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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 February 28, 2009

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

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 June 30, 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 February 28, 2009 (unaudited) and May 31, 2008 (unaudited)                                        |  | 4       
|        |  |                                                                                                                                    
|        |  | Consolidated Statements of Operations - Three and Nine Months Ended February 28, 2009 (unaudited) and February 29, 2008 (unaudited) |  | 6       
|        |  |                                                                                                                                    
|        |  | Consolidated Statements of Cash Flows - Nine Months Ended February 28, 2009 (unaudited) and February 29, 2008 (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                                                                          |  | 51      
|        |  |                                                                                                                                    
|Item 4. |  | Controls and Procedures                                                                                                             |  | 51      
|        |  |                                                                                                                                    
|        |  | Part II. Other Information                                                                                                          |  |         
|        |  |                                                                                                                                    
|Item 1. |  | Legal Proceedings                                                                                                                   |  | 55      
|        |  |                                                                                                                                    
|Item 2. |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                         |  | 55      
|        |  |                                                                                                                                    
|Item 3. |  | Defaults Upon Senior Securities                                                                                                     |  | 55      
|        |  |                                                                                                                                    
|Item 4. |  | Submission of Matters to a Vote of Security Holders                                                                                 |  | 55      
|        |  |                                                                                                                                    
|Item 5. |  | Other Information                                                                                                                   |  | 55      
|        |  |                                                                                                                                    
|Item 6. |  | Exhibits                                                                                                                            |  | 56      
|        |  |                                                                                                                                    
|        |  | Signatures                                                                                                                          |  | 57      



2



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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



|                                                                                                                         |  |                  |        |             |   |       
|------------------------------------------------------------------------------------------------------------------------ |  | ---------------- | ------ | ----------- | - | ------
|                                                                                                                         |  | February 28,2009 |        | May 31,2008
|CURRENT ASSETS:                                                                                                          |  |                  |        |             |   |       
|Cash                                                                                                                     |  | $                | 1,871  |             | $ | 4,729 
|Certificates of deposit-restricted                                                                                       |  |                  | 400    |             |   | 400   
|Accounts receivable, net of allowance of $672 at February 28, 2009 and $480 at May 31, 2008                              |  |                  | 6,877  |             |   | 8,185 
|Unbilled accounts receivable                                                                                             |  |                  | 2,833  |             |   | 3,135 
|Inventories, net of reserve of $260 at February 28, 2009 and $263 at May 31, 2008                                        |  |                  | 1,849  |             |   | 2,401 
|Notes receivable                                                                                                         |  |                  | 868    |             |   |      
|Prepaid expenses and other current assets                                                                                |  |                  | 307    |             |   | 829   
|                                                                                                                         |  |                  |        |             |   |       
|Total Current Assets                                                                                                     |  |                  | 15,005 |             |   | 19,679
|                                                                                                                         |  |                  |        |             |   |       
|                                                                                                                         |  |                 
|LONG-TERM RECEIVABLE-RELATED PARTY                                                                                       |  |                  |       |             |   | 250   
|                                                                                                                         |  |                 
|PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $7,027 at February 28, 2009 and $7,253 at May 31,
2008 |  |                  | 3,049  |             |   | 3,210 
|                                                                                                                         |  |                 
|GOODWILL                                                                                                                 |  |                  | 343    |             |   | 343   
|                                                                                                                         |  |                 
|INTANGIBLE ASSETS, net of accumulated amortization of $7,772 at February 28, 2009 and $7,169 at May 31, 2008             |  |                  | 4,389  |             |   | 5,087 
|                                                                                                                         |  |                  |        |             |   |       
|                                                                                                                         |  |                 
|TOTAL ASSETS                                                                                                             |  | $                | 22,786 |             | $ | 28,569
|                                                                                                                         |  |                  |        |             |   |       

See Accompanying Notes to Consolidated Financial Statements



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TELETOUCH COMMUNICATIONS, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except share data)

LIABILITIES AND SHAREHOLDERS DEFICIT



|                                                                                                                                                              |  |                  |         |   |             |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ----------- | - | ------- | -
|                                                                                                                                                              |  | February 28,2009 |         |   | May 31,2008 |  
|CURRENT LIABILITIES:                                                                                                                                          |  |                  |         |   |             |   |         |  
|                                                                                                                                                              |  |                 
|Accounts payable                                                                                                                                              |  | $                | 8,705   |   |             | $ | 10,156  |  
|Accounts payable-related party                                                                                                                                |  |                  | 48      |   |             |   | 62      |  
|Accrued expenses and other current liabilities                                                                                                                |  |                  | 6,197   |   |             |   | 6,547   |  
|Current portion of long-term debt                                                                                                                             |  |                  | 9,551   |   |             |   | 9,727   |  
|Deferred revenue                                                                                                                                              |  |                  | 390     |   |             |   | 400     |  
|Current portion of redeemable common stock purchase warrants                                                                                                  |  |                  |        |   |             |   | 1,800   |  
|                                                                                                                                                              |  |                  |         |   |             |   |         |  
|Total Current Liabilities                                                                                                                                     |  |                  | 24,891  |   |             |   | 28,692  |  
|                                                                                                                                                              |  |                  |         |   |             |   |         |  
|                                                                                                                                                              |  |                 
|LONG-TERM LIABILITIES:                                                                                                                                        |  |                  |         |   |             |   |         |  
|Long-term debt, net of current portion                                                                                                                        |  |                  | 7,899   |   |             |   | 7,429   |  
|Redeemable common stock purchase warrants                                                                                                                     |  |                  |        |   |             |   | 1,200   |  
|                                                                                                                                                              |  |                  |         |   |             |   |         |  
|Total Long Term Liabilities                                                                                                                                   |  |                  | 7,899   |   |             |   | 8,629   |  
|                                                                                                                                                              |  |                  |         |   |             |   |         |  
|                                                                                                                                                              |  |                 
|TOTAL LIABILITIES                                                                                                                                             |  |                  | 32,790  |   |             |   | 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 February 28,
2009 and May 31, 2008 |  |                  | 50      |   |             |   | 50      |  
|Additional paid-in capital                                                                                                                                    |  |                  | 50,895  |   |             |   | 50,724  |  
|Treasury stock, 864,209 shares held at February 28, 2009 and May 31, 2008                                                                                     |  |                  | (185    | ) |             |   | (185    | )
|Accumulated deficit                                                                                                                                           |  |                  | (60,764 | ) |             |   | (59,341 | )
|                                                                                                                                                              |  |                  |         |   |             |   |         |  
|Total Shareholders Deficit                                                                                                                                   |  |                  | (10,004 | ) |             |   | (8,752  | )
|                                                                                                                                                              |  |                  |         |   |             |   |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS DEFICIT                                                                                                                   |  | $                | 22,786  |   |             | $ | 28,569  |  
|                                                                                                                                                              |  |                  |         |   |             |   |         |  

See Accompanying Notes to Consolidated Financial Statements



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TELETOUCH COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except shares and per share amounts)

(unaudited)



|                                                                                                  |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|------------------------------------------------------------------------------------------------- |  | ------------------------------ | ---------- | - | ----------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                  |  | Three Months EndedFebruary 28, |            |   | Nine Months EndedFebruary 28, |  
|                                                                                                  |  | 2009                           |            |   | 2008                          |   |            | 2009 |  |   | 2008       |  
|Operating revenues:                                                                               |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Service, rent, and maintenance revenue                                                            |  | $                              | 6,778      |   |                               | $ | 7,253      |      |  | $ | 20,524     |   |  | $ | 21,994     |  
|Product sales revenue                                                                             |  |                                | 4,270      |   |                               |   | 6,116      |      |  |   | 14,603     |   |  |   | 19,475     |  
|                                                                                                  |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Total operating revenues                                                                          |  |                                | 11,048     |   |                               |   | 13,369     |      |  |   | 35,127     |   |  |   | 41,469     |  
|                                                                                                  |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|                                                                                                  |  |                                |            |  
|Operating expenses:                                                                               |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Cost of service, rent and maintenance (exclusive of depreciation and amortization included below) |  |                                | 2,226      |   |                               |   | 2,495      |      |  |   | 6,934      |   |  |   | 8,213      |  
|Cost of products sold                                                                             |  |                                | 4,186      |   |                               |   | 5,520      |      |  |   | 13,577     |   |  |   | 17,235     |  
|Selling and general and administrative                                                            |  |                                | 4,241      |   |                               |   | 4,696      |      |  |   | 12,917     |   |  |   | 15,280     |  
|Depreciation and amortization                                                                     |  |                                | 346        |   |                               |   | 367        |      |  |   | 1,075      |   |  |   | 1,170      |  
|Gain on forgiveness of trade payable obligation to AT&T                                           |  |                                |           |   |                               |   |           |      |  |   |           |   |  |   | (3,824     | )
|Gain on disposal of assets                                                                        |  |                                | (7         | ) |                               |   | (17        | )    |  |   | (8         | ) |  |   | (34        | )
|                                                                                                  |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Total operating expenses                                                                          |  |                                | 10,992     |   |                               |   | 13,061     |      |  |   | 34,495     |   |  |   | 38,040     |  
|                                                                                                  |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Operating income                                                                                  |  |                                | 56         |   |                               |   | 308        |      |  |   | 632        |   |  |   | 3,429      |  
|                                                                                                  |  |                                |            |  
|Interest expense, net                                                                             |  |                                | (558       | ) |                               |   | (1,014     | )    |  |   | (1,811     | ) |  |   | (3,027     | )
|                                                                                                  |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|                                                                                                  |  |                                |            |  
|Income (loss) before income tax expense                                                           |  |                                | (502       | ) |                               |   | (706       | )    |  |   | (1,179     | ) |  |   | 402        |  
|Income tax expense                                                                                |  |                                | 81         |   |                               |   | 60         |      |  |   | 244        |   |  |   | 179        |  
|                                                                                                  |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss)                                                                                 |  | $                              | (583       | ) |                               | $ | (766       | )    |  | $ | (1,423     | ) |  | $ | 223        |  
|                                                                                                  |  |                                |            |  
|Participation rights of common stock purchase warrants in undistributed earnings                  |  |                                |           |   |                               |   |           |      |  |   |           |   |  |   | (24        | )
|                                                                                                  |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) applicable to common shareholders                                               |  | $                              | (583       | ) |                               | $ | (766       | )    |  | $ | (1,423     | ) |  | $ | 199        |  
|                                                                                                  |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|                                                                                                  |  |                                |            |  
|Income (loss) per share applicable to common shareholders:                                        |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Basic                                                                                             |  | $                              | (0.01      | ) |                               | $ | (0.02      | )    |  | $ | (0.03      | ) |  | $ | 0.00       |  
|                                                                                                  |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Diluted                                                                                           |  | $                              | (0.01      | ) |                               | $ | (0.02      | )    |  | $ | (0.03      | ) |  | $ | 0.00       |  
|                                                                                                  |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|                                                                                                  |  |                                |            |  
|Weighted average shares outstanding:                                                              |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Basic                                                                                             |  |                                | 49,051,980 |   |                               |   | 49,051,980 |      |  |   | 49,051,980 |   |  |   | 48,810,954 |  
|                                                                                                  |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Diluted                                                                                           |  |                                | 49,051,980 |   |                               |   | 49,051,980 |      |  |   | 49,051,980 |   |  |   | 54,961,483 |  
|                                                                                                  |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  

