<PAGE>
 
                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 Ended                  Commission File Number
          November 30, 1997                              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. [_]
 
  On February 25, 1998, the aggregate market value of the voting stock held by
nonaffiliates of the Company was approximately $581,115,900, based on the
closing sale price of $30.00 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 25, 1998, there were 29,377,009 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 1998 are incorporated by reference into Part III of
this Form 10-K.
<PAGE>
 
                              CELLSTAR CORPORATION
                               INDEX TO FORM 10-K
 
<TABLE>
<CAPTION>
                                                                          PAGE
                                                                         NUMBER
 <C>       <S>                                                           <C>
 Part I.

 Item 1.   Business                                                         3

 Item 2.   Properties                                                      14

 Item 3.   Legal Proceedings                                               14

 Item 4.   Submission of Matters to a Vote of Security Holders             15


 Part II.

 Item 5.   Market for Registrant's Common Equity and Related
           Stockholder Matters                                             16

 Item 6.   Selected Consolidated Financial Data                            17

 Item 7.   Management's Discussion and Analysis of Financial Condition
           and Results of Operations                                       18
 Item 7A.  Quantitative and Qualitative Disclosures About Market Risk      26

 Item 8.   Consolidated Financial Statements and Supplementary Data        26

 Item 9.   Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure                                        26
 

 Part III.

 Item 10.  Directors and Executive Officers of the Registrant              27

 Item 11.  Executive Compensation                                          27

 Item 12.  Security Ownership of Certain Beneficial Owners and
           Management                                                      27

 Item 13.  Certain Relationships and Related Transactions                  27

 Part IV.

 Item 14.  Exhibits, Financial Statement Schedules and Reports on Form
           8-K                                                             28
</TABLE>
 
                                       2
<PAGE>
 
                                    PART I.
 
ITEM 1.  BUSINESS
 
GENERAL
 
 CellStar Overview
 
  CellStar Corporation ("CellStar" or the "Company") is a leading global
provider of wireless communications products, primarily handsets, with
operations in the United States, the Asia-Pacific Region, the Latin American
Region and the European Region. 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, Ecuador, Chile, Argentina and Brazil. The "European
Region" consists of the United Kingdom and Sweden.
 
  The Company is one of the world's largest non-carrier wholesale distributors
of wireless phones for Motorola, Inc. ("Motorola") and Ericsson Inc.
("Ericsson") and also distributes wireless phones for manufacturers such as
Nokia Mobile Phones, Inc. ("Nokia"), QUALCOMM Incorporated ("QUALCOMM"), Sony
Electronics Inc. ("Sony") and NEC Corporation ("NEC").
 
  The Company's distribution services include purchasing, marketing, selling,
warehousing, picking, packing, shipping and "just-in-time" delivery of wireless
handsets and accessories. In addition, in the United States and certain other
markets the Company offers its customers value-added facilitation services,
including inventory management, 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 is also a retailer of wireless communications products. The Company's
revenues grew at a 52.3% compound annual rate during the five fiscal years
ended November 30, 1997, and increased 56.5% for the year ended November 30,
1997, compared to the year ended November 30, 1996. Net income for fiscal 1997
was $53.6 million, compared to a net loss of $6.4 million for fiscal 1996.
 
  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 in 1989, the Company became an authorized distributor of
Motorola cellular phones in certain regions 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 United Kingdom in 1996.
 
 Industry Overview
 
  Wireless communications technology encompasses wireless communications
devices such as handheld, mobile and transportable phones, pagers and two-way
radios. Since its inception in 1983, the wireless phone service market has
grown rapidly. An industry source, Dataquest, estimates that from 1992 through
1996, worldwide wireless phone subscribers grew at a compound annual rate of
approximately 54.5%. According to Dataquest estimates, as of December 31, 1997,
there were approximately 193.9 million wireless phone subscribers worldwide, of
which approximately 52.2 million subscribers were in the United States,
approximately 22.0 million subscribers were in the Asia-Pacific Region,
approximately 8.9 million subscribers were in the Latin American Region and
approximately 8.0 million subscribers were in the United Kingdom.
 
  The Company believes that growth in its industry will continue 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,
 
                                       3
<PAGE>
 
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.
 
  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.
 
  The Company's rapid growth has also placed significant strains on its
information technology systems, including those used to manage inventory,
accounts receivable, and accounts payable. Although the Company has hired
additional employees and is investing in refinements to its systems, the
Company's growth may continue to place strains upon its systems and its human,
financial and other resources and may negatively affect its ability to manage
and control its operations.
 
UNITED STATES
 
 Industry
 
  In the United States, wireless phone service was developed as an alternative
to conventional landline systems and existing mobile phone 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 phone industry in 1983. According to Dataquest estimates, as of
December 31, 1996, there were approximately 42.2 million subscribers in the
United States. Dataquest estimates that the number of wireless subscribers in
the United States grew by close to ten million in 1997.
 
  The chart below sets forth certain estimated information regarding U.S.
wireless phone shipments and subscriber growth.
<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                              ----------------------------------
                                               1997   1996   1995   1994   1993
                                              ------ ------ ------ ------ ------
                                                        (In thousands)
<S>                                           <C>    <C>    <C>    <C>    <C>
Number of Wireless Phones Shipped............ 20,956 16,457 14,381 12,774  8,565
Number of Subscribers........................ 52,180 42,188 32,187 23,630 16,255
</TABLE>
--------
Source: Dataquest, Mobile Telephones Worldwide, 1992-2001--Market Trends 1997
        (September 1997 Estimates)
 
  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 is expected to offer other advantages,
such as improved overall average signal quality, improved call security,
potentially lower incremental costs for additional subscribers and the ability
to provide data transmission services. If digital technology improves and
becomes more affordable, the Company may benefit both from the sale of digital
wireless phones as replacements for existing analog wireless phones and from
the increased system capacity digital technology offers.
 
 Wholesale Operations
 
  General. Approximately 96% of the Company's U.S. revenues during fiscal 1997
were derived from wholesale operations, compared to 78% for fiscal 1996. In the
United States, manufacturers such as Motorola,
 
                                       4
<PAGE>
 
Ericsson and NEC sell wireless phones directly to large wireless carriers, such
as AT&T Wireless Services, Inc., and large mass merchandisers, such as Sears,
Roebuck and Co. 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 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 1997, the Company sold its products to over 2,500 U.S.
wholesale customers, the ten largest of which accounted for approximately 29%
of the Company's consolidated net product sales in fiscal 1997. The Company
offers wireless phones and accessories manufactured by OEMs, such as Motorola,
Ericsson, Nokia, QUALCOMM, 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 these products under private labels to wireless carriers such as
Southwestern Bell Mobile Systems, Inc. ("SBMS"), GTE Mobilnet, AirTouch
Cellular, Pacific Bell Mobile Services ("PBMS") and U.S. Cellular.
 
  The Company offers a broad product mix in the United States, including
products that are compatible with digital systems, such as TDMA and CDMA, as
well as analog systems, such as AMPs. 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 OEM
product packaging and configuration, inventory management, order processing,
return and repair management, marketing and design, credit and collections and
phone 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 international headquarters in the Dallas/Fort Worth
metropolitan area. The Company also operates a wholesale distribution facility
in Miami, Florida to serve customers in the Latin American Region. The Company
also offers facilitation services for its operations in the Latin American
Region out of the Miami, Florida location. In addition, the Company has
recently entered into a lease for a new 58,900 square foot 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 U.S. revenues in fiscal 1997 were
derived from retail operations compared to 22% for fiscal 1996. As of November
30, 1997, the Company conducted its U.S. retail operations through 13 stand-
alone retail stores in three states.
 
  The Company's retail stores generate revenues from three sources: the sale of
wireless phones 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
 
                                       5
<PAGE>
 
offered by that particular wireless carrier. Most of the Company's carrier
contracts provide for a residual payment, which is a monthly payment made by a
wireless carrier to the Company based on the wireless phone usage by a customer
activated by the Company. Because standard wireless industry practice among
activation agents is to offer certain wireless phones to a wireless subscriber
at no charge, as a practical matter, the Company does not believe it can
operate at the retail level on a profitable basis without agency agreements
with wireless carriers that provide for activation commissions or residual
fees. The Company's relationships with its carriers are governed by contracts,
pursuant to which the Company is engaged as an agent to solicit and sell
wireless phone services in certain geographic areas and may not act as a
representative or agent for any other carrier or reseller in those areas.
 
  Sales and Marketing. The Company promotes its stand-alone retail stores
through direct mailings and local media, including newspapers.
 
ASIA-PACIFIC REGION
 
 Industry
 
  According to Dataquest estimates, as of December 31, 1996, there were
approximately 12.3 million subscribers in the Asia-Pacific Region. Dataquest
estimates that the number of wireless subscribers in the Asia-Pacific Region
grew by close to ten million in 1997. 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, 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, despite the fact that wireless service
may be more expensive to the consumer than conventional landline
communications.
 
  The chart below sets forth certain estimated information regarding wireless
phone shipments and subscriber growth in the Asia-Pacific Region.
 
