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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-K/A

Amendment No. 3



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

ACT OF 1934



OR



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

EXCHANGE ACT OF 1934



|For the Fiscal Year     |  | Commission File Number
|----------------------- |  | ----------------------
|Ended November 30, 2002 |  | 0-22972               



CELLSTAR CORPORATION

(Exact name of registrant as specified in its charter)



|Delaware                 |  | 75-2479727                          
|------------------------ |  | ------------------------------------
|(State of Incorporation) |  | (I.R.S. Employer Identification No.)



1730 Briercroft
Court

Carrollton, Texas 75006

Telephone (972) 466-5000

(Address, including zip code, and telephone number,

including area code, of registrants principal executive offices)



Securities registered pursuant to Section 12(b) of the Act: None



Securities registered pursuant to Section 12(g) of the Act:



Common Stock, par value $0.01 per share

(Title of Class)



Rights to Purchase Series A Preferred Stock

(Title of Class)



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    x     No ̈



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ̈



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



The aggregate market value of the registrants common stock held by non-affiliates of the registrant as of May 31, 2002, the last business day of the
Companys most recently completed second fiscal quarter, based on the closing sale price of $4.07 as reported by the Nasdaq National Market, was approximately $32,590,562. The aggregate market value of the registrants common stock
held by non-affiliates of the registrant as of February 20, 2003, based on the closing sale price of $5.54 as reported by the Nasdaq National Market, was approximately $59,476,742. (For purposes of determination of the above stated amounts, only
directors, executive officers and 10% or greater stockholders have been deemed affiliates).



On February 20, 2003, there were 20,354,365 outstanding shares of common stock, $0.01 par value per share.



DOCUMENTS INCORPORATED BY REFERENCE



None.



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CELLSTAR CORPORATION



Introductory Note



CellStar Corporation (the Company or
CellStar) hereby amends in its entirety the Companys Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 28, 2003, as amended by Amendment No. 2 on Form 10-K/A filed with the Securities and
Exchange Commission on April 28, 2003.



INDEX TO FORM 10-K/A



|                                         |  |                                                                                                |  | PageNumber
|---------------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | ----------
|                                         |  |                                                                                               
|PART I.                                  |  |                                                                                                |  |           
|                                         |  |                                                                                               
|Item 1.                                  |  | Business                                                                                       |  | 3         
|                                         |  |                                                                                               
|Item 2.                                  |  | Properties                                                                                     |  | 16        
|                                         |  |                                                                                               
|Item 3.                                  |  | Legal Proceedings                                                                              |  | 17        
|                                         |  |                                                                                               
|Item 4.                                  |  | Submission of Matters to a Vote of Security Holders                                            |  | 17        
|                                         |  |                                                                                               
|PART II.                                 |  |                                                                                                |  |           
|                                         |  |                                                                                               
|Item 5.                                  |  | Market for Registrants Common Equity and Related Stockholder Matters                          |  | 18        
|                                         |  |                                                                                               
|Item 6.                                  |  | Selected Consolidated Financial Data                                                           |  | 19        
|                                         |  |                                                                                               
|Item 7.                                  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 22        
|                                         |  |                                                                                               
|Item 7(A).                               |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 47        
|                                         |  |                                                                                               
|Item 8.                                  |  | Consolidated Financial Statements and Supplementary Data                                       |  | 48        
|                                         |  |                                                                                               
|Item 9.                                  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 48        
|                                         |  |                                                                                               
|PART III.                                |  |                                                                                                |  |           
|                                         |  |                                                                                               
|Item 10.                                 |  | Directors and Executive Officers of the Registrant                                             |  | 48        
|                                         |  |                                                                                               
|Item 11.                                 |  | Executive Compensation                                                                         |  | 50        
|                                         |  |                                                                                               
|Item 12.                                 |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 56        
|                                         |  |                                                                                               
|Item 13.                                 |  | Certain Relationships and Related Transactions                                                 |  | 58        
|                                         |  |                                                                                               
|Item 14.                                 |  | Controls and Procedures                                                                        |  | 60        
|                                         |  |                                                                                               
|PART IV.                                 |  |                                                                                                |  |           
|                                         |  |                                                                                               
|Item 15.                                 |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                |  | 62        
|                                         |  |                                                                                               
|Signatures                               |  |                                                                                                |  | 67        
|                                         | 
|Certification of Chief Executive Officer |  | 68                                                                                            
|                                         | 
|Certification of Chief Financial Officer |  | 69                                                                                            





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PART I.



Item 1.    Business



General



CellStar Corporation (the
Company or CellStar) is a leading global provider of distribution and value-added logistics services to the wireless communications industry, with operations in the Asia-Pacific, North America, Latin America and European
regions. The Company facilitates the effective and efficient distribution of handsets, related accessories, and other wireless products from leading manufacturers to network operators, agents, resellers, dealers and retailers. The Company also
provides activation services in some of its markets that generate new subscribers for wireless carriers.



The Companys Asia-Pacific Region consists of the Peoples Republic of China (the PRC), Hong Kong, Taiwan, Singapore,
The Philippines, and Korea. Malaysia was included in the Asia-Pacific Region until the Company fully divested its ownership interests in the third quarter of 2002. The Companys North American Region consists of the United States.
The Companys Latin American Region consists of Mexico, Chile, Colombia, and the Companys Miami, Florida operations. The Companys European Region consists of Sweden and The Netherlands.



In the second quarter of 2002, the Company decided as part of its plan to
reposition its operations that it would exit the United Kingdom (the U.K.), Peru and Argentina as soon as practicable, as well as address the balance of its European and Latin American markets, excluding Mexico and Miami. (See
BusinessLatin American Region and BusinessEuropean Region). During the third quarter of 2002, the Company completed the divestiture of its operations in Peru and Argentina. As of August 31, 2002, the
Companys operations in the U.K were closed, except for certain administrative matters. In January, 2003, the Company signed a letter of intent with local management for the sale of its Netherlands operations. There can be no assurance that the
sale will be completed due to a number of contingencies contained in the letter of intent. In addition, the Company has completed the evaluations of the balance of its Latin American markets, excluding Mexico and Miami, as well as its Sweden
operations. The Company has decided to keep its operations in Chile, to negotiate with its major carrier customer in Colombia to shift its business from CellStars operation in Colombia to Miami, and to explore sale opportunities for its
operations in Sweden.



The Company believes that the intrinsic
value of its Asia-Pacific Region is not currently reflected in the market price of the Companys common stock. As a result, the Company engaged UBS Warburg to assist it in evaluating transactions that could result in recognizing the value that
it believes is locked up in the Asia-Pacific Region. Those evaluations have focused on a number of possible transactions including a possible initial public offering of all or a portion of the Asia-Pacific Region operations, a sale to outside
investors or a management buyout. Based on these evaluations, the Company has decided to pursue an initial public offering of its operations in the PRC, Hong Kong and Taiwan (the Greater China Operations) on an exchange in Asia. Although
the Company intends to pursue the transaction that it believes will be most favorable to the Company, there are a number of steps to be completed before there is such a transaction. Accordingly, there can be no assurance of the timing of the
transaction or that any transaction will occur.



As a result of
such evaluation process, however, the Company is now required by generally accepted accounting principles (GAAP) to effect a change in its historical accounting treatment for the undistributed earnings of its Asia-Pacific Region
subsidiaries. Prior to the fourth quarter of 2002, the Company did not accrue for U.S. Federal income taxes or tax benefits on the undistributed earnings and/or losses of its international subsidiaries because earnings have been reinvested and, in
the opinion of management, would continue to be reinvested indefinitely. (See Note (7) of the Notes to Consolidated Financial Statements for CellStar Corporation contained in the Form 10-K for fiscal year ended November 30, 2001, filed with the
Securities and Exchange Commission on February 28, 2002.) Accordingly, there was no liability recorded for such potential U.S. Federal income taxes. As a result of the progress in the fourth quarter of 2002 in evaluating the strategic options with
regard to its Asia-Pacific Region, it was determined that the Company is now required by GAAP to account for



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the earnings in its Asia-Pacific Region as not being permanently reinvested since the Company has manifested its intent to pursue possible transactions
designed to allow the Company to withdraw and return to the U.S. some or all of the value of those operations. Accordingly, in the quarter ended November 30, 2002, the Company was required to accrue U.S. Federal income taxes on the undistributed
earnings of the Asia-Pacific Region of approximately $42.2 million.



No U.S. Federal income taxes on the undistributed earnings will be payable until such earnings are actually remitted back to the U.S. in the form of dividends or, in the case of a completed transaction such as those discussed above, sale
proceeds. As of November 30, 2002, the Company has net operating loss carryforwards in the U.S. of approximately $70.4 million, a significant portion of which the Company believes it will be able to utilize to offset the taxes payable in the event
that a transaction is completed. The Company therefore does not expect that the impact of the payment of any taxes associated with any such transaction will significantly impact the cash position of the Company at the time of such payment.
Furthermore, the Company will have cash proceeds from any such transaction to fund the actual payment of such taxes. As a result of the accrual in the quarter ended November 30, 2002 of U.S. Federal income taxes on the undistributed earnings of the
Asia-Pacific Region, the Company will not recognize tax expense in future periods for financial statement purposes on any such future transaction up to the amount of the tax recognized on the undistributed earnings.



Consistent with the change in historical accounting treatment for
undistributed earnings discussed above, the Company recorded U.S. Federal income taxes of approximately $2.0 million in the fourth quarter of 2002 for previously undistributed earnings from Sweden, The Netherlands and Colombia. These previously
undistributed earnings are no longer considered permanently reinvested following the completion of the Companys evaluations of these markets.



The Companys distribution services include purchasing, selling, warehousing, picking, packing, shipping and just-in-time delivery of
wireless handsets and accessories. In addition, the Company offers its customers value-added services, including Internet-based supply chain services via its OrderStar® system (patent pending), Internet-based tracking and reporting, inventory management, marketing, prepaid wireless
products, product fulfillment, kitting and customized packaging, private labeling, light assembly, accounts receivable management and end-user support services. The Company also provides wireless activation services and operates retail locations in
certain markets from which wireless communications products and accessories are marketed to the public.



The Company markets its products to wholesale purchasers using, among other methods, direct sales strategies, the Internet, strategic account management,
trade shows and trade journal advertising. The Company offers advertising allowances, ready-to-use advertising materials and displays, access to hard-to-find products, credit terms, a variety of name brand products and highly-responsive customer
service.



The Company, a Delaware corporation, was formed in
1993 to hold the stock of National Auto Center, Inc. (National Auto Center), a company that is now an operating subsidiary. National Auto Center was originally formed in 1981 to distribute and install automotive aftermarket products. In
1984, National Auto Center began offering wireless communications products and services. In 1989, National Auto Center became an authorized distributor of Motorola, Inc. (Motorola) wireless handsets in certain portions of the United
States. National Auto Center entered into similar arrangements with Motorola in the Latin American Region in 1991, and the Company entered into similar arrangements with Motorola in the Asia-Pacific Region in 1994 and the European Region in 1996.
The Company has also entered into similar distributor agreements with other manufacturers, including Nokia Inc. (Nokia), Sony Ericsson (USA) Inc. (Sony Ericsson), Samsung Electronics LatinoAmerica Miami, Inc.
(Samsung), Kyocera Wireless Corp. (Kyocera) and Wuhan NEC Mobile Communication Co., Ltd. (NEC).



Wireless communications technology encompasses wireless communications devices such as handsets, personal digital assistants, satellite dishes, instant
messaging devices, pagers and two-way radios. The Company believes that handsets with color screens, picture messaging, polyphonic speakers and digital camera capabilities should increase consumer demand for new and replacement handsets. In
addition, the emergence of new



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technologies, including data products and services, should create opportunities in the wireless market as users continually strive to stay connected while
remaining mobile.



From its inception in 1983, the wireless
handset market grew rapidly until 2001, when overall growth in the industry slowed. In 2002, the Company was faced with a difficult economic environment in the wireless industry in general. Despite recent slowdowns, the Company believes that future
growth in the worldwide subscriber base and the convergence of existing and emerging technologies into a single multifunction handset enabling the user to connect to a wireless web and take and send digital photographs should create significant new
opportunities for growth. The Company believes that the wireless communications industry should continue to grow, although at a slower rate than in prior years, for a number of reasons, including increased service availability, the lower cost of
wireless service compared to conventional landline telephone systems, and the availability of handsets with emerging technologies. The Company also believes that advanced digital technologies have led to increases in the number of network operators
and resellers, which have promoted greater competition for subscribers and will continue to result in increased demand for wireless communications products.



CellStars revenues grew at a 8.2% compound annual rate for the five fiscal years ended November 30, 2002, and decreased 9.7% for the year ended
November 30, 2002, compared to the prior fiscal year. The Company generated 74.6% of its revenues in 2002 from operations conducted outside the United States.



Cautionary Statements



The Companys success will depend upon, among other things, economic conditions, wireless market conditions, the financial health of its largest
customers, its ability to improve its operating margins, continue to secure an adequate supply of competitive products on a timely basis and on commercially reasonable terms, service its indebtedness and meet covenant requirements, secure adequate
financial resources, continually turn its inventories and accounts receivable, successfully manage changes in the size of its operations (including monitoring operations, controlling costs, maintaining adequate information systems and effective
inventory and credit controls), manage operations that are geographically dispersed, achieve significant penetration in existing and new geographic markets, hire, train and retain qualified employees who can effectively manage and operate its
business, and successfully manage the repositioning of its operations.



The Companys foreign operations are subject to various political and economic risks including, but not limited to, the following: political instability, economic instability, currency controls, currency devaluations, exchange rate
fluctuations, potentially unstable channels of distribution, increased credit risks, export control laws that might limit the markets the Company can enter, inflation, changes in laws and enforcement policies related to foreign ownership of
businesses abroad, foreign tax laws, trade disputes among nations, changes in cost of and access to capital, changes in import/export regulations, including enforcement policies, gray market resales, and tariff and freight rates.



In addition to the factors listed above, threats of terrorist
attacks in the United States, the U.S. retaliation for these attacks, possible U.S. military action in Iraq, the related decline in consumer confidence and continued economic weakness in the U.S. and throughout the countries in which the Company
does business could have a material adverse impact on our business.



The Companys consolidated financial statements and accompanying notes, which include certain business segment and geographic information for the last three fiscal years, can be found in Part IV of this Form 10-K.



Asia-Pacific Region



The Company believes that in the Asia-Pacific Region, primarily in China,
demand for wireless communications services has been and should continue to be driven by an unsatisfied demand for basic phone service due to the lack of adequate landline service and limited wireless penetration. The Company believes that wireless
systems in this region offer a more attractive alternative to landline systems because wireless systems do not require the substantial amount of time and investment in infrastructure (in the form of buried or overhead



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cables) associated with landline systems. In addition, declining tariffs and low-end handsets are expected to increase penetration in the future, as a larger
proportion of the population will be able to afford to use wireless communication services. According to UBS Warburg, LLC, for the Pacific Rim, total subscribers are estimated to grow from approximately 328 million in 2001 to 676 million by 2005.



In China, according to data provided by the Ministry of
Information and Industry of the PRC (the MII), the number of subscribers in recent years has increased at a compound annual growth rate of 111%, from approximately 177,000 at the end of 1992 to approximately 145 million at the end of
2001. According to the MII, the number of mobile telephone subscribers in China as of December 31, 2002 was 206.6 million. This growth is expected to continue, with the number of subscribers in China predicted to expand to 285 million by the year
2006, according to Datamonitor. As of December 2002, China had a penetration rate of approximately 16%. Based on these and other factors, as well as the large population base and economic growth in this region, the Company believes that phone users
should increasingly use wireless systems, which should continue to create growth opportunities in the region.



In the Asia-Pacific Region, the Company offers wireless handsets and accessories manufactured by Original Equipment Manufacturers (OEMs), such
as Nokia, Motorola, Sony Ericsson and NEC and aftermarket accessories manufactured by a variety of suppliers. Throughout the region, the Company acts as a wholesale distributor of wireless handsets to large and small volume purchasers.



CellStar (Asia) Corporation Limited (CellStar Asia), the
oldest of the Companys wholly-owned business units in the region, derives its revenue principally from wholesale sales of wireless handsets to Hong Kong-based companies that export these products.



Shanghai CellStar International Trading Co., Ltd. (CellStar
Shanghai), a wholly-owned, limited liability foreign trade company established in Shanghai, China, commenced operations in China in 1997 in the Shanghai Waigaiqiao Bonded Zone. CellStar Shanghai purchases wireless handsets locally manufactured
by Nokia, Motorola, Sony Ericsson and NEC and wholesales those products to distributors and retailers located throughout China. CellStar Shanghai has also entered into cooperative arrangements with certain local distributors that allow them to
establish wholesale and retail operations using CellStars trademarks. Under the terms of these arrangements, CellStar Shanghai provides services, sales support, training and access to promotional materials for use in these distributors
operations. As a result of these cooperative arrangements, approximately 1,700 retail points of sale in China display the CellStar name and trademarks. In exchange, those distributors agree to purchase only from CellStar Shanghai those products sold
by CellStar Shanghai.



CellStar Shanghai currently deals with
numerous local distributors, including distributors located in the ten largest metropolitan areas in China. The Company has an extensive distribution network through its sales of products to 26 wholesale distributors located throughout China. The
Company has a total of 67 wholesale customers in China. CellStar Shanghais largest customer, Beijing Fengxing Shi Da, constituted approximately 10% of consolidated revenues for fiscal 2002. CellStar Shanghai is the major supplier for this
customer, a wholesale distributor located in northern China. CellStar Shanghai also provides marketing support to this customer in the form of marketing managers and other assistance.



CellStar Shanghai leases warehouse, showroom and office space in the Pudong district of Shanghai, as well as office and
warehouse space in both Beijing and Guangzhou.



A substantial
amount of revenues in the Asia-Pacific Region are generated in the China market. China is the largest cellular phone market in the world, and the Company anticipates that the China market will continue to expand. However, there can be no assurance
that growth in demand in China for mobile communications products will continue at the current pace.



Additionally, carriers in China historically have not subsidized the sale of handsets in connection with activations as is frequently done in the U.S.
market. As a result, the China market has begun to shift toward a preference for less expensive handsets as the market begins to mature. Accordingly, the Companys sales of



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higher-end handsets manufactured by Nokia and Motorola, the Companys largest suppliers for that market, have been negatively impacted by increased
competition from manufacturers of low-end handsets. The Company does not currently have supply agreements with manufacturers of low-end handsets; however, the Company is working to increase its product offerings to include such low-end handsets.
There can be no assurance that the Company will be able to procure such low-end handsets on favorable terms such that it can effectively compete in this area.



For the year ended November 30, 2002, the five largest customers of the Asia-Pacific Region accounted for approximately 46.6% of the total revenues of
the region. The Companys customers in the Asia-Pacific Region are not obligated, pursuant to any contractual commitments or otherwise, to purchase any minimum amount of the products distributed by its subsidiaries in the region. The
regions principal competitors are other agents who distribute the same brands of mobile telephones as the Company, and increased sales by these competitors may directly decrease the sales of products carried by the Companys subsidiaries
in the Asia-Pacific Region. Further, the Company expects competition to remain strong in the future, especially given the easing of restrictions on foreign entities engaging in wholesale distribution, which is anticipated in connection with
Chinas entry into the World Trade Organization.



In
China, operation of the business is materially affected by regulations that limit its methods of operation. A wholly foreign owned trading company such as CellStar Shanghai is not permitted by current laws and regulations to operate as a wholesaler
or a retailer in the domestic China market. As a result, the Companys trading activities are currently carried out via government authorized commodities exchanges in the Waigaoqiao Bonded Zone which possess the requisite government licenses to
conduct trading activities between enterprises located in the Waigaoqiao Bonded Zone and enterprises located outside that zone. The Companys operations in the PRC are dependent upon the continuation of these trading practices in the Waigaoqiao
Bonded Zone. If the central or local PRC governmental authorities decide to reverse this practice, the Companys operations in the PRC may be adversely affected. The telecommunications industry in China is a heavily regulated industry. Under
current regulations, foreign investors are restricted from participating in the operation and management of a telecommunications services business in China. Further, the Renminbi, (the RMB) the currency used in the PRC, is not a freely
convertible currency. PRC legal requirements, and the interpretation thereof, are subject to change from time to time. Any failure of the Company to comply with such requirements could harm its business and adversely affect its financial condition
and results of operations.



The other countries in the
Asia-Pacific Region in which the Company operates include Singapore, Taiwan, The Philippines and Korea. Although the Companys business in the Asia-Pacific Region is predominantly wholesale, retail operations are also conducted in Taiwan.
Revenues in Singapore and The Philippines are derived solely from wholesale customers. The Companys operations in Korea consist of a majority-owned (80%) subsidiary set up to locate and purchase product and to develop relationships with local
handset manufacturers in the area. In the third quarter of 2002, due to the continuing deterioration in the Malaysia market, the Company completed the divesture of its ownership interest in CellStar Amtel Sdn Bhd (CellStar Amtel), a
Malaysian joint venture in which the Company was a minority partner.



The following table outlines CellStars entry into the Asia-Pacific Region for countries in which operations were conducted in fiscal 2002:



|Country                    |  | Year Entered |  | Type of Operation (as of November 30, 2002)                       
|-------------------------- |  | ------------ |  | ------------------------------------------------------------------
|Hong Kong                  |  | 1993         |  | Wholesale                                                         
|Singapore                  |  | 1995         |  | Wholesale                                                         
|The Philippines            |  | 1995         |  | Wholesale                                                         
|Malaysia                   |  | 1995         |  | Wholesale and Retail (ownership divested in third quarter of 2002)
|Taiwan                     |  | 1995         |  | Wholesale and Retail                                              
|Peoples Republic of China |  | 1997         |  | Wholesale                                                         
|Korea                      |  | 2000         |  | Purchasing                                                        



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At November 30, 2002, the Company sold its products to over 250 wholesale customers in the Asia-Pacific
Region, the ten largest of which accounted for approximately 31% of consolidated revenues. The Company offers a broad product mix compatible with digital systems in the Asia-Pacific Region and anticipates that its product offerings will continue to
expand with the evolution of new technologies as they become commercially viable.



The Company markets its products to a variety of wholesale purchasers, including retailers, exporters and wireless carriers, through its direct sales force, trade shows, direct advertising, and incentives to retail
and wholesale customers. To penetrate local markets in certain countries, the Company has made use of subagent and license relationships.



The Company believes that the intrinsic value of its Asia-Pacific Region is not currently reflected in the market price of the Companys common
stock. As a result, the Company engaged UBS Warburg to assist it in evaluating transactions that could result in recognizing the value that it believes is locked up in the Asia-Pacific Region. Those evaluations have focused on a number of possible
transactions including a possible initial public offering of all or a portion of the Asia-Pacific Region operations, a sale to outside investors or a management buyout. Based on these evaluations, the Company has decided to pursue an initial public
offering of its Greater China Operations on an exchange in Asia. Although the Company intends to pursue the transaction that it believes will be most favorable to the Company, there are a number of steps to be completed before there is such a
transaction. Accordingly, there can be no assurance of the timing of the transaction or that any transaction will occur.



As a result of such evaluation process, however, the Company is now required by GAAP to effect a change in its historical accounting treatment for the
undistributed earnings of its Asia-Pacific Region subsidiaries. Prior to the fourth quarter of 2002, the Company did not accrue for U.S. Federal income taxes or tax benefits on the undistributed earnings and/or losses of its international
subsidiaries because earnings have been reinvested and, in the opinion of management, would continue to be reinvested indefinitely. (See Note (7) of the Notes to Consolidated Financial Statements for CellStar Corporation contained in the Form 10-K
for fiscal year ended November 30, 2001, filed with the Securities and Exchange Commission on February 28, 2002.) Accordingly, there was no liability recorded for such potential U.S. Federal income taxes. As a result of the progress in the fourth
quarter of 2002 in evaluating the strategic options with regard to its Asia-Pacific Region, it was determined that the Company is now required by GAAP to account for the earnings in its Asia-Pacific Region as not being permanently reinvested since
the Company has manifested its intent to pursue possible transactions designed to allow the Company to withdraw and return to the U.S. some or all of the value of those operations. Accordingly, in the quarter ended November 30, 2002, the Company was
required to accrue U.S. Federal income taxes on the undistributed earnings of the Asia-Pacific Region of approximately $42.2 million.



No U.S. Federal income taxes on the undistributed earnings will be payable until such earnings are actually remitted back to the U.S. in the form of
dividends or, in the case of a completed transaction such as those discussed above, sale proceeds. As of November 30, 2002, the Company has net operating loss carryforwards in the U.S. of approximately $70.4 million, a significant portion of which
the Company believes it will be able to utilize to offset the taxes payable in the event that a transaction is completed. The Company therefore does not expect that the impact of the payment of any taxes associated with any such transaction will
significantly impact the cash position of the Company at the time of such payment. Furthermore, the Company will have cash proceeds from any such transaction to fund the actual payment of such taxes. As a result of the accrual in the quarter ended
November 30, 2002, of U.S. Federal income taxes on the undistributed earnings of the Asia-Pacific Region, the Company will not recognize tax expense in future periods for financial statement purposes on any such future transaction up to the amount
of the tax recognized on the undistributed earnings.



North
American Region



Wireless communications services in the
United States were developed as an alternative to conventional landline systems and were among the fastest growing market segments in the communications industry. Growth



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in subscribers in the United States decreased during 2002 due to the economic slow down and, more generally, due to declining rates of subscriber growth as
overall rates of penetration in the wireless industry approach 50%.



The Company offers a broad product mix in the United States, and anticipates that the Companys product offerings will continue to expand with the evolution of new technologies as they become commercially viable.
The Company distributes products through direct-to-retailer fulfillment, direct-to-distributor fulfillment and direct-to-consumer fulfillment of both handsets and accessories. The Company also offers value-added fulfillment services such as kitting,
programming, one-off shipping, inventory purchasing and warehousing to its customers. In addition, the Company provides private labeling services for handsets and accessories to several major carriers.



The Company offers wireless handsets and accessories manufactured by OEMs,
such as Motorola, Nokia, Kyocera and Sony Ericsson, and aftermarket accessories manufactured by a variety of suppliers. The Companys revenues in the North American Region are generated primarily from handset sales. The Company also offers
satellite dish technology. The Companys distribution operations and value-added services complement the manufacturer distribution channels by allowing the manufacturers to distribute their products to smaller volume purchasers and retailers.



At November 30, 2002, the Company sold its products to
approximately 2,400 customers in the North American Region, the ten largest of which accounted for approximately 14.6% of consolidated revenues.



In the fourth quarter of 2002, the parent of one of the Companys largest customers announced that some of the customers lenders under its
vendor credit facilities had ceased funding new loan requests, that it was in default on certain credit facilities and that it was seeking new sources of financing and a restructuring of its outstanding indebtedness. These events of default provided
the customers credit facility lenders with certain rights under their credit agreements, including the right to declare their existing loans due and payable. Revenues from this customer were less than 10% of the Companys consolidated
revenues for fiscal 2002.



In October 2002, the Company entered
into an agreement with the customer to convert its current business relationship to a primarily consignment relationship. Although the new business model did not have a significant impact on fiscal 2002 revenues, the Company anticipates that
revenues in future periods will decrease as the Company receives fulfillment fees for the services provided pursuant to the agreement instead of product revenues. The future impact on net income is dependent upon the volume of fulfillment activity
and the amount of fulfillment fees received compared to the historical gross margin on product sales. There can be no assurance that fulfillment fees under the new agreement will equal historical gross margin. By converting to a primarily
consignment relationship, the Company has reduced its accounts receivable exposure. The Company has also reduced working capital requirements since the Company will not be required to purchase and hold inventory for that segment of the business
relationship. The agreement expired on January 31, 2003 but has been extended through February 28, 2003.The Company expects to extend the current agreement, with certain modifications, until March 31, 2003. During this extension, the Company
intends to negotiate a new agreement with this customer. There can be no assurance the agreement will be renewed or that the customer will maintain similar volumes of business in the future. The Company expects a decline in volume for fiscal 2003
which could have a material adverse impact on the Companys financial results.



The Company continues to develop and enhance the functionality of its OrderStar® and netXtreme(SM) programs. These programs are proprietary, Internet-based order entry and supply-chain services software and systems designed to assist customers in the submission and
tracking of orders and to allow customers to analyze their business activities with CellStar through the creation of customized reports. The OrderStar® system was officially launched in March of 2002 and replaced the existing AOS On-Line system. New and existing customers began migrating to
the OrderStar® system thereafter, and the migration
was completed in the fourth quarter of 2002. The OrderStar® system enhances the CellStar customer experience by offering faster product navigation and streamlined checkout procedures, private labeling capabilities, and marketing and advertising opportunities. Together, the
OrderStar® and netXtreme systems greatly enhance a
customers ability to actively manage inventories and reduce supply-chain delays while reducing the cost to CellStar of fulfilling their orders. Today, nearly 80% of all orders CellStar receives in the U.S. are in electronic form via the
OrderStar® or



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netXtreme systems or electronic data interchange (EDI). In addition, the Company assists customers in developing e-commerce platforms and solutions designed
to enhance sales and reduce product delivery and activation delays.



Although the Companys business in the North American Region is primarily generated from wholesale revenues, as of November 30, 2002, the Company operated two retail locations in the United Statesone in Austin, Texas, and one in
Houston, Texas. The Companys activation agreements with wireless carriers for these locations expire in the third quarter of 2003. There can be no assurance that these agreements will be renewed. The Company uses several marketing strategies
throughout the North American Region, including trade shows, trade magazine advertising, direct mail, e-marketing, and distributing product catalogs and service and program brochures.



Latin American Region



As in the Asia-Pacific Region, the Company believes that demand for wireless communications services in the Latin American Region has been and should
continue to be driven by an unsatisfied demand for basic phone service due to the lack of adequate landline service and limited wireless penetration. The Company believes that wireless systems in this region offer a more attractive alternative to
landline systems because wireless systems do not require the substantial amount of time and investment in infrastructure (in the form of buried or overhead cables) associated with landline systems. However, political and economic instability in the
region in recent years in certain of the countries in which the Company operates has caused the Company to formulate a strategy to reposition its operations in those areas.



In the second quarter of 2002, as a result of economic instability and continued economic decline, the Company decided as
part of its plan to reposition its operations that it would exit Peru and Argentina as soon as practicable. The economic climate in Peru and Argentina, coupled with the small scale of the Companys operations in those countries, provided little
upside and significant risk. During the third quarter of 2002, the Company completed its divestitures of its Peru and Argentina operations to local management. In addition, the Company has completed the evaluation of the balance of its Latin
American markets, excluding Mexico and Miami. The Company has decided to continue its operation in Chile as this operation is expected to continue to be profitable and to generate cash. To reduce its in-country exposure in Colombia, the Company is
negotiating with its major carrier customer in Colombia to shift the carrier customers business to the Companys Miami export operations.



In the Latin American Region, CellStar offers wireless communications handsets, related accessories and other wireless products manufactured by OEMs, such
as Motorola, Samsung, Kyocera, Nokia and Sony Ericsson, and aftermarket accessories manufactured by a variety of suppliers to carriers, mass merchandisers and other retailers. The Company, through its Miami, Florida operations, acts as a wholesale
distributor of wireless communications products in the Latin American Region to large volume purchasers, such as wireless carriers, as well as to smaller volume purchasers. As a result, the Companys Miami operations are included in the Latin
American Region.



Consistent with the change in historical
accounting treatment for undistributed earnings in the Asia-Pacific Region, the Company recorded U.S. Federal income taxes of approximately $2.0 million in the fourth quarter of 2002 for previously undistributed earnings from Sweden, The Netherlands
and Colombia. These previously undistributed earnings are no longer considered permanently reinvested following the completion of the Companys evaluations of these markets.



Although the Companys business in the Latin American Region is predominantly wholesale and value-added fulfillment
services, the Company conducts retail operations in all countries in which it operates in this region, with the exception of the Miami operations. At November 30, 2002, CellStar operated 94 retail locations (including kiosks) in the Latin American
Region, 36 of which are located in Chile, 36 of which are located in Colombia, and 22 of which are located in Mexico. Historically, the Company has acted primarily through wholly-owned subsidiaries in each of the countries in this region.



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The following table outlines CellStars entry into the Latin American Region for countries in which
operations were conducted in fiscal 2002:



|Country   |  | Year Entered |  | Type of Operation (as of November 30, 2002)
|--------- |  | ------------ |  | -------------------------------------------
|Mexico    |  | 1991         |  | Wholesale and Retail                       
|Chile     |  | 1993         |  | Wholesale and Retail                       
|Colombia  |  | 1994         |  | Wholesale and Retail                       
|Argentina |  | 1995         |  | Wholesale and Retail                       
|          |  |              |  | (Divested in third quarter of 2002)        
|Peru      |  | 1998         |  | Wholesale and Retail                       
|          |  |              |  | (Divested in third quarter of 2002)        



The Companys
Mexico operations derive their revenues primarily from wholesale purchasers and activation of handsets. The Companys operations in Mexico account for approximately 60%, 61%, and 54% of the Latin America Regions revenues in 2000, 2001,
and 2002, respectively. Over the last three years, the operations in Mexico have recognized operating gains (losses) of $15.4 million, ($9.8) million, and ($11.5) million in 2000, 2001, and 2002, respectively. The Company believes growth and profit
potential exist in the Mexico market due to the size of this market as well as the relationships being built between the carriers and the Company.



As of November 30, 2002, the Company sold its products to over 700 wholesale customers, including subagents, in the Latin American Region, excluding
Argentina and Peru. The ten largest customers accounted for approximately 9.3% of the Companys consolidated revenues in fiscal 2002. The Company offers a broad product mix in the Latin American Region, including products that are compatible
with both digital and analog systems, and anticipates that its product offerings will continue to expand in the countries in which the Company continues to operate with the evolution of new technologies as such products become commercially viable.



The Company markets its products through trade shows, trade
magazines, direct sales and advertising. The Company uses direct mailings and newspapers to promote its retail operations. To penetrate local markets, the Company has made use of subagent relationships in certain countries.



European Region



The Company acts as a wholesale distributor of wireless communications
products in the European Region to large volume purchasers, such as wireless carriers and retailers, as well as to smaller volume purchasers. The Company uses distribution facilities in Stockholm, Sweden and sHertogenbosch, The Netherlands, to
serve customers in the European Region. In the European Region, the Company offers wireless communications handsets, related accessories and other wireless products manufactured by its primary suppliers, Nokia and Sony Ericsson, and aftermarket
accessories manufactured by a variety of suppliers to carriers, mass merchandisers and other retailers.



In April 2000, the Company curtailed a significant portion of its U.K. international trading operations following third party theft and fraud losses.
Trading in wireless handsets involves the purchase of wireless handsets from sources other than the manufacturers or network operators (i.e., trading companies) and the sale of those handsets to other trading companies. The curtailment in the
Companys trading activities had a significant impact on revenues and profit for its U.K. operations and on the European Region as a whole for fiscal 2001. The Company decided, in the second quarter of 2002, to exit the U.K. as soon as
practicable. The Company determined that improving its position in the U.K. would require substantial investment in that market, which the Company was not willing to make. As of August 31, 2002, the Companys operations in the U.K. were closed
except for certain administrative matters.



In January 2003,
the Company signed a letter of intent with local management for the sale of its Netherlands operations. There can be no assurance that the sale will be completed due to a number of contingencies contained in the letter of intent. In addition, as
part of the Companys overall plan to reposition its operations, the Company has completed the evaluation of its operations in Sweden and will explore opportunities to sell these operations.



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Consistent with the change in historical accounting treatment for undistributed earnings in the
Asia-Pacific Region, the Company recorded U.S. Federal income taxes of approximately $2.0 million in the fourth quarter of 2002 for previously undistributed earnings from Sweden, The Netherlands and Colombia. These previously undistributed earnings
are no longer considered permanently reinvested following the completion of the Companys evaluations of these markets.



Although the Companys business in the European Region is predominantly wholesale, the Company has one retail location in The Netherlands. The
Company has historically acted through wholly-owned subsidiaries in each of the countries in this region. The following table outlines the Companys entry into the European Region for countries in which operations were conducted in fiscal 2002:



|Country         |  | Year Entered |  | Type of Operation (as of November 30, 2002)
|--------------- |  | ------------ |  | -------------------------------------------
|United Kingdom  |  | 1996         |  | Wholesale                                  
|                |  |              |  | (Closed as of August 31, 2002)             
|Sweden          |  | 1998         |  | Wholesale                                  
|The Netherlands |  | 1999         |  | Wholesale and Retail                       



As of November 30,
2002, the Company sold its products to over 1,700 wholesale customers in the European Region, excluding the U.K., the ten largest of which accounted for approximately 2.5% of consolidated revenues. The Company offers a broad product mix compatible
with digital systems in the European Region. The Company markets its products through direct sales, trade shows, custom catalogues and advertising.



Industry Relationships



The Company has established strong relationships with leading wireless equipment manufacturers and wireless service carriers. Although the Company
purchased its products from more than 20 suppliers in fiscal 2002, the majority of the Companys purchases were from Nokia, Motorola, Sony Ericsson, Samsung and Kyocera.For the year ended November 30, 2002, Nokia and Motorola accounted
for approximately 74% of the Companys product purchases.



The Company has distribution agreements with many of its suppliers, including Motorola, Nokia, Sony Ericsson, Kyocera, NEC, and Samsung, or their foreign affiliates, that specify territories, pricing and payment terms. These contracts
typically provide the Company with price protection, or the right to receive the benefit of price decreases on products currently in the Companys inventory if such products were purchased by the Company within a specified period of
time prior to the effective date of the price decrease. The Company also has established supply relationships with other manufacturers on a purchase order basis, such as LG and Panasonic.



