<PAGE>
 
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               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
 
                                   FORM 10-K
 
[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, 1998                        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. [X]
 
  On February 23, 1999, the aggregate market value of the voting stock held by
nonaffiliates of the Company was approximately $465,274,573, based on the
closing sale price of $11.75 as reported by the NASDAQ/NMS. (For purposes of
determination of the above stated amount, only directors, executive officers
and 10% or greater stockholders have been deemed affiliates).
 
  On February 23, 1999, there were 59,541,096 outstanding shares of Common
Stock, $0.01 par value per share.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  Portions of the Proxy Statement for the Annual Meeting of Stockholders of
the Company to be held during 1999 are incorporated by reference into Part III
of this Form 10-K.
 
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<PAGE>
 
                    CELLSTAR CORPORATION INDEX TO FORM 10-K
 
<TABLE>
<CAPTION>
                                                                           PAGE
                                                                          NUMBER
                                                                          ------
<S>                                                                       <C>
PART I.
Item 1. Business........................................................     3
Item 2. Properties......................................................    12
Item 3. Legal Proceedings...............................................    13
Item 4. Submission of Matters to a Vote of Security Holders.............    14
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
 Matters................................................................    15
Item 6. Selected Consolidated Financial Data............................    16
Item 7. Management's Discussion and Analysis of Financial Condition and
 Results of Operations..................................................    17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....    24
Item 8. Consolidated Financial Statements and Supplementary Data........    25
Item 9. Changes in and Disagreements with Accountants on Accounting and
 Financial Disclosure...................................................    25
PART III.
Item 10. Directors and Executive Officers of the Registrant.............    26
Item 11. Executive Compensation.........................................    26
Item 12. Security Ownership of Certain Beneficial Owners and Management.    26
Item 13. Certain Relationships and Related Transactions.................    26
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-
 K......................................................................    27
</TABLE>
 
                                       2
<PAGE>
 
                                    PART I.
 
ITEM 1. BUSINESS
 
GENERAL
 
 CellStar Overview
 
  CellStar Corporation ("CellStar" or the "Company") is a global company
focused on providing distribution and value-added services to wireless
carriers and manufacturers in direct relationships. With operations in the
North American Region, the Asia-Pacific Region, the Latin American Region and
the European Region, CellStar is one of the world's largest non-carrier
wholesale distributors of wireless handsets for major manufacturers. The
"North American Region" currently consists of the United States. The "Asia-
Pacific Region" consists of the People's Republic of China, including Hong
Kong ("PRC"), Singapore, Malaysia, Taiwan and The Philippines. The "Latin
American Region" consists of Mexico, Colombia, Venezuela, Chile, Argentina,
Brazil and Peru. The "European Region" consists of the United Kingdom, Sweden
and Poland.
 
  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 inventory management, marketing,
prepaid wireless, product fulfillment, kitting and customized packaging,
private labeling, light assembly, accounts receivable management and end-user
support services, including customized "1-800" fulfillment. The Company
recently entered into agreements with several providers of global satellite
communication services to distribute wireless handsets and accessories and
provide certain value-added fulfillment services. The Company is also a
retailer of wireless communications products in certain markets.
 
  The Company's revenues grew at a 48.6% compound annual rate for the five
fiscal years ended November 30, 1998, and increased 34.6% for the year ended
November 30, 1998, compared to the prior fiscal year. Net income for fiscal
1998 was $14.4 million, compared to net income of $53.6 million for fiscal
1997. This decrease was primarily due to the Company's recognition of the net
loss of Topp Telecom, Inc. ("Topp") to the extent of the Company's entire debt
and equity investment in Topp; the settlement of the Company's class action
lawsuit; and the costs of de-emphasizing or eliminating certain businesses,
including the Company's reseller and U.S. retail operations and other
operations that are non-essential to the Company's core business.
 
  In the fourth quarter, CellStar reviewed all operations, particularly non-
strategic and poorly performing operations, and focused its growth strategy on
providing value-added services to wireless carriers and manufacturers in
direct relationships. As a result, the Company is:
 
  .  De-emphasizing or eliminating businesses, and writing off related
     assets, that do not support its growth strategy;
 
  .  Targeting for sale its reseller operations, retail operations in the
     United States and other operations that are non-essential to its core
     business;
 
  .  Intensifying its focus on cost control; and
 
  .  Continuing to invest in operations that strengthen its direct
     relationships with wireless carriers and manufacturers.
 
  CellStar believes that successful implementation of these strategic
initiatives should generate consistently improved results, beginning in 1999,
and should enhance the long-term value of its stockholders' investments in the
Company.
 
  The Company, a Delaware corporation, was formed in 1993 to hold the stock of
a company that is now an operating subsidiary. The operating subsidiary was
originally formed in 1981 to distribute and install automotive aftermarket
products. In 1984, the Company began offering wireless communications products
and services, and
 
                                       3
<PAGE>
 
in 1989, the Company became an authorized distributor of Motorola, Inc.
("Motorola") wireless handsets in certain portions of the United States. The
Company entered into similar arrangements with Motorola in the Latin American
Region in 1991, 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 Mobile Phones, Inc. ("Nokia"), Ericsson
Inc. ("Ericsson") and QUALCOMM Incorporated ("QUALCOMM").
 
  The Company's rapid growth has placed a significant strain on its
management, employees, systems and financial resources. The Company's
continued growth will depend upon, among other things, the Company's ability
to maintain its operating margins, continue to secure an adequate supply of
competitive products on a timely basis and on commercially reasonable terms,
continually turn its inventories and accounts receivable, successfully manage
growth (including monitoring operations, controlling costs and maintaining
effective inventory and credit controls), manage operations that are
geographically dispersed, achieve significant penetration in existing and new
geographic markets and hire, train and retain qualified employees who can
effectively manage and operate its business.
 
 Industry Overview
 
  Wireless communications technology encompasses wireless communications
devices such as handheld, mobile and transportable handsets, pagers and two-
way radios. Since its inception in 1983, the wireless handset market has grown
rapidly. The Company believes that the wireless communications industry will
continue to grow for a number of reasons. Economic growth, increased service
availability and the lower cost of wireless service compared to conventional
landline telephone systems in emerging markets will, the Company believes,
continue to create demand for wireless communications products. The Company
also believes that the change from analog to digital technology will increase
overall market growth and encourage consumers to purchase the next generation
of products. In addition, advanced digital technologies have led to increases
in the number of network operators and resellers, which have promoted greater
competition for subscribers and, the Company believes, have resulted in
increased demand for wireless communications products. Finally, the
proliferation of new manufacturers is expected to lower prices, increase
product selection and expand sales channels.
 
NORTH AMERICAN REGION
 
 Industry
 
  In the United States, wireless handset service was developed as an
alternative to conventional landline systems and existing mobile handset
service and has been one of the fastest growing market segments in the
communications industry. The number of U.S. wireless subscribers has grown
significantly since the inception of the wireless handset industry in 1983.
The Company believes that the U.S. market for wireless services will continue
to expand due to the increasing affordability and availability of such
services and shorter development cycles for new products and enhancements. In
addition, many wireless service providers are upgrading their existing systems
from analog to digital technology as a result of capacity constraints in many
of the larger wireless markets and in order to respond to competition. Digital
technology increases system capacity and offers other advantages, such as
improved overall average signal quality, improved call security, lower
incremental costs for additional subscribers and the ability to provide data
transmission services.
 
 Wholesale Operations
 
  General. Approximately 96% of the Company's North American Region revenues
during fiscal 1998 were derived from wholesale operations, compared to 93% for
fiscal 1997 (excluding the Company's Miami, Florida operations, which are
included in the Latin American Region). In the United States, manufacturers
such as Motorola, Nokia, Ericsson and NEC Corporation ("NEC") sell wireless
handsets directly to large wireless carriers, such as AT&T Wireless Services,
Inc., and large mass merchandisers, such as Best Buy Co., Inc. and Circuit
City Stores, Inc. The Company's wholesale operations complement these
manufacturers' distribution channels, in that these manufacturers generally
also sell to wholesale distributors such as the Company in order
 
                                       4
<PAGE>
 
to access smaller volume purchasers. The Company also acts as a wholesale
distributor of wireless accessories manufactured by original equipment
manufacturers ("OEMs") and other suppliers to large wireless carriers and mass
merchandisers, as well as to smaller volume purchasers.
 
  During fiscal 1998, the Company sold its products to over 2,500 U.S.
wholesale customers, the ten largest of which accounted for approximately 15%
of the Company's consolidated revenues in fiscal 1998, of which approximately
10% are attributable to the Company's agreement to provide fulfillment and
other distribution services to Pacific Bell Mobile Services ("PBMS"). The
Company offers wireless handsets and accessories manufactured by OEMs, such as
Motorola, Ericsson, Nokia, QUALCOMM, Sony Electronics Inc. ("Sony") and NEC,
and aftermarket accessories manufactured by a variety of suppliers.
Accessories include, among others, boosters, hands-free kits, handheld
accessories, antennas, batteries, battery packs, battery eliminators, leather
cases and battery chargers. The Company sells handsets and accessories under
private labels to wireless carriers such as Southwestern Bell Wireless Inc.,
GTE Mobilnet, Western Wireless, PBMS and U.S. Cellular.
 
  The Company offers a broad product mix in the United States, including
products that are compatible with digital and analog systems. The Company
anticipates that its product offerings will continue to expand with the
evolution of new technologies as they become commercially viable.
 
  In addition to its distribution services, the Company provides various
value-added facilitation and fulfillment services, including aftermarket and
OEMs product packaging and configuration, inventory management, order
processing, return and repair management, marketing and design, credit and
collections and handset sales. The Company believes that opportunities
continue to exist for it to assist wireless communications carriers in meeting
their supply and distribution needs by providing complete order-fulfillment
services. The Company anticipates an increased demand for such services as new
and existing wireless carriers and manufacturers desire to outsource these
activities in order to reduce costs and focus on their own core businesses.
 
  The Company's primary distribution facility, a 120,000 square foot warehouse
facility, is located at its corporate headquarters in the Dallas/Fort Worth
metropolitan area. The Company also operates a 58,900 square foot wholesale
distribution facility in Chino, California to support the Company's west coast
customers.
 
  Sales and Marketing. The Company markets its products nationally 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, easy access to hard-to-find products,
credit terms, a variety of name brand products and highly-responsive customer
service.
 
 Retail Operations
 
  General. Approximately 4% of the Company's North American Region revenues
during fiscal 1998 were derived from retail operations, compared to 7% for
fiscal 1997 (excluding the Company's Miami, Florida operations, which are
included in the Latin American Region). As of November 30, 1998, the Company
conducted its U.S. retail operations through 13 stand-alone retail stores in
three states. In January 1999, the Company sold its six retail stores located
in the Dallas-Fort Worth area to Southwestern Bell Wireless Inc. and announced
its intent to dispose of its remaining seven retail locations in the United
States in the near term.
 
  The Company's retail stores generate revenues from three sources: the sale
of wireless handsets and other products, activation commissions and, in most
cases, residual payments. An activation commission is paid by a wireless
carrier when a customer initially subscribes for wireless service. The amount
of the activation commission paid by a wireless carrier is based on the
service plans and promotional marketing programs offered by that particular
wireless carrier. The Company's carrier contracts also provide for a residual
payment, which is a monthly payment made by a wireless carrier to the Company
based on the wireless handset usage by a customer activated by the Company.
 
  Sales and Marketing. The Company promotes its stand-alone retail stores
through direct mailings and local media, including newspapers.
 
                                       5
<PAGE>
 
ASIA-PACIFIC REGION
 
 Industry
 
  Whereas demand for wireless service in major industrialized countries has
been driven primarily by automobile and business travel, the Company believes
that in the Asia-Pacific Region, primarily in the PRC, demand for such
services has been and will continue to be driven by an unsatisfied demand for
basic phone service due to the lack of adequate landline service and to
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. Based on these factors, as well as the large population
bases and economic growth in this region, the Company believes that phone
users will increasingly utilize wireless systems.
 
 Operations
 
  General. The key to the Company's expansion in the Asia-Pacific Region has
been its relationships with wireless equipment manufacturers. The Company
historically has entered a new market with the support of a manufacturer. The
Company distributes products in the Asia-Pacific Region for Motorola, Nokia
and Ericsson. Throughout the Asia-Pacific Region, CellStar 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 business units in the region, derives its revenue principally from
wholesale sales of wireless products to Hong Kong-based companies that ship
wireless products to the remainder of the PRC and Taiwan.
 
  Shanghai CellStar International Trading Company, Ltd. ("CellStar Shanghai"),
a wholly-owned, limited liability foreign trade company established in
Shanghai, PRC, commenced domestic wholesale operations in the PRC in 1997
using a local commodities exchange market as an intermediary, pursuant to an
experimental initiative permitting market access as authorized by the Shanghai
municipal government. CellStar Shanghai purchases wireless handsets locally
manufactured by Motorola and Nokia and wholesales those products to
distributors and retailers located throughout the PRC. CellStar Shanghai has
also entered into cooperative arrangements with certain local distributors
that allow them to establish wholesale and retail operations utilizing
CellStar's trademarks. Under the terms of such arrangements, CellStar Shanghai
provides services, sales support, training and access to promotional materials
for use in their operations. In exchange, those distributors agree to purchase
most of their requirements of wireless handsets from CellStar Shanghai and
further agree to allow CellStar Shanghai to purchase up to 50% of their
operation if and when foreign ownership of domestic retail operations is
allowed by the PRC government. CellStar Shanghai currently deals with numerous
local distributors, including distributors located in the ten largest
metropolitan areas in the PRC. CellStar Shanghai leases warehouse, showroom
and office space in the Pudong district of Shanghai.
 
  Although the Company's business in the Asia-Pacific Region is predominantly
wholesale, operations within a particular country may be either wholesale,
retail, or both, and may be owned solely by the Company or jointly with local
partners, depending on the market and regulatory environment in the host
country.
 
  The following table outlines the Company's entry into the Asia-Pacific
Region:
 
<TABLE>
<CAPTION>
                                                             TYPE OF OPERATION
                                                     YEAR    (AS OF NOVEMBER 30,
     COUNTRY                                        ENTERED         1998)
     -------                                        ------- --------------------
     <S>                                            <C>     <C>
     Hong Kong/China...............................  1993        Wholesale
     Singapore.....................................  1995   Wholesale and Retail
     The Philippines...............................  1995   Wholesale and Retail
     Malaysia......................................  1995   Wholesale and Retail
     Taiwan........................................  1995   Wholesale and Retail
</TABLE>
 
 
                                       6
<PAGE>
 
  At November 30, 1998, the Company sold its products to over 250 wholesale
customers in the Asia-Pacific Region (excluding customers of the Company's
Malaysian joint venture), the ten largest of which accounted for approximately
25% of the Company's consolidated revenues in fiscal 1998. The Company offers
wireless handsets and accessories manufactured by OEMs, such as Motorola,
Nokia and Ericsson, and aftermarket accessories manufactured by a variety of
suppliers. Accessories include, among others, batteries, hands-free kits,
chargers, carkits, battery eliminators and leather cases.
 
  The Company offers a broad product mix in the Asia-Pacific Region, including
products that are compatible with digital and analog systems. The Company
anticipates that its product offerings will continue to expand with the
evolution of new technologies as they become commercially viable.
 
  The Company's operations and sales in the Asia-Pacific Region are subject to
political and economic risks, including the following: political 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 related to foreign ownership of businesses abroad; foreign tax
laws; changes in import/export regulations, including enforcement policies;
and tariff and freight rates. Political and other factors beyond the control
of the Company, including trade disputes among nations, currency fluctuations
or internal instability in any nation where the Company conducts business,
could have a materially adverse effect on the Company.
 
  Sales and Marketing. The Company markets its products to a variety of
wholesale purchasers, including retailers, exporters and wireless carriers,
through its direct sales force and through trade shows and television
advertising. To penetrate local markets in The Philippines, the Company has
made use of subagent and license relationships.
 