<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                 -------------------------------
                                                  1997   1996  1995  1994  1993
                                                 ------ ------ ----- ----- -----
                                                         (In thousands)
<S>                                              <C>    <C>    <C>   <C>   <C>
Number of Wireless Phones Shipped............... 11,252  6,456 3,606 1,685   954
Number of Subscribers........................... 22,023 12,319 6,753 3,576 2,054
</TABLE>
--------
Source: Dataquest, Mobile Telephones Worldwide, 1992-2001--Market Trends 1997
        (September 1997 Estimates)
 
 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 primarily for Motorola
and Ericsson. In February 1998, the Company entered into agreements for the
distribution of cellular mobile telephones and accessories for Nokia in the
PRC. Throughout the Asia-Pacific Region, CellStar acts as a wholesale
distributor of wireless phones to large and small volume purchasers, including
indirect sales to the large wireless carriers.
 
  All of the Company's operations in this region are wholly or majority-owned
except for the Company's operations in Malaysia. CellStar (Asia) Corporation
Limited ("CellStar Asia"), the oldest of the Company's business units in the
region and the Company's most significant operation outside the United States,
began as a
 
                                       6
<PAGE>
 
joint venture in 1993 and became wholly-owned in June 1995. CellStar Asia's
revenue is derived principally from wholesale sales of wireless products to
Hong Kong-based companies that ship wireless products to the remainder of the
PRC.
 
  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 in market access authorized by the Shanghai municipal
government. CellStar Shanghai purchases wireless handsets locally manufactured
by Motorola and, beginning in February 1998, 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 further provides services, sales support, training and access to
promotional materials for use in their operations. In exchange, those
distributors agree to purchase all 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 local distributors in approximately ten major metropolitan areas
throughout the PRC. CellStar Shanghai, in cooperation with one of its local
distributors, uses space in a three-story building in the Pudong district of
Shanghai, including a showroom for its products.
 
  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>
                  Year      Type of Operation
Country          Entered (as of November 30, 1997)
-------          ------- ------------------------
<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
</TABLE>
 
  At November 30, 1997, the Company sold its products to over 450 wholesale
customers in the Asia-Pacific Region (excluding customers of the Company's
Malaysian joint venture), the ten largest of which accounted for approximately
21% of the Company's consolidated net product sales in fiscal 1997. The Company
offers wireless phones and accessories manufactured by OEMs, such as Motorola,
Ericsson and, beginning in February 1998 in the PRC, Nokia, 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 systems, such as GSM, DCS-1800MHz and
D-AMPS, as well as analog systems, such as AMPS and ETACs. 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
 
                                       7
<PAGE>
 
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 tradeshows and television
advertising. To penetrate local markets in The Philippines and Indonesia, the
Company has made use of subagent and license relationships.
 
LATIN AMERICAN REGION
 
 Industry
 
  According to Dataquest estimates, as of December 31, 1996, there were
approximately 5.5 million subscribers in the Latin American Region. Dataquest
estimates that the number of wireless subscribers in the Latin American Region
grew over three million in 1997. The Company believes that in the Latin
American Region, demand for such services has been and will continue to be
driven by an unsatisfied demand for basic phone service due to lack of adequate
landline service and limited wireless penetration, as well as expansion of
wireless capacity in this region.
 
  The chart below sets forth certain estimated information regarding wireless
phone shipments and subscriber growth in the Latin American Region.
 
<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                                                    ----------------------------
                                                    1997  1996  1995  1994  1993
                                                    ----- ----- ----- ----- ----
                                                           (In thousands)
<S>                                                 <C>   <C>   <C>   <C>   <C>
Number of Wireless Phones Shipped.................. 4,005 2,452 1,442 1,010 434
Number of Subscribers ............................. 8,889 5,469 3,287 1,951 962
</TABLE>
--------
Source: Dataquest, Mobile Telephones Worldwide, 1992-2001--Market Trends 1997
        (September 1997 Estimates)
 
 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, Ericsson and Nokia. 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.
 
  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. The Company's largest
wholesale customers in the region are wireless carriers. As of November 30,
1997, the Company operated 30 retail locations (including kiosks) in Latin
America -- 25 in Mexico, three in Colombia and one in each of Venezuela and
Ecuador. The Company receives activation commissions in all Latin American
retail markets.
 
  The following table outlines the Company's entry into the Latin American
Region:
 
<TABLE>
<CAPTION>
            Year      Type of Operation
Country    Entered (as of November 30, 1997)
-------    ------- ------------------------
<S>        <C>     <C>
Mexico      1991   Wholesale and Retail
Venezuela   1993   Wholesale and Retail
Brazil      1993   Wholesale
Chile       1993   Wholesale
Colombia    1994   Wholesale and Retail
Ecuador     1995   Wholesale and Retail
Argentina   1995   Wholesale
</TABLE>
 
 
                                       8
<PAGE>
 
  At November 30, 1997, the Company sold its products to over 1,000 wholesale
customers in the Latin American Region, the ten largest of which accounted for
approximately 6% of the Company's consolidated net product sales in fiscal
1997. The Company offers wireless communications products 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, leather cases, power supplies and antennas. The Company
sells these products to mass merchandisers and other retailers.
 
  The Company offers a broad product mix in the Latin American Region,
including products that are compatible with digital systems, primarily TDMA, as
well as analog systems, such as AMPS and NAMPS. 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 the Latin American 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, Colombia and Ecuador and
license relationships in Uruguay and Peru. In addition, the Company offers
prepaid wireless programs in Venezuela. The Company expects these prepaid
programs to make wireless communications services more accessible to the
overall population in these markets because it eliminates the need for
established credit and monthly fees.
 
EUROPEAN REGION
 
  The Company's U.K. subsidiary distributes wireless phones, pagers, mobile
radio and other wireless communications equipment and related accessory
products throughout the United Kingdom. In February 1998, the Company completed
its acquisition of TA Intercall AB, a wholesale distributor of wireless
communications products in Sweden. The new company, CellStar-Intercall AB
distributes products in Sweden and other European markets for several
manufacturers, including Ericcson, Nokia and Motorola. The Company's operations
and sales in the European Region are subject to certain of the political and
economic risks to which the Company is subject in its other regions.
 
OTHER REGIONS
 
  The Company is also considering entry into other countries where the Company
believes the business environment is conducive to the growth of the wireless
market. The Company will continue to assess evolving market conditions,
economic conditions and other factors that may affect its prospects in a
particular foreign country.
 
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 1997, substantially all of the Company's purchases were
from Motorola, Nokia, Ericsson and NEC. For the year ended November 30, 1997,
Motorola accounted for approximately 74% of the Company's product purchases,
 
                                       9
<PAGE>
 
including CellStar branded products. In addition, revenues attributable to the
Company's fulfillment agreement with PBMS accounted for approximately 12% of
total revenues for fiscal 1997. This level of revenues resulted from the
rollout of PCS product into certain west coast markets and is not necessarily
indicative of future results.
 
  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 the largest manufacturer of wireless
products in the world, according to Dataquest, and the Company's largest
supplier. The Company considers its relationships with its suppliers to be
satisfactory. The Company believes that its relationship with Motorola will
enable it to continue to offer a wide variety of wireless communications
products in the marketplace. In July 1995, Motorola purchased 1,044,656 shares
of the outstanding common stock of the Company. 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 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.
 
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, however, contribute to the increase in the
Company's sales during the fourth quarter of 1996. 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.
 
ASSET MANAGEMENT
 
 Information Technology
 
  The Company continues to invest in and focus on technology to improve
financial and information technology control systems. The Company is also
continuing to focus on materials management and international operations. In
addition, the Company has undertaken several short-term and long-term projects
to enhance its information technology systems, including (i) development of
data warehousing and decision support technologies, (ii) updates to the network
operating system and core network servers to newer technology, (iii) upgrades
to allow remote computing, (iv) advancements in inventory planning and control,
(v) implementation of electronic commerce utilizing the Internet and (vi)
integration and more efficient communication between global sites.
 
  Many existing computer systems use only two digits to identify a year in the
date field and thus are not equipped to handle the change in the century. In
June 1997, the Company initiated a Year 2000 readiness project. The Company
believes that the costs of addressing, and the effects of, the Year 2000 issue
will not be material to the Company's business, operations or financial
condition.
 
                                       10
<PAGE>
 
 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 1997, 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 "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of 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 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.
 
                                       11
<PAGE>
 
  In the current U.S. wholesale wireless communications products markets, the
Company's primary competitors are wireless carriers and other independent
distributors such as Brightpoint, Inc. ("Brightpoint") and Pana-Pacific
Corporation. 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 Asia-Pacific and Latin American Regions
include 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, 1997, the Company had approximately 1,100 employees
worldwide. In Mexico, approximately 120 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       54 Chief Executive Officer and Chairman of the Board
   Richard M. Gozia        53 President, Chief Operating Officer and Director
   A.S. Horng              40 Chairman, Chief Executive Officer and General
                              Manager of CellStar (Asia) Corporation Limited
   Mark Q. Huggins         48 Senior Vice President--Administration, Chief
                              Financial Officer and Treasurer
   Daniel T. Bogar         38 Senior Vice President--Latin American Region and
                              Director
   Timothy L. Maretti      44 Senior Vice President--U.S. Region
   Evelyn Henry Miller     40 Vice President--Corporate Controller
   Elaine Flud Rodriguez   41 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.
 
  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,
 
                                       12
<PAGE>
 
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 cellular phone accessory products. Mr. Horng serves the Company
pursuant to an employment agreement.
 
