estimated future cash flows. Because of the
sustained losses the Company has incurred during the past several years, the Company also reviewed the market values of these assets. The review indicated the market value exceeded the carrying value at May 31, 2008. There were no significant
events in the first quarter of fiscal year 2009 which required the Company to review the carrying value of its tangible long-lived assets. However, if the cash flow estimates or the significant operating assumptions upon which they are based change
in the future, Teletouch may be required to record impairment charges related to its long-lived assets.

The most significant long-lived tangible asset
owned by the Company is the Fort Worth, Texas corporate office building and the associated land. The Company has received periodic appraisals of the fair value of this property. In each instance the appraised value exceeds the carrying value of the
property.

In accordance with SFAS 144, Teletouch evaluates the recoverability of the carrying value of its long-lived assets and certain intangible assets
based on estimated undiscounted cash flows to be generated from such assets.

The evaluation of the Companys long-lived intangible assets is
discussed in Note 2 under Intangible Assets. Under the same premise as the long-lived tangible assets, their market values were also evaluated at May 31, 2008, and the Company determined that based primarily on the market value and
supported by the Companys cash flow projections, there was no impairment of these assets. There were no significant events in the first quarter of fiscal year 2009 which required the Company to review the carrying value of its long-lived
intangible assets. However, if the cash flow estimates or the significant operating assumptions upon which they are based change in the future, Teletouch may be required to record impairment charges related to its long-lived assets.

Provision for Income Taxes:The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes (SFAS
109), using the asset and liability approach, which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of such assets and
liabilities. This method utilizes enacted statutory tax rates in effect for the year in which the temporary differences are expected to reverse and gives immediate effect to changes in income tax rates upon enactment. Deferred tax assets are
recognized, net of any valuation allowance, for temporary differences and net operating loss and tax credit carry forwards. Deferred income tax expense represents the change in net deferred assets and liability balances. Deferred income taxes result
from temporary differences between the basis of assets and liabilities recognized for differences between the financial statement and tax basis thereon and for the



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expected future tax benefits to be derived from net operating losses and tax credit carry forwards. A valuation allowance is recorded when it is more likely
than not that deferred tax assets will be unrealizable in future periods. On November 1, 2005, the Company became a member of the consolidated tax group of Progressive Concepts Communications Inc. (PCCI) as a result of PCCIs
gaining control of over 80% of the outstanding common stock of Teletouch on that date. PCCI gained control of Teletouchs common stock through the conversion by TLL Partners, LLC, PCCIs wholly owned subsidiary, of all of its shares of the
Companys outstanding Series C Preferred Stock into 43,500,000 shares of common stock on November 1, 2005. As of November 1, 2005, TLLP was a disregarded entity for federal tax purposes since it was at that time a single member
limited liability company (LLC). Therefore, the parent company of Teletouch for federal tax purposes was deemed to be PCCI. The Company continued to account for its taxes under SFAS 109 and record its deferred taxes on a stand-alone
basis while part of PCCIs consolidated tax group. In August 2006 as a result certain debt restructuring activities involving TLLP, Teletouchs direct parent and PCCIs wholly owned subsidiary, the Company broke from the PCCI tax
group due to new TLLP shares that were issued as part of this restructuring, which resulted in TLLP no longer being disregarded for tax purposes. Beginning in August 2006, TLLP is taxed as a partnership, and the Company is again separately liable
for its federal income taxes.

Goodwill: Goodwill represents the excess of costs over
fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized but instead are tested for impairment at least annually in accordance
with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). The SFAS 142 goodwill impairment model is a two-step process. The first step compares the fair value of a reporting unit that has
goodwill assigned to its carrying value. The fair value of a reporting unit using discounted cash flow analysis is estimated. If the fair value of the reporting unit is determined to be less than its carrying value, a second step is performed to
compute the amount of goodwill impairment, if any. Step two allocates the fair value of the reporting unit to the reporting units net assets other than goodwill. The excess of the fair value of the reporting unit over the amounts assigned to
its net assets other than goodwill is considered the implied fair value of the reporting units goodwill. The implied fair value of the reporting units goodwill is then compared to the carrying value of its goodwill. Any shortfall
represents the amount of goodwill impairment. Under the guidance of SFAS 142, companies are required to test for impairment of intangible assets with indefinite lives at least annually. Teletouchs only intangible asset with an indefinite life
is goodwill, which was acquired in January 2004 as part of the purchase of the two-way radio assets of Delta Communications, Inc. The Company decided to test this goodwill annually on March 1st, the first day of its fourth fiscal quarter, of each year unless an event occurs that would cause the Company to believe the value is impaired at an interim date.