The Companys agreements with its suppliers generally have terms ranging
from nine months to three years. The majority of our supplier agreements can be terminated without cause by the terminating party giving notice within periods ranging from 30 to 90 days prior to such termination. Our agreements with Kyocera and NEC,
however, may be terminated only for cause. Certain of our supplier agreements, including agreements with Ericsson, Motorola, NEC and Samsung, automatically renew for periods ranging from one to three years. Other agreements, such as Kyocera and
Nokia, expire at various times and must be extended in writing by the parties. Most of our agreements with suppliers are non-exclusive.



The Company is required, pursuant to certain supplier agreements, to submit forecasts on either a monthly or a three month rolling basis. Such estimates
are on a best efforts basis.



The Companys agreements
with its customers generally have terms ranging from one to four years, and are extended for successive one year terms thereafter or month to month in one instance. Most agreements can be



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terminated by either party without cause by the terminating party giving notice within periods ranging from 60 to 180 days prior to such termination. The
Company does not have agreements with the majority of its customers. While the Company believes its customer relations are good, there can be no assurance that the Company will retain its current customer base.



In the past, the Companys expansion has been due to several factors,
one of which is its relationship with Motorola, historically one of the largest manufacturers of wireless products in the world and the Companys largest supplier in the North American Region. In July 1995, Motorola purchased a split-adjusted
417,862 shares of the outstanding common stock of the Company, currently approximately 2% of the Companys total shares outstanding. The Company believes that its relationship with Motorola and its other suppliers should enable it to continue
to offer a wide variety of wireless communications products in all markets in which it operates. In addition, strong relationships with Nokia, the Companys largest supplier in fiscal 2002, have helped to solidify the Companys position in
domestic and foreign markets. While the Company believes that its relationship with Motorola, Nokia and other significant vendors is satisfactory, there can be no assurance that these relationships will continue.



The loss of Motorola, Nokia or any other significant vendor, a substantial
price increase imposed by any vendor or a shortage or oversupply of product available from its vendors could have a material adverse impact on the Company. No assurance can be given that product shortages or product surpluses will not occur in the
future.



Asset Management



The Company continues to invest in and focus on technology to improve
financial and information control systems. The Company expanded and extended its technology tools to improve financial and information control systems during 2002 in the following areas: (i) completion of the implementation of virtual private
network capabilities in the PRC and Taiwan, greatly increasing wide area network performance; (ii) expansion of customer usage of the Companys netXtreme tools; (iii) further expansion of EDI processing for both customer and vendor
relationships; (iv) streamlining processes in the PRC through infrastructure and applications for multiple level distribution operations; and (v) expansion of the Companys supply chain management system. One result of the Companys
technology investment is that e-commerce tools process over 80% of all U.S. orders and virtually all orders in the PRC. The Company believes these initiatives will continue to position the Company to take advantage of the market trends with
Internet-based commerce and further provide opportunities to integrate its systems with those of its customers.



The Companys suppliers ship directly to the Companys warehouse or distribution facilities or drop ship directly to the Companys
customers. Inventory purchases are based on quality, price, service, market demand, product availability and brand recognition. Some of the Companys major vendors provide favorable purchasing terms to the Company, including price protection
credits, stock balancing, increased product availability and cooperative advertising and marketing allowances.



Inventory control is important to the Companys ability to maintain its margins while offering its customers competitive prices and rapid delivery of
a wide variety of products. The Company uses its integrated management information technology systems, specifically its inventory management, electronic purchase order and sales modules (consisting of its OrderStar® and netXtreme systems) to help manage inventory and sales margins.



Accounts receivable management is important to the Companys ability
to control its bad debt expense and working capital. The Company uses a variety of credit management tools, including credit scoring services and, in certain of its markets, credit insurance to manage its accounts receivable exposure.



The Company has converted certain of its customer accounts to a consignment
model. Under this model, the customer owns the inventory and the Company provides fulfillment services for those products. Fulfillment services include any combination of kitting, programming, inventory management and packaging of handsets,



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wireless accessories and other items, as well as the distribution of such products for our consignment customers. Consignment offers certain advantages,
including lower working capital requirements, reduced accounts receivable exposure and reduced exposure to inventory obsolescence. Although overall revenues may be lowered as a result of operating on a consignment model, the Company believes that
net income is not significantly impacted as fulfillment fees are being generated. Ultimately the impact on net income is dependent upon the volume of fulfillment activity and the amount of fulfillment fees received compared to the historical gross
margin on product sales. There can be no assurance that fulfillment fees will equal historical gross margins.



Under the terms of the Companys agreements with its consignment customers, title to the products remains with the customer. The Company bears all
risk of casualty loss with respect to consignment products while such products remain in the Companys care, custody and control. These agreements generally have terms from one to four years, and may be extended for successive one year terms
thereafter or month to month in one instance. Most agreements can be terminated by either party without cause by the terminating party giving notice within periods ranging from 60 to 180 days prior to such termination. In some agreements, the
Companys customers provide product forecasts on a rolling three month basis, however, those forecasts are on a best efforts basis. In some cases, the Company may charge the customer a storage fee for products held by the Company for an
excessive period of time, generally 90 days or more.



The
market for wireless products is characterized by rapidly changing technology and frequent new product introductions, often resulting in product obsolescence or short product life cycles. The Companys success depends in large part upon its
ability to anticipate and adapt its business to such technological changes. There can be no assurance that the Company will be able to identify, obtain and offer products necessary to remain competitive or that competitors or manufacturers of
wireless communications products will not market products that have perceived advantages over the Companys products or that render the products sold by the Company obsolete or less marketable. The Company maintains a significant investment in
its product inventory and, therefore, is subject to the risks of inventory obsolescence and excessive inventory levels. The Company attempts to limit these risks by managing inventory turns and by entering into arrangements with its vendors,
including price protection credits and return privileges for slow-moving products. The Companys significant inventory investment in its international operations exposes it to certain political and economic risks. See Business
Cautionary Statements and Managements Discussion and Analysis of Financial Condition and Results of OperationsInternational Operations. Typically, the Company ships its products within one business day of receipt of
customer orders and, therefore, backlog is not considered material to the Companys business.



Significant Trademarks



The Company markets certain of its products under the trade name CellStar. The Company has registered the trade name CellStar on
the Principal Register of the United States Patent and Trademark Office and has registered or applied for registration of its trade name in certain foreign jurisdictions. The Company has also filed for registrations of its other trade names in the
United States and other jurisdictions in which it does business.



Competition



The Company operates in a highly
competitive environment and believes that such competition will intensify in the future. The Company competes primarily on the basis of inventory availability and selection, delivery time, service and price. Many of the Companys competitors
are larger and have greater capital and management resources than the Company. In addition, potential users of wireless systems may find their communications needs satisfied by other current and developing technologies. The Companys ability to
remain competitive will therefore depend upon its ability to anticipate and adapt its business to such technological changes. There can be no assurance that the Company will be successful in anticipating and adapting to such technological changes.



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In the current U.S. wireless communications products market, the Companys primary competitors are
manufacturers, wireless carriers and other independent distributors such as Brightpoint, Inc. The Company also competes with logistics companies who provide similar distribution and inventory management services. Competitors of the Company in the
Asia-Pacific, Latin American and European Regions include manufacturers, national carriers that have retail outlets with direct end-user access, and U.S. and foreign-based exporters and distributors. The Company is also subject to competition from
gray market activities by third parties that are legal, but are not authorized by manufacturers, or that are illegal (e.g., activities that avoid applicable duties or taxes). In addition, the Company competes for activation fees and residual fees
with agents and subagents for wireless carriers.



Seasonality and Cyclicality



The
Companys sales are influenced by a number of seasonal factors in the different countries and markets in which it operates, including the purchasing patterns of customers in different markets, product promotions of competitors and suppliers,
availability of distribution channels, and product supply and pricing. The Companys sales are also influenced by cyclical economic conditions in the different countries and markets in which it operates. An economic downturn in one of the
Companys principal markets could have a materially adverse effect on the Companys operating results.



Employees



As of November 30, 2002, the Company had approximately 1,100 employees worldwide. In Mexico, certain of the Companys employees are subject to labor
agreements. The Company has never experienced any material labor disruption and is unaware of any efforts or plans to organize additional employees. Management believes that its labor relations are satisfactory.



Executive Officers of the Registrant



The following table sets forth certain information concerning the executive
officers of the Company:



|Terry S. Parker       |  | 57 |  | Chief Executive Officer                                                                     
|--------------------- |  | -- |  | --------------------------------------------------------------------------------------------
|                      |  |   
|A.S. Horng            |  | 45 |  | Chairman, Chief Executive Officer and General Manager of CellStar (Asia) Corporation Limited
|                      |  |   
|Robert A. Kaiser      |  | 49 |  | Senior Vice President, Chief Financial Officer and Treasurer                                
|                      |  |   
|Lawrence King         |  | 37 |  | President and Chief Operating Officer of the Asia-Pacific Region                            
|                      |  |   
|Elaine Flud Rodriguez |  | 46 |  | Senior Vice President, General Counsel and Secretary                                        
|                      |  |   
|Raymond L. Durham     |  | 41 |  | Vice President and Corporate Controller                                                     



Terry S. Parker has
served as Chief Executive Officer of the Company since July 2001, as a director of the Company since March 1995 and as President and Chief Operating Officer of the Company from March 1995 through July 1996. Mr. Parker served as Senior Vice President
of GTE Corporation and President of GTEs Personal Communications Services, GTEs wireless division, from October 1993 until he joined the Company. From 1991 to 1993, Mr. Parker served as President of GTE Telecommunications Products and
Services. Before 1991, Mr. Parker served as President of GTE Mobile Communications. Mr. Parker serves as an officer of the Company pursuant to his employment agreement.



A.S. Horng has served as Chairman of CellStar Asia since January 1998 and has also served as Chief Executive Officer of
CellStar Asia since April 1997 and General Manager since 1993. From April 1997 until January 1998, Mr. Horng served as Vice Chairman of CellStar Asia, and from April 1997 until October 1997,



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Mr. Horng served as President of CellStar Asia. From 1991 to 1993, Mr. Horng was President of C-Mart USA Corporation, a distributor and manufacturer of
aftermarket wireless phone accessory products. Mr. Horng serves the Company pursuant to his employment agreement.



Robert A. Kaiser has served as Senior Vice President, Chief Financial Officer and Treasurer since December 2001. Prior to joining CellStar, Mr. Kaiser
served as President and Chief Executive Officer of MobileStar Network Corporation, a provider of broadband wireless Internet access, from May 2001 to December 2001. Prior to joining MobileStar, Mr. Kaiser served as Chief Executive Officer of
WorldCom Broadband Solutions Group from August 2000 to May 2001. Mr. Kaiser served as Chief Executive Officer and Chief Financial Officer of SkyTel from January 2000 to August 2000 and as Chief Financial Officer from August 1996 to December 1999.
Mr. Kaiser served as Chief Financial Officer of Southwestern Bells Mobile Systems from March 1987 to August 1996. Mr. Kaiser serves as an officer of the Company pursuant to his employment agreement.



Lawrence King has served as President and Chief Operating Officer of the
Asia-Pacific Region since April 2000. Previously, Mr. King served as Vice President of Operations for CellStar Asia, since February 1998. Mr. King joined the Company in 1994. Prior to joining the Company, Mr. King was the General Manager and
co-founder of GloMax Inc.



Elaine Flud Rodriguez has been
Senior Vice President, General Counsel and Secretary since January 2000. Previously, Ms. Rodriguez served as Vice President, General Counsel and Secretary since joining the Company in October 1993. From October 1991 to August 1993, she was General
Counsel and Secretary of Zoecon Corporation, a pesticide manufacturer and distributor owned by Sandoz Ltd. Prior thereto, she was engaged in the private practice of law with Atlas & Hall and Akin, Gump, Strauss, Hauer & Feld. Ms. Rodriguez
is licensed to practice law in the states of Texas and Louisiana. Ms. Rodriguez serves as an officer of the Company pursuant to her employment agreement.



Raymond L. Durham has served as Vice President and Corporate Controller since February 2001, Corporate Controller from November 1999 until January 2001,
and acting Corporate Controller from July 1999 until November 1999. From March 1997 until July 1999, Mr. Durham served as Director of Audit Services for the Company. Prior to joining the Company, he was with KPMG LLP, an international independent
accounting firm, from 1986 until 1997 where he held several positions including Audit Senior Manager from 1990 until 1997. Mr. Durham is a certified public accountant.



The Companys success is dependent on the efforts of its executive officers and key employees including Terry S.
Parker, Chief Executive Officer, and A.S. Horng, the Chairman, Chief Executive Officer and General Manager of CellStar Asia. The Asia-Pacific Region was responsible for approximately 51%of the Companys revenues for fiscal 2002. If Mr.
Horng were to depart as Chief Executive Officer of CellStar Asia, the Companys operations in the Asia-Pacific Region could be materially adversely affected. Although the Company has entered into employment agreements with these officers and
several other officers and key employees, there can be no assurance that the Company will be able to retain their services.



The Company does not maintain key man insurance on the life of any officer of the Company. The loss or interruption of the continued full-time service of
the Companys executive officers and key employees could have a material adverse impact on the Companys business. To support its continued growth, the Company must effectively recruit, develop and retain additional qualified management.
The inability of the Company to attract and retain such necessary personnel could also have a material adverse effect on the Company.



Item 2.    Properties



As of November 30, 2002, the Company had a total of 25 operating facilities in the Asia-Pacific Region, 23 of which were leased; a total of 109 operating facilities in the Latin American Region (including kiosks), all but one of which
were leased; and a total of 6 operating facilities in the European Region, all of which were leased. These facilities serve as offices, warehouses, distribution centers or retail locations.



The Companys corporate headquarters is located at 1730 Briercroft
Court, and its principal North American Region distribution facility is located at 1728 Briercroft Court, each in Carrollton, Texas. Both facilities are



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owned by the Company. As of November 30, 2002, the Company had three other operating facilities in the North American Region, all of which were leased.



The Company believes that suitable additional space will be
available, if necessary, to accommodate future expansion of its operations.



Item 3.    Legal Proceedings



On October 15, 2001, the Company announced that the results for the three and six months ended May 31, 2001 would be restated to reflect certain accounting adjustments. In October 2001, the Company received an inquiry
from the SEC requesting information concerning the restatement of earnings for the quarter ended May 31, 2001. The Company believes that it has fully responded to such request.



The Company is a party to various other claims, legal actions and complaints arising in the ordinary course of business.



Management believes that the disposition of these matters will
not have a materially adverse effect on the consolidated financial condition or results of operations of the Company.



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



There were no matters submitted to a vote of the Companys security holders during the fiscal quarter ended November 30, 2002.



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PART II.



Item 5.    Market for Registrants Common Equity and Related Stockholder Matters



The Companys common stock is quoted on the Nasdaq National Market (Nasdaq) under the symbol CLST. The following table sets
forth, on a per share basis for the periods indicated, the high and low closing sale prices for the common stock as reported by Nasdaq (adjusted for the effect of the one-for-five reverse stock split effective on February 22, 2002).



|                                    |  | High |       | Low
|----------------------------------- |  | ---- | ----- | ---
|Fiscal Year ended November 30, 2002 |  |      |       |    
|Quarter Ended:                      |  |      |       |    
|February 28, 2002                   |  | $    | 4.80  |    
|May 31, 2002                        |  |      | 4.90  |    
|August 31, 2002                     |  |      | 4.22  |    
|November 30, 2002                   |  |      | 4.80  |    
|Fiscal Year ended November 30, 2001 |  |      |       |    
|Quarter Ended:                      |  |      |       |    
|February 28, 2001                   |  | $    | 10.63 |    
|May 31, 2001                        |  |      | 10.60 |    
|August 31, 2001                     |  |      | 12.90 |    
|November 30, 2001                   |  |      | 6.65  |    



As of February 20,
2003, there were 148 stockholders of record, although the Company believes that the number of beneficial owners is significantly greater because a large number of shares are held of record by CEDE & Co.



The Company has never declared or paid cash dividends on its common stock.
The Company currently intends to retain all earnings to finance its business and does not anticipate paying cash dividends on the common stock in the foreseeable future. Any future determination as to the payment of cash dividends will depend on a
number of factors, including future earnings, capital requirements, the financial condition and prospects of the Company and any restrictions under the Companys credit agreements existing from time to time, as well as other factors the Board
of Directors may deem relevant. The Companys current revolving credit facility and 12% senior subordinated notes restrict the payment of dividends by the Company to its stockholders. There can be no assurance that the Company will pay any
dividends in the future.



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Item 6.    Selected Consolidated Financial Data



The financial data presented below, as of and for each of the years in the five-year period ended November 30, 2002, were derived from the Companys audited financial statements. The selected consolidated
financial data should be read in conjunction with  Managements Discussion and Analysis of Financial Condition and Results of Operations, and the Companys consolidated financial statements and notes thereto, included elsewhere
herein.



|                                                                           |  | Year Ended November 30,                                  |          
|-------------------------------------------------------------------------- |  | -------------------------------------------------------- | ---------
|                                                                           |  | 2002(3)(9)                                               |          
|                                                                           |  | (In thousands, except per share data and operating data) |          
|Statements of Operations Data:                                             |  |                                                          |          
|Revenues                                                                   |  | $                                                        | 2,196,614
|Cost of sales                                                              |  |                                                          | 2,065,806
|                                                                           |  |                                                          |          
|Gross profit                                                               |  |                                                          | 130,808  
|Operating expenses:                                                        |  |                                                          |          
|Selling, general and administrative expenses                               |  |                                                          | 112,652  
|Impairment of assets                                                       |  |                                                          | 3,655    
|Severance and exit charges                                                 |  |                                                          | 2,566    
|Lawsuit settlement                                                         |  |                                                          |         
|Separation agreement                                                       |  |                                                          |         
|Restructuring charge (credit)                                              |  |                                                          |         
|                                                                           |  |                                                          |          
|Operating income (loss):                                                   |  |                                                          | 11,935   
|Other income (expense):                                                    |  |                                                          |          
|Interest expense                                                           |  |                                                          | (7,564   
|Equity in income (loss) of affiliated companies, net                       |  |                                                          |         
|Gain on sale of assets                                                     |  |                                                          |         
|Impairment of investment                                                   |  |                                                          | (125     
|Other, net                                                                 |  |                                                          | 1,947    
|                                                                           |  |                                                          |          
|Total other income (expense)                                               |  |                                                          | (5,742   
|Income (loss) before income taxes and extraordinary gain (loss)            |  |                                                          | 6,193    
|Provision (benefit) for income taxes                                       |  |                                                          | 47,131   
|                                                                           |  |                                                          |          
|Income (loss) before extraordinary gain (loss)                             |  |                                                          | (40,938  
|Extraordinary gain (loss) on early extinguishment of debt, net of tax      |  |                                                          | 11,014   
|                                                                           |  |                                                          |          
|Net income (loss)                                                          |  | $                                                        | (29,924  
|                                                                           |  |                                                          |          
|Net income (loss) per share:                                               |  |                                                          |          
|Basic:                                                                     |  |                                                          |          
|Income (loss) before extraordinary gain (loss)                             |  | $                                                        | (3.34    
|Extraordinary gain (loss) on early extinguishment of debt, net of tax      |  |                                                          | 0.90     
|                                                                           |  |                                                          |          
|Net income (loss)                                                          |  | $                                                        | (2.44    
|                                                                           |  |                                                          |          
|Diluted:                                                                   |  |                                                          |          
|Income (loss) before extraordinary gain (loss)                             |  | $                                                        | (3.34    
|Extraordinary gain (loss) on early extinguishment of debt, net of tax      |  |                                                          | 0.90     
|                                                                           |  |                                                          |          
|Net income (loss)                                                          |  | $                                                        | (2.44    
|                                                                           |  |                                                          |          
|Weighted average number of shares:(1)(2)                                   |  |                                                          |          
|Basic                                                                      |  |                                                          | 12,268   
|Diluted                                                                    |  |                                                          | 12,268   
|Operating Data:                                                            |  |                                                          |          
|International revenues, including export sales, as a percentage of revenue |  |                                                          | 74.6     



19



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##### Table of Contents

|                                                    |  | At November 30,
|--------------------------------------------------- |  | ---------------
|                                                    |  | 2002           
|                                                    |  | (In thousands) 
|Balance Sheet Data:                                 |  |                
|Working capital                                     |  | $              
|Total assets                                        |  |                
|Notes payable and current portion of long-term debt |  |                
|Long-term debt, less current portion                |  |                
|Stockholders equity                                |  |                

---

|(1) |  | Common stock amounts have been retroactively adjusted to give effect to the one-for-five reverse stock split effective February 22, 2002, and a two-for-one stock split, which was
made in the form of a stock dividend distributed on June 23, 1998.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | On February 20, 2002, the Company issued, in an exchange offer, $39.1 million in 5% senior subordinated convertible notes which were converted into 7.8 million shares of common
stock as of November 30, 2002 (see Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | In the second quarter of 2002 the Company decided, as part of its plan to reposition its operations, to exit the U.K., Peru, and Argentina markets as soon as practicable. The
Company recorded a net charge for the year ended November 30, 2002 of $6.7 million related to this decision. See Managements Discussion and Analysis of Financial Condition and Results of OperationsInternational
OperationsRepositioning of Operations.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) |  | On July 6, 2001 the Company announced that Alan H. Goldfield had retired effective immediately from the position of Chairman and Chief Executive Officer and recorded an expense of
$5.7 million related to the separation agreement. See Managements Discussion and Analysis of Financial Condition and Results of OperationsFiscal 2002 Compared to Fiscal 2001Separation Agreement.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) |  | For the year ended November 30, 2000, the Company recorded a $12.3 million charge for impairment of assets primarily related to its operations in Venezuela and Peru. See
Managements Discussion and Analysis of Financial Condition and Results of OperationsFiscal 2001 Compared to Fiscal 2000Impairment of Assets.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) |  | In the fourth quarter of 1999, based on the market conditions in Poland, the Company decided to sell its operations in Poland. The sale was completed in 2000 resulting in a gain of
$0.2 million. The Company recorded an impairment charge of $5.5 million, including a $4.5 million writedown of goodwill to reduce the carrying value of the assets of the operations in Poland to their estimated fair value. Revenues for the operations
in Poland were $2.2 million, $7.4 million and $9.9 million for the years ended November 30, 2000, 1999, and 1998, respectively.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(7) |  | As part of the Companys strategy to streamline its organizational structure, beginning in the second quarter of 1999 the Company reorganized and consolidated the management of
the Companys Latin American and North American Regions and centralized the management in the Companys Asia-Pacific Region. As a result, the consolidated statement of operations for the year ended November 30, 1999, includes a charge of
$3.6 million related to the reorganization. Of the total costs, $0.8 million consisted of non-cash outlays and the remaining $2.8 million consisted of cash outlays, which were paid in full by November 30, 2000. The components of the
restructuring charge were as follows (in thousands):
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Employee termination costs |  | $ | 2,373
|-------------------------- |  | - | -----
|Write-down of assets       |  |   | 760  
|Other                      |  |   | 506  
|                           |  |   |      
|                           |  | $ | 3,639
|                           |  |   |      



20



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##### Table of Contents

|(8) |  | During the period from May 14, 1996 through July 22, 1996, four separate purported class action lawsuits were filed in the United States District Court, Northern District of Texas,
Dallas Division, against the Company, certain of the Companys current and former officers, directors and employees. The four lawsuits were consolidated, and the State of Wisconsin Investment Board was appointed lead plaintiff in the
consolidated action. On November 19, 1998, the Company entered into a Stipulation of Settlement that resolved all claims pending in the suit. The settlement was approved by the Court on January 25, 1999, and all remaining claims were dismissed.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(9) |  | Effective December 1, 2002, the Company adopted Financial Accounting Standards Board Statement No. 142, Goodwill and Other Intangible Assets. Pursuant to the
provisions of Statement No. 142, the Company stopped amortizing goodwill as of December 1, 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following table shows the Companys 2002, 2001, and 2000 results adjusted to exclude amortization expense related to goodwill (in thousands,
except per share data):



|                                                                  |  | Year Ended November 30, |        
|----------------------------------------------------------------- |  | ----------------------- | -------
|                                                                  |  | 2002                    |        
|Income (loss) before extraordinary gain (loss)as reported        |  | $                       | (40,938
|Goodwill amortization                                             |  |                         | 1,513  
|                                                                  |  |                         |        
|                                                                  |  |                         |        
|Income (loss) before before extraordinary gain (loss)as adjusted |  | $                       | (39,425
|                                                                  |  |                         |        
|                                                                  |  |                         |        
|Net income (loss)as reported                                     |  | $                       | (29,924
|Goodwill amortization                                             |  |                         | 1,513  
|                                                                  |  |                         |        
|                                                                  |  |                         |        
|Net income (loss)as adjusted                                     |  | $                       | (28,411
|                                                                  |  |                         |        
|Basic per share:                                                  |  |                         |        
|Income (loss) before before extraordinary gain (loss)as reported |  | $                       | (3.34  
|Goodwill amortization                                             |  |                         | 0.13   
|                                                                  |  |                         |        
|                                                                  |  |                         |        
|Income (loss) before before extraordinary gain (loss)as adjusted |  | $                       | (3.21  
|                                                                  |  |                         |        
|                                                                  |  |                         |        
|Net income (loss)as reported                                     |  | $                       | (2.44  
|Goodwill amortization                                             |  |                         | 0.12   
|                                                                  |  |                         |        
|                                                                  |  |                         |        
|Net income (loss)as adjusted                                     |  | $                       | (2.32  
|                                                                  |  |                         |        
|                                                                  |  |                         |        
|Diluted per share:                                                |  |                         |        
|Income (loss) before before extraordinary gain (loss)as reported |  | $                       | (3.34  
|Goodwill amortization                                             |  |                         | 0.13   
|                                                                  |  |                         |        
|                                                                  |  |                         |        
|Income (loss) before before extraordinary gain (loss)as adjusted |  | $                       | (3.21  
|                                                                  |  |                         |        
|                                                                  |  |                         |        
|Net income (loss)as reported                                     |  | $                       | (2.44  
|Goodwill amortization                                             |  |                         | 0.12   
|                                                                  |  |                         |        
|                                                                  |  |                         |        
|Net income (loss)as adjusted                                     |  | $                       | (2.32  
|                                                                  |  |                         |        
|                                                                  |  |                         |        
|Weighted average common shares outstanding:                       |  |                         |        
|Basic                                                             |  |                         | 12,268 
|                                                                  |  |                         |        
|                                                                  |  |                         |        
|Diluted                                                           |  |                         | 12,268 
|                                                                  |  |                         |        



21



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##### Table of Contents

Item 7.    Managements Discussion and Analysis of Financial Condition and Results of Operations



Overview



CellStar is a leading global provider of distribution and value-added logistics services to the wireless communications industry, with operations in the
Asia-Pacific, North America, Latin America, and European Regions. The Company facilitates the effective and efficient distribution of handsets, related accessories and other wireless products from leading manufacturers to network operators, agents,
resellers, dealers and retailers. The Company also provides activation services in some of its markets that generate new subscribers for wireless carriers. The Companys revenues have decreased from $2,433.8 million in 2001 to $2,196.6 million
in 2002. The decrease in revenues is primarily due to several factors: a) a decrease in the Companys Hong Kong operations of $134.0 million primarily due to an increase in the availability in China of in-country manufactured products causing
sales to the Companys Hong Kong based customers to decrease, b) a decrease in revenues of $49.9 million from decreased sales to the Companys largest carrier customer in the Companys Mexico operations, and c) a decrease of
$77.0 million from operations which the Company has divested or closed. The Company experienced an improvement in gross profit to 5.9% of revenues in 2002 from 5.6% of revenues in 2001, primarily as a result of additional incentives received
from manufacturers in 2002 and changes in the Companys geographic mix of revenues. Selling, general and administrative expenses were $112.7 million in 2002 compared to $113.8 million in 2001. Interest expense decreased to $7.6 million in
2002 from $15.4 million in 2001 primarily as a result of the completion of the Companys exchange offer on February 20, 2002. The Company had tax expense of $47.1 million in 2002 compared to $2.2 million in 2001. The increase in tax
expense is primarily a result of the Company providing for taxes of $42.2 million on the undistributed earnings in the Asia-Pacific Region which were previously considered to be permanently reinvested. The Company had a loss before extraordinary
items of $40.9 million, or $3.34 per diluted share, in 2002 compared to income of $1.2 million, or $0.10 per diluted share in 2001.



Asia-Pacific



The Company believes that the intrinsic value of its Asia-Pacific Region is not currently reflected in the market price of the Companys common
stock. As a result, the Company engaged UBS Warburg to assist it in evaluating transactions that could result in recognizing the value that it believes is locked up in the Asia-Pacific Region. Those evaluations have focused on a number of possible
transactions including a possible initial public offering of all or a portion of the Asia-Pacific Region operations, a sale to outside investors or a management buyout. Based on these evaluations, the Company has decided to pursue an initial public
offering of its Greater China Operations on an exchange in Asia. Although the Company intends to pursue the transaction that it believes will be most favorable to the Company, there are a number of steps to be completed before there is such a
transaction. Accordingly, there can be no assurance of the timing of the transaction or that any transaction will occur.



As a result of such evaluation process, however, the Company is now required by GAAP to effect a change in its historical accounting treatment for the
undistributed earnings of its Asia-Pacific Region subsidiaries. Prior to the fourth quarter of 2002, the Company did not accrue for U.S. Federal income taxes or tax benefits on the undistributed earnings and/or losses of its international
subsidiaries because earnings have been reinvested and, in the opinion of management, would continue to be reinvested indefinitely. (See Note (7) of the Notes to Consolidated Financial Statements for CellStar Corporation contained in the Form 10-K
for fiscal year ended November 30, 2001, filed with the Securities and Exchange Commission on February 28, 2002.) Accordingly, there was no liability recorded for such potential U.S. Federal income taxes. As a result of the progress in the fourth
quarter of 2002 in evaluating the strategic options with regard to its Asia-Pacific Region, it was determined that the Company is now required by GAAP to account for the earnings in its Asia-Pacific Region as not being permanently reinvested since
the Company has manifested its intent to pursue possible transactions designed to allow the Company to withdraw and return to the U.S. some or all of the value of those operations. Accordingly, in the quarter ended November 30, 2002, the Company was
required to accrue U.S. Federal income taxes on the undistributed earnings of the Asia-Pacific Region of approximately $42.2 million.



22



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##### Table of Contents

No U.S. Federal income taxes on the undistributed earnings will be payable until such earnings are
actually remitted back to the U.S. in the form of dividends or, in the case of a completed transaction such as those discussed above, sale proceeds. As of November 30, 2002, the Company has net operating loss carryforwards in the U.S. of
approximately $70.4 million, a significant portion of which the Company believes it will be able to utilize to offset the taxes payable in the event that a transaction is completed. The Company therefore does not expect that the impact of the
payment of any taxes associated with any such transaction will significantly impact the cash position of the Company at the time of such payment. Furthermore, the Company will have cash proceeds from any such transaction to fund the actual payment
of such taxes. As a result of the accrual in the quarter ended November 30, 2002, of U.S. Federal income taxes on the undistributed earnings of the Asia-Pacific Region, the Company will not recognize tax expense in future periods for financial
statement purposes on any such future transaction up to the amount of the tax recognized on the undistributed earnings.



Repositioning of Operations



In the second quarter of 2002, the Company decided as part of its plan to reposition its operations that it would exit the U.K., Peru and Argentina as
soon as practicable, as well as address the balance of its European and Latin American markets, excluding Mexico and Miami. As a result of the decision to exit the U.K., Peru and Argentina, the Company recorded a net charge of $10.0 million for the
three months ended May 31, 2002. During the third quarter of 2002, the Company completed its divestitures of its Peru and Argentina operations to local management at approximately book value and closed the U.K. operations, except for certain
administrative matters. In the third and fourth quarters of 2002, the Company reversed $3.3 million of the allowances related to the exit charge for the U.K. operations. The following table summarizes the income statement classification of the
charge (in thousands):



|                                    |  | Three monthsended May 31, 2002 |        |   | Reversal ofallowances |        |   | Net charge |       
|----------------------------------- |  | ------------------------------ | ------ | - | --------------------- | ------ | - | ---------- | ------
|Cost of sales                       |  | $                              | 2,256  |   |                       | (1,131 | ) |            | 1,125 
|Selling, general and administrative |  |                                | 1,691  |   |                       | (588   | ) |            | 1,103 
|Impairment of assets                |  |                                | 3,655  |   |                       |       |   |            | 3,655 
|Severance and exit charges          |  |                                | 2,566  |   |                       |       |   |            | 2,566 
|                                    |  |                                |        |   |                       |        |   |            |       
|Total charge                        |  |                                | 10,168 |   |                       | (1,719 | ) |            | 8,449 
|Tax benefit                         |  |                                | (184   | ) |                       | (1,541 | ) |            | (1,725
|                                    |  |                                |        |   |                       |        |   |            |       
|Net charge                          |  | $                              | 9,984  |   |                       | (3,260 | ) |            | 6,724 
|                                    |  |                                |        |   |                       |        |   |            |       



In January 2003, the
Company signed a letter of intent with local management for the sale of its Netherlands operations. There can be no assurance that the sale will be completed due to a number of contingencies contained in the letter of intent. In addition, the
Company has completed the evaluations of the balance of its Latin American markets, excluding Mexico and Miami, as well as its Sweden operations. The Company has decided to keep its operations in Chile, to negotiate with its major carrier customer
in Colombia to shift its business from CellStars operation in Colombia to Miami, and to explore sale opportunities for its operations in Sweden.



Consistent with the change in historical accounting treatment for undistributed earnings discussed above, the Company recorded U.S. Federal income taxes
of approximately $2.0 million in the fourth quarter of 2002 for previously undistributed earnings from Sweden, The Netherlands and Colombia. These previously undistributed earnings are no longer considered permanently reinvested following the
completion of the Companys evaluations of these markets.



Subordinated Notes



On February 20, 2002 the
Company completed its exchange offer for its $150 million 5% convertible subordinated notes due October 2002. Holders owning $128.6 million of existing convertible subordinated notes exchanged them for $47.2 million in cash, $12.4 million of new 12%
senior subordinated notes due January



23



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##### Table of Contents

2007, and $39.1 million of new 5% senior subordinated convertible notes due November 2002. The Company recognized an extraordinary gain of $11.0 million
after-tax in 2002 as a result of the exchange. Between February 20, 2002 and July 29, 2002, the Company purchased for a combination of cash and its common stock, $4.5 million of its 5% convertible subordinated notes. The Company retired the
remaining $16.9 million of 5% convertible subordinated notes not tendered in the exchange at maturity. As of November 30, 2002, the $39.1 million of senior subordinated convertible notes have been converted into 7.8 million shares of
common stock.



Other



The Company derives substantially all revenues from net product sales, which
includes sales of handsets and other wireless communications products. The Company also derives revenues from value-added services, including activations, residual income, and prepaid wireless services. Value-added service revenues include
fulfillment service fees, handling fees and assembly revenues. Activation income includes commissions paid by a wireless carrier to the Company when a customer initially subscribes for the carriers wireless service through the Company.
Residual income includes payments received from carriers based on the wireless handset usage by a customer activated by the Company.



Special Cautionary Notice Regarding Forward-Looking Statements



Certain of the matters discussed under the captions Business, Properties, Legal Proceedings, Managements
Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this report may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended, and the Exchange Act and, as
such, may involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied
by such forward-looking statements. When used in this report, the words anticipates, estimates, believes, continues, expects, intends, may, might,
could, should, and similar expressions are intended to be among the statements that identify forward-looking statements. Statements of various factors that could cause the actual results, performance or achievements of the
Company to differ materially from the Companys expectations (Cautionary Statements), are disclosed in this report, including, without limitation, those statements made in conjunction with the forward-looking statements included
under the captions identified above and otherwise herein. All forward-looking statements attributable to the Company are expressly qualified in their entirety by the Cautionary Statements.