LATIN AMERICAN REGION
 
 Industry
 
  As in the Asia-Pacific Region, the Company believes that demand for wireless
services in the Latin American Region has been and will continue to be driven
by an unsatisfied demand for basic phone service due to the lack of adequate
landline service and to 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. Based on these factors, as
well as the large population bases and economic growth in this region, the
Company believes that phone users will increasingly utilize wireless systems.
 
 Operations
 
  General. The key to the Company's expansion in the Latin American Region has
been its relationships with wireless equipment manufacturers and wireless
service carriers. The Company distributes products in the Latin American
Region for manufacturers such as Motorola, Nokia and Ericsson. CellStar acts
as a wholesale distributor of wireless communications products in the Latin
American Region to large volume purchasers, such as the large wireless
carriers (e.g., Telcel, the wireless subsidiary of Telmex), as well as to
smaller volume purchasers. The Company operates a wholesale distribution
facility in, and offers facilitation services out of, Miami, Florida to serve
customers in the Latin American Region. As a result, the Company's Miami,
Florida operations are included in the Latin American Region.
 
  Although the Company's business in the Latin American Region is
predominantly wholesale, operations within a particular country may be either
wholesale, retail or both. The Company has historically acted through wholly-
owned subsidiaries in each of the countries in this region. In 1998, the
Company entered into a majority owned joint venture to conduct its operations
in Brazil. The Company's largest wholesale customers in the region are
wireless carriers. As of November 30, 1998, the Company operated 50 retail
locations (including kiosks) in the Latin American Region--43 in Mexico, three
in Colombia, three in Chile and one in Argentina.
 
                                       7
<PAGE>
 
  The following table outlines the Company's entry into the Latin American
Region:
 
<TABLE>
<CAPTION>
                                                             TYPE OF OPERATION
                                                     YEAR    (AS OF NOVEMBER 30,
     COUNTRY                                        ENTERED         1998)
     -------                                        ------- --------------------
     <S>                                            <C>     <C>
     Mexico........................................  1991   Wholesale and Retail
     Venezuela.....................................  1993        Wholesale
     Brazil........................................  1993        Wholesale
     Chile.........................................  1993   Wholesale and Retail
     Colombia......................................  1994   Wholesale and Retail
     Argentina.....................................  1995   Wholesale and Retail
     Peru..........................................  1998        Wholesale
</TABLE>
 
  At November 30, 1998, the Company sold its products to over 1,650 wholesale
customers in the Latin American Region, the ten largest of which accounted for
approximately 20% of the Company's consolidated revenues in fiscal 1998. The
Company offers wireless communications handsets and accessories manufactured
by OEMs, such as Motorola, Nokia and Ericsson, and aftermarket accessories
manufactured by a variety of suppliers to mass merchandisers and other
retailers. Accessories include, among others, batteries, hands-free kits,
chargers, leather cases, power supplies and antennas.
 
  The Company offers a broad product mix in the Latin American Region,
including products that are compatible with digital and analog systems. The
Company anticipates that its product offerings will continue to expand with
the evolution of new technologies as they become commercially viable.
 
  The Company's operations and sales in the Latin American Region are subject
to political and economic risks, including the following: political
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 related to foreign ownership of businesses abroad;
foreign tax laws; changes in import/export regulations, including enforcement
policies; and tariff and freight rates. Political and other factors beyond the
control of the Company, including trade disputes among nations, currency
fluctuations or internal instability in any nation where the Company conducts
business, could have a materially adverse effect on the Company.
 
  Sales and Marketing. The Company markets its products through direct sales
and advertising. In those markets where it conducts retail operations, the
Company primarily utilizes direct mailings and newspapers to promote its
retail operations. To penetrate local markets, the Company has made use of
subagent relationships in Mexico, Venezuela and Colombia. In addition, the
Company offers prepaid wireless programs in Venezuela and Peru. On February
18, 1999, the Company entered into an agreement to sell its Venezuelan prepaid
wireless business.
 
EUROPEAN REGION
 
  The Company's U.K. subsidiary sells wireless handsets, pagers, mobile radio
and other wireless communications equipment and related accessory products
throughout Europe, Africa and the Middle East. The Company's subsidiaries in
Sweden and Poland distribute products in their respective countries and in
other European markets for several manufacturers, including Ericsson, Nokia
and Motorola.
 
  The Company's operations and sales in the European Region are subject to
political and economic risks, including the following: political instability;
currency controls; currency devaluations; exchange rate fluctuations; risks
related to the Euro conversion; potentially unstable channels of distribution;
increased credit risks; export control laws that might limit the markets the
Company can enter; inflation; changes in laws related to foreign ownership of
businesses abroad; foreign tax laws; changes in import/export regulations,
including enforcement policies; and tariff and freight rates. Political and
other factors beyond the control of the Company, including trade disputes
among nations, currency fluctuations or internal instability in any nation
where the Company conducts business, could have a materially adverse effect on
the Company.
 
                                       8
<PAGE>
 
INDUSTRY RELATIONSHIPS
 
  The Company has established relationships with leading wireless equipment
manufacturers and wireless service carriers. These alliances have been key to
the Company's market and product expansion.
 
  Although the Company purchased its products from more than 20 primary
suppliers in fiscal 1998, substantially all of the Company's purchases were
from Motorola, Nokia, Ericsson and NEC. For the year ended November 30, 1998,
Motorola accounted for approximately 67% of the Company's product purchases,
including CellStar branded products. In addition, revenues attributable to the
Company's fulfillment agreement with PBMS accounted for approximately 10% of
consolidated revenues for fiscal 1998.
 
  The Company has various supply contracts with terms of approximately one
year with Motorola, Nokia, Ericsson, QUALCOMM and Sony that specify
territories, minimum purchase levels, pricing and payment terms. These
contracts typically provide that the Company will receive the benefit of price
decreases on products in the Company's inventory if such products were shipped
to the Company within a specified period of time prior to the price decrease.
 
  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 July
1995, Motorola purchased a split adjusted 2,089,312 shares of the outstanding
common stock of the Company. The Company believes that its relationship with
its suppliers will enable it to continue to offer a wide variety of wireless
communications products in the marketplace. While the Company believes that
its relationship with Motorola and other significant vendors is satisfactory,
there can be no assurance that these relationships will continue.
 
  The Company has recently formed several new relationships with various
providers of global satellite communication services. In September and
November 1998, the Company entered into agreements with Iridium LLC and
Iridium North America, respectively, to distribute wireless handsets and
accessories for the Iridium World Product Care and Iridium World Roaming
Service programs. The Company will also act as a non-exclusive global
distribution vendor to provide certain value-added fulfillment services,
including terrestrial wireless product provisioning and programming. In
January 1999, the Company entered into agreements with affiliates of ORBCOMM
Global, L.P ("ORBCOMM"), pursuant to which the Company will establish a
program to distribute subscriber communicators and related accessories to
ORBCOMM system customers throughout the world. In February 1999, the Company
entered into an agreement with AirTouch Satellite Services, Inc. under which
CellStar will distribute wireless handsets, fixed terminals and accessories
and will provide procurement, fulfillment, packaging and returns management
services within the United States.
 
  The Company experiences, from time to time, shortages in supply for certain
products that are in high demand, and no assurance can be given that product
shortages will not occur in the future. The loss of Motorola or any other
significant vendor or a substantial price increase imposed by any vendor or a
shortage of product available from its vendors could have a materially adverse
impact on the Company.
 
ASSET MANAGEMENT
 
 Information Technology
 
  The Company continues to invest in and focus on technology to improve
financial and information technology control systems. During 1998, the Company
made significant progress on several information technology initiatives: (i)
implementation and rollout of data mart and decision support applications to
improve sales and inventory analysis, (ii) upgrades to the corporate
headquarter network backbone to improve reliability and performance, (iii)
implementation of a common electronic mail and groupware solution worldwide,
(iv) implementation of remote access and computing for all traveling
workforce, and (v) upgrade of all internet security and electronic commerce
platforms. In addition, the Company, through the rollout of a common
application suite, provided improvements in work flow at various sites and
positioned the Company to be
 
                                       9
<PAGE>
 
Year 2000 compliant. Key efforts for 1999 include: (1) rollout of a single
multi-currency/language platform to support the satellite business and global
carriers; (2) completion of Year 2000 preparation; and (3) further rollout of
internet based computing and commerce applications.
 
 Inventory
 
  The Company purchases its products from more than 20 primary suppliers that
ship directly to the Company's warehouse or distribution facilities. Inventory
purchases are based on quality, price, service, market demand, product
availability and brand recognition. Certain 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. The Company provides stock balancing to
certain of its customers.
 
  Inventory control is important to the Company's ability to maintain 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, to help manage inventory and sales margins.
 
  During fiscal 1998, the Company continued implementation of its program to
reengineer its materials management processes, including configuration of its
main warehouse layout to optimize cycle times and reduce inventory handling
costs. The Company has also continued to expand on technologies such as Radio
Frequency (to capture outbound serial numbers into the Company's AS/400
system) and integration of the Company's major shipping partner into the
AS/400 system.
 
  Typically, the Company ships its products within 24 hours from receipt of
customer orders and, therefore, backlog is not considered material to the
Company's business.
 
  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 "Item7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--
International Operations."
 
SIGNIFICANT TRADEMARKS
 
  The Company markets certain of its products under the trade name CellStar.
The Company has registered its trade name 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
also has filed for registrations of its other trade names in the United States
and other jurisdictions where 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
 
                                      10
<PAGE>
 
management resources than the Company. In addition, potential users of
wireless systems may find their communications needs satisfied by other
current and developing technologies. For example, advanced digital systems are
being developed to compete with analog systems. 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.
 
  In the current U.S. wholesale wireless communications products markets, the
Company's primary competitors are manufacturers, wireless carriers and other
independent distributors such as Brightpoint, Inc. ("Brightpoint"). The
Company also competes with logistics companies. The Company's major
competitors in the United States in the retail wireless communications
products markets are other agents and resellers and wireless carriers that
have retail outlets.
 
  Competitors of the Company in the European, Asia-Pacific and Latin American
Regions include manufacturers, national carriers that have retail outlets with
direct end-user access, and U.S. and foreign-based exporters and distributors,
including Brightpoint. 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 the wireless carriers.
 
EMPLOYEES
 
  As of November 30, 1998, the Company had approximately 1,100 employees
worldwide. In Mexico, approximately 150 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:
 
<TABLE>
   <S>                      <C> <C>
   Alan H. Goldfield.......  55 Chief Executive Officer and Chairman of the Board
   Richard M. Gozia........  54 President, Chief Operating Officer and Director
   A.S. Horng..............  41 Chairman, Chief Executive Officer and General Manager of
                                CellStar (Asia) Corporation Limited
   Evelyn Henry Miller.....  41 Senior Vice President--Finance and Chief Financial Officer
   Daniel T. Bogar.........  39 Senior Vice President--Latin American Region and Director
   Timothy L. Maretti......  45 Senior Vice President--Brazil Region
   Elaine Flud Rodriguez...  42 Vice President, General Counsel and Secretary
</TABLE>
 
  Alan H. Goldfield is a founder of the Company and has been the Chairman of
the Board and Chief Executive Officer of the Company since its formation. Mr.
Goldfield served as President of the Company from its formation until March
1995, when Terry S. Parker was appointed President, and from August 1996 until
December 1996, when Richard M. Gozia was appointed President. Mr. Goldfield
serves as an officer and director of the Company pursuant to his employment
agreement.
 
  Richard M. Gozia has been the President and Chief Operating Officer of the
Company since December 1996. Mr. Gozia joined CellStar as Executive Vice
President--Administration and Chief Financial Officer in June 1996. He has
been a member of the Board of Directors since June 1996. Mr. Gozia serves as
an officer and director of the Company pursuant to his employment agreement.
From 1994 to 1996, Mr. Gozia served as Executive Vice President of
SpectraVision, Inc. ("SpectraVision"), a provider of in-room hotel movies. In
June 1995, SpectraVision filed for protection under the federal bankruptcy
laws. From 1991 to 1994, Mr. Gozia was Chairman and Chief Executive Officer of
Wyatt Cafeterias, Inc. In June 1995, Triangle FoodService Corporation,
formerly Wyatt Cafeterias, Inc., filed for protection under the federal
bankruptcy laws.
 
                                      11
<PAGE>
 
  A.S. Horng has served as Chairman of CellStar Asia since January 1998 and
has also served as Chief Executive Officer of such company 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, 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 an employment agreement.
 
  Evelyn Henry Miller has served as Senior Vice President--Finance and Chief
Financial Officer since January 1999. From November 1995 until January 1999,
she was Vice President--Corporate Controller of the Company. From August 1993
until October 1995, Ms. Miller served as Director, Corporate Accounting of
Aviall, Inc. ("Aviall"), the world's largest independent overhauler of turbine
engines and distributor of airplane parts. From April 1988 until August 1993,
Ms. Miller served in various other capacities for Aviall. Prior to joining
Aviall, Ms. Miller served as Assistant Controller, Accounting Operations for
Dallas Market Center (a Trammell Crow Company) and held several positions with
KPMG LLP. Ms. Miller is a certified public accountant.
 
  Daniel T. Bogar has served as Senior Vice President--Latin American Region
since January 1998 and as a director of the Company since July 1994. Mr. Bogar
served as Vice President of Latin American Operations from April 1997 to
January 1998. From 1993 to 1997, Mr. Bogar served as Vice President of South
American Operations. From 1991 to 1992, Mr. Bogar managed the Company's
operations in Mexico, and from 1987 to 1991, Mr. Bogar was General Manager of
the Company's Houston operations. Mr. Bogar has been responsible for the
Company's Latin American Region operations since 1992.
 
  Timothy L. Maretti has served as Senior Vice President--Brazil Region since
November 1998. From January 1998 until November 1998, he was Senior Vice
President--U.S. Region of the Company and has been a Vice President of the
Company since October 1993. From March 1992 to 1993, Mr. Maretti served as
general director of the Company's Mexican operations. From 1987 to 1992, Mr.
Maretti served as Vice President-- Regional General Manager of Southwestern
Bell Mobile Systems, Inc., Dallas.
 
  Elaine Flud Rodriguez joined the Company in September 1993 and has been Vice
President, General Counsel and Secretary since 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 in the states of
Texas and Louisiana.
 
  The Company's success is substantially dependent on the efforts of Alan H.
Goldfield, its Chief Executive Officer, and certain other of the Company's
executive officers and key employees. The loss or interruption of the
continued full-time service of Mr. Goldfield or other of the Company's
executive officers and key employees could materially and adversely affect the
Company's business. Although the Company has entered into employment
agreements with Mr. Goldfield and several other officers and 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 Mr. Goldfield
or any other officer of the Company. In addition, the Company would be in
default under the terms of its Multicurrency Revolving Credit Facility if both
Mr. Goldfield and the Company's President, Richard M. Gozia, cease to be
involved in the Company's management. To support its continued growth, the
Company will be required to effectively recruit, develop and retain additional
qualified management. The inability of the Company to attract and retain such
necessary personnel could also have a materially adverse effect on the
Company.
 
ITEM 2. PROPERTIES
 
  As of November 30, 1998, the Company had a total of 19 operating facilities
in the United States of which 17 were leased. In December 1998, the Company
sold six of its 13 retail store operations in the North American Region and
intends to sell the remaining seven retail store operations in the near term.
As of November 30, 1998, the Company had a total of 32 operating facilities in
the Asia-Pacific Region (including kiosks, but not
 
                                      12
<PAGE>
 
including facilities of the Company's Malaysian joint venture), 31 of which
were leased, and a total of 60 operating facilities in the Latin American
Region (including kiosks), 59 of which were leased. These facilities serve as
offices, warehouses, distribution centers or retail locations. The Company
leased one of its former U.S. stand-alone retail stores from its Chief
Executive Officer, Alan H. Goldfield.
 
  The Company's corporate headquarters and distribution facility, located at
1730 and 1728 Briercroft Court in Carrollton, Texas, are owned by the Company.
The corporate headquarters contains approximately 43,000 square feet and is
utilized as the Company's primary corporate offices and as a product return
center. The distribution facility contains approximately 120,000 square feet
and is used as the Company's primary warehouse and distribution center, as
well as for corporate offices.
 