See Accompanying Notes to Consolidated Financial Statements



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TELETOUCH COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                          |  |                               |        |   |      |   |        |  
|----------------------------------------------------------------------------------------- |  | ----------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                          |  | Nine Months EndedFebruary 28, |       
|                                                                                          |  | 2009                          |        |   | 2008 |  
|Operating Activities:                                                                     |  |                               |        |   |      |   |        |  
|Net income (loss)                                                                         |  | $                             | (1,423 | ) |      | $ | 223    |  
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                               |        |   |      |   |        |  
|Depreciation and amortization                                                             |  |                               | 1,075  |   |      |   | 1,170  |  
|Non-cash compensation expense                                                             |  |                               | 171    |   |      |   | 88     |  
|Non-cash interest expense                                                                 |  |                               | 87     |   |      |   | 1,281  |  
|Non-cash gain on forgiveness of a trade payable obligation to AT&T                        |  |                               |       |   |      |   | (3,824 | )
|Provision for losses on accounts receivable                                               |  |                               | 677    |   |      |   | 787    |  
|Provision for inventory obsolescence                                                      |  |                               | 249    |   |      |   | 25     |  
|Gain on disposal of assets                                                                |  |                               | (8     | ) |      |   | (34    | )
|Changes in operating assets and liabilities:                                              |  |                               |        |   |      |   |        |  
|Accounts receivable, net                                                                  |  |                               | 835    |   |      |   | (1,535 | )
|Inventories                                                                               |  |                               | 228    |   |      |   | 529    |  
|Notes receivable                                                                          |  |                               | 8      |   |      |   |       |  
|Prepaid expenses and other current assets                                                 |  |                               | 522    |   |      |   | (51    | )
|Accounts payable                                                                          |  |                               | (1,455 | ) |      |   | (5,544 | )
|Accrued expenses and other current liabilities                                            |  |                               | (472   | ) |      |   | 1,318  |  
|Deferred revenue                                                                          |  |                               | (10    | ) |      |   | (16    | )
|                                                                                          |  |                               |        |   |      |   |        |  
|Net cash provided by (used in) operating activities                                       |  |                               | 484    |   |      |   | (5,583 | )
|                                                                                          |  |                               |        |   |      |   |        |  
|                                                                                          |  |                              
|Investing Activities:                                                                     |  |                               |        |   |      |   |        |  
|Purchases of property and equipment                                                       |  |                               | (233   | ) |      |   | (188   | )
|Net proceeds from sale of assets                                                          |  |                               | 25     |   |      |   | 16     |  
|Issuance of notes receivable                                                              |  |                               | (428   | ) |      |   |       |  
|                                                                                          |  |                               |        |   |      |   |        |  
|Net cash used in investing activities                                                     |  |                               | (636   | ) |      |   | (172   | )
|                                                                                          |  |                               |        |   |      |   |        |  
|                                                                                          |  |                              
|Financing Activities:                                                                     |  |                               |        |   |      |   |        |  
|Deferred financing costs                                                                  |  |                               |       |   |      |   | (24    | )
|Net (payments on) proceeds from borrowings                                                |  |                               | (760   | ) |      |   | 798    |  
|Proceeds from long-term debt                                                              |  |                               | 250    |   |      |   |       |  
|Payments on short-term debt                                                               |  |                               | (68    | ) |      |   | (82    | )
|Payments on long-term debt                                                                |  |                               | (628   | ) |      |   | (81    | )
|Payments on redeemable common stock purchase warrants                                     |  |                               | (1,500 | ) |      |   |       |  
|Proceeds from stock issuance                                                              |  |                               |       |   |      |   | 60     |  
|                                                                                          |  |                               |        |   |      |   |        |  
|Net cash provided by (used in) financing activities                                       |  |                               | (2,706 | ) |      |   | 671    |  
|                                                                                          |  |                               |        |   |      |   |        |  
|                                                                                          |  |                              
|Net decrease in cash                                                                      |  |                               | (2,858 | ) |      |   | (5,084 | )
|Cash at beginning of period                                                               |  |                               | 4,729  |   |      |   | 7,824  |  
|                                                                                          |  |                               |        |   |      |   |        |  
|                                                                                          |  |                              
|Cash at end of period                                                                     |  | $                             | 1,871  |   |      | $ | 2,740  |  
|                                                                                          |  |                               |        |   |      |   |        |  
|Supplemental Cash Flow Data:                                                              |  |                               |        |   |      |   |        |  
|Cash payments for interest                                                                |  | $                             | 1,738  |   |      | $ | 1,748  |  
|                                                                                          |  |                               |        |   |      |   |        |  
|Cash payments for income taxes                                                            |  | $                             | 246    |   |      | $ |       |  
|                                                                                          |  |                               |        |   |      |   |        |  
|Non-Cash Transactions:                                                                    |  |                               |        |   |      |   |        |  
|Transfer of long-term receivable-related party to notes receivable                        |  | $                             | 428    |   |      | $ |       |  
|                                                                                          |  |                               |        |   |      |   |        |  
|Transfer of redeemable common stock purchase warrants to long-term debt                   |  | $                             | 1,500  |   |      | $ |       |  
|                                                                                          |  |                               |        |   |      |   |        |  

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 February 28, 2009 and for each of the three and nine months ended February 28, 2009 and 2008, 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 and nine months ended February 28, 2009, 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 May 31, 2008 Annual Report on Form 10-K.

Financial Condition and Going Concern: The Company had a working capital deficit of approximately $9,886,000 and $9,013,000 at February 28, 2009 and May 31, 2008, respectively, and a shareholders deficit of
approximately $10,004,000 and $8,752,000 at February 28, 2009 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 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. The stated maturity date of the obligation is February 2010. The factoring debt obligation at February 28, 2009 and May 31, 2008, was approximately $8,266,000 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 was able to partially improve its working capital deficit and shareholders equity deficit as of May 31,
2008. 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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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 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 and 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 February 28, 2009 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, as described below.

Accounts receivable are presented net of an allowance for doubtful accounts of $672,000 and $480,000 at February 28, 2009 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 past due accounts that are in various stages of the Companys collection process 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. Beginning in the third quarter of fiscal year 2009, the Company began performing the
evaluation of its past due accounts on a quarterly basis and will write-off those accounts it believes are uncollectible at the end of each quarter.

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 only of finished goods. In determining the adequacy of the reserve for inventory obsolescence, management considers a number of factors including recent sales trends, quantities on-hand, industry market conditions and economic
conditions. In assessing the reserve, management also considers any price protection credits the Company has received or due from its vendors. In addition, management establishes specific valuation allowances for discontinued inventory based on its
prior experience liquidating this type of inventory although actual results could differ from those estimates. 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 February 28, 2009 and May 31, 2008, respectively.

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 network infrastructure |  | 5-15 years                                      
|Office and computer equipment  |  | 3-5 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 No.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   



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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

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 (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



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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 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
February 28, 2009 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 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 February 28, 2009 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 Progressive Concepts Communications, Inc. (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 TLL Partners, LLC (TLLP), PCCIs wholly owned subsidiary and an entity controlled by Robert McMurrey, Teletouchs Chairman, 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 /



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exchange program for new cellular subscribers in order to match programs put in place by most of the 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 of those that do, 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, 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 to date have been within managements
expectations but due to the current economic environment in the United States, management expects credit losses to increase through the remainder of fiscal 2009 and continuing into fiscal 2010.

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 February 28, 2009 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 No. 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



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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).

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 and nine months ended
February 28, 2009 and 2008 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 nine months ended February 28,
2009 and 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 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 ranged from 172.6% to 173.7% for options issued in the nine months ended February 28, 2009 and were 140.8% for options issued in the nine months ended February 29, 2008. 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 range from 5.0 years to 6.0 years
for options issued in the nine months ended February 28, 2009 and 5.5 years for options issued in the nine months ended February 29, 2008. 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 range from 3.39% to 3.54% for options issued in the nine months ended February 28, 2009 and was 3.35% for the options issued in the nine
months ended February 29, 2008. Dividend yield is zero for these options granted in the nine months ended February 28, 2009 and 2008 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 nine months ended February 28, 2009 and 2008. The Company reviews the
expected forfeiture rate annually to determine if that percent is still reasonable based on historical experience.

Options exercisable at
February 28, 2009 and May 31, 2008 totaled 1,424,326 and 1,078,656, respectively. The weighted-average exercise price per share of options exercisable at February 28, 2009 and May 31, 2008 was $0.38 and $0.41, respectively, with
remaining weighted-average contractual terms of approximately 6.5 years as of both dates.

The weighted-average grant date fair value of options granted
during the nine months ended February 28, 2009 and 2008 was $0.19 and $0.24, respectively.

At February 28, 2009, the total remaining
unrecognized compensation cost related to unvested stock options amounted to approximately $381,000, which will be amortized over the weighted-average remaining requisite service period of 2.3 years.



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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 12 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. 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 net income for the nine months ended February 29, 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 and nine months ended February 28, 2009.

The following table provides a reconciliation of the numerators and the denominators used to calculate basic and diluted loss per share as disclosed in our Consolidated Statement of Operations for the three and nine
months ended February 28, 2009 and 2008 (in thousands except per share amounts):



|                                                                                                                                     |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------ | ------ | - | ----------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                                     |  | Three Months EndedFebruary 28, |        |   | Nine Months EndedFebruary 28, |  
|                                                                                                                                     |  | 2009                           |        |   | 2008                          |   |        | 2009 |  |   | 2008   |  
|Numerator:                                                                                                                           |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss)                                                                                                                    |  | $                              | (583   | ) |                               | $ | (766   | )    |  | $ | (1,423 | ) |  | $ | 223    |  
|Participation rights of preferred stock in undistributed earnings (see percentage calculation below)                                 |  |                                |       |   |                               |   |       |      |  |   |       |   |  |   | (24    | )
|                                                                                                                                     |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Numerator for basic net income (loss) per common share - income (loss) available to common shareholders under the two-class
method   |  | $                              | (583   | ) |                               | $ | (766   | )    |  | $ | (1,423 | ) |  | $ | 199    |  
|Participation rights of preferred stock in undistributed earnings                                                                    |  |                                |       |   |                               |   |       |      |  |   |       |   |  |   | 24     |  
|                                                                                                                                     |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Numerator for diluted net income (loss) per common share - income (loss) available to common shareholders under the two-class
method |  | $                              | (583   | ) |                               | $ | (766   | )    |  | $ | (1,423 | ) |  | $ | 223    |  
|                                                                                                                                     |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Denominator:                                                                                                                         |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Denominator for basic net income (loss) per common share - weighted-average shares                                                   |  |                                | 49,052 |   |                               |   | 49,052 |      |  |   | 49,052 |   |  |   | 48,811 |  
|Effect of dilution due to common stock purchase warrants                                                                             |  |                                |       |   |                               |   |       |      |  |   |       |   |  |   | 5,763  |  
|                                                                                                                                     |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Subtotal                                                                                                                             |  |                                | 49,052 |   |                               |   | 49,052 |      |  |   | 49,052 |   |  |   | 54,574 |  
|Percentage of undistributed earnings allocated to common stock purchase warrants                                                     |  |                                | 0.0    | % |                               |   | 0.0    | %    |  |   | 0.0    | % |  |   | 10.6   | %
|Effect of dilution due to stock options                                                                                              |  |                                |       |   |                               |   |        |      |  |   |       |   |  |   | 387    |  
|                                                                                                                                     |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Denominator for diluted net income (loss) per common share - adjusted weighted-average shares                                        |  |                                | 49,052 |   |                               |   | 49,052 |      |  |   | 49,052 |   |  |   | 54,961 |  
|                                                                                                                                     |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss) per common share:                                                                                                  |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Basic                                                                                                                                |  | $                              | (0.01  | ) |                               | $ | (0.02  | )    |  | $ | (0.03  | ) |  | $ | 0.00   |  
|                                                                                                                                     |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Diluted                                                                                                                              |  | $                              | (0.01  | ) |                               | $ | (0.02  | )    |  | $ | (0.03  | ) |  | $ | 0.00   |  
|                                                                                                                                     |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  

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



|                     |  |                                            |  |                                  
|-------------------- |  | ------------------------------------------ |  | ---------------------------------
|                     |  | Three and NineMonths EndedFebruary 28,2009 |  | ThreeMonths EndedFebruary 29,2008
|Common stock options |  | 3,911                                      |  | 2,054                            



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Recently Issued Accounting Pronouncements Not Yet Effective

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)). This statement amends SFAS 141 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 No. 160, Noncontrolling Interests in Consolidated Financial Statements 
An Amendment of ARB No. 51 (SFAS 160). 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 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



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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 EndedFebruary 28, |        |   | Nine Months EndedFebruary 28, |  
|                                             |  | 2009                           |        |   | 2008                          |   |        | 2009 |  |   | 2008    |  
|Gross service, rent and maintenance billings |  | $                              | 15,298 |   |                               | $ | 16,333 |      |  | $ | 46,560  |   |  | $ | 49,264  |  
|Less: Direct costs paid to AT&T              |  |                                | (8,520 | ) |                               |   | (9,079 | )    |  |   | (26,036 | ) |  |   | (27,270 | )
|                                             |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Net service, rent and maintenance revenue    |  | $                              | 6,778  |   |                               | $ | 7,254  |      |  | $ | 20,524  |   |  | $ | 21,994  |  
|                                             |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  

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, 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.