  Mark Q. Huggins joined the Company as Senior Vice President--Administration,
Chief Financial Officer and Treasurer in January 1997. From September 1992
until January 1997, Mr. Huggins served as Chief Financial Officer of Van Camp
Seafood Company, Inc. ("Van Camp"), a manufacturer of canned seafood products.
In April 1997, Van Camp filed for protection under the federal bankruptcy laws.
Mr. Huggins is a certified public accountant. Mr. Huggins serves as an officer
of the Company pursuant to his employment agreement.
 
  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
February 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 South American operations since 1992.
 
  Timothy L. Maretti has served as Senior Vice President--U.S. Region of the
Company since January 1998 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 SBMS, Dallas.
 
  Evelyn Henry Miller has served as Vice President--Corporate Controller of the
Company since November 1995. 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 Peat Marwick. Ms.
Miller is a certified public accountant.
 
  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.
 
                                       13
<PAGE>
 
ITEM 2.  PROPERTIES
 
  As of November 30, 1997, the Company had a total of 19 U.S. operating
facilities in five states of which 16 were leased. As of November 30, 1997, the
Company had a total of 29 operating facilities in the Asia-Pacific Region
(including kiosks, but not including facilities of the Company's Malaysian
joint venture), 28 of which were leased, and a total of 37 operating facilities
in the Latin American Region (including kiosks), 36 of which were leased. These
facilities serve as offices, warehouses, distribution centers or retail
locations. The Company leases one of its 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 its Miami, Florida distribution facility, which contains
approximately 22,500 square feet and is used to serve customers in the Latin
American Region. In addition, the Company has recently entered into a lease for
a new 58,900 square foot 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 have since been 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 has been appointed lead plaintiff in the
consolidated action and has 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 alleges, 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 are also
asserted against the Company's auditors, KPMG Peat Marwick LLP. The plaintiffs
seek compensatory damages, exemplary damages and costs and expenses, including
attorneys' fees and expert fees. Although the plaintiffs have not specified the
amount of damages sought, they have argued that the alleged class has sustained
in excess of $50 million in damages. In December 1996, defendants filed motions
to dismiss all claims asserted in the Consolidated Amended Complaint. The
motions are pending.
 
                                       14
<PAGE>
 
  The Company believes it has meritorious defenses to these claims and is
vigorously defending this action. No discovery has been taken at this time, and
the ultimate outcome is not currently predictable.
 
  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, 1997.
 
                                       15
<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 sale prices for the common stock as
reported by the NASDAQ Stock Market. Sales prices prior to June 18, 1997, have
been adjusted to give effect to a three-for-two stock split, which was made in
the form of a stock dividend distributed on June 17, 1997.
 
<TABLE>
<CAPTION>
                                                                 HIGH     LOW
                                                                ------- -------
      <S>                                                       <C>     <C>
      Fiscal Year ended November 30, 1997
       Quarter Ended:
        February 28, 1997...................................... $17.666 $ 7.417
        May 31, 1997........................................... $24.250 $13.250
        August 31, 1997........................................ $34.750 $22.167
        November 30, 1997...................................... $49.875 $25.875
      Fiscal Year ended November 30, 1996
       Quarter Ended:
        February 29, 1996...................................... $19.500 $11.583
        May 31, 1996........................................... $12.000 $ 3.833
        August 31, 1996........................................ $ 6.917 $ 4.167
        November 30, 1996...................................... $ 8.500 $ 4.000
</TABLE>
 
  As of February 25, 1998, there were 155 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.
 
  On October 14, 1997, the Company issued $150.0 million of 5% Convertible
Subordinated Notes Due 2002 (the "Notes"). Bear, Stearns & Co. Inc. and Chase
Securities Inc. initially purchased the Notes from the Company in a private
offering pursuant to Section 4(2) of the Securities Act of 1933, as amended
(the "Securities Act"), and sold the Notes in reliance on Rule 144A and
Regulation S under the Securities Act to qualified institutional investors. The
Notes were sold for an aggregate offering price of $150.0 million less
discounts and commissions of $4,237,500. The Notes are unsecured obligations
and are convertible into the Company's common stock at a price of $55.335 per
share, subject to adjustment.
 
                                       16
<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, 1997, 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,
                        --------------------------------------------------------
                           1997      1996     1995          1994          1993
                        ----------  -------  -------       -------       -------
                           (IN THOUSANDS, EXCEPT PER SHARE AND
                                     OPERATING DATA)
<S>                     <C>         <C>      <C>           <C>           <C>
STATEMENTS OF
 OPERATIONS DATA:
 Revenues:
  Net product sales     $1,442,875  845,569  723,886       447,741       224,845
  Activation income         28,561   88,474   75,690        60,153        42,223
  Residual income           11,378   13,558   12,339        10,528         8,308
                        ----------  -------  -------       -------       -------
 Total revenues          1,482,814  947,601  811,915       518,422       275,376
 Cost of sales           1,325,488  810,000  702,074       448,780       229,796
                        ----------  -------  -------       -------       -------
 Gross profit              157,326  137,601  109,841        69,642        45,580
                        ----------  -------  -------       -------       -------
 Operating expenses:
  Selling, general and
   administrative
   expenses                 81,319  135,585   76,553        44,598        28,321
  Fees and bonus to
   stockholders                  -        -        -             -         3,135
                        ----------  -------  -------       -------       -------
 Total operating
  expenses                  81,319  135,585   76,553        44,598        31,456
                        ----------  -------  -------       -------       -------
 Operating income           76,007    2,016   33,288        25,044        14,124
 Other income
  (expense), net            (5,051)  (8,882)  (2,950)          232        (1,228)
                        ----------  -------  -------       -------       -------
 Income (loss) before
  income taxes              70,956   (6,866)  30,338        25,276        12,896
 Income taxes               17,323     (453)   7,442         9,028         5,043
                        ----------  -------  -------       -------       -------
 Net income (loss)      $   53,633   (6,413)  22,896        16,248         7,853
                        ==========  =======  =======       =======       =======
 Net income (loss) per
  share                 $     1.78    (0.22)    0.81          0.59          0.39
                        ==========  =======  =======       =======       =======
 Weighted average
  number of shares and
  equivalent shares
  outstanding(/1/)          30,084   28,910   28,233        27,662        20,250
                        ==========  =======  =======       =======       =======
OPERATING DATA:
 International revenues
  as a percentage of
  total revenues              41.5%    39.9%    41.1%(/2/)    23.3%(/2/)    22.5%
<CAPTION>
                                     AT NOVEMBER 30,
                        --------------------------------------------------------
                           1997      1996     1995          1994          1993
                        ----------  -------  -------       -------       -------
                                      (IN THOUSANDS)
<S>                     <C>         <C>      <C>           <C>           <C>
BALANCE SHEET DATA:
 Working capital        $  259,954   71,365   74,410        63,668         7,052
 Total assets           $  497,111  298,551  314,921       186,354        89,894
 Short-term debt        $        -   56,704   99,187        12,735         8,968
 Long-term debt, less
  current portion       $  150,000    6,285    6,880         3,095             -
 Notes payable to
  stockholders, less
  current portion       $        -        -        -             -         7,214
 Stockholders' equity   $  160,865  104,263  111,295        76,642         7,749
</TABLE>
--------
(/1/) Common stock amounts have been retroactively adjusted to give effect to a
      three-for-two stock split, which was made in the form of a stock dividend
      distributed on June 17, 1997.
(/2/) Excludes sales to CellStar Asia, which were included in U.S. sales prior
      to the Company's acquisition of the remaining 50% interest in CellStar
      Asia in June 1995. If the Company's acquisition of the remaining 50%
      interest in CellStar Asia in June 1995 is given pro forma effect as of
      December 1, 1993, international revenues as a percentage of total revenues
      would be 51.9% and 34.7% for fiscal 1995 and 1994, respectively.
 
                                       17
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
OVERVIEW
 
  The Company is a leading global provider of wireless communications products,
primarily handsets. From fiscal 1993 to fiscal 1997, the Company's total
revenues grew from $275.4 million to $1,482.8 million. The Company accomplished
this growth in both U.S. and international sales by focusing its efforts on the
cellular phone industry. To date, U.S. 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 international sales of
wireless communications products have increased primarily as a result of its
entry into the Asia-Pacific Region and the Latin American Region. The Company's
earnings per share increased from $0.39 to $1.78 between its fiscal years ended
November 30, 1993 and 1997.
 
  The Company's revenues are grouped into three categories: net product sales,
activation income and residual income. Net product sales include sales of
handsets and other wireless communications products and revenues from
fulfillment and other value-added services. Activation income includes
commissions paid by a cellular carrier when a customer initially subscribes for
cellular service through the Company. Residual income includes payments
received from carriers based on the cellular phone usage by a customer
activated by the Company.
 
  The Company's historical records do not enable management to provide accurate
information with respect to disaggregated wholesale and retail prices, volumes
and gross margins. The gross margins realized from the Company's wholesale
product revenues have generally been lower than the margins realized from its
retail product revenues. However, due to the more labor intensive nature of the
Company's retail operations, selling, general and administrative expenses have
generally been higher with respect to retail sales, which partially offsets the
higher gross margins the Company realizes from retail product sales.
 
