Funtalk China Holdings (NASDAQ:FTLK)

Based on the financial position and results of Pypo HK as of and for the year ended March 31, 2009, Pypo HK failed to meet the financial covenants for maintaining the minimum EBITDA, adjusted net income threshold and margin, solvency ratio, leverage ratio and current ratio. Based on the financial position and results of Pypo HK as of and for the year ended March 31, 2010, Pypo HK also failed to meet the financial covenants for maintaining the solvency ratio, current ratio and net margin. Although we obtained an amendment and waiver of certain breaches and potential breaches from FMO, the waiver only covered HK Pypo's breaches of financial covenants for the period from March 31, 2009 to March 31, 2010. Pypo HK was also not in compliance with certain negative undertakings, including obtaining pre-approval for acquisitions and negative pledge in the same period. We cannot assure you that the prior amendment and waiver was effective against these breaches and other potential breaches. In addition, we have not complied with all of the conditions relating to our prior amendment and waiver and, although we have obtained written confirmation from FMO that the prior amendment and waiver remains effective, we cannot assure you that this confirmation has cured such non-compliance or that we will be able to meet the relevant conditions going forward.

Based on the financial position and results of Pypo HK as of and for the three months ended June 30, 2010, Pypo HK failed to meet the financial covenants for maintaining the solvency ratio, current ratio and net margin for which we have not obtained a waiver. Pypo HK may continue to be in breach of certain financial and other restrictive covenants for the quarters ending September 30, 2010, December 31, 2010 and March 31, 2011 and the year ending March 31, 2011. We are in discussions with FMO to obtain a waiver for these breaches and other potential breaches. If we breach any covenants, we cannot assure you that we would be able to obtain any amendments to or waivers of such covenants contained in the FMO Facility or obtain alternative financing on commercially viable terms. In addition, any amendment to or waiver of the covenants may involve upfront fees, higher annual interest costs and other terms less favorable to us than those currently offered by the FMO Facility