At March 1, 2008, the Company evaluated the carrying value of its goodwill associated with its two-way business and concluded that no impairment of its goodwill is
required this year. The Company estimates the fair value of its two-way business using a discounted cash flow method. No changes have occurred in the two-way business during fiscal year 2009 that indicated any impairment of the goodwill. The Company
continually evaluates whether events and circumstances have occurred that indicate the remaining balance of goodwill may not be recoverable. In evaluating impairment the Company estimates the sum of the expected future cash flows derived from such
goodwill. Such evaluations for impairment are significantly impacted by estimates of future revenues, costs and expenses and other factors. A significant change in cash flows in the future could result in an additional impairment of goodwill.

Revenue Recognition:Teletouch recognizes revenue over the period the service is performed in accordance with SEC Staff Accounting Bulletin
No. 104, Revenue Recognition in Financial Statements (SAB 104). SAB 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists,
(2) delivery has occurred or services rendered, (3) the fee is fixed and determinable, and (4) collectibility is reasonably assured. Teletouch believes, relative to sales of products, that all of these conditions are met; therefore,
product revenue is recognized at the time of shipment.



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The Company primarily generates revenues through billing services and product sales. Billing services include customer
billings for cellular airtime, landline service, long distance service, internet service and pager service. Product sales include sales of cellular telephones, accessories and car and home audio products through the Companys retail and
wholesale operations.

Revenues and related costs generated through the Companys billing services 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. In addition, it is typical to incur losses on the sale of the cellular phone equipment related to signing up customers under a cellular airtime contract; therefore, any reserves
recorded for customer returns would be an accrual of gains via reversing the losses incurred on the original cellular phone sale transaction. The Company does not believe accruing for the potential gains would be in accordance with GAAP but rather
records this gain in the period that it actually realized.

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.

Deferred revenue represents prepaid
monthly service fees paid by customers.

Stock-Based Compensation:Upon adoption of SFAS No. 123(R), Share-Based Payments,
(SFAS 123R), on June 1, 2006, we began estimating the value of employee stock options on the date of grant using the Black-Scholes model. The determination of fair value of stock-based payment awards on the date of grant using an
option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the expected stock price volatility over the term of the awards
and the actual and projected employee stock option exercise behaviors. The Company has elected to estimate the expected life of an award based on the SEC approved simplified method. We calculated our expected volatility assumption
required in the Black-Scholes model based on the historical volatility of our stock. As of June 1, 2006, we adopted the modified prospective transition method, and its effect is included in our consolidated financial statements for the three
months ended August 31, 2008 and 2007. We will update these assumptions on at least an annual basis and on an interim basis if significant changes to the assumptions are warranted.



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|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

We did
not have any foreign currency hedges or other derivative financial instruments as of August 31, 2008. We do not enter into financial instruments for trading or speculative purposes and do not currently utilize derivative financial instruments.
Our operations are conducted primarily in the United States and as such are not subject to material foreign currency exchange rate risk.



|Item 4. | Controls and Procedures
|------- | -----------------------

Evaluation of Disclosure Controls and
Procedures.

We evaluated the design and operation of the effectiveness of our disclosure controls and procedures as of August 31, 2008 (due to the
Companys delinquency in its public reporting (as discussed below), the evaluation of the Companys disclosure controls as of August 31, 2008 was performed over the period July though December 2008), under the supervision and with the
participation of our management, including the Chief Executive Officer, President and Chief Financial Officer (the Certifying Officers), pursuant to Rule 13a-15(b) of the Exchange Act. Based on this evaluation, the Certifying
Officers concluded that, for the reasons described below, our disclosure controls and procedures were not effective as of August 31, 2008. As discussed below, following August 31, 2008, several of the control deficiencies identified were
remediated, but this process is ongoing.

To address the material weaknesses in the Companys internal control over financial reporting described
below, the Company performed additional manual procedures and analysis and other post-closing procedures in order to prepare the consolidated financial statements included in this Quarterly Report. Notwithstanding the material weaknesses in our
internal control over financial reporting as of August 31, 2008, described below, we believe that the consolidated financial statements contained in this Quarterly Report present our financial condition, results of operations, and cash flows as
of the dates, and for the periods presented, fairly and accurately and in conformity with generally accepted accounting principles in the United States of America (GAAP).

We have continued to work diligently to remedy our accounting issues and improve our internal controls and procedures for financial reporting following the Companys acquisition of Progressive Concepts, Inc.
(PCI) on August 11, 2006. As previously reported in our fiscal 2007 and 2008 Annual Reports on Form 10-K, the acquisition of PCI and the sale of the Companys legacy paging business resulted in PCI representing the majority of
the operations of Teletouch. Upon completing the acquisition of PCI, we became aware of several control deficiencies in the financial reporting at PCI which could only be remedied by rebuilding PCIs internal accounting records from 2003 and
all periods thereafter on a new platform and by completing substantially all of the general ledger account reconciliations for this period. The significant change to the operating and systems environment at Teletouch as a result of the acquisition
of PCI combined with having to utilize a significant portion of the Companys accounting resources to rebuild PCIs internal accounting records, resulted in a breakdown in many of the internal controls which were previously effective for
Teletouch. Although the process of designing and implementing procedures to minimize the control deficiencies is important to the Company, the challenge of integrating PCI and the significant delay in the completion of the fiscal 2007 and 2008
Annual Reports caused a delay in managements efforts to adequately design, implement and monitor new procedures to minimize the control deficiencies that led to the issues outlined below. The Company is currently in the process of designing
and implementing new procedures to remedy the control deficiencies that led to these issues. As a result, the Certifying Officers have concluded that the material weaknesses in our internal control over financial reporting identified as of
May 31, 2008 continue to exist as of August 31, 2008. Specifically, management identified the following material weaknesses:

Control
Environment:We did not maintain an effective control environment. Specifically:



| | 1. | We have not yet implemented all the necessary policies and procedures to ensure that we have an effective control environment based on criteria established in the COSO framework.
Specifically, the Company needs to fully implement controls to help prevent or detect the circumvention of our controls by employees or management. The Company also needs to perform a formal risk profile and analysis of the Company.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | 2. | The Company did not maintain sufficient policies and procedures over the administration of a fraud risk policy.
| | -- | ---------------------------------------------------------------------------------------------------------------



| | 3. | The Companys information systems lack sufficient controls that limit access to and modification of key applications and data. There is a lack of procedures and controls in the
system developmental life cycle, including change management.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | We did not maintain a sufficient documentation on the review and follow up on the remediation of deficiencies.
| | -- | --------------------------------------------------------------------------------------------------------------



| | 5. | We did not maintain a sufficient segregation of duties to decrease the risk of inappropriate accounting.
| | -- | --------------------------------------------------------------------------------------------------------



| | 6. | We did not have the appropriate policy and procedures in place regarding a formal whistle blower policy.
| | -- | --------------------------------------------------------------------------------------------------------



| | 7. | We did not maintain regular communication of financial information to the Board or its Audit Committee nor was their evidence of sufficient review of interim financial statements or
other material but routine transactions by the Board.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Period-end financial reporting process:We did not maintain effective controls
over the period-end reporting process, including controls with respect to the review, supervision, and monitoring of accounting operations. Specifically, we have not fully designed or implemented effective controls to ensure the completeness,
accuracy, and timeliness of the financial and accounting process. Weaknesses identified include controls over financial statement preparation and review and accuracy in accounting for certain complex transactions.

Accounts payable process:We did not maintain effective controls over the accounts payable process, including controls with respect to the review, supervision,
and monitoring of accounts payables process. Specifically:



| | 1. | Proper segregation of duties between authorized check signors, review and approval of check registers, review an approval of bank reconciliations. Also proper segregation between
the originator, approver and submitter of wire transfers was not appropriate.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | There was not a proper review performed of the three way match between the purchase order, invoice and the receiving report.
| | -- | ----------------------------------------------------------------------------------------------------------------------------



| | 3. | Following the acquisition of PCI, the Company did not have a formal spending authorization policy resulting in inadequate review of certain expenditures, however, all such
expenditures were reviewed prior to disbursement.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Changes in Internal Control Over Financial Reporting and Remediation of the Material Weaknesses

Based on the additional procedures performed as part of the Companys ongoing remediation of its financial controls, the Companys management has concluded that
important improvements and remedial measures were made to the control environment commencing in fiscal 2008 and continuing through the fiscal quarter ended August 31, 2008, including: (i) an improved commitment to competency manifested by
the hiring of more experienced and senior finance personnel; (ii) the development of additional financial policies and procedures that when fully implemented will enhance independent judgment and review, including, as appropriate, segregation
of duties and increased employee responsibility and accountability for the completeness of the Companys disclosures; (iii) the establishment of processes and procedures to increase communications between the financial reporting and
accounting functions and senior management, including our Audit Committee; and (iv) instituting a formal whistle-blower policy.

Management is
committed to remediating the material control weaknesses identified and implementing changes to the Companys internal control over financial reporting. Management, along with our Board, has implemented, or is in the process of implementing the
following changes to the Companys internal control over financial reporting:



| |  |  | As of the date of this Report, we have published a formal Whistleblower Policy which as been distributed to all employees of the Company. This policy provides for a
line of communication between the employees and the members of the Audit Committee.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As of the date of this Report, we have established a formal purchasing policy including defined spending authorization limits providing for management approval of
all expenditures over $1,000 and senior management review of all expenditures prior to payment. In addition, the Board is required to approve certain material expenditures under this policy.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We are in the process of establishing a summarized financial reporting package that will be provided to the Board on a monthly basis. In addition, under the
recently established purchasing policy, the Board is required to approve certain material expenditures of the Company. Although there are numerous meetings of the Board on larger transaction related matters, management will be providing more interim
financial information and analytics to the Board for its review. In addition, we will be developing a schedule that will increase the number of on-site visits to the Company by the Board to improve the Boards understanding of the accounting
and control environment. Management will focus on these efforts to continuously improve our broader control environment.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We are in the process of developing and implementing several new policies and procedures to address key weaknesses specifically related to segregation of duties and
information system security, accuracy and integrity.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We are developing specific accounting and finance policies and standardized processes in all critical accounting areas, including areas currently relying on
subjective management judgment and discretion.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Additionally, management is investing in ongoing efforts to continuously improve the
control environment and has committed considerable resources to the continuous improvement of the design, implementation, documentation, testing, and monitoring of our internal controls. Although we have not fully remediated the material weaknesses
described above, we believe we have made substantial progress and intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business.