  The Company leases two distribution facilities in Miami, Florida, which
contain approximately 22,500 square feet and 60,000 square feet, respectively,
and are used to serve customers in the Latin American Region. In addition, the
Company has a lease for a 58,900 square feet distribution facility located in
Chino, California.
 
  The Company believes that suitable additional space will be available, if
necessary, to accommodate future expansion of its operations.
 
ITEM 3. LEGAL PROCEEDINGS
 
  During the period from May 1996 through July 1996, four purported class
action lawsuits were filed in the United States District Court for the
Northern District of Texas, Dallas Division, styled as follows: (1) Sidney
Gluck, John Dolcemaschio, James Miller and Nancy L. Miller v. CellStar
Corporation, Alan H. Goldfield, Terry S. Parker, John S. Bain, Kenneth W.
Sanders, and KPMG Peat Marwick, L.L.P.; (2) Diane Larson against CellStar
Corporation, Alan H. Goldfield, Terry S. Parker and Evelyn M. Henry; (3) Elvia
H. Goggin and R. Heath Larry vs. CellStar Corporation, Alan H. Goldfield and
Terry S. Parker; and (4) Reed and Lillian Riemer v. CellStar Corporation, Alan
H. Goldfield, Terry S. Parker, John S. Bain, Kenneth W. Sanders and KPMG Peat
Marwick, L.L.P.
 
  These four lawsuits were consolidated into the case styled State of
Wisconsin Investment Board, Diane Larson, Martin Katz, Mostafa Aboul-Fetouh,
Ahmed Aboul-Fetouh and Enass Aboul-Fetouh on behalf of themselves and others
similarly situated v. Alan H. Goldfield, Terry S. Parker, Kenneth W. Sanders,
John S. Bain, Evelyn M. Henry, Michael S. Hedge, Kenneth E. Kerby, Daniel T.
Bogar, Leonard C. Ratley, James L. Johnson, Ronald J. Kramer, CellStar
Corporation and KPMG Peat Marwick LLP, Civil Action No. 3:96-CV-1353-R. The
State of Wisconsin Investment Board was appointed lead plaintiff in the
consolidated action and filed a Consolidated Amended Complaint asserting
claims against the Company and certain of its present and former officers and
directors for violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and Rule 10b-5
promulgated thereunder, Section 27.01 of the Texas Civil Statutes, common law
fraud, negligent misrepresentation, and breach of fiduciary duty to disclose
under Delaware common law. The Consolidated Amended Complaint alleged, among
other things, that the defendants misrepresented or failed to disclose
material facts regarding the business, financial condition, performance and
future prospects of the Company and that, as a result of such statements or
omissions, the value of the Company's Common Stock was artificially inflated.
Claims were also asserted against the Company's auditors, KPMG Peat Marwick
L.L.P. The plaintiffs sought compensatory damages, exemplary damages and costs
and expenses, including attorneys' fees and expert fees. Although the
plaintiffs did not specify the amount of damages sought, they argued that the
alleged class sustained damages in excess of $50 million.
 
  In December 1996, defendants filed motions to dismiss all claims asserted in
the Consolidated Amended Complaint. By orders dated in August and September
1998, the Court (i) dismissed all claims as to defendants KPMG Peat Marwick
L.L.P., Michael S. Hedge, Kenneth E. Kerby, Daniel T. Bogar, James L. Johnson
and Ronald J. Kramer; (ii) dismissed the claim alleging breach of fiduciary
duty as to all defendants; and (iii) denied the motions to dismiss all other
claims as to all other defendants.
 
  Although the Company believes it had meritorious defenses to these claims,
on November 19, 1998, the Company entered into a Stipulation of Settlement
resolving all claims pending in the suit. The settlement was approved by the
Court on January 25, 1999 and all remaining claims were dismissed.
 
                                      13
<PAGE>
 
  On August 3, 1998, the Company announced that the Securities and Exchange
Commission is conducting an investigation of the Company relating to its
compliance with federal securities laws. The Company believes that it has
fully complied with all securities laws and regulations and is cooperating
with the Commission staff in their investigation.
 
  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 other 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, 1998.
 
                                      14
<PAGE>
 
                                   PART II.
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
  The Company's common stock is quoted on the NASDAQ Stock Market 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 the NASDAQ Stock Market. Sales prices have been adjusted to
give effect to a three-for-two stock split on June 17, 1997 and a two-for-one
stock split on June 23, 1998.
 
<TABLE>
<CAPTION>
                                                                   HIGH    LOW
                                                                  ------- ------
     <S>                                                          <C>     <C>
     Fiscal Year ended November 30, 1998
      Quarter Ended:
       February 28, 1998......................................... $16.156  9.438
       May 31, 1998..............................................  18.391 12.938
       August 31, 1998...........................................  17.875  6.625
       November 30, 1998.........................................   9.563  3.063
     Fiscal Year ended November 30, 1997
      Quarter Ended:
       February 28, 1997......................................... $ 8.750  3.813
       May 31, 1997..............................................  11.958  6.917
       August 31, 1997...........................................  16.813 11.208
       November 30, 1997.........................................  24.469 12.938
</TABLE>
 
  As of February 23, 1999, there were 267 stockholders of record, although the
Company believes that the number of beneficial owners is significantly greater
than that number 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 the continued
growth and development of 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 restricts 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.
 
                                      15
<PAGE>
 
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, 1998, were derived from the Company's
audited financial statements. The selected consolidated financial data should
be read in conjunction with "Item 7. 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.
<TABLE>
<CAPTION>
                                    YEAR ENDED NOVEMBER 30,
                          ---------------------------------------------------
                             1998       1997      1996     1995        1994
                          ----------  ---------  -------  -------     -------
                              (IN THOUSANDS, EXCEPT PER SHARE AND
                                        OPERATING DATA)
<S>                       <C>         <C>        <C>      <C>         <C>
STATEMENTS OF OPERATIONS
 DATA:
  Revenues..............  $1,995,850  1,482,814  947,601  811,915     518,422
  Cost of sales.........   1,823,075  1,325,488  810,000  702,074     448,780
                          ----------  ---------  -------  -------     -------
  Gross profit..........     172,775    157,326  137,601  109,841      69,642
                          ----------  ---------  -------  -------     -------
  Operating expenses:
    Selling, general and
     administrative
     expenses...........     116,747     81,319  135,585   76,553      44,598
    Lawsuit settlement..       7,577        --       --       --          --
                          ----------  ---------  -------  -------     -------
  Total operating
   expenses.............     124,324     81,319  135,585   76,553      44,598
                          ----------  ---------  -------  -------     -------
  Operating income......      48,451     76,007    2,016   33,288      25,044
  Other income
   (expense):
    Interest expense....     (14,446)    (7,776)  (8,350)  (6,144)     (1,016)
    Other, net..........     (27,059)     2,725     (532)   3,194       1,248
                          ----------  ---------  -------  -------     -------
  Total other income
   (expense)............     (41,505)    (5,051)  (8,882)  (2,950)        232
                          ----------  ---------  -------  -------     -------
  Income (loss) before
   income taxes.........       6,946     70,956   (6,866)  30,338      25,276
  Income taxes..........      (7,418)    17,323     (453)   7,442       9,028
                          ----------  ---------  -------  -------     -------
  Net income (loss).....  $   14,364     53,633   (6,413)  22,896      16,248
                          ==========  =========  =======  =======     =======
  Net income (loss) per
   share:(1)
    Basic...............  $     0.24       0.92    (0.11)    0.41        0.29
    Diluted.............  $     0.24       0.89    (0.11)    0.41        0.29
  Weighted average
   number of shares
   outstanding and
   effect of dilutive
   securities:
    Basic...............      58,865     58,144   57,821   56,466      55,324
    Diluted.............      60,656     60,851   57,821   56,466      55,324
OPERATING DATA:
  International
   revenues, including
   export sales, as a
   percentage of
   revenues.............        76.3%      66.7%    64.0%    63.5%(2)    45.0%(2)
<CAPTION>
                                        AT NOVEMBER 30,
                          ---------------------------------------------------
                             1998       1997      1996     1995        1994
                          ----------  ---------  -------  -------     -------
                                         (IN THOUSANDS)
<S>                       <C>         <C>        <C>      <C>         <C>
BALANCE SHEET DATA:
  Working capital.......  $  259,923    259,954   71,365   74,410      63,668
  Total assets..........  $  775,525    497,111  298,551  314,921     186,354
  Notes payable to
   financial
   institutions and
   current portion of
   long-term debt.......  $   85,023        --    56,704   99,187      12,735
  Long-term debt, less
   current portion......  $  150,000    150,000    6,285    6,880       3,095
  Stockholders' equity..  $  177,791    160,865  104,263  111,295      76,642
</TABLE>
--------
(1) Common stock amounts have been retroactively adjusted to give effect to a
    two-for-one stock split, which was made in the form of a stock dividend
    distributed on June 23, 1998.
(2) Includes export sales of $90.2 million and $59.8 million in 1995 and 1994,
    respectively, to CellStar Asia prior to June 3, 1995 when it became a
    wholly-owned subsidiary of the Company.
 
 
                                      16
<PAGE>
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS
 
OVERVIEW
 
  CellStar is a global company focused on providing distribution and value-
added services to wireless carriers and manufacturers in direct relationships.
From 1994 through 1998, the Company's revenues grew from $518.4 million to
$1,995.9 million. The Company accomplished this growth in both U.S. and
international sales by focusing its efforts on the wireless handset industry.
Sales of wireless communications products have increased primarily as a result
of greater market penetration due in part to decreasing unit prices.
 
  The Company's diluted net income per share in 1998 decreased to $0.24 from
$0.89 in 1997. This decrease was primarily due to the Company's recognition of
Topp's net loss to the extent of the Company's entire debt and equity
investment in Topp; the settlement of the class action lawsuit; and the cost
of de-emphasizing or eliminating certain businesses, including the Company's
reseller and U.S. retail operations and other operations that are non-
essential to the Company's core business.
 
  The Company derives revenues from three categories: net product sales,
activation income and residual income. Substantially all of the Company's
revenues are net product sales, which include sales of handsets and other
wireless communications products, revenues from fulfillment services and
revenues from other value-added services. Activation income includes
commissions paid by a wireless carrier when a customer initially subscribes
for 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. The Company expects its activation and residual
income to decrease as it implements its plan to de-emphasize or eliminate
certain businesses.
 
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," "Quantitative and Qualitative
Disclosures about Market Risk," and elsewhere in this report may constitute
"forward-looking" statements for purposes of the Securities Act 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," "will," "continues," "expects," "intends," "may," "might,"
"would," "could," and similar expressions are intended to be among the
statements that identify forward-looking statements. Various factors that
could cause the actual results, performance or achievements of the Company to
differ materially from the Company's expectations are disclosed in this report
("Cautionary Statements"), including, without limitation, those statements
made in conjunction with the forward-looking statements included under the
captions identified above and otherwise herein. All written and oral forward-
looking statements attributable to the Company are expressly qualified in
their entirety by the Cautionary Statements.
 
 
                                      17
<PAGE>
 
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:
 
<TABLE>
<CAPTION>
                                                           1998   1997   1996
                                                           -----  -----  -----
   <S>                                                     <C>    <C>    <C>
   Revenues............................................... 100.0% 100.0% 100.0%
   Cost of sales..........................................  91.3   89.4   85.5
                                                           -----  -----  -----
     Gross profit.........................................   8.7   10.6   14.5
   Selling, general and administrative expenses...........   5.8    5.5   14.3
   Lawsuit settlement.....................................   0.4    --     --
                                                           -----  -----  -----
     Operating income.....................................   2.5    5.1    0.2
   Other income (expense):
     Interest expense.....................................  (0.7)  (0.5)  (0.9)
     Other, net...........................................  (1.4)   0.2    --
                                                           -----  -----  -----
       Total other income (expense).......................  (2.1)  (0.3)  (0.9)
                                                           -----  -----  -----
     Income (loss) before income taxes....................   0.4    4.8   (0.7)
   (Benefit) provision for income taxes...................  (0.3)   1.2    --
                                                           -----  -----  -----
   Net income (loss)......................................   0.7%   3.6%  (0.7)%
                                                           =====  =====  =====
</TABLE>
 
  The amount of revenues and the approximate percentages of revenues
attributable to the Company's operations for the past three fiscal years are
shown below:
 
<TABLE>
<CAPTION>
                                     1998             1997            1996
                               ----------------  ---------------  -------------
                                           (DOLLARS IN THOUSANDS)
   <S>                         <C>        <C>    <C>       <C>    <C>     <C>
   North American Region...... $  472,837  23.7%   493,585  33.3% 341,352  36.0%
   Asia-Pacific Region........    513,869  25.7    422,751  28.5  248,493  26.2
   Latin American Region......    705,624  35.4    497,336  33.6  347,188  36.7
   European Region............    303,520  15.2     69,142   4.6   10,568   1.1
                               ---------- -----  --------- -----  ------- -----
   Total...................... $1,995,850 100.0% 1,482,814 100.0% 947,601 100.0%
                               ========== =====  ========= =====  ======= =====
</TABLE>
 
  Revenues from the Company's Miami, Florida operations ("Miami") have been
classified as Latin American Region revenues as these revenues are primarily
exports to South American countries, either by the Company or exporter
customers.
 
FISCAL 1998 COMPARED TO FISCAL 1997
 
  Revenues. Revenues increased $513.1 million, or 34.6%, from $1,482.8 million
in 1997 to $1,995.9 million in 1998.
 
  North American Region revenues decreased 4.2% from $493.6 million in 1997 to
$472.8 million in 1998. The decrease was due to a decrease in net product
sales of $10.8 million and continued decreases in both activation and residual
income. The decrease in net product sales was largely due to decreasing unit
sales prices, which was partially offset by increases in revenues from
distribution and fulfillment contracts for the provision of products and
value-added services.
 
  Revenues in the Asia-Pacific Region increased $91.1 million, or 21.5%, from
$422.8 million in 1997 to $513.9 million in 1998. The Company's operations in
the PRC provided $404.9 million in revenues, an increase of $85.2 million, or
26.6%, from $319.7 million. This increase was due to continued strong demand
in the PRC, a broadened source of product manufactured there and the impact of
tighter customs controls beginning in
 
                                      18
<PAGE>
 
August 1998. The Company's operations in Taiwan provided $68.4 million of
revenues, an increase of $52.3 million, or 324.8%, from $16.1 million. The
increase was due to higher demand resulting from the entry of several new
carriers into the wireless market in the first fiscal quarter of 1998.
Revenues from the Company's Singapore operations decreased $46.4 million, or
53.3%, from $87.0 million to $40.6 million. This decrease was due to decreased
demand for wireless products as a result of the general economic, financial
and currency conditions in the Southern Asia-Pacific area.
 
  The Company's operations in the Latin American Region provided $705.6
million of revenues in 1998, compared to $497.3 million in 1997, or a 41.9%
increase. Revenues in Brazil, Mexico, Venezuela, Peru and Chile increased
$92.4 million, $76.7 million, $37.3 million, $13.1 million, and $11.5 million,
respectively. The increase in Brazil was due to revenue growth in the
Company's majority-owned joint venture, which benefited from the privatization
of the telecommunications industry and the entry of additional carriers into
the wireless market during the latter half of 1998. Subsequent to November 30,
1998, the Brazilian government allowed the value of the real to float freely
against other foreign currencies, which resulted in a significant devaluation
of the real against the U.S. dollar. See "--International Operations." The
increase in Mexico was due to an extension of a promotion by the principal
wireless carrier, which began the promotion in the fourth quarter of 1997. The
increase in Venezuela was a result of the Company's prepaid wireless business,
which the Company entered into an agreement to sell on February 18, 1999. In
connection with the agreement, the Company was awarded an exclusive two-year
contract to supply services for prepaid phone kits. The Company began its
operations in Peru through the Company's acquisition of a prepaid wireless
business in the second quarter of 1998. The increase in Chile was due to
carrier promotions, which started in the second quarter of 1998 and lasted
through the third quarter of 1998. Revenues in the remainder of the region
decreased $22.7 million, primarily in Miami and Argentina. The decrease in
Miami was largely due to an increase in demand for digital handsets and
increased product availability from in-country suppliers thereby reducing
export sales from Miami. The decrease in revenues in Argentina was caused by
significant subscriber cancellations and excess inventory held by the
carriers.
 