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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):



|                               |  |                   |       |         |              |      |           |  |   |       |   |         |   |       |           |   |      |   |  |   |       |  
|------------------------------ |  | ----------------- | ----- | ------- | ------------ | ---- | --------- |  | - | ----- | - | ------- | - | ----- | --------- | - | ---- | - |  | - | ----- | -
|                               |  | February 28, 2009 |       |         | May 31, 2008 |     
|                               |  | Cost              |       | Reserve |              |      | Net Value |  |   | Cost  |   | Reserve |   |       | Net Value |  
|Phones and related accessories |  | $                 | 727   |         | $            |     |           |  | $ | 727   |   |         | $ | 1,262 |           | $ |     |   |  | $ | 1,262 |  
|Automotive products            |  |                   | 480   |         |              |     |           |  |   | 480   |   |         |   | 621   |           |   |     |   |  |   | 621   |  
|Satellite products             |  |                   | 24    |         |              |     |           |  |   | 24    |   |         |   | 29    |           |   |     |   |  |   | 29    |  
|Two-way products               |  |                   | 680   |         |              | (60  | )         |  |   | 620   |   |         |   | 563   |           |   | (39  | ) |  |   | 524   |  
|Other                          |  |                   | 198   |         |              |     |           |  |   | 198   |   |         |   | 189   |           |   |     |   |  |   | 189   |  
|                               |  |                   |       |         |              |      |           |  |   |       |   |         |   |       |           |   |      |   |  |   |       |  
|Total inventory and reserves   |  | $                 | 2,109 |         | $            | (60  | )         |  | $ | 2,049 |   |         | $ | 2,664 |           | $ | (39  | ) |  | $ | 2,625 |  
|                               |  |                   |       |         |              |     
|Obsolescence reserve           |  |                   |      |         |              | (200 | )         |  |   | (200  | ) |         |   |      |           |   | (224 | ) |  |   | (224  | )
|                               |  |                   |       |         |              |      |           |  |   |       |   |         |   |       |           |   |      |   |  |   |       |  
|Total inventory and reserves   |  | $                 | 2,109 |         | $            | (260 | )         |  | $ | 1,849 |   |         | $ | 2,664 |           | $ | (263 | ) |  | $ | 2,401 |  
|                               |  |                   |       |         |              |      |           |  |   |       |   |         |   |       |           |   |      |   |  |   |       |  

NOTE 5  NOTES RECEIVABLE

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 is secured by substantially all of the assets of Mobui, excluding certain intellectual property, and by personal guarantee from the founder of Mobui.



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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
minority equity position in Mobui.

As of February 28, 2009 the total principal and accrued interest due under the Sixth Amended Note is approximately
$429,000 which is reported as a current asset on the Companys balance sheet.

In addition 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 fiscal year 2009, 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 was 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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As of the date of this Report, Air-bank is in default on the promissory note since they could not make the initial
principal and accrued interest payment which was extended by the Company to April 10, 2009. Due to their default status, the Company has initiated foreclosure procedures on the assets of Air-bank. The Company believes the fair value of
Air-banks collateralized assets will be in excess of the balance of the note recorded in the Companys financials.

Furthermore, the Company
issued a promissory note in August 2008 to Wireless Works, a former PCI cellular agent, for approximately $13,000 related to unpaid equipment purchases. The note is due in full on December 31, 2009 and has an annual interest rate of 0%.

NOTE 6  PROPERTY, PLANT AND EQUIPMENT

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



|                                     |  |                  |        |   |             |   |        |  
|------------------------------------ |  | ---------------- | ------ | - | ----------- | - | ------ | -
|                                     |  | February 28,2009 |        |   | May 31,2008 |  
|                                     |  |                 
|Land                                 |  | $                | 774    |   |             | $ | 774    |  
|Buildings and leasehold improvements |  |                  | 3,165  |   |             |   | 3,168  |  
|Two-way network infrastructure       |  |                  | 1,067  |   |             |   | 1,177  |  
|Office and computer equipment        |  |                  | 3,312  |   |             |   | 3,197  |  
|Signs and displays                   |  |                  | 1,386  |   |             |   | 1,737  |  
|Other                                |  |                  | 372    |   |             |   | 410    |  
|                                     |  |                  |        |   |             |   |        |  
|                                     |  | $                | 10,076 |   |             | $ | 10,463 |  
|Accumulated depreciation             |  |                  | (7,027 | ) |             |   | (7,253 | )
|                                     |  |                  |        |   |             |   |        |  
|                                     |  | $                | 3,049  |   |             | $ | 3,210  |  
|                                     |  |                  |        |   |             |   |        |  

Depreciation expense was approximately $116,000 and $145,000 for the three months ended February 28, 2009 and
2008, respectively and $377,000 and $507,000 for the nine months ended February 28, 2009 and 2008, 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 February 28, 2009 (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 |  | $                | 92  |             | $ | 10          |  | $             | 163 |               | $ |                    |  | $              | 11 |  | $ | 1,266 |  | $ | 1,542
|Office and computer equipment        |  |                  | 115 |             |   | 132         |  |               | 16  |               |   |                    |  |                |   |  |   |      |  |   | 263  
|Two-way network infrastructure       |  |                  | 51  |             |   | 30          |  |               | 243 |               |   |                    |  |                |   |  |   |      |  |   | 324  
|Signs and displays                   |  |                  | 66  |             |   | 19          |  |               |    |               |   |                    |  |                |   |  |   |      |  |   | 85   
|Other                                |  |                  | 28  |             |   | 33          |  |               |    |               |   |                    |  |                |   |  |   |      |  |   | 61   
|Land                                 |  |                  |    |             |   |            |  |               |    |               |   |                    |  |                |   |  |   | 774   |  |   | 774  
|                                     |  |                  |     |             |   |             |  |               |     |               |   |                     |  |                |    |  |   |       |  |   |      
|                                     |  | $                | 352 |             | $ | 224         |  | $             | 422 |               | $ |                    |  | $              | 11 |  | $ | 2,040 |  | $ | 3,049
|                                     |  |                  |     |             |   |             |  |               |     |               |   |                     |  |                |    |  |   |       |  |   |      

NOTE 7  GOODWILL AND OTHER INTANGIBLE ASSETS

Intangible Assets with Indefinite Lives: In accordance with SFAS 142, 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 was no change in the $343,000 carrying amount of goodwill for the three and nine months ended February 28, 2009.

The reported goodwill of the Company at February 28, 2009 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



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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.

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



|                                              |  |                     |        |                         |   |        |                  |  |                     |       |                         |   |        |                  |   |        |   |  |   |      
|--------------------------------------------- |  | ------------------- | ------ | ----------------------- | - | ------ | ---------------- |  | ------------------- | ----- | ----------------------- | - | ------ | ---------------- | - | ------ | - |  | - | -----
|                                              |  | February 28, 2009   |        | May 31, 2008           
|                                              |  | GrossCarryingAmount |        | AccumulatedAmortization |   |        | NetCarryingValue |  | GrossCarryingAmount |       | AccumulatedAmortization |   |        | NetCarryingValue
|                                              |  |                     |        |                         |   |       
|Wireless contracts and subscriber bases       |  | $                   | 10,258 |                         | $ | (6,135 | )                |  | $                   | 4,123 |                         | $ | 10,258 |                  | $ | (5,546 | ) |  | $ | 4,712
|FCC licenses                                  |  |                     | 104    |                         |   | (58    | )                |  |                     | 46    |                         |   | 104    |                  |   | (50    | ) |  |   | 54   
|Wholesale customer list                       |  |                     | 1,235  |                         |   | (1,235 | )                |  |                     |      |                         |   | 1,235  |                  |   | (1,235 | ) |  |   |     
|Loan origination fees                         |  |                     | 394    |                         |   | (174   | )                |  |                     | 220   |                         |   | 394    |                  |   | (86    | ) |  |   | 308  
|Non-competition agreements                    |  |                     |       |                         |   |       |                  |  |                     |      |                         |   | 95     |                  |   | (82    | ) |  |   | 13   
|Internally-developed software                 |  |                     | 170    |                         |   | (170   | )                |  |                     |      |                         |   | 170    |                  |   | (170   | ) |  |   |     
|                                              |  |                     |        |                         |   |        |                  |  |                     |       |                         |   |        |                  |   |        |   |  |   |      
|                                              |  |                     |        |                         |   |       
|Balance at February 28, 2009 and May 31, 2008 |  | $                   | 12,161 |                         | $ | (7,772 | )                |  | $                   | 4,389 |                         | $ | 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 February 28, 2009 and 2008 was approximately $230,000
and $221,000, respectively and $698,000 and $663,000 for the nine months ended February 28, 2009 and 2008, respectively.

NOTE 8  ACCRUED
EXPENSES AND OTHER CURRENT LIABILITIES

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



|                                            |  |                  |       |             |   |      
|------------------------------------------- |  | ---------------- | ----- | ----------- | - | -----
|                                            |  | February 28,2009 |       | May 31,2008
|                                            |  |                 
|Accrued payroll and other personnel expense |  | $                | 1,180 |             | $ | 1,743
|Accrued state and local taxes               |  |                  | 768   |             |   | 872  
|Unvouchered accounts payable                |  |                  | 2,983 |             |   | 2,407
|Customer deposits payable                   |  |                  | 618   |             |   | 679  
|Unearned sales/leaseback profit             |  |                  | 39    |             |   |     
|Other                                       |  |                  | 609   |             |   | 846  
|                                            |  |                  |       |             |   |      
|Total                                       |  | $                | 6,197 |             | $ | 6,547
|                                            |  |                  |       |             |   |      



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NOTE 9  LONG-TERM DEBT

Long-term debt at February 28, 2009 and May 31, 2008 consists of the following (in thousands):



|                                      |  |                  |        |   |             |   |        |  
|------------------------------------- |  | ---------------- | ------ | - | ----------- | - | ------ | -
|                                      |  | February 28,2009 |        |   | May 31,2008 |  
|Vehicle notes                         |  | $                | 2      |   |             | $ | 7      |  
|Thermo revolver                       |  |                  | 4,782  |   |             |   | 4,863  |  
|United Commercial Bank debt           |  |                  | 2,488  |   |             |   | 2,552  |  
|Jardine Capital Corporation bank debt |  |                  | 637    |   |             |   | 643    |  
|Thermo factoring debt                 |  |                  | 8,266  |   |             |   | 9,091  |  
|Warrant redemption notes payable      |  |                  | 1,275  |   |             |   |       |  
|                                      |  |                  |        |   |             |   |        |  
|Total long-term debt                  |  | $                | 17,450 |   |             | $ | 17,156 |  
|Less: Current portion                 |  |                  | (9,551 | ) |             |   | (9,727 | )
|                                      |  |                  |        |   |             |   |        |  
|Long-term debt, net                   |  | $                | 7,899  |   |             | $ | 7,429  |  
|                                      |  |                  |        |   |             |   |        |  

Current portion of long-term debt at February 28, 2009 and May 31, 2008 consists of the following (in
thousands):



|                                        |  |                  |       |             |   |      
|--------------------------------------- |  | ---------------- | ----- | ----------- | - | -----
|                                        |  | February 28,2009 |       | May 31,2008
|Vehicle notes                           |  | $                | 2     |             | $ | 6    
|Thermo revolver                         |  |                  | 873   |             |   | 540  
|United Commercial Bank debt             |  |                  | 101   |             |   | 82   
|Jardine Capital Corporation bank debt   |  |                  | 9     |             |   | 8    
|Thermo factoring debt                   |  |                  | 8,266 |             |   | 9,091
|Warrant redemption notes payable        |  |                  | 300   |             |   |     
|                                        |  |                  |       |             |   |      
|Total current portion of long-term debt |  | $                | 9,551 |             | $ | 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 February 28, 2009 approximately $5,114,000 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 12 Shareholders Equity for discussion of May 2008 agreement to redeem common stock purchase warrants and redemption in June
2008).