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Part II. Other Information



|Item 1. | Legal Proceedings
|------- | -----------------

Teletouch is subject to various legal
proceedings arising in the ordinary course of business. Except as set forth below, the Company believes there is no proceeding, either threatened or pending, against it that could result in a material adverse effect on its results of operations or
financial condition.

Claim Asserted Against Use of Hawk Electronics Name

In June 2008, the Company was notified of its alleged infringement on the trade name Hawk Electronics. The Company is currently in discussions with the other party and aggressively defending its position that its use
of the name in the markets in which it operates is proper. We cannot give any assurance that we will be successful in resolving this matter. If this matter results in litigation and an adverse determination, we may be forced to cease using the Hawk
Electronics name wholly or in some markets. Litigation to resolve the infringement claim could result in substantial costs and diversion of resources. Furthermore, an adverse result in an action against the Company may require that we pay
substantial damages, cease operating under the Hawk Electronics name and expend significant resources to either license the infringing brand name or develop a non-infringing brand name. Legal costs related to responding to this claim are being
charged to expense as incurred and as of the date of this Report, the outcome of this litigation cannot be predicted nor can any final cost to settle this matter be estimated so no accrual has been recorded.

Claim Against Company by Former Employee

In March 2008, the Company
received a demand letter from Keith Cole, former CFO of PCI and General Counsel for the Company. Mr. Cole was terminated in January 2008. Mr. Cole has made a demand for certain compensation that he believed was due prior to his
termination. The basis for this claim is certain alleged verbal conversations with management of the Company. The total alleged unpaid compensation amount claimed by Mr. Cole is approximately $455,000. As of the date of this Report, the Company
has reached a preliminary agreement with Mr. Cole to settle this claim for a one time payment of $80,000 and is in the process of drafting the settlement and release agreement that it will require from Mr. Cole in exchange for this
payment.



|Item 1A. | Risk Factors
|-------- | ------------

Our future performance is subject to a variety of
risks. If any of the events or circumstances described in the following risk factors actually occurs, our business, financial condition or results of operations could suffer. In addition to the following disclosures, please refer to the other
information contained in this Report, including consolidated financial statements and related notes, and information contained in the Companys other SEC filings.

We could fail to remain a going concern. We may need to raise additional capital to fund our operations and service our existing trade and debt obligations, and we do not have any commitments for that capital.

The Company had a working capital deficit of approximately $9,259,000 and $9,013,000 at August 31, 2008 and May 31, 2008, respectively, and a
shareholders deficit of approximately $9,156,000 and $8,752,000 at August 31, 2008 and May 31, 2008, respectively. The Companys factoring debt obligation with Thermo has been presented as a current liability on the
Companys consolidated balance sheet at August 31, 2008 and May 31, 2008, in accordance with EITF 95-22, because the factoring agreement requires a lockbox agreement under which customer payments on accounts are directed to a lockbox
controlled by Thermo and



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because certain subjective acceleration rights are retained by Thermo under the agreement. However, the stated maturity date of the obligation is February
2010. The factoring debt obligations at August 31, 2008 and May 31, 2008, were approximately $8,959,000 and $9,091,000, respectively. In May 2008, the Company was able to secure an additional $5,000,000 asset based revolving credit
facility with Thermo Credit, LLC (Thermo), with the proceeds used primarily to pay $2,000,000 to PCIs former senior lender to have the liens on the assets of PCI fully and permanently released, and $1,500,000 was used to make an
initial payment to the holders of certain long-standing redeemable common stock warrants that became due in December 2007. Even upon the Companys completion of the restructuring of its debt obligations in May 2008, and increasing its debt
facility, the Company has only been able to partially improve its working capital deficit and shareholders equity deficit. The Company is continuing to seek additional debt and equity financing to ensure it is able to meet its remaining trade
and debt obligations in the event that there are changes to its existing credit arrangements as well as provide sufficient working capital to expand its operations. If it is unsuccessful in its efforts to secure additional financing and the
Companys current credit arrangements are accelerated, the Company may be unable to meet its obligations and might be forced to seek protection from its creditors.

As a result of the above conditions and in accordance with generally accepted accounting principles in the United States, there exists substantial doubt about the Companys ability to continue as a going concern.
The financial statements do not include any adjustments that might result from this uncertainty.