  Revenues from the Company's European Region were $303.5 million in 1998
compared to $69.1 million in 1997, an increase of $234.4 million, or 339.2%.
This increase reflects the continued growth of the Company's U.K. operation,
arising primarily from sales in international markets, and revenues from
operations acquired in Sweden and Poland earlier in the year.
 
  Gross Profit. Gross profit increased $15.5 million, or 9.9%, from $157.3
million in 1997 to $172.8 million in 1998, while gross profit as a percentage
of revenues decreased from 10.6% in 1997 to 8.7% in 1998. The increase in
gross profit was due to the increase in wholesale revenues, which revenues
were comprised primarily of net product sales. The decrease in gross profit as
a percentage of revenues was due primarily to a decrease in U.S. retail
revenues, which have a higher gross profit margin than wholesale revenues, to
the impact of lower margins in the PRC as compared to those historically
recognized in Hong Kong and to an increase in international sales by the U.K.
operations, which have lower margins than the Company's other regions.
 
  Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $35.4 million, or 43.5%, from $81.3 million
in 1997 to $116.7 million in 1998. This increase was principally due to costs
incurred from the continued build-out of infrastructure, costs associated with
business expansion activities and costs to de-emphasize or eliminate certain
businesses. Overall selling, general and administrative expenses as a
percentage of revenues increased to 5.8% in 1998 from 5.5% in 1997. Bad debt
expense as a percentage of revenues increased to 0.7% in 1998 from 0.2% in
1997.
 
  Lawsuit Settlement. The Company recorded a charge of $7.6 million, which
primarily represents the Company's portion of the settlement of the class
action lawsuit.
 
  Interest Expense. Interest expense increased to $14.4 million in 1998 from
$7.8 million in 1997. The increase was due to the addition of long-term debt
at the end of 1997 and an increase in debt related to the Company's operations
in Brazil.
 
 
                                      19
<PAGE>
 
  Equity in (Loss) Income of Affiliated Companies, Net. The significant equity
in loss of affiliated companies in 1998 was primarily a result of the
Company's recognition of a $29.2 million loss on its entire debt and equity
investment in Topp. Beginning in the third quarter of 1998, the Company became
the primary source of funding for Topp through the supply of handsets and,
therefore, recognized Topp's net loss to the extent of the Company's entire
debt and equity investment. In February 1999, the Company sold part of its
equity investment in Topp to a wholly-owned subsidiary of Telefonos de Mexico
S.A. de C.V. At the closing, the Company also sold a portion of its debt
investment to certain other shareholders of Topp. As a result of these
transactions, the Company received cash in the amount of $7.0 million and
retained a 19.5% equity ownership interest in Topp.
 
  Other, Net. Other, net, decreased $0.9 million, from income of $2.3 million
in 1997 to $1.4 million in 1998. This decrease was primarily due to foreign
currency transaction losses from the European Region's financing activities.
 
  (Benefit) Provision for Income Taxes. The Company's effective tax rate and
income tax expense decreased due to higher losses before income taxes in
countries, primarily in the United States, for which the benefits are
recordable, and increases in income before taxes in foreign countries where
tax rates are low or tax holidays are in effect.
 
FISCAL 1997 COMPARED TO FISCAL 1996
 
  Revenues. Revenues increased $535.2 million, or 56.5%, from $947.6 million
in 1996 to $1,482.8 million in 1997.
 
  North American Region revenues increased $152.2 million, or 44.6%, from
$341.4 million in 1996 to $493.6 million in 1997. The increase was due to an
increase in net product sales of $213.7 million, which was partially offset by
decreases in activation and residual income. The increase in net product sales
was largely due to the increase in revenues from distribution and fulfillment
contracts for the provision of products and value added services. As expected
for 1997, activation and residual income decreased, primarily as a result of
the sale of substantially all the Company's Communication Centers on November
26, 1996.
 
  Revenues in the Asia-Pacific Region increased $174.3 million, or 70.1%, from
$248.5 million in 1996 to $422.8 million in 1997. The Company's operations in
the PRC, primarily Hong Kong, provided $319.7 million in revenues in 1997, an
increase of $120.0 million when compared to $199.7 million in 1996. The higher
revenue levels resulted from the expansion in overall demand for wireless
handsets in the region, particularly in the PRC, coupled with the increased
availability of product during the year. Revenues provided by the Company's
Singapore operations increased $40.2 million, from $46.8 million in 1996 to
$87.0 million in 1997. This increase was primarily due to increased demand in
The Philippines and Indonesia. The Company's operations in Taiwan, which
commenced in the second quarter of 1996, provided $16.1 million of revenues in
1997, an increase of $14.1 million when compared to $2.0 million in 1996.
 
  The Company's operations in the Latin American Region provided $497.3
million of revenues in 1997 compared to $347.2 million in 1996, an increase of
$150.1 million, or 43.2%. The increase in revenues was primarily due to an
increase of $145.9 million in sales by the Company's Miami, Florida warehouse
to customers exporting into South American countries, principally Brazil. This
increase resulted from the Company's shift in strategy from in-country product
sales by the Company's South American subsidiaries to reduce currency,
accounts receivable, and inventory risks. The increase in revenues was also
attributable to increases in Mexico, Argentina, and Venezuela of $23.7
million, $7.8 million, and $7.1 million, respectively. The increase in Mexico
was the result of a change in promotional strategy by the principal wireless
carrier, which began subsidizing units. The increase in Argentina was due to
improved market penetration and a new pricing strategy by local wireless
carriers whereby the calling party pays for the call. The increase in
Venezuela was fueled by the
 
                                      20
<PAGE>
 
Company's prepaid wireless business. Brazil and the remainder of the region
had decreases of $23.1 million and $11.3 million, respectively. The sharp
decline in Brazil was principally due to actions of the Brazilian government,
which limited the authorization of additional wireless lines.
 
  Revenues from the Company's European operation in the United Kingdom, which
commenced in the second quarter of 1996, were $69.1 million in 1997, an
increase of $58.5 million compared to $10.6 million in 1996.
 
  Gross Profit. Gross profit increased $19.7 million, or 14.3%, from $137.6
million in 1996 to $157.3 million in 1997, while gross profit as a percentage
of revenues decreased from 14.5% in 1996 to 10.6% in 1997. The increase in
gross profit was primarily due to the increase in CellStar Asia's net product
sales of high-end products and due to the increase in sales from the Company's
Miami, Florida, warehouse to customers exporting into South American
countries. A reduction in the provision for inventory obsolescence of $3.9
million, from $8.7 million in 1996 to $4.8 million in 1997, also contributed
to the increase in gross profit. These increases were partially offset by a
significant decrease in U.S. retail revenues of $92.0 million, from $127.9
million in 1996 to $35.9 million in 1997. Retail revenues have a higher gross
profit as a percentage of revenues than wholesale net product sales. Gross
profit as a percentage of revenues decreased primarily due to the sale of
substantially all of the Company's Communication Centers in November 1996 and
due to the higher percentage of revenues from distribution and fulfillment
contracts, which have lower gross profit margins than the Company's
traditional wholesale business. Net foreign currency transaction losses in
1997 were $1.4 million compared to $1.8 million in 1996.
 
  Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $54.3 million, or 40.0%, from $135.6 million
in 1996 to $81.3 million in 1997. Approximately $22.6 million, or 41.6%, of
the decrease was attributable to the reduction of employees related to the
sale of the Communication Centers. The sale of the Communication Centers also
gave rise to other decreases in selling, general and administrative expenses
totaling approximately $8.9 million. A reduction in bad debt expense of $24.8
million, or 45.7% of the total decrease, was primarily attributable to the
continuing strategy of increasing sales from the Company's Miami, Florida
warehouse to customers exporting into South American countries, which has
resulted in the Company's ability to enhance its controls over the extension
of credit. Bad debt expense as a percentage of total revenues decreased from
2.9% in 1996 to 0.2% in 1997. These decreases were partially offset by an
increase of $7.5 million in 1997 in employee-related costs incurred in
connection with the increase in net product sales. Overall, the Company
reduced selling, general and administrative expenses as a percentage of
revenues from 14.3% in 1996 to 5.5% in 1997.
 
  Interest Expense. Interest expense declined to $7.8 million in 1997 from
$8.4 million in 1996. The decrease in interest expense resulted primarily from
the maintenance of lower balances under the Company's revolving credit
agreement.
 
  Other, Net. Other, net increased $2.6 million, from an expense of $0.3
million in 1996 to income of $2.3 million in 1997, primarily as a result of an
increase in interest income of $1.2 million, from $0.9 million to $2.1
million, and a decrease in minority interest of $0.7 million due to the
acquisition of the remaining 20.0% interest of the Company's Singapore
subsidiary on May 30, 1997.
 
  Provision (Benefit) for Income Taxes. The Company's income tax expense
increased $17.8 million in 1997. The increase was primarily due to higher
income before income taxes for the year ended November 30, 1997. The effective
tax rate is higher for the year ended November 30, 1997 compared to the same
period a year earlier, primarily due to higher proportional taxable income in
both the United States and the Latin American Region, which have statutory tax
rates of approximately 35%.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  During the year ended November 30, 1998, the Company relied primarily on
cash available at November 30, 1997, cash generated from operations and on
borrowings under its $135.0 million Multicurrency Revolving
 
                                      21
<PAGE>
 
Credit Facility (the "Facility") to fund working capital, capital expenditures
and expansions. At November 30, 1998 and February 22, 1999, the Company had
available $41.0 million and $54.7 million of borrowing capacity, respectively,
under the Facility.
 
  At November 30, 1998, the Company had $48.0 million of cash and cash
equivalents, a decrease of $26.7 million since November 30, 1997. Cash was
primarily used to fund global working capital requirements and acquisitions in
Sweden, Poland and Peru. Accounts receivable increased primarily from
significantly higher sales activity related to South America and the PRC, both
of which typically have longer credit terms than those experienced by the
Company elsewhere. Inventories have increased primarily as a result of
increases in inventories of high-end wireless handsets in the PRC and Taiwan.
 
  As of November 30, 1998, the Company's Brazilian operations had borrowed
$11.5 million, including accrued interest, under credit facilities with
several Brazilian banks. Of these borrowings, $7.0 million was denominated in
U.S. dollars. In conjunction with these credit facilities, the Company issued
$7.0 million of letters of credit against its Facility to guarantee the
repayment of the principal plus interest and all other contractual obligations
of its Brazilian operations to one of the Brazilian banks. Annual interest
rates on borrowings in Brazil ranged from approximately 36% to 48%.
 
  In January 1999, the Brazilian government allowed the value of the real to
float freely against other foreign currencies, which resulted in a significant
devaluation against the U.S. dollar. See "--International Operations." As of
January 31, 1999, the Company's Brazilian operations had borrowed $9.7
million, including accrued interest, $5.7 million of which was denominated in
U.S. dollars and recorded on the Company's majority-owned Brazilian joint
venture. On February 18, 1999, the joint venture recognized a currency
transaction loss of approximately $4.0 million upon the conversion of the U.S.
dollar denominated debt into a Brazilian real credit facility.
 
  As of November 30, 1998, the Company's guarantee for bank borrowings by its
Malaysian joint venture was MYR13.2 million (Malaysian ringgits), or $3.5
million.
 
  The Company anticipates that available cash, amounts available under the
Facility and cash generated from operations will be sufficient to satisfy the
Company's working capital, capital expenditures and expansion plans for the
1999 fiscal year.
 
INTERNATIONAL OPERATIONS
 
  The Company's international operations are subject to political and economic
risks, including but not limited to political instability, increased credit
risks, changing tax and trade regulations, and currency devaluations and
controls; however, the Company has not experienced any material foreign
currency transaction gains or losses during the last three fiscal years. 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 foreign currency non-deliverable forward ("NDF") contracts in
certain instances.
 
  During the latter half of 1998, the Company's sales from Miami to customers
exporting into South American countries began to decline as a result of an
increase in demand for digital handsets and increased in-country product
availability in Latin America. The Company expects to focus its efforts on
servicing large, financially-sound carrier partners from the Company's Latin
American subsidiaries.
 
  The Company's Brazilian operations are principally conducted through a
majority-owned joint venture. The primary supplier of handsets to the joint
venture is a Brazilian importer who is serviced from Miami. Sales to the
importer are excluded from the Company's consolidated revenues, and the
related gross profit is deferred until the handsets are sold by the Brazilian
joint venture to customers. At November 30, 1998, the Company had Brazilian
real NDF contracts, with maturities through January 29, 1999, to manage
currency exposure risk related
 
                                      22
<PAGE>
 
to these transactions. Subsequent to November 30, 1998, the Company entered
into additional NDF contracts with expiration dates through March 10, 1999.
Currently, the Brazilian joint venture is assessing other methods of limiting
its exposure to movements in the Brazilian real against the U.S. dollar. In
agreements made in January 1999, the Brazilian joint venture will be paid by
certain major customers at the current value of the real against the U.S.
dollar on the date of payment. The Company may be exposed to foreign currency
losses from the time the Brazilian joint venture remits payment to the
importer in Brazilian reals and the importer pays the Company in U.S. dollars.
The ability of the importer to remit U.S. dollar payments to the Company may
be restricted if the Brazilian government imposes currency controls. As of
February 22, 1999, the Company had $34.8 million in accounts receivable due
from the importer.
 
  Certain currencies in the Asia-Pacific Region have lost value relative to
the U.S. dollar as a result of economic volatility. Although the Company has
experienced no material foreign currency transaction losses, the Company's
operations in its Asia-Pacific Region have experienced a higher degree of
economic instability, especially in the southern portion of the region, which
includes the Company's operations in Singapore, The Philippines and Malaysia.
 
  Additionally, the Company maintains a growing presence in Europe, and with
the creation of the euro currency on January 1, 1999, the Company's operations
in Europe may be exposed to more currency volatility and economic instability
than has historically been the case.
 
YEAR 2000
 
  Since June 1997, the Company has been implementing a plan to assess and
resolve Year 2000 issues that may affect it. The Company believes that the
Year 2000 issues it must address include ensuring (i) that its information
technology systems (hardware and software) enable it to manage and operate its
business and (ii) that its non-information technology systems (including
heating and air conditioning systems and warehouse equipment) will continue to
operate.
 
  The phases and timetable for the Company's plans are as follows:
 
  Phase I.  Create awareness of and identify Year 2000 issues (June 1997-July
     1997)
 
  Phase II.  Assess and renovate existing systems (July 1997-July 1999)
 
  Phase III.  Validate and test systems (July 1998-July 1999)
 
  Phase IV.  Complete Year 2000 compliance (March 1999-August 1999)
 
  The Company is currently on schedule for implementing this plan. Phases II.
and III. of the original plan conveyed in the Company's Form 10-Q dated August
31, 1998 have been extended to include the latest operating system releases
for the Company's file servers and installations of financial and sales order
systems at approximately one-half of the Company's international sites. The
Company does not believe it has material, potential liability to third parties
if its systems are not Year 2000 compliant.
 
  The Company has made substantial progress in assessing Year 2000 issues that
affect third parties with which it has material relationships. It has sent
questionnaires to its major suppliers and has received written responses from
a majority of them. The responses received to date indicate that the suppliers
have or will timely resolve their Year 2000 issues. Because the Company does
not believe that its customers' Year 2000 compliance issues will have a
significant impact on the Company, to date the Company has only conducted
informal conversations about Year 2000 issues with its customers. Each
electronic data interchange or trading partner is being reviewed and upgraded
to Year 2000 standards.
 
  The Company's costs of compliance with Year 2000 requirements are immaterial
because it was in the process of upgrading or establishing systems to keep
pace with its growth.
 