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
 
  Certain of the matters discussed under the captions "Business," "Properties,"
"Legal Proceedings," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and elsewhere in this report may
constitute "forward-looking" statements for purposes of the Securities Act 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," "projections," "forecasts,"
"intends," "may," "might," "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.
 
                                       18
<PAGE>
 
RESULTS OF OPERATIONS
 
  The following table sets forth certain consolidated statements of operations
data for the Company expressed as a percentage of total revenues for the past
three fiscal years:
 
<TABLE>
<CAPTION>
                                              1997   1996    1995
                                              -----  -----   -----
<S>                                           <C>    <C>     <C>
Revenues:
  Net product sales                            97.3%  89.2%   89.2%
  Activation income                             1.9    9.3     9.3
  Residual income                               0.8    1.5     1.5
                                              -----  -----   -----
   Total revenues                             100.0  100.0   100.0
Cost of sales                                  89.4   85.5    86.5
                                              -----  -----   -----
  Gross profit                                 10.6   14.5    13.5
Selling, general and administrative expenses    5.5   14.3     9.4
                                              -----  -----   -----
  Operating income                              5.1    0.2     4.1
Other income (expense):
  Interest expense                             (0.5)  (0.9)   (0.8)
  Other, net                                    0.2      -     0.4
                                              -----  -----   -----
   Total other income (expense)                (0.3)  (0.9)   (0.4)
                                              -----  -----   -----
  Income (loss) before income taxes             4.8   (0.7)    3.7
Income taxes                                    1.2      -     0.9
                                              -----  -----   -----
  Net income (loss)                             3.6%  (0.7)%   2.8%
                                              =====  =====   =====
</TABLE>
 
  The amount of net revenues and the approximate percentages of net revenues
attributable to the Company's operations for the past three fiscal years are
shown below:
 
<TABLE>
<CAPTION>
                               1997            1996           1995
                         ----------------  -------------  -------------
                                    (DOLLARS IN THOUSANDS)
<S>                      <C>        <C>    <C>     <C>    <C>     <C>
U.S.:
  Net product sales(/1/) $  845,354  57.0% 485,788  51.3% 415,094  51.1%
  Activation income          12,962   0.9   71,072   7.5   52,704   6.5
  Residual income             8,550   0.6   11,884   1.3   10,379   1.3
                         ---------- -----  ------- -----  ------- -----
   Total U.S.               866,866  58.5  568,744  60.1  478,177  58.9
                         ---------- -----  ------- -----  ------- -----
Asia-Pacific:
  Net product sales(/2/)    419,008  28.3  247,773  26.1  183,274  22.6
  Activation income           3,743   0.2      720   0.1        -     -
  Residual income                 -     -        -     -        -     -
                         ---------- -----  ------- -----  ------- -----
   Total Asia-Pacific       422,751  28.5  248,493  26.2  183,274  22.6
                         ---------- -----  ------- -----  ------- -----
Latin America:
  Net product sales         109,371   7.4  101,440  10.7  125,518  15.5
  Activation income          11,856   0.8   16,682   1.8   22,986   2.8
  Residual income             2,828   0.2    1,674   0.1    1,960   0.2
                         ---------- -----  ------- -----  ------- -----
   Total Latin America      124,055   8.4  119,796  12.6  150,464  18.5
                         ---------- -----  ------- -----  ------- -----
Europe:
  Net product sales          69,142   4.6   10,568   1.1        -     -
  Activation income               -     -        -     -        -     -
  Residual income                 -     -        -     -        -     -
                         ---------- -----  ------- -----  ------- -----
   Total Europe              69,142   4.6   10,568   1.1        -     -
                         ---------- -----  ------- -----  ------- -----
Total                    $1,482,814 100.0% 947,601 100.0% 811,915 100.0%
                         ========== =====  ======= =====  ======= =====
</TABLE>
--------
(/1/) Includes export sales of $90.2 million in 1995 to CellStar Asia prior to
      June 3, 1995 when CellStar Asia became a wholly-owned subsidiary of the
      Company.
(/2/) Fiscal year 1995 includes sales of $143.1 million by CellStar Asia after
      June 2, 1995.
 
                                       19
<PAGE>
 
FISCAL 1997 COMPARED TO FISCAL 1996
 
  Revenues. Total revenues increased $535.2 million, or 56.5%, from $947.6
million in fiscal 1996 to $1,482.8 million in fiscal 1997.
 
  U.S. revenues increased $298.2 million, or 52.4%, from $568.7 million in
fiscal 1996 to $866.9 million in fiscal 1997. The increase was due to an
increase in net product sales of $359.6 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 and sales from
the Company's Miami, Florida warehouse to customers exporting into South
American countries. As expected for fiscal 1997, U.S. activation and residual
income decreased, primarily as a result of the sale of substantially all of the
Company's Communication Centers on November 26, 1996.
 
  Net product sales in the Asia-Pacific Region increased $171.2 million, or
69.1%, from $247.8 million in fiscal 1996 to $419.0 million in fiscal 1997. The
Company's operations in the PRC, primarily Hong Kong, provided $319.7 million
in net product sales in fiscal 1997, an increase of $120.0 million compared to
$199.7 million in fiscal 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.
Net product sales by the Company's Singapore operations increased $37.2
million, from $46.1 million in fiscal 1996 to $83.2 million in fiscal 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 fiscal 1996, provided $16.1 million of net product sales in fiscal
1997, an increase of $14.1 million compared to $2.0 million in fiscal 1996. The
Asia-Pacific operations are substantially wholesale related, and, as a result,
activation income is not significant.
 
  The Company's operations in the Latin American Region provided $109.4 million
of net product sales in fiscal 1997, compared to $101.4 million in fiscal 1996,
an $8.0 million, or 7.9%, increase. Net product sales in Mexico, Argentina and
Venezuela increased $27.0 million, $7.8 million and $6.4 million, respectively.
Net product sales in Brazil and the remainder of the region decreased $23.1
million and $10.1 million, respectively. The increase in Mexico was the result
of a change in promotional strategy by the principal cellular carrier, which
began subsidizing cellular phone units. The increase in Argentina was due to
improved market penetration and a new pricing strategy by the local carrier
whereby the calling party pays for the call. The increase in Venezuela was
fueled by the Company's prepaid cellular business. The sharp decline in Brazil
was principally due to actions of the Brazilian government, which limited the
authorization of additional wireless phone lines. Activation and residual
income generated by the Company's operations in the Latin American Region
decreased from $18.4 million in fiscal 1996 to $14.7 million in fiscal 1997.
The decrease in activation income was principally attributable to Mexico, which
experienced a decrease of $3.8 million as a result of a reduction in
commissions from its principal cellular carrier. The reduction was slightly
offset by an increase in activation income in Venezuela from the Company's
prepaid cellular business.
 
  Net product sales from the Company's European operation in the United
Kingdom, which commenced in the second quarter of fiscal 1996, were $69.1
million in fiscal 1997, an increase of $58.5 million compared to $10.6 million
in fiscal 1996.
 
  Gross Profit. Gross profit increased $19.7 million, or 14.3%, from $137.6
million in fiscal 1996 to $157.3 million in fiscal 1997, while gross profit as
a percentage of total revenues decreased from 14.5% in fiscal 1996 to 10.6% in
fiscal 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 fiscal 1996 to $4.8 million
in fiscal 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 fiscal 1996 to $35.9 million
in fiscal 1997. Retail revenues have a higher gross profit as a percentage of
total revenues than wholesale net product sales. Gross profit as a percentage
of total revenues decreased primarily due to the sale
 
                                       20
<PAGE>
 
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
fiscal 1997 were $1.4 million, compared to $1.8 million in fiscal 1996.
 
  Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $54.3 million, or 40.0%, from $135.6 million
in fiscal 1996 to $81.3 million in fiscal 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 fiscal 1996 to 0.2% in fiscal 1997. These
decreases were partially offset by an increase of $7.5 million in fiscal 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 total revenues from 14.3% in fiscal
1996 to 5.5% in fiscal 1997.
 
  Operating Income. Operating income increased $74.0 million, from $2.0
million in fiscal 1996 to $76.0 million in fiscal 1997, due to the increase in
revenues and the decrease in selling, general and administrative expenses.
Correspondingly, operating income as a percentage of total revenues increased
from 0.2% in fiscal 1996 to 5.1% in fiscal 1997.
 
  Interest Expense. Interest expense declined in fiscal 1997 to $7.8 million
from $8.4 million in fiscal 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 fiscal 1996 to income of $2.3 million in fiscal 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.
 
  Income Taxes. The Company's income tax expense increased $17.8 million in
fiscal 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 Regions, which have statutory tax rates
of approximately 35%.
 
FISCAL 1996 COMPARED TO FISCAL 1995
 
  Revenues. Total revenues increased $135.7 million, or 16.7%, from $811.9
million in fiscal 1995 to $947.6 million in fiscal 1996.
 
  U.S. revenues increased 18.9%, from $478.2 million in fiscal 1995 to $568.7
million in fiscal 1996. The increase was due to increases in net product sales
of $70.7 million, activation income of $18.4 million and residual income of
$1.5 million. The increase in net product sales was due primarily to a shift
in strategy from in-country product sales by the Company's South American
subsidiaries to sales by the Company's Miami, Florida warehouse to customers
exporting into South American countries. The Company adopted this strategy to
reduce currency, accounts receivable and inventory risks. In addition, the
U.S. operations achieved growth in net product sales from sales to wholesale
customers in the United States.
 