NOTE 10  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):



|                                                            |  |                  |         |   |             |   |         |  
|----------------------------------------------------------- |  | ---------------- | ------- | - | ----------- | - | ------- | -
|                                                            |  | February 28,2009 |         |   | May 31,2008 |  
|                                                            |  |                 
|Deferred Tax Assets:                                        |  |                  |         |   |             |   |         |  
|Current deferred tax assets:                                |  |                  |         |   |             |   |         |  
|Accrued liabilities                                         |  | $                | 396     |   |             | $ | 433     |  
|Deferred revenue                                            |  |                  | 41      |   |             |   | 34      |  
|Inventories                                                 |  |                  | 95      |   |             |   | 87      |  
|Bad debt reserve                                            |  |                  | 229     |   |             |   | 158     |  
|                                                            |  |                  |         |   |             |   |         |  
|                                                            |  |                  | 761     |   |             |   | 712     |  
|Valuation allowance                                         |  |                  | (761    | ) |             |   | (689    | )
|                                                            |  |                  |         |   |             |   |         |  
|Current deferred tax assets, net of valuation allowance     |  |                  |        |   |             |   | 23      |  
|                                                            |  |                 
|Non-current deferred tax assets:                            |  |                  |         |   |             |   |         |  
|Net operating loss                                          |  |                  | 11,558  |   |             |   | 11,157  |  
|Intangible assets                                           |  |                  | 185     |   |             |   | 150     |  
|Fixed assets                                                |  |                  | 256     |   |             |   | 288     |  
|Licenses                                                    |  |                  | 19      |   |             |   | 21      |  
|Other                                                       |  |                  | 2       |   |             |   | 2       |  
|                                                            |  |                  |         |   |             |   |         |  
|                                                            |  |                  | 12,020  |   |             |   | 11,618  |  
|Valuation allowance                                         |  |                  | (11,950 | ) |             |   | (11,536 | )
|                                                            |  |                  |         |   |             |   |         |  
|Non-current deferred tax assets, net of valuation allowance |  |                  | 70      |   |             |   | 82      |  
|                                                            |  |                  |         |   |             |   |         |  
|                                                            |  |                 
|Deferred Tax Liabilities:                                   |  |                  |         |   |             |   |         |  
|Current deferred tax liabilities:                           |  |                  |         |   |             |   |         |  
|Other                                                       |  |                  |        |   |             |   | 23      |  
|                                                            |  |                  |         |   |             |   |         |  
|Non-current deferred tax liabilities:                       |  |                  |         |   |             |   |         |  
|Fixed assets                                                |  |                  | 70      |   |             |   | 82      |  
|                                                            |  |                  |         |   |             |   |         |  
|                                                            |  |                 
|Net Current Deferred Tax Asset                              |  | $                |        |   |             | $ |        |  
|                                                            |  |                  |         |   |             |   |         |  
|                                                            |  |                 
|Net Non-Current Deferred Tax Asset                          |  | $                |        |   |             | $ |        |  
|                                                            |  |                  |         |   |             |   |         |  

NOTE 11  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 February 28,
|                 |  | Total                             |       | 2010 |   | 2011  |  | 2012 |     | 2013 |   | Thereafter
|Operating leases |  | $                                 | 6,254 |      | $ | 1,243 |  | $    | 570 |      | $ | 408        |  | $ | 317 |  | $ | 3,716

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 successful in resolving this matter. If this



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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 reached a final agreement with Mr. Cole to settle this claim and a one time payment of $80,000 was paid in April 2009 in exchange for a settlement and release agreement.

NOTE 12  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 had
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 had the ability to
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.

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



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Refinanced, the Company 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 13  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 Internal Revenue 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 February 28, 2009, approximately 28,661 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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##### Table of Contents

A summary of option activity for the nine months ended February 28, 2009 is as follows:



|                                         |  |           |   |  |                              |      |                                         |      |                         |   |  
|---------------------------------------- |  | --------- | - |  | ---------------------------- | ---- | --------------------------------------- | ---- | ----------------------- | - | -
|                                         |  | Shares    |   |  | WeightedAverageExercisePrice |      | WeightedAverageRemainingContractualTerm |      | AggregateIntrinsicValue
|Outstanding at June 1, 2008              |  | 1,565,323 |   |  | $                            | 0.40 |                                         |     |                         |   |  
|Nine months ended February 28, 2009      |  |           |   |  |                              |      |                                         |      |                         |   |  
|Granted                                  |  | 2,398,156 |   |  |                              | 0.19 |                                         |     |                         |   |  
|Exercised                                |  |          |   |  |                              |     |                                         |     |                         |   |  
|Forfeited                                |  | (52,664   | ) |  |                              | 0.41 |                                         |     |                         |   |  
|                                         |  |           |   |  |                              |      |                                         |      |                         |   |  
|Outstanding at February 28, 2009         |  | 3,910,815 |   |  |                              | 0.27 |                                         | 8.24 |                         | $ | 
|                                         |  |           |   |  |                              |      |                                         |      |                         |   |  
|                                         |  |           |   | 
|Options exercisable at February 28, 2009 |  | 1,424,326 |   |  | $                            | 0.38 |                                         | 6.47 |                         | $ | 
|                                         |  |           |   |  |                              |      |                                         |      |                         |   |  

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                          |  | (253,334           | ) |  |                            | 0.36
|Forfeited                       |  | (10,000            | ) |  |                            | 0.22
|                                |  |                    |   |  |                            |     
|Non-vested at February 28, 2009 |  | 2,486,489          |   |  | $                          | 0.20
|                                |  |                    |   |  |                            |     

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 $85,000 and $28,000 in stock based compensation expense in the consolidated financial statements for the three months ended February 28, 2009 and 2008, respectively. The Company recorded approximately $171,000 and $88,000 in stock
based compensation expense in the consolidated financial statements for the nine months ended February 28, 2009 and 2008, respectively.

NOTE 14
 RELATED PARTY TRANSACTIONS

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

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 February 28, 2009, $48,000 remains payable
to TLLP by the Company.

NOTE 15  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 SFAS No. 131 Disclosures about Segments of an Enterprise and Related Information (SFAS 131).



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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. Furthermore, in January
2009 Teletouch 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 and products.

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 unaudited operating financial information by each segment for the three
and nine months ended February 28, 2009 and 2008 (in thousands):



|                                                                                                  |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ----------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                  |  | Three Months EndedFebruary 29, |        |   | Nine Months EndedFebruary 29, |  
|                                                                                                  |  | 2009                           |        |   | 2008                          |   |        | 2009 |  |   | 2008   |  
|Operating revenues:                                                                               |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Service, rent and maintenance revenue                                                             |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Cellular                                                                                          |  | $                              | 6,290  |   |                               | $ | 6,634  |      |  | $ | 19,137 |   |  | $ | 20,208 |  
|Two-way                                                                                           |  |                                | 458    |   |                               |   | 526    |      |  |   | 1,246  |   |  |   | 1,410  |  
|Other                                                                                             |  |                                | 30     |   |                               |   | 94     |      |  |   | 141    |   |  |   | 376    |  
|                                                                                                  |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Total                                                                                             |  |                                | 6,778  |   |                               |   | 7,254  |      |  |   | 20,524 |   |  |   | 21,994 |  
|                                                                                                  |  |                                |        |  
|Product sales revenue                                                                             |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Cellular                                                                                          |  |                                | 1,774  |   |                               |   | 1,915  |      |  |   | 5,366  |   |  |   | 5,806  |  
|Wholesale                                                                                         |  |                                | 1,870  |   |                               |   | 3,200  |      |  |   | 7,071  |   |  |   | 10,260 |  
|Two-way                                                                                           |  |                                | 542    |   |                               |   | 562    |      |  |   | 1,878  |   |  |   | 1,843  |  
|Other                                                                                             |  |                                | 84     |   |                               |   | 439    |      |  |   | 288    |   |  |   | 1,566  |  
|                                                                                                  |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Total                                                                                             |  |                                | 4,270  |   |                               |   | 6,116  |      |  |   | 14,603 |   |  |   | 19,475 |  
|                                                                                                  |  |                                |        |  
|Operating Revenue                                                                                 |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Cellular                                                                                          |  |                                | 8,064  |   |                               |   | 8,549  |      |  |   | 24,503 |   |  |   | 26,014 |  
|Wholesale                                                                                         |  |                                | 1,870  |   |                               |   | 3,200  |      |  |   | 7,071  |   |  |   | 10,260 |  
|Two-way                                                                                           |  |                                | 1,000  |   |                               |   | 1,088  |      |  |   | 3,124  |   |  |   | 3,253  |  
|Other                                                                                             |  |                                | 114    |   |                               |   | 533    |      |  |   | 429    |   |  |   | 1,942  |  
|                                                                                                  |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Total                                                                                             |  |                                | 11,048 |   |                               |   | 13,370 |      |  |   | 35,127 |   |  |   | 41,469 |  
|                                                                                                  |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|                                                                                                  |  |                                |        |  
|Operating expenses:                                                                               |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Cost of service, rent and maintenance (exclusive of depreciation and amortization included below) |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Cellular                                                                                          |  |                                | 1,763  |   |                               |   | 1,982  |      |  |   | 5,516  |   |  |   | 6,528  |  
|Two-way                                                                                           |  |                                | 435    |   |                               |   | 463    |      |  |   | 1,313  |   |  |   | 1,443  |  
|Other                                                                                             |  |                                | 28     |   |                               |   | 51     |      |  |   | 105    |   |  |   | 241    |  
|                                                                                                  |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Total                                                                                             |  |                                | 2,226  |   |                               |   | 2,496  |      |  |   | 6,934  |   |  |   | 8,212  |  
|                                                                                                  |  |                                |        |  
|Cost of products sold                                                                             |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Cellular                                                                                          |  |                                | 2,077  |   |                               |   | 1,971  |      |  |   | 5,739  |   |  |   | 5,732  |  
|Wholesale                                                                                         |  |                                | 1,635  |   |                               |   | 2,789  |      |  |   | 6,254  |   |  |   | 9,028  |  
|Two-way                                                                                           |  |                                | 407    |   |                               |   | 446    |      |  |   | 1,373  |   |  |   | 1,338  |  
|Other                                                                                             |  |                                | 67     |   |                               |   | 315    |      |  |   | 211    |   |  |   | 1,138  |  
|                                                                                                  |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Total                                                                                             |  |                                | 4,186  |   |                               |   | 5,521  |      |  |   | 13,577 |   |  |   | 17,236 |  
|                                                                                                  |  |                                |        |  
|Selling and general and administrative                                                            |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Cellular                                                                                          |  |                                | 1,335  |   |                               |   | 1,475  |      |  |   | 4,096  |   |  |   | 4,976  |  
|Wholesale                                                                                         |  |                                | 317    |   |                               |   | 365    |      |  |   | 958    |   |  |   | 1,165  |  
|Two-way                                                                                           |  |                                | 130    |   |                               |   | 153    |      |  |   | 404    |   |  |   | 392    |  
|Corporate                                                                                         |  |                                | 2,375  |   |                               |   | 2,486  |      |  |   | 7,081  |   |  |   | 8,074  |  
|Other                                                                                             |  |                                | 84     |   |                               |   | 217    |      |  |   | 378    |   |  |   | 674    |  
|                                                                                                  |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Total                                                                                             |  |                                | 4,241  |   |                               |   | 4,696  |      |  |   | 12,917 |   |  |   | 15,281 |  
|                                                                                                  |  |                                |        |  
|Depreciation and amortization                                                                     |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Two-way                                                                                           |  |                                | 46     |   |                               |   | 60     |      |  |   | 158    |   |  |   | 181    |  
|Corporate                                                                                         |  |                                | 300    |   |                               |   | 306    |      |  |   | 917    |   |  |   | 989    |  
|                                                                                                  |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Total                                                                                             |  |                                | 346    |   |                               |   | 366    |      |  |   | 1,075  |   |  |   | 1,170  |  
|                                                                                                  |  |                                |        |  
|Gain on forgiveness of trade payable obligation                                                   |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Corporate                                                                                         |  |                                |       |   |                               |   |       |      |  |   |       |   |  |   | (3,824 | )
|                                                                                                  |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|                                                                                                  |  |                                |        |  
|Gain on disposal of assets                                                                        |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Corporate                                                                                         |  |                                | (7     | ) |                               |   | (17    | )    |  |   | (8     | ) |  |   | (34    | )
|                                                                                                  |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Total Operating expenses                                                                          |  |                                | 10,992 |   |                               |   | 13,062 |      |  |   | 34,495 |   |  |   | 38,041 |  
|                                                                                                  |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|                                                                                                  |  |                                |        |  
|Operating income (loss)                                                                           |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Cellular                                                                                          |  |                                | 2,889  |   |                               |   | 3,121  |      |  |   | 9,152  |   |  |   | 8,778  |  
|Wholesale                                                                                         |  |                                | (82    | ) |                               |   | 46     |      |  |   | (141   | ) |  |   | 67     |  
|Two-way                                                                                           |  |                                | (18    | ) |                               |   | (34    | )    |  |   | (124   | ) |  |   | (101   | )
|Corporate                                                                                         |  |                                | (2,668 | ) |                               |   | (2,775 | )    |  |   | (7,990 | ) |  |   | (5,205 | )
|Other                                                                                             |  |                                | (65    | ) |                               |   | (50    | )    |  |   | (265   | ) |  |   | (111   | )
|                                                                                                  |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Total                                                                                             |  |                                | 56     |   |                               |   | 308    |      |  |   | 632    |   |  |   | 3,428  |  
|                                                                                                  |  |                                |        |  
|Interest Expense, Net                                                                             |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Two-way                                                                                           |  |                                |       |   |                               |   |       |      |  |   |       |   |  |   | (2     | )
|Corporate                                                                                         |  |                                | (558   | ) |                               |   | (1,014 | )    |  |   | (1,811 | ) |  |   | (3,025 | )
|                                                                                                  |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Total                                                                                             |  |                                | (558   | ) |                               |   | (1,014 | )    |  |   | (1,811 | ) |  |   | (3,027 | )
|                                                                                                  |  |                                |        |  
|Net income (loss) before income taxes                                                             |  |                                | (502   | ) |                               |   | (706   | )    |  |   | (1,179 | ) |  |   | 401    |  
|                                                                                                  |  |                                |        |  
|Income tax expense                                                                                |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|Corporate                                                                                         |  |                                | 81     |   |                               |   | 60     |      |  |   | 244    |   |  |   | 178    |  
|                                                                                                  |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|                                                                                                  |  |                                |        |  
|Net income (loss)                                                                                 |  | $                              | (583   | ) |                               | $ | (766   | )    |  | $ | (1,423 | ) |  | $ | 223    |  
|                                                                                                  |  |                                |        |  
|Participation rights of common stock purchase warrants in undistributed earnings                  |  |                                |       |   |                               |   |       |      |  |   |       |   |  |   | (24    | )
|                                                                                                  |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  
|                                                                                                  |  |                                |        |  
|Net income (loss) per share applicable to common shareholders                                     |  | $                              | (583   | ) |                               | $ | (766   | )    |  | $ | (1,423 | ) |  | $ | 199    |  
|                                                                                                  |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   |        |  