  The Company believes that it and its material suppliers will resolve their
Year 2000 issues in a timely fashion. However, if the Company or its material
suppliers do not become Year 2000 compliant, the Company
 
                                      23
<PAGE>
 
could suffer a material adverse effect on its business, results of operations
and financial condition. The Company believes that it is unlikely that any of
these events will result, but there can be no such assurance. The Company
currently has no contingency plans to handle the occurrence of these events
and does not currently intend to create one.
 
IMPACT OF INFLATION
 
  Historically, inflation has not had a significant impact on the Company's
overall operating results. However, the effects of inflation in volatile
economies in foreign markets could have an adverse impact on the Company.
 
SEASONALITY AND CYCLICALITY
 
  The effects of seasonal fluctuations have not historically been apparent in
the Company's operating results due to the Company's rapid growth in revenues.
However, 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. Seasonality did contribute to the increase in the
Company's sales during the fourth quarter of 1996 due to the Company's retail
operations, most of which the Company has divested. 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.
 
ACCOUNTING PRONOUNCEMENT NOT YET ADOPTED
 
  In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities"
("Statement 133"), which will become effective for the Company for its interim
and annual periods commencing December 1, 1999. Given the Company's current
and anticipated derivative activities, management does not believe the
adoption of Statement 133 will have a material effect on the Company's
consolidated financial position and results of operations.
 
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
FOREIGN EXCHANGE RISK
 
  The Company's international operations are subject to foreign currency risk;
however, the Company has not experienced any material foreign currency
transaction gains or losses during the last three fiscal years. Foreign
currency translation adjustments for subsidiaries domiciled in non-highly
inflationary countries are recorded to consolidated stockholders' equity under
accumulated other comprehensive income. In highly inflationary countries, the
Company records remeasurement gains and losses to the consolidated statements
of operations. For the year ended November 30, 1998, the Company's
international subsidiaries in Mexico and Venezuela had recorded immaterial
foreign currency remeasurement losses because the economies of those countries
were considered to be highly inflationary. Effective January 1, 1999, Mexico
is no longer considered to be a highly inflationary economy.
 
  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 NDF contracts in certain instances.
 
  As of November 30, 1998, the Company's Brazilian operations had borrowed
$11.5 million, including accrued interest, under credit facilities with
several Brazilian banks. Of these borrowings, $7.0 million was denominated in
U.S. dollars, $1.3 million of which was repaid in December 1998. In January
1999, the Brazilian government allowed the value of the real to float freely
against other foreign currencies, which resulted in a significant devaluation
of the real against the U.S. dollar. On February 18, 1999, the remaining $5.7
million U.S. dollar denominated debt in Brazil was converted into a Brazilian
real denominated credit facility by the Company's majority-owned Brazilian
joint venture. Upon conversion, the joint venture realized a foreign currency
transaction loss of approximately $4.0 million.
 
                                      24
<PAGE>
 
DERIVATIVE FINANCIAL INSTRUMENTS
 
  The Company does not use derivative instruments for trading purposes and the
Company has procedures in place to monitor and control derivative use. As of
November 30, 1998, the Company had Brazilian real NDF contracts aggregating
$44.8 million with maturities from January 11, 1999 through January 29, 1999
and at strike prices ranging from 1.2325 to 1.2405 between the Brazilian real
and the U.S. dollar. The Company's counterparty to these contracts was Chase
Bank of Texas, N.A. ("Chase"). The Company continues to use contracts of this
nature and it monitors the credit rating of Chase on a regular basis.
 
INTEREST RATE RISK
 
  The interest rate of the Company's Facility is a market rate at the time of
borrowing plus an applicable margin on certain borrowings. The interest rate
is based on either the bank's prime lending rate or the London Interbank
Offered Rate. Additionally, the applicable margin is subject to increases if
the Company's ratio of consolidated funded debt to consolidated cash flow is
greater than or equal to 3.0 to 1.0, which ratio is determined at the end of
each fiscal quarter. During the year ended November 30, 1998, the interest
rates of borrowings under the Facility ranged from 6.56% to 8.5%. The Company
manages its borrowings under the Facility each business day to minimize
interest expense.
 
  The borrowings of the Company's Brazilian operations are short time in
nature, typically less than six months. Through November 30, 1998, annual
interest rates on borrowings by the Brazilian operations ranged from
approximately 36% to 48%. As a result of the recent devaluation of the
Brazilian real against the U.S. dollar, annual interest rates have increased
to approximately 38% to 53% in Brazil. Through January 31, 1999, the Brazilian
operations have decreased their borrowings from $11.5 million to $9.7 million.
The Company is evaluating financing alternatives to reduce interest expense
for its Brazilian operations.
 
  The Company's $150.0 million in long-term debt has a fixed coupon interest
rate of 5.0%.
 
 
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.
 
                                      25
<PAGE>
 
                                   PART III.
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
  The information required by this item regarding Directors of the Company is
set forth in the Proxy Statement (the "Proxy Statement") to be delivered to
the Company's stockholders in connection with the Company's 1999 Annual
Meeting of Stockholders under the heading "Election of Directors," which
information is incorporated herein by reference. The information required by
this item regarding executive officers of the Company is set forth under the
heading "Executive Officers of the Registrant" in Part I of this Form 10-K,
which information is incorporated herein by reference.
 
ITEM 11. EXECUTIVE COMPENSATION
 
  The information required by this item is set forth in the Proxy Statement
under the heading "Executive Compensation," which information is incorporated
herein by reference. Information contained in the Proxy Statement under the
captions "Executive Compensation--Report of the Compensation Committee of the
Board of Directors on Executive Compensation" and "Comparative Performance
Graph" is not incorporated herein by reference.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  The information required by this item is set forth in the Proxy Statement
under the heading "Security Ownership of Certain Beneficial Owners and
Management," which information is incorporated herein by reference.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  The information required by this item is set forth in the Proxy Statement
under the caption "Certain Transactions," which information is incorporated
herein by reference.
 
                                      26
<PAGE>
 
                                    PART IV.
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-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.
 
3. EXHIBITS
 
<TABLE>
<CAPTION>
 NUMBER                               DESCRIPTION
 ------                               -----------
 <C>    <S>
   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. (16)
   3.3  Amended and Restated Bylaws of CellStar Corporation. (14)
   4.1  The Certificate of Incorporation, Certificate of Amendment to
        Certificate of Incorporation and Amended and Restated Bylaws of
        CellStar Corporation filed as Exhibits 3.1, 3.2 and 3.3 are
        incorporated into this item by reference. (1)(16)(14)
   4.2  Specimen Common Stock Certificate of CellStar Corporation. (2)
   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  Form of Certificate of Designation, Preferences and Rights of Series A
        Preferred Stock of CellStar Corporation ("Certificate of Designation").
        (3)
   4.6  Form of Rights Certificate. (3)
   4.7  Certificate of Correction of Certificate of Designation. (4)
   4.8  Indenture, dated as of October 14, 1997, by and between CellStar
        Corporation and The Bank of New York, as Trustee. (13)
  10.1  Employment Agreement, effective as of December 1, 1994, by and between
        CellStar Corporation and Alan H. Goldfield. (2)(19)
  10.2  Employment Agreement, effective as of May 24, 1996, by and between
        CellStar, Ltd., CellStar Corporation and Richard M. Gozia. (5)(19)
  10.3  Employment Agreement by and between CellStar, Ltd., CellStar
        Corporation and Mark Q. Huggins, effective as of January 15, 1997.
        (6)(19)
  10.4  Employment Agreement, effective January 22, 1998, by and between
        CellStar (Asia) Corporation Limited, CellStar Corporation and Hong An-
        Hsien. (14)(19)
  10.5  Agreement by and between Motorola Inc., by and through its Pan American
        Cellular Subscriber Group, and CellStar, Ltd., effective January 1,
        1997 (United States). (7)(20)
  10.6  Master Agreement for the Purchase of Products and Inventory
        Maintenance, Assembly and Fulfillment (IAF) Services between Pacific
        Bell Mobile Services and CellStar, Ltd., effective September 20, 1996.
        (6)(20)
  10.7  Agreement by and between National Auto Center, Inc. and the Pan
        American Cellular Subscriber Division of Motorola Inc., dated as of
        January 1, 1995 (Latin American and Caribbean Territory). (8)
  10.8  Lease by and between Alan H. Goldfield and National Auto Center, Inc.
        regarding 605 West Airport Freeway, Irving, Texas. (10)(19)
  10.9  Exclusive Cellular Subagent Agreement by and between National Auto
        Center and Alan H. Goldfield d/b/a National Tape. (10)(19)
 10.10  Registration Rights Agreement by and between the Company and Audiovox
        Corporation. (10)
</TABLE>
 
                                       27
<PAGE>
 
<TABLE>
<CAPTION>
 NUMBER                               DESCRIPTION
 ------                               -----------
 <C>    <S>
 10.11  Form of Warrant for the purchase of shares of common stock to be issued
        to Ladenburg, Thalmann & Co., Inc. and Raymond James & Associates, Inc.
        (10)
 10.12  Stock Purchase Agreement by and between the Company and Motorola Inc.,
        dated as of July 20, 1995. (1)
 10.13  Registration Rights Agreement by and between the Company and Motorola
        Inc., dated as of July 20, 1995. (1)
 10.14  Credit Agreement, dated as of October 15, 1997, among CellStar
        Corporation, each of the banks or other lending institutions signatory
        thereto, The First National Bank of Chicago and National City Bank, as
        co-agents, and Texas Commerce Bank National Association, as agent. (14)
 10.15  CellStar Corporation 1993 Amended and Restated Long-Term Incentive
        Plan. (14)(19)
 10.16  CellStar Corporation Amended and Restated Annual Incentive Compensation
        Plan. (6)(19)
 10.17  CellStar Corporation 1994 Amended and Restated Director Nonqualified
        Stock Option Plan. (11)
 10.18  Registration Rights Agreement, dated as of June 2, 1995, between Hong
        An Hsien and CellStar Corporation. (14)(19)
 10.19  Registration Rights Agreement, entered into as of May 30, 1997, between
        Leap International PTE LTD and CellStar Corporation. (12)
 10.20  Purchase Agreement, dated October 7, 1997, by and among CellStar
        Corporation and Bear, Stearns & Co. Inc. and Chase Securities Inc. (13)
 10.21  Registration Rights Agreement, dated as of October 14, 1997, by and
        among CellStar Corporation and Bear, Stearns & Co. Inc. and Chase
        Securities Inc. (13)
 10.22  Agreement, dated as of April 28, 1995, by and between CellStar, Ltd.
        and Motorola, Inc., Greater China Cellular Subscriber Division
        (People's Republic of China). (9)
 10.23  First Amendment, dated as of February 20, 1998, to Credit Agreement
        dated as of October 15, 1997, among CellStar Corporation, each of the
        banks or other lending institutions signatory thereto, The First
        National Bank of Chicago and National City Bank, as co-agents, and
        Chase Bank of Texas, National Association (formerly known as Texas
        Commerce Bank National Association). (15)
 10.24  1993 Amended and Restated Long-Term Incentive Plan (as amended through
        May 19, 1998). (16)
 10.25  Second Amendment to Credit Agreement, dated as of July 24, 1998, among
        CellStar Corporation, each of the banks or other lending institutions
        signatory thereto, The First National Bank of Chicago and National City
        Bank, as co-agents, and Chase Bank of Texas, National Association, as
        agent. (17)
 10.26  Stock Purchase Agreement, effective November 1, 1997, by and among Topp
        Telecom, Inc., CellStar Telecom, Inc., David Topp and Frederick J.
        Pollak. (17)
 10.27  Shareholders' Agreement, dated as of November 4, 1997, by and among
        Topp Telecom, Inc., CellStar Telecom, Inc., David Topp, F.J. Pollak and
        Dora Topp. (17)
 10.28  Letter Agreement, dated September 1, 1998, by and among CellStar, Ltd.,
        Topp Telecom, Inc., David Topp and Frederick J. Pollak. (17)
 10.29  Amendment to Stock Purchase Agreement, dated as of September 1, 1998,
        by and among Topp Telecom, Inc., CellStar Telecom, Inc., and Frederick
        J. Pollak. (17)
 10.30  Promissory Note dated as of September 1, 1998 in the amount of
        $26,990,000, executed by Topp Telecom, Inc., in favor of CellStar, Ltd.
        (17)
 10.31  Amendment to Shareholders Agreement, dated as of September 1, 1998, by
        and among Topp Telecom, Inc., CellStar Telecom, Inc., David Topp,
        Frederick J. Pollak and Dora Topp. (17)
 10.32  Security Agreement, dated as of September 1, 1998, by and between Topp
        Telecom, Inc. and CellStar Ltd. (17)
 10.33  Warrant to Subscribe for and Purchase Voting Common Stock and Nonvoting
        Common Stock of Topp Telecom, Inc., dated September 1, 1998. (17)
 10.34  Stock Option Agreement, dated as of September 1, 1998, by and between
        CellStar Telecom, Inc. and Topp Telecom, Inc. (17)
 10.35  Third Amendment to Credit Agreement, dated as of September 11, 1998,
        among CellStar Corporation, each of the banks or other lending
        institutions signatory thereto, The First National Bank of Chicago
        National City Bank, as co-agents, and Chase Bank of Texas, National
        Association, as agent. (17)
</TABLE>
 
                                       28
<PAGE>
 
<TABLE>
<CAPTION>
 NUMBER                               DESCRIPTION
 ------                               -----------
 <C>    <S>
 10.36  Amendment to September 1st letter Agreement, dated December 18, 1998 by
        and among CellStar, Ltd., CellStar Telecom, Inc., Topp Telecom, Inc.,
        David Topp, Dora Topp, Risia Topp Wine, Mark Topp and F.J. Pollak. (18)
 10.37  Stock Purchase Agreement dated as of February 5, 1999 by and among
        Inmobiliaria Aztlan, S.A. de C.V., Telefonos de Mexico, S.A. de C.V.,
        David Topp, Dora Topp, Risia Topp Wine, Mark Topp, CellStar Telecom,
        Inc. and Topp Telecom, Inc. (18)
 10.38  Shareholders' Agreement dated as of February 12, 1999, by and among
        Topp Telecom, Inc., Telefonos de Mexico, S.A. de C.V., Inmobiliaria
        Aztlan, S.A. de C.V., CellStar Telecom, Inc., David Topp, Dora Topp,
        Risia Wine Topp, Mark Topp, F.J. Pollak and Richard P. Anderson. (18)
 10.39  Dividend Replacement Note Number One dated February 12, 1999 in the
        amount of $22,507,537, executed by Topp Telecom, Inc. in favor of
        CellStar, Ltd. (18)
 10.40  Amended and Restated Letter Agreement dated as of February 5, 1999, by
        and among CellStar, Ltd., CellStar Telecom, Inc., Topp Telecom, Inc.,
        David Topp, Dora Topp, Risia Topp Wine, Mark Topp and F.J. Pollak. (18)
 10.41  Third Amendment to Distribution and Fulfillment Agreement dated as of
        February 12, 1999, by and between CellStar, Ltd. and Topp Telecom, Inc.
        (18)
  21.1  Subsidiaries of the Company. (18)
  23.1  Consent of KPMG LLP. (18)
  27.1  Financial Data Schedule. (18)
  27.2  Restated Financial Data Schedule. (18)
  99.1  Shareholders Agreement by Alan H. Goldfield to Motorola Inc., dated as
        of July 20, 1995. (1)
</TABLE>
--------
(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, 1995, 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 Quarterly Report on Form
    10-Q for the quarter ended May 31, 1996, and incorporated herein by
    reference.
(6) 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.
(7) Previously filed as an exhibit to the Company's Quarterly Report on Form
    10-Q for the quarter ended August 31, 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, 1994, 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, 1995, and incorporated herein by
    reference.
(10) Previously filed as an exhibit to the Company's Registration Statement No.
     33-70262 on Form S-1 and incorporated herein by reference.
(11) 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.
(12) Previously filed as an exhibit to the Company's Quarterly Report on Form
     10-Q for the quarter ended May 31, 1997 and incorporated herein by
     reference.
(13) 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.
(14) Previously filed as an exhibit to the Company's Annual Report on Form10-K
     for the fiscal year ended November 30, 1997, and incorporated herein by
     reference.
 