  U.S. activation income increased primarily as a result of an overall
increase in sales of cellular phone units at the retail level. The increase in
unit sales at the retail level was attributable to the Company's expansion of
Communication Centers in Sam's Clubs beginning in the fourth quarter of fiscal
1994. Since the Company sold
 
                                      21
<PAGE>
 
substantially all of its Communication Centers in November 1996, the Company
expected a decline in activation income in fiscal 1997. The increase in
residual income primarily corresponded to the Company's growing cellular phone
user base where the Company operated stand-alone retail stores, which increase
was partially offset by lower average monthly user phone bills.
 
  The Company's international revenues, which include direct revenues derived
primarily from the operations of its subsidiaries in the Asia-Pacific and Latin
American Regions, increased 13.5%, from $333.7 million in fiscal 1995 to $378.8
million in fiscal 1996. The growth in international revenues was due to the
acquisition of the remaining 50% interest in CellStar Asia, which resulted in
CellStar Asia's sales being classified as international sales beginning in June
1995. Prior to the June 1995 acquisition, CellStar Asia's operations were not
consolidated with the operations of the Company, and sales of products to
CellStar Asia were considered revenues of the Company's U.S. operations. Net
product sales to CellStar Asia prior to the acquisition totaled $90.2 million
in fiscal 1995. After the acquisition, CellStar Asia had $143.1 million and
$199.7 million in fiscal 1995 and 1996, respectively, of net product sales,
which were included in the Company's international revenues. In the aggregate,
sales by CellStar Asia decreased from $228.0 million in fiscal 1995 to $199.7
million in fiscal 1996. The decrease was due to several factors including the
unavailability of the highly popular PCS phones and increased competition that
caused downward pressure on selling prices. The Company's Singapore operations
provided $40.2 million of net product sales in fiscal 1995 compared to $46.1
million of net product sales of fiscal 1996. The Company's operations in
Taiwan, which commenced operations in the second quarter in fiscal 1996,
provided $2.0 million of net product sales in fiscal 1996. The Asia-Pacific
operations are substantially wholesale related, and, as a result, activation
income is not significant.
 
  The Company's operations in the Latin American Region provided $101.4 million
of net product sales in fiscal 1996, compared to $125.5 million in fiscal 1995.
The decline was due primarily to a sharp decline in sales in Brazil, which
decreased from $47.0 million in fiscal 1995 to $30.6 million in fiscal 1996.
This decline was due to the continued deterioration in the business climate in
Brazil for the cellular phone industry and to a change in the Company's
strategy of selling products from its warehouse in Miami, Florida, to customers
exporting into South American countries. The decline in net product sales was
partially offset by a $20.0 million increase in net product sales in Argentina,
a market the Company entered in late 1995. Activation income generated by the
Company's operations in the Latin American Region decreased from $23.0 million
in fiscal 1995 to $16.7 million in fiscal 1996. The decrease in activation
income was primarily attributable to the decline in activation income in
Venezuela, which decreased from $4.8 million in fiscal 1995 to $0.7 million in
fiscal 1996 due to weak economic conditions and political turmoil.
 
  Gross Profit. Gross profit increased $27.8 million, or 25.3%, from $109.8
million in fiscal 1995 to $137.6 million in fiscal 1996, while gross profit as
a percentage of total revenues increased from 13.5% to 14.5% in fiscal 1995 and
1996, respectively. This increase in the gross margin percent was primarily due
to the consolidation of CellStar Asia's higher gross margin revenues following
the Company's acquisition of the remaining 50% interest in CellStar Asia in
June 1995, and an increase in higher margin U.S. retail sales. Revenues for
fiscal 1995 include export sales of $90.2 million, with a gross margin of 4.0%,
to CellStar Asia prior to June 1995 when it became a wholly-owned subsidiary.
After CellStar Asia became a wholly-owned subsidiary, its revenues were
consolidated with the Company's rather than being reported as U.S. net product
sales. U.S. retail sales increased from $90.5 million in fiscal 1995 to $127.9
million in fiscal 1996 due to the increase in the number of Communication
Centers. These gross profit increases were partially offset by provisions for
inventory obsolescence and the effect of general economic declines in the Latin
American Region.
 
  Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $59.0 million, or 77.0%, from $76.6 million
in fiscal 1995 to $135.6 million in fiscal 1996. Approximately $28.0 million,
or 47.5%, of the increase resulted from an increase in trade accounts
receivable reserves to reflect a further deterioration in the trade accounts
receivable portfolio, primarily for Brazil-related receivables. Substantially
all of the Company's customers in Brazil were significantly and adversely
impacted by actions
 
                                       22
<PAGE>
 
taken by Telebras, the government owned cellular telephone company, which
unexpectedly limited the number of cellular telephone lines available for
activation in Brazil during 1995 and 1996. Beginning in late 1995 and
continuing through 1996, Telebras announced plans to activate significant
numbers of cellular lines on a monthly basis to meet the large demand for
cellular service in the major metropolitan areas. In response to these
announcements, many of the Company's retail customers began to rapidly expand
their operations, in many cases opening multiple retail locations specializing
in cellular telephones and related products and incurring corresponding
increases in inventory and overhead. However, the government failed to release
the number of lines promised, leaving many of the Company's retail customers
with insufficient sales revenues to support the increased overhead and
ultimately insufficient cash flows to repay the Company. Bad debt expense as a
percentage of total revenues increased from 0.3% in fiscal 1995 to 2.9% in
fiscal 1996. An additional $11.7 million, or 19.8%, of the increase in selling,
general and administrative expenses was attributable to an increase in salaries
and employee benefits for the addition of employees to support the growth of
the Company's operations, primarily related to the Communication Centers. The
Communication Centers also contributed to other increases in selling, general
and administrative expenses as these operations experienced higher operating
expenses than wholesale operations. The Company sold 334 of its Communication
Centers on November 26, 1996. As a percentage of total revenues, selling,
general and administrative expenses increased from 9.4% to 14.3%.
 
  Operating Income. Operating income decreased substantially from $33.3 million
in fiscal 1995 to $2.0 million in fiscal 1996 due mainly to the significant
increase in selling, general and administrative expenses, as discussed above.
 
  (Undistributed Loss) Equity in Earnings of Joint Ventures. (Undistributed
loss) equity in earnings of joint ventures decreased in fiscal 1996 by $3.4
million from fiscal 1995. The decrease was attributable to the Company's
acquisition of the remaining 50% interest in CellStar Asia in June 1995. The
Company's 50% equity interest in the operations of CellStar Asia prior to the
date of the acquisition was classified as equity in earnings of joint ventures.
 
  Interest Expense. Interest expense increased in fiscal 1996 to $8.3 million
from $6.1 million in fiscal 1995. The increase in interest expense resulted
primarily from the maintenance of higher average balances under the Company's
revolving credit agreements.
 
  Income Taxes. The Company's income tax expense decreased in fiscal 1996 by
$7.9 million, or 106.7%, from fiscal 1995, due to a tax benefit resulting from
accumulated losses related to the Company's Brazilian operations and a lower
overall effective tax rate. The lower effective tax rate in fiscal 1996 was
primarily attributable to foreign and U.S. tax effects from foreign operations.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  Prior to the Company's issuance of $150.0 million of 5% Convertible
Subordinated Notes Due 2002 (the "Notes"), as described below, the Company
relied primarily on cash generated from operations and borrowings under its
revolving credit facility in the United States to fund working capital, capital
expenditures and expansions. The Company also received extended credit terms
from certain suppliers.
 
  On October 14, 1997, the Company issued the Notes in reliance on registration
exemptions under the Securities Act. The Notes are unsecured obligations, are
convertible into the Company's common stock at a price of $55.335 per share,
are not callable for three years and mature on October 15, 2002. The proceeds
from the Notes were used to pay off the revolving credit facility in the United
States, to retire long-term debt obligations, to fund working capital
requirements and for other general corporate purposes. Commencing April 15,
1998, the Company will be required to make interest payments on the Notes semi-
annually on April 15 and October 15 of each year.
 
  On October 15, 1997, the Company entered into a new $135.0 million
Multicurrency Revolving Credit Facility (the "Facility") with a syndicate of
banks. The Facility has a term of approximately five years,
 
                                       23
<PAGE>
 
replaces the Company's previous $90.0 million revolving credit facility 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.
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 February 27, 1998, $21.9 million was outstanding under the Facility.
 
  At November 30, 1997, the Company had $74.6 million of cash and cash
equivalents, an increase of $47.4 million since November 30, 1996. The increase
resulted primarily from cash generated from operating activities outside the
United States and by the proceeds from the Notes. Approximately two-thirds of
the Company's cash resides outside the United States, primarily in its Asia-
Pacific Region subsidiaries. While the Company has historically retained cash
in that region to support the subsidiaries in that region, the Company
currently expects to utilize its recently-established global agency treasury
center in Dublin, Ireland, to pool certain of its global resources. This
approach should allow the Company to better utilize its cash worldwide, while
minimizing income taxes. Additionally, the Company's accounts receivable,
inventories and accounts payable have increased in the United States and the
Asia-Pacific Region since November 30, 1996, as a result of increased net
product sales.
 