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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 February 28, 2009 and May 31, 2008 are as follows:



|          |  |                   |        |                            |   |               |  |                       |     |              |   |                            |  |               |        |                       |   |       |  |   |     |  |   |      
|--------- |  | ----------------- | ------ | -------------------------- | - | ------------- |  | --------------------- | --- | ------------ | - | -------------------------- |  | ------------- | ------ | --------------------- | - | ----- |  | - | --- |  | - | -----
|          |  | February 28, 2009 |        | May 31, 2008              
|          |  | Total Assets      |        | Property andEquipment, net |   | Goodwill, net |  | Intangible Assets,net |     | Total Assets |   | Property andEquipment, net |  | Goodwill, net |        | Intangible Assets,net
|Segment   |  |                   |        |                            |   |               |  |                       |     |              |   |                            |  |               |        |                       |   |       |  |   |     |  |   |      
|Cellular  |  | $                 | 14,094 |                            | $ | 229           |  | $                     |    |              | $ | 4,124                      |  | $             | 15,938 |                       | $ | 325   |  | $ |    |  | $ | 4,698
|Two-way   |  |                   | 1,937  |                            |   | 489           |  |                       | 343 |              |   | 45                         |  |               | 2,160  |                       |   | 512   |  |   | 343 |  |   | 81   
|Wholesale |  |                   | 1,021  |                            |   | 4             |  |                       |    |              |   |                           |  |               | 2,043  |                       |   |      |  |   |    |  |   |     
|Corporate |  |                   | 5,678  |                            |   | 2,320         |  |                       |    |              |   | 220                        |  |               | 8,269  |                       |   | 2,354 |  |   |    |  |   | 308  
|Other     |  |                   | 56     |                            |   | 7             |  |                       |    |              |   |                           |  |               | 159    |                       |   | 19    |  |   |    |  |   |     
|          |  |                   |        |                            |   |               |  |                       |     |              |   |                            |  |               |        |                       |   |       |  |   |     |  |   |      
|Totals    |  | $                 | 22,786 |                            | $ | 3,049         |  | $                     | 343 |              | $ | 4,389                      |  | $             | 28,569 |                       | $ | 3,210 |  | $ | 343 |  | $ | 5,087
|          |  |                   |        |                            |   |               |  |                       |     |              |   |                            |  |               |        |                       |   |       |  |   |     |  |   |      

During the three and nine months ended February 28, 2009 and 2008, the Company did not have a single customer
that represented more than 10% of total segment revenues.



|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



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

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

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

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

RESULTS OF OPERATIONS

Operating revenues are primarily generated
from the Companys cellular, wholesale and two-way radio operations and are comprised of a mix of service, rent and maintenance revenues as well as product revenues. Service, rent and maintenance revenues are generated primarily from the
Companys cellular and two-way radio operations. Within the cellular operations, the primary service revenues are generated by PCI



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from the sale of recurring cellular subscription services under several master distributor agreements with AT&T. Within the two-way radio operations,
service revenues are generated by the sale of subscription radio services on the Companys owned radio network as well as from the sale of maintenance services on customer owned radio equipment. The Company generates other service revenues from
some of its ancillary and smaller operations, including internet services and satellite television services.

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

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

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

Based on its assessment of the indicators listed in EITF 99-19, the Company has concluded that the AT&T services provided by PCI should be reported on a net basis. PCI does bill and assume the collections risk on
100% of the cellular services used by its customers. However, under a net basis of reporting these revenues, only the excess of the gross customer billings over the contractual percentage of these billed amounts paid to AT&T is reported as
revenue on the Companys consolidated financials.

Cost of providing service, rent and maintenance consists primarily of costs related to supporting
the PCIs cellular subscriber base under the master distributor agreement with AT&T including:



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



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



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



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| |  |  | 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.

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

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

The service, rent and maintenance revenues shown below have been grouped and are discussed by the
Companys reportable operating segments as defined under GAAP. The other category includes the service revenues generated by the remaining operations of the Company that individually do not meet the quantitative requirements for reporting
separately under GAAP, including car dealer installation, satellite television and dial up internet services.



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|                                                         |  |              |         |   |              |    |   |      |   |         |             |  |    |          |  |   |          |   |  |      |  
|-------------------------------------------------------- |  | ------------ | ------- | - | ------------ | -- | - | ---- | - | ------- | ----------- |  | -- | -------- |  | - | -------- | - |  | ---- | -
|(dollars in thousands)                                   |  | February 28, |         |   | 2009 vs 2008 |   
|                                                         |  | 2009         |         |   | % ofOperRev  |    |   | 2008 |   |         | % ofOperRev |  |    | $ Change |  |   | % Change |  
|Three Months Ended                                       |  |              |         |   |              |    |   |      |   |         |             |  |    |          |  |   |          |   |  |      |  
|Service, rent, and maintenance revenue                   |  |              |         |   |              |    |   |      |   |         |             |  |    |          |  |   |          |   |  |      |  
|Cellular operations                                      |  |              |         |   |              |    |   |      |   |         |             |  |    |          |  |   |          |   |  |      |  
|Gross cellular subscription billings                     |  | $            | 14,810  |   |              |    |   |      | $ | 15,713  |             |  |    |          |  | $ | (903     | ) |  | -6   | %
|Net revenue adjustment (revenue share due AT&T)          |  |              | (8,520  | ) |              |    |   |      |   | (9,079  | )           |  |    |          |  |   | 559      |   |  | -6   | %
|                                                         |  |              |         |   |              |    |   |      |   |         |             |  |    |          |  |   |          |   |  |      |  
|Net revenue reported from cellular subscription billings |  |              | 6,290   |   |              | 57 | % |      |   | 6,634   |             |  | 50 | %        |  |   | (344     | ) |  | -5   | %
|Other service revenue                                    |  |              |        |   |              | 0  | % |      |   |        |             |  | 0  | %        |  |   |         |   |  | 0    | %
|                                                         |  |              |         |   |              |    |   |      |   |         |             |  |    |          |  |   |          |   |  |      |  
|Cellular operations total service revenues:              |  |              | 6,290   |   |              | 57 | % |      |   | 6,634   |             |  | 50 | %        |  |   | (344     | ) |  | -5   | %
|                                                         |  |              |         |   |              |   
|Two-way radio operations                                 |  |              | 458     |   |              | 4  | % |      |   | 526     |             |  | 4  | %        |  |   | (68      | ) |  | -13  | %
|Other operations                                         |  |              | 30      |   |              | 0  | % |      |   | 94      |             |  | 0  | %        |  |   | (64      | ) |  | -68  | %
|                                                         |  |              |         |   |              |    |   |      |   |         |             |  |    |          |  |   |          |   |  |      |  
|                                                         |  |              |         |   |              |   
|Service, rent, and maintenance revenue                   |  | $            | 6,778   |   |              | 61 | % |      | $ | 7,254   |             |  | 54 | %        |  | $ | (476     | ) |  | -7   | %
|                                                         |  |              |         |   |              |    |   |      |   |         |             |  |    |          |  |   |          |   |  |      |  
|                                                         |  |              |         |   |              |   
|Total operating revenues                                 |  | $            | 11,048  |   |              |    |   |      | $ | 13,370  |             |  |    |          |  | $ | (2,322   | ) |  | -17  | %
|                                                         |  |              |         |   |              |   
|Nine Months Ended                                        |  |              |         |   |              |    |   |      |   |         |             |  |    |          |  |   |          |   |  |      |  
|Service, rent, and maintenance revenue                   |  |              |         |   |              |    |   |      |   |         |             |  |    |          |  |   |          |   |  |      |  
|Cellular operations                                      |  |              |         |   |              |    |   |      |   |         |             |  |    |          |  |   |          |   |  |      |  
|Gross cellular subscription billings                     |  | $            | 45,173  |   |              |    |   |      | $ | 47,319  |             |  |    |          |  | $ | (2,146   | ) |  | -5   | %
|Net revenue adjustment (revenue share due AT&T)          |  |              | (26,036 | ) |              |    |   |      |   | (27,270 | )           |  |    |          |  |   | 1,234    |   |  | -5   | %
|                                                         |  |              |         |   |              |    |   |      |   |         |             |  |    |          |  |   |          |   |  |      |  
|Net revenue reported from cellular subscription billings |  |              | 19,137  |   |              | 54 | % |      |   | 20,049  |             |  | 48 | %        |  |   | (912     | ) |  | -5   | %
|Other service revenue                                    |  |              |        |   |              | 0  | % |      |   | 159     |             |  | 1  | %        |  |   | (159     | ) |  | -100 | %
|                                                         |  |              |         |   |              |    |   |      |   |         |             |  |    |          |  |   |          |   |  |      |  
|Cellular operations total service revenues:              |  |              | 19,137  |   |              | 54 | % |      |   | 20,208  |             |  | 49 | %        |  |   | (1,071   | ) |  | -5   | %
|                                                         |  |              |         |   |              |   
|Two-way radio operations                                 |  |              | 1,246   |   |              | 4  | % |      |   | 1,410   |             |  | 3  | %        |  |   | (164     | ) |  | -12  | %
|Other operations                                         |  |              | 141     |   |              | 0  | % |      |   | 376     |             |  | 1  | %        |  |   | (235     | ) |  | -63  | %
|                                                         |  |              |         |   |              |    |   |      |   |         |             |  |    |          |  |   |          |   |  |      |  
|                                                         |  |              |         |   |              |   
|Service, rent, and maintenance revenue                   |  | $            | 20,524  |   |              | 58 | % |      | $ | 21,994  |             |  | 53 | %        |  | $ | (1,470   | ) |  | -7   | %
|                                                         |  |              |         |   |              |    |   |      |   |         |             |  |    |          |  |   |          |   |  |      |  
|                                                         |  |              |         |   |              |   
|Total operating revenues                                 |  | $            | 35,127  |   |              |    |   |      | $ | 41,469  |             |  |    |          |  | $ | (6,342   | ) |  | -15  | %