                                       29
<PAGE>
 
(15) Previously filed as an exhibit to the Company's Quarterly Report on Form
     10-Q for the quarter ended February 28, 1998, 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 May 31, 1998, 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 August 31, 1998, and incorporated herein by
     reference.
(18) Filed herewith.
(19) The exhibit is a management contract or compensatory plan or arrangement.
(20) Certain provisions of this exhibit are subject to a request for
     confidential treatment filed with the Securities and Exchange Commission.
 
4. REPORTS ON FORM 8-K
 
  On November 10, 1998, the Company filed a Current Report on Form 8-K dated
November 10, 1998, to report, under Item 5 therein, the settlement of claims in
its pending class action litigation.
 
                                       30
<PAGE>
 
                                  SIGNATURES
 
  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
 
                                          CELLSTAR CORPORATION
 
                                          By      /s/ Alan H. Goldfield
                                            -----------------------------------
                                                     Alan H. Goldfield
                                                 Chairman of the Board and
                                                  Chief Executive Officer
 
                                                  Date: February 24, 1999
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
 
By     /s/ Alan H. Goldfield                      Date: February 24,
 -----------------------------------               1999
          Alan H. Goldfield
   Chairman of the Board and Chief
          Executive Officer
    (Principal Executive Officer)
 
By     /s/ Richard M. Gozia                       Date: February 24,
 -----------------------------------               1999
          Richard M. Gozia
 President, Chief Operating Officer
            and Director
 
By     /s/ Evelyn Henry Miller                    Date: February 24,
 -----------------------------------               1999
         Evelyn Henry Miller
  Senior Vice President-Finance and
       Chief Financial Officer
 (Principal Financial and Accounting
              Officer)
 
By      /s/ Daniel T. Bogar                       Date: February 24,
 -----------------------------------               1999
           Daniel T. Bogar
    Senior Vice President--Latin
    American Region and Director
 
By      /s/ James L. Johnson                      Date: February 24,
 -----------------------------------               1999
          James L. Johnson
              Director
 
By      /s/ Sheldon I. Stein                      Date: February 24,
 -----------------------------------               1999
          Sheldon I. Stein
              Director
 
By      /s/ John T. Stupka                        Date: February 24,
 -----------------------------------               1999
           John T. Stupka
              Director
 
By      /s/ Terry S. Parker                       Date: February 24,
 -----------------------------------               1999
           Terry S. Parker
              Director
 
                                      31
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>                                                                        <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of November 30, 1998 and 1997.............. F-3
Consolidated Statements of Operations for the years ended November 30,
 1998, 1997 and 1996...................................................... F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Income
 (Loss) for the years ended November 30, 1998, 1997 and 1996.............. F-5
Consolidated Statements of Cash Flows for the years ended November 30,
 1998, 1997 and 1996...................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
Schedule II--Valuation and Qualifying Accounts for the years ended Novem-
 ber 30, 1998, 1997 and 1996.............................................. S-1
</TABLE>
 
                                      F-1
<PAGE>
 
                         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 generally accepted auditing
standards. 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-
year period ended November 30, 1998, in conformity with generally accepted
accounting principles. 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 12, 1999
 
                                      F-2
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                           NOVEMBER 30, 1998 AND 1997
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                              1998      1997
                                                            ---------  -------
<S>                                                         <C>        <C>
                                   ASSETS
Current assets:
  Cash and cash equivalents................................ $  47,983   74,646
  Accounts receivable (less allowance for doubtful accounts
   of $33,361 and $23,857, respectively)...................   360,048  176,032
  Inventories..............................................   274,438  190,404
  Deferred income tax assets...............................    18,670    2,457
  Prepaid expenses.........................................     6,518    2,661
                                                            ---------  -------
    Total current assets...................................   707,657  446,200
Property and equipment, net................................    27,858   22,877
Goodwill (less accumulated amortization of $4,032 and
 $2,378, respectively).....................................    32,910   17,616
Other assets...............................................     7,100   10,418
                                                            ---------  -------
                                                            $ 775,525  497,111
                                                            =========  =======
                    LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable......................................... $ 311,326  160,614
  Notes payable to financial institutions..................    85,023      --
  Accrued expenses.........................................    39,395   13,545
  Income taxes payable.....................................     8,601   11,044
  Deferred income tax liabilities..........................     3,389    1,043
                                                            ---------  -------
    Total current liabilities..............................   447,734  186,246
Long-term debt.............................................   150,000  150,000
                                                            ---------  -------
    Total liabilities......................................   597,734  336,246
Stockholders' equity:
  Preferred stock, $.01 par value, 5,000,000 shares
   authorized; none issued.................................       --       --
  Common stock, $.01 par value, 200,000,000 shares
   authorized; 58,963,218 and 58,498,840 shares issued and
   outstanding, respectively...............................       590      293
  Additional paid-in capital...............................    76,962   72,985
  Common stock warrant.....................................         4        4
  Accumulated other comprehensive income--foreign currency
   translation adjustments.................................    (8,181)  (6,469)
  Retained earnings........................................   108,416   94,052
                                                            ---------  -------
    Total stockholders' equity.............................   177,791  160,865
                                                            ---------  -------
                                                            $ 775,525  497,111
                                                            =========  =======
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-3
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                   1998       1997      1996
                                                ----------  ---------  -------
<S>                                             <C>         <C>        <C>
Revenues....................................... $1,995,850  1,482,814  947,601
Cost of sales..................................  1,823,075  1,325,488  810,000
                                                ----------  ---------  -------
  Gross profit.................................    172,775    157,326  137,601
Selling, general and administrative expenses...    116,747     81,319  135,585
Lawsuit settlement.............................      7,577        --       --
                                                ----------  ---------  -------
  Operating income.............................     48,451     76,007    2,016
Other income (expense):
  Interest expense.............................    (14,446)    (7,776)  (8,350)
  Equity in (loss) income of affiliated compa-
   nies, net...................................    (28,448)       465     (219)
  Other, net...................................      1,389      2,260     (313)
                                                ----------  ---------  -------
    Total other income (expense)...............    (41,505)    (5,051)  (8,882)
                                                ----------  ---------  -------
  Income (loss) before income taxes............      6,946     70,956   (6,866)
(Benefit) provision for income taxes...........     (7,418)    17,323     (453)
                                                ----------  ---------  -------
  Net income (loss)............................ $   14,364     53,633   (6,413)
                                                ==========  =========  =======
Net income (loss) per share:
  Basic........................................ $     0.24       0.92    (0.11)
                                                ==========  =========  =======
  Diluted...................................... $     0.24       0.89    (0.11)
                                                ==========  =========  =======
</TABLE>
 
 
 
          See accompanying notes to consolidated financial statements.
 
                                      F-4
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
                          COMPREHENSIVE INCOME (LOSS)
                 YEARS ENDED NOVEMBER 30, 1998, 1997, AND 1996
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                           ACCUMULATED
                         COMMON STOCK  ADDITIONAL COMMON      OTHER
                         -------------  PAID-IN    STOCK  COMPREHENSIVE RETAINED
                         SHARES AMOUNT  CAPITAL   WARRANT    INCOME     EARNINGS   TOTAL
                         ------ ------ ---------- ------- ------------- --------  -------
<S>                      <C>    <C>    <C>        <C>     <C>           <C>       <C>
Balance at November 30,
 1995..................  57,821  $193    68,167       4      (3,901)     46,832   111,295
  Comprehensive loss:
    Net loss...........     --    --        --      --          --       (6,413)   (6,413)
    Foreign currency
     translation
     adjustment........     --    --        --      --         (619)        --       (619)
                                                                                  -------
      Total
       comprehensive
       loss............                                                            (7,032)
                         ------  ----    ------     ---      ------     -------   -------
Balance at November 30,
 1996..................  57,821   193    68,167       4      (4,520)     40,419   104,263
  Comprehensive income:
    Net income.........     --    --        --      --          --       53,633    53,633
    Foreign currency
     translation
     adjustment........     --    --        --      --       (1,949)        --     (1,949)
                                                                                  -------
      Total
       comprehensive
       income..........                                                            51,684
  Common stock issued
   under stock option
   plan................     334     2     2,167     --          --          --      2,169
  Common stock issued
   for acquisition of
   minority interest...     344     1     2,748     --          --          --      2,749
  Three-for-two stock
   split...............     --     97       (97)    --          --          --        --
                         ------  ----    ------     ---      ------     -------   -------
Balance at November 30,
 1997..................  58,499   293    72,985       4      (6,469)     94,052   160,865
  Comprehensive income:
    Net income.........     --    --        --      --          --       14,364    14,364
    Foreign currency
     translation
     adjustment........     --    --        --      --       (1,712)        --     (1,712)
                                                                                  -------
      Total
       comprehensive
       income..........                                                            12,652
  Common stock issued
   under stock option
   plan................     464     5     4,269     --          --          --      4,274
  Two-for-one common
   stock split.........     --    292      (292)    --          --          --        --
                         ------  ----    ------     ---      ------     -------   -------
Balance at November 30,
 1998..................  58,963  $590    76,962       4      (8,181)    108,416   177,791
                         ======  ====    ======     ===      ======     =======   =======
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-5
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                 YEARS ENDED NOVEMBER 30, 1998, 1997, AND 1996
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                   1998       1997       1996
                                                 ---------  ---------  --------
<S>                                              <C>        <C>        <C>
Cash flows from operating activities:
  Net income (loss)............................  $  14,364     53,633    (6,413)
  Adjustments to reconcile net income (loss) to
   net cash (used in) provided by operating ac-
   tivities:
    Provision for doubtful accounts............     14,120      4,239    32,561
    Provision for inventory obsolescence.......     12,434      4,830     8,718
    Depreciation and amortization..............     11,426      5,063     5,799
    Gain on sale of assets.....................        --         --       (128)
    Equity in loss (income) of affiliated com-
     panies, net...............................     28,448       (465)      219
    Deferred income taxes......................    (13,073)     1,754    (1,116)
    Changes in certain operating assets and li-
     abilities:
      Accounts receivable......................   (214,833)   (50,408)  (40,660)
      Inventories..............................    (90,164)  (100,761)    6,067
      Prepaid expenses.........................     (2,407)    (1,148)      611
      Other assets.............................       (116)       241       318
      Accounts payable.........................    119,360     44,523    36,162
      Accrued expenses.........................     19,760      2,624     3,361
      Income taxes payable.....................     (2,109)     9,192    (7,397)
                                                 ---------  ---------  --------
        Net cash (used in) provided by operat-
         ing activities........................   (102,790)   (26,683)   38,102
                                                 ---------  ---------  --------
Cash flows from investing activities:
  Purchases of property and equipment..........    (12,498)    (6,212)   (6,139)
  Acquisitions of businesses, net of cash......    (13,526)       --        --
  Proceeds from sale of assets.................        --         --      6,903
  Acquisitions of minority interests...........       (900)      (502)      --
  Purchases of equity investments in affiliated
   companies...................................        --      (3,412)      --
                                                 ---------  ---------  --------
        Net cash (used in) provided by invest-
         ing activities........................    (26,924)   (10,126)      764
                                                 ---------  ---------  --------
Cash flows from financing activities:
  Net borrowings (payments) on notes payable to
   financial institutions......................     82,030    (56,136)  (42,467)
  Checks not presented for payment.............     17,719        --        --
  Net proceeds from issuance of long-term debt.        --     144,979       --
  Principal payments on long-term debt.........        --      (6,853)     (611)
  Net proceeds from issuance of common stock...      3,302      2,169       --
                                                 ---------  ---------  --------
        Net cash provided by (used in) financ-
         ing activities........................    103,051     84,159   (43,078)
                                                 ---------  ---------  --------
Net (decrease) increase in cash and cash equiv-
 alents........................................    (26,663)    47,350    (4,212)
Cash and cash equivalents at beginning of year.     74,646     27,296    31,508
                                                 ---------  ---------  --------
Cash and cash equivalents at end of year.......  $  47,983     74,646    27,296
                                                 =========  =========  ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-6
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 (a) Basis for Presentation
 
  CellStar Corporation and subsidiaries (the "Company") is a global company
focused on providing distribution and value-added services to wireless
carriers and manufacturers in direct relationships. With operations in the
North American Region, the Asia-Pacific Region, the Latin American Region and
the European Region, the Company is one of the world's largest non-carrier
wholesale distributors of wireless handsets for major manufacturers.
 
  All significant intercompany balances and transactions have been eliminated
in consolidation. Certain prior year 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.
 
 (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 net realizable value of this intangible asset
by determining the estimated future cash flows related to such assets. In the
event that assets are found to be carried at amounts which are in excess of
estimated future operating cash flows, then the intangible assets will be
adjusted for impairment to a level commensurate with a discounted cash flow
analysis of the underlying assets.
 
 (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
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                  NOTES TO 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 product is
shipped. 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 upon 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 upon the wireless
service providers' acceptance of subscriber contracts 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.
 
 (i) 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 a separate component of 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 transaction gains or (losses) for the years
ended November 30, 1998, 1997 and 1996 were $0.3 million, ($1.4) million and
($1.8) million, respectively. The currency exchange rates of the Latin
American countries in 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.
 
 (j) Derivative Financial Instruments
 
  The Company uses foreign currency non-deliverable forward contracts to
manage certain foreign exchange risks. These contracts do not qualify as
hedges against financial statement exposure. Gains or losses on these
contracts represent the difference between the forward rate available on the
underlying currency against the U.S. dollar for the remaining maturity of the
contracts as of the balance sheet date and the contracted forward rate and are
included in the consolidated statements of operations.
 
 (k) Preopening Costs
 
  Labor and certain other costs related to the opening of new retail locations
are expensed as incurred.
 
 (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
 
                                      F-8
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
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.
 
 (m) Net Income (Loss) Per Share
 
  The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("Statement 128"), effective December 1, 1997. Statement
128 replaces "primary" and "fully diluted" net income per share with "basic"
and "diluted" net income per share. Basic net income per common share is based
on the weighted average number of common shares outstanding for the relevant
period. Diluted net income 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. Net income (loss) per share for prior periods has been restated to
reflect Statement 128.
 
  A reconciliation of the numerators and denominators of the basic and diluted
net income per share computations for the years ended November 30, 1998, 1997,
and 1996 follows (in thousands, except per share data):
 
<TABLE>
<CAPTION>
                                                          1998    1997   1996
                                                         ------- ------ ------
   <S>                                                   <C>     <C>    <C>
   Basic:
   Net income (loss).................................... $14,364 53,633 (6,413)
   Weighted average number of shares outstanding........  58,865 58,144 57,821
                                                         ------- ------ ------
     Net income (loss) per share........................ $  0.24   0.92  (0.11)
                                                         ======= ====== ======
   Diluted:
   Net income (loss).................................... $14,364 53,633 (6,413)
   Interest on convertible notes, net of tax effect.....     --     567    --
                                                         ------- ------ ------
     Adjusted net income (loss)......................... $14,364 54,200 (6,413)
   Weighted average number of shares outstanding........  58,865 58,144 57,821
   Effect of dilutive securities:
     Stock options and warrants.........................   1,791  2,024    --
     Convertible notes..................................     --     683    --
                                                         ------- ------ ------
   Weighted average number of shares outstanding and
    effect of dilutive securities.......................  60,656 60,851 57,821
                                                         ------- ------ ------
     Net income (loss) per share........................ $  0.24   0.89  (0.11)
                                                         ======= ====== ======
</TABLE>
 
 (n) Comprehensive Income (Loss)
 
  On December 1, 1997, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("Statement 130"), which
establishes standards for reporting and presentation of comprehensive income
(loss) and its components. 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). Statement 130 does not affect the Company's consolidated financial
position or results of operations. The Company does not tax effect its foreign
currency translation adjustments since it considers the unremitted earnings of
its foreign subsidiaries to be indefinitely reinvested.
 