24



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##### Table of Contents

Results of Operations



The following table sets forth certain consolidated statements of operations data for the Company expressed as a percentage of revenues for the past three
fiscal years:



|                                                                      |  | 2002  |    |  | 2001  |   |  | 2000  |  
|--------------------------------------------------------------------- |  | ----- | -- |  | ----- | - |  | ----- | -
|Revenues                                                              |  | 100.0 | %  |  | 100.0 |   |  | 100.0 |  
|Cost of sales                                                         |  | 94.1  |    |  | 94.4  |   |  | 95.5  |  
|                                                                      |  |       |    |  |       |   |  |       |  
|Gross profit                                                          |  | 5.9   |    |  | 5.6   |   |  | 4.5   |  
|Selling, general and administrative expenses                          |  | 5.1   |    |  | 4.7   |   |  | 6.8   |  
|Impairment of assets                                                  |  | 0.2   |    |  |      |   |  | 0.5   |  
|Severance and exit charges                                            |  | 0.1   |    |  |      |   |  |      |  
|Separation agreement                                                  |  |      |    |  | 0.3   |   |  |      |  
|Restructuring charge (credit)                                         |  |      |    |  |      |   |  |      |  
|                                                                      |  |       |    |  |       |   |  |       |  
|Operating income (loss)                                               |  | 0.5   |    |  | 0.6   |   |  | (2.8  | )
|Other income (expense):                                               |  |       |    |  |       |   |  |       |  
|Interest expense                                                      |  | (0.4  | )  |  | (0.6  | ) |  | (0.8  | )
|Equity in loss of affiliated companies                                |  |      |    |  |      |   |  | (0.1  | )
|Gain on sale of assets                                                |  |      |    |  |      |   |  | 0.3   |  
|Impairment of investment                                              |  |      |    |  | (0.1  | ) |  |      |  
|Other, net                                                            |  | 0.1   |    |  | 0.2   |   |  |      |  
|                                                                      |  |       |    |  |       |   |  |       |  
|Total other income (expense)                                          |  | (0.3  | )  |  | (0.5  | ) |  | (0.6  | )
|Income (loss) before income taxes and extraordinary gain (loss)       |  | 0.2   |    |  | 0.1   |   |  | (3.4  | )
|Provision (benefit) for income taxes                                  |  | 2.1   |    |  | 0.1   |   |  | (0.9  | )
|                                                                      |  |       |    |  |       |   |  |       |  
|Income (loss) before extraordinary gain (loss)                        |  | (1.9  | )  |  |      |   |  | (2.5  | )
|Extraordinary gain (loss) on early extinguishment of debt, net of tax |  | 0.5   |    |  |      |   |  |      |  
|                                                                      |  |       |    |  |       |   |  |       |  
|Net income (loss)                                                     |  | (1.4  | )% |  |      |   |  | (2.5  | )
|                                                                      |  |       |    |  |       |   |  |       |  



The amount of revenues
and the approximate percentages of revenues attributable to the Companys operations by region for the past three fiscal years are shown below:



|                      |  | 2002                               |           |  | 2001  |   | 2000
|--------------------- |  | ---------------------------------- | --------- |  | ----- | - | ----
|                      |  | (in thousands, except percentages)
|Asia-Pacific Region   |  | $                                  | 1,115,499 |  | 50.8  | % |     
|North American Region |  |                                    | 558,173   |  | 25.4  |   |     
|Latin America Region  |  |                                    | 341,632   |  | 15.6  |   |     
|European Region       |  |                                    | 181,310   |  | 8.2   |   |     
|                      |  |                                    |           |  |       |   |     
|Total                 |  | $                                  | 2,196,614 |  | 100.0 | % |     
|                      |  |                                    |           |  |       |   |     



Revenues from the
Companys Miami operations have been classified as Latin American Region revenues as these revenues are primarily exports to Latin American countries, either by the Company or by exporter customers.



Fiscal 2002 Compared to Fiscal 2001



Revenues.    The Companys revenues
decreased $237.2 million from $2,433.8 million to $2,196.6 million. The Company sold 13.5 million handsets in the fiscal year ended November 30, 2002 compared to 13.7 million in 2001. The average selling price of handsets in 2002 was $148
compared to $160 in 2001.



Revenues in the Asia-Pacific Region
decreased $98.0 million, or 8.1%, from $1,213.5 million to $1,115.5 million. The Companys operations in the PRC provided $882.0 million in revenues, an increase of



25



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##### Table of Contents

$5.3 million, or 0.6%, from $876.7 million. In the first two quarters of 2002, growth in the PRC was driven by increased market penetration. Revenues
for the Companys PRC operations for the first six months of 2002 were $531.9 million compared to $435.3 million in the first six months of 2001. In the second half of 2002, the Companys PRC operations saw a decline in revenues from
$441.4 million in 2001 to $350.1 million in 2002 primarily due to increased market competition from local manufacturers and the increased demand for low-end handsets. The Companys revenues in the PRC have historically been from the sale of
handsets supplied by Nokia and Motorola.



In the second half of
2002, Nokia and Motorola lost market share to the local Chinese manufacturers as the local manufacturers had more low priced handsets. Local Chinese manufacturers now have an estimated 30 percent market share. The Companys revenues in
future periods will be significantly impacted by its ability to obtain low priced handsets from its current suppliers or from new suppliers. Historically, carriers in China have not subsidized the sale of handsets in connection with activations as
is frequently done in the U.S. market. As the Chinese market shifts toward less expensive handsets, the Companys sales of higher-end handsets have been negatively impacted. The Company does not currently have supply agreements with
manufacturers of low-end handsets, however, the Company is working to increase its product offerings to include such low-end handsets. There can be no assurance that the Company will be able to procure such low-end handsets on favorable terms such
that it can effectively compete in this area.



Revenues from
the Companys operations in Hong Kong decreased from $172.9 million to $38.9 million. As the availability in China of in-country manufactured product has increased, sales to the Companys Hong Kong-based customers that ship products
to the remainder of China have decreased. Additionally, the Companys primary supplier in Hong Kong has significantly reduced the supply of product available in Hong Kong to encourage the purchase in China of the suppliers in-country
manufactured product. Revenues from the Companys operations in Singapore increased $48.8 million to $139.2 million, or 54.0%, due to carrier promotions and increased sales to customers in the India, Malaysia, and Middle Eastern markets.
Revenues from the Taiwan operations were $30.0 million, compared to $29.2 million in 2001. The Companys supplier base in Taiwan is limited, and there were no compelling new products from its major supplier. The Companys operations in
Taiwan were also affected by the high market penetration rate. Revenues in The Philippines declined from $44.1 million to $25.1 million, primarily due to a large customer purchasing directly from the manufacturer.



North American Region revenues were $558.2 million, a decrease of $20.4
million compared to $578.6 million in 2001. The decrease in North America was primarily due to a $27.0 million decrease in product sales to a major U.S. account which was converted in the first quarter of 2001 to a consignment model with
fulfillment fees. The decline was partially offset by growth due to promotions and new products.



In the fourth quarter of 2002, the parent of one of the Companys largest customers announced that some of the customers lenders under its
vendor credit facilities had ceased funding new loan requests, that it was in default on certain credit facilities and that it was seeking new sources of financing and a restructuring of its outstanding indebtedness. These events of default provided
the customers credit facility lenders with certain rights under their credit agreements, including the right to declare their existing loans due and payable. Revenues from this customer were less than 10% of the Companys consolidated
revenues for fiscal 2002.



In October of 2002, the Company
entered into an agreement with the customer to convert its current business relationship to a primarily consignment relationship. Although the new business model did not have a significant impact on fiscal 2002 revenues, the Company anticipates that
revenues in future periods will decrease as the Company receives fulfillment fees for the services provided pursuant to the agreement instead of product revenues. The future impact on net income is dependent upon the volume of fulfillment activity
and the amount of fulfillment fees received compared to the gross margin on product sales. There can be no assurance that fulfillment fees under the new agreement will equal historical gross profit. By converting to a primarily consignment
relationship, the Company has reduced its accounts receivable exposure. The Company has also



26



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##### Table of Contents

reduced working capital requirements since the Company will not be required to purchase and hold inventory for that segment of the business relationship. The
agreement expired on January 31, 2003 but has been extended through February 28, 2003.The Company expects to extend the current agreement, with certain modifications, until March 31, 2003. During this extension, the Company intends to
negotiate a new agreement with this customer. There can be no assurance the agreement will be renewed or that the customer will maintain similar volumes of business in the future. The Company expects a decline in volume for fiscal 2003 which could
have a material adverse impact on the Companys financial results.



The Companys operations in the Latin America Region provided $341.6 million of revenues, compared to $411.1 million in 2001, a $69.5 million decrease. Revenues in Mexico, the regions largest revenue contributor, were $185.6
million compared to $250.3 million in 2001 due primarily to a decrease of $49.9 million in sales to the Companys largest carrier customer in Mexico due to increased market competition. Revenues from the Companys Miami export operations
were $55.2 million compared to $55.0 million a year ago. Revenues from the Companys Colombia operations were $78.6 million in 2002 and $72.3 million in 2001. As part of the Companys overall plan to reposition its operations and to reduce
its in-country exposure in Colombia, the Company is negotiating with its major carrier customer in Colombia to shift the Companys business with the carrier to the Companys Miami export operation. Revenues from the Companys
primarily service operations in Chile were $5.7 million in 2002 and $3.8 million in 2001. Combined revenues for the Companys operations in Argentina and Peru, which were divested in the third quarter of 2002, were $16.5 million in 2002
and $28.4 million in 2001. Revenues from the Companys Venezuela operations, which were sold in December 2000, were $1.2 million in 2001.



The Companys European Region operations recorded revenues of $181.3 million, a decrease of $49.4 million, from $230.7 million in 2001. Revenues
from the Companys U.K. operations, which were closed in the third quarter of 2002, were $47.5 million in 2002 and $111.4 million in 2001. The Companys Sweden operations decreased $3.6 million from $86.7 million in 2001 to $83.1 million
in 2002. Revenues from the Companys Netherlands operations were $50.7 million in 2002 compared to $32.5 million in 2001, an increase of $18.2 million. This increase is being driven by the addition of new customers as well as increased sales to
existing customers. The handset market in Europe is highly penetrated and is increasingly driven by replacement sales. Replacement sales have been depressed due to delays in the rollout and acceptance of new handset technologies and services. In
January, 2003, the Company signed a letter of intent with local management for the sale of its Netherlands operations. There can be no assurance that the sale will be completed due to a number of contingencies contained in the letter of intent. In
addition, as part of the Companys overall plan to reposition its operations, the Company will explore opportunities to sell its operations in Sweden.



Gross Profit.    Gross profit decreased $5.0 million from $135.8 million to $130.8 million. Gross profit as a percentage of revenues
was 5.9% for fiscal 2002 compared to 5.6% for the prior year. Gross profit as a percentage of revenues improved primarily as a result of additional incentives received from manufacturers and changes in the Companys geographic mix of revenues.
Cost of sales in 2002 included a $1.1 million charge related to inventory, the marketability of which was negatively impacted by the Companys decision to exit the U.K., Peru and Argentina operations. The Company recovered $0.9 million in cash
associated with the third party theft and fraud losses in the U.K. in 2000. This recovery is recorded in cost of sales in the fourth quarter of 2002.



Selling, General, and Administrative Expenses.    Selling, general, and administrative expenses decreased $1.1 million from $113.8
million to $112.7 million. This decrease was primarily attributable to a decrease in payroll and benefits of $1.2 million, and bad debt expense of $2.2 million, offset partially by an increase in insurance premiums. Bad debt expense was $4.5 million
and $6.7 million in 2002 and 2001, respectively. Bad debt expense in 2001 included a recovery of $3.9 million related to a receivable from a satellite handset customer, which was reserved in the fourth quarter of 2000. Selling, general, and
administrative expenses in 2002 included a $1.1 million charge associated with the closure of the Companys operations in the U.K., Peru and Argentina, primarily bad debt expense related to receivables, the collectibility of which was
negatively impacted by the Companys decision to exit these operations. Selling, general and administrative expenses for the Companys operations in the U.K., Peru, and Argentina were $7.1 million and $11.3 million in 2002 and 2001,



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respectively. Fiscal year 2002 included $1.1 million in senior management transition costs. In the fourth quarter of 2001, the Company recorded a charge of
$3.0 million related to a value-added tax asset in Mexico, the recoverability of which is uncertain. In the fourth quarter of 2002, the Company recorded an additional charge of $1.5 million related to an additional portion of the value-added tax,
the recoverability of which is uncertain. Selling, general, and administrative expenses as a percentage of revenues were 5.1% and 4.7%, in 2002 and 2001, respectively.



Impairment of Assets.    In the second quarter of 2002, the Company decided as part of its plan to
reposition its operations to exit the U.K., Peru and Argentina as soon as practicable. As a result of this decision, an impairment charge of $3.7 million was incurred for the three months ended May 31, 2002, which included $2.2 million for
accumulated foreign currency translation adjustments as a result of the Companys liquidation of its investment in each of these operations and $1.5 million for property and equipment. The property and equipment was reduced to estimated market
value.



Severance and Exit Charges.    In
the second quarter of 2002, the Company recorded $2.6 million in severance and exit charges related to the Companys decision to exit the U.K., Peru and Argentina. Of the $2.6 million in severance and exit charges, all of which consisted
of cash outlays, $1.8 million has been paid or settled as part of the transfer of the companys Peru and Argentina operations to local management and the shutdown of the U.K. operations and $0.8 million has not been paid as of November 30,
2002. The remaining $0.8 million relates to lease payments associated with the U.K. operations.



The severance and exit charges consist of the following (in thousands):



|Severance80 Employees |  | $ | 1,626
|---------------------- |  | - | -----
|Lease accruals         |  |   | 780  
|Other                  |  |   | 160  
|                       |  |   |      
|                       |  | $ | 2,566
|                       |  |   |      



Separation
Agreement.    The Company announced on July 6, 2001, that Alan H. Goldfield retired effective immediately from the position of Chairman and Chief Executive Officer and that James L. Rocky Johnson, who has served on
the Board of Directors since March 1994, became non-executive Chairman of the Board. Terry S. Parker, a member of the Board of Directors and a former President and Chief Operating Officer of CellStar, rejoined the Company as Chief Executive Officer.
The Company recorded expense of $5.7 million in the third quarter of 2001 related to the separation agreement between the Company and Mr. Goldfield. Included in the $5.7 million charge is a cash payment of $4.3 million and stock option compensation
expense of $0.6 million.



Restructuring
Charge.    In connection with its previously announced intent, the Company restructured its Miami facilities in the second quarter of 2001 to reduce the size and cost of those operations, resulting in a charge of $0.8 million,
primarily related to the impairment of leasehold improvements.



Equity in Loss of Affiliated Companies.    Equity in loss of affiliated companies was $0.8 million in 2001 primarily due to losses from the Companys 49% minority interest in CellStar Amtel. As a result of the
deterioration in the Malaysia market, the Company divested its ownership in the third quarter of 2002.



Gain on Sale of Assets.    During the first quarter of 2001, the Company recorded a gain on sale of assets of $0.9 million primarily
associated with the sale of its Venezuela operations in December 2000.



Interest Expense.    Interest expense decreased to $7.6 million from $15.4 million. The decrease was primarily a result of the completion of the Companys exchange offer (see Managements Discussion and
Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources) on February 20, 2002, as well as lower borrowing levels and a lower interest rate on the Companys domestic credit facility.



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Impairment of Investment.    The Company recorded a $2.2 million impairment charge in
the third quarter of 2001 to reduce the carrying value of its 3.5% investment in a Taiwan retailer. The Company purchased its 3.5% investment in the Taiwan retailer in January of 2000 for $4.1 million. The Taiwan retailers common stock was not
traded on a foreign market of the breadth and scope comparable to a U.S. market, and the Company accounted for the investment on the cost basis. The Company used the information it received from an Asian market that is similar to an over-the-counter
market in the U.S. as a means of monitoring its investment for other than temporary impairment. Initially the trading price increased significantly (90% above the Companys cost during the first quarter of 2000). During the third quarter of
2000, the price began to decrease but was still above the Companys cost by almost 33%. This downward trend continued into the third quarter of 2001. In addition, the overall Taiwan stock market declined over 50% from January 2000 to August
2001. Beginning with the retailers first quarter of 2001, the Company also began to receive and review the operating results of the Taiwan retailer on a quarterly basis. The Companys results in Taiwan also declined during this time
period which management believed reflected the economic and political environment in Taiwan. Until the third quarter of 2001, management believed these declines were temporary and that conditions would soon improve. During the third quarter of 2001,
based on the continuing decline in the trading price, the Taiwan stock exchange, and the Taiwan economy, the Company considered that the decrease in value of its investment was other than temporary. Accordingly, the Company recorded an impairment
charge of $2.2 million in the third quarter of 2001 to write-down the Companys investment to the Companys pro rata share of the retailers net book value, which the Company believed was the best indicator of the fair value of the
investee. The Company continued to monitor the overall market conditions in Taiwan and again considered the investment to be impaired in the fourth quarter of 2002 and recorded a charge of $0.1 million to write-down the Companys
investment to the Companys pro rata share of the retailers net book value, which the Company believed was the best indicator of the fair value of the investee. The Companys remaining investment of $1.8 million at November 30,
2002 is included in other assets in the consolidated balance sheet.



Other, Net.    Other, net decreased $3.4 million, from income of $5.3 million to income of $1.9 million, primarily due to a gain of $1.3 million in 2001 on foreign currencies compared to a gain of $0.5 million in 2002
and to a reduction in interest income from $3.2 million in 2001 compared to $1.4 million in 2002.



Income Taxes.    Income tax expense increased from an expense of $2.2 million in 2001 to an expense of $47.1 million in 2002. The
increase in 2002 is primarily a result of a change in the Companys historical accounting treatment for its undistributed earnings and/or losses of its Asia-Pacific Region subsidiaries. Prior to the fourth quarter of 2002, the Company did not
accrue for U.S. Federal income taxes or tax benefits on the undistributed earnings and/or losses of its international subsidiaries because earnings have been reinvested and, in the opinion of management, would continue to be reinvested indefinitely.
(See Note (7) of the Notes to Consolidated Financial Statements for CellStar Corporation contained in the Form 10-K for fiscal year ended November 30, 2001, filed with the Securities and Exchange Commission on February 28, 2002.) Accordingly, there
was no liability recorded for such potential U.S. Federal income taxes. As a result of the progress in the fourth quarter of 2002 in evaluating the strategic options with regard to its Asia-Pacific Region, it was determined that the Company is now
required by GAAP to account for the earnings in its Asia-Pacific Region as not being permanently reinvested since the Company has manifested its intent to pursue possible transactions designed to allow the Company to withdraw and return to the U.S.
some or all of the value of those operations. Accordingly, in the quarter ended November 30, 2002, the Company was required to accrue U.S. Federal income taxes on the undistributed earnings of the Asia-Pacific Region of approximately $42.2 million.



No U.S. Federal income taxes on the undistributed earnings
will be payable until such earnings are actually remitted back to the U.S. in the form of dividends or, in the case of a completed transaction such as those discussed above, sale proceeds. As of November 30, 2002, the Company has net operating loss
carryforwards in the U.S. of approximately $70.4 million, a significant portion of which the Company believes it will be able to utilize to offset the taxes payable in the event that a transaction is completed. The Company therefore does not expect
that the impact of the payment of any taxes associated with any such transaction will significantly impact the cash position of the Company at the time of such payment. Furthermore, the Company will have cash proceeds from any such transaction to
fund the actual payment of such taxes. As a result of the accrual in the



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quarter ended November 30, 2002 of U.S. Federal income taxes on the undistributed earnings of the Asia-Pacific Region, the Company will not recognize tax
expense in future periods for financial statement purposes on any such future transaction up to the amount of the tax recognized on the undistributed earnings.



Consistent with the change in historical accounting treatment for undistributed earnings discussed above, the Company recorded U.S. Federal income
taxes of approximately $2.0 million in the fourth quarter of 2002 for previously undistributed earnings from Sweden, The Netherlands and Colombia. These previously undistributed earnings are no longer considered permanently reinvested following the
completion of the Companys evaluations of these markets.



Extraordinary Gain (Loss) on Early Extinguishment of Debt, Net of Tax. In 2002, the Company had an extraordinary gain, net of tax, of $11.0 million primarily related to the Companys Exchange Offer. (See Note 12 to the Consolidated
Financial Statements and Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources). In 2001, as a result of the early termination of its previously-existing revolving
credit facility, the Company had an after tax extraordinary loss of $0.6 million, primarily related to the write off of deferred loan costs related to the facility.



Fiscal 2001 Compared to Fiscal 2000



Revenues.    The Companys revenues decreased $41.9 million, or 1.7%, from $2,475.7 million to $2,433.8 million. The
Company sold 13.7 million handsets in 2001 compared to 11.3 million in 2000. The average selling price of handsets was $160 in 2001 compared to $195 in 2000.



Revenues in the Asia-Pacific Region increased $188.7 million, or 18.4%, from $1,024.8 million to $1,213.5 million. The Companys operations in
the PRC provided $876.7 million in revenue, an increase of $296.3 million, or 51.0%, from $580.4 million. Growth in China, where market penetration of handsets was approximately 10% of the total population, was driven by the addition of new wireless
subscribers. However, the Companys growth in the PRC was negatively impacted in the fourth quarter of 2001 by the lack of availability of compelling new products and the implementation of new warranty requirements to the manufacturer, which
resulted in the delay of consumer purchases. The Companys revenues in the PRC in the fourth quarter of 2001 of $203.0 million were the lowest since the fourth quarter of 2000 when revenues were $179.5 million. Revenues from the Companys
operations in Hong Kong increased from $145.0 million in 2000 to $172.9 million in 2001. Revenues from the Companys operations in Singapore increased $47.5 million, or 110.6%, to $90.4 million due to third party subsidies and new products,
including sales of two products for which the Company had exclusive rights. Revenues from Taiwan and The Philippines operations decreased $178.5 million, or 85.9%, and $4.6 million, or 9.4%, respectively, to $29.2 million and $44.1 million,
respectively. The Companys operations in Taiwan and The Philippines were affected by economic and political turmoil in the respective countries. In addition, the Companys supplier base in Taiwan was limited, and there were no new
compelling products from the Companys major supplier.



North American Region revenues were $578.6 million, an increase of $79.4 million, or 15.9%, when compared to $499.2 million. U.S. revenues benefited from strong promotional activity by several customers, as well as from the addition of new
customers and expanded markets. Early in the first quarter of 2001, the Company converted a major U.S. account to a consignment basis with fulfillment fees. Revenues for the years ended November 30, 2001 and November 30, 2000, on a comparable basis,
were $547.8 million and $399.9 million, respectively. The conversion to consignment did not significantly impact net income, but reduced account receivable exposure, inventory risk, and the need for working capital. By converting to consignment
basis, the Company was not required to purchase and hold inventory for this customer which therefore eliminated the Companys exposure to declines in market prices.



The Latin American Region provided $411.1 million of revenues, compared to $636.4 million, or a 35.4% decrease. Revenues in
Mexico decreased $133.0 million from $383.3 million in 2000, when the Company benefited from strong carrier promotions, to $250.3 million in 2001. The decrease was primarily due to reduced



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promotional activities by carrier customers and to reduced business with carrier customers. Revenues for Brazil were $40.6 million in 2000. The Company sold
its Brazil operations in August 2000 (see Managements Discussion and Analysis of Financial Condition and Results of OperationsInternational Operations). Revenues from Venezuela operations were $36.6 million in 2000. The
Company sold its Venezuela operations in December 2000 (see Managements Discussion and Analysis of Financial Condition and Results of OperationsInternational Operations). Revenues from the Companys operations in Miami
decreased $24.1 million from $79.1 million in 2000 to $55.0 million in 2001 as increased product availability from in-country manufacturers in Latin America reduced exports from Miami. The Company phased out a major portion of its redistributor
business in its Miami and North American operations, starting in the second quarter of 2000, due to the volatility of the redistributor business, its relatively lower margins, and higher credit risks. As a result, the Company restructured its Miami
operations to reduce the size and cost of the operation, resulting in a charge of $0.8 million in the second quarter of 2001. Combined revenues from the operations in Argentina, Chile, Colombia and Peru increased $7.8 million to $104.6 million
primarily due to significant promotional activity by a major carrier in Colombia during the first quarter of 2001.



The European Region recorded revenues of $230.7 million, a decrease of $84.7 million, or 26.9%, from $315.4 million, primarily due to the Companys
decision to curtail its U.K. international trading operations in April 2000 (see Managements Discussion and Analysis of Financial Condition and Results of OperationsInternational Operations) and a decline in the
Companys Sweden operations. Revenues in the U.K. decreased from $163.8 million to $111.4 million, and revenues in Sweden decreased from $118.7 million to $86.7 million. In 2001, the handset market in Europe was highly penetrated and
increasingly driven by replacement sales, which were depressed due to delays in the rollout of new handset technologies and services.



Gross Profit.    Gross profit increased $24.3 million from $111.5 million, or 4.5% of revenues, to $135.8 million, or 5.6%
of revenues. During 2000, the Company incurred $32.3 million in inventory obsolescence primarily as a result of price declines during the second quarter, and $3.2 million in third party theft and fraud losses during the purchase, transfer of title
and transport of six shipments of wireless handsets related to the U.K. international trading operations. In 2001, the Company incurred $10.2 million in inventory obsolescence. The increase in gross profit as a percentage of revenues was due to
better inventory management and product mix. Also in 2000, the Companys commitment to defend market share in the face of intense global industry price competition, particularly in the Asia-Pacific Region, negatively impacted the gross margin
percentage. Based on 1999s handset shortages and industry forecasts of higher demand, manufacturers significantly increased production in 2000. However, worldwide handset sales, while significantly higher in 2000, were still below industry
forecasts. This resulted in a surplus of product during parts of 2000 driving stronger-than-usual competition for market share, mainly in the Asia-Pacific Region and to a lesser extent in the Latin American Region.



Selling, General and Administrative
Expenses.    Selling, general and administrative expenses decreased $55.4 million from $169.2 million to $113.8 million. This decrease was principally due to a reduction in bad debt expense of $44.8 million from $51.5
million to $6.7 million in 2001. The bad debt expense in 2000 was primarily related to (i) certain U.S.-based accounts receivable from Brazilian importers, the collectibility of which deteriorated significantly in the second quarter of 2000, and
which were further affected by the Companys decision to divest its majority interest in its joint venture in Brazil; (ii) accounts receivable from redistributors, many of which were impacted by a supply shortage in 1999 and were also further
affected by the phase-out of a major portion of the redistributor business in the Miami and North America operations; (iii) accounts receivable in the Asia-Pacific Region whose businesses were adversely affected by competitive market conditions in
Asia; and (iv) a receivable in the U.S. from a satellite handset customer. Bad debt expense in 2001 included a recovery of $3.9 million related to the receivable from a satellite handset customer, which was reserved in 2000. Selling, general and
administrative expenses related to the Brazil and Venezuela operations, which were sold in August 2000 and December 2000, respectively, were $0.2 million in 2001 and $17.8 million in 2000 and included $2.5 million in bad debt expense. In the
fourth quarter of 2001, selling, general and administrative expenses included a $3.0 million charge related to value-added taxes.



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Impairment of Assets.    In the third quarter of 2000, the Company decided to exit
its Venezuela operations. In the third quarter of 2000, the Company recorded a $4.9 million non-cash impairment charge to reduce the carrying value of certain Venezuela assets, primarily goodwill, to their estimated fair value. In December 2000, the
Company sold its Venezuela operations. In the fourth quarter of 2000, the Company recorded a non-cash goodwill impairment charge of $6.4 million related to the operations in Peru due to a major carrier customers proposed changes to an existing
contract that adversely changed the long-term prospects of the Peru operations. In 2000, the Company also recorded a charge of $1.0 million to reduce the carrying value of other assets.



Separation Agreement.    The Company announced on July 6, 2001, that Alan H. Goldfield retired
effective immediately from the position of Chairman and Chief Executive Officer and that James L. Rocky Johnson, who has served on the Board of Directors since March 1994, became Chairman of the Board, and that Terry S. Parker, a member
of the Board of Directors and a former President and Chief Operating Officer of the Company, rejoined the Company as Chief Executive Officer. In 2001, the Company recorded expense of $5.7 million related to the separation agreement between the
Company and Mr. Goldfield. Included in the $5.7 million charge is a cash payment of $4.3 million and stock option compensation expense of $0.6 million.



Restructuring Charge.    The Company restructured its Miami facilities in the second quarter of 2001 to reduce the size and cost of
those operations, resulting in a charge of $0.8 million, primarily related to the impairment of leasehold improvements.



Equity in Loss of Affiliated Companies.    Equity in loss of affiliated companies was $0.9 million in 2001 and $1.8 million in
2000 primarily due to losses from the Companys 49% minority interest in CellStar Amtel.



Gain on Sale of Assets.    The Company recorded a gain on sale of assets of $0.9 million in 2001 primarily associated with the sale of its Venezuela operations in December 2000. In third
quarter of 2000, the Company recorded a pre-tax gain of $6.0 million from the completion of the divestiture of its 51% ownership interest in its Brazil joint venture (see Managements Discussion and Analysis of Financial Condition and
Results of OperationsInternational Operations). During the third quarter 2000, the Company also completed the sale of its Poland operations and recognized a pre-tax gain of $0.2 million.



Interest Expense.    Interest expense decreased to
$15.4 million in 2001 from $19.1 million in 2000. This decrease was primarily related to the elimination of debt of the Brazil operations, which were sold in August 2000, and to a lesser extent, lower borrowings and interest rates on the
Companys revolving credit facility. These decreases were partially offset by interest on additional borrowings in the Asia-Pacific Region.



Impairment of Investment.    In 2001, the Company recorded an impairment charge of $2.2 million to reduce the carrying value of
its 3.5% interest in a Taiwan retailer. The Company purchased its 3.5% investment in the Taiwan retailer in January of 2000 for $4.1 million. The Taiwan retailers common stock was not traded on a foreign market of the breadth and scope
comparable to a U.S. market, and the Company accounted for the investment on the cost basis. The Company used the information it received from an Asian market that is similar to an over-the-counter market in the U.S. as a means of monitoring its
investment for other than temporary impairment. Initially the trading price increased significantly (90% above the Companys cost during the first quarter of 2000). During the third quarter of 2000, the price began to decrease but was still
above the Companys cost by almost 33%. This downward trend continued into the third quarter of 2001. Beginning with the retailers first quarter of 2001, the Company also began to receive and review the operating results of the Taiwan
retailer on a quarterly basis. In addition, the overall Taiwan stock market declined over 50% from January 2000 to August 2001. The Companys results in Taiwan also declined during this time period which management believed reflected the
economic and political environment in Taiwan. Until the third quarter of 2001, management believed these declines were temporary and that conditions would soon improve. During the third quarter of 2001 based on the continuing decline in the trading
price, the Taiwan stock exchange, and the Taiwan economy, the Company considered that the decrease in value of its investment was other than temporary. Accordingly, the Company recorded an impairment charge of $2.2 million in the third quarter of
2001 to write-



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down the Companys investment to the Companys pro rata share of the retailers net book value, which the Company believed was the best
indicator of the fair value of the investee.



Other,
Net.    Other, net increased $4.4 million, from income of $0.9 million to income of $5.3 million, primarily due to gains on foreign currencies related to European operations in 2001 compared with losses in 2000.



Income Taxes.    Income tax expense
increased from a benefit of $20.8 million in 2000 to an expense of $2.2 million in 2001 due to changes in pretax income. The Companys annual effective tax rate for 2001 was 65% and for 2000 was 25%. The increase in the effective tax rate
for 2001 is primarily due to the impact of non-deductible items. The impact of the non-deductible items is greater in 2001 due to the smaller amount of pretax income.



Extraordinary loss on early extinguishment of debt, net of tax. As a result of the early termination of its
previously-existing revolving credit facility, the Company had an after tax extraordinary loss of $0.6 million, primarily related to the write off of deferred loan costs related to the facility.



Liquidity and Capital Resources



The following table summarizes the Companys contractual obligations at
November 30, 2002 (amounts in thousands):



|                                                                                   |  |       |        | Payments Due By Period
|---------------------------------------------------------------------------------- |  | ----- | ------ | ----------------------
|                                                                                   |  | Total |        | Less thanOne Year     
|Contractual obligations                                                            |  |       |        |                       
|Notes payable                                                                      |  |       |        |                       
|Revolving credit facility (variable interest, 5.25% at November 30, 2002)          |  | $     | 23,089 |                       
|Peoples Republic of China credit facilities (0.00% to 5.85% at November 30, 2002) |  |       | 30,258 |                       
|12% senior subordinated notes                                                      |  |       | 12,374 |                       
|Operating leases                                                                   |  |       | 9,154  |                       
|                                                                                   |  |       |        |                       
|Total contractual obligations                                                      |  | $     | 74,875 |                       
|                                                                                   |  |       |        |                       



During the year ended
November 30, 2002, the Company relied primarily on cash available at November 30, 2001, funds generated from operations, borrowings under its credit facilities and cash generated from the closure and/or divestiture of certain of its operations
to fund working capital, capital expenditures and expansions.



On October 15, 1997, the Company entered into a five year $135.0 million Multicurrency Revolving Credit Facility (the Facility) with a syndicate of banks. During fiscal year ended November 30, 1999, the amount of the Facility
was reduced from $135.0 million to $115.0 million due to the release of a syndication member bank. The Company entered into three amendments during fiscal year 2000 and two additional amendments during the first quarter of 2001 to allow it to remain
in compliance with certain covenants.



On February 27, 2001,
the Company and its banking syndicate executed a Second Amended and Restated Credit Agreement which further reduced the amount of the Facility to $85.0 million and called for further reductions in the amount of the facility during the remainder of
the Companys fiscal year. The Second Amended and Restated Credit Agreement called for an interest rate increase, shortened the term of the Facility, provided for additional collateral for the Facility, provided for dominion of funds by the
banks for the Companys domestic operations, limited the borrowing base and tightened restrictions on the Companys ability to fund its operations.



As of September 28, 2001, the Company had negotiated and finalized a new, five-year, $60.0 million Loan and Security Agreement (the New
Facility) with a bank and terminated the previously existing Facility. On



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October 12, 2001 the Company finalized an amendment to the New Facility increasing the commitment amount from $60.0 million to $85.0 million. The New
Facility lowers the applicable interest rate margin by 25 basis points from its level at August 31, 2001, and provides a more extensive borrowing base, more flexible financial covenants and greater flexibility in funding foreign operations.



Fundings under the New Facility are limited by a borrowing
base test, which is measured weekly. Interest on borrowings under the New Facility is at the London Interbank Offered Rate or at the banks prime lending rate, plus an applicable margin. The New Facility is also secured by a pledge of 100% of
the outstanding stock of all U.S. subsidiaries and 65% of the outstanding stock of all first tier foreign subsidiaries. The New Facility is further secured by the Companys domestic accounts receivable, inventory, property, plant and equipment
and all other domestic real property and intangible assets. The New Facility contains, among other provisions, covenants relating to the maintenance of minimum net worth and certain financial ratios, exchanging, refinancing or extending of the
Companys convertible notes, dividend payments, additional debt, mergers and acquisitions and disposition of assets. As of November 30, 2002, the Company had borrowed $23.1 million under the New Facility.



In connection with the Companys decision to reposition its operations
(See Managements Discussion and Analysis of Financial Condition and Results of OperationsInternational OperationsRepositioning of Operations) the New Facility was amended to allow the Company to pursue its exit strategy
from the U.K., Peru and Argentina, and any similar decision the Company may make with respect to the balance of its European and Latin American markets, excluding Mexico and Miami.



On February 6, 2003, the Company finalized an amendment to the New Facility that allowed for the exclusion of certain
charges from certain financial covenants in the loan agreement related to credit facilities that it may establish in its Mexico operations. On February 28, 2003, the Company completed an amendment to the New Facility that allowed for the exclusion
of U.S. Federal income taxes on undistributed earnings associated with the Companys Asia-Pacific, European, and Latin American Regions, excluding Mexico and Miami, from certain financial covenants in the loan agreement (see
Managements Discussion and Analysis of Financial Condition and Results of Operations).



As of February 20, 2003, the Company had borrowed $20.9 million under the New Facility.



At November 30, 2002, the Companys operations in China had three lines of credit totaling approximately 250 RMB
(approximately USD $30.3 million), bearing interest at rates ranging from 0.00% to 5.85%. The loans have maturity dates through March 2003. The Company typically renews these lines of credit for three to six month terms, although there can be no
assurance that these lines of credit will be renewed in the future. The lines of credit are either fully or partially collateralized.



The fully collateralized loans (approximately $25.2 million) are collateralized by either U.S. dollar cash deposits in Hong Kong ($5.8 million of loans
collateralized by a $7.0 million cash deposit) or PRC accounts receivable ($19.4 million of loans). The partially collateralized loans total $5.1 million and are collateralized by $1.0 million in cash in the PRC. Restricted cash of $12.2 million in
Hong Kong was serving as collateral for an additional $12.0 million line of credit in the PRC that was not utilized as of November 30, 2002. An additional $3.0 million of restricted cash in Hong Kong was unutilized at November 30, 2002.



At February 20, 2003, the Company had borrowings of $45.9 million in its
China operations. The borrowings were similarly either fully or partially collateralized as described above by cash deposits or by PRC accounts receivable.



On October 24, 2002, the Company entered into a revolving credit facility in Sweden of 70 million Swedish Krona (approximately $7.5 million). The facility
is secured by the accounts receivable of the Sweden operations and bears interest at a rate of 5.60%. The facility matures on December 31, 2003, but is automatically extended for 12 months unless terminated by one of the parties. The credit facility
contains certain financial and other



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covenants for the Sweden operations. At November 30, 2002, the Company had no borrowings under this facility. At February 20, 2003, the Company had borrowed
approximately $4.7 million under this line of credit.



The
Company entered into a 6.0 million Euro (approximately $6.2 million) credit facility on December 20, 2002 in The Netherlands. The facility is collateralized by accounts receivable, inventory and fixed assets from the Companys Netherland
operations and bears interest at a variable rate, which consists of the banks Euro Base rate, plus a margin. The interest rate of the facility is currently 5.00%. The facility may be terminated without notice by either party. The credit
facility contains certain financial and other covenants for The Netherlands operations. At November 30, 2002, the Company had no borrowings under this facility. At  February 20, 2003, the Company had borrowed approximately $5.9 million under
this line of credit.



The credit facilities in Sweden and the
Netherlands were established to pay off intercompany loans, remit cash to the U.S., and to lower the Companys net working capital investment in these operations. As of February 13, 2003, the Company has returned $10.1 million to the U.S.
as a result of entering into these credit facilities. By leveraging the assets of these operations and returning cash to the U.S, the Company believes that it has enhanced the potential marketability of these businesses.



On December 30, 2002, the Company entered into a 30 million Taiwan dollar
(approximately $0.9 million) line of credit in Taiwan. The Taiwan line of credit is collateralized by real estate owned in Taiwan, bears interest at 2.70%, and matures on February 27, 2003.



At November 30, 2001, the Company had $150.0 million of 5% convertible
subordinated notes due October 15, 2002 (the Subordinated Notes), which were convertible into 1.1 million shares of common stock at $138.34 per share (adjusted for the effect of the one-for-five reverse stock split effective on
February 22, 2002) at any time prior to maturity.