Teletouch may be unable to complete its future
regulatory filings in a timely manner.

Since the acquisition of PCI on August 11, 2006, Teletouch has been unable to meet its deadlines for filing
its periodic reports with the SEC. Because of the common ownership of both PCI and Teletouch prior to the acquisition, the acquisition of PCI was accounted for in a manner similar to a pooling of interests. Because of the pooling,
PCIs fiscal year was changed, and the historical financials of PCI were required to be audited and combined with Teletouchs historical financials. PCI was a privately held company and although its parent company had been previously
audited, PCI had never been audited on a stand-alone basis. This auditing process had been ongoing but certain financial reporting challenges were encountered, which delayed the progress on these audits. Due to the size of PCI relative to that of
Teletouch at the date of acquisition, Teletouch was required to file three consecutive years of audited financial statements for PCI on a stand-alone basis with the SEC within 75 days of the completion of the acquisition. The latest date that these
financials could have been filed to be considered a timely filer was October 27, 2006. The Company was unable to meet this deadline until May 2008. Once the Company became a late filer with the SEC, then the Company became subject to more
comprehensive requirements related to future registration statements. These additional requirements to register its securities for sale could directly impact its ability to raise the necessary capital to grow the business. Furthermore, once the
Company became a late filer with the SEC, Teletouch was in violation of the NYSE Amex (formerly, the American Stock Exchange) (the AMEX) continued listing standards. On January 12, 2007, the Board approved voluntary withdrawal of
the Companys securities from the AMEX and the move of the Companys securities to the Pink Sheets. The foregoing action by the Board was taken following the delisting determination by the AMEX Panel issued on January 9, 2007.

Because of the unanticipated challenges in the PCI financial records and the resulting delays in the completion of the required audits, the Company made
the decision to focus all efforts on the completion of its delinquent fiscal 2009 Quarterly Reports on Form 10-Q and to defer work on the Quarterly Reports on Form 10-Q for the periods following the August 11, 2006 acquisition of PCI. The
Annual Report on Form 10-K for the year ended May 31, 2008 and May 31, 2007 filed in January, 2009 and November, 2008, respectively, were significant milestones for the Company toward regaining timeliness in its financial reporting but
does not guarantee the Company will be able to regain timeliness. As of the date of this Report, the Company is delinquent in filing its Quarterly Reports on Form 10-Q for the quarters ended August 31, 2006, November 30,
2006, February 28, 2007, August 31, 2007, November 30, 2007, February 29, 2008 and November 30, 2008.



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Teletouchs parent company may be unable to meet its future financial obligations.

Prior to the acquisition of PCI, TLLP, Teletouchs parent company, assumed all of the remaining institutional debt of PCI, whereby the senior debt obligations
formerly at PCI were transferred to TLLP as senior debt obligations and the subordinated debt obligations of PCI were partially settled by the issuance of Teletouchs common stock owned by TLLP with the balance converted to redeemable Series A
preferred units of TLLP. To secure the senior debt obligation, TLLP, pledged all of its assets, which consist primarily of its holding of approximately 80% of the outstanding common stock of Teletouch. When the senior debt originally matured in
August 11, 2007, TLLP did not have sufficient cash or other means to repay this debt and was successful in negotiating an initial extension of the maturity date through October 11, 2007. Subsequent extensions were granted by the senior
debt holder to TLLP extending the maturity date through May 16, 2008. On May 16, 2008, TLLP and Teletouch were successful negotiating the termination of the TPA with the senior debt holder fully releasing Teletouch and PCI from any future
contingent obligations under this debt. As part of this transaction, the senior debt obligation was further amended to extend the maturity date to May 16, 2010. TLLP is a holding company with no operations and only a minimal amount cash on hand
and may be dependent upon selling a sufficient number of shares it owns in Teletouch common stock or upon the cash flows of Teletouch through the receipt of future cash dividends to service its outstanding debt obligations. The Company has no
current agreements with TLLP to fund cash nor does it have any current plans to declare dividends in order to allow TLLP to meet the debt obligations. TLLPs management has represented to the Company that its plan to settle this debt obligation
is to sell a sufficient number of its shares of Teletouchs common stock in order to raise the necessary funds when this obligation becomes payable. If TLLP is unsuccessful in repaying these obligations, then the ownership of Teletouch could
substantially change in the future. If the lenders foreclose on Teletouchs common stock owned by TLLP and become the majority shareholders of Teletouch, then there is a risk these lenders could vote through matters that may not be in the best
interest of the shareholders as a whole.

Teletouch may be unable to secure the financing needed for future acquisitions.

Teletouch may be unable to secure financing or only be presented with financing options that contain unfavorable terms to finance future acquisitions. If financing is
unavailable to the Company, Teletouch will be unable to complete future acquisitions and would then be forced to grow its revenues from its existing businesses, which to-date has proved difficult without additional capital funding.