                                      F-9
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 (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 $13.0 million,
$7.1 million and $8.7 million of interest for the years ended November 30,
1998, 1997 and 1996, respectively. The Company paid approximately $8.7
million, $6.4 million and $7.8 million of income taxes for the years ended
November 30, 1998, 1997 and 1996, 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 its fixed stock option plans. As such, compensation expense
would be recorded on the date of grant of options only if the current market
price of the underlying stock exceeded the exercise price.
 
(2)RELATED PARTY TRANSACTIONS
 
 (a) Transactions with Motorola
 
  Motorola purchased 2.1 million shares of the Company's common stock in July
1995 and is a major supplier of handsets and accessories. Total purchases from
Motorola approximated $1,276.1 million, $1,057.2 million and $609.7 million
for the years ended November 30, 1998, 1997 and 1996, respectively. Included
in accounts payable at November 30, 1998 and 1997 was approximately $200.3
million and $109.2 million, respectively, due to Motorola for purchases of
inventory.
 
 (b) Transactions with E.A. Eletronicos e Componentes Ltda.
 
  The Company's Brazilian operations are primarily conducted through a
majority-owned joint venture. The primary supplier of handsets to the joint
venture is a Brazilian importer, E.A. Eletronicos e Componentes Ltda.
("E.A."), who is a customer of the Company. Sales to E.A. are excluded from
the Company's consolidated revenues, and the related gross profit is deferred
until the handsets are sold by the Brazilian joint venture to customers. At
November 30, 1998, the Company had accounts receivable of $58.5 million due
from E.A. and accounts payable of $50.9 million due to E.A. from the Brazilian
joint venture.
 
(3)FAIR VALUE OF FINANCIAL INSTRUMENTS
 
  The carrying amounts of current assets and liabilities as of November 30,
1998 and 1997 approximate fair value due to the short maturity of these
instruments. The fair value of the Company's long-term debt represents quoted
market prices as of November 30, 1998 and 1997 as set forth in the table below
(in thousands):
 
<TABLE>
<CAPTION>
                                                     1998             1997
                                                --------------- ----------------
                                                CARRYING  FAIR  CARRYING  FAIR
                                                 AMOUNT  VALUE   AMOUNT   VALUE
                                                -------- ------ -------- -------
     <S>                                        <C>      <C>    <C>      <C>
     Long-term debt............................ $150,000 91,500 150,000  122,250
                                                ======== ====== =======  =======
</TABLE>
 
 
                                     F-10
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
(4)PROPERTY AND EQUIPMENT
 
  Property and equipment consisted of the following at November 30, 1998 and
1997 (in thousands):
 
<TABLE>
<CAPTION>
                                                                1998     1997
                                                               -------  -------
     <S>                                                       <C>      <C>
     Land and building........................................ $ 9,298    8,559
     Furniture, fixtures and equipment........................  23,895   18,208
     Jet aircraft.............................................   4,454    4,306
     Leasehold improvements...................................   4,159    2,936
                                                               -------  -------
                                                                41,806   34,009
     Less accumulated depreciation and amortization........... (13,948) (11,132)
                                                               -------  -------
                                                               $27,858   22,877
                                                               =======  =======
</TABLE>
 
(5)INVESTMENTS IN AFFILIATED COMPANIES
 
  At November 30, 1998 and 1997, investments in affiliated companies consisted
of an 18% voting interest in the common stock of Topp Telecom, Inc. ("Topp")
and a 49% interest in CellStar Amtel Sdn. Bhd. ("Amtel"), a Malaysian company,
respectively. Topp is a reseller of wireless airtime through the provision of
prepaid wireless services, and Amtel is a distributor of wireless handsets.
 
  In November 1997, the Company made a $3.0 million equity investment in Topp,
which represented an 18% voting interest in its common stock, and began
supplying Topp with handsets.
 
 
                                     F-11
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
  Topp incurred substantial operating losses associated with the acquisition
costs of expanding its customer base. Beginning in the Company's third fiscal
quarter of 1998, the Company became Topp's primary source of funding through
the Company's supply of handsets. Accordingly, the Company then began to
account for its debt and equity investment in Topp under the modified equity
method. Under this method, the Company recognized Topp's net loss to the
extent of the Company's entire debt and equity investment, or $29.2 million.
Subsequent to November 30, 1998, the Company sold a portion of its debt and
equity investment (note 14). Summary financial information for Topp follows:
 
                              TOPP TELECOM, INC.
                           CONDENSED BALANCE SHEETS
                                  (UNAUDITED)
                                (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                       NOVEMBER 30, DECEMBER 31,
                                                           1998         1997
                                                       ------------ ------------
     <S>                                               <C>          <C>
     Current assets...................................   $13,303       11,435
     Total assets.....................................    16,575       13,869
     Current liabilities..............................    34,062       20,358
     Total liabilities................................    58,852       20,358
     Stockholders' deficit............................   (42,277)      (6,489)
</TABLE>
 
                              TOPP TELECOM, INC.
                      CONDENSED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
                                (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                           ELEVEN MONTHS ENDED    YEAR ENDED
                                            NOVEMBER 30, 1998  DECEMBER 31, 1997
                                           ------------------- -----------------
     <S>                                   <C>                 <C>
     Revenues.............................       $34,491             30,850
     Gross margin.........................         8,183              6,545
     Net loss.............................       (35,788)           (10,207)
</TABLE>
 
  The Company's investment in Amtel approximates that of the Company's
ownership percentage of Amtel's net assets. It is not practicable for the
Company to estimate the fair value of its investments in Topp and Amtel, since
there are no quoted market prices available.
 
(6)DEBT
 
  Notes payable to financial institutions consisted of the following at
November 30, 1998 (in thousands):
 
<TABLE>
     <S>                                                                <C>
     Multicurrency revolving credit facility........................... $73,500
     Brazilian credit facilities.......................................  11,523
                                                                        -------
                                                                        $85,023
                                                                        =======
</TABLE>
 
  On October 15, 1997, the Company entered into a $135.0 million Multicurrency
Revolving Credit Facility (the "Facility") with a syndicate of banks. The
Facility has a term of approximately five years and provides the ability to
borrow up to $25.0 million in certain currencies that are customarily offered
to banks in the London interbank market and are convertible into dollars in
the international bank market. Fundings under the Facility are limited by an
asset coverage test, which is measured quarterly. Borrowings under the
Facility are made under
 
                                     F-12
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
London Interbank Offered Rate contracts, generally for 30 days, or at the
bank's prime lending rate. Total interest charged on those borrowings may
include an applicable margin that is subject to increases if the Company's
ratio of consolidated funded debt to consolidated cash flow is greater than or
equal to 3.0 to 1.0, which is determined at the end of each fiscal quarter. At
November 30, 1998, the interest rates on Facility borrowings ranged from 6.56%
to 7.75%. The Facility is secured by the Company's accounts receivable,
property, plant and equipment and all other real property. The Facility
contains, among other provisions, covenants relating to the maintenance of
minimum net worth and certain financial ratios, dividend payments, additional
debt, mergers and acquisitions and dispositions of assets. At November 30,
1998, the Company had available $41.0 million of borrowing capacity.
 
  As of November 30, 1998, the Company's Brazilian operations had borrowed
$11.5 million, including accrued interest, under credit facilities with
several Brazilian banks. Of these borrowings, $7.0 million was denominated in
U.S. dollars. Annual interest rates on borrowings in Brazil range from
approximately 36% to 48%. In conjunction with these credit facilities, the
Company issued $7.0 million of letters of credit against its Facility to
guarantee the repayment of the principal plus interest and all other
contractual obligations of its Brazilian operations to one of the Brazilian
banks.
 
  The weighted average interest rate on short-term borrowings at November 30,
1998 was 7.3%.
 
  At November 30, 1998 and 1997, long-term debt consisted of $150.0 million of
the Company's 5% Convertible Subordinated Notes Due October 15, 2002 (the
"Notes"), which are convertible into 5.4 million shares of common stock at
$27.668 per share at any time prior to maturity. Subsequent to October 18,
2000, the Notes are redeemable at the option of the Company, in whole or in
part, initially at 102% and thereafter at prices declining to 100% at
maturity, together with accrued interest. The Notes were initially issued
pursuant to an exempt offering and were subsequently registered under the
Securities Act, along with the common stock into which the Notes are
convertible.
 
 
                                     F-13
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
(7)INCOME TAXES
 
  The Company's income (loss) before income taxes was comprised of the
following for the years ended November 30, 1998, 1997 and 1996 (in thousands):
 
<TABLE>
<CAPTION>
                                                         1998     1997   1996
                                                       --------  ------ -------
     <S>                                               <C>       <C>    <C>
     United States.................................... $(48,413) 22,539 (22,354)
     International....................................   55,359  48,417  15,488
                                                       --------  ------ -------
     Total............................................ $  6,946  70,956  (6,866)
                                                       ========  ====== =======
</TABLE>
 
  (Benefit) provision for income taxes for the years ended November 30, 1998,
1997 and 1996 consisted of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                   CURRENT   DEFERRED   TOTAL
                                                   --------  --------  -------
     <S>                                           <C>       <C>       <C>
     Year ended November 30, 1998:
       United States:
         Federal.................................. $ (3,005) (14,831)  (17,836)
         State....................................    1,067     (849)      218
       International..............................    7,141    3,059    10,200
                                                   --------  -------   -------
                                                   $  5,203  (12,621)   (7,418)
                                                   ========  =======   =======
     Year ended November 30, 1997:
       United States:
         Federal.................................. $  4,408    1,736     6,144
         State....................................    1,134       89     1,223
       International                                 10,027      (71)    9,956
                                                   --------  -------   -------
                                                   $ 15,569    1,754    17,323
                                                   ========  =======   =======
     Year ended November 30, 1996:
       United States:
         Federal.................................. $ (4,682)  (1,383)   (6,065)
         State....................................     (366)     (78)     (444)
       International..............................    5,711      345     6,056
                                                   --------  -------   -------
                                                   $    663   (1,116)     (453)
                                                   ========  =======   =======
</TABLE>
 
  (Benefit) provision for income taxes differed from the amounts computed by
applying the U.S. Federal income tax rate of 35% to income (loss) before
income taxes as a result of the following for the years ended November 30,
1998, 1997 and 1996 (in thousands):
 
<TABLE>
<CAPTION>
                                                         1998     1997    1996
                                                       --------  ------  ------
     <S>                                               <C>       <C>     <C>
     Expected tax expense (benefit)..................  $  2,431  24,835  (2,403)
     International and U.S. tax effects attributable
      to international operations....................   (11,207) (7,022)  2,658
     State income taxes, net of Federal benefits.....       142     795    (289)
     Equity in (loss) income of affiliated companies,
      net............................................       781    (163)     77
     Other, net......................................       435  (1,122)   (496)
                                                       --------  ------  ------
     Actual tax (benefit) expense....................  $ (7,418) 17,323    (453)
                                                       ========  ======  ======
</TABLE>
 
                                     F-14
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
  As a result of certain activities undertaken by the Company, income in
certain foreign countries is subject to reduced tax rates, and in some cases
is wholly exempt from taxes, primarily through 1999. The income tax benefits
attributable to the tax status of these subsidiaries are estimated to be $5.3
million, $1.5 million and zero for 1998, 1997 and 1996, respectively.
 
  The tax effect of temporary differences underlying significant portions of
deferred income tax assets and liabilities at November 30, 1998 and 1997, is
presented below (in thousands):
 
<TABLE>
<CAPTION>
                                                                1998     1997
                                                               -------  ------
     <S>                                                       <C>      <C>
     Deferred income tax assets:
       United States:
         Accounts receivable.................................. $12,744   2,845
         Inventory adjustments for tax purposes...............   3,425     755
         Class action lawsuit settlement......................   2,498     --
         Other, net...........................................     340  (1,323)
       International:
         Accounts receivable..................................     189      28
         Net operating loss carryforwards.....................   1,913   1,405
         Other, net...........................................     135     152
                                                               -------  ------
                                                                21,244   3,862
       Valuation allowance....................................  (2,574) (1,405)
                                                               -------  ------
                                                               $18,670   2,457
                                                               =======  ======
     Deferred income tax liabilities:
       International:
         Other, net........................................... $(3,389) (1,043)
                                                               =======  ======
</TABLE>
 
  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 upon the generation of future taxable income in the
originating tax jurisdiction during the periods in which those temporary
differences become deductible. The valuation allowance for deferred income tax
assets as of December 1, 1997 and 1996 was $1.4 million and $1.5 million,
respectively. The net change in the total valuation allowance for the years
ended November 30, 1998 and 1997 was an increase of $1.2 million and a
decrease of $0.1 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 upon 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 will realize the benefits of
these deductible differences. The amount of the deferred income tax assets
considered realizable, however, could be reduced in the near term if estimates
of future taxable income are reduced.
 
  The Company does not provide for U.S. Federal income taxes or tax benefits
on the undistributed earnings and/or losses of its international subsidiaries
because earnings are reinvested and, in the opinion of management, will
continue to be reinvested indefinitely. At November 30, 1998, the Company had
not provided U.S. Federal income taxes on earnings of international
subsidiaries of approximately $104.5 million. Upon distribution of these
earnings in the form of dividends or otherwise, the Company would be subject
to both U.S. income taxes and certain withholding taxes in the various
international jurisdictions. Determination of the related amount of
unrecognized deferred U.S. income tax liability is not practicable because of
the complexities associated with this hypothetical calculation.
 
 
                                     F-15
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
  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 upon final determination by the respective taxing
authorities. Management believes it has provided an adequate tax provision.
 
(8)LEASES
 
  The Company leases certain warehouse and office facilities, equipment and
retail stores under operating leases which range from two to ninety-nine years
and which facility and retail store leases generally contain renewal options.
Rental expense for operating leases was $5.6 million, $4.3 million and $4.3
million for the years ended November 30, 1998, 1997 and 1996, respectively.
Future minimum lease payments under operating leases as of November 30, 1998
are as follows (in thousands):
 
<TABLE>
<CAPTION>
               YEAR
              ENDING
             NOVEMBER
               30,                              AMOUNT
             --------                           -------
            <S>                                 <C>
              1999.............................  $4,312
              2000.............................   3,842
              2001.............................   2,060
              2002.............................   1,616
              2003.............................     889
            Thereafter.........................   1,498
                                                -------
                                                $14,217
                                                =======
</TABLE>
 
(9)CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMER INFORMATION
 
  Pacific Bell Mobile Services, a North American Region customer, accounted
for 9.7%, or $194.6 million, and 12.0%, or $178.2 million, of consolidated
revenues for the years ended November 30, 1998 and 1997, respectively. No
other customer accounted for 10% or more of consolidated revenues in any of
the years ended November 30, 1998, 1997 or 1996.
 
(10)SEGMENT AND RELATED INFORMATION
 
  The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information"
("Statement 131"). Segment information for the years ended November 30, 1997
and 1996 has been restated to conform to the new presentation.
 
  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 geographical regions: North America, primarily the
United States, Asia-Pacific, Latin America, which includes Mexico and the
Company's Miami, Florida operations ("Miami"), and Europe. Revenues and
operating results of Miami are included in Latin America since Miami's
activities are primarily for export to South American countries, either by the
Company or through its exporter customers. The Corporate segment includes
headquarter operations, income and expenses not allocated to reportable
segments, and interest expense on the Company's Facility and Notes. The
accounting policies of the reportable segments are the same as those described
in note (1). Intersegment sales and transfers are not significant.
 