On January
14, 2002, the Company filed an S-4 registration statement (the Exchange Offer) with the Securities and Exchange Commission offering to exchange, for each $1,000 principal amount of the Subordinated Notes, $366.67 in cash and, at the
election of the holder, one of the following options: a) $400.94 principal amount of 12% Senior Subordinated Notes due January 2007 (the Senior Notes), b) $320.75 principal amount of Senior Notes and $80.19 principal
amount of 5% Senior Subordinated Convertible Notes due November 2002, (the Senior Convertible Notes), or c) $400.94 principal amount of Senior Convertible Notes.



On February 20, 2002, the Company completed its Exchange Offer for its Subordinated Notes. Holders owning $128.6 million of
Subordinated Notes exchanged them for $47.2 million in cash, $12.4 million of Senior Notes and $39.1 million of Senior Convertible Notes. Upon completion of the Exchange Offer, $21.4 million of the Subordinated Notes were not exchanged. The Company
recognized an extraordinary gain of $11.0 million after-tax in 2002 as a result of the exchange.



Between February 20, 2002, and July 29, 2002, the Company purchased, for a combination of cash and its common stock, $4.5 million of its Subordinated
Notes. On October 15, 2002, the Company redeemed at maturity, for cash, the remaining $16.9 million of its Subordinated Notes.



The $39.1 million of Senior Convertible Notes were manditorily convertible into the Companys common stock on November 30, 2002, and bore interest at
5%, payable semi-annually in arrears, in either cash or stock, at the Companys option, on August 15, 2002, and November 30, 2002. The Senior Convertible Notes were converted into 7.8 million shares of the Companys common stock at a
conversion price of $5.00 per share (adjusted for the effect of the one-for-five reverse stock split effective on February 22, 2002).



At November 30, 2002, long-term debt consisted of $12.4 million of the Companys Senior Notes. The Senior Notes bear interest at 12%, payable in cash
in arrears semi-annually on February 15 and August 15, commencing August 15, 2002. The Senior Notes contain certain covenants that restrict the Companys ability to



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incur additional indebtedness; make investments, loans and advances; declare dividends or certain other distributions; create liens; enter into
sale-leaseback transactions; consolidate; merge; sell assets and enter into transactions with affiliates.



Cash, cash equivalents, and restricted cash at November 30, 2002 were $53.0 million, compared to $89.3 million at November 30, 2001, primarily
reflecting the use of the cash for the Exchange Offer, to redeem the Subordinated Notes at maturity, and to reduce debt in the Companys operations in the Asia-Pacific Region.



Compared to November 30, 2001, accounts receivable decreased from $216.0 million to $175.1 at November 30, 2002. Accounts
receivable days sales outstanding for fiscal year 2002, based on monthly accounts receivable balances, were 31.5, compared to 36.1 for fiscal year 2001. Inventories declined to $163.2 million at November 30, 2002, from $218.9 million at
November 30, 2001. Inventory turns for fiscal year 2002, based on monthly inventory balances, were 10.4 turns per year, compared to 10.7 for fiscal year 2001. Accounts payable declined to $166.1 million at November 30, 2002, compared to $229.0
million at November 30, 2001. Working capital balances have declined in connection with the conversion in the U.S. of a large customer to a primarily consignment relationship (See Business-North American Region). The Company experienced
a decrease in accounts receivable, inventory and accounts payable of approximately $30 million, $9 million and $35 million, respectively, from November 30, 2001, to November 30, 2002, due to the conversion. The closure of the Companys U.K.
operations and the divestiture of the Companys Peru and Argentina operations during 2002 has also contributed to the decline. Additionally, management has worked aggressively to reduce accounts receivable and inventory levels and improve
turnover through tightening of credit policies to limit risk, aggressive collection efforts, and better purchasing and inventory management.



Management of the Company has made a number of estimates and assumptions related to the reporting of the allowance for doubtful accounts and the reserve
for inventory obsolescence in preparation of the consolidated financial statements in conformity with generally accepted accounting principles. In determining the adequacy of the allowance for doubtful accounts, management considers a number of
factors including the aging of the receivable portfolio, customer payment trends, the financial condition of the customer, economic conditions in the customers country and industry conditions. In determining the adequacy of the reserve for
inventory obsolescence, management considers a number of factors including the aging of the inventory, recent sales trends, industry market conditions and economic conditions. In assessing the reserve, management also considers price protection
credits or other incentives the Company expects to receive from the vendor. Actual amounts could differ significantly from managements estimates.



There is no effect on liquidity due to transactions, arrangements or relationships with unconsolidated entities.



Based upon current and anticipated levels of operations, the Company
anticipates that its cash flow from operations, together with amounts available under its credit facilities and existing unrestricted cash balances, will be adequate to meet its anticipated cash requirements in the foreseeable future. In the event
that existing unrestricted cash balances, cash flows and available borrowings under the credit facilities are not sufficient to meet future cash requirements, the Company may be required to reduce planned expenditures or seek additional financing.
The Company can provide no assurances that reductions in planned expenditures would be sufficient to cover shortfalls in available cash or that additional financing would be available or, if available, offered on terms acceptable to the Company.



International Operations



The Companys foreign operations are subject to various political and
economic risks including, but not limited to, the following: political instability, economic instability, currency controls, currency devaluations, exchange rate fluctuations, potentially unstable channels of distribution, increased credit risks,
export control laws that might limit the markets the Company can enter, inflation, changes in laws and enforcement policies related to foreign ownership of businesses abroad, foreign tax laws, trade disputes among nations, changes in cost



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of and access to capital, changes in import/export regulations, including enforcement policies, gray market resales, and tariff and freight
rates.



In addition to the factors listed above, threats of
terrorist attacks in the United States, the U.S. retaliation for these attacks, possible U.S. military action in Iraq, the related decline in consumer confidence and continued economic weakness in the U.S. and throughout the countries in which the
Company does business could have a material adverse impact on our business.



Asia-Pacific



The
Company believes that the intrinsic value of its Asia-Pacific Region is not currently reflected in the market price of the Companys common stock. As a result, the Company engaged UBS Warburg to assist it in evaluating transactions that could
result in recognizing the value that it believes is locked up in the Asia-Pacific Region. Those evaluations have focused on a number of possible transactions including a possible initial public offering of all or a portion of the Asia-Pacific Region
operations, a sale to outside investors or a management buyout. Based on these evaluations, the Company has decided to pursue an initial public offering of its Greater China Operations on an exchange in Asia. Although the Company intends to pursue
the transaction that it believes will be most favorable to the Company, there are a number of steps to be completed before there is such a transaction. Accordingly, there can be no assurance of the timing of the transaction or that any transaction
will occur.



The Company began exploring possible methods of
realizing the value of its operations in Hong Kong, the PRC, and Taiwan (the Greater China Operations) in late Spring 2002. In June 2002, the Company engaged the Hongkong and Shanghai Banking Corporation Limited to act as the lead
underwriter if the Company decided to pursue an initial public offering of the Greater China Operations (the IPO). In July 2002, the Company engaged UBS Warburg to act as financial advisor to the Company to assist the Company in
evaluating and structuring a potential offering as well as to review other possible transactions which could achieve the Companys goals. In July 2002, the Company entered into a new employment agreement with A.S. Horng, Chairman, Chief
Executive Officer and General Manager of CellStar (Asia) Corporation Limited, in anticipation of the expiration of the existing employment agreement in January 2003. As an incentive for Mr. Horng to enter into such agreement, the Company agreed to
pay a signing bonus of $1.5 million, and also agreed to pay an additional bonus in the amount of $1.5 million upon the successful completion of any public offering related to the Asia-Pacific Region. In September 2002, the Company engaged Raymond
James & Associates, Inc. (Raymond James) as an additional financial advisor to advise the Board on the fairness of a proposed transaction. In September 2002, the Company submitted an outline of the proposed structure for the IPO to
the Stock Exchange of Hong Kong (SEHK) seeking informal approval of the proposed structure. Throughout the period from September 2002 to January 2003, the Company was responding to comments and concerns of the SEHK. In January 2003, the
SEHK advised the Company that it had tentatively approved the proposed structure. On March 13, 2003, the Board of Directors received the Raymond James fairness opinion, approved the terms of the transaction and authorized management to proceed
with the listing on the SEHK and the filing of a preliminary proxy statement with the SEC. Throughout the period from September 2002 to March 2003, the Company was negotiating the terms of the transaction with the CellStar Asia management team. On
March 14, 2003, the Company entered into a non-binding letter of intent with the CellStar Asia management team setting forth the structure of the proposed transaction and the proposed agreements between the CellStar Asia management team and the
Company. On March 14, 2003, the Company filed the preliminary proxy statement with the SEC, and on March 17, 2003, the Company filed documents with the SEHK to commence the process of applying for listing.



As a result of such evaluation process, however, the Company is now required
by GAAP to effect a change in its historical accounting treatment for the undistributed earnings of its Asia-Pacific Region subsidiaries. Prior to the fourth quarter of 2002, the Company did not accrue for U.S. Federal income taxes or tax benefits
on the undistributed earnings and/or losses of its international subsidiaries because earnings have been reinvested and, in the opinion of management, would continue to be reinvested indefinitely. (See Note (7) of the Notes to Consolidated Financial
Statements for CellStar Corporation contained in the Form 10-K for fiscal year ended



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November 30, 2001, filed with the Securities and Exchange Commission on February 28, 2002.) Accordingly, there was no liability recorded for such potential
U.S. Federal income taxes. As a result of the progress in the fourth quarter of 2002 in evaluating the strategic options with regard to its Asia-Pacific Region, it was determined that the Company is now required by GAAP to account for the earnings
in its Asia-Pacific Region as not being permanently reinvested since the Company has manifested its intent to pursue possible transactions designed to allow the Company to withdraw and return to the U.S. some or all of the value of those operations.
Accordingly, in the quarter ended November 30, 2002, the Company was required to accrue U.S. Federal income taxes on the undistributed earnings of the Asia-Pacific Region of approximately $42.2 million.



As noted above, the Company began to explore its options in regards to the
Asia-Pacific Region in the Spring of 2002. In exploring the options, an IPO was the alternative that would most likely result in the highest value for the stockholders. Before the IPO was a realistic possibility, a number of issues had to be
resolved, the failure of which could potentially stop the IPO. These items included the participation of the CellStar Asia management team, the approval of a structure by the SEHK, and a fairness opinion from Raymond James. It was not until late in
the fourth quarter of 2002 and into the first quarter of 2003 that it became apparent to the Company that an IPO was a realistic possibility. During the second to fourth quarters of 2002, the Company also had to evaluate its options if the IPO was
not a realistic possibility, and determine if the stockholders would be better served by a management buyout, a third party sale, or the Company maintaining the Greater China Operations and continuing to operate them. As the Company had previously
reinvested the earnings in its Asia-Pacific operations and met the indefinite reversal criteria of APB 23 and the Company did not change its view that earnings were permanently invested, the Company did not believe it was proper to change the tax
treatment of these undistributed earnings until the Company determined that the circumstances had changed and that it was apparent that some or all of the undistributed earnings would be remitted in the foreseeable future. This did not become
apparent to the Company until the fourth quarter of 2002.



No
U.S. Federal income taxes on the undistributed earnings will be payable until such earnings are actually remitted back to the U.S. in the form of dividends or, in the case of a completed transaction such as those discussed above, sale proceeds. As
of November 30, 2002, the Company has net operating loss carryforwards in the U.S. of approximately $70.4 million, a significant portion of which the Company believes it will be able to utilize to offset the taxes payable in the event that a
transaction is completed. The Company therefore does not expect that the impact of the payment of any taxes associated with any such transaction will significantly impact the cash position of the Company at the time of such payment. Furthermore, the
Company will have cash proceeds from any such transaction to fund the actual payment of such taxes. As a result of the accrual in the quarter ended November 30, 2002, of U.S. Federal income taxes on the undistributed earnings of the Asia-Pacific
Region, the Company will not recognize tax expense in future periods for financial statement purposes on any such future transaction up to the amount of the tax recognized on the undistributed earnings.



Repositioning of Operations



In April 2000, the Company curtailed a significant portion of its U.K.
international trading operations following third party theft and fraud losses. The trading business involves the purchase of products from suppliers other than manufacturers and the sale of those products to customers other than network operators or
their dealers and other representatives. As a result of the curtailment, the Company experienced a reduction in revenues for the U.K. operations after the first quarter of 2000 compared to 1999. Since the curtailment, the Company experienced
operating losses in its U.K. operations. For the quarter ended May 31, 2000, the Company recorded a $4.4 million charge consisting of $3.2 million from third party theft and fraud losses during the purchase, transfer of title and transport of six
shipments of wireless handsets, and $1.2 million in inventory obsolescence expense for inventory price reductions incurred while the international trading business was curtailed pending investigation. The Company has recovered $0.9 million in cash
associated with the third party theft and fraud losses. This recovery is recorded in cost of sales in the fourth quarter of 2002. The Company is pursuing legal action where appropriate to recover additional amounts. However, the ultimate recovery in
relation to these losses, if any, cannot be determined at this time.



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The Argentine economy has been in a state of turmoil since the Argentine government removed the fixed
exchange rate maintained between the Argentine peso and the U.S. dollar. In the fourth quarter of 2000, the Company recorded a non-cash goodwill impairment charge of $6.4 million related to the operations in Peru due to a major carrier
customers proposed changes to an existing contract that adversely affected the long-term prospects of the Peru operations. From the second quarter of 2001 until the divestiture in the third quarter of 2002, the Company incurred losses in its
Peru operations.



In the second quarter of 2002, the Company
decided, as part of its plan to reposition its operations, to exit the U.K., Peru and Argentina as soon as practicable due to the poor performance of these operations. The Company determined that improving its position in the U.K. market would
require substantial investment, which the Company was not willing to make. The economic climate in Peru and Argentina, coupled with the small scale of the Companys operation in those countries, provided little upside and significant risk. In
addition, the Company decided to evaluate the balance of its European and Latin American markets, excluding Mexico and Miami, over the remainder of the year, assessing each operation in view of its over-all long-term strategy. In conjunction with
this decision, the Companys revolving credit facility was amended to allow the Company to pursue its exit strategy from these markets, and any similar decision the Company may make with respect to the balance of its European and Latin American
operations. As a result of the decision to exit the U.K., Peru and Argentina, the Company recorded a pre-tax charge of $10.2 million for the three months ended May 31, 2002.



During the third quarter of 2002, the Company completed its divestitures of its Peru and Argentina operations at
approximately book value to local management and closed the U.K. operations, except for certain administrative matters. In the divestitures, the Company obtained promissory notes totaling $0.9 million and $0.2 million for Peru and Argentina,
respectively. These promissory notes are fully reserved and will remain reserved pending receipt of payments by the Company. In the third and fourth quarters of 2002, the Company reversed $3.3 million of the allowances related to the exit charge for
the U.K. operations as the amounts collected on accounts receivable and the market value of the inventory exceeded original estimates. Also, due to the progress made with the tax authorities, the valuation allowance was reversed on an income tax
receivable.



The following table summarizes the income
statement classification of the charge (in thousands):



|                                    |  | Three monthsendedMay 31, 2002 |        |   | Reversal ofallowances |        |   | Net charge |       
|----------------------------------- |  | ----------------------------- | ------ | - | --------------------- | ------ | - | ---------- | ------
|Cost of Sales                       |  | $                             | 2,256  |   |                       | (1,131 | ) |            | 1,125 
|Selling, general and administrative |  |                               | 1,691  |   |                       | (588   | ) |            | 1,103 
|Impairment of assets                |  |                               | 3,655  |   |                       |       |   |            | 3,655 
|Severance and exit charges          |  |                               | 2,566  |   |                       |       |   |            | 2,566 
|                                    |  |                               |        |   |                       |        |   |            |       
|Total charge                        |  |                               | 10,168 |   |                       | (1,719 | ) |            | 8,449 
|Tax benefit                         |  |                               | (184   | ) |                       | (1,541 | ) |            | (1,725
|                                    |  |                               |        |   |                       |        |   |            |       
|Net charge                          |  | $                             | 9,984  |   |                       | (3,260 | ) |            | 6,724 
|                                    |  |                               |        |   |                       |        |   |            |       



Of the $2.6 million in
severance and exit charges, all of which consisted of expected cash outlays, $1.8 million has been paid or settled as part of the divestiture of the Companys Peru and Argentina operations and the shutdown of the U.K. operations. The
remaining $0.8 million relates to lease payments associated with the U.K. operations and has not yet been paid as of November 30, 2002. Monthly lease payments are expected to be made over the next five years unless a settlement can be reached with
the lessor.



The severance and exit charges consists of the
following (in thousands):



|Severance80 employees |  | $ | 1,626
|---------------------- |  | - | -----
|Lease accruals         |  |   | 780  
|Other                  |  |   | 160  
|                       |  |   |      
|                       |  | $ | 2,566
|                       |  |   |      



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In connection with the repositioning of its operations, the Company announced that Dale H. Allardyce
would resign from the position of President and Chief Operating Officer and that Terry S. Parker, the Companys Chief Executive Officer, would assume the duties of President and Chief Operating Officer. Included in the severance charges is $0.6
million related to Mr. Allardyces separation. The severance charge includes all of the employees (58) for the U.K. operations and certain employees (21) for Argentina. The remaining employees in Argentina and Peru were part of the divestiture.



The Company recorded an impairment charge of $3.7 million for
the three months ended May 31, 2002, which included $2.2 million for accumulated foreign currency translation adjustments as a result of the Companys liquidation of its investments in each of these operations and $1.5 million for property and
equipment. The property and equipment were reduced to estimated market value of $0.1 million.



Following is a summary of the combined results of operations, including the exit charge in the U.K., Peru, and Argentina (in thousands):



|                                             |  | Fiscal year ended November 30, |        
|-------------------------------------------- |  | ------------------------------ | -------
|                                             |  | 2002                           |        
|Revenues                                     |  | $                              | 63,942 
|Cost of sales                                |  |                                | 61,585 
|                                             |  |                                |        
|Gross profit                                 |  |                                | 2,357  
|Selling, general and administrative expenses |  |                                | 6,893  
|Impairment of assets                         |  |                                | 3,655  
|Severance and exit charges                   |  |                                | 2,566  
|                                             |  |                                |        
|Operating loss                               |  | $                              | (10,757
|                                             |  |                                |        



As of February 14,
2003, the Company has repatriated $7.7 million in cash to the U.S. from the exited operations.



The Company has completed the evaluation of the balance of its European and Latin American markets, excluding Mexico and Miami. The Company has decided to continue its operations in Chile as these operations are
expected to continue to be profitable and to generate cash. To reduce its in-country exposure in Colombia, the Company is negotiating with its major carrier customer in Colombia to shift the Companys business with the carrier to the
Companys Miami export operation. In January 2003, the Company signed a letter of intent with local management for the sale of its Netherlands operations. There can be no assurance that the sale will be completed due to a number of
contingencies contained in the letter of intent. The Company will explore opportunities to sell its operations in Sweden. In Sweden and The Netherlands, the market is highly competitive and highly penetrated. The operations in Sweden and The
Netherlands do not present significant growth opportunities without significant investment of capital. The Company excluded Miami from the evaluation due to the recent performance of this operation and the export opportunities into Latin America
that the Company believes exist in this market. Despite the disappointing performance in Mexico, the Company believes growth and profit potential exist in the Mexico market due to the size of this market. However, significant improvement in the
Companys Mexico operations will need to be made in 2003. If significant improvement is not made, the Company will evaluate its overall position in its Mexico operations.



Consistent with the change in historical accounting treatment for undistributed earnings in the Asia-Pacific Region, the
Company recorded U.S. Federal income taxes of approximately $2.0 million in the fourth quarter of 2002 for previously undistributed earnings from Sweden, The Netherlands and Colombia. These previously undistributed earnings are no longer considered
permanently reinvested following the completion of the Companys evaluations of these markets.



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Other



At November 30, 2002, the Company has a gross value-added tax prepaid asset in its Mexico operations of $10.7 million related to the Companys 1998
to 2001 returns. The Company is seeking resolution of this issue with the tax authorities in Mexico. In the fourth quarter of 2001, the Company recorded a charge of $3.0 million related to such value-added tax, the recoverability of which is
uncertain. In the fourth quarter of 2002, the Company recorded an additional charge of $1.5 million related to an additional portion of the value-added tax, the recoverability of which is uncertain.



In Mexico, the requirements of the Mexican tax authority for a refund request
specify that all original documents (original invoices, original import documents, etc.) must be available for review by the tax authority in order to substantiate the refund claim. The gross asset balance of $10.7 million consists of amounts
accumulated for the period from 1998 through 2001. Numerous personnel changes and computer system changes in the Companys Mexico operations have led the Company to conclude that all of the original supporting documentation may not be
available. While the Company is pursuing the full refund request of $10.7 million with the tax authorities, the supporting documentation may not meet the requirements of the Mexican tax authorities for the full refund request. As a result of the
Companys review of the documentation, the Company recorded a charge for $3.0 million in the fourth quarter of 2001 and an additional charge of $1.5 million in the fourth quarter of 2002. The Company believes it has all of the documentation
necessary to support the net balance.



The Companys sales
from its Miami operations to customers exporting into South American countries have declined as a result of increased in-country manufactured product availability in South America, primarily Brazil. In the second quarter of 2000, the Company phased
out a major portion of its redistributor business in Miami due to the volatility of the business, the relatively lower margins, and higher credit risks. The Company restructured its Miami operations in the second quarter of 2001 to reduce the size
and cost of the operation, resulting in a charge of $0.8 million, primarily related to the impairment of leasehold improvements.



In 2000 and 2001, the Company incurred losses of $1.8 million and $0.7 million, respectively, related to its minority interest in CellStar Amtel. As a
result of the deterioration in the Malaysia market, the Company divested its ownership in the third quarter of 2002.



During the third quarter ended August 31, 2000, the Company decided, based on the current and future economic and political outlook in Venezuela, to
divest its operations in Venezuela. In that quarter, the Company recorded an impairment charge of $4.9 million to reduce the carrying value of certain Venezuela assets, primarily goodwill, to their estimated fair value. In December 2000, the Company
completed the sale of its Venezuela operations and recorded a gain of $1.1 million.



From 1998 to 2000, the Companys Brazil operations were primarily conducted through a majority-owned joint venture. Following a review of its operations in Brazil, the Company concluded that its joint venture
structure, together with foreign exchange risk, the high cost of capital in that country, alternative uses of capital, accumulated losses, and the prospect of ongoing losses, were not optimal for success in that market. As a result, in the second
quarter of 2000, the Company elected to exit the Brazil market and to divest its 51% interest in its joint venture. In August 2000, the Company completed its divestiture of its 51% interest in its joint venture. The Company fully reserved certain
U.S.-based accounts receivable from Brazilian importers in the second quarter of 2000, the collectibility of which significantly deteriorated in the second quarter of 2000, and which were further affected by the decision, in the second quarter of
2000, to exit Brazil.



Impact of Inflation



Historically, inflation has not had a significant impact on CellStars
overall operating results as the majority of the Companys business is in markets that are relatively stable. However, the effects of inflation could have a



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material adverse impact on the Company if the markets become unstable. The following table summarizes the revenues and percentages of consolidated revenues
for the Companys five largest geographical operations for the year ended November 30, 2002 (dollars in thousands):



|Operation  |  | Revenues |           | Percent |      
|---------- |  | -------- | --------- | ------- | -----
|PRC        |  | $        | 882,033   |         | 40.2 
|U.S.       |  |          | 613,402   |         | 27.9 
|Mexico     |  |          | 185,627   |         | 8.5  
|Singapore  |  |          | 139,188   |         | 6.3  
|Sweden     |  |          | 83,139    |         | 3.8  
|All others |  |          | 293,225   |         | 13.3 
|           |  |          |           |         |      
|Total      |  | $        | 2,196,614 |         | 100.0
|           |  |          |           |         |      



Critical Accounting Policies



The Securities and Exchange Commission issued Financial
Reporting Release No. 60 which requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Note 1 of the Notes to the Consolidated Financial Statements includes a summary
of the significant accounting policies and methods used in the preparation of the Companys Consolidated Financial Statements. The following is a brief discussion of the more critical accounting policies and methods used by the Company.



(a)    Significant Estimates



Management of the Company has made a number of estimates and
assumptions related to the reporting of assets and liabilities in preparation of the consolidated financial statements in conformity with generally accepted accounting principles. The most significant estimates relate to the allowance for doubtful
accounts, the reserve for inventory obsolescence, the deferred tax asset valuation allowance and impairment of goodwill.



In determining the adequacy of the allowance for doubtful accounts, management considers a number of factors including the aging of the receivable
portfolio, customer payment trends, financial condition of the customer, economic conditions in the customers country, and industry conditions. In some years, the Company has experienced significant amounts of bad debt, including $51.5 million
in 2000. In 2000, the decline in the redistributor market in the North American Region and Miami, the decision to exit the Brazil market, and the competitive market conditions significantly impacted bad debt expense. Actual amounts could differ
significantly from managements estimates.



In determining
the adequacy of the reserve for inventory obsolescence, management considers a number of factors including the aging of the inventory, recent sales trends, industry market conditions, and economic conditions. In assessing the reserve, management
also considers price protection credits or other incentives the Company expects to receive from the vendor. In some years, the Company has experienced significant amounts of inventory obsolescence, including $32.3 million in 2000. After a supply
shortage in 1999, there was an oversupply of product resulting in intense price competition in 2000, which significantly impacted obsolescence. Actual amounts could differ significantly from managements estimates.



In assessing the realizability of deferred income tax assets, management
considers whether it is more likely than not that the deferred income tax assets will be realized. At November 30, 2002 the Company has deferred income tax assets, net of valuation-allowances, of $53.0 million, a significant portion of which relates
to net operating loss carryforwards. The ultimate realization of deferred income tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences are deductible. Management considers the
scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on the level of historical taxable income and projections for future taxable income over the periods
in which the deferred income tax assets are deductible,



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management determines if it is more likely than not that the Company will realize the benefits of these deductible differences. The amount of the deferred
income tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry-forward period are reduced.



As a result of the Exchange Offer, the Company was deemed to have undergone an ownership change for purposes of the Internal
Revenue code. The Company may have limitations beginning with the year ending November 30, 2002 on the utilization of its U.S. tax carry-forwards in accordance with Section 382 of the Internal Revenue Code.



Prior to the fourth quarter of 2002, the Company did not accrue for U.S.
Federal income taxes or tax benefits on the undistributed earnings and/or losses of its international subsidiaries because earnings have been reinvested and, in the opinion of management, would continue to be reinvested indefinitely. (See Note (7)
of the Notes to Consolidated Financial Statements for CellStar Corporation contained in the Form 10-K for fiscal year ended November 30, 2001, filed with the Securities and Exchange Commission on February 28, 2002.) Accordingly, there was no
liability recorded for such potential U.S. Federal income taxes. As a result of the progress in the fourth quarter of 2002 in evaluating the strategic options with regard to its Asia-Pacific Region, it was determined that the Company is now required
by GAAP to account for the earnings in its Asia-Pacific Region as not being permanently reinvested since the Company has manifested its intent to pursue possible transactions designed to allow the Company to withdraw and return to the U.S. some or
all of the value of those operations. Accordingly, in the quarter ended November 30, 2002, the Company was required to accrue U.S. Federal income taxes on the undistributed earnings of the Asia-Pacific Region of approximately $42.2 million.



No U.S. Federal income taxes on the undistributed earnings
will be payable until such earnings are actually remitted back to the U.S. in the form of dividends or, in the case of a completed transaction such as those discussed above, sale proceeds. As of November 30, 2002, the Company has net operating loss
carryforwards in the U.S. of approximately $70.4 million, a significant portion of which the Company believes it will be able to utilize to offset the taxes payable in the event that a transaction is completed. The Company therefore does not expect
that the impact of the payment of any taxes associated with any such transaction will significantly impact the cash position of the Company at the time of such payment. Furthermore, the Company will have cash proceeds from any such transaction to
fund the actual payment of such taxes. As a result of the accrual in the quarter ended November 30, 2002 of U.S. Federal income taxes on the undistributed earnings of the Asia-Pacific Region, the Company will not recognize tax expense in future
periods for financial statement purposes on any such future transaction up to the amount of the tax recognized on the undistributed earnings.



Consistent with the change in historical accounting treatment for undistributed earnings discussed above, the Company recorded U.S. Federal income taxes
of approximately $2.0 million in the fourth quarter of 2002 for previously undistributed earnings from Sweden, The Netherlands and Colombia. These previously undistributed earnings are no longer considered permanently reinvested following the
completion of the Companys evaluations of these markets.



At November 30, 2002, the Company had not provided for U.S. Federal income taxes on earnings of international subsidiaries of approximately $21.6 million as these earnings were considered permanently reinvested.



Goodwill represents the excess of the purchase price over the fair value of
net assets acquired and is amortized using the straight-line method over 20 years. The Company assesses the recoverability of this intangible asset by determining the estimated future cash flows related to such acquired assets. In the event that
goodwill is found to be carried at an amount that is in excess of estimated future operating cash flows, then the goodwill will be adjusted to a level commensurate with a discounted cash flow analysis using a discount rate reflecting the
Companys average cost of funds.



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Managements estimates of future cash flows are based in part upon prior performance, industry
conditions, economic conditions, and vendor and customer relationships. Changes in these factors or other factors could result in significantly different cash flow estimates and an impairment charge. In 1999, due to changing market conditions in
Poland, the Company considered the remaining $4.5 million in goodwill related to its Poland operations to be impaired. In 2000, due to the current and expected economic conditions in Venezuela, the Company considered the goodwill related to the
Venezuela operations impaired and recorded a $3.9 million impairment charge. In 2000, a major customers change to an existing contract that adversely changed the long-term prospects of the Peru operation resulted in the Company recording a
goodwill impairment charge of $6.4 million.



At
November 30, 2002, the Company had goodwill, net of accumulated amortization, of $20.9 million related to its Asia-Pacific operations ($12.3 million) and its remaining Europe operations in Sweden and The Netherlands ($8.6 million).In January
2003, the Company signed a letter of intent with local management for the sale of its Netherlands operations. There can be no assurance that the sale will be completed due to a number of contingencies contained in the letter of intent (see
Managements Discussion and Analysis of Financial Condition and Results of Operations-International Operations).



The Financial Accounting Standards Board has issued Statements No. 141 and No. 142, which will impact the Companys accounting policy for goodwill.
For a more complete discussion of Statements No. 141 and No. 142, see Managements Discussion and Analysis of Financial Condition and Results of Operations-Accounting Pronouncements Not Yet Adopted in this Form 10-K.



(b)    Revenue Recognition



For the Companys wholesale business, revenue is
recognized when the customer takes title and assumes risk of loss. If the customer takes title and assumes risk of loss upon shipment, revenue is recognized on the shipment date. If the customer takes title and assumes risk of loss upon delivery,
revenue is recognized upon delivery. In accordance with contractual agreements with wireless service providers, the Company receives an activation commission for obtaining subscribers for wireless services in connection with the Companys
retail operations. The agreements contain various provisions for additional commissions (residual commissions) based on subscriber usage. The agreements also provide for the reduction or elimination of activation commissions if
subscribers deactivate service within stipulated periods. The Company recognizes revenue for activation commissions on the wireless service providers activation of the subscribers service and residual commissions when earned and provides
an allowance for estimated wireless service deactivations, which is reflected as a reduction of accounts receivable and revenues in the accompanying consolidated financial statements. The Company recognizes fee service revenue when the service is
completed or, if applicable, upon shipment of the related product, whichever is later.



(c)    Vendor Credits



The Company recognizes price protection credits and other incentives, such as volume discounts, from vendors when such credits are received in writing from the vendor, or if the credits are based on sell-through to
customers, when the credits have been received in writing from the vendor and the related product is sold. Price protection credits and other incentives are applied against inventory and cost of goods sold, depending on whether the related inventory
is on-hand or has been previously sold at the time the credits are received in writing. Sell-through credits are recorded as a reduction in cost of goods sold in the period received.



The Company recognizes advertising allowances from vendors when such allowances are received in writing from the vendor and
earned. Advertising allowances are generally for the reimbursement of specific incremental, identifiable costs incurred by the Company and are recorded as a reduction of the related cost. Allowances in excess of the specific costs incurred, if any,
are recorded as a reduction costs of goods sold or inventory, as applicable.



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Accounting Pronouncements Not Yet Adopted



In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards
(Statement) No. 141, Business Combinations. Statement No. 141 changes the accounting for business combinations to eliminate the pooling-of-interests method and requires all business combinations initiated after June 30, 2001
to be accounted for using the purchase method. This statement also requires intangible assets that arise from contractual or other legal rights, or that are capable of being separated or divided from the acquired entity, be recognized separately
from goodwill. Existing intangible assets and goodwill that were acquired in a prior purchase business combination must be evaluated and any necessary reclassifications must be made in order to conform with the new criteria in Statement No. 141 for
recognition apart from goodwill. The Company does not expect the adoption of this statement to have a material impact on its consolidated results of operations or financial position.



In June 2001, the FASB issued Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 142
addresses the initial recognition and measurement of intangible assets acquired (other than those acquired in a business combination, which is addressed by Statement No. 141) and the subsequent accounting for goodwill and other intangible assets
after initial recognition. Statement No. 142 eliminates the amortization of goodwill and intangible assets with indefinite lives. Intangible assets with lives restricted by contractual, legal, or other means will continue to be amortized over their
useful lives. Adoption of this statement will also require the Company to reassess the useful lives of all intangible assets acquired, and make any necessary amortization period adjustments. Goodwill and other intangible assets not subject to
amortization will be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Statement No. 142 requires a two-step process for testing goodwill for impairment. First, the
fair value of each reporting unit will be compared to its carrying value to determine whether an indication of impairment exists. A reporting unit is an operating segment or one level below an operating segment. The Companys reporting units
are Asia PacificGreater China Operations, Asia PacificSouth Pacific Operations, North America, Latin AmericaMexico, Latin Americaexcluding Mexico, Sweden and The Netherlands. If an impairment is indicated, then the fair value
of the reporting units goodwill will be determined by allocating the units fair value to its assets and liabilities (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. The
amount of impairment for goodwill and other intangible assets will be measured as the excess of its carrying value over its fair value. Goodwill and intangible assets acquired after June 30, 2001 will be immediately subject to the impairment
provisions of this statement. For goodwill and other intangible assets acquired on or before June 30, 2001, the Company is required to adopt Statement No. 142 no later than the beginning of fiscal 2003. At November 30, 2002, the Company had
goodwill, net of accumulated amortization, of $20.9 million related to its Asia-Pacific operations ($12.3 million) and its remaining Europe operations in Sweden and the Netherlands ($8.6 million). In January, 2003, the Company signed a letter of
intent with local management for the sale of its Netherlands operations. There can be no assurance that the sale will be completed due to a number of contingencies contained in the letter of intent. The Company will explore opportunities to sell its
operation in Sweden in view of the Companys long-term strategy (see Managements Discussion and Analysis of Financial Condition and Results of Operations-International Operations). The Company believes the adoption of
Statement 142 will likely result in a one-time, non-cash pre-tax charge of $20.9 million to write-down the Companys goodwill.



In June 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting
obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition,
construction, development and (or) normal use of the asset. Statement No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value
can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accrued at the end of each period through charges to
operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize



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a gain or loss on settlement. The Company is required to adopt the provisions of Statement No. 143 no later than the beginning of fiscal year 2003, with
early adoption permitted. The Company does not expect the adoption of this statement to have a material effect on its consolidated results of operations or financial position.



In October 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long- Lived Assets, which
addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While Statement No. 144 supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, it retains many of the fundamental provisions of that Statement. The Company is required to adopt the provisions of Statement No. 144 no later than the beginning of fiscal year 2003, with early adoption permitted. The Company does not expect the
adoption of this statement to have a material effect on its consolidated results of operations or financial position.



In April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. Statement No. 145 rescinds Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt and an amendment of Statement No. 4, Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. Statement No. 145 also rescinds Statement No. 44, Accounting for Intangible Assets of Motor Carriers. Statement No. 145 amends Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic affects that are similar to sale-leaseback transactions. Statement No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. Under Statement No. 4, all gains and losses from extinguishment of debt were required to be aggregated
and, if material, classified as an extraordinary item, net of related income tax effect. Statement No. 145 eliminates Statement No. 4, and, thus the exception to applying Opinion 30 to all gains and losses related to extinguishments of debt
(other than extinguishments of debt to satisfy sinking-fund requirements). As a result, gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria in Opinion 30. Applying the provisions of
Opinion 30 will distinguish transactions that are part of an entitys recurring operations from those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item. Statement No. 145 becomes effective for
fiscal years beginning after May 15, 2002, with early applications encouraged. The Company expects to reclassify the extraordinary gain on early extinguishment of debt resulting from its Exchange Offer upon adoption. The Company does not expect the
adoption of the other portions of this statement to have a material effect on its consolidated results of operations or financial position.



In June 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial
accounting and reporting for the costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). Statement No. 146 is effective for exit or disposal activities initiated after December 31, 2002, with early applications encouraged. The Company does not expect the adoption of this
statement to have a material effect on its consolidated results of operations or financial position.



In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based CompensationTransition and Disclosure, an amendment of FASB
Statement No. 123. Statement No. 148, amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. Statement No. 148 is effective for fiscal years ending after December 15, 2002, with early applications encouraged. The Company does not expect the adoption of this
statement to have a material effect on its consolidated results of operations or financial position.



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Item 7(A).    Quantitative and Qualitative Disclosures About Market Risk



Foreign Exchange Risk



For the year ended November 30, 2002 and 2001, the Company recorded net foreign currency losses of $1.5 million and $1.0 million, respectively, in
costs of goods sold. For the year ended November 30, 2002 and 2001, the Company recorded in other income (expense), net foreign currency gains of $0.5 million and $1.3 million, respectively. As part of the Companys continuing evaluation
of the European and Latin American Regions, the Company has recognized a foreign currency gain of $0.5 million in 2002 related to intercompany advances which were previously not considered to be payable in the foreseeable future.