We depend upon a limited number of suppliers, who may not provide us with competitive products at reasonable prices when we need them in the future, or have adequate
financing to secure such products.

Our business depends upon several factors, one of which is our relationship with AT&T, the Companys
largest supplier of cellular services and products. The loss of AT&T or any other significant vendor, a substantial price increase or decrease imposed by any vendor, a shortage or oversupply of product available from our vendors or tightening of
credit terms by our vendors could have a material adverse impact on the Company. We are dependent on maintaining open vendor trade credit lines on reasonable terms. Interruption of these lines could have a material adverse impact and could determine
whether or not the Company can continue as a going concern. We cannot assure you that product shortages, product surpluses or renewed tightening of trade credit terms will not occur in the future.



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The loss of any of our key customers, a material reduction in our customer base for cellular service or a reduction in
prices charged to customers could have a material adverse effect on our business.

Many of our customers have experienced severe price competition and
for this and other reasons may seek to obtain products or services from us at lower prices than previously provided. The Companys wholesale business contains several key customers. As a result, we remain vulnerable to a significant loss of
revenues in the event we should lose any key customer. The loss of any key customer, a reduction in the amount of product or services from key customers or the inability to maintain current terms, including price, with these or other customers
could have an adverse effect on our financial condition, results of operations and liquidity. We do not maintain agreements with the majority of our customers in the wholesale business, which increases the risk that such relationships could be
terminated at any time. The Company does maintain contracts varying from one to two years with a portion of its customer base for cellular service; however, the customer may elect to transfer to another carrier at any time and incur a penalty fee.
We cannot assure you that any of our customers will continue to purchase products or services from us or that their purchases will be at the same or greater levels than in prior periods.

The demand for our products depends in large part on the continued growth of the cellular industry. A marked decline in growth of the cellular industry and/or demand for cellular products in the areas in which we
operate could have an adverse effect on our business.

Our success depends largely upon continued consumer demand for cellular products. While the
industry has been experiencing growth, we cannot assure you that such growth will continue or that we will be able to adjust our business model to capitalize on that growth. The demand for our products and services has fluctuated and may continue to
vary substantially.

Economic slowdowns or changes in promotional programs offered by AT&T may lower consumer demand and create higher levels of
inventories in our distribution channels, resulting in lower than anticipated demand for the products and services that we offer. The current economic slow-down in the United States could negatively impact our results of operations and financial
position in 2009 and beyond.

Any type of systems failure could reduce sales, increase costs or result in liability claims.

Despite the Companys implementation of preventive safety measures, Teletouchs technology is vulnerable to systems failure due to such things as computer
viruses, unauthorized access, energy blackouts, natural disasters and telecommunications failures. Any systems failure, accident or security breach could cause significant interruptions in our operations. In addition, we could be subject to
liability for any loss or damage to our customers data or applications or inappropriate disclosure of customers confidential information. The cost to remedy a systems failure, accident or security breach could have a significant effect
on our financial condition.

We cannot be sure that our systems will operate appropriately if we experience a hardware or software failure or if there is
an earthquake, fire or other natural disaster, a power or telecommunications failure, intentional disruptions of service by third parties, an act of God or an act of war. A failure in our systems could cause us to be unable to service our customers
or provide timely and accurate billing, and as a result, we may lose customers or face litigation that could involve material costs and distract management from operating our business.

Any defects in Teletouchs products or in those provided to us by suppliers could expose the Company to liability, damage its reputation and customer relations, and adversely affect the development and release
of future products.

Teletouchs products are inherently complex; therefore, it is possible that any defects contained therein may only be
detectable once the product is in use. Given the critical services our products provide, these defects could have a serious adverse impact on our customers, which could damage our reputation, harm customer relations and expose us to liability.



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Demand for our products may be adversely affected by the increasing presence of our competitors in these markets.

Although Teletouchs subsidiary, PCI has operated in the Dallas / Fort Worth metropolitan market for over 20 years, demand for its products may be
adversely affected by the increasing presence of competitors. These competitors are comprised of competing cellular service providers, including the Companys primary supplier, AT&T. Several of the Companys competitors, including
AT&T, have more extensive marketing capabilities and greater financial, technical and personnel resources. Furthermore, Teletouchs competitors may have greater brand recognition, broader product lines and more established customer
relations.

Our success depends on the introduction and acceptance of new products and services.

The telecommunications market is constantly changing, due in part to technological advances, evolving industry standards and the development of new products.
Teletouchs future success will depend partly on our ability to keep up with these changes by purchasing new products for resale and developing unique service offerings with a high market demand. If we fail to identify such products and
services in response to market demands, we could fail to obtain an adequate return on our investments and could lose market share to our competitors.

We face risks inherent in new product and service offerings as well as new markets.