 
                                     F-16
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
  Segment information for the years ended November 30, 1998, 1997 and 1996
follows (in thousands):
 
<TABLE>
<CAPTION>
                           NORTH     ASIA-    LATIN
                          AMERICA   PACIFIC  AMERICA  EUROPE   CORPORATE   TOTAL
                          --------  -------  -------  -------  --------- ---------
<S>                       <C>       <C>      <C>      <C>      <C>       <C>
November 30, 1998:
 Revenues from external
  customers.............  $472,837   13,869  705,624  303,520       --   1,995,850
 Lawsuit settlement.....       --       --       --       --      7,577      7,577
 Operating income
  (loss)................       527   38,727   28,541    5,226   (24,570)    48,451
 Equity in (loss) income
  of affiliated compa-
  nies, net.............   (29,216)     768      --       --        --     (28,448)
 (Loss) income before
  interest and income
  taxes.................   (28,437)  37,804   27,959    6,482   (25,337)    18,471
 Income tax (benefit)
  provision.............   (15,264)   4,448   11,840    1,489    (9,931)    (7,418)
 Net (loss) income......   (13,173)  36,345   13,964    3,582   (26,354)    14,364
 Total assets...........   152,004  235,147  319,944   54,659    13,771    775,525
 Depreciation and amor-
  tization..............     3,197    2,012    3,742      670     1,805     11,426
November 30, 1997:
 Revenues from external
  customers.............  $493,585  422,751  497,336   69,142       --   1,482,814
 Operating income
  (loss)................     5,475   44,535   41,446     (145)  (15,304)    76,007
 Equity in income of af-
  filiated company......       --       465      --       --        --         465
 Income (loss) before
  interest and income
  taxes.................     7,219   45,437   41,216     (215)  (17,055)    76,602
 Income tax provision
  (benefit).............       678    7,449   17,481      --     (8,285)    17,323
 Net income (loss)......     6,541   39,424   22,974      (92)  (15,214)    53,633
 Total assets...........   183,687  120,728  168,532   15,438     8,726    497,111
 Depreciation and amor-
  tization..............     1,691    1,417      715      152     1,088      5,063
November 30, 1996:
 Revenues from external
  customers.............  $341,352  248,493  347,188   10,568       --     947,601
 Bad debt expense in ex-
  cess of historical
  levels................       --       --    23,933      --        --      23,933
 Operating income
  (loss)................       154   20,808   (3,462)    (379)  (15,105)     2,016
 Equity in loss of af-
  filiated company......       --      (219)     --       --        --        (219)
 Income (loss) before
  interest and income
  taxes.................       348   19,615   (3,506)    (217)  (15,668)       572
 Income tax (benefit)
  provision.............      (479)   4,615    2,042      --     (6,631)      (453)
 Net income (loss)             827   15,479   (5,585)    (213)  (16,921)    (6,413)
 Total assets...........   126,985   81,556   73,798   12,152     4,060    298,551
 Depreciation and amor-
  tization..............     2,890    1,172      719       48       970      5,799
</TABLE>
 
 
                                      F-17
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
  Bad debt expense in excess of historical levels represents an increase in
the trade accounts receivable reserves to reflect a deterioration in the Latin
American Region's trade accounts receivable portfolio, primarily for Brazil-
related receivables. In 1996, substantially all of the Company's customers in
Brazil were significantly and adversely impacted by actions taken by the
Brazilian government's wireless carrier, which unexpectedly limited the number
of wireless lines made available for activation. Beginning in late 1995 and
continuing through 1996, this carrier announced plans to activate significant
numbers of wireless lines on a monthly basis to meet the large demand for
wireless service in major metropolitan areas. Many of the Company's customers
rapidly expanded their operations and incurred corresponding increases in
inventory and overhead. Since this carrier failed to release the number of
lines it announced, the Company's customers were unable to pay and,
accordingly, the Company increased its trade accounts receivable reserves.
 
  Geographical information for the years ended November 30, 1998, 1997 and
1996 follows (in thousands):
 
<TABLE>
<CAPTION>
                                    1998                  1997                1996
                            --------------------- -------------------- -------------------
                                       LONG-LIVED           LONG-LIVED          LONG-LIVED
                             REVENUES    ASSETS   REVENUES    ASSETS   REVENUES   ASSETS
                            ---------- ---------- --------- ---------- -------- ----------
   <S>                      <C>        <C>        <C>       <C>        <C>      <C>
   United States........... $  834,521   17,336     866,866   14,409   568,644    14,110
   People's Republic of
    China, including Hong
    Kong...................    404,883    1,770     319,703    2,004   191,491       591
   United Kingdom..........    209,439      372      69,142      466    10,568       344
   All other countries.....    547,007    8,380     227,103    5,998   176,898     5,089
                            ----------   ------   ---------   ------   -------    ------
                            $1,995,850   27,858   1,482,814   22,877   947,601    20,134
                            ==========   ======   =========   ======   =======    ======
</TABLE>
 
(11)ACQUISITIONS
 
 (a) Businesses Acquired
 
  The Company acquired three companies during 1998: 1) TA Intercall AB
(Sweden), January 1998; 2) Digicom Spoka zo.o. (Poland), March 1998; and 3)
ACC del Peru (Peru), May 1998. Each of these transactions was accounted for as
a purchase and, accordingly, the consolidated financial statements include the
operating results of each business from the date of acquisition. The aggregate
of the purchase prices was $18.2 million, which resulted in $18.1 million of
goodwill with an estimated life of 20 years. Additional payments based upon
future operating results of the applicable businesses over the next two years
may be paid either in cash or common stock at the Company's option. Contingent
payments, if paid, will be accounted for as goodwill. The impact of these
acquisitions was not material in relation to the Company's consolidated
financial position or results of operations.
 
 (b) Acquisition of Minority Interest in CellStar Pacific
 
  On May 30, 1997, the Company acquired the remaining 20% minority interest of
CellStar Pacific, the Company's Singapore subsidiary, which conducts
operations in Singapore, The Philippines, and Malaysia, for common stock
valued at $2.7 million and $0.5 million in cash.
 
                                     F-18
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
(12)STOCKHOLDERS' EQUITY
 
 (a) Stock Options
 
  The Company has a stock option plan ("the Plan") covering 8.3 million shares
of common stock of the Company. 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 primarily
have vesting schedules of 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 will
automatically be granted an option to purchase 2,500 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 150,000 shares of common stock is authorized for
issuance pursuant to the Directors' Option Plan. Each option granted under the
Directors' Option Plan will become exercisable six months after its date of
grant and will 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.
 
  The per share weighted-average fair market value of stock options granted
during the years ended November 30, 1998, 1997 and 1996 was $6.375, $7.249 and
$3.431, respectively, on the date of grant using the Black-Scholes option-
pricing model with the following weighted-average assumptions:
 
<TABLE>
<CAPTION>
                                                               1998  1997  1996
                                                               ----- ----- -----
     <S>                                                       <C>   <C>   <C>
     Dividend yield...........................................  0.0%  0.0%  0.0%
     Volatility............................................... 83.0% 77.0% 77.0%
     Risk-free interest rate..................................  5.4%  6.0%  5.2%
     Expected term of options (in years)......................  3.2   3.7   2.6
</TABLE>
 
  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 123, the Company's net income (loss) would have been the pro forma
amounts below for the years ended November 30, 1998, 1997 and 1996 (in
thousands):
 
<TABLE>
<CAPTION>
                                                           1998    1997   1996
                                                          ------- ------ ------
     <S>                                                  <C>     <C>    <C>
     Net income (loss) as reported....................... $14,364 53,633 (6,413)
     Pro forma...........................................  10,136 51,380 (8,068)
     Pro forma diluted net income (loss) per share.......    0.17   0.87  (0.14)
</TABLE>
 
  Pro forma net income (loss) reflects only options granted after November 30,
1995. Therefore, the full impact of calculating compensation cost for stock
options under Statement 123 is not reflected in the pro forma net income
(loss) amounts presented above because compensation cost is reflected over the
options' vesting period of four years and compensation cost for options
granted prior to December 1, 1995 is not considered.
 
 
                                     F-19
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
  Stock option activity during the years ended November 30, 1998, 1997 and
1996 is as follows:
 
<TABLE>
<CAPTION>
                                1998                1997                1996
                         ------------------- ------------------- -------------------
                                   WEIGHTED-           WEIGHTED-           WEIGHTED-
                                    AVERAGE             AVERAGE             AVERAGE
                          NUMBER   EXERCISE   NUMBER   EXERCISE   NUMBER   EXERCISE
                         OF SHARES  PRICES   OF SHARES  PRICES   OF SHARES  PRICES
                         --------- --------- --------- --------- --------- ---------
<S>                      <C>       <C>       <C>       <C>       <C>       <C>
Granted................. 2,095,458  $11.491  2,448,500  $12.499  1,415,002  $6.944
Exercised...............   464,378    7.110    334,406    6.484        --      --
Forfeited............... 1,075,062   19.680    162,500    6.988  1,213,272   6.349
Outstanding, end of
 year................... 4,690,028    8.704  4,134,010    9.965  2,182,416   6.366
Exercisable, end of
 year................... 1,417,757    6.531  1,192,876    6.374    541,408   6.990
Reserved for future
 grants under the Plan.. 2,797,314
Reserved for future
 grants under the
 Directors' Option Plan.   112,500
</TABLE>
 
  For options outstanding and exercisable as of November 30, 1998, the
exercise prices and remaining lives were:
 
<TABLE>
<CAPTION>
                                  OPTIONS OUTSTANDING           OPTIONS EXERCISABLE
                          ------------------------------------ ---------------------
                                        WEIGHTED-    WEIGHTED-             WEIGHTED-
                                         AVERAGE      AVERAGE               AVERAGE
                            NUMBER    REMAINING LIFE EXERCISE    NUMBER    EXERCISE
RANGE OF EXERCISE PRICES  OUTSTANDING   (IN YEARS)    PRICES   EXERCISABLE  PRICES
------------------------  ----------- -------------- --------- ----------- ---------
<S>                       <C>         <C>            <C>       <C>         <C>
$2.170--4.063...........     225,754       7.6        $ 3.440     116,254   $ 3.344
$5.000--7.670...........   2,342,128       7.3          6.397   1,170,253     6.291
$8.670--12.940..........   1,933,980       9.0         11.352     109,375    10.243
$13.630--19.880.........     188,166       9.1         16.522      21,875    17.790
                           ---------                            ---------
                           4,690,028       8.1          8.704   1,417,757     6.531
                           =========                            =========
</TABLE>
 
 (b) Stockholder Rights Plan
 
  The Company adopted a Stockholder Rights Plan, which provides that the
holders of the Company's common stock receive one-third of a right ("Right")
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 per one one-thousandth of
a share, 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 acquiror of the Company at a 50% discount. The Rights expire on January
9, 2007, unless earlier redeemed by the Company.
 
 (c) Stock Split
 
  On May 19, 1998 the Board of Directors approved a two-for-one common stock
split, which was effected in the form of a stock dividend that was distributed
on June 23, 1998 to stockholders of record on June 5, 1998. All historical
common stock, weighted average number of shares, dilutive securities and net
income (loss) per share amounts have been retroactively adjusted for the stock
split.
 
 
                                     F-20
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
(13)COMMITMENTS AND CONTINGENCIES
 
 (a) Class Action Lawsuit Settlement
 
  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;
and the Company's independent auditors. 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.
 
 (b) SEC Investigation
 
  On August 3, 1998, the Company announced that the Securities and Exchange
Commission is conducting an investigation of the Company relating to its
compliance with Federal securities laws. The Company believes that it has
fully complied with all securities laws and regulations and is cooperating
with the Commission in its investigation.
 
 (c) Litigation
 
  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.
 
 (d) Financial Guarantee
 
  The Company has guaranteed up to MYR13.2 million (Malaysian ringgits), or
$3.5 million as of November 30, 1998, for bank borrowings of its Malaysian
joint venture.
 
 (e) Foreign Currency Non-deliverable Forward Contracts
 
  In connection with product sales in Brazil, the Company entered into
Brazilian real non-deliverable forward ("NDF") contracts aggregating $44.8
million with maturities from January 11, 1999 through January 29, 1999. These
NDF contracts are used to manage the Company's foreign currency exposure to
the Brazilian real with respect to credit sales made to E.A. Payment is
remitted by E.A. at the Brazilian real rate of exchange against the U.S.
dollar on the day the Company recorded the sale to E.A. A net mark-to-market
gain of $0.1 million through November 30, 1998, with respect to these
transactions has been recorded in the consolidated statements of operations.
 
 (f) 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
upon completing ninety 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 15% 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. During the years ended November 30, 1998 and
1997, the Company made contributions of approximately $0.3 million to the
plan.
 
                                     F-21
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
(14)SUBSEQUENT EVENTS (UNAUDITED)
 
 (a) Devaluation of the Brazilian Real
 
  In January 1999, the Brazilian government allowed the value of the real to
float freely against other foreign currencies, which resulted in a significant
devaluation against the U.S. dollar. The Company's majority-owned Brazilian
joint venture had $5.7 million in U.S. dollar denominated debt outstanding in
Brazil at January 31, 1999. On February 18, 1999, the Company's majority-owned
Brazilian joint venture recognized a currency transaction loss of
approximately $4.0 million upon the conversion of the U.S. dollar denominated
debt into a Brazilian real credit facility. The Company has NDF contracts to
manage its foreign currency exposure to the Brazilian real with respect to
credit sales made to E.A. The Company may incur additional foreign currency
transaction losses related to its Brazilian operations.
 
 (b) Topp Telecom, Inc.
 
  In February 1999, the Company sold part of its equity investment in Topp to
a wholly-owned subsidiary of Telefonos de Mexico S.A. de C.V. At the closing,
the Company also sold a portion of its debt investment to certain other
shareholders of Topp. As a result of these transactions, the Company received
cash in the amount of $7.0 million, and retained a 19.5% equity ownership
interest in Topp.
 
 (c) Sale of Prepaid Operation in Venezuela
 
  On February 18, 1999, the Company agreed to sell its Movil Amigo prepaid
cellular operation in Venezuela to Movilnet del Venezuela. The Company expects
to close the transaction on March 20, 1999.
 
                                     F-22
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                    SUPPLEMENTAL FINANCIAL DATA (UNAUDITED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                          FIRST   SECOND   THIRD     FOURTH
                                         QUARTER  QUARTER QUARTER    QUARTER
                                         -------- ------- -------    -------
<S>                                      <C>      <C>     <C>        <C>
1998
Revenues................................ $406,745 445,660 501,750    641,695
Gross profit............................   41,410  44,902  41,025     45,438
Net income (loss).......................   14,248  16,599   2,390(a) (18,873)(b)
Net income (loss) per share:
  Basic.................................     0.24    0.28    0.04      (0.32)
  Diluted...............................     0.23    0.27    0.04      (0.32)
1997
Revenues................................ $256,645 377,562 442,106    406,501
Gross profit............................   31,851  40,646  43,916     40,913
Net income..............................    5,982  14,209  16,170     17,272
Net income per share:
  Basic.................................     0.10    0.25    0.28       0.30
  Diluted...............................     0.10    0.24    0.26       0.28
</TABLE>
--------
(a) In the third quarter of 1998, the Company's operations were affected by
    the Company's adoption of the modified equity method of accounting for its
    investment in Topp, which method increased recognition of Topp's net loss.
(b) In the fourth quarter of 1998, the Company's operations were affected by
    its recognition of Topp's net loss to the extent of the Company's entire
    debt and equity investment in Topp; the settlement of the class action
    lawsuit; and the cost of de-emphasizing or eliminating certain businesses.
 
                                     F-23
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                          BALANCE AT  CHARGED TO CHARGED TO DEDUCTIONS, BALANCE AT
                         BEGINNING OF COSTS AND  ACTIVATION   NET OF      END OF
                            PERIOD     EXPENSES  INCOME (A) RECOVERIES    PERIOD
                         ------------ ---------- ---------- ----------- ----------
<S>                      <C>          <C>        <C>        <C>         <C>
Allowance for doubtful
 accounts:
  November 30, 1998.....   $23,857      13,639        481      (4,616)    33,361
  November 30, 1997.....    29,023       3,131      1,108      (9,405)    23,857
  November 30, 1996.....     3,738      27,951      4,610      (7,276)    29,023
Reserve for inventory
 obsolescence:
  November 30, 1998.....   $ 2,795      12,434        --       (3,147)    12,082
  November 30, 1997.....     8,322       4,830        --      (10,357)     2,795
  November 30, 1996.....       804       8,718        --       (1,200)     8,322
</TABLE>
--------
(a) The Company, under agent agreements, earns activation commissions from
    wireless service providers upon 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