  The Company anticipates that proceeds from the Notes, amounts available under
the Facility and funds from operations will be sufficient to satisfy its
capital requirements and current expansion plans for fiscal 1998.
 
  Cash used in investing activities of $6.2 million in fiscal 1997 included the
purchase of additional prepaid cellular hardware and software in Venezuela for
$1.4 million, acquisition of office space in Shanghai, PRC for $1.2 million and
purchases of various computer and office equipment for $3.6 million. The
Company believes that the fiscal 1997 level of capital expenditures is
representative of ongoing annual maintenance capital expenditures.
 
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 maintains a significant presence in Hong Kong, and with the transfer of
Hong Kong from the United Kingdom to the PRC on July 1, 1997, the Company's
operations in the Asia-Pacific Region may be exposed to a higher degree of
currency volatility and economic instability than has historically been the
case. As a result of recent economic volatility in the Asia-Pacific region,
many currencies in the region have lost value relative to the U.S. dollar.
Although the Company has experienced no material foreign currency transaction
losses since the beginning of this currency crisis, the Company's operations in
its Asia-Pacific Region have been subject to a higher degree of economic
instability, especially in the southern portion of such region, which includes
the Company's operations in Singapore, The Philippines and Malaysia.
 
  In early 1996, the Company instituted a strategy to reduce the overall level
of assets maintained in the Latin American Region. The intent of this strategy
was to reduce the Company's working capital requirements related to its Latin
American operations and to reduce the Company's exposure to financial and
operating risks in the Latin American Region. Other changes to the Company's
business strategy in the Latin American Region include sales of products from
the Miami, Florida warehouse to customers exporting into South American
countries. While these initiatives have reduced the Company's exposure to
certain economic and political risks associated with transacting business in
the Latin American Region, the Company continues to maintain a significant
presence in the region. As such, the Company will remain subject to the risks
created by the volatile political and economic conditions that have
historically prevailed in the region.
 
 
                                       24
<PAGE>
 
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, however, contribute to the increase in the
Company's sales during the fourth quarter of 1996. 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 PRONOUNCEMENTS NOT YET ADOPTED
 
  In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" ("Statement 128"), which is effective for interim
or annual periods ending after December 15, 1997. Statement 128 will change how
the Company calculates its earnings per share and will require earnings per
share amounts for all prior periods to be restated to conform with the new
presentation. Management does not believe that the adoption of Statement 128
will have a material effect on the Company's earnings per share amounts.
 
MANAGEMENT'S RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS
 
  The consolidated financial statements of the Company are the responsibility
of management. They have been prepared in accordance with generally accepted
accounting principles and include estimates and judgments made by management.
To meet the responsibility for reliable financial data, management maintains a
system of internal accounting controls which is designed to provide reasonable
assurance that transactions are executed as authorized and are accurately
recorded and that assets are properly safeguarded. Although accounting controls
are designed to achieve this objective, it must be recognized that errors or
irregularities may occur. In addition, it is necessary to assess and balance
the relative cost and the expected benefit of the internal accounting controls.
 
                                       25
<PAGE>
 
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
  Not applicable.
 
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.
 
                                       26
<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 1998 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.
 
                                       27
<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>
 <C>   <S>
  3.1  Amended and Restated Certificate of Incorporation of CellStar
       Corporation.(1)
  3.2  Amended and Restated Bylaws of CellStar Corporation.(14)
  4.1  The Amended and Restated Certificate of Incorporation and Amended and
       Restated Bylaws of CellStar Corporation filed in response to items 3.1
       and 3.2 are incorporated in this item by reference.(1)(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)(15)
 10.2  Employment Agreement, effective as of May 24, 1996, by and between
       CellStar, Ltd., CellStar Corporation and Richard M. Gozia.(5)(15)
 10.3  Employment Agreement by and between CellStar, Ltd., CellStar Corporation
       and Mark Q. Huggins, effective as of January 15, 1997.(6)(15)
 10.4  Employment Agreement, effective January 22, 1998, by and between
       CellStar (Asia) Corporation Limited, CellStar Corporation and Hong An-
       Hsien.(14)(15)
 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)(16)
 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)(16)
 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)(15)
 10.9  Exclusive Cellular Subagent Agreement by and between National Auto
       Center and Alan H. Goldfield d/b/a National Tape.(10)(15)
 10.10 Registration Rights Agreement by and between the Company and Audiovox
       Corporation.(10)
 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)
</TABLE>
 
                                       28
<PAGE>
 
<TABLE>
 <C>   <S>
 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)(15)
 10.16 CellStar Corporation Amended and Restated Annual Incentive Compensation
       Plan. (6)(15)
 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)(15)
 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)
 21.1  Subsidiaries of the Company. (14)
 23.1  Consent of KPMG Peat Marwick LLP. (14)
 27    Financial Data Schedule (14)
 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) Filed herewith.
(15) The exhibit is a management contract or compensatory plan or arrangement.
(16) Certain provisions of this exhibit are subject to a request for
     confidential treatment filed with the Securities and Exchange Commission.
 
                                       29
<PAGE>
 
4. REPORTS ON FORM 8-K
 
  On September 26, 1997, the Company filed a Current Report on Form 8-K dated
September 25, 1997, to report, under Item 5 therein, (i) the Company's planned
private offering of $100.0 million aggregate principal amount of Convertible
Subordinated Notes Due 2002 (the "Notes"); and (ii) the Company's negotiations
for a new $125.0 million multicurrency revolving credit facility. On October
24, 1997, the Company filed a Current Report on Form 8-K dated October 8, 1997,
to report, under Item 5 therein, (i) pricing of $130.0 million of the Notes,
the grant of an over-allotment option to purchase up to an additional $20.0
million of the Notes and consummation of the offering of $150.0 million of the
Notes and (ii) completion of a new $135.0 million multicurrency revolving
credit facility.
 
                                       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
 
                                                  /s/ Alan H. Goldfield
                                          By: _________________________________
                                                       Alan H. Goldfield
                                                       Chairman of the Board
                                                       and
                                                       Chief Executive Officer
 
                                          Date: February 27, 1998
 
                                       31
<PAGE>
 
  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.
 
<TABLE>
<S>                                             <C>
   By:  /s/  Alan H. Goldfield                   Date: February 27, 1998
       ----------------------------------------
                Alan H. Goldfield
     Chairman of the Board and Chief Executive
       Officer (Principal Executive Officer)

   By:  /s/ Richard M. Gozia                     Date: February 27, 1998
       ----------------------------------------
                Richard M. Gozia
      President, Chief Operating Officer and
                     Director

   By:  /s/ Mark Q. Huggins                      Date: February 27, 1998
       ----------------------------------------
                 Mark Q. Huggins
      Senior Vice President--Administration,
       Chief Financial Officer and Treasurer
           (Principal Financial Officer)

   By:  /s/ Evelyn Henry Miller                  Date: February 27, 1998
       ----------------------------------------
               Evelyn Henry Miller
       Vice President--Corporate Controller
         (Principal Accounting Officer)

   By:  /s/ Daniel T. Bogar                      Date: February 27, 1998
       ----------------------------------------
                 Daniel T. Bogar
       Senior Vice President--Latin American
                      Region
                   and Director

   By:  /s/ James L. Johnson                     Date: February 27, 1998
       ----------------------------------------
                James L. Johnson
                     Director

   By:  /s/ Sheldon I. Stein                     Date: February 27, 1998
       ----------------------------------------
                Sheldon I. Stein
                     Director

   By:  /s/ John T. Stupka                       Date: February 27, 1998
       ----------------------------------------
                 John T. Stupka
                     Director

   By:  /s/ Terry S. Parker                      Date: February 27, 1998
       ----------------------------------------
                 Terry S. Parker
                     Director
</TABLE>
 
                                       32
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<S>                                                                          <C>
Independent Auditors' Report...............................................  F-2
Consolidated Balance Sheets as of November 30, 1997 and 1996...............  F-3
Consolidated Statements of Operations for the years ended November 30,
 1997, 1996 and 1995.......................................................  F-4
Consolidated Statements of Stockholders' Equity for the years ended
 November 30, 1997, 1996 and 1995..........................................  F-5
Consolidated Statements of Cash Flows for the years ended November 30,
 1997, 1996 and 1995.......................................................  F-6
Notes to Consolidated Financial Statements.................................  F-7
Schedule II--Valuation and Qualifying Accounts for the years ended November
 30, 1997, 1996 and 1995...................................................  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, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-
year period ended November 30, 1997, 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.
 