The Company manages foreign currency risk by attempting to increase prices of
products sold at or above the anticipated exchange rate of the local currency relative to the U.S. dollar, by indexing certain of its accounts receivable to exchange rates in effect at the time of their payment and by entering into foreign currency
hedging instruments in certain instances. The Company consolidates the bulk of its foreign exchange exposure related to intercompany transactions in its international finance subsidiary. These transactional exposures are managed using various
derivative alternatives, as considered necessary, depending on the length and size of the exposure. The Company continues to evaluate foreign currency exposures and related protection measures.



At November 30, 2002, the Company had no forward contracts and does not hold
any other derivative instruments.



The Company has foreign
exchange exposure on the restricted cash deposited by the Hong Kong entity on behalf of the PRC entity as the funds have been effectively converted into RMB. The Company also has foreign exchange exposure on the RMB lines of credit in China as they
are collateralized by U.S. dollars. For the year ended November 30, 2002, $882.0 million, or 40.2%, of the Companys revenues were from the Companys operations in China. With the exception of intercompany activity, all revenues and
expenses of the China operations are in RMB. The Company does not hold derivative instruments related to the RMB.



The Argentine economy has been in a state of turmoil since the Argentine government removed the fixed exchange rate maintained between the Argentine peso
and the U.S. dollar. As a result of the Companys decision to exit its operations in Argentina, the Company recorded an impairment of $0.9 million for currency translation adjustments in the second quarter of 2002. The Company divested its
operations in Argentina in the third quarter of 2002.



Derivative Financial
Instruments



The Company periodically uses various
derivative financial instruments as part of an overall strategy to manage its exposure to market risk associated with interest rate and foreign currency exchange rate fluctuations. The Company periodically uses foreign currency forward contracts to
manage the foreign currency exchange rate risks associated with international operations. The Company evaluates the use of interest rate swaps and cap agreements to manage its interest risk on debt instruments, including the reset of interest rates
on variable rate debt. The Company does not hold or issue derivative financial instruments for trading purposes. The Companys risk of loss in the event of non-performance by any counterparty under derivative financial instrument agreements is
not significant. Although the derivative financial instruments expose CellStar to market risk, fluctuations in the value of the derivatives are mitigated by expected offsetting fluctuations in the matched instruments. The Company periodically uses
foreign currency forward contracts to reduce exposure to exchange rate risks primarily associated with transactions in the regular course of its international operations. The forward contracts establish the exchange rates at which the Company
purchases or sells the contracted amount of local currencies for specified foreign currencies at a future date. Forward contracts used by the Company are typically short-term in nature (45 days to one year), and the Company receives or pays the
difference between the contracted forward rate and the exchange rate at the settlement date.



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At November 30, 2002, the Company had no forward contracts and does not hold any other derivative
instruments.



Interest Rate Risk



The Company manages its borrowings under the revolving credit facility each
business day to minimize interest expense. The interest rate of the Companys New Facility is an index rate at the time of borrowing plus an applicable margin on certain borrowings. The interest rate is based on either the agent banks
prime lending rate or the London Interbank Offered Rate. During the year ended November 30, 2002, the interest rates of borrowings under the U.S. revolving credit facility ranged from 5.25% to 6.0%. A one percent change in variable interest rates
will not have a material impact on the Company. The Company has short-term borrowings in China bearing interest from 0.00% and 5.85% (see Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity
and Capital Resources). The note payable in Taiwan bears interest at 2.70%. The credit facility in Sweden bears interest at 5.60%. The credit facility in Netherlands bears interest at 5.00%. The Senior Notes issued in February 2002 bear
interest at 12.0% and mature January 15, 2007.



Item 8.    Consolidated Financial Statements and Supplementary Data



See Index to Consolidated Financial Statements on Page F-1 of this Form 10-K.



Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure



None.



PART III



Item 10.    Directors and Executive Officers of the Registrant



Information regarding executive officers is provided under the caption BusinessExecutive Officers of the Registrant.



The Companys Board of Directors consists of five directors. Each
director has been elected to serve for a specified term or until his successor has been elected and qualified.



Set forth below is a description of the backgrounds of each of the directors of the Company.



Dale V. Keslerhas served as a director of the Company since March 1999. Mr. Kesler retired as an active partner of
the professional accounting firm of Arthur Andersen LLP in 1996 and served as the Managing Partner of Arthur Andersens Dallas/Fort Worth office from 1983 to 1994. Mr. Kesler was responsible for strategic planning on a world-wide basis for the
Audit and Business Advisory practices of Arthur Andersen in 1982 and 1983 and served as the head of the Audit Practice in the firms Dallas office from 1973 to 1982. Mr. Kesler also serves on the Board of Directors of Elcor Corporation, New
Millennium Homes, Resource Services, Inc., Triad Hospitals, Inc. and IMCO Recycling Inc., and serves as an advisory board member to Snelling and Snelling, Inc. Mr. Kesler currently serves as Chairman of the Audit Committee of CellStars Board
of Directors.



James L. Johnsonhas served as the
non-executive Chairman of the Board of Directors since July 2001 and as a director of the Company since March 1994. Mr. Johnson has been Chairman Emeritus of GTE Corporation since May 1992 and served as GTEs Chairman and Chief Executive
Officer from April 1988 to April 1992. Mr. Johnson began his career with Southwestern Associated Telephone Company (the predecessor company of GTE Central) in 1949. He was a member of GTEs Board of D irectors from 1985 to May 1999 and a
member of the Board of Directors of Finova Group Incorporated (formerly GTE Financial) until 2001. He is currently a director of Harte Hanks Communications, Inc. and M.O.N.Y (Mutual of New York, Inc.). Mr. Johnson is also past Chairman of the United
States Telephone Association. Mr. Johnson currently serves on the Nominating and Compensation Committees of CellStars Board of Directors.



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John L. (J.L.) Jacksonhas served as a director of the Company since March 1999. Mr.
Jackson served as Chairman and Chief Executive Officer of Global Industrial Technologies, Inc. (formerly, INDRESCO) from 1993 to 1998. Before joining Global Industrial Technologies, Mr. Jackson was engaged in private executive business consulting
from 1987 to 1993. From 1983 to 1987, Mr. Jackson served as a Director and as the President and Chief Operating Officer of Diamond Shamrock Corporation, and was Executive Vice President of Diamond Shamrock and President of its then newly-formed coal
unit from 1979 to 1983. Mr. Jackson has served on numerous Boards of Directors, including the Fourth District Federal Reserve Bank of Cleveland, First Republic Bank, American Federal Bank, Hadson Energy Resources and National Gypsum Company.
Mr. Jackson currently serves as Chairman of the Compensation Committee of CellStars Board of Directors and also serves on the Audit Committee of CellStars Board of Directors.



Jere W. Thompsonhas served as a director of the Company since October
1999. Mr. Thompson served as President and Chief Executive Officer of The Southland Corporation from 1986 to 1991. Mr. Thompson joined Southland in 1954 and was made Vice President of store operations in 1962. He became Southlands President in
1973 and was elected to Southlands Board of Directors in 1961. Mr. Thompson was engaged in private business consulting from 1991 to 1996 when he became the President of The Williamsburg Corporation. Mr. Thompson serves on the Board of
Directors and is the former Chairman of The National Center for Policy Analysis. He is also a board member of St. Paul and Zale Lipshy University Hospitals, and a member and former Chairman of The Development Board and the College and Graduate
School of Business Foundation Advisory Council for The University of Texas at Austin. Mr. Thompson currently serves as Chairman of the Nominating Committee of CellStars Board of Directors and also serves on the Audit and Compensation
Committees of CellStars Board of Directors.



Terry S.
Parkerhas served as Chief Executive Officer of the Company since July 2001, as a director of the Company since March 1995 and as President and Chief Operating Officer of the Company from March 1995 through July 1996. Mr. Parker served as Senior
Vice President of GTE Corporation and President of GTEs Personal Communications Services, GTEs wireless division, from October 1993 until he joined the Company. From 1991 to 1993, Mr. Parker served as President of GTE Telecommunications
Products and Services. Prior to 1991, Mr. Parker served as President of GTE Mobile Communications. Mr. Parker served on the Board of Directors for Nucentrix Corporation from 1998 until 2001, the Board of Directors of Highway Master Communications,
Inc. from 1995 to 2000, the Board of Directors of Illinois Superconductor Corporation from 1998 to 2000, the Board of Directors of Equalnet Corporation from 1996 to 1999, and the Board of Directors of Telenetics Corporation from May 2000 to March
2001. Mr. Parker also served as the President and Chief Executive Officer of Telenetics from September 2000 until March 2001.



Section 16(a) Beneficial Ownership Reporting Compliance



Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Companys executive officers, directors, and persons who beneficially
own more than 10% of a registered class of the Companys equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of the Companys common stock (the Common Stock) and other equity
securities of the Company. Such persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms that they file.



Based solely on the Companys review of such forms furnished to the Company, the Company believes that all filing requirements applicable to the
Companys executive officers, directors, and greater than 10% beneficial owners were complied with, except for the following: In fiscal 2002, Mr. Kaiser, upon becoming an executive officer of the Company on December 12, 2001, did not timely
file a Form 3; in fiscal 2001, Mr. Parker did not timely file a Form 4 or Form 5 reporting a change in beneficial ownership in connection with the acquisition of options to purchase 200,000 shares of Common Stock granted pursuant to his employment
agreement dated July 5, 2001; and for fiscal 2000, the Company is unable to locate evidence that Mr. Thompson timely filed a Form 4 reporting a change in beneficial ownership in connection with a purchase of shares of Common Stock. Mr. Thompson
filed a Form 5 in December of 2002 reporting beneficial ownership of such shares.



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Item 11.    Executive Compensation



Summary Compensation Table



The following
table sets forth information concerning the compensation in each of the Companys last three fiscal years of the Companys Chief Executive Officer and each of the other four most highly compensated executive officers of the Company
(collectively, the Named Executive Officers) who were serving as such on November 30, 2002, based on salary and bonus earned during the fiscal year ended November 30, 2002.



|                                                                                                        |  |                |  | Annual Compensation     |     |  |                          |     | Long TermCompensation Awards |                               |  |                               | 
|------------------------------------------------------------------------------------------------------- |  | -------------- |  | ----------------------- | --- |  | ------------------------ | --- | ---------------------------- | ----------------------------- |  | ----------------------------- | 
|Name and Principal Position                                                                             |  | Year           |  | Salary ($)              |     |  | Bonus(*) ($)             |     |                              | Other Annual Compensation ($) |  | Restricted Stock Award(s) ($) | 
|Terry S. Parker Chief Executive Officer                                                                 |  | 2002 2001 2000 |  | 950,000 341,634        | (4) |  | 380,000 200,000         |     |                              |                            |  |                            | 
|                                                                                                        |  |                |  |                         |     |  |                         
|A.S. Horng Chairman, Chief Executive Officer and General Manager of CellStar (Asia) Corporation Limited |  | 2002 2001 2000 |  | 841,818 800,133 800,103 |     |  | 1,566,966 300,000 66,675 | (6) |                              |                            |  |                            | 
|                                                                                                        |  |                |  |                         |     |  |                         
|Robert A. Kaiser Senior Vice President and Chief Financial Officer                                      |  | 2002 2001 2000 |  | 436,442               | (8) |  | 675,000                | (9) |                              |                            |  |                            | 
|                                                                                                        |  |                |  |                         |     |  |                         
|Lawrence King President and Chief Operating Officer of Asia Pacific Region                              |  | 2002 2001 2000 |  | 369,290 360,058 360,058 |     |  | 30,005 70,780 30,005     |     |                              |                            |  |                            | 
|                                                                                                        |  |                |  |                         |     |  |                         
|Elaine Flud Rodriguez Senior Vice President, Secretary and General Counsel                              |  | 2002 2001 2000 |  | 285,000 265,000 250,000 |     |  | 115,000 35,774 10,000    |     |                              |                            |  |                            | 

---

|(*) |  | Bonus information includes payments earned in the stated fiscal year but actually paid in the subsequent fiscal year.
|--- |  | ---------------------------------------------------------------------------------------------------------------------

|(1) |  | Reflects options to acquire shares of Common Stock. The Company has not granted stock appreciation rights.
|--- |  | ----------------------------------------------------------------------------------------------------------

|(2) |  | All figures in this column reflect an adjustment for the one-for-five reverse stock split (the Reverse Split) occurring on February 22, 2002.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Consists of insurance premiums paid by the Company and Company matching contributions to the named executives 401(k) plan.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------

|(4) |  | Mr. Parker was appointed Chief Executive Officer of the Company on July 5, 2001.
|--- |  | --------------------------------------------------------------------------------

|(5) |  | Consists of options granted to Mr. Parker while serving as a director of the Company.
|--- |  | -------------------------------------------------------------------------------------

|(6) |  | Includes a signing bonus of $1,500,000 paid upon the effective date of Mr. Horngs new employment agreement, dated July 5, 2002, with CellStar Asia. Mr. Horng
is also eligible to receive a bonus of
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | $1,500,000 upon the successful completion of an initial public offering related to the Asia-Pacific Region. In the event the market capitalization of New
CellStar Asia at the time of the IPO, as determined pursuant to the terms of the transaction, is $250 million or greater, such cash bonus will be increased to $2.5 million. See Executive Compensation  Employee Contracts and
Termination of Employment Agreements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Consists of a Company matching contribution to its Hong Kong retirement plan.
|--- |  | -----------------------------------------------------------------------------

|(8) |  | Mr. Kaiser was appointed Senior Vice President and Chief Financial Officer on December 12, 2001.
|--- |  | ------------------------------------------------------------------------------------------------

|(9) |  | Consists of a signing bonus of $300,000, $200,000 paid pursuant to Mr. Kaisers employment agreement, and a bonus of $175,000 paid pursuant to the Companys Amended and
Restated Annual Incentive Compensation Plan (the Incentive Plan).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) |  | Consists of insurance premiums paid by the Company and a Company matching contribution to its Hong Kong retirement plan.
|---- |  | ------------------------------------------------------------------------------------------------------------------------

|(11) |  | Consists of insurance premiums paid by the Company.
|---- |  | ---------------------------------------------------



Option Grants During 2002 Fiscal Year



The following table provides information related to options granted to the Named Executive Officers during the fiscal year ended November 30, 2002.



|                      |  | Individual Grants                                        |  |                                                      |  |                                     |  | Potential Realizable Value at
Assumed Annual Rates of Stock Price Appreciation
for Option Term(1)(2)
|--------------------- |  | -------------------------------------------------------- |  | ---------------------------------------------------- |  | ----------------------------------- |  | ----------------------------------------------------------------------------------------------------
|Name                  |  | Number of Securities Underlying Options Granted(#)(2)(3) |  | % of Total Options Granted to Employeesin FiscalYear |  | Exercise or Base Price ($/Sh)(2)(4) |  | Expiration Date                                                                                     
|Terry S. Parker(5)    |  |                                                         |  |                                                     |  |                                    |  |                                                                                                    
|A.S. Horng            |  | 260,000                                                  |  | 54.133                                               |  | (6)                                 |  | (6)                                                                                                 
|Robert A. Kaiser      |  | 80,000                                                   |  | 16.656                                               |  | 4.60                                |  | December 11, 2011                                                                                   
|Lawrence King         |  | 7,000                                                    |  | 1.457                                                |  | 4.30                                |  | January 7, 2012                                                                                     
|Elaine Flud Rodriguez |  | 10,000                                                   |  | 2.082                                                |  | 4.30                                |  | January 7, 2012                                                                                     

---

|(1) |  | The potential realizable value portion of the table illustrates value that might be realized upon exercise of the options immediately prior to the expiration of their term, assuming
the specified compounded rates of appreciation on the Common Stock over the term of the options. These numbers do not take into account provisions of certain options providing for termination of the option following termination of employment,
nontransferability or vesting over periods of up to ten years.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | All figures in this column reflect an adjustment for the Reverse Split.
|--- |  | -----------------------------------------------------------------------

|(3) |  | Reflects options to acquire shares of Common Stock. The Company has not granted stock appreciation rights. The options become exercisable with respect to 25% of the shares covered
thereby on each of the first four anniversaries of the date of grant. In the event of a change of control (as defined in the Companys 1993 Amended and Restated Long-Term Incentive Plan (the 1993 Plan)), any
unexercisable portion of the options will become immediately exercisable.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | The exercise price is equal to the fair market value of the Common Stock on the date of grant. The option exercise price may be paid as follows: (a) in cash or by certified check,
bank draft or money order payable to the order of the Company; (b) in Common Stock (including restricted stock), valued at its fair market value on the date of exercise; (c) by delivery to the Company or its designated agent of an executed
irrevocable option exercise form together with irrevocable instructions from the optionee to a broker or dealer, reasonably acceptable to the Company, to sell certain of the shares of Common Stock purchased upon exercise of the stock option or to
pledge such shares as collateral for a loan from a third party and promptly deliver to the Company the amount of sale or loan proceeds necessary to pay such purchase price; and/or (d) in any other form of valid consideration that is acceptable to
the Compensation Committee of the Board of Directors in its sole discretion.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(5) |  | Mr. Parker did not receive any option grants from the Company in fiscal 2002.
|--- |  | -----------------------------------------------------------------------------

|(6) |  | The number, exercise price and expiration date of Mr. Horngs options are as follows:
|--- |  | -------------------------------------------------------------------------------------



|Number  |  | Exercise Price |  | Expiration Date  
|------- |  | -------------- |  | -----------------
|60,000  |  | $4.300         |  | January 7, 2012  
|200,000 |  | $3.250         |  | September 9, 2012



Option Exercises During 2002 Fiscal
Year and Fiscal Year End Option Values



The following
table provides information related to options exercised by the Named Executive Officers during the fiscal year ended November 30, 2002 and the number and value of options held on November 30, 2002. The Company does not have any outstanding stock
appreciation rights. None of the Named Executive Officers in the table below exercised any options in fiscal 2002.



|Name                  |  | Shares Acquired on Exercise(#)(1) |  | Value Realized
($)(2) |  | Number of Securities Underlying
Unexercised Options at FY-End
(#)(1) |  | Value of Unexercised In- the-Money Options/ at FY-End ($)(1)(3)
|--------------------- |  | --------------------------------- |  | --------------------- |  | -------------------------------------------------------------------- |  | ---------------------------------------------------------------
|                      |  |                                   |  | Exercisable           |  | Unexercisable                                                        |  | Exercisable                                                    
|Terry S. Parker       |  |                                  |  |                      |  | 105,750                                                              |  | 103,750                                                        
|A.S. Horng            |  |                                  |  |                      |  | 126,142                                                              |  | 305,141                                                        
|Robert A. Kaiser      |  |                                  |  |                      |  |                                                                     |  | 80,000                                                         
|Lawrence King         |  |                                  |  |                      |  | 57,814                                                               |  | 20,314                                                         
|Elaine Flud Rodriguez |  |                                  |  |                      |  | 33,087                                                               |  | 27,385                                                         

---

|(1) |  | All figures in this column reflect an adjustment for the Reverse Split.
|--- |  | -----------------------------------------------------------------------

|(2) |  | Value realized is calculated based on the difference between the option exercise price and the closing market price of the Common Stock on the date of exercise multiplied by the
number of shares to which the exercise related.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | The closing price for the Common Stock, as reported by The Nasdaq National Market System on November 29, 2002, the last trading day of fiscal 2002, was $4.69. The value of
unexercised in-the-money options is calculated on the basis of the difference between the option exercise price and $4.69 multiplied by the number of shares of Common Stock underlying the option.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Compensation of Directors



During the fiscal year ended November 30, 2002, each director of the Company
who was not an officer or other employee of the Company (an Independent Director) received an annual retainer fee of $25,000, plus $1,500 for each meeting of the Board of Directors or committee of the Board of Directors that he attended
and $750 for each telephonic Board of Directors or committee meeting that he attended. To the extent that any committee meeting is held on the same day as a full Board of Directors meeting or another committee meeting, only one $1,500 or $750 fee
(as applicable) was paid. The Company also pays a per diem fee of $1,500 to each Independent Director for each day such director performs additional services for the Company at the request of the Chief Executive Officer. There were no per diem fees
paid to any director for the fiscal year ended November 30, 2002.



In July 2001, Mr. Johnson was elected Chairman of the Board of Directors and the Company entered into an agreement with Mr. Johnson whereby he would receive annual compensation of $250,000 for serving as non-executive Chairman of the Board
of Directors, in addition to whatever compensation and expense reimbursement he is entitled to as an Independent Director. Mr. Johnson received $250,000 for his services as Chairman during fiscal 2002, in addition to $55,000 in director and retainer
fees as described above.



Pursuant to the Companys 1994
Amended and Restated Non-Employee Director Nonqualified Stock Option Plan (the Directors Plan), each Independent Director automatically receives an option (the Initial



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Option) to purchase 1,500 shares of Common Stock upon becoming an Independent Director. In addition to the Initial Option, each Independent Director
receives an annual grant pursuant to the 1993 Plan of an option (the Annual Option) to purchase 1,000 shares of Common Stock, which option will be automatically granted on the date of the first full Board of Directors meeting following
the end of each fiscal year. The Annual Option will vest with respect to 25% of the shares covered thereby on each of the first four anniversaries of the date of grant and will expire ten years following the date of grant. The exercise price of all
options granted to Independent Directors must be equal to the fair market value of the Common Stock on the date of grant. The Directors Plan expires on March 3, 2004.



Directors who are also employees of the Company receive no additional compensation for serving as directors. All directors
of the Company are entitled to reimbursement of their reasonable out-of-pocket expenses in connection with their travel to, and attendance at, meetings of the Board of Directors or committees thereof.



Employment Contracts and Termination of Employment and Change in Control Arrangements



The Company entered into employment agreements
(collectively, the Employment Agreements or individually, an Employment Agreement) with Mr. Parker, Mr. Horng, Mr. Kaiser, and Ms. Rodriguez (collectively, the Executives and individually, an
Executive), effective July 5, 2001, July 5, 2002, December 12, 2001, and January 21, 2000, respectively. Mr. King does not have an employment agreement with the Company. The Employment Agreements of Messrs. Parker, Horng, Kaiser and
Ms. Rodriguez provide for annual base salaries of $850,000, $900,000, $450,000 and $250,000, respectively. Mr. Kaiser also received a signing bonus of $300,000. Mr. Horng received a signing bonus of $1.5 million, subject to repayment provisions
if Mr. Horng terminates his Employment Agreement under certain conditions, and a success bonus of $1.5 million payable upon completion of the Companys divestiture (the the CellStar Asia Transaction), through a combination of
an initial public offering (the IPO) and private placements, of up to 70% of its operations in the Peoples Republic of China, Hong Kong and Taiwan (the Greater China Operations), consisting of substantially all of its
Asian operations; provided, however, that in the event the market capitalization, at the time of the IPO, of the holding company formed to hold the Greater China Operations (New CellStar Asia) is $250.0 million or greater as determined
by CellStar, New CellStar Asia and the underwriters pursuant to the terms of the CellStar Asia Transaction, the success bonus will be increased to $2.5 million. The Employment Agreement with Mr. Horng will terminate upon completion of the
the CellStar Asia Transaction without payment of compensation and will be replaced by a new employment agreement between New CellStar Asia and Mr. Horng. Each of the Employment Agreements also provides that the Executive is eligible to
participate in an annual incentive plan approved by the Companys Board of Directors during the term of his or her Employment Agreement.



Pursuant to his original Employment Agreement, the Company acknowledged Mr. Kaisers desire to assume greater responsibility for business operations,
particularly in the North American Region of the Companys subsidiary, CellStar, Ltd. (Employer). Employer agreed to establish an escrow account in the amount of $700,000, which amount was to be paid to Mr. Kaiser in the event that
he was not named as Senior Vice President of the Company and President of Employers North American Region on or before June 1, 2002. Mr. Kaiser, the Company and Employer executed a First Amendment to Employment Agreement, effective as of
April 2, 2002, which removed the requirement for the escrow and extended the date for the Company and Employer to name Mr. Kaiser as Senior Vice President of the Company and President of Employers North American Region to on or before
September 1, 2002. Mr. Kaiser, the Company and Employer executed a Second Amendment to Employment Agreement, effective as of September 10, 2002, which provided for the payment of $200,000 to Mr. Kaiser in consideration for Mr. Kaisers
agreement to further extend the date by which he would be named as Senior Vice President of the Company and President of Employers North American Region to on or before March 1, 2003. The amendment further reduces the amount payable in the
event Mr. Kaiser is not so named to $500,000. Such date may be extended an additional 90 days by mutual written agreement of the parties. Mr. Kaiser, the Company and Employer executed a Third Amendment to Employment Agreement as of February 28,
2003, extending the date by which he would be named as Senior Vice President of the Company and President of Employers North American Region to on or before May 1, 2003. No additional compensation was paid to Mr. Kaiser for such extension.



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The Company is obligated, during the term of his Employment Agreement, to provide to Mr. Kaiser a life
insurance policy with a face amount of $1,500,000 and a disability insurance policy with an annual disability benefit of $200,000 until attainment of age 65. The Company has in place insurance to cover a portion of such expenses. Mr. Kaiser and Mr.
Horng are each eligible to participate in the life, health and disability insurance programs customarily made available to employees of the Company.



Each of the Employment Agreements has an initial term of four years, except that of Mr. Horng. Mr. Horngs Employment Agreement expires on the
fifth anniversary of the date on which the Board of Directors of the Company notifies Mr. Horng that it has determined to discontinue the automatic daily extension of the Employment Agreement. Pursuant to his Employment Agreement, Mr. Horng is an
employee of CellStar Asia, and any continuing obligations of the Company contained in his Employment Agreement will terminate upon the completion of the CellStar Asia Transaction. Upon such termination, Mr. Horngs outstanding options to
purchase Common Stock will expire 30 days after the termination date. All of the Employment Agreements are subject to earlier termination as follows: (i) by the Company (a) due to the disability of the Executive, (b) for cause or
(c) without cause; or (ii) by the Executive (a) upon a material breach by the Company of the Employment Agreement (Company Breach), (b) within twelve months of a change in control or (c) without good
reason (defined as termination for any reason other than Company Breach). If any Executive terminates his or her employment due to Company Breach or if any Executive is terminated by the Company without cause, he or she will be
entitled to receive his or her accrued but unpaid base salary and annual incentive payments through the date of termination plus an amount equal to the product of (i)(a) his or her base salary plus (b) the amount of his or her annual incentive
payments for the preceding year divided by 365 and (ii) multiplied by (a) with respect to the employees other than Mr. Horng, the lesser of (x) 720 or (y) the greater of the number of days remaining in the term of his or her employment or 365 or (b)
with respect to Mr. Horng only, the number of days from the date the Board of Directors notifies Mr. Horng that it has determined to discontinue the automatic daily extension of his Employment Agreement to the end of the term, which period shall
equal five years. In the event of termination of employment after a change in control, each of the Executives will be entitled to receive an amount equal to $100 less than three times his or her annualized includable compensation
for the base period (as defined in Section 280G of the Code) or such lesser amount that is the maximum payment permitted by the Code that does not constitute an excess parachute payment.



Under the Employment Agreements, a termination will be deemed to be
without cause if it is for any reason other than due to the disability of the Executive or for cause. Under the Employment Agreements, a termination will generally be considered to be for cause if it is due to the
Executives (i) continued unsatisfactory job performance after written warning or, in the cases of Messrs. Horng and Kaiser, gross incompetence or, in the case of Mr. Parker, willful failure to perform his duties, (ii) misconduct or, in the
cases of Messrs. Horng and Kaiser, willful misconduct, that causes or is likely to cause material economic harm to, or discredit to the reputation of, the Company or its affiliated entities, (iii) failure to follow the directions of senior
management or the Boards of Directors of the Company or the Executives employer, (iv) conviction of or a plea of nolo contendre to a felony involving moral turpitude or the entry of an order by any federal or state regulatory agency
prohibiting the Executive from participating in the affairs of the Company, or (v) any other material breach of his Employment Agreement that is not cured within thirty days after receipt of written notice from the Company specifying the breach.



For purposes of the Employment Agreements a change in
control will be deemed to occur upon the occurrence of any of the following: (1) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Common Stock would
be converted into cash, securities or other property, other than a merger of the Company in which the holders of Common Stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation
immediately after the merger; (2) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company; (3) any approval by the stockholders of the Company of
any plan or proposal for the liquidation or dissolution of the Company; (4) the cessation of control (by virtue of their not constituting a majority of directors) of the Board of Directors by the



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Continuing Directors (as defined in the Employment Agreements); or (5) subject to applicable law, in a Chapter 11 bankruptcy proceeding, the appointment
of a trustee or the conversion of a case involving the Company to a case under Chapter 7 of the United States Bankruptcy Code. Ms. Rodriguezs Employment Agreement was amended effective as of September 10, 2002 so that neither (i) the
acquisition of beneficial ownership of 15% of the voting power of the Companys outstanding voting securities by any person or group who beneficially owned less than 10% of such voting power on the date of the Employment Agreement, or the
acquisition of beneficial ownership of an additional 5% of the voting power of the Companys outstanding voting securities by any person or group who beneficially owned at least 10% of such voting power on the date of the Employment Agreement
nor (ii) the execution by the Company and a stockholder of a contract that by its terms grants such stockholder or such stockholders affiliate the right to veto or block decisions or actions of the Board of Directors, would constitute a change
in control for purposes of the Employment Agreement. This amendment is consistent with the terms of the existing Employment Agreements of Mr. Parker and Mr. Kaiser, and with the recent Employment Agreement of Mr. Horng.



The Employment Agreements also provide that the Executives will be
indemnified by the Company to the extent provided in the Companys Certificate of Incorporation or bylaws as of the date of the Employment Agreement and to the fullest extent permitted by changes to Delaware law. The Employment Agreements of
all Executives include non-competition and confidentiality provisions.



Compensation Committee Interlocks and Insider Participation



For fiscal 2002, the Compensation Committee of the Board of Directors consisted of J.L. Jackson (Chairman), James L. Johnson, and Jere W. Thompson. No member of the Compensation Committee is or has been an officer or
employee of the Company or any of its subsidiaries. Mr. Johnson, who also serves as the Companys non-executive Chairman of the Board of Directors, received a total of $305,000 in compensation for holding such position in fiscal year 2002. See
Executive CompensationCompensation of Directors. Mr. Johnson was the only member of the Compensation Committee that had any relationship requiring disclosure pursuant to Item 404 of Regulation S-K promulgated by the SEC. No
executive officer of the Company served on the compensation committee, or as a director, of another entity, one of whose executive officers served on the Companys Compensation Committee or on its Board of Directors in fiscal 2002.



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Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters



The following table sets forth information with respect to the number of shares of Common Stock beneficially owned as of February 28, 2003, by (i) each
person known by the Company to beneficially own more than five percent (5%) of the outstanding shares of Common Stock; (ii) the Named Executive Officers; (iii) each director and nominee for director of the Company; and (iv) all directors and
executive officers of the Company as a group. Unless otherwise noted, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock beneficially owned by them.



|Name of Beneficial Owner or Group                          |  | Amount and Nature of Beneficial Ownership |             |  | Percent of Class(1)
|---------------------------------------------------------- |  | ----------------------------------------- | ----------- |  | -------------------
|Alan H. Goldfield(2)                                       |  | 4,220,222                                 | (3)         |  | 20.5               
|Michael A. Roth and Brian J. Stark(4)                      |  | 5,594,959                                 | (5)         |  | 27.5               
|The Northwestern Mutual Life Company(6) Terry S. Parker(8) |  | 1,128,400 107,250                         | (7) (9)(10) |  | 5.5 *              
|A.S. Horng(8)                                              |  | 637,712                                   | (11)        |  | 3.1                
|Robert A. Kaiser(8)(12)                                    |  | 20,080                                    | (13)        |  | *                  
|Lawrence King(8)                                           |  | 64,720                                    | (14)        |  | *                  
|Elaine Flud Rodriguez(8)                                   |  | 43,775                                    | (15)        |  | *                  
|James L. Johnson(8)                                        |  | 12,000                                    | (9)(16)     |  | *                  
|Dale V. Kesler(8)                                          |  | 4,700                                     | (9)(17)(18) |  | *                  
|John L. (J.L.) Jackson(8)                                |  | 6,500                                     | (9)(17)     |  | *                  
|Jere W. Thompson(8)                                        |  | 4,990                                     | (9)(17)     |  | *                  
|Current Directors and Executive Officers as a Group        |  | 911,852                                   | (19)        |  | 4.4                

---

|* |  | Less than 1%.
|- |  | -------------

|(1) |  | Based on 20,354,365 shares outstanding as of February 28, 2003. The Company converted its 5% Senior Convertible Notes due November 2002 (the Senior Convertible Notes)
into 7,730,600 shares of Common Stock on November 30, 2002.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | The address for Mr. Goldfield is 1851 Turbeville Road, Denton, Texas 76210. Mr. Goldfield retired from his services as a director and officer of the Company in July 2001.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Includes 3,541,222 shares held in various entities controlled by Mr. Goldfield and his wife. Also includes 474,000 shares that are subject to a revocable (upon 90 days written
notice) proxy granted to Mr. Goldfield by Mr. A.S. Horng, which proxy gives Mr. Goldfield the right to vote such shares. Also includes 205,000 shares subject to options granted under the 1993 Plan, which options are exercisable within
60 days.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | The address for Messrs. Roth and Stark is 1500 West Market Street, Suite 200, Mequon, Wisconsin 53092.
|--- |  | ------------------------------------------------------------------------------------------------------

|(5) |  | Based on a Schedule 13D filed with the SEC on March 12, 2002 by Michael A. Roth and Brian J. Stark, filing as joint filers pursuant to Rule 13D-1(k). Messrs. Roth
and Stark reported sole dispositive and sole voting power with respect to 5,594,959 shares as a result of electing to exchange their 5% Convertible Subordinated Notes due October 2002 (the Subordinated Notes) for cash and Senior
Convertible Notes pursuant to the Companys exchange offer. As of February 21, 2002, Stark Investments Limited Partnership (Stark) held 82,459 shares of Common Stock, and a face amount of $15,715,000 in Senior Convertible Notes,
which were convertible into 3,143,000 shares (a current total of 15.8%) of Common Stock. As of February 21, 2002, Shepherd Trading (Shepherd) held 60,300 shares of Common Stock, and a face amount of $11,546,000 in Senior Convertible
Notes, which were convertible into 2,309,200 shares (a current total of 11.6%) of Common Stock. Therefore, as of February 21, 2002, Messrs. Roth and Stark, in their capacity as the founding members of Stark Asset Management, L.L.C., a
Wisconsin limited liability company, which serves as (a) the managing general partner of Stark, and (b) the investment manager of Shepherd, reported beneficial ownership of an aggregate of 5,594,959 shares, or approximately 27.5% of the Common Stock
outstanding on February 28, 2003.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(6) |  | The address for The Northwestern Mutual Life Insurance Company (Northwestern Mutual) is 720 East Wisconsin Avenue, Milwaukee, Wisconsin 53202.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Based on a Schedule 13G filed with the SEC on February 12, 2003 by Northwestern Mutual, Northwestern Mutual reported shared voting power and shared dispositive power with regard to
the 1,128,400 shares as follows: 1,048,400 shares are owned directly by Northwestern Mutual. Northwestern Mutual may be deemed to be the indirect beneficial owner of 80,000 shares owned by The Northwestern Mutual Life Insurance Company Group Annuity
Separate Account (GASA). Northwestern Investment Management Company, LLC, a wholly-owned company of Northwestern Mutual, serves as an investment advisor to Northwestern Mutual and GASA and shares voting and investment power with respect
to all of the aforementioned holdings.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | The address for such individual is 1730 Briercroft Court, Carrollton, Texas 75006.
|--- |  | ----------------------------------------------------------------------------------

|(9) |  | Includes 1,500 shares subject to options granted under the Directors Plan, which options are exercisable within 60 days.
|--- |  | -------------------------------------------------------------------------------------------------------------------------

|(10) |  | Includes 105,750 shares subject to options granted under the 1993 Plan, which options are exercisable within 60 days.
|---- |  | ---------------------------------------------------------------------------------------------------------------------

|(11) |  | Includes 474,000 shares that are subject to a revocable (upon 90 days written notice) proxy to vote such shares held by Alan H. Goldfield. Also includes 163,712 shares subject to
options granted under the 1993 Plan, which options are exercisable within 60 days.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) |  | Mr. Kaiser was appointed Senior Vice President and Chief Financial Officer of the Company on December 12, 2001.
|---- |  | ---------------------------------------------------------------------------------------------------------------

|(13) |  | Includes 20,000 shares subject to options granted under the 1993 Plan, which options are exercisable within 60 days.
|---- |  | --------------------------------------------------------------------------------------------------------------------

|(14) |  | Consists of 64,720 shares subject to options granted under the 1993 Plan, which options are exercisable within 60 days.
|---- |  | -----------------------------------------------------------------------------------------------------------------------

|(15) |  | Includes 42,655 shares subject to options granted under the 1993 Plan, which options are exercisable within 60 days.
|---- |  | --------------------------------------------------------------------------------------------------------------------

|(16) |  | Includes 6,000 shares subject to options granted under the 1993 Plan, which options are exercisable within 60 days.
|---- |  | -------------------------------------------------------------------------------------------------------------------

|(17) |  | Includes 3,000 shares subject to options granted under the 1993 Plan, which options are exercisable within 60 days.
|---- |  | -------------------------------------------------------------------------------------------------------------------

|(18) |  | Includes 200 shares held jointly with Mr. Keslers wife.
|---- |  | --------------------------------------------------------

|(19) |  | Includes shares subject to options held by directors and Named Executive Officers more fully described in footnotes 9 through 18 above, and 10,125 shares subject to options granted
under the 1993 Plan to executive officers not named in the table, which options are exercisable within 60 days.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Equity Compensation Plan Information



The following table sets forth information about the Companys equity compensation plans as of November 30, 2002:



|Plan Category                                              |  | Number of Securities to beIssued Upon Exercise ofOutstanding Options (1) |     |  | Weighted AverageExercise Price ofOutstanding Options (1) |       | Number of Securities RemainingAvailable for Future Issuance(Excluding Securities Reflected inFirst Column) |        
|---------------------------------------------------------- |  | ------------------------------------------------------------------------ | --- |  | -------------------------------------------------------- | ----- | ---------------------------------------------------------------------------------------------------------- | -------
|Equity compensation plans approved by security holders     |  | 1,477,658                                                                | (2) |  | $                                                        | 23.83 |                                                                                                            | 488,709
|                                                           |  |                                                                          |    
|Equity compensation plans not approved by security holders |  | 50,000                                                                   | (4) |  | $                                                        | 10.25 |                                                                                                            | 0      
|                                                           |  |                                                                          |    
|Total                                                      |  | 1,527,658                                                                |     |  |                                                          |       |                                                                                                            | 488,709



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|(1) |  | The Company does not have outstanding any warrants or rights to purchase its common stock, with the exception of its stockholder rights plan, which is offered to all stockholders on
a pro rata basis.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Consists of 1,470,158 shares of Common Stock issued pursuant to the 1993 Plan and its predecessors, and 7,500 shares of Common Stock issued pursuant to the Directors Plan.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Consists of 470,709 shares of Common Stock which may be issued pursuant to the 1993 Plan and its predecessors, and 18,000 shares of Common Stock which may be issued pursuant to the
Directors Plan.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | On July 5, 2001, the Company granted options to purchase 50,000 shares of Common Stock at an exercise price of $10.25 per share, adjusted to reflect the Reverse Split, to Terry S.
Parker (the Parker Options). The Parker Options were granted in connection with Mr. Parkers appointment as Chief Executive Officer of the Company. 25% of the Parker Options vested immediately upon grant, and the remainder vest in
25% increments thereafter beginning on the first anniversary of the grant date. The Parker Options expire on July 5, 2011, unless a termination of service occurs. In addition, the Parker Options become immediately vested upon the occurrence of
certain events, including termination from the Company without cause, Company Breach, or as a result of a Change in Control, as such terms are defined in Mr. Parkers employment agreement.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 13.    Certain Relationships and Related Transactions



If the CellStar Asia Transaction occurs, A.S. Horng, the Chairman, CEO and General Manager of CellStar Asia, and an executive officer of the Company, will
own 85% of a newly-formed company (ManCo) that will own 20% of the outstanding shares in New CellStar Asia. The remaining 15% of ManCo will be owned by Lawrence King, President and Chief Operating Officer of the Asia-Pacific Region and
an executive officer of the Company, Conor Yang, Chief Financial Officer of the Asia-Pacific Region, and Peng-Hong See, Vice President of CellStar Asia, who will each own 5% of ManCo. Neither Mr. Yang nor Mr. See is considered by the Company to
be an executive officer. The CellStar Asia management team determined the stock ownership of ManCo.