Gross cellular subscription billings are measured as the total recurring monthly cellular service charges
invoiced to PCIs wireless subscribers for which a fixed percentage of the dollars invoiced are retained by PCI as compensation for the services it provides to these subscribers and for which PCI takes full (100%) accounts receivable risk
before deducting certain revenue sharing amounts that are payable to AT&T under PCIs master distributor agreements with AT&T. The Company uses the calculation of gross cellular subscription billings to measure the Companys
overall growth rate, as well as to compute the common industry metrics of Average Revenue Per Unit (ARPU), Cash Cost Per User (CCPU) and Cost Per Gross Add (CPGA), each of which are also considered non-GAAP
performance measures.

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

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



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

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

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

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

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

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



|                                            |  |              |       |              |   |        |  |   |          |   |  |     |  
|------------------------------------------- |  | ------------ | ----- | ------------ | - | ------ |  | - | -------- | - |  | --- | -
|(dollars in thousands)                      |  | February 28, |       | 2009 vs 2008 |  
|                                            |  | 2009         |       | 2008         |   | Change |  |   | % Change |  
|Three Months Ended                          |  |              |       |              |   |        |  |   |          |   |  |     |  
|Cost of service, rent and maintenance       |  |              |       |              |   |        |  |   |          |   |  |     |  
|Cellular operations                         |  | $            | 1,763 |              | $ | 1,982  |  | $ | (219     | ) |  | -11 | %
|Two-way operations                          |  |              | 435   |              |   | 463    |  |   | (28      | ) |  | -6  | %
|Other operations                            |  |              | 28    |              |   | 51     |  |   | (23      | ) |  | -45 | %
|                                            |  |              |       |              |   |        |  |   |          |   |  |     |  
|                                            |  |              |       |             
|Total cost of service, rent and maintenance |  | $            | 2,226 |              | $ | 2,496  |  | $ | (270     | ) |  | -11 | %
|                                            |  |              |       |              |   |        |  |   |          |   |  |     |  
|                                            |  |              |       |             
|Nine Months Ended                           |  |              |       |              |   |        |  |   |          |   |  |     |  
|Cost of service, rent and maintenance       |  |              |       |              |   |        |  |   |          |   |  |     |  
|Cellular operations                         |  | $            | 5,516 |              | $ | 6,528  |  | $ | (1,012   | ) |  | -16 | %
|Two-way operations                          |  |              | 1,313 |              |   | 1,443  |  |   | (130     | ) |  | -9  | %
|Other operations                            |  |              | 105   |              |   | 241    |  |   | (136     | ) |  | -56 | %
|                                            |  |              |       |              |   |        |  |   |          |   |  |     |  
|                                            |  |              |       |             
|Total cost of service, rent and maintenance |  | $            | 6,934 |              | $ | 8,212  |  | $ | (1,278   | ) |  | -16 | %
|                                            |  |              |       |              |   |        |  |   |          |   |  |     |  



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

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

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

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



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



|                            |  |              |        |             |              |   |      |   |             |  |    |          |  |   |          |   |  |     |  
|--------------------------- |  | ------------ | ------ | ----------- | ------------ | - | ---- | - | ----------- |  | -- | -------- |  | - | -------- | - |  | --- | -
|(dollars in thousands)      |  | February 28, |        |             | 2009 vs 2008 |  
|                            |  | 2009         |        | % ofOperRev |              |   | 2008 |   | % ofOperRev |  |    | $ Change |  |   | % Change |  
|Three Months Ended          |  |              |        |             |              |   |      |   |             |  |    |          |  |   |          |   |  |     |  
|Product Sales Revenue       |  |              |        |             |              |   |      |   |             |  |    |          |  |   |          |   |  |     |  
|Cellular                    |  | $            | 1,774  |             | 16           | % |      | $ | 1,915       |  | 15 | %        |  | $ | (141     | ) |  | -7  | %
|Wholesale                   |  |              | 1,870  |             | 17           | % |      |   | 3,200       |  | 24 | %        |  |   | (1,330   | ) |  | -42 | %
|Two-Way                     |  |              | 542    |             | 5            | % |      |   | 562         |  | 4  | %        |  |   | (20      | ) |  | -4  | %
|Other                       |  |              | 84     |             | 1            | % |      |   | 439         |  | 3  | %        |  |   | (355     | ) |  | -81 | %
|                            |  |              |        |             |              |   |      |   |             |  |    |          |  |   |          |   |  |     |  
|Total product sales revenue |  | $            | 4,270  |             | 39           | % |      | $ | 6,116       |  | 46 | %        |  | $ | (1,846   | ) |  | -30 | %
|                            |  |              |        |             |              |   |      |   |             |  |    |          |  |   |          |   |  |     |  
|                            |  |              |        |             |              |  
|Cost of products sold       |  |              |        |             |              |   |      |   |             |  |    |          |  |   |          |   |  |     |  
|Cellular                    |  |              | 2,077  |             | 19           | % |      |   | 1,971       |  | 15 | %        |  |   | 106      |   |  | 5   | %
|Wholesale                   |  |              | 1,635  |             | 15           | % |      |   | 2,789       |  | 21 | %        |  |   | (1,154   | ) |  | -41 | %
|Two-Way                     |  |              | 407    |             | 4            | % |      |   | 446         |  | 3  | %        |  |   | (39      | ) |  | -9  | %
|Other                       |  |              | 67     |             | 0            | % |      |   | 315         |  | 2  | %        |  |   | (248     | ) |  | -79 | %
|                            |  |              |        |             |              |   |      |   |             |  |    |          |  |   |          |   |  |     |  
|Cost of products sold       |  | $            | 4,186  |             | 38           | % |      | $ | 5,521       |  | 41 | %        |  | $ | (1,335   | ) |  | -24 | %
|                            |  |              |        |             |              |   |      |   |             |  |    |          |  |   |          |   |  |     |  
|                            |  |              |        |             |              |  
|Total Operating Revenues    |  | $            | 11,048 |             |              |   |      | $ | 13,370      |  |    |          |  | $ | (2,322   | ) |  |     |  
|                            |  |              |        |             |              |  
|Nine Months Ended           |  |              |        |             |              |   |      |   |             |  |    |          |  |   |          |   |  |     |  
|Product Sales Revenue       |  |              |        |             |              |   |      |   |             |  |    |          |  |   |          |   |  |     |  
|Cellular                    |  | $            | 5,366  |             | 15           | % |      | $ | 5,806       |  | 14 | %        |  | $ | (440     | ) |  | -8  | %
|Wholesale                   |  |              | 7,071  |             | 20           | % |      |   | 10,260      |  | 25 | %        |  |   | (3,189   | ) |  | -31 | %
|Two-Way                     |  |              | 1,878  |             | 6            | % |      |   | 1,843       |  | 4  | %        |  |   | 35       |   |  | 2   | %
|Other                       |  |              | 288    |             | 1            | % |      |   | 1,566       |  | 4  | %        |  |   | (1,278   | ) |  | -82 | %
|                            |  |              |        |             |              |   |      |   |             |  |    |          |  |   |          |   |  |     |  
|Total product sales revenue |  | $            | 14,603 |             | 42           | % |      | $ | 19,475      |  | 47 | %        |  | $ | (4,872   | ) |  | -25 | %
|                            |  |              |        |             |              |   |      |   |             |  |    |          |  |   |          |   |  |     |  
|                            |  |              |        |             |              |  
|Cost of products sold       |  |              |        |             |              |   |      |   |             |  |    |          |  |   |          |   |  |     |  
|Cellular                    |  |              | 5,739  |             | 16           | % |      |   | 5,732       |  | 14 | %        |  |   | 7        |   |  | 0   | %
|Wholesale                   |  |              | 6,254  |             | 18           | % |      |   | 9,028       |  | 22 | %        |  |   | (2,774   | ) |  | -31 | %
|Two-Way                     |  |              | 1,373  |             | 4            | % |      |   | 1,338       |  | 3  | %        |  |   | 35       |   |  | 3   | %
|Other                       |  |              | 211    |             | 1            | % |      |   | 1,138       |  | 3  | %        |  |   | (927     | ) |  | -81 | %
|                            |  |              |        |             |              |   |      |   |             |  |    |          |  |   |          |   |  |     |  
|Cost of products sold       |  | $            | 13,577 |             | 39           | % |      | $ | 17,236      |  | 42 | %        |  | $ | (3,659   | ) |  | -21 | %
|                            |  |              |        |             |              |   |      |   |             |  |    |          |  |   |          |   |  |     |  
|                            |  |              |        |             |              |  
|Total Operating Revenues    |  | $            | 35,127 |             |              |   |      | $ | 41,469      |  |    |          |  | $ | (6,342   | ) |  |     |  

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

Product sales revenue: The decrease in product sales from the Companys cellular operations for the three and nine months
ended February 28, 2009 compared to the same periods in the prior fiscal year is the result of lower selling prices on cellular phones due to increased market competition for new subscriber activations. Overall sales related to cellular phone
equipment decreased by approximately $120,000 and $275,000 for the three and nine months ended February 28, 2009, respectively, compared to the same periods in the prior fiscal year. The decrease in car audio equipment sales also contributed to
the decrease in product sales revenue. Sales related to car audio equipment decreased by approximately $62,000 and $212,000 for the three and nine months ended February 28, 2009, respectively, compared to the same periods in the prior fiscal
year. The decrease in product sales revenues for the three months ended February 28, 2009 were partially offset by product sales revenues generated from the T-Mobile business the



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Company implemented in February 2009. Sales from the T-Mobile business included approximately $30,000 in cellular phone and accessories sales revenue and
approximately $60,000 in commission revenue for the 3 months and nine months ended February 28, 2009.

The decline in product sales from the
Companys wholesale operations for the three and nine months ended February 28, 2009 compared to the same periods in fiscal year 2008, is attributable to fewer cellular handsets, cellular accessories and car audio equipment sales due to
increased market competition and lower demand for aftermarket car audio equipment. The decrease in smaller electronic equipment retailers also contributed to the decline in the wholesale operations product revenue for the three and nine months
ended February 28, 2009 compared to the same periods in the prior fiscal year.