                                          /s/ KPMG Peat Marwick LLP
 
Dallas, Texas
January 13, 1998
 
                                      F-2
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                           November 30, 1997 and 1996
                 (Dollars in thousands, except per share data)
 
<TABLE>
<CAPTION>
                                                              1997     1996
                                                            --------  -------
<S>                                                         <C>       <C>
                          ASSETS
Current assets:
  Cash and cash equivalents                                 $ 74,646   27,296
  Accounts receivable (less allowance for doubtful accounts
   of $23,857 and $29,023, respectively)                     176,032  131,812
  Inventories                                                190,404   94,473
  Deferred income tax assets                                   2,457    4,274
  Prepaid expenses                                             2,661    1,513
                                                            --------  -------
    Total current assets                                     446,200  259,368
Property and equipment, net                                   22,877   20,134
Goodwill (less accumulated amortization of $2,378 and
 $1,330, respectively)                                        17,616   16,597
Other assets                                                  10,418    2,452
                                                            --------  -------
                                                            $497,111  298,551
                                                            ========  =======
           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                          $160,614  116,091
  Notes payable to financial institutions                          -   56,136
  Accrued expenses                                            13,545   12,250
  Income taxes payable                                        11,044    1,852
  Deferred income tax liabilities                              1,043    1,106
  Current portion of long-term debt                                -      568
                                                            --------  -------
    Total current liabilities                                186,246  188,003
Long-term debt, less current portion                         150,000    6,285
                                                            --------  -------
    Total liabilities                                        336,246  194,288
Stockholders' equity:
  Preferred stock, $.01 par value, 5,000,000 shares
   authorized; none issued                                         -        -
  Common stock, $.01 par value, 45,000,000 shares
   authorized; 29,249,420 and 28,910,343 shares issued and
   outstanding, respectively                                     293      193
  Additional paid-in capital                                  72,985   68,167
  Common stock warrants                                            4        4
  Foreign currency translation adjustments                    (6,469)  (4,520)
  Retained earnings                                           94,052   40,419
                                                            --------  -------
    Total stockholders' equity                               160,865  104,263
                                                            --------  -------
                                                            $497,111  298,551
                                                            ========  =======
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-3
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                  Years ended November 30, 1997, 1996 and 1995
                     (In thousands, except per share data)
 
<TABLE>
<CAPTION>
                                                 1997      1996     1995
                                              ----------  -------  -------
<S>                                           <C>         <C>      <C>
Revenues:
  Net product sales                           $1,442,875  845,569  723,886
  Activation income                               28,561   88,474   75,690
  Residual income                                 11,378   13,558   12,339
                                              ----------  -------  -------
    Total revenues                             1,482,814  947,601  811,915
Cost of sales                                  1,325,488  810,000  702,074
                                              ----------  -------  -------
    Gross profit                                 157,326  137,601  109,841
Selling, general and administrative expenses      81,319  135,585   76,553
                                              ----------  -------  -------
    Operating income                              76,007    2,016   33,288
Other income (expense):
  Interest expense                                (7,776)  (8,350)  (6,144)
  Equity in earnings (undistributed loss) of
   joint ventures                                    465     (219)   3,222
  Other, net                                       2,260     (313)     (28)
                                              ----------  -------  -------
    Total other income (expense)                  (5,051)  (8,882)  (2,950)
                                              ----------  -------  -------
  Income (loss) before income taxes               70,956   (6,866)  30,338
Provision (benefit) for income taxes              17,323     (453)   7,442
                                              ----------  -------  -------
  Net income (loss)                           $   53,633   (6,413)  22,896
                                              ==========  =======  =======
Net income (loss) per share                   $     1.78    (0.22)    0.81
                                              ==========  =======  =======
Weighted average number of shares and
 equivalent shares outstanding                    30,084   28,910   28,233
                                              ==========  =======  =======
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-4
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  Years ended November 30, 1997, 1996 and 1995
                                 (In thousands)
 
<TABLE>
<CAPTION>
                                                             FOREIGN
                         COMMON STOCK  ADDITIONAL  COMMON   CURRENCY
                         -------------  PAID-IN    STOCK   TRANSLATION RETAINED
                         SHARES AMOUNT  CAPITAL   WARRANTS ADJUSTMENTS EARNINGS  TOTAL
                         ------ ------ ---------- -------- ----------- -------- -------
<S>                      <C>    <C>    <C>        <C>      <C>         <C>      <C>
Balance at November 30,
 1994                    27,840  $186    52,940       4        (424)    23,936   76,642
  Net income                  -     -         -       -           -     22,896   22,896
  Issuance of common
   stock                  1,070     7    15,227       -           -          -   15,234
  Foreign currency
     translation
     adjustment               -     -         -       -      (3,477)         -   (3,477)
                         ------  ----    ------     ---      ------     ------  -------
Balance at November 30,
 1995                    28,910   193    68,167       4      (3,901)    46,832  111,295
  Net loss                    -     -         -       -           -     (6,413)  (6,413)
  Foreign currency
     translation
     adjustment               -     -         -       -        (619)         -     (619)
                         ------  ----    ------     ---      ------     ------  -------
Balance at November 30,
 1996                    28,910   193    68,167       4      (4,520)    40,419  104,263
  Net income                  -     -         -       -           -     53,633   53,633
  Common stock issued
     under stock option
     plans                  166     2     2,167       -           -          -    2,169
  Common stock issued
     for acquisition of
     minority interest      173     1     2,748       -           -          -    2,749
  Three-for-two common
   stock split                -    97       (97)      -           -          -        -
  Foreign currency
     translation
     adjustment               -     -         -       -      (1,949)         -   (1,949)
                         ------  ----    ------     ---      ------     ------  -------
Balance at November 30,
 1997                    29,249  $293    72,985       4      (6,469)    94,052  160,865
                         ======  ====    ======     ===      ======     ======  =======
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-5
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  Years ended November 30, 1997, 1996 and 1995
                                 (In thousands)
 
<TABLE>
<CAPTION>
                                                   1997     1996     1995
                                                 --------  -------  -------
<S>                                              <C>       <C>      <C>
Cash flows from operating activities:
  Net income (loss)                              $ 53,633   (6,413)  22,896
  Adjustments to reconcile net income (loss) to
   net cash (used in) provided by operating
   activities:
    Provision for doubtful accounts                 4,239   32,561    5,954
    Provision for inventory obsolescence            4,830    8,718      466
    Depreciation and amortization                   5,063    5,799    3,372
    Gain on sale of assets                              -     (128)       -
    (Equity in earnings) undistributed loss of
     joint ventures                                  (465)     219   (3,222)
    Deferred income taxes                           1,754   (1,116)  (1,823)
    Changes in operating assets and liabilities:
      Accounts receivable                         (50,408) (40,660) (76,496)
      Inventories                                (100,761)   6,067   (5,971)
      Prepaid expenses                             (1,148)     611   (1,480)
      Other assets                                    241      318   (1,708)
      Accounts payable                             44,523   36,162   (5,166)
      Accrued expenses                              2,624    3,361    3,056
      Income taxes payable                          9,192   (7,397)   3,495
                                                 --------  -------  -------
        Net cash (used in) provided by operating
         activities                               (26,683)  38,102  (56,627)
                                                 --------  -------  -------
Cash flows from investing activities:
  Purchases of property and equipment              (6,212)  (6,139) (12,284)
  Proceeds from sale of assets                          -    6,903        -
  Acquisition of minority interest                   (502)       -        -
  Purchases of equity investments in affiliated
   companies                                       (3,412)       -     (750)
                                                 --------  -------  -------
        Net cash (used in) provided by investing
         activities                               (10,126)     764  (13,034)
                                                 --------  -------  -------
Cash flows from financing activities:
  Net (payments) borrowings on notes payable to
   financial institutions                         (56,136) (42,467)  86,103
  Proceeds from issuance of note payable to
   stockholder                                          -        -    3,728
  Payments on notes payable to stockholders             -        -  (22,000)
  Net proceeds from issuance of long-term debt    144,979        -    4,425
  Principal payments on long-term debt             (6,853)    (611)    (291)
  Net proceeds from issuance of common stock        2,169        -   15,234
                                                 --------  -------  -------
        Net cash provided by (used in) financing
         activities                                84,159  (43,078)  87,199
                                                 --------  -------  -------
Net increase (decrease) in cash and cash
 equivalents                                       47,350   (4,212)  17,538
Cash and cash equivalents at beginning of year     27,296   31,508   13,970
                                                 --------  -------  -------
Cash and cash equivalents at end of year         $ 74,646   27,296   31,508
                                                 ========  =======  =======
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-6
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 (a) Description of Business
 
  CellStar Corporation and subsidiaries (the "Company") is a leading global
provider of wireless communications products, primarily handsets, with
operations in the United States, 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 phones for Motorola and Ericsson,
and also distributes wireless phones for manufacturers such as Nokia, QUALCOMM,
Sony and NEC.
 
  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) Inventories
 
  Inventories are stated at the lower of cost (primarily on a moving average
basis) or market.
 
 (c) 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 lives or the related lease term.
Major renewals are capitalized, while maintenance, repairs and minor renewals
are expensed as incurred.
 
 (d) Preopening Costs
 
  Labor and certain other costs related to the opening of new retail locations
are expensed as incurred.
 
 (e) Revenue Recognition
 
  For the Company's wholesale business, revenue is recognized when product is
shipped. In accordance with contractual agreements with cellular service
providers, the Company receives an activation commission for obtaining
subscribers for cellular phone 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 cellular service
providers' acceptance of subscriber contracts and residual commissions when
earned and provides an allowance for estimated cellular service deactivations,
which is reflected as a reduction of accounts receivable and activation income
in the accompanying consolidated financial statements.
 
 (f) 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 cost of sales in the accompanying consolidated statements of
operations. Net transaction losses for the years ended November 30, 1997, 1996
and 1995 were $1.4 million, $1.8 million and $1.3 million, respectively. The
currency exchange rates of the Latin American countries in which the Company
conducts operations have historically been
 
                                      F-7
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
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 and by indexing
certain of its receivables to exchange rates in effect at the time of their
payment.
 