Assuming the market value of New CellStar Asia at the time of the IPO is $250.0 million, Mr. Horngs ownership interest in ManCo would be worth
approximately $42.5 million, and Mr. Kings ownership interest in ManCo would be worth approximately $2.5 million. In addition, pursuant to his employment agreement, Mr. Horng will receive a cash bonus of $1.5 million upon the
successful completion of the IPO. In the event the market capitalization of New CellStar Asia at the time of the IPO, as determined pursuant to the terms of the CellStar Asia Transaction, is greater than or equal to $250.0 million, such cash
bonus will be increased to $2.5 million. Mr. Horng and Mr. King are the only directors or executive officers of the Company who have a direct financial interest in the CellStar Asia Transaction. Each of the members of the CellStar Asia management
team will enter into employment agreements with New CellStar Asia at the time of the IPO that will contain customary non-competition, non-solicitation and confidentiality covenants that management of New CellStar Asia believes are enforceable under
Hong Kong law.



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In recognition of the key roles the Companys directors, certain executive officers and certain key
employees have played in the CellStar Asia Transaction, such individuals were granted options to purchase shares of Common Stock (the Transaction Options) containing certain incentives for the completion of the CellStar Asia Transaction.
The Transaction Options were granted on January 22, 2003 at an exercise price of $5.45 per share, which was the closing sale price of the Common Stock on the grant date, and will become exercisable with respect to 25% of the shares covered by the
Transaction Options on each anniversary of the grant date; provided, however, that 100% of the shares shall become exercisable immediately upon the earlier to occur of (i) the closing of the CellStar Asia Transaction, if the CellStar Asia
Transaction yields to the Company proceeds of US$50 million or more in cash or cash equivalents, (ii) if the grantee is a non-employee director, such person is not nominated and re-elected to the Board of Directors, or (iii) if the grantee is an
employee, such persons employment is terminated without cause. The Transaction Options will terminate if not exercised within 10 years from the grant date. The grants of the Transaction Options were as follows:



|Name and Principal Position      |  | Number ofTransactionOptionsGranted |    
|-------------------------------- |  | ---------------------------------- | ---
|Terry S. Parker                  |  | 50,000                             |    
|Chief Executive Officer          |  |                                    |    
|                                 | 
|Robert A. Kaiser                 |  | 50,000                             |    
|Senior Vice President and        |  |                                    |    
|Chief Financial Officer          |  |                                    |    
|                                 | 
|Elaine Flud Rodriguez            |  | 50,000                             |    
|Senior Vice President, Secretary |  |                                    |    
|and General Counsel              |  |                                    |    
|                                 | 
|Raymond L. Durham                |  | 20,000                             |    
|Vice President and               |  |                                    |    
|Corporate Controller             |  |                                    |    
|                                 | 
|James L Johnson                  |  | 25,000                             |    
|Chairman of the Board            |  |                                    |    
|                                 | 
|J.L. Jackson                     |  | 25,000                             |    
|Director                         |  |                                    |    
|                                 | 
|Jere Thompson                    |  | 25,000                             |    
|Director                         |  |                                    |    
|                                 | 
|Dale Kesler                      |  | 25,000                             |    
|Director                         |  |                                    |    
|                                 | 
|TOTAL                            |  | 312,500                            | (1)

---

|(1) |  | Includes 42,500 Transaction Options granted to other key employees, who are not executive officers, not named in the table.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------



In July, 2001, the Company entered into a Consulting Agreement with Alan H.
Goldfield, the Companys former Chief Executive Officer, under which the Company engaged Mr. Goldfield to perform such services for the Company as are mutually agreeable to Mr. Goldfield and the Chief Executive Officer of the Company. Under the
Consulting Agreement, Mr. Goldfield has the honorary title of Chairman Emeritus of the Company but is not a director, officer or employee of the Company and has no authority to act on behalf of the Company. The Company agreed to pay Mr.
Goldfield 5% of net earnings from specified new lines of business conducted by the Company in PRC, Hong Kong, Korea, Japan, Taiwan, Singapore, Malaysia and the Philippines (the Earnout) through November 30, 2006 if not earlier
terminated, but not to exceed $15,000,000. New business lines covered by the Earnout include the sale of prepaid calling cards, the sale of specified paging and long distance services, the sale of Tai Chi box services and products and
the sale of personal digital assistants and digital cameras. For



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fiscal year 2002, the Company paid Mr. Goldfield $241,077 in connection with services provided pursuant to his Separation Agreement and Release effective
July 5, 2001. No payments have been made pursuant to the Consulting Agreement. The Consulting Agreement terminates on the earlier of November 30, 2006, a termination of Mr. Goldfield for cause by the Company, the death of Mr. Goldfield, written
notice of termination by either party as a result of the disability of Mr. Goldfield or voluntary termination by Mr. Goldfield upon not less than 30 days prior written notice. Under the Consulting Agreement, a termination will generally be
considered for cause if it is due to Mr. Goldfields (i) willful gross misconduct, (ii) conviction of a felony, (iii) breach of his covenants of confidentiality and non-competition set forth in the Consulting Agreement or (iv)
violation of the Foreign Corrupt Practices Act. In the event of termination due to the death or disability of Mr. Goldfield, the Company must still pay the Earnout through November 30, 2006.



The Consulting Agreement also includes non-competition and confidentiality
provisions. The non-competition provision is effective until the later of July 5, 2003 or the date the Consulting Agreement is terminated.



Item 14.    Controls and Procedures



The Companys Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Companys disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and
15d-14(c)) as of a date within 90 days of the initial filing date of the Companys annual report on Form 10-K (the Evaluation Date), have concluded that as of the Evaluation Date, the Companys disclosure controls and
procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules
and forms of the Securities and Exchange Commission.



In the
second quarter of 2002, the Company replaced its internal auditor, Arthur Andersen, LLP, with Deloitte & Touche, LLP due to concerns about the financial stability of Arthur Andersen, LLP.



In response to the Sarbanes-Oxley Act of 2002, the Company established a
disclosure committee composed of representatives of various departments within the Company. The disclosure committee is charged with, among other things, ensuring that the established systems of disclosure controls and procedures and internal
controls are complied with appropriately, and that such controls and procedures are adequate to meet required reporting obligations, and with reviewing the Companys periodic reports and other public disclosures. The disclosure committee
reports to the chief executive officer and chief financial officer, who ultimately bear express responsibility for designing, establishing, maintaining, reviewing and evaluating the Companys disclosure controls and procedures.



There were no significant changes in the Companys internal controls or
in other factors that could significantly affect these controls subsequent to the Evaluation Date, nor any significant deficiencies or material weaknesses in such internal controls requiring corrective actions. As a result, no corrective actions
were taken.



However, the Company is currently in negotiations
with the Asia Pacific Region management team regarding their participation in the possible initial public offering of the Greater China Operations. There is no indication that such negotiations had any effect on the Companys internal controls
during fiscal 2002 or that such negotiations will have any impact in the future.



Although there are no material weaknesses in the Companys internal controls on a consolidated basis, the Companys auditors have identified a material weakness in the Companys Mexico operations that
relates to the reconciliation of certain manual accounting systems in Mexico. The Companys accounting for activations in Mexico involves numerous manual inputs and requires primarily manual reconciliations with both the wireless service
provider and the Companys agents. This manual process increases the possibility of duplicate activations being recorded or activations being omitted completely. The Company has begun implementation of a new system to automate the process in
order to reduce and/or eliminate duplicate activations and omissions and also has begun to reduce the number of agents. In addition, the Companys manual reconciliation process with one of



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its major carrier customers involves numerous transactions and disputed items. The Company and the carrier customer manually reconcile these accounts. The
Company and the carrier customer are communicating more frequently to reconcile the accounts and resolve disputed items on a more timely basis. Lastly, the taxing authorities in Mexico changed the method for computing the value added tax
(VAT) during 2002. The Company is in the process of obtaining all required documentation, as well as revising the internal tax computation to comply with the revised VAT law. The Company expects these improvements in internal controls to
be completed during 2003. Also, the Company made significant management changes during fiscal 2002 in its Mexico operations.



The Companys management, including the Chief Executive Officer and the Chief Financial Officer, does not expect that disclosure controls and
procedures or internal controls can prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable and not absolute assurance that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. While the Companys management believes it has taken all reasonable measures to
ensure that fraud can be detected and prevented, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instance of fraud, if any, have been detected. However,
the Companys current disclosure controls and procedures provide the certifying officers reasonable assurance that such disclosure controls and procedures are adequate to achieve their objectives.



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PART IV.



Item 15.    Exhibits, Financial Statement Schedules and Reports on Form 8-K



(a)    The following are filed as part of this Annual Report on Form 10-K:



(1)    Consolidated Financial Statements



See Index to Consolidated Financial
Statements on page F-1 of this Form 10-K.



(2)    Financial Statement Schedules



See Index to Consolidated Financial Statements on page F-1 of this Form 10-K.



(3)    Exhibits



|Number |  | Description                                                                                                                                                                                                                                                                              
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       | 
|3.1    |  | Amended and Restated Certificate of Incorporation of CellStar Corporation (the Certificate of Incorporation). (1)                                                                                                                                                                      
|       | 
|3.2    |  | Certificate of Amendment to Certificate of Incorporation. (9)                                                                                                                                                                                                                            
|       | 
|3.3    |  | Amended and Restated Bylaws of CellStar Corporation. (13)                                                                                                                                                                                                                                
|       | 
|3.4    |  | Certificate of Amendment to the Amended and Restated Certificate of Incorporation dated as of February 20, 2002 of CellStar Corporation. (the Second Certificate of
Amendment). (20)                                                                                                   
|       | 
|4.1    |  | The Certificate of Incorporation, Certificate of Amendment to Certificate of Incorporation, Amended and Restated Bylaws of CellStar Corporation and Second Certificate of Amendment
filed as Exhibits 3.1, 3.2, 3.3 and 3.4 are incorporated into this item by reference. (1)(9)(13)(20).
|       | 
|4.2    |  | Specimen Common Stock Certificate of CellStar Corporation. (16)                                                                                                                                                                                                                          
|       | 
|4.3    |  | Rights Agreement, dated as of December 30, 1996, by and between CellStar Corporation and Chase Mellon Shareholder Services, L.L.C., as Rights Agent (Rights Agreement).
(3)                                                                                                            
|       | 
|4.4    |  | First Amendment to Rights Agreement, dated as of June 18, 1997. (4)                                                                                                                                                                                                                      
|       | 
|4.5    |  | Second Amendment to Rights Agreement, dated as of February 11, 2002, by and between CellStar Corporation and Mellon Investor Services LLC, formerly known as ChaseMellon
Shareholder Services, L.L.C., as Rights Agent. (20)                                                             
|       | 
|4.6    |  | Form of Certificate of Designation, Preferences and Rights of Series A Preferred Stock of CellStar Corporation (Certificate of Designation). (2) (3)                                                                                                                                   
|       | 
|4.7    |  | Form of Rights Certificate. (19)                                                                                                                                                                                                                                                         
|       | 
|4.8    |  | Certificate of Correction of Certificate of Designation. (3) (4)                                                                                                                                                                                                                         
|       | 
|4.9    |  | Indenture, dated as of October 14, 1997, by and between CellStar Corporation and The Bank of New York, as Trustee. (7)                                                                                                                                                                   
|       | 
|4.10   |  | 12% Senior Subordinated Notes Indenture, dated as of February 20, 2002, by and between CellStar Corporation and The Bank of New York, as Trustee. (15)                                                                                                                                   
|       | 
|4.11   |  | 5% Senior Subordinated Convertible Notes Indenture, dated as of February 20, 2002, by and between CellStar Corporation and The Bank of New York, as Trustee (5%
Indenture). (15)                                                                                                       
|       | 
|4.12   |  | First Supplemental Indenture, dated as of November 5, 2002, to 5% Indenture, by and between CellStar Corporation and The Bank of New York, as Trustee. (20)                                                                                                                              
|       | 
|4.13   |  | First Amended and Restated Rights Agreement, dated as of February 11, 2002, by and between CellStar Corporation and Mellon Investor Services LLC, formerly known as ChaseMellon
Shareholder Services, L.L.C., as Rights Agent. (19)                                                      



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##### Table of Contents

|      | 
|----- | 
|10.1  | 
|      | 
|10.2  | 
|      | 
|10.3  | 
|      | 
|10.4  | 
|      | 
|10.5  | 
|      | 
|10.6  | 
|      | 
|10.7  | 
|      | 
|10.8  | 
|      | 
|10.9  | 
|      | 
|10.10 | 
|      | 
|10.11 | 
|      | 
|10.12 | 
|      | 
|10.13 | 
|      | 
|10.14 | 
|      | 
|10.15 | 
|      | 
|10.16 | 
|      | 
|10.17 | 
|      | 
|10.18 | 
|      | 
|10.19 | 



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##### Table of Contents

|      | 
|----- | 
|10.20 | 
|      | 
|10.21 | 
|      | 
|10.22 | 
|      | 
|10.23 | 
|      | 
|10.24 | 
|      | 
|10.25 | 
|      | 
|10.26 | 
|      | 
|10.27 | 
|      | 
|10.28 | 
|      | 
|10.29 | 
|      | 
|10.30 | 
|      | 
|10.31 | 
|      | 
|10.32 | 
|      | 
|10.33 | 
|      | 
|10.34 | 
|      | 
|10.35 | 
|      | 
|10.36 | 



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##### Table of Contents

|      | 
|----- | 
|10.37 | 
|      | 
|10.38 | 
|      | 
|10.39 | 
|      | 
|10.40 | 
|      | 
|10.41 | 
|      | 
|10.42 | 
|      | 
|21.1  | 
|      | 
|23.1  | 
|      | 
|99.1  | 
|      | 
|99.2  | 
|      | 
|99.3  | 

---

|(1) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter ended August 31, 1995, and incorporated herein by reference.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the fiscal year ended November 30, 1996, and incorporated herein by reference.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Previously filed as an exhibit to the Companys Registration Statement on Form 8-A (File No. 000-22972), filed January 3, 1997, and incorporated herein by reference.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Previously filed as an exhibit to the Companys Registration Statement on Form 8-A/A, Amendment No. 1 (File No. 000-22972), filed June 30, 1997, and incorporated herein by
reference.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Previously filed as an exhibit to the Companys Registration Statement No. 33-70262 on Form S-1 and incorporated herein by reference.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter ended February 28, 1995, and incorporated herein by reference.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Previously filed as an exhibit to the Companys Current Report on Form 8-K dated October 8, 1997, filed October 24, 1997, and incorporated herein by reference.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the fiscal year ended November 30, 1997, and incorporated herein by reference.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter ended May 31, 1998, and incorporated herein by reference.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the fiscal year ended November 30, 1999 and incorporated herein by reference.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the fiscal year ended November 30, 2000, filed on February 28, 2001, and incorporated herein by
reference.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter ended February 28, 2001, and incorporated herein by reference.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



65



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|(13) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter ended May 31, 2001, and incorporated herein by reference.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|(14) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q/A for the quarter ended August 31, 2001, and incorporated herein by reference.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(15) |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the fiscal year ended November 30, 2001, filed on February 28, 2002, and incorporated herein by
reference.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(16) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter ended February 28, 2002, and incorporated herein by reference.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(17) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter ended May 31, 2002, and incorporated herein by reference.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|(18) |  | Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter ended August 31, 2002, and incorporated herein by reference.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(19) |  | Previously filed as an exhibit to the Companys Registration Statement on Form 8-A/A, Amendment No. 2 (File No. 000-22972), filed December 5, 2002, and incorporated herein
by reference.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(20) |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the fiscal year ended November 30, 2002, filed with the SEC on February 28, 2003, and
incorporated herein by reference.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(21) |  | Filed herewith.
|---- |  | ---------------

|(22) |  | The exhibit is a management contract or compensatory plan or agreement.
|---- |  | -----------------------------------------------------------------------

|(23) |  | Certain provisions of this exhibit are subject to a request for confidential treatment filed with the Securities and Exchange Commission.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



CELLSTAR CORPORATIONBy:

/s/    Elaine Flud RodriguezElaine Flud Rodriguez Senior Vice
President, General Counsel and SecretaryDate: July 7, 2003




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##### Table of Contents

CERTIFICATION OF CHIEF EXECUTIVE OFFICER



I, Terry
S. Parker, certify that:



1.    I have
reviewed this annual report on Form 10-K of CellStar Corporation;



2.    Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this annual report;



3.    Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;



4.    The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



a)    designed such disclosure controls and procedures to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;



b)    evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual report (the Evaluation Date); and



c)    presented in this annual report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;



5.    The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or
persons performing the equivalent functions):



a)    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified
for the registrants auditors any material weaknesses in internal controls; and



b)    any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrants internal controls; and



6.    The registrants other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



/s/    Terry S. ParkerTerry S. Parker Chief Executive Officer




Date:    July 7, 2003



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##### Table of Contents

CERTIFICATION OF CHIEF FINANCIAL OFFICER



I, Robert
A. Kaiser, certify that:



1.    I have
reviewed this annual report on Form 10-K of CellStar Corporation;



2.    Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this annual report;



3.    Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;



4.    The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



a)    designed such disclosure controls and procedures to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;



b)    evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual report (the Evaluation Date); and



c)    presented in this annual report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;



5.    The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or
persons performing the equivalent functions):



a)    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified
for the registrants auditors any material weaknesses in internal controls; and



b)    any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrants internal controls; and



6.    The registrants other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



/s/    Robert A. KaiserRobert A. Kaiser Chief Financial Officer




Date:    July 7, 2003



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##### Table of Contents

CELLSTAR CORPORATION AND SUBSIDIARIES



Index to Consolidated Financial Statements



|Independent Auditors Report                                                                                                         |  | F-2
|------------------------------------------------------------------------------------------------------------------------------------ |  | ---
|                                                                                                                                     | 
|Consolidated Balance Sheets as of November 30, 2002 and 2001                                                                         |  | F-3
|                                                                                                                                     | 
|Consolidated Statements of Operations for the years ended November 30, 2002, 2001 and 2000                                           |  | F-4
|                                                                                                                                     | 
|Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss) for the years ended November 30, 2002, 2001 and 2000 |  | F-5
|                                                                                                                                     | 
|Consolidated Statements of Cash Flows for the years ended November 30, 2002, 2001 and 2000                                           |  | F-6
|                                                                                                                                     | 
|Notes to Consolidated Financial Statements                                                                                           |  | F-7
|                                                                                                                                     | 
|Schedule IIValuation and Qualifying Accounts for the years ended November 30, 2002, 2001 and 2000                                   |  | S-1



F-1



---

##### Table of Contents

INDEPENDENT AUDITORS REPORT



The Board of
Directors and Stockholders

CellStar Corporation:



We have audited the consolidated financial statements of CellStar Corporation and subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.



In our opinion,
the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CellStar Corporation and subsidiaries as of November 30, 2002 and 2001, and the results of their operations and their cash
flows for each of the years in the three-year period ended November 30, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.



KPMG LLP



Dallas, Texas

January 10, 2003

except as to note 23 which

is as of January
31, 2003

and the fourth paragraph

of note 6 which is as of

February 28, 2003



F-2



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##### Table of Contents

CELLSTAR CORPORATION AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

November 30, 2002 and 2001

(In thousands, except share data)



|                                                                                                                                   |  | 2002 |         |   | 2001 |        
|---------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | -------
|ASSETS                                                                                                                             |  |      |         |   |      |        
|                                                                                                                                   |  |     
|Current assets:                                                                                                                    |  |      |         |   |      |        
|Cash and cash equivalents                                                                                                          |  | $    | 29,270  |   |      | 47,474 
|Restricted cash                                                                                                                    |  |      | 23,778  |   |      | 41,820 
|Accounts receivable (less allowance for doubtful accounts of $57,630 and$57,359, respectively)                                     |  |      | 175,102 |   |      | 216,002
|Inventories                                                                                                                        |  |      | 163,226 |   |      | 218,927
|Deferred income tax assets                                                                                                         |  |      | 32,786  |   |      | 35,915 
|Prepaid expenses                                                                                                                   |  |      | 21,942  |   |      | 18,614 
|                                                                                                                                   |  |      |         |   |      |        
|Total current assets                                                                                                               |  |      | 446,104 |   |      | 578,752
|Property and equipment, net                                                                                                        |  |      | 18,701  |   |      | 19,340 
|Goodwill (less accumulated amortization of $8,953 and $7,423 respectively)                                                         |  |      | 20,939  |   |      | 22,060 
|Deferred income tax assets                                                                                                         |  |      | 20,231  |   |      | 18,102 
|Other assets                                                                                                                       |  |      | 9,616   |   |      | 7,816  
|                                                                                                                                   |  |      |         |   |      |        
|                                                                                                                                   |  | $    | 515,591 |   |      | 646,070
|                                                                                                                                   |  |      |         |   |      |        
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                               |  |      |         |   |      |        
|                                                                                                                                   |  |     
|Current liabilities:                                                                                                               |  |      |         |   |      |        
|Notes payable                                                                                                                      |  | $    | 53,347  |   |      | 52,644 
|5% Convertible subordinated notes                                                                                                  |  |      |        |   |      | 150,000
|Account payable                                                                                                                    |  |      | 166,141 |   |      | 228,958
|Accrued expenses                                                                                                                   |  |      | 31,934  |   |      | 21,804 
|Income taxes payable                                                                                                               |  |      | 7,840   |   |      | 4,767  
|Deferred income tax liabilities                                                                                                    |  |      | 44,988  |   |      | 3,687  
|                                                                                                                                   |  |      |         |   |      |        
|Total current liabilities                                                                                                          |  |      | 304,250 |   |      | 461,860
|12% Senior subordinated notes                                                                                                      |  |      | 12,374  |   |      |       
|Other long-term liabilities                                                                                                        |  |      | 4,636   |   |      |       
|                                                                                                                                   |  |      |         |   |      |        
|Total liabilities                                                                                                                  |  |      | 321,260 |   |      | 461,860
|                                                                                                                                   |  |      |         |   |      |        
|Stockholders equity:                                                                                                              |  |      |         |   |      |        
|Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued                                                          |  |      |        |   |      |       
|Common stock, $.01 par value, 200,000,000 shares authorized; 20,354,365 and 12,028,425 shares issued and outstanding,
respectively |  |      | 204     |   |      | 120    
|Additional paid-in capital                                                                                                         |  |      | 123,392 |   |      | 82,443 
|Accumulated other comprehensive lossforeign currency translation adjustments                                                      |  |      | (14,435 | ) |      | (13,447
|Retained earnings                                                                                                                  |  |      | 85,170  |   |      | 115,094
|                                                                                                                                   |  |      |         |   |      |        
|Total stockholders equity                                                                                                         |  |      | 194,331 |   |      | 184,210
|                                                                                                                                   |  |      |         |   |      |        
|                                                                                                                                   |  | $    | 515,591 |   |      | 646,070
|                                                                                                                                   |  |      |         |   |      |        



See accompanying notes
to consolidated financial statements.



F-3



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##### Table of Contents

CELLSTAR CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended November 30, 2002, 2001, and 2000

(In thousands, except per share data)



|                                                                      |  | 2002 |           |   | 2001 |           |   | 2000 |          
|--------------------------------------------------------------------- |  | ---- | --------- | - | ---- | --------- | - | ---- | ---------
|Revenues                                                              |  | $    | 2,196,614 |   |      | 2,433,803 |   |      | 2,475,682
|Cost of sales                                                         |  |      | 2,065,806 |   |      | 2,297,977 |   |      | 2,364,197
|                                                                      |  |      |           |   |      |           |   |      |          
|Gross profit                                                          |  |      | 130,808   |   |      | 135,826   |   |      | 111,485  
|Selling, general and administrative expenses                          |  |      | 112,652   |   |      | 113,785   |   |      | 169,232  
|Impairment of assets                                                  |  |      | 3,655     |   |      |          |   |      | 12,339   
|Severance and exit charges                                            |  |      | 2,566     |   |      |          |   |      |         
|Separation agreement                                                  |  |      |          |   |      | 5,680     |   |      |         
|Restructuring charge (credit)                                         |  |      |          |   |      | 750       |   |      | (157     
|                                                                      |  |      |           |   |      |           |   |      |          
|Operating income (loss)                                               |  |      | 11,935    |   |      | 15,611    |   |      | (69,929  
|Other income (expense):                                               |  |      |           |   |      |           |   |      |          
|Interest expense                                                      |  |      | (7,564    | ) |      | (15,383   | ) |      | (19,113  
|Equity in loss of affiliated companies, net                           |  |      |          |   |      | (858      | ) |      | (1,805   
|Gain on sale of assets                                                |  |      |          |   |      | 933       |   |      | 6,200    
|Impairment of investment                                              |  |      | (125      | ) |      | (2,215    | ) |      |         
|Other, net                                                            |  |      | 1,947     |   |      | 5,288     |   |      | 932      
|                                                                      |  |      |           |   |      |           |   |      |          
|Total other income (expense)                                          |  |      | (5,742    | ) |      | (12,235   | ) |      | (13,786  
|                                                                      |  |      |           |   |      |           |   |      |          
|Income (loss) before income taxes and extraordinary gain (loss)       |  |      | 6,193     |   |      | 3,376     |   |      | (83,715  
|Provision (benefit) for income taxes                                  |  |      | 47,131    |   |      | 2,200     |   |      | (20,756  
|                                                                      |  |      |           |   |      |           |   |      |          
|Income (loss) before extraordinary gain (loss)                        |  |      | (40,938   | ) |      | 1,176     |   |      | (62,959  
|Extraordinary gain (loss) on early extinguishment of debt, net of tax |  |      | 11,014    |   |      | (626      | ) |      |         
|                                                                      |  |      |           |   |      |           |   |      |          
|Net income (loss)                                                     |  | $    | (29,924   | ) |      | 550       |   |      | (62,959  
|                                                                      |  |      |           |   |      |           |   |      |          
|Net income (loss) per share:                                          |  |      |           |   |      |           |   |      |          
|Basic:                                                                |  |      |           |   |      |           |   |      |          
|Income (loss) before extraordinary gain (loss)                        |  | $    | (3.34     | ) |      | 0.10      |   |      | (5.24    
|Extraordinary gain (loss) on early extinguishment of debt,net of tax  |  |      | 0.90      |   |      | (0.05     | ) |      |         
|                                                                      |  |      |           |   |      |           |   |      |          
|Net income (loss)                                                     |  | $    | (2.44     | ) |      | 0.05      |   |      | (5.24    
|                                                                      |  |      |           |   |      |           |   |      |          
|Diluted:                                                              |  |      |           |   |      |           |   |      |          
|Income (loss) before extraordinary gain (loss)                        |  | $    | (3.34     | ) |      | 0.10      |   |      | (5.24    
|Extraordinary gain (loss) on early extinguishment of debt,net of tax  |  |      | 0.90      |   |      | (0.05     | ) |      |         
|                                                                      |  |      |           |   |      |           |   |      |          
|Net income (loss)                                                     |  | $    | (2.44     | ) |      | 0.05      |   |      | (5.24    
|                                                                      |  |      |           |   |      |           |   |      |          



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

CELLSTAR CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)

Years ended November 30,
2002, 2001, and 2000

(In thousands)



|                                                                        |  | Common Stock |  | Additionalpaid-in capital |     | Accumulated othercomprehensiveloss |         |  | Retainedearnings |   |  | Total   |  
|----------------------------------------------------------------------- |  | ------------ |  | ------------------------- | --- | ---------------------------------- | ------- |  | ---------------- | - |  | ------- | -
|                                                                        |  | Shares       |  | Amount                    |     |                                    |         | 
|Balance at November 30, 1999                                            |  | 12,011       |  | $                         | 120 |                                    | 81,410  |  | (8,509           | ) |  | 177,503 |  
|Comprehensive loss:                                                     |  |              |  |                           |     |                                    |         |  |                  |   |  |         |  
|Net loss                                                                |  |             |  |                           |    |                                    |        |  |                 |   |  | (62,959 | )
|Foreign currency translation adjustment                                 |  |             |  |                           |    |                                    |        |  | (2,352           | ) |  |        |  
|                                                                        |  |              |  |                           |     |                                    |         |  |                  |   |  |         |  
|Total comprehensive loss                                                |  |              |  |                           |     |                                    |         |  |                  |   |  |         |  
|Common stock issued under stock option plans                            |  | 17           |  |                           |    |                                    | 370     |  |                 |   |  |        |  
|                                                                        |  |              |  |                           |     |                                    |         |  |                  |   |  |         |  
|Balance at November 30, 2000                                            |  | 12,028       |  |                           | 120 |                                    | 81,780  |  | (10,861          | ) |  | 114,544 |  
|Comprehensive income (loss):                                            |  |              |  |                           |     |                                    |         |  |                  |   |  |         |  
|Net income                                                              |  |             |  |                           |    |                                    |        |  |                 |   |  | 550     |  
|Foreign currency translation adjustment                                 |  |             |  |                           |    |                                    |        |  | (2,586           | ) |  |        |  
|                                                                        |  |              |  |                           |     |                                    |         |  |                  |   |  |         |  
|Total comprehensive income (loss)                                       |  |              |  |                           |     |                                    |         |  |                  |   |  |         |  
|Stock option compensation expense                                       |  |             |  |                           |    |                                    | 663     |  |                 |   |  |        |  
|                                                                        |  |              |  |                           |     |                                    |         |  |                  |   |  |         |  
|Balance at November 30, 2001                                            |  | 12,028       |  |                           | 120 |                                    | 82,443  |  | (13,447          | ) |  | 115,094 |  
|Comprehensive loss:                                                     |  |              |  |                           |     |                                    |         |  |                  |   |  |         |  
|Net loss                                                                |  |             |  |                           |    |                                    |        |  |                 |   |  | (29,924 | )
|Foreign currency translation adjustment                                 |  |             |  |                           |    |                                    |        |  | (988             | ) |  |        |  
|                                                                        |  |              |  |                           |     |                                    |         |  |                  |   |  |         |  
|Total comprehensive loss                                                |  |              |  |                           |     |                                    |         |  |                  |   |  |         |  
|Common stock issued with purchases of 5% convertible subordinated notes |  | 497          |  |                           | 5   |                                    | 1,879   |  |                 |   |  |        |  
|Conversion of 5% senior subordinated convertible notes                  |  | 7,829        |  |                           | 79  |                                    | 39,070  |  |                 |   |  |        |  
|                                                                        |  |              |  |                           |     |                                    |         |  |                  |   |  |         |  
|Balance at November 30, 2002                                            |  | 20,354       |  | $                         | 204 |                                    | 123,392 |  | (14,435          | ) |  | 85,170  |  
|                                                                        |  |              |  |                           |     |                                    |         |  |                  |   |  |         |  



See accompanying notes
to consolidated financial statements.



F-5



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##### Table of Contents

CELLSTAR CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended November 30, 2002, 2001, and 2000

(In thousands)



|                                                                                                  |  | 2002 |          |   | 2001 |          |   | 2000 |         
|------------------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | -------- | - | ---- | --------
|Cash flows from operating activities:                                                             |  |      |          |   |      |          |   |      |         
|Net income (loss)                                                                                 |  | $    | (29,924  | ) |      | 550      |   |      | (62,959 
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities |  |      |          |   |      |          |   |      |         
|Provision for doubtful accounts                                                                   |  |      | 4,479    |   |      | 6,684    |   |      | 51,636  
|Provision for inventory obsolesence                                                               |  |      | 10,588   |   |      | 10,210   |   |      | 32,255  
|Depreciation, amortization, and impairment of assets                                              |  |      | 11,834   |   |      | 10,967   |   |      | 23,571  
|Gain on sale of assets                                                                            |  |      |         |   |      | (933     | ) |      | (6,200  
|Equity in loss of affiliated companies, net                                                       |  |      |         |   |      | 858      |   |      | 1,805   
|Deferred income taxes                                                                             |  |      | 42,301   |   |      | (9,553   | ) |      | (34,446 
|Stock option compensation expense                                                                 |  |      |         |   |      | 663      |   |      |        
|Impairment of investment                                                                          |  |      | 125      |   |      | 2,215    |   |      |        
|Extraordinary (gain) loss on extinguishment of debt                                               |  |      | (11,014  | ) |      | 626      |   |      |        
|Changes in certain operating assets and liabilities:                                              |  |      |          |   |      |          |   |      |         
|Accounts receivable                                                                               |  |      | 30,213   |   |      | 118,282  |   |      | (101,243
|Inventories                                                                                       |  |      | 43,771   |   |      | 35,278   |   |      | (119,867
|Prepaid expenses                                                                                  |  |      | (3,947   | ) |      | 5,784    |   |      | 2,705   
|Other assets                                                                                      |  |      | (3,517   | ) |      | (141     | ) |      | (648    
|Accounts payable                                                                                  |  |      | (58,714  | ) |      | (130,169 | ) |      | 168,224 
|Accrued expenses                                                                                  |  |      | 4,235    |   |      | (207     | ) |      | 1,474   
|Income taxes payable                                                                              |  |      | (3,244   | ) |      | 2,114    |   |      | (5,698  
|                                                                                                  |  |      |          |   |      |          |   |      |         
|Net cash provided by (used in) operating activities                                               |  |      | 37,186   |   |      | 53,228   |   |      | (49,391 
|                                                                                                  |  |      |          |   |      |          |   |      |         
|Cash flows from investing activities:                                                             |  |      |          |   |      |          |   |      |         
|Purchases of property and equipment                                                               |  |      | (6,760   | ) |      | (5,558   | ) |      | (5,461  
|Acquisitions of businesses, net of cash acquired                                                  |  |      | (276     | ) |      | (320     | ) |      | (4,241  
|Proceeds from sale of assets                                                                      |  |      |         |   |      | 2,237    |   |      | 377     
|Purchase of investment                                                                            |  |      |         |   |      |         |   |      | (4,144  
|Investment in joint venture                                                                       |  |      |         |   |      | (735     | ) |      |        
|Change in restricted cash                                                                         |  |      | 18,042   |   |      | 802      |   |      | (17,622 
|                                                                                                  |  |      |          |   |      |          |   |      |         
|Net cash provided by (used in) investing activities                                               |  |      | 11,006   |   |      | (3,574   | ) |      | (31,091 
|                                                                                                  |  |      |          |   |      |          |   |      |         
|Cash flows from financing activities:                                                             |  |      |          |   |      |          |   |      |         
|Borrowings on notes payable                                                                       |  |      | 720,281  |   |      | 311,318  |   |      | 404,637 
|Payments on notes payable                                                                         |  |      | (719,578 | ) |      | (385,802 | ) |      | (318,000
|Additions to deferred loan costs                                                                  |  |      | (521     | ) |      | (4,719   | ) |      |        
|Net proceeds from issuance of common stock                                                        |  |      |         |   |      |         |   |      | 370     
|Payments on 5% convertible subordinated notes                                                     |  |      | (66,578  | ) |      |         |   |      |        
|                                                                                                  |  |      |          |   |      |          |   |      |         
|Net cash provided by (used in) financing activities                                               |  |      | (66,396  | ) |      | (79,203  | ) |      | 87,007  
|                                                                                                  |  |      |          |   |      |          |   |      |         
|Net increase (decrease) in cash and cash equivalents                                              |  |      | (18,204  | ) |      | (29,549  | ) |      | 6,525   
|Cash and cash equivalents at beginning of the year                                                |  |      | 47,474   |   |      | 77,023   |   |      | 70,498  
|                                                                                                  |  |      |          |   |      |          |   |      |         
|Cash and cash equivalents at end of year                                                          |  | $    | 29,270   |   |      | 47,474   |   |      | 77,023  
|                                                                                                  |  |      |          |   |      |          |   |      |         



See accompanying notes
to consolidated financial statements.