The 4% decrease in product sales revenue related to the two-way radio
operations for the three months ended February 28, 2009 compared to the same period in fiscal year 2008, is primarily due to a decline in sales of emergency vehicle products (EVP). The Company recorded $104,000 in EVP revenues in
the three months ended February 28, 2009 compared to $116,000 in EVP revenues in the three months ended February 29, 2008. The 2% increase in product sales revenue for the nine months ended February 28, 2009 compared to the same
period in fiscal year 2008 is attributable to the overall fiscal year sales of emergency vehicle products. The Company established the emergency vehicle product line in the fourth quarter of fiscal year 2007 and has seen an increase in the product
revenues sales year over year. The Company recorded $338,000 in EVP sales in the nine months ended February 28, 2009 compared to $307,000 in EVP sales in the nine months ended February 29, 2008.

The decrease in product sales related to the Companys other operations for the three and nine months ended February 28, 2009 compared to the same periods in
2008, 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 decrease in total cost of products sold for the three and nine months ended February 28, 2009 compared to the same periods in the prior fiscal year, is a direct result of a decrease in product sales
revenues across all of the Companys operating segments.



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##### Table of Contents

Selling and General and Administrative Expenses for the Three and Nine Months ended February 28, 2009 and 2008

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



|                                             |  |              |        |              |   |          |  |   |          |   |  |     |  
|-------------------------------------------- |  | ------------ | ------ | ------------ | - | -------- |  | - | -------- | - |  | --- | -
|(dollars in thousands)                       |  | February 28, |        | 2009 vs 2008 |  
|                                             |  | 2009         |        | 2008         |   | $ Change |  |   | % Change |  
|Three Months Ended                           |  |              |        |              |   |          |  |   |          |   |  |     |  
|Selling and general and administrative       |  |              |        |              |   |          |  |   |          |   |  |     |  
|Salaries and other personnel expenses        |  | $            | 2,677  |              | $ | 3,018    |  | $ | (341     | ) |  | -11 | %
|Office expense                               |  |              | 464    |              |   | 544      |  |   | (80      | ) |  | -15 | %
|Advertising expense                          |  |              | 190    |              |   | 309      |  |   | (119     | ) |  | -39 | %
|Professional fees                            |  |              | 465    |              |   | 246      |  |   | 219      |   |  | 89  | %
|Taxes and licenses fees                      |  |              | 35     |              |   | 61       |  |   | (26      | ) |  | -43 | %
|Stock-based compensation expense             |  |              | 85     |              |   | 28       |  |   | 57       |   |  | 204 | %
|Other expenses                               |  |              | 325    |              |   | 490      |  |   | (165     | ) |  | -34 | %
|                                             |  |              |        |              |   |          |  |   |          |   |  |     |  
|                                             |  |              |        |             
|Total selling and general and administrative |  | $            | 4,241  |              | $ | 4,696    |  | $ | (455     | ) |  | -10 | %
|                                             |  |              |        |              |   |          |  |   |          |   |  |     |  
|                                             |  |              |        |             
|Nine Months Ended                            |  |              |        |              |   |          |  |   |          |   |  |     |  
|Selling and general and administrative       |  |              |        |              |   |          |  |   |          |   |  |     |  
|Salaries and other personnel expenses        |  | $            | 8,184  |              | $ | 9,949    |  | $ | (1,765   | ) |  | -18 | %
|Office expense                               |  |              | 1,496  |              |   | 1,578    |  |   | (82      | ) |  | -5  | %
|Advertising expense                          |  |              | 579    |              |   | 983      |  |   | (404     | ) |  | -41 | %
|Professional fees                            |  |              | 1,215  |              |   | 877      |  |   | 338      |   |  | 39  | %
|Taxes and licenses fees                      |  |              | 151    |              |   | 155      |  |   | (4       | ) |  | -3  | %
|Stock-based compensation expense             |  |              | 171    |              |   | 88       |  |   | 83       |   |  | 94  | %
|Other expenses                               |  |              | 1,121  |              |   | 1,651    |  |   | (530     | ) |  | -32 | %
|                                             |  |              |        |              |   |          |  |   |          |   |  |     |  
|                                             |  |              |        |             
|Total selling and general and administrative |  | $            | 12,917 |              | $ | 15,281   |  | $ | (2,364   | ) |  | -15 | %
|                                             |  |              |        |              |   |          |  |   |          |   |  |     |  

Selling and General and Administrative Expenses Discussion for the Three and Nine Months Ended
February 28, 2009 and 2008

The 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 nine months ended February 28, 2009 compared to approximately $311,000 in the nine months ended February 29,
2008. As a result of the reorganization, salaries and overtime costs decreased by approximately $145,000 and $718,000 for the three months and nine months ended February 28, 2009, respectively, compared to the three months and nine months ended
February 29, 2008. Reductions in payroll taxes, contract labor, employee and agent commissions and employee insurance costs also contributed to the overall decrease in costs personnel expenses. These costs decreased by approximately $167,000
and $813,000 for the three months and nine months ended February 28, 2009, respectively, compared to the three months and nine months ended February 29, 2008.

The decrease in office expense for the three and nine months ended February 28, 2009 compared to the same periods in fiscal year 2008 is primarily attributable to closing the Kennedale location in the second
quarter of fiscal year 2009 as well as relocating certain Hawk Electronic stores to retail spaces with reduced monthly leases. The reduction is partially offset by the addition of 5 retail kiosks leases related to the Companys expansion into
the cellular agent business with T-Mobile. These kiosks are located in mall locations within the state of Oklahoma.

The decrease in advertising expense
for the three and nine months ended February 28, 2009 compared to the same periods in fiscal year 2008, 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 increase in professional fees for the three and nine months ended February 28, 2009 compared to the same periods
in fiscal year 2008 is due to consulting fees related to the financial reporting rules under Section 404 of the Sarbanes-Oxley Act of 2002 as well as investor relations fees incurred in the third quarter



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of fiscal year 2009 to increase the Companys investor awareness. In addition the Company recorded an increase in legal fees in the nine months ended
February 28, 2009 compared to the same period in fiscal year 2008 due to its investment in Mobui as well as legal costs incurred from an alleged trademark infringement lawsuit (see Note 11  Commitments and Contingencies for
further discussion).

The increase in stock-based compensation expense for the three and nine months ended February 28, 2009 compared to the same
periods in fiscal year 2008, 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 2,398,156 in stock options which contributed to
the increase in expense for the three and nine months ended February 28, 2009 compared to the same periods in the prior year.

The decrease in other
expenses is attributable to the Company reducing travel expenses in the three and nine months ended February 28, 2009 compared to the same periods from the prior fiscal year due to the reorganization of the Companys business units in
August 2007. The Company recorded travel expenses of approximately $72,000 and $237,000 for the three and nine months ended February 28, 2009, respectively, compared to $93,000 and $345,000 for the three and nine months ended February 29,
2008, respectively. Business insurance expense also contributed to the decrease in other costs for the three and nine months ended February 28, 2009 as a result of the Company combining policies that were previously carried by PCI and Teletouch
separately. For the three and nine months ended February 28, 2009, insurance expense was approximately $39,000 and $203,000, respectively, compared to $116,000 and $296,000 for the three and nine months ended February 29, 2008,
respectively. In addition the decrease in other expenses recorded in the nine months ended February 29, 2009 compared to the same period in fiscal year 2008 is attributable to debt extension fees related to extending the maturity date of
PCIs former senior debt with Fortress. The Company recorded expenses related to these fees of approximately $206,000 in nine months ended February 29, 2008, with no similar occurring transactions in fiscal year 2009.

Other Operating Expenses for the Three and Nine Months Ended February 28, 2009 and 2008



|                                                        |  |              |       |   |              |   |        |          |  |   |          |   |  |      |  
|------------------------------------------------------- |  | ------------ | ----- | - | ------------ | - | ------ | -------- |  | - | -------- | - |  | ---- | -
|(dollars in thousands)                                  |  | February 29, |       |   | 2009 vs 2008 |  
|                                                        |  | 2009         |       |   | 2008         |   |        | $ Change |  |   | % Change |  
|Three Months Ended                                      |  |              |       |   |              |   |        |          |  |   |          |   |  |      |  
|Other Operating Expenses                                |  |              |       |   |              |   |        |          |  |   |          |   |  |      |  
|Depreciation and amortization:                          |  |              |       |   |              |   |        |          |  |   |          |   |  |      |  
|Depreciation                                            |  | $            | 116   |   |              | $ | 145    |          |  | $ | (29      | ) |  | -20  | %
|Amortization                                            |  |              | 230   |   |              |   | 221    |          |  |   | 9        |   |  | 4    | %
|                                                        |  |              |       |   |              |   |        |          |  |   |          |   |  |      |  
|Total depreciation and amortization                     |  |              | 346   |   |              |   | 366    |          |  |   | (20      | ) |  | -5   | %
|Gain on disposal of assets                              |  |              | (7    | ) |              |   | (17    | )        |  |   | 10       |   |  | -59  | %
|                                                        |  |              |       |   |              |   |        |          |  |   |          |   |  |      |  
|                                                        |  |              |       |  
|Total other operating expenses                          |  | $            | 339   |   |              | $ | 349    |          |  | $ | (10      | ) |  | -3   | %
|                                                        |  |              |       |   |              |   |        |          |  |   |          |   |  |      |  
|                                                        |  |              |       |  
|Nine Months Ended                                       |  |              |       |   |              |   |        |          |  |   |          |   |  |      |  
|Other Operating Expenses                                |  |              |       |   |              |   |        |          |  |   |          |   |  |      |  
|Depreciation and amortization:                          |  |              |       |   |              |   |        |          |  |   |          |   |  |      |  
|Depreciation                                            |  | $            | 377   |   |              | $ | 507    |          |  | $ | (130     | ) |  | -26  | %
|Amortization                                            |  |              | 698   |   |              |   | 663    |          |  |   | 35       |   |  | 5    | %
|                                                        |  |              |       |   |              |   |        |          |  |   |          |   |  |      |  
|Total depreciation and amortization                     |  |              | 1,075 |   |              |   | 1,170  |          |  |   | (95      | ) |  | -8   | %
|Gain on forgiveness of trade payable obligation to AT&T |  |              |      |   |              |   | (3,824 | )        |  |   | 3,824    |   |  | -100 | %
|Gain on disposal of assets                              |  |              | (8    | ) |              |   | (34    | )        |  |   | 26       |   |  | -76  | %
|                                                        |  |              |       |   |              |   |        |          |  |   |          |   |  |      |  
|                                                        |  |              |       |  
|Total other operating expenses (income)                 |  | $            | 1,067 |   |              | $ | (2,688 | )        |  | $ | 3,755    |   |  | -140 | %
|                                                        |  |              |       |   |              |   |        |          |  |   |          |   |  |      |  

The decrease in depreciation expense for the three and nine months ended February 28, 2009 compared to the
same periods in fiscal year 2008 is attributable to the Companys minimal purchases of fixed assets for its corporate offices and retail locations as well as a reduction in capital expenditures related to the two-way network infrastructure. In
addition the age of certain existing capital assets also contributed to the decrease in depreciation expense for the periods presented in fiscal year 2009 compared to same periods in fiscal year 2008. The decrease in depreciation expense is
partially offset by an increase in amortization expense related to loan origination costs associated with obtaining a revolving asset based credit facility with Thermo Credit, LLC in April 2008.



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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 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 reported a reduction of a gain on the disposal of assets of $10,000 and $26,000 for three months and nine months ending February 28, 2009, respectively, compared to
the three months and nine months ending February 29, 2008. The gains reported in fiscal year 2008 periods were primarily related to a vendor fair held at the Fort Worth warehouse where a number of unused retail displays were sold. No similar
transactions occurred during the periods presented in fiscal year 2009.