From time to time, we introduce new products and
services or expand our previous product and service offerings to existing and target markets. Our products must therefore be considered in light of the risks, expenses, problems and delays inherent in establishing new lines of business in a rapidly
changing industry. Although we believe we can successfully differentiate our product and service offerings from others in the marketplace, we must be able to compete against other companies, who may already be established in the marketplace and have
greater resources. There can be no assurance we will be successful in adding products or services or expanding into new markets or that our administrative, operational, infrastructure and financial resources and systems will be adequate to
accommodate such offerings or expansion.

We may incur losses if we are unable to collect our accounts receivable.

Although the Company entered into a factoring facility with Thermo in August 2006, the Company, as part of the agreement, continues to service the accounts receivables.
The Company is subject to recourse on the accounts receivables if they age over 90 days from the due date. As a result, accounts receivable management continues to be important to the Companys liquidity. The Company uses credit management
tools, which include credit scoring services in the Companys operations, to manage its accounts receivable exposure. Several factors can affect the collection of our accounts receivable, including, but not limited to, the financial health of
the customer, industry and economic conditions, our policies related to extending credit, contractual provisions and the ability of the customer to provide security, collateral or guarantees relative to credit granted by us. Adverse changes in any
of these factors, some of which may not be wholly within our control, could create delays in collecting or an inability to collect our accounts receivable, which could have a material adverse effect on our financial position, cash flows and results
of operations.



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Our future operating results will depend on our ability to maintain or improve operating margins.

The Companys primary source of revenue is generated from its subsidiary, PCI, through the sale of AT&Ts cellular service and the related sale of wireless
products. Any disruption in the relationship between PCI and AT&T could have a material adverse effect on the Companys financial position, cash flows and results of operations. Our ability to be successful will depend upon our ability to
maintain or improve our operating margins. Given the fixed revenue share relationship with AT&T on the service billings, PCI can only improve gross margins through the introduction of add-on services to these cellular subscribers. Under the
agreement with AT&T, PCI absorbs 100% of the cost of third party roaming charges incurred by its customer base. Gross margins could be negatively affected by increased roaming usage by its customer base, which is difficult to predict and
control. We may not be able to improve our current operating margins for products or services offered or increase our sales. Even if our sales volumes increase, the gross margins that we receive from our sales may not be sufficient to make our
operations profitable.

Teletouch may be unsuccessful in obtaining and enforcing intellectual property protection.

The Companys ability to compete with its competitors in the markets that it operates depends in part on its ability to enforce its intellectual property rights,
such as the Hawk Electronics name. The Companys subsidiary, PCI has operated under the Hawk Electronics name since the late 1970s in the Dallas / Fort Worth market, and the brand recognition provides some advantage to PCI over its
competitors.

If we determine that our intellectual property rights have been infringed upon or if we are notified that we are infringing upon certain
intellectual property rights, the Company may become involved in litigation. Such litigation or claims could result in substantial costs and diversion of resources. Furthermore, an adverse result in an action against the Company may require that we
pay substantial damages, cease operating under the Hawk Electronics name and expend significant resources to either license the infringing brand name or develop a non-infringing brand name. We cannot give any assurance that we would be able to
develop a similar non-infringing brand name quickly enough in the market to continue to remain competitive with more well-known brand competitors.

In June
2008, the Company was notified of its alleged infringement on the trade name Hawk Electronics. The Company is currently in discussions with the other party and aggressively defending its position that its use of the name in the markets in which it
operates is proper. We cannot give any assurance that we will be successful in resolving this matter. If this matter results in litigation and an adverse determination, we may be forced to cease using the Hawk Electronics name. Litigation to resolve
the infringement claim could result in substantial costs and diversion of resources. Furthermore, an adverse result in an action against the Company may require that we pay substantial damages, cease operating under the Hawk Electronics name and
expend significant resources to either license the infringing brand name or develop a non-infringing brand name. Legal costs related to responding to this claim are being charged to expense as incurred and as of the date of this Report, the outcome
of this litigation cannot be predicted nor can any final cost to settle this matter be estimated so no accrual has been recorded.

Compliance with
changing regulation of corporate governance and public disclosure may result in additional expenses.

Changing laws, regulations and standards relating
to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and stock exchange rules, have required most public companies, including our Company, to devote additional internal and external resources
to various governance and compliance matters. Because we have a relatively small corporate staff, we rely heavily on outside professional advisers to assist us with these efforts. As a result, we incurred additional operating expenses in 2007 and
2008 and will incur further expenses in the future. These future costs will include increased accounting related fees associated with preparing the attestation report on our internal controls over financial reporting as required under
Section 404 of the Sarbanes-Oxley Act of 2002 by May 2010. In addition, these new or changed laws, regulations and



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standards are subject to varying interpretations, as well as modifications by the government and stock exchanges. The way in which they are applied and
implemented may change over time, which could result in even higher costs to address and implement revisions to compliance (including disclosure) and governance practices.

Our products are subject to government regulation.