F-6



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##### Table of Contents

CELLSTAR CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(1)    Summary of Significant Accounting Policies



(a)    Basis for Presentation



CellStar Corporation, including its subsidiaries (the Company), is a leading global provider of distribution and value-added logistics services to the wireless communications industry, with operations in
the Asia-Pacific, North America, Latin America, and European regions. The Company facilitates the effective and efficient distribution of handsets, related accessories and other wireless products from leading manufacturers to network operators,
agents, resellers, dealers and retailers. In some of its markets, the Company provides activation services that generate new subscribers for its wireless carrier customers.



All significant intercompany balances and transactions have been eliminated in consolidation.



Certain prior year financial amounts have been reclassified to conform to the
current year presentation.



(b)    Use
of Estimates



Management of the Company has made a number
of estimates and assumptions related to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities in preparation of these consolidated financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.



(c)    Inventories



Inventories are stated at the lower of cost (primarily on a moving average basis) or market and are comprised of finished goods.



(d)    Property and Equipment



Property and equipment are recorded at cost. Depreciation of equipment is provided over the estimated useful lives of the respective assets, which range
from three to thirty years, on a straight-line basis. Leasehold improvements are amortized over the shorter of their useful life or the related lease term. Major renewals are capitalized, while maintenance, repairs and minor renewals are expensed as
incurred.



(e)    Goodwill



Goodwill represents the excess of the purchase price over
the fair value of net assets acquired and is amortized using the straight-line method over 20 years. The Company assesses the recoverability of this intangible asset by determining the estimated future cash flows related to such acquired assets. In
the event that goodwill is found to be carried at an amount that is in excess of estimated future operating cash flows, then the goodwill will be adjusted to a level commensurate with a discounted cash flow analysis using a discount rate reflecting
the Companys average cost of funds.



(f)    Impairment of Long-Lived Assets



Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.



F-7



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##### Table of Contents

CELLSTAR CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(g)    Equity Investments in Affiliated Companies



The Company accounts for its investments in common stock of affiliated
companies using the equity method or the modified equity method, if required. The investments are included in other assets in the accompanying consolidated balance sheets.



(h)    Revenue Recognition



For the Companys wholesale business, revenue is recognized when the customer takes title and assumes risk of loss. If
the customer takes title and assumes risk of loss upon shipment, revenue is recognized on the shipment date. If the customer takes title and assumes risk of loss upon delivery, revenue is recognized on the delivery date. In accordance with
contractual agreements with wireless service providers, the Company receives an activation commission for obtaining subscribers for wireless services in connection with the Companys retail operations. The agreements contain various provisions
for additional commissions (residual commissions) based on subscriber usage. The agreements also provide for the reduction or elimination of activation commissions if subscribers deactivate service within stipulated periods. The Company
recognizes revenue for activation commissions on the wireless service providers activation of the subscribers service and residual commissions when earned and provides an allowance for estimated wireless service deactivations, which is
reflected as a reduction of accounts receivable and revenues in the accompanying consolidated financial statements. The Company recognizes service fee revenue when the service is completed and, if applicable, upon shipment of the related product,
whichever is later.



The Company adopted the provision of SEC
Staff Service Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, (SAB No. 101) in Fiscal Year 2001. The adoption of SAB No. 101 had no material impact on the Companys revenue recognition practices.



(i)    Vendor Credits



The Company recognizes price protection credits and other incentives from
vendors, such as volume discounts, when such credits are received in writing from the vendor, or if the credits are based on sell-through to customers, when the credits have been received in writing from the vendor and the related product is sold.
Price protection credits and other incentives are applied against inventory and cost of goods sold, depending on whether the related inventory is on-hand or has been previously sold at the time the credits are received in writing. Sell-through
credits are recorded as a reduction in cost of goods sold in the period received.



The Company recognizes advertising allowances from vendors when such allowances are received in writing from the vendor and earned. Advertising allowances are generally for the reimbursement of specific incremental,
identifiable costs incurred by the Company and are recorded as a reduction of the related cost. Allowances in excess of the specific costs incurred, if any, are recorded as a reduction of costs of goods sold or inventory, as applicable.



(j)    Foreign Currency



Assets and liabilities of the Companys foreign subsidiaries have been
translated at the rate of exchange at the end of each period. Revenues and expenses have been translated at the weighted average rate of exchange in effect during the respective period. Gains and losses resulting from translation are accumulated as
other comprehensive loss in stockholders equity, except for subsidiaries located in countries whose economies are considered highly inflationary. In such cases, translation adjustments are included primarily in other income (expense) in the
accompanying consolidated statements of operations. Net foreign currency transaction gains (losses) for the years ended November 30, 2002, 2001 and 2000 were ($1.0) million, $0.3 million and $(10.0) million, respectively. The currency exchange
rates of the Latin American and Asia-Pacific countries in



F-8



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##### Table of Contents

CELLSTAR CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



which the Company conducts operations have historically been volatile. The Company manages the risk of foreign currency devaluation by attempting to increase
prices of products sold at or above the anticipated rate of local currency devaluation relative to the U.S. dollar, by indexing certain of its receivables to exchange rates in effect at the time of their payment and by entering into non-deliverable
foreign currency forward contracts in certain instances.



(k)    Derivative Financial Instruments



The Company periodically uses various derivative financial instruments as part of an overall strategy to manage the Companys exposure to market risk associated with interest rate and foreign currency exchange
rate fluctuations. The Company periodically uses foreign currency forward contracts to manage the foreign currency exchange rate risks associated with international operations. The Company evaluates the use of interest rate swaps and cap agreements
to manage its interest risk on debt instruments, including the reset of interest rates on variable rate debt. The Company does not hold or issue derivative financial instruments for trading purposes.



The Company currently has no material derivative instruments that qualify as
a hedge as defined by Financial Accounting Standards Board Statement (Statement) No. 133, Accounting for Derivative Instruments, and Statement No. 138, Accounting for Derivative Instruments and Certain Hedging Activities.Accordingly,
all changes in fair value of derivative instruments are recognized in the statements of operations.



(l)    Income Taxes



Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred income tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.



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##### Table of Contents

CELLSTAR CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(m)    Net Income (Loss) Per Share



Basic net income (loss) per common share is based on the weighted average
number of common shares outstanding for the relevant period. Diluted net income (loss) per common share is based on the weighted average number of common shares outstanding plus the dilutive effect of potentially issuable common shares pursuant to
stock options, warrants, and convertible debentures.



A
reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share computations for the years ended November 30, 2002, 2001, and 2000, follows (in thousands, except per share data):



|                                                                                     |  | 2002 |         |   | 2001 |        |   | 2000 |        
|------------------------------------------------------------------------------------ |  | ---- | ------- | - | ---- | ------ | - | ---- | -------
|Basic:                                                                               |  |      |         |   |      |        |   |      |        
|Income (loss) before extraordinary gain (loss)                                       |  | $    | (40,938 | ) |      | 1,176  |   |      | (62,959
|Extraordinary gain (loss) on early extinguishment of debt, net of tax                |  |      | 11,014  |   |      | (626   | ) |      |       
|                                                                                     |  |      |         |   |      |        |   |      |        
|Net income (loss)                                                                    |  | $    | (29,924 | ) |      | 550    |   |      | (62,959
|                                                                                     |  |      |         |   |      |        |   |      |        
|                                                                                     |  |      |        
|Weighted average number of shares outstanding                                        |  |      | 12,268  |   |      | 12,028 |   |      | 12,026 
|                                                                                     |  |      |        
|Income (loss) per share before extraordinary gain (loss)                             |  | $    | (3.34   | ) |      | 0.10   |   |      | (5.24  
|Extraordinary gain (loss) per share on early extinguishment of debt, net of tax      |  |      | 0.90    |   |      | (0.05  | ) |      |       
|                                                                                     |  |      |         |   |      |        |   |      |        
|Net income (loss), per share                                                         |  | $    | (2.44   | ) |      | 0.05   |   |      | (5.24  
|                                                                                     |  |      |         |   |      |        |   |      |        
|                                                                                     |  |      |        
|Diluted:                                                                             |  |      |         |   |      |        |   |      |        
|Income (loss) before extraordinary gain (loss)                                       |  | $    | (40,938 | ) |      | 1,176  |   |      | (62,959
|Extraordinary gain (loss) on early extinguishment of debt, net of tax                |  |      | 11,014  |   |      | (626   | ) |      |       
|                                                                                     |  |      |         |   |      |        |   |      |        
|Net income (loss)                                                                    |  |      | (29,924 | ) |      | 550    |   |      | (62,959
|Interest on 5% Convertible Subordinated Notes, net of tax                            |  |      |        |   |      |       |   |      |       
|                                                                                     |  |      |         |   |      |        |   |      |        
|Adjusted net income (loss)                                                           |  | $    | (29,924 | ) |      | 550    |   |      | (62,959
|                                                                                     |  |      |         |   |      |        |   |      |        
|                                                                                     |  |      |        
|Weighted average number of shares outstanding                                        |  |      | 12,268  |   |      | 12,028 |   |      | 12,026 
|Effect of dilutive securities:                                                       |  |      |         |   |      |        |   |      |        
|Stock options                                                                        |  |      |        |   |      | 1      |   |      |       
|Convertible notes                                                                    |  |      |        |   |      |       |   |      |       
|                                                                                     |  |      |         |   |      |        |   |      |        
|Weighted average number of share outstanding including effect of dilutive securities |  |      | 12,268  |   |      | 12,029 |   |      | 12,026 
|                                                                                     |  |      |         |   |      |        |   |      |        
|                                                                                     |  |      |        
|Income (loss) per share before extraordinary gain (loss)                             |  | $    | (3.34   | ) |      | 0.10   |   |      | (5.24  
|Extraordinary gain (loss) per share on early extinguishment of debt, net of tax      |  |      | 0.90    |   |      | (0.05  | ) |      |       
|                                                                                     |  |      |         |   |      |        |   |      |        
|Net income (loss)                                                                    |  | $    | (2.44   | ) |      | 0.05   |   |      | (5.24  
|                                                                                     |  |      |         |   |      |        |   |      |        



Outstanding options to
purchase 1.4 million, 1.3 million and 0.9 million shares of common stock at November 30, 2002, 2001 and 2000, respectively, were not included in the computation of diluted earnings per share because their inclusion would have been anti-dilutive.



Diluted weighted average shares outstanding at November 30,
2001 and 2000 do not include 1.1 million common equivalent shares issuable for the 5% Convertible Subordinated Notes, as their effect would be anti-dilutive. (See Note 12.)



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##### Table of Contents

CELLSTAR CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The 5% Senior Subordinated Convertible Notes issued in the exchange in February 2002 are
anti-dilutive as the Company incurred a loss in 2002.



(n)    Comprehensive Income (Loss)



Comprehensive income (loss) consists of net income (loss) and foreign currency translation adjustments and is presented in the consolidated statements of stockholders equity and comprehensive income (loss). The Company does not tax
effect its foreign currency translation adjustments.



(o)    Consolidated Statements of Cash Flow Information



For purposes of the consolidated statements of cash flows, the Company considers all highly-liquid investments with an original maturity of 90 days or less to be cash equivalents. The Company paid approximately $8.4
million, $16.8 million and $17.9 million of interest for the years ended November 30, 2002, 2001 and 2000, respectively. The Company paid approximately $7.5 million, $4.8 million and $14.5 million of income taxes for the years ended November 30,
2002, 2001 and 2000, respectively.



(p)    Stock Option Plans



The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (Opinion 25), and related interpretations, in
accounting for grants to employees and non-employee directors under its fixed stock option plans. Accordingly, compensation expense is recorded for grants of options only if the current market price of the underlying stock exceeds the exercise price
on the date of grant.



(2)    Related Party Transactions



(a)    Transactions with Motorola



Motorola purchased 0.4 million shares of the
Companys common stock in July 1995 and is a major supplier of handsets and accessories to the Company. Total purchases from Motorola approximated $662.0 million, $834.1 million and $1,074.3 million for the years ended November 30, 2002, 2001
and 2000, respectively. Included in accounts payable at November 30, 2002 and 2001 was approximately $39.4 million and $46.5 million, respectively, due to Motorola for purchases of inventory.



(b)    Sale of Aircraft to Chief Executive Officer



In December 1993, the Company and its then Chief
Executive Officer entered into an agreement pursuant to which the Company purchased the Chief Executive Officers jet aircraft at book value. Pursuant to that agreement, the Company sold the Companys jet aircraft back to the Chief
Executive Officer for the book value of $2.2 million in January 2001.



(c)    Employment Agreement



In July 2002, the Company entered into a new employment agreement with A.S. Horng, the Chairman, Chief Executive Officer and General Manager of CellStar Asia, in anticipation of the expiration of the existing employment agreement in January
2003. As an incentive for Mr. Horng to enter into such agreement, the Company agreed to pay a signing bonus of $1.5 million, and also agreed to pay an additional bonus in the amount of $1.5 million upon the successful completion of a public offering
related to the Companys Asia-Pacific operations.





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##### Table of Contents

CELLSTAR CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(3)    Fair Value of Financial Instruments



The carrying amounts of accounts receivable, accounts payable and notes
payable as of November 30, 2002 and 2001 approximate fair value due to the short maturity of these instruments. The fair value as set forth in the table below (in thousands) is based on quoted market prices for the Companys 5% Subordinated
Notes and managements estimate for the fair value of the Companys 12% Senior Subordinated Notes.



|                                 |  | CarryingAmount |        | FairValue |        | CarryingAmount |         | FairValue
|-------------------------------- |  | -------------- | ------ | --------- | ------ | -------------- | ------- | ---------
|5% Subordinated ConvertibleNotes |  | $              |       |           |       |                | 150,000 |          
|                                 |  |                |        |           |        |                |         |          
|12% Senior Subordinated Notes    |  | $              | 12,374 |           | 12,374 |                |        |          
|                                 |  |                |        |           |        |                |         |          



The Company did not
hold any derivative instruments at November 30, 2002 and 2001, respectively.



(4)    Property and Equipment



Property and equipment consisted of the following at November 30, 2002 and 2001 (in thousands):



|                                               |  | 2002 |         |   | 2001 |        
|---------------------------------------------- |  | ---- | ------- | - | ---- | -------
|Land and buildings                             |  | $    | 11,003  |   |      | 11,034 
|Furniture, fixtures and equipment              |  |      | 31,858  |   |      | 27,718 
|Leasehold improvements                         |  |      | 4,854   |   |      | 5,408  
|                                               |  |      |         |   |      |        
|                                               |  |      | 47,715  |   |      | 44,160 
|Less accumulated depreciation and amortization |  |      | (29,014 | ) |      | (24,820
|                                               |  |      |         |   |      |        
|                                               |  | $    | 18,701  |   |      | 19,340 
|                                               |  |      |         |   |      |        



(5)    Investments in Affiliated Companies



At November 30, 2001, investments in affiliated companies included a 49% interest in CellStar Amtel Sdn. Bhd. (CellStar Amtel), a Malaysian company. As a result of the deterioration in the Malaysia
market, the Company divested its 49% ownership in CellStar Amtel in 2002. The carrying value of the investment at November 30, 2001 was zero. During the years ended November 30, 2001 and 2000, the Company incurred losses of $0.7 and $1.8 million,
respectively related to the operations of CellStar Amtel.



In
January 2000, the Company acquired for $4.1 million 3.5% of the issued and outstanding common stock of Arcoa Communications Co. Ltd, (Arcoa) a telecommunications retail store chain in Taiwan. Arcoas common stock was not traded on a
foreign market of the breadth and scope comparable to a U.S. market, and the Company accounted for the investment on the cost basis. The Company periodically received indications that shares were being exchanged at amounts less than the
Companys purchase price. Based on the continuing decline in the Taiwan stock exchange and the Taiwan economy, the Company considered that the decrease in value of its investment was other than temporary. In the third quarter of 2001, the
Company recorded an impairment charge of $2.2 million to write-down the Companys investment to the Companys pro rata share of the retailers net book value, which the Company believed was the best indicator of the fair value of the
investee. The Company continued to monitor the overall market conditions in Taiwan and again considered the investment to be impaired in the fourth quarter of 2002 and recorded a charge of $0.1 million to write-down the Companys investment to
the Companys pro rata share of the retailers net book value, which the Company believed was the best indicator of the fair value of the investee. The Companys remaining investment of $1.8 million at November 30, 2002 is
included in other assets in the consolidated balance sheet.



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CELLSTAR CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(6)    Debt



Debt consisted of the following at November 30, 2002 and 2001 (in thousands):



|                                                     |  | 2002    |  | 2001   
|---------------------------------------------------- |  | ------- |  | -------
|Notes payable                                        |  |         |  |        
|Revolving credit facility                            |  | $23,089 |  |       
|Peoples Republic of China (PRC) credit facilities |  | 30,258  |  | 39,078 
|Peoples Republic of China (PRC) notes payable     |  |        |  | 5,799  
|Taiwan notes payable                                 |  |        |  | 7,767  
|                                                     |  |         |  |        
|Total notes payable                                  |  | 53,347  |  | 52,644 
|Current and Long Term Debt                           |  |         |  |        
|5% Convertible Subordinated Notes                    |  |        |  | 150,000
|12% Senior Subordinated Notes                        |  | 12,374  |  |       
|                                                     |  |         |  |        
|Total debt                                           |  | $65,721 |  | 202,644
|                                                     |  |         |  |        



As of September 28,
2001, the Company had negotiated and finalized a new, five-year, $60.0 million Loan and Security Agreement (the New Facility) with a bank and terminated the previously existing facility. On October 12, 2001 the Company finalized an
amendment to the New Facility increasing the commitment amount from $60.0 million to $85.0 million. The New Facility lowers the applicable interest rate margin by 25 basis points from its level at August 31, 2001, provides a more extensive borrowing
base, more flexible financial covenants and greater flexibility in funding foreign operations.



Fundings under the New Facility are limited by a borrowing base test, which is measured weekly. Interest on borrowings under the New Facility is at the London Interbank Offered Rate or at the banks prime lending
rate, plus an applicable margin. The New Facility is also secured by a pledge of 100% of the outstanding stock of all U.S. subsidiaries and 65% of the outstanding stock of all first tier foreign subsidiaries. The New Facility is further secured by
the Companys domestic accounts receivable, inventory, property, plant and equipment and all other domestic real property and intangible assets. The New Facility contains, among other provisions, covenants relating to the maintenance of minimum
net worth and certain financial ratios, exchanging, refinancing or extending of the Companys convertible notes, additional debt, mergers and acquisitions and disposition of assets. In addition, the Company is prohibited from making any cash or
property dividends to its shareholders under the New Facility. At November 30, 2002, the Company had borrowed $23.1 million under the New Facility.



On February 6, 2003, the Company finalized an amendment to the New Facility that allowed for the exclusion of certain charges from certain financial
covenants in the loan agreement related to credit facilities that it may establish in its Mexico operations. On February 28, 2003, the Company completed an amendment to the New Facility that allowed for the exclusion of U.S. Federal income taxes on
undistributed earnings associated with the Companys Asia-Pacific, European, and Latin American Regions, excluding Mexico and Miami, from certain financial covenants in the loan agreement.



At November 30, 2002, the Companys operations in China had three lines
of credit totaling approximately 250 RMB (approximately USD $30.3 million), bearing interest at rates ranging from 0.00% to 5.85%. The loans have maturity dates through March 2003. The Company typically refinances these lines of credit for three to
six month terms, although there can be no assurance that these lines of credit will be refinanced in the future. The lines of credit are either fully or partially collateralized.



The fully collateralized loans (approximately $25.2 million) are collateralized by either U.S. dollar cash deposits in Hong
Kong ($5.8 million of loans collateralized by a $7.0 million cash deposit) or PRC accounts receivable ($19.4 million of loans). The partially collateralized loans total $5.1 million and are collateralized by $1.0 million in cash in the PRC.
Restricted cash of $12.2 million in Hong Kong was serving as collateral for an additional $12.0 million line of credit that was not utilized as of November 30, 2002. An additional $3.0 million of restricted cash in Hong Kong was unutilized at
November 30, 2002.



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CELLSTAR CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



On October 24, 2002, the Company entered into a revolving credit facility in Sweden of 70 million
Swedish Krona (approximately $7.5 million). The facility is secured by the accounts receivable of the Sweden operations and bears interest at a rate of 5.60%. The facility matures on December 31, 2003, but is automatically extended for 12 months
unless terminated by one of the parties. The credit facility contains certain financial and other covenants for the Sweden operations. At November 30, 2002, the Company had no borrowings under this facility.



The Company entered into a 6.0 million Euro (approximately $6.2 million)
credit facility on December 20, 2002 in The Netherlands. The facility is collateralized by accounts receivable, inventory and fixed assets from the Companys Netherland operations and bears interest at a variable rate, which consists of the
banks Euro Base rate, plus a margin. The interest rate of the facility is currently 5.00%. The facility may be terminated without notice by either party. The credit facility contains certain financial and other covenants for The Netherlands
operations.



At November 30, 2001, the Company had $150.0
million of 5% Convertible Subordinated Notes due October 15, 2002, which were convertible into 1.1 million shares of common stock at $138.34 per share (adjusted for the effect of the one-for-five reverse stock split effective on February 22, 2002)
at any time prior to maturity. (See note 12).



At November 30,
2002, long-term debt consisted of $12.4 million of the Companys 12% Senior Subordinated Notes (the Senior Notes) due January 15, 2007. The Senior Notes bear interest at 12%, payable in cash in arrears semi-annually on February 15
and August 15, commencing August 15, 2002. The Senior Notes contain certain covenants that restrict the Companys ability to incur additional indebtedness; make investments, loans and advances; declare dividends or certain other distributions;
create liens; enter into sale-leaseback transactions; consolidate; merge; sell assets and enter into transactions with affiliates.



(7)    Income Taxes



The Companys income (loss) before extraordinary items and income taxes was comprised of the following for the years ended November 30, 2002, 2001
and 2000 (in thousands):



|              |  | 2002 |        |   | 2001 |       |   | 2000 |        
|------------- |  | ---- | ------ | - | ---- | ----- | - | ---- | -------
|United States |  | $    | (5,665 | ) |      | 3,593 |   |      | (85,138
|International |  |      | 11,858 |   |      | (217  | ) |      | 1,423  
|              |  |      |        |   |      |       |   |      |        
|Total         |  | $    | 6,193  |   |      | 3,376 |   |      | (83,715
|              |  |      |        |   |      |       |   |      |        



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CELLSTAR CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Provision (benefit) for income taxes for the years ended November 30, 2002, 2001 and 2000 consisted
of the following (in thousands):



|                              |  | Current |        | Deferred |         |   | Total |        
|----------------------------- |  | ------- | ------ | -------- | ------- | - | ----- | -------
|Year ended November 30, 2002  |  |         |        |          |         |   |       |        
|United States:                |  |         |        |          |         |   |       |        
|Federal                       |  | $       |       |          | 45,341  |   |       | 45,341 
|State                         |  |         | 90     |          |        |   |       | 90     
|International                 |  |         | 4,740  |          | (3,040  | ) |       | 1,700  
|                              |  |         |        |          |         |   |       |        
|                              |  | $       | 4,830  |          | 42,301  |   |       | 47,131 
|                              |  |         |        |          |         |   |       |        
|Year ended November 30, 2001: |  |         |        |          |         |   |       |        
|United States:                |  |         |        |          |         |   |       |        
|Federal                       |  | $       |       |          | 3,782   |   |       | 3,782  
|State                         |  |         | 152    |          | (3      | ) |       | 149    
|International                 |  |         | 11,601 |          | (13,332 | ) |       | (1,731 
|                              |  |         |        |          |         |   |       |        
|                              |  | $       | 11,753 |          | (9,553  | ) |       | 2,200  
|                              |  |         |        |          |         |   |       |        
|Year ended November 30, 2000: |  |         |        |          |         |   |       |        
|United States:                |  |         |        |          |         |   |       |        
|Federal                       |  | $       |       |          | (28,296 | ) |       | (28,296
|State                         |  |         | 1,138  |          | (1,778  | ) |       | (640   
|International                 |  |         | 12,552 |          | (4,372  | ) |       | 8,180  
|                              |  |         |        |          |         |   |       |        
|                              |  | $       | 13,690 |          | (34,446 | ) |       | (20,756
|                              |  |         |        |          |         |   |       |        



Provision (benefit)
for income taxes differed from the amounts computed by applying the U.S. Federal income tax rate of 35% to income before income taxes as a result of the following for the years ended November 30, 2002, 2001 and 2000 (in thousands):



|                                                                            |  | 2002 |        | 2001 |        |   | 2000 |        
|--------------------------------------------------------------------------- |  | ---- | ------ | ---- | ------ | - | ---- | -------
|Expected tax expense (benefit)                                              |  | $    | 2,167  |      | 1,182  |   |      | (29,300
|International and U.S. tax effects attributable to international operations |  |      | 32,575 |      | 1,326  |   |      | (4,731 
|State income taxes, net of Federal benefits                                 |  |      | 59     |      | 97     |   |      | (416   
|Equity in loss of affiliated companies, net                                 |  |      |       |      | 204    |   |      | 631    
|Non-deductible goodwill and other                                           |  |      | 4,848  |      | 2,097  |   |      | 1,919  
|Change in valuation allowance                                               |  |      | 4,140  |      | (2,315 | ) |      | 11,763 
|Foreign accumulated earnings tax                                            |  |      |       |      |       |   |      | 1,228  
|Foreign dividend                                                            |  |      | 1,446  |      |       |   |      |       
|Dispositions                                                                |  |      | 1,429  |      |       |   |      |       
|Other, net                                                                  |  |      | 467    |      | (391   | ) |      | (1,850 
|                                                                            |  |      |        |      |        |   |      |        
|Actual tax (benefit) expense                                                |  | $    | 47,131 |      | 2,200  |   |      | (20,756
|                                                                            |  |      |        |      |        |   |      |        



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##### Table of Contents

CELLSTAR CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The tax effect of temporary differences underlying significant portions of deferred income tax assets
and liabilities at November 30, 2002 and 2001, is presented below (in thousands):



|                                                     |  | 2002 |         |   | 2001 |       
|---------------------------------------------------- |  | ---- | ------- | - | ---- | ------
|Deferred income tax assets:                          |  |      |         |   |      |       
|United States:                                       |  |      |         |   |      |       
|Accounts receivable                                  |  | $    | 13,947  |   |      | 13,987
|Inventory adjustments for tax purposes               |  |      | 1,244   |   |      | 2,578 
|Net operating loss carryforwards                     |  |      | 24,631  |   |      | 22,117
|Foreign tax credit carryforwards                     |  |      | 2,469   |   |      | 2,469 
|Capital losses                                       |  |      | 3,160   |   |      | 3,791 
|Debt issuance cost                                   |  |      | 285     |   |      |      
|Prepaid bond interest                                |  |      | 2,151   |   |      |      
|Other, net                                           |  |      | 3,934   |   |      | 4,451 
|International:                                       |  |      |         |   |      |       
|Accounts receivable                                  |  |      | 5,103   |   |      | 3,246 
|Net operating loss carryforwards                     |  |      | 12,579  |   |      | 5,751 
|Other, net                                           |  |      | 1,978   |   |      | 2,937 
|                                                     |  |      |         |   |      |       
|                                                     |  |      | 71,481  |   |      | 61,327
|Valuation allowance                                  |  |      | (11,450 | ) |      | (7,310
|                                                     |  |      |         |   |      |       
|                                                     |  |      | 60,031  |   |      | 54,017
|                                                     |  |      |         |   |      |       
|Deferred income tax liabilities                      |  |      |         |   |      |       
|United States unremitted foreign earnings            |  |      | 44,200  |   |      |      
|International inventory adjustments for tax purposes |  |      | 7,802   |   |      | 3,687 
|                                                     |  |      |         |   |      |       
|                                                     |  | $    | 52,002  |   |      | 3,687 
|                                                     |  |      |         |   |      |       



In assessing the
realizability of deferred income tax assets, management considers whether it is more likely than not that the deferred income tax assets will be realized. The ultimate realization of deferred income tax assets is dependent on the generation of
future taxable income during the periods in which those temporary differences become deductible. The valuation allowance for deferred income tax assets as of December 1, 2000 and 2001 was $15.9 million and $7.3 million, respectively. The net change
in the total valuation allowance for the years ended November 30, 2002 and 2001 was an increase of $4.1 million and a decrease of $8.6 million, respectively. Management considers the scheduled reversal of deferred income tax liabilities, projected
future taxable income, and tax planning strategies in making this assessment. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred income tax assets are deductible,
management believes it is more likely than not the Company should realize the benefits of these deductible differences. The amount of the deferred income tax asset considered realizable, however, could be reduced in the near term if estimates of
future taxable income during the carry forward period are reduced. At November 30, 2002, the Company had U.S. Federal net operating loss carryforwards of approximately $70.4 million, which will begin to expire in 2018.



Prior to the fourth quarter of 2002, the Company did not accrue for U.S.
Federal income taxes or tax benefits on the undistributed earnings and/or losses of its international subsidiaries because earnings have been reinvested and, in the opinion of management, would continue to be reinvested indefinitely. Accordingly,
there was no liability recorded for such potential U.S. Federal income taxes. As a result of the progress in the fourth quarter of 2002 in evaluating the strategic options with regard to its Asia-Pacific Region, it was determined that



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##### Table of Contents

CELLSTAR CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



the Company is now required to account for the earnings in its Asia-Pacific Region as not being permanently reinvested since the Company has manifested its
intent to pursue possible transactions designed to allow the Company to withdraw and return to the U.S. some or all of the value of those operations. Accordingly, in the quarter ended November 30, 2002, the Company was required to accrue U.S.
Federal income taxes on the undistributed earnings of the Asia-Pacific Region of approximately $42.2 million.



No U.S. Federal income taxes on the undistributed earnings will be payable until such earnings are actually remitted back to the U.S. in the form of
dividends or, in the case of a completed transaction such as those discussed above, sale proceeds. As of November 30, 2002, the Company has net operating loss carryforwards in the U.S. of approximately $70.4 million, a significant portion of which
the Company believes it will be able to utilize to offset the taxes payable in the event that a transaction is completed. The Company therefore does not expect that the impact of the payment of any taxes associated with any such transaction will
significantly impact the cash position of the Company at the time of such payment. Furthermore, the Company will have cash proceeds from any such transaction to fund the actual payment of such taxes. As a result of the accrual in the quarter ended
November 30, 2002, of U.S. Federal income taxes on the undistributed earnings of the Asia-Pacific Region, the Company will not recognize tax expense in future periods for financial statement purposes on any such future transaction up to the amount
of the tax recognized on the undistributed earnings.



Consistent with the change in historical accounting treatment for undistributed earnings discussed above, the Company recorded U.S. Federal income taxes of approximately $2.0 million in the fourth quarter of 2002 for previously
undistributed earnings from Sweden, The Netherlands and Colombia. These previously undistributed earnings are no longer considered permanently reinvested following the completion of the Companys evaluations of these markets.



At November 30, 2002, the Company had not provided for U.S. Federal income
taxes on earnings of international subsidiaries of approximately $21.6 million as these earnings were considered permanently reinvested.



As a result of the Exchange Offer, the Company was deemed to have undergone an ownership change for purposes of the Internal Revenue code. The Company may
have limitations beginning with the year ending November 30, 2002 on the utilization of its U.S. tax carry-forwards in accordance with Section 382 of the Internal Revenue Code.



Because many types of transactions are susceptible to varying interpretations under foreign and domestic income tax laws and
regulations, the amounts recorded in the accompanying consolidated financial statements may be subject to change on final determination by the respective taxing authorities. Management believes it has made an adequate tax provision.



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CELLSTAR CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(8)    Leases



The Company leases certain warehouse and office facilities, equipment and retail stores under operating leases that range
from two to six years. Facility and retail store leases generally contain renewal options. Rental expense for operating leases was $3.2 million, $3.9 million and $5.0 million for the years ended November 30, 2002, 2001 and 2000, respectively. Future
minimum lease payments under operating leases as of November 30, 2002 are as follows (in thousands):



|Year ending November 30, |  |  |  | Amount
|------------------------ |  |  |  | ------
|2003                     |  |  |  | $3,721
|2004                     |  |  |  | 2,290 
|2005                     |  |  |  | 1,588 
|2006                     |  |  |  | 801   
|2007                     |  |  |  | 543   
|Thereafter               |  |  |  | 212   



(9)    Impairment of Assets



In the second quarter of 2002, the Company decided as part of its plan to reposition its operations to exit the U.K., Peru and Argentina as soon as practicable (see Note 13). As a result of this decision, an impairment charge of
$3.7 million was incurred for the three months ended May 31, 2002, which included $2.2 million for accumulated foreign currency translation adjustments as a result of the Companys liquidation of its investment in each of these operations
and $1.5 million for property and equipment. The property and equipment was reduced to estimated market value.



In the third quarter of 2000, the Company decided to exit its Venezuela operations (see Note 16). The Company recorded a $4.9 million impairment charge to
reduce the carrying value of certain Venezuela assets, primarily goodwill, to their estimated fair value. In December 2000, the Company completed the sale of its Venezuela operations and realized a gain of $1.1 million.



In the fourth quarter of 2000, the Company recorded a non-cash goodwill
impairment charge of $6.4 million due to a major carrier customers proposed changes to an existing contract that adversely changed the long-term prospects of the Peru operations.



In the second quarter of 2000, the Company recorded an impairment charge of $1.0 million to reduce the carrying value of
other assets.



(10)    Separation Agreement



The Company announced on July 6, 2001, that Alan H.
Goldfield retired effective immediately from the position of Chairman and Chief Executive Officer and that James L. Rocky Johnson, who has served on the Board of Directors since March 1994 became Chairman of the Board, and Terry S.
Parker, a member of the Board of Directors and a former President and Chief Operating Officer of the Company, rejoined the Company as Chief Executive Officer. The Company recorded expense of $5.7 million in 2001 related to the separation agreement
between the Company and Mr. Goldfield. Included in the $5.7 million charge is a cash payment of $4.3 million and stock option compensation expense of $0.6 million.



In July, 2001, the Company entered into a Consulting Agreement with Alan H. Goldfield, under which the Company engaged Mr.
Goldfield to perform such services for the Company as are mutually agreeable to



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CELLSTAR CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Mr. Goldfield and the Chief Executive Officer of the Company. Under the Consulting Agreement, Mr. Goldfield has the honorary title of Chairman
Emeritus of the Company but is not a director, officer or employee of the Company and has no authority to act on behalf of the Company. The Company agreed to pay Mr. Goldfield 5% of net earnings from specified new lines of business conducted
by the Company in PRC, Hong Kong, Korea, Japan, Taiwan, Singapore, Malaysia and the Philippines (the Earnout) through November 30, 2006 if not earlier terminated, but not to exceed $15,000,000. New business lines covered by the Earnout
include the sale of prepaid calling cards, the sale of specified paging and long distance services, the sale of Tai Chi box services and products and the sale of personal digital assistants and digital cameras. For fiscal year 2002, the
Company paid Mr. Goldfield $241,077 in connection with services provided pursuant to his Separation Agreement and Release effective July 5, 2001. No payments have been made pursuant to the Consulting Agreement. The Consulting Agreement terminates on
the earlier of November 30, 2006, a termination of Mr. Goldfield for cause by the Company, the death of Mr. Goldfield, written notice of termination by either party as a result of the disability of Mr. Goldfield or voluntary termination by Mr.
Goldfield upon not less than 30 days prior written notice. Under the Consulting Agreement, a termination will generally be considered for cause if it is due to Mr. Goldfields (i) willful gross misconduct, (ii) conviction of a
felony, (iii) breach of his covenants of confidentiality and non-competition set forth in the Consulting Agreement or (iv) violation of the Foreign Corrupt Practices Act. In the event of termination due to the death or disability of Mr. Goldfield,
the Company must still pay the Earnout through November 30, 2006.



The Consulting Agreement also includes non-competition and confidentiality provisions. The non-competition provision is effective until the later of July 5, 2003 or the date the Consulting Agreement is terminated.



(11)    Gain on Sale of Assets



The Company recorded a gain on sale of assets of $0.9 million in 2001
primarily associated with the sale of its Venezuela operations in December 2000. (See Note 16.) The Company recorded a gain of $6.2 million for the year ended November 30, 2000, associated with the sale of the following (in thousands):



|Brazil joint venture (see Note 15) |  | $ | 6,048
|---------------------------------- |  | - | -----
|Poland operations                  |  |   | 152  
|                                   |  |   |      
|                                   |  | $ | 6,200
|                                   |  |   |      



In the fourth quarter
of 1999, based on the market conditions in Poland, the Company decided to sell its operations in Poland. The Company recorded an impairment charge of $5.5 million, including a $4.5 million write down of goodwill to reduce the carrying value of the
assets of the operations in Poland to their estimated fair value in 1999. The sale was completed in 2000 resulting in a gain of $0.2 million. Revenues for the operations in Poland were $2.2 million for the year ended November 30, 2000.