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Interest Expense, Net of Interest Income for the Three and Nine Months Ended February 28, 2009 and 2008



|                                 |  |                                 |       |   |              |   |       |          |  |   |          |   |  |      |  
|-------------------------------- |  | ------------------------------- | ----- | - | ------------ | - | ----- | -------- |  | - | -------- | - |  | ---- | -
|(dollars in thousands)           |  | Three Months Ended February 28, |       |   | 2009 vs 2008 |  
|                                 |  | 2009                            |       |   | 2008         |   |       | $ Change |  |   | % Change |  
|Interest expense (income)        |  |                                 |       |   |              |   |       |          |  |   |          |   |  |      |  
|Senior debt                      |  | $                               |      |   |              | $ | 439   |          |  | $ | (439     | ) |  | -100 | %
|Warrant redemption notes payable |  |                                 | 40    |   |              |   |      |          |  |   | 40       |   |  | 100  | %
|Thermo factoring debt            |  |                                 | 361   |   |              |   | 501   |          |  |   | (140     | ) |  | -28  | %
|Thermo revolving credit facility |  |                                 | 139   |   |              |   |      |          |  |   | 139      |   |  | 100  | %
|Mortgage debt                    |  |                                 | 41    |   |              |   | 75    |          |  |   | (34      | ) |  | -45  | %
|Other                            |  |                                 | (23   | ) |              |   | (1    | )        |  |   | (22      | ) |  | 2200 | %
|                                 |  |                                 |       |   |              |   |       |          |  |   |          |   |  |      |  
|                                 |  |                                 |       |  
|Total interest expense, net      |  | $                               | 558   |   |              | $ | 1,014 |          |  | $ | (456     | ) |  | -45  | %
|                                 |  |                                 |       |   |              |   |       |          |  |   |          |   |  |      |  
|                                 |  |                                
|                                 |  | Nine Months Ended February 28,  |       |   | 2009 vs 2008 |  
|                                 |  | 2009                            |       |   | 2008         |   |       | $ Change |  |   | % Change |  
|Interest expense (income)        |  |                                 |       |   |              |   |       |          |  |   |          |   |  |      |  
|Senior debt                      |  | $                               |      |   |              | $ | 1,276 |          |  | $ | (1,276   | ) |  | -100 | %
|Warrant redemption notes payable |  |                                 | 126   |   |              |   |      |          |  |   | 126      |   |  | 100  | %
|Thermo factoring debt            |  |                                 | 1,108 |   |              |   | 1,525 |          |  |   | (417     | ) |  | -27  | %
|Thermo revolving credit facility |  |                                 | 458   |   |              |   |      |          |  |   | 458      |   |  | 100  | %
|Mortgage debt                    |  |                                 | 145   |   |              |   | 229   |          |  |   | (84      | ) |  | -37  | %
|Other                            |  |                                 | (26   | ) |              |   | (3    | )        |  |   | (23      | ) |  | 767  | %
|                                 |  |                                 |       |   |              |   |       |          |  |   |          |   |  |      |  
|                                 |  |                                 |       |  
|Total interest expense, net      |  | $                               | 1,811 |   |              | $ | 3,027 |          |  | $ | (1,216   | ) |  | -40  | %
|                                 |  |                                 |       |   |              |   |       |          |  |   |          |   |  |      |  

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 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.



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As a result of the above transactions, PCI recorded non-cash interest expense of $439,000 for the three months ended
February 29, 2008 and $1,276,000 for the nine months ended February 29, 2008 related to the senior debt obligation with Fortress. No similar non-cash interest expense transactions occurred in the three and nine months ended
February 28, 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 and nine months ended February 28, 2009 compared to the same periods in the prior fiscal year due to monthly principal payments on various automobile notes and bank
debt used to refinance a term loan. The decrease is also attributable to fewer discount fees incurred from the Companys factoring debt facility with Thermo in the three and nine months ended February 28, 2009 compared to the same periods
in fiscal year 2008 due to lower fundings which was a result of decreased cellular billings and equipment sales from the Companys wholesale segment. 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 12  Shareholders Equity for
additional information). The Company also began recording monthly cash interest expense associated with the revolving asset based credit facility which was executed with Thermo in April 2008.

Income Tax Expense for the Nine Months Ended February 28, 2009 and 2008

For the three months ended February 28, 2009 and 2008 the Company recorded $81,000 and $60,000 in state tax expense, respectively and for the nine months ended February 28, 2009 and 2008, the Company recorded $244,000 and $178,000
in state tax expense, respectively. All of the periods presented 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)                          |  | Nine Months Ended February 28, |        |   | 2009 vs 2008 |  
|                                                |  | 2009                           |        |   | 2008         |   |        | $ Change | 
|Cash provided by (used in) operating activities |  | $                              | 484    |   |              | $ | (5,583 | )        |  | $ | 6,067  |  
|Cash used in investing activities               |  |                                | (636   | ) |              |   | (172   | )        |  |   | (464   | )
|Cash provided by (used in) financing activities |  |                                | (2,706 | ) |              |   | 671    |          |  |   | (3,377 | )
|                                                |  |                                |        |   |              |   |        |          |  |   |        |  
|Net decrease in cash                            |  | $                              | (2,858 | ) |              | $ | (5,084 | )        |  | $ | 2,226  |  
|                                                |  |                                |        |   |              |   |        |          |  |   |        |  

Operating Activities

The increase in cash provided by operations during the nine months ended February 28, 2009 as compared to the nine months ended February 29, 2008 is 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. The increase in
cash provided by operations during the



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nine months ended February 28, 2009 compared the same period in fiscal year 2008 is also related to the change in the Companys accounts receivable
balances. The change in these balances is attributable to the Company restricting the extension of credit to customers during fiscal year 2009 due to current economic conditions in the Unites States. The decrease in sales from the Companys
wholesale operations in the nine months ended February 28, 2009 compared to the same period in fiscal year 2008 also contributed to the change in the Companys accounts receivable balances.

Investing Activities

The increase in cash used in investing
activities for the nine months ended February 28, 2009 as compared to the nine months ended February 29, 2008 is due to the issuance of a $415,000 promissory note to Mobui Corporation in exchange for an equity position in the mobile
applications development and content delivery company. In addition the Company issued a $13,000 promissory note in August 2008 to a former cellular agent of the Company for unpaid equipment purchases (see Note 5  Notes Receivable
for additional information on the notes).

Financing Activities

The decrease in cash provided by financing activities for the nine months ended February 28, 2009 as compared to the nine months ended February 29, 2008 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 as well as monthly principal and accrued
interest payments on the remaining $1,500,000 balance beginning in July 2008. In addition the Company received less fundings from its factoring debt facility with Thermo in the nine months ended February 28, 2009 compared to the same period in
the prior fiscal year, primarily the result of a decrease in cellular billings as well as a decline in audio and cellular equipment sales from the Companys wholesale segment. The monthly principal payments on the asset based revolving credit
facility which the Company executed with Thermo in April 2008, also contributed to the decrease in cash provided by financing activities. In accordance with the agreement for this revolving debt facility, the Company is required to make monthly
interest payments based upon the average unpaid balance outstanding at the end of each month commencing on May 31, 2008. Beginning in November 2008 the Company is also required to pay a monthly principal payment based upon a step-down method in
addition to the monthly interest payments. The decreases in cash provided by financing activities are offset by proceeds of $250,000 the Company received in August 2008 from its asset based revolving credit facility with Thermo. This additional
funding was used primarily as an investment in Mobui.

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



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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.

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 $9,886,000 and $9,013,000 at February 28, 2009 and May 31, 2008, respectively, and a shareholders deficit of approximately $10,004,000 and $8,752,000 at February 28, 2009
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 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. The stated
maturity date of the obligation is February 2010. The factoring debt obligation at February 28, 2009 and May 31, 2008, was approximately $8,266,000 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 was able to partially improve its working capital deficit and shareholders equity deficit as of May 31, 2008. 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 increase in margins on the cellular service billing revenues during both fiscal



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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 and 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,



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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.

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, as discussed
below.

Accounts receivable are presented net of an allowance for doubtful accounts of $672,000 and $480,000 at February 28, 2009 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 past due accounts that are in various stages of the Companys collection process 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. Beginning in the third quarter of fiscal year 2009, the Company began performing the
evaluation of its past due accounts on a quarterly basis and will write-off those accounts it believes are uncollectible at the end of each quarter.

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 only finished goods. In determining the adequacy of the reserve for inventory obsolescence, management considers a number of factors, including recent sales trends, quantities on-hand, industry market
conditions and economic conditions. In assessing the reserve, management also



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considers any price protection credits or other incentives, such as volume incentive rebates the Company has received or due from its vendors. 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 February 28, 2009 and May 31, 2008, respectively.

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 third 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 third 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.



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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 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



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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.

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 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 of those that do, 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



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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 and nine months ended February 28, 2009 and 2008. We will update these assumptions on at least an annual basis and on an
interim basis if significant changes to the assumptions are warranted.



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

We did
not have any foreign currency hedges or other derivative financial instruments as of February 28, 2009. 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 February 28, 2009 (due to
the Companys delinquency in its public reporting (as discussed below), the evaluation of the Companys disclosure controls as of February 28, 2009 was performed over the period July though December 2008), under the supervision and
with the participation of our management, including the Chief Executive Officer and Chief Financial Officer (the Certifying Officers) and President, 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 February 28, 2009. As discussed below, during the quarter ended November 30, 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 February 28, 2009, 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 and our August 31, 2008 Quarterly Report on Form 10-Q, 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



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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 and the subsequent 2009 Quarterly 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 several of the material weaknesses in our internal control over financial reporting identified as of May 31, 2008 continue to exist as of
February 28, 2009 with certain items remediated during the second quarter of fiscal 2009 as noted below and others in various stages of implementation. We expect that all items listed below will be remediated prior to May 31, 2009, the end
of our fiscal year. 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. The risk profile
and analysis is currently in process of being completed and is expected to be finalized in the fourth quarter of 2009.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 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 segregation of duties to decrease the risk of inappropriate accounting.
| | -- | --------------------------------------------------------------------------------------------------------



| | 5. | 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.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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 February 28, 2009, 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



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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 which will be formally tested during the fourth quarter of fiscal 2009:



| |  |  | During the second quarter of fiscal 2009, we published a formal Whistleblower Policy which was made available to all employees of the Company through posting at
local offices and inclusion on all Company intranet sites. 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, the Whistleblower policy has been included in
the Companys employee handbook and which has been re-distributed to all employees and is included as part of the new hire packet.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the quarter ended November 30, 2008, we 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. This purchasing policy requires an approved purchase order for all expenditures over $1,000. Any invoice for services or goods over $1,000
must be matched by accounts payable to an approved purchase order and confirmation of receipt before being paid. In addition, the Board is required to approve certain material expenditures under this policy. As of the date of this Report, the Board
is in the process of completing a formal grant of authority statement policy whereby a formal set of approval procedures will be established for executive management related to routine and non-routine transactions.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the quarter ended November 30, 2008, we reviewed our existing procedures related to our period end financial close process and concluded that the
existing procedures were sufficient but had not been appropriately documented. We have now developed procedures of documenting our period end close process through a series of reviews and approvals of all transactions with evidence being maintained.
In addition, we have implemented procedures to identify any non-routine transactions during a period and have implemented several research tools for our staff to use when evaluating the proper treatment of these transactions. These tools that have
been implemented also provide our accounting department with the appropriate checklists to ensure proper disclosure is being made in all financial statements prepared for external distribution.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As of the date of this Report, certain staffing changes have been made within our accounting department to allow for more appropriate segregation of duties. In
addition, several policies have been implemented to refine the review and approval of transactions and processes at the accounting department level in order to monitor those controls and further define our segregation of duties.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As of the date of this Report, we have implemented several information systems policies including a formalized change management procedure including documentation
and approval of all system modifications.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | 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. In addition, certain staffing changes are in the process being implemented to better facilitate segregation of duties within the Company.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 and expect these policies to be completed during the fourth quarter of fiscal 2009.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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
reached a final agreement with Mr. Cole to settle this claim and a one time payment of $80,000 was made in April 2009 in exchange for a settlement and release agreement.



|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



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|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: July 6, 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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