Two-way radio communications are subject to regulation by the
government. Teletouchs two-way radio products and technology must conform to domestic rules and regulations established to avoid interference among users and facilitate interconnection of telecommunications systems. It is our opinion that our
products and technology are in compliance with all currently existing government rules and regulations. However, new rules or regulations could adversely affect our business by requiring that current products or technology be modified to comply with
such rules or regulations or by rendering current products or technology obsolete. Furthermore, Teletouch cannot predict if and when new rules or regulations will come into effect. Regulatory changes could adversely affect our business by
restricting our development of our services and increasing the opportunity for additional competition.

The Federal Communications Commission (the
FCC) must approve renewal applications for Teletouchs radio licenses.

The FCC grants radio licenses for varying terms of up to 10
years, and the FCC must approve renewal applications. There can be no assurance that the FCC will approve or act upon Teletouchs future applications in a timely manner. Delays in or denial of our renewal applications could adversely affect our
business operations, which could reduce our revenues and decrease our level of profitability.

Future applications by Teletouch for additional
transmitter sites to expand our coverage on existing frequencies must be approved by the FCC.

Teletouch regularly applies to the FCC to use additional
frequencies and to add additional transmitter sites to expand coverage on existing frequencies. Under current FCC guidelines, we can expand our coverage and add additional sites only under frequencies below 929 MHz. All other frequencies below 929
MHz on which Teletouch holds licenses are frozen in a status quo condition pending the final announcement and implementation of geographic area licensing auctions. In addition, FCC approval is required for the Companys acquisitions of radio
licenses held by other companies, as well as transfers of controlling interests of any entities that hold radio licenses. Teletouch cannot be sure that the FCC will approve or act upon the Companys future applications in a timely manner.
Denial or delayed approval by the FCC could affect our business operations, which could reduce our revenues and adversely affect our level of profitability.

Also, all major modification and expansion applications are subject to competitive bidding procedures. Teletouch cannot predict the impact that these procedures will have on its licensing practices.

The global wireless industry is intensely competitive, and we may not be able to continue to compete successfully in this industry.

We operate in a highly competitive environment and believe that such competition will intensify in the future. We compete primarily on the basis of inventory
availability and selection, price, delivery time and service. Many of our competitors are larger and have greater capital and management resources than we do. We are constantly exposed to the risk that our competitors may obtain access to new
technologies before we do or may offer lower prices, additional products or services or other incentives that we cannot or will not offer. In addition, potential users of wireless systems may find their communications needs satisfied by other
current and



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developing technologies. During the last several years, the telecommunications industry has been very volatile as a result of overcapacity, which has led to
price erosion and bankruptcies. If the Company cannot control subscriber and customer attrition through maintaining competitive services and pricing, revenue could decrease significantly. Our ability to remain competitive will therefore depend upon
our ability to anticipate and adapt our business to such technological changes and our ability to achieve significant penetration in existing and new geographic markets. There can be no assurance that we will be successful in anticipating and
adapting to such technological changes.

Terrorist attacks or acts of war may seriously harm our business.

Terrorist attacks or acts of war may cause damage or disruption to our operations, our employees, our facilities and our customers, which could significantly impact our
revenues, costs and expenses, and financial condition. The terrorist attacks that took place in the United States on September 11, 2001 were unprecedented events that have created many economic and political uncertainties, some of which may
materially adversely affect our business, results of operations and financial condition. The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility have created many
economic and political uncertainties, which could materially adversely affect our business, results of operations, and financial condition in ways that management currently cannot predict.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

None



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

None



|Item 5. | Other Information
|------- | -----------------

None



|Item 6. | Exhibits
|------- | --------



|              |  |                                                                           
|------------- |  | --------------------------------------------------------------------------
|ExhibitNumber |  | Title of Exhibit                                                          
|31.1          |  | Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a)               
|              | 
|31.2          |  | Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a)               
|              | 
|32.1          |  | Certification pursuant to 1350, Chapter 63, Title 18 of United States Code
|              | 
|32.2          |  | Certification pursuant to 1350, Chapter 63, Title 18 of United States Code



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto
duly authorized.



|                     |  |                                |  |                                             
|-------------------- |  | ------------------------------ |  | --------------------------------------------
|Date: March 27, 2009 |  | TELETOUCH COMMUNICATIONS, INC.
|                     |  |                                |  | Registrant                                  
|                     |  |                               
|                     |  | By:                            |  | /s/ Robert M. McMurrey                      
|                     |  |                                |  | Robert M. McMurrey                          
|                     |  |                                |  | Chief Executive Officer                     
|                     |  |                                |  | (Principal Executive Officer)               
|                     |  |                               
|                     |  | By:                            |  | /s/ Douglas E. Sloan                        
|                     |  |                                |  | Douglas E. Sloan                            
|                     |  |                                |  | Chief Financial Officer                     
|                     |  |                                |  | (Principal Financial and Accounting Officer)



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