(12)    Extraordinary Gain (Loss) on Early Extinguishment of Debt



At November 30, 2001, the Company had $150.0 million of
5% Convertible Subordinated Noted due October 15, 2002, which were convertible into 1.1 million shares of common stock at $138.34 per share (adjusted for the effect of the one-for-five reverse stock split effective on February 22, 2002) at any time
prior to maturity.



On January 14, 2002, the Company filed an
S-4 registration statement (the Exchange Offer) with the Securities and Exchange Commission offering to exchange, for each $1,000 principal amount of its existing 5% Convertible Subordinated Notes due October 2002, (the
Subordinated Notes) $366.67 in cash and, at the



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CELLSTAR CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



election of the holder, one of the following options: a) $400.94 principal amount of 12% Senior Subordinated Notes due January 2007 (the Senior
Notes), b) $320.75 principal amount of Senior Notes and $80.19 principal amount of 5% Senior Subordinated Convertible Notes due November 2002 (the Senior Convertible Notes), or c) $400.94 principal amount of Senior Convertible
Notes.



On February 20, 2002, the Company completed its
Exchange Offer for its $150.0 million of Subordinated Notes. Holders owning $128.6 million of Subordinated Notes exchanged them for $47.2 million in cash, $12.4 million of Senior Notes, and $39.1 million of Senior Convertible Notes. Upon
completion of the Exchange Offer $21.4 million of the Subordinated Notes were not exchanged.



The Company realized a pre-tax extraordinary gain on early extinguishment of debt of $17.1 million during the first quarter of fiscal 2002 ($10.9 million after-tax) as a result of the exchange. The exchange was
accounted for as a troubled debt restructuring in accordance with Financial Accounting Standards Board Statement No. 15. Accordingly, the total future interest payments of $8.8 million on the Senior Notes and Senior Convertible Notes were accrued
upon completion of the exchange and were included in accrued expenses ($3.4 million) and other long-term liabilities ($5.4 million). As of November 30, 2002, the Company had made cash payments of $1.7 million for interest associated with the
Senior Notes and Senior Convertible Notes and the Company has future interest payments accrued of $2.5 million in accrued expenses and $4.6 million in other long-term liabilities. The Company will not recognize these payments as interest expense in
future periods.



As a result of the Exchange Offer, the Company
was deemed to have undergone an ownership change for purposes of the Internal Revenue Code. The Company has sufficient tax carryforwards to offset the tax liability on the extraordinary gain.



The Company extinguished $4.5 million of the Subordinated Notes not tendered
in the Exchange Offer in several transactions through July 29, 2002 using various combinations of cash and the Companys common stock. On October 15, 2002, the Company redeemed at maturity for cash, the remaining $16.9 million of its
Subordinated Notes.



The following summarizes the gain on early
extinguishment of debt (in thousands):



|                                                  |  | ExchangeOffer |         |   | OtherTransactions |       |   | Total |        
|------------------------------------------------- |  | ------------- | ------- | - | ----------------- | ----- | - | ----- | -------
|Face amount of Subordinated Notes                 |  | $             | 128,616 |   |                   | 4,446 |   |       | 133,062
|Deferred loan costs related to Subordinated Notes |  |               | (507    | ) |                   | (8    | ) |       | (515   
|                                                  |  |               |         |   |                   |       |   |       |        
|Book value of Subordinated Notes                  |  |               | 128,109 |   |                   | 4,438 |   |       | 132,547
|Consideration and expenses                        |  |               |         |   |                   |       |   |       |        
|Cash                                              |  |               | 47,205  |   |                   | 2,435 |   |       | 49,640 
|Senior Convertible Notes issued                   |  |               | 39,148  |   |                   |      |   |       | 39,148 
|Senior Notes issued                               |  |               | 12,374  |   |                   |      |   |       | 12,374 
|Common stock issued                               |  |               |        |   |                   | 1,884 |   |       | 1,884  
|Future interest payments on notes issued          |  |               | 8,793   |   |                   |      |   |       | 8,793  
|Expenses incurred                                 |  |               | 3,500   |   |                   |      |   |       | 3,500  
|                                                  |  |               |         |   |                   |       |   |       |        
|Gain on exchange                                  |  |               | 17,089  |   |                   | 119   |   |       | 17,208 
|Taxes                                             |  |               | 6,152   |   |                   | 42    |   |       | 6,194  
|                                                  |  |               |         |   |                   |       |   |       |        
|Gain, net of tax                                  |  | $             | 10,937  |   |                   | 77    |   |       | 11,014 
|                                                  |  |               |         |   |                   |       |   |       |        



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CELLSTAR CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In 2001, as a result of the early termination of its previously existing credit facility, the Company
had an after tax extraordinary loss of $0.6 million, primarily related to the write off of deferred loan costs related to the facility.



On December 1, 2002, the Company adopted FASB Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13
and Technical Corrections which requires that all gains and losses on extinguishment of debt be classified as extraordinary items only if they meet the criteria in APB No. 30. Accordingly, the Company will reclassify in 2003 the gain (loss) on
early extinguishment of debt from an extraordinary gain (loss) to a separate line item before income taxes.



(13)    Repositioning of Operations



In the second quarter of 2002, the Company decided, as part of its plan to reposition its operations, that it would exit the United Kingdom (the
U.K.), Peru and Argentina as soon as practicable, as well as address the balance of its European and Latin American markets, excluding Mexico and Miami. As a result of the decision to exit the U.K., Peru and Argentina, the Company
recorded a net charge of $10.0 million for the three months ended May 31, 2002. During the third quarter of 2002, the Company completed the divestitures of its Peru and Argentina operations to local management at approximately book value. As part of
the divestitures the Company obtained promissory notes totaling $0.9 million and $0.2 million, respectively, from local management in Peru and Argentina. These promissory notes are fully reserved and will remain reserved pending receipt of payments
by the Company. As of August 31, 2002, the Companys operations in the U.K. were closed, except for certain administrative matters. The third and fourth quarters of 2002 include reversal of allowances of $0.8 million and $2.5 million,
respectively, related to the closure of the U.K. operation as the amounts collected on accounts receivable and the market value of the inventory exceeded original estimates. Also, due to the progress made with the tax authorities, the valuation
allowance was reversed on an income tax receivable.



The
following table summarizes the income statement classification of the charge (in thousands):



|                                    |  | Three monthsendedMay 31, 2002 |        |   | Reversal ofallowances |        |   | Net charge |       
|----------------------------------- |  | ----------------------------- | ------ | - | --------------------- | ------ | - | ---------- | ------
|Cost of sales                       |  | $                             | 2,256  |   |                       | (1,131 | ) |            | 1,125 
|Selling, general and administrative |  |                               | 1,691  |   |                       | (588   | ) |            | 1,103 
|Impairment of assets                |  |                               | 3,655  |   |                       |       |   |            | 3,655 
|Severance and exit charges          |  |                               | 2,566  |   |                       |       |   |            | 2,566 
|                                    |  |                               |        |   |                       |        |   |            |       
|Total charge                        |  |                               | 10,168 |   |                       | (1,719 | ) |            | 8,449 
|Tax benefit                         |  |                               | (184   | ) |                       | (1,541 | ) |            | (1,725
|                                    |  |                               |        |   |                       |        |   |            |       
|Net charge                          |  | $                             | 9,984  |   |                       | (3,260 | ) |            | 6,724 
|                                    |  |                               |        |   |                       |        |   |            |       



Of the $2.6 million in
severance and exit charges, all of which consisted of expected cash outlays, $1.8 million has been paid or settled as part of the divestiture of the Companys Peru and Argentina operations and the shutdown of the U.K. operations. The
remaining $0.8 million relates to lease payments associated with the U.K. operations and has not yet been paid as of November 30, 2002.



The severance and exit charge consists of the following (in thousands):



|Severance80 employees |  | $1,626
|---------------------- |  | ------
|Lease accruals         |  | 780   
|Other                  |  | 160   
|                       |  |       
|                       |  | $2,566
|                       |  |       



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CELLSTAR CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company recorded an impairment charge of $3.7 million for the three months ended May 31, 2002,
which included $2.2 million for accumulated foreign currency translation adjustments as a result of the Companys liquidation of its investments in each of these operations and $1.5 million for property and equipment. The property and equipment
were reduced to estimated market value of $0.1 million.



Following is a summary of the combined results of operations, including the exit charge in the U.K., Peru, and Argentina (in thousands):



|                                             |  | Fiscal year ended November 30, |        
|-------------------------------------------- |  | ------------------------------ | -------
|                                             |  | 2002                           |        
|Revenues                                     |  | $                              | 63,942 
|Cost of sales                                |  |                                | 61,585 
|                                             |  |                                |        
|Gross profit                                 |  |                                | 2,357  
|Selling, general and administrative expenses |  |                                | 6,893  
|Impairment of assets                         |  |                                | 3,655  
|Severance and exit charges                   |  |                                | 2,566  
|                                             |  |                                |        
|Operating loss                               |  | $                              | (10,757
|                                             |  |                                |        



The Company has
completed the evaluation of the balance of its Latin American markets, excluding Mexico and Miami. The Company has decided to continue its operation in Chile as this operation is expected to continue to be profitable and to generate cash. To reduce
its in-country exposure in Colombia, the Company is negotiating with its major carrier customer in Colombia to shift the Companys business with the carrier to the Companys Miami export operations. In January 2003, the Company signed a
letter of intent with local management for the sale of its Netherlands operations. There can be no assurance that the sale will be completed due to a number of contingencies contained in the letter of intent. The Company will explore opportunities
to sell its operations in Sweden.



(14)    United
Kingdom International Trading Operations



In April 2000,
the Company curtailed a significant portion of its U.K. international trading operations following third party theft and fraud losses. As a result of the curtailment, the Company experienced a reduction in revenues for the U.K. operations after the
first quarter of 2000 compared to 1999. The trading business involves the purchase of products from suppliers other than manufacturers and the sale of those products to customers other than network operators or their dealers and other
representatives.



For the quarter ended May 31, 2000, the
Company recorded a $4.4 million charge consisting of $3.2 million from third party theft and fraud losses during the purchase, transfer of title and transport of six shipments of wireless handsets and $1.2 million in inventory obsolescence expense
for inventory price reductions incurred while the international trading business was curtailed pending investigation. The Company recovered $0.9 million in cash associated with the third party theft and fraud losses. This recovery is recorded
in cost of sales in the fourth quarter of 2002. The Company is pursuing legal action where appropriate to recover additional amounts. However, the ultimate recovery in relation to these losses, if any, cannot be determined at this time.



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CELLSTAR CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(15)    Brazil



From 1998 to 2000, the Companys Brazil operations were primarily conducted through a majority-owned joint venture.
Following a review of its operations in Brazil, the Company concluded that its joint venture structure, together with foreign exchange risk, the high cost of capital in that country, accumulated losses, and the prospect of ongoing losses, were not
optimal for success in that market. As a result, in the second quarter of 2000 the Company elected to exit the Brazil market.



On August 25, 2000, the Company completed the divestiture of its 51% ownership in the joint venture to its joint venture partner, Fontana Business Corp.
Following is a summary of the operations related to Brazil (amounts in thousands):



|                                             |  | Year ended November 30, 2000 |  
|-------------------------------------------- |  | ---------------------------- | -
|Revenues                                     |  | $40,602                      |  
|Cost of sales                                |  | 41,567                       |  
|                                             |  |                              |  
|Gross profit (loss)                          |  | (965                         | )
|Selling, general and administrative expenses |  | 10,038                       |  
|                                             |  |                              |  
|Operating loss                               |  | 11,003                       |  
|                                             |  |                              |  
|Other income (expense):                      |  |                              |  
|Gain on sale of assets                       |  | 6,048                        |  
|Interest expense                             |  | (3,475                       | )
|                                             |  |                              |  
|Total other income (expense)                 |  | 2,573                        |  
|                                             |  |                              |  
|Loss before income taxes                     |  | $  8,430                     |  
|                                             |  |                              |  



The Company recognized
a pre-tax gain on sale of $6.0 million in conjunction with the disposition of its 51% interest in the joint venture in the third quarter of 2000. The Company had a negative carrying value in its 51% interest in the joint venture as a result of
losses previously recognized. In the disposition, the Company obtained promissory notes totaling $8.5 million related to the Companys funding of certain U.S. letters of credit supporting Brazilian debt obligations. These promissory notes are
fully reserved and will remain reserved pending receipt of payments by the Company.



During the quarter ended May 31, 2000, the Company also fully reserved certain U.S.-based accounts receivable from Brazilian importers, the collectibility of which deteriorated significantly in the second quarter of
2000 and which were further affected by the decision, in the second quarter of 2000, to exit Brazil.



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CELLSTAR CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(16)    Venezuela



During the quarter ended August 31, 2000, the Company decided, based upon the current and expected future economic and
political climate in Venezuela, to divest its operations in Venezuela. For the quarter ended August 31, 2000, the Company recorded an impairment charge of $4.9 million to reduce the carrying value of certain Venezuela assets, primarily goodwill, to
their estimated fair value. The Company subsequently sold its operations in Venezuela in December 2000 for a gain of $1.1 million. Following is a summary of the Venezuela operations (amounts in thousands):



|                                             |  | Year ended November 30, 2000 |  
|-------------------------------------------- |  | ---------------------------- | -
|Revenues                                     |  | $ 36,639                     |  
|Cost of sales                                |  | 35,342                       |  
|                                             |  |                              |  
|Gross profit                                 |  | 1,297                        |  
|Selling, general and administrative expenses |  | 8,630                        |  
|Impairment of assets                         |  | 4,930                        |  
|                                             |  |                              |  
|Operating loss                               |  | 12,263                       |  
|                                             |  |                              |  
|Other income (expense):                      |  |                              |  
|Interest expense                             |  | (8                           | )
|Other, net                                   |  | (1,039                       | )
|                                             |  |                              |  
|Total other income (expense)                 |  | (1,047                       | )
|                                             |  |                              |  
|Loss before income taxes                     |  | $13,310                      |  
|                                             |  |                              |  



(17)    Redistributor Business



The Company phased out a major portion of its redistributor business in the Miami and North American operations in 2000 due to the volatility of the redistributor business, the relatively lower margins and higher credit risks.
Redistributors are distributors that do not have existing direct relationships with manufacturers and who do not have long-term carrier or dealer/agent relationships. These distributors purchase product on a spot basis to fulfill intermittent
customer demand and do not have long-term predictable product demand. Revenues for the redistributor business for Miami and the North American Region for the year ended November 30, 2000 were $57.4 million.



(18)    Inventory Obsolescence Expense and Bad Debt Expense



Inventory obsolescence expense of $10.6 million, $10.2
million and $32.3 million for the years ended November 30, 2002, 2001 and 2000, respectively, is included in cost of goods sold in the accompanying consolidated statements of operations.



Bad debt expense of $4.5 million, $6.7 million and $51.5 million for the years ended November 30, 2002, 2001 and 2000
respectively, is included in selling, general and administrative expenses in the accompanying consolidated statements of operations.



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CELLSTAR CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(19)    Segment and Related Information



The Company operates predominantly within one industry, wholesale and retail
sales of wireless telecommunications products. The Companys management evaluates operations primarily on income before interest and income taxes in the following reportable geographic regions: Asia-Pacific, North America, which consists of the
United States, Latin America, which includes Mexico and the Companys Miami, Florida operations (Miami) and Europe. Revenues and operations of Miami are included in Latin America since Miamis product sales are primarily for
export to Latin American countries, either by the Company or through its exporter customers. The Corporate segment includes headquarters operations, income and expenses not allocated to reportable segments, and interest expense on the Companys
Facility and Notes. Corporate segment assets primarily consist of cash, cash equivalents and deferred income tax assets. The accounting policies of the reportable segments are the same as those described in note (1). Intersegment sales and transfers
are not significant. Segment information for the years ended November 30, 2002, 2001 and 2000 follows (in thousands):



|                                                                      |  | Asia- Pacific |           |   | NorthAmerica |         |   | Latin America |         |   | Europe |         |   | Corporate |         |   | Total |          
|--------------------------------------------------------------------- |  | ------------- | --------- | - | ------------ | ------- | - | ------------- | ------- | - | ------ | ------- | - | --------- | ------- | - | ----- | ---------
|November 30, 2002:                                                    |  |               |           |   |              |         |   |               |         |   |        |         |   |           |         |   |       |          
|Revenues from external customers                                      |  | $             | 1,115,499 |   |              | 558,173 |   |               | 341,632 |   |        | 181,310 |   |           |        |   |       | 2,196,614
|Impairment of assets                                                  |  |               |          |   |              |        |   |               | 2,532   |   |        | 1,123   |   |           |        |   |       | 3,655    
|Severance and exit charges                                            |  |               |          |   |              |        |   |               | 561     |   |        | 2,005   |   |           |        |   |       | 2,566    
|Operating income (loss)                                               |  |               | 34,374    |   |              | 18,774  |   |               | (15,047 | ) |        | (5,247  | ) |           | (20,919 | ) |       | 11,935   
|Income (loss) before interest and income taxes and extraordinary gain |  |               | 34,417    |   |              | 14,873  |   |               | (16,700 | ) |        | 8,133   |   |           | (28,399 | ) |       | 12,324   
|Extraordinary gain on extinguishment of debt                          |  |               |          |   |              |        |   |               |        |   |        |        |   |           | 11,014  |   |       | 11,014   
|Total assets                                                          |  |               | 229,176   |   |              | 72,863  |   |               | 117,151 |   |        | 46,535  |   |           | 49,866  |   |       | 515,591  
|Depreciation, amortization and impairment of assets                   |  |               | 2,601     |   |              | 1,137   |   |               | 4,563   |   |        | 1,886   |   |           | 1,647   |   |       | 11,834   
|Capital expenditures                                                  |  |               | 3,939     |   |              | 386     |   |               | 1,198   |   |        | 171     |   |           | 1,066   |   |       | 6,760    
|                                                                      |  |               |           |   |              |        
|November 30, 2001:                                                    |  |               |           |   |              |         |   |               |         |   |        |         |   |           |         |   |       |          
|Revenues from external customers                                      |  | $             | 1,213,454 |   |              | 578,612 |   |               | 411,079 |   |        | 230,658 |   |           |        |   |       | 2,433,803
|Separation agreement                                                  |  |               |          |   |              |        |   |               |        |   |        |        |   |           | 5,680   |   |       | 5,680    
|Operating income (loss)                                               |  |               | 33,099    |   |              | 25,805  |   |               | (11,372 | ) |        | (3,878  | ) |           | (28,043 | ) |       | 15,611   
|Equity in income (loss) of affiliated companies, net                  |  |               | (858      | ) |              |        |   |               |        |   |        |        |   |           |        |   |       | (858     
|Impairment of investment                                              |  |               | (2,215    | ) |              |        |   |               |        |   |        |        |   |           |        |   |       | (2,215   
|Income (loss) before interest and income taxes and extraordinary loss |  |               | 30,300    |   |              | 21,752  |   |               | (10,793 | ) |        | (3,722  | ) |           | (22,015 | ) |       | 15,522   
|Extraordinary loss on extinguishment of debt, net of tax              |  |               |          |   |              |        |   |               |        |   |        |        |   |           | (626    | ) |       | (626     
|Total assets                                                          |  |               | 263,268   |   |              | 143,598 |   |               | 130,481 |   |        | 48,885  |   |           | 59,838  |   |       | 646,070  
|Depreciation, amortization and impairment of assets                   |  |               | 2,309     |   |              | 1,179   |   |               | 2,664   |   |        | 929     |   |           | 3,886   |   |       | 10,967   
|Capital expenditures                                                  |  |               | 2,822     |   |              | 801     |   |               | 1,108   |   |        | 258     |   |           | 569     |   |       | 5,558    
|                                                                      |  |               |           |   |              |        
|November 30, 2000:                                                    |  |               |           |   |              |         |   |               |         |   |        |         |   |           |         |   |       |          
|Revenues from external customers                                      |  | $             | 1,024,762 |   |              | 499,171 |   |               | 636,354 |   |        | 315,395 |   |           |        |   |       | 2,475,682
|Impairment of assets                                                  |  |               |          |   |              | 974     |   |               | 11,365  |   |        |        |   |           |        |   |       | 12,339   
|Operating income (loss)                                               |  |               | 7,770     |   |              | (16,425 | ) |               | (38,724 | ) |        | 2,263   |   |           | (24,813 | ) |       | (69,929  
|Equity in income (loss) of affiliated companies, net                  |  |               | (1,805    | ) |              |        |   |               |        |   |        |        |   |           |        |   |       | (1,805   
|Income (loss) before interest and income taxes                        |  |               | 6,361     |   |              | (24,021 | ) |               | (31,623 | ) |        | 2,450   |   |           | (22,528 | ) |       | (69,361  
|Total assets                                                          |  |               | 289,677   |   |              | 172,527 |   |               | 256,907 |   |        | 56,824  |   |           | 82,889  |   |       | 858,824  
|Depreciation, amortization and impairment of assets                   |  |               | 1,905     |   |              | 3,661   |   |               | 14,492  |   |        | 810     |   |           | 2,703   |   |       | 23,571   
|Capital expenditures                                                  |  |               | 1,256     |   |              | 1,309   |   |               | 2,052   |   |        | 452     |   |           | 392     |   |       | 5,461    



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CELLSTAR CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



A reconciliation from the segment information to the income (loss) before income taxes included in
the consolidated statements of operations for the years ended November 30, 2002, 2001, and 2000 follows (in thousands):



|                                                                                                              |  | 2002 |        |   | 2001 |         |   | 2000 |        
|------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | ------- | - | ---- | -------
|Income (loss) before interest and income taxes and extraordinary gain (loss) per segment information          |  | $    | 12,324 |   |      | 15,522  |   |      | (69,361
|Interest expense per the consolidated statements of operations                                                |  |      | (7,564 | ) |      | (15,383 | ) |      | (19,113
|Interest income included in other, net in the consolidated statements of operations                           |  |      | 1,433  |   |      | 3,237   |   |      | 4,759  
|                                                                                                              |  |      |        |   |      |         |   |      |        
|Income (loss) before income taxes and extraordinary gain (loss) per the consolidated statements of operations |  | $    | 6,193  |   |      | 3,376   |   |      | (83,715
|                                                                                                              |  |      |        |   |      |         |   |      |        



Geographical
information for the years ended November 30, 2002, 2001 and 2000, follows (in thousands):



|                           |  | 2002     |           | 2001              |        | 2000    
|-------------------------- |  | -------- | --------- | ----------------- | ------ | --------
|                           |  | Revenues |           | Long-lived assets |        | Revenues
|United States              |  | $        | 613,402   |                   | 11,109 |         
|Peoples Republic of China |  |          | 882,033   |                   | 3,640  |         
|Hong Kong                  |  |          | 38,873    |                   | 6,051  |         
|United Kingdom             |  |          | 47,467    |                   |       |         
|Mexico                     |  |          | 185,627   |                   | 2,196  |         
|All other countries        |  |          | 429,212   |                   | 5,321  |         
|                           |  |          |           |                   |        |         
|                           |  | $        | 2,196,614 |                   | 28,317 |         
|                           |  |          |           |                   |        |         



For purposes of the
geographical information above, the Companys Miami operations are included in the United States. Revenues are attributed to individual countries based on the location of the originating transaction.



A customer in the Asia-Pacific Region accounted for approximately 10% or
$230.0 million and 11% or $268.0 million of consolidated revenues for the years ended November 30, 2002 and 2001, respectively. No customer accounted for 10% or more of consolidated revenues in the year ended November 30, 2000.



At November 30, 2001, the Company had a receivable of $33.4 million from a
customer in the North America Region.



(20)    Acquisitions



In
August 1999, the Company acquired the business and certain net assets of Montana Telecommunications Group B.V. in The Netherlands in a transaction accounted for as a purchase. The purchase price was $2.3 million, which resulted in $1.0 million
of goodwill with an estimated life of 20 years. Additional payments based on future operating results of the business over the four year period subsequent to acquisition may be paid in cash. For 2000, 2001, and 2002 payments of $0.1 million, $0.1
and $0.2 million were made pursuant to the agreement and recorded as goodwill.



The Company acquired TA Intercall AB (Sweden), in January 1998. This transaction was accounted for as a purchase. The original purchase price was $9.1 million, which resulted in $6.5 million of goodwill with an
estimated life of 20 years. Additional payments based on operating results of Sweden for the three years subsequent to acquisition were paid either in cash or common stock at the Companys option. In 2000, $4.0 million of additional
goodwill was recorded for Sweden based upon the estimated payment amount. In 2001, $0.6 million of additional goodwill was recorded in conjunction with the final acquisition payment.



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CELLSTAR CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The consolidated financial statements include the operating results of each business from the date of
acquisition. The impact of these acquisitions was not material in relation to the Companys consolidated financial position or results of operations.



(21)    Stockholders Equity



(a)    Common Stock Options



The Company has a stock option plan (the Plan) covering 2.28 million shares of its common stock. Options under the Plan expire ten years from
the date of grant unless earlier terminated due to the death, disability, retirement or other termination of service of the optionee. Options have vesting schedules ranging from 100% on the first anniversary of the date of grant to 25% per year
commencing on the first anniversary of the date of grant. The exercise price is equal to the fair market value of the common stock on the date of grant.



The Company also has a stock option plan for non-employee directors (Directors Option Plan). The Directors Option Plan provides
that each non-employee director of the Company as of the date the Directors Option Plan was adopted and each person who thereafter becomes a non-employee director should automatically be granted an option to purchase 1,500 shares of common
stock. The exercise price is equal to the fair market value of the common stock on the date of grant. A total of 30,000 shares of common stock are authorized for issuance pursuant to the Directors Option Plan. Each option granted under the
Directors Option Plan becomes exercisable six months after its date of grant and expires ten years from the date of grant unless earlier terminated due to the death, disability, retirement or other termination of service of the optionee.
Non-employee directors also receive an annual grant of an option to purchase 1,000 shares of Company common stock under the Plan. Such options vest over a four year period and have an exercise price equal to the fair market value of the
Companys common stock as of market close on the date of grant. The per share weighted-average fair value of stock options granted during the years ended November 30, 2002, 2001 and 2000, was $2.34, $5.51 and $29.25, respectively, on the date
of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:



|                                    |  | 2002  |   |  | 2001  |  | 2000 
|----------------------------------- |  | ----- | - |  | ----- |  | -----
|Dividend yield                      |  | 0.00  | % |  | 0.00  |  | 0.00 
|Volatility                          |  | 90.00 |   |  | 92.00 |  | 88.00
|Risk-free interest rate             |  | 3.50  |   |  | 4.70  |  | 6.50 
|Expected term of options (in years) |  | 3.40  |   |  | 3.40  |  | 3.40 



The Company applies
Opinion 25 in accounting for its plans and, accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date
for its stock options under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, the Companys net income (loss) would have been the pro forma amounts below for the years ended November 30,
2002, 2001 and 2000 (in thousands, except per share amounts):



|                                                |  | 2002 |         |   | 2001 |        |   | 2000 |        
|----------------------------------------------- |  | ---- | ------- | - | ---- | ------ | - | ---- | -------
|Net income (loss) as reported                   |  | $    | (29,924 | ) |      | 550    |   |      | (62,959
|Diluted net income (loss) per share as reported |  |      | (2.44   | ) |      | 0.05   |   |      | (5.24  
|Pro forma net income (loss)                     |  |      | (30,499 | ) |      | (1,380 | ) |      | (65,981
|Pro forma diluted net loss per share            |  |      | (2.49   | ) |      | (0.11  | ) |      | (5.49  



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CELLSTAR CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Stock option activity during the years ended November 30, 2002, 2001 and 2000, is as follows:



|                                                            |  | 2002             |  | 2001                              |  | 2000            
|----------------------------------------------------------- |  | ---------------- |  | --------------------------------- |  | ----------------
|                                                            |  | Number of shares |  | Weighted- Average Exercise Prices |  | Number of shares
|Granted                                                     |  | 484,300          |  | 3.873                             |  | 603,925         
|Exercised                                                   |  |                 |  | 0.000                             |  |                
|Forfeited                                                   |  | 337,568          |  | 19.312                            |  | 159,860         
|Outstanding, end of year                                    |  | 1,527,658        |  | 23.828                            |  | 1,380,926       
|Exercisable, end of year                                    |  | 721,717          |  | 37.165                            |  | 597,780         
|Reserved for future grants under the Plan                   |  | 470,710          |  |                                   |  |                 
|Reserved for future grants under the Directors Option Plan |  | 18,000           |  |                                   |  |                 



For options
outstanding and exercisable as of November 30, 2002, the exercise prices and remaining lives were:



|Range of Exercise Prices |  | Number Outstanding |  | Average Remaining Life (in years) |  | Weighted- Average Exercise Prices |         | Number Exercisable |         | Weighted-Average Exercise Prices
|------------------------ |  | ------------------ |  | --------------------------------- |  | --------------------------------- | ------- | ------------------ | ------- | --------------------------------
|$3.0604.300             |  | 390,000            |  | 9.5                               |  | $                                 | 3.7070  |                    | 500     |                                 
|$4.350010.2500          |  | 435,524            |  | 8.5                               |  |                                   | 8.7419  |                    | 137,886 |                                 
|$10.600049.3750         |  | 510,109            |  | 5.0                               |  |                                   | 39.3260 |                    | 397,031 |                                 
|$51.565099.4000         |  | 192,025            |  | 5.3                               |  |                                   | 57.7431 |                    | 186,300 |                                 
|                         |  |                    |  |                                   |  |                                   |         |                    |         |                                 
|                         |  | 1,527,658          |  | 7.2                               |  | $                                 | 23.8284 |                    | 721,717 |                                 
|                         |  |                    |  |                                   |  |                                   |         |                    |         |                                 



(b)    Stockholder Rights Plan



The Company has a Stockholder Rights Plan, which provides that the holders of the Companys common stock receive five-thirds of a right (Right), as adjusted for prior stock splits, for each share of the Companys
common stock they own. Each Right entitles the holder to buy one one-thousandth of a share of Series A Preferred Stock, par value $.01 per share, at a purchase price of $80.00, subject to adjustment. The Rights are not currently exercisable,
but would become exercisable if certain events occurred relating to a person or group acquiring or attempting to acquire 15% or more of the outstanding shares of common stock of the Company. Under those circumstances, the holders of Rights would be
entitled to buy shares of the Companys common stock or stock of an acquirer of the Company at a 50% discount. The Rights expire on January 9, 2007, unless earlier redeemed by the Company.



(22)    Commitments and Contingencies



(a)    Legal Proceedings



On October 15, 2001, the Company announced that the results for the three
and six months ended May 31, 2001 would be restated to reflect certain accounting adjustments. In October 2001, the Company received an inquiry from the SEC requesting information concerning the restatement of earnings for the quarter ended
May 31, 2001. The Company believes that it has fully responded to such request.



The Company is also a party to various other claims, legal actions and complaints arising in the ordinary course of business.



Management believes that the disposition of these matters should not have a materially adverse effect on the consolidated financial condition or results
of operations of the Company.



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CELLSTAR CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(b)    401(k) Savings Plan



The Company established a savings plan for employees in 1994. Employees are
eligible to participate if they were full-time employees as of July 1, 1994, or on completing 90 days of service. The plan is subject to the provisions of the Employee Retirement Income Security Act of 1974. Under provisions of the plan, eligible
employees are allowed to contribute as much as 50% of their compensation, up to the annual maximum allowed by the Internal Revenue Service. The Company may make a discretionary matching contribution based on the Companys profitability. The
Company made contributions of approximately $0.3 million, $0.3 million and $0.2 million to the plan for the years ended November 30, 2002, 2001 and 2000 respectively.



(c)    Foreign Currency Contracts



From time to time, the Company uses foreign currency forward contracts to reduce exposure to exchange rate risks primarily
associated with transactions in the regular course of the Companys international operations. The forward contracts establish the exchange rates at which the Company should purchase or sell the contracted amount of local currencies for
specified foreign currencies at a future date. The Company uses forward contracts, which are short-term in nature (45 days to one year), and receives or pays the difference between the contracted forward rate and the exchange rate at the settlement
date.



At November 30, 2002 and November 30, 2001, the Company
had no forward contracts.



(23)    Subsequent Event



In January 2003, the Company signed a letter of intent
with local management for the sale of its Netherlands operations. There can be no assurance that the sale will be completed due to a number of contingencies contained in the letter of intent.



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CELLSTAR CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



CELLSTAR CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL FINANCIAL DATA (UNAUDITED)

(In thousands, except per share data)



|                             |  | FirstQuarter |         |     | SecondQuarter |         |      | ThirdQuarter |         |      | FourthQuarter |        
|---------------------------- |  | ------------ | ------- | --- | ------------- | ------- | ---- | ------------ | ------- | ---- | ------------- | -------
|2002                         |  |              |         |     |               |         |      |              |         |      |               |        
|Revenues                     |  | $            | 629,243 |     |               | 573,262 |      |              | 522,971 |      |               | 471,138
|Gross profit                 |  |              | 34,654  |     |               | 35,006  |      |              | 34,742  |      |               | 26,406 
|Net income (loss)            |  |              | 11,395  | (a) |               | (5,913  | )(b) |              | 6,149   | (c)  |               | (41,555
|Net income (loss) per share: |  |              |         |     |               |         |      |              |         |      |               |        
|Basic:                       |  |              | 0.95    | (a) |               | (0.49   | )(b) |              | 0.50    | (c)  |               | (3.29  
|Diluted:                     |  |              | 0.90    | (a) |               | (0.49   | )(b) |              | 0.30    | (c)  |               | (3.29  
|2001                         |  |              |         |     |               |         |      |              |         |      |               |        
|Revenues                     |  | $            | 645,158 |     |               | 572,879 |      |              | 610,496 |      |               | 605,270
|Gross profit                 |  |              | 36,793  |     |               | 32,267  |      |              | 31,069  |      |               | 35,697 
|Net income (loss)            |  |              | 4,192   |     |               | 3,591   |      |              | (5,840  | )(e) |               | (1,393 
|Net income (loss) per share: |  |              |         |     |               |         |      |              |         |      |               |        
|Basic:                       |  |              | 0.35    |     |               | 0.30    |      |              | (0.49   | )(e) |               | (0.12  
|Diluted:                     |  |              | 0.35    |     |               | 0.30    |      |              | (0.49   | )(e) |               | (0.12  



|(a) |  | In the first quarter of 2002, the Company completed its exchange offer for its $150.0 million 5% convertible subordinated notes and recognized an extraordinary gain net of tax of
$10.9 million.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | In the second quarter of 2002, the Company decided as part of its plan to reposition its operations that it would exit the United Kingdom, Peru and Argentina. As a result of the
decision, the Company recorded an after-tax charge of $10.0 million.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) |  | In the third and fourth quarters of 2002, the Company reversed allowances of $0.8 million and $2.5 million, respectively, related to the closure of the U.K. operations.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(d) |  | In the fourth quarter of 2002, the Company recorded tax expense of $44.2 million related to undistributed earnings in its non-U.S. subsidiaries which were previously considered
permanently reinvested.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(e) |  | In the third quarter of 2001, the Companys operations were affected by a charge related to the separation agreement between the Company and the former Chief Executive Officer
of $5.7 million and an impairment charge to reduce the carrying value of an investment of $2.2 million.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(f) |  | In the fourth quarter of 2001, the Companys operations were affected by $0.6 million after tax extraordinary loss on the early extinguishment of debt and a charge in selling,
general and administrative expenses related to value-added taxes of $3.0 million.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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CELLSTAR CORPORATION AND SUBSIDIARIES



SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS

Years ended November 30, 2002, 2001 and 2000

(in thousands)



|                                   |  | Balance atbeginning of period |        | Charged tocosts and expenses |        | Charged toactivation income (a) |     |   | Deductions, net of recoveries |         |   | Balance atend of period
|---------------------------------- |  | ----------------------------- | ------ | ---------------------------- | ------ | ------------------------------- | --- | - | ----------------------------- | ------- | - | -----------------------
|Allowance for doubtful accounts:   |  |                               |        |                              |        |                                 |     |   |                               |         |   |                        
|November 30, 2002                  |  | $                             | 57,359 |                              | 4,479  |                                 |    |   |                               | (4,208  | ) |                        
|November 30, 2001                  |  |                               | 75,810 |                              | 6,737  |                                 | (53 | ) |                               | (25,135 | ) |                        
|November 30, 2000                  |  |                               | 33,152 |                              | 51,533 |                                 | 103 |   |                               | (8,978  | ) |                        
|Reserve for inventory obsolescence |  |                               |        |                              |        |                                 |     |   |                               |         |   |                        
|November 30, 2002                  |  | $                             | 16,188 |                              | 10,588 |                                 |    |   |                               | (15,327 | ) |                        
|November 30, 2001                  |  |                               | 19,312 |                              | 10,210 |                                 |    |   |                               | (13,334 | ) |                        
|November 30, 2000                  |  |                               | 14,868 |                              | 32,255 |                                 |    |   |                               | (27,811 | ) |                        



|(a) |  | The Company, under agent agreements, earns activation commissions from wireless service providers on engaging subscribers for wireless handset services in connection with the
Companys retail operations. The agent agreements also provide for the reduction or elimination of activation commissions if the subscribers deactivate service within a stipulated period. The Company reduces activation income for increases in
the allowance for estimated deactivations.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



S-1