 (g) Income Taxes
 
  Income taxes are accounted for under the asset and liability method. Deferred
income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred income tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred income tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
 
 (h) Net Income (Loss) Per Share
 
  Net income (loss) per share is computed by dividing net income (loss) by the
weighted average number of shares of common stock and common stock equivalents
outstanding during each period. Primary and fully diluted earnings per common
and common equivalent share are essentially the same.
 
 (i) Statements of Cash Flows 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 $7.1 million, $8.7
million and $6.0 million of interest for the years ended November 30, 1997,
1996 and 1995, respectively. The Company paid approximately $6.4 million, $7.8
million and $4.0 million of income taxes for the years ended November 30, 1997,
1996 and 1995, respectively.
 
 (j) Equity Investments in Affiliated Companies
 
  The Company accounts for its investments in common stock of affiliated
companies using the equity method. The investments are included in other assets
in the accompanying consolidated balance sheets.
 
 (k) 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. In 1997, the Company made contributions of
approximately $0.3 million to the plan. The Company did not make contributions
to the plan in 1996 or 1995.
 
 (l) 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 these intangible assets
by determining the estimated future cash flows related to such assets. In the
event that these 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-8
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 (m) 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.
 
 (n) Impairment of Long-Lived Assets
 
  On December 1, 1996, the Company adopted Financial Accounting Standards Board
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("Statement 121"). This statement requires
that long-lived assets and certain identifiable intangibles held and used by
the Company be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Statement 121 also requires that long-lived assets to be disposed
of be reported at the lower of the carrying amount or the fair value less costs
to sell. Adoption of this statement did not have a material impact on the
Company's consolidated financial position, results of operations, or liquidity.
 
 (o) Stock Option Plans
 
  Prior to December 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("Opinion 25"), and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On December 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("Statement 123"), which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of grant.
Alternatively, Statement 123 also allows entities to continue to apply the
provisions of Opinion 25 and provide pro forma net income and pro forma income
per share disclosures for employee stock option grants made in 1996 and future
years as if the fair-value-based method defined in Statement 123 had been
applied. The Company has elected to continue to apply the provisions of Opinion
25 and provide the pro forma disclosure provisions of Statement 123.
 
(2) RELATED PARTY TRANSACTIONS
 
  Motorola is a major supplier of cellular phones and accessories. Total
purchases from Motorola approximated $1,057.2 million, $609.7 million and
$420.2 million for the years ended November 30, 1997, 1996 and 1995,
respectively. Included in accounts payable at November 30, 1997 and 1996 was
approximately $109.2 million and $90.8 million, respectively, due to Motorola
for purchases of inventory.
 
  In accordance with a stock purchase agreement dated July 20, 1995, Motorola
purchased 1.0 million shares of restricted stock from the Company for $15.0
million. The proceeds were used to pay a portion of the $22.0 million note
payable to the Chief Executive Officer issued in connection with the Company's
acquisition of CellStar Asia (note 10).
 
(3) FAIR VALUE OF FINANCIAL INSTRUMENTS
 
  The carrying amounts of current assets and liabilities as of November 30,
1997 and 1996, approximate fair value due to the short maturity of these
instruments. The fair value of the Company's long-term debt is estimated by
discounting the future cash flows of each instrument at rates currently offered
to the Company for similar debt instruments of comparable maturities or from
quoted market prices.
 
                                      F-9
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The following table sets forth the estimated fair values of the Company's
long-term debt as of November 30, 1997 and 1996 (in thousands):
 
<TABLE>
<CAPTION>
                            1997            1996
                      ---------------- --------------
                      CARRYING  FAIR   CARRYING FAIR
                       AMOUNT   VALUE   AMOUNT  VALUE
                      -------- ------- -------- -----
      <S>             <C>      <C>     <C>      <C>
      Long-term debt  $150,000 122,250  6,285   6,285
                      ======== =======  =====   =====
</TABLE>
 
(4) PROPERTY AND EQUIPMENT
 
  Property and equipment consisted of the following at November 30, 1997 and
1996 (in thousands):
 
<TABLE>
<CAPTION>
                                                        1997     1996
                                                      --------  ------
      <S>                                             <C>       <C>
      Land and building                               $  8,559   6,837
      Furniture, fixtures and equipment                 18,208  14,894
      Jet aircraft                                       4,306   4,306
      Leasehold improvements                             2,936   1,688
                                                      --------  ------
                                                        34,009  27,725
      Less accumulated depreciation and amortization   (11,132) (7,591)
                                                      --------  ------
                                                      $ 22,877  20,134
                                                      ========  ======
 
(5) DEBT
 
  Notes payable to financial institutions consisted of the following at November
30, 1997 and 1996 (in thousands):
 
<CAPTION>
                                                        1997     1996
                                                      --------  ------
      <S>                                             <C>       <C>
      Multicurrency revolving credit facility         $      -       -
      U.S. revolving credit facility                         -  53,233
      Brazilian credit facility                              -   2,903
                                                      --------  ------
                                                      $      -  56,136
                                                      ========  ======
</TABLE>
 
  On October 15, 1997, the Company entered into a new $135.0 million
Multicurrency Revolving Credit Facility (the "Facility") with a syndicate of
banks. The Facility has a term of approximately five years, replaces the
Company's previous $90.0 million revolving credit facility 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. 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,
1997, the Company had available all of the $135.0 million borrowing capacity.
 
  In October 1997, the U.S. Revolving Credit Facility was replaced by the
Facility as the Company's primary working capital line of credit. The U.S.
Revolving Credit Facility was retired with proceeds from the Company's 5%
Convertible Subordinated Notes.
 
  The weighted average interest rate on short-term borrowings at November 30,
1996 was 9.57%.
 
                                      F-10
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Long-term debt consisted of the following at November 30, 1997 and 1996 (in
thousands):
 
<TABLE>
<CAPTION>
                                           1997        1996 
                                         --------      -----
      <S>                                <C>           <C>  
      5% Convertible Subordinated Notes  $150,000          -
      Equipment loan                            -      2,723
      Mortgage note payable                     -      4,130
                                         --------      -----
                                          150,000      6,853
      Less current portion                      -       (568)
                                         --------      -----
                                         $150,000      6,285
                                         ========      ===== 
</TABLE>
 
  The Company's 5% Convertible Subordinated Notes Due October 15, 2002 (the
"Notes") are convertible into 2.7 million shares of common stock at $55.335 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
102.0% 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.
 
  The equipment loan and mortgage note payable were retired with proceeds from
the Notes.
 
(6) INCOME TAXES
 
  Provision (benefit) for income taxes for the years ended November 30, 1997,
1996 and 1995 consisted of the following (in thousands):
 
<TABLE>
<CAPTION>
                                     CURRENT  DEFERRED  TOTAL 
                                     -------  --------  ------
      <S>                            <C>      <C>       <C>   
      Year ended November 30, 1997:                           
       United States:                                         
        Federal                      $ 4,408    1,736    6,144
        State                          1,134       89    1,223
       Latin America                   2,570      (63)   2,507
       Asia-Pacific                    7,457       (8)   7,449
                                     -------   ------   ------
                                     $15,569    1,754   17,323
                                     =======   ======   ======
      Year ended November 30, 1996:                           
       United States:                                         
        Federal                      $(4,682)  (1,383)  (6,065)
        State                           (366)     (78)    (444)
       Latin America                   1,237      204    1,441
       Asia-Pacific                    4,474      141    4,615
                                     -------   ------   ------
                                     $   663   (1,116)    (453)
                                     =======   ======   ======
      Year ended November 30, 1995:                           
       United States:                                         
        Federal                      $ 4,793   (1,187)   3,606
        State                            575      (25)     550
       Latin America                     655     (450)     205
       Asia-Pacific                    3,242     (161)   3,081
                                     -------   ------   ------
                                     $ 9,265   (1,823)   7,442
                                     =======   ======   ====== 
</TABLE>
 
                                      F-11
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Provision (benefit) for income taxes differed from the amounts computed by
applying the U.S. Federal income tax rate of 35% to pretax income as a result
of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                     1997     1996    1995
                                                    -------  ------  ------
      <S>                                           <C>      <C>     <C>
      Expected tax expense (benefit)                $24,835  (2,403) 10,618
      Foreign and U.S. tax effects attributable to
       foreign operations                            (7,022)  2,658  (2,630)
      State income taxes, net of Federal benefit        795    (289)    358
      Equity in earnings (undistributed loss) of
       joint ventures                                  (163)     77  (1,128)
      Other, net                                     (1,122)   (496)    224
                                                    -------  ------  ------
      Actual tax expense (benefit)                  $17,323    (453)  7,442
                                                    =======  ======  ======
</TABLE>
 
  The tax effect of temporary differences underlying significant portions of
deferred income tax assets at November 30, 1997 and 1996, is presented below
(in thousands):
 
<TABLE>
<CAPTION>
                                                   1997     1996
                                                  -------  ------
      <S>                                         <C>      <C>
      Deferred income tax assets:
        United States:
          Allowance for doubtful accounts         $ 2,845   2,734
          Inventory adjustments for tax purposes      755   2,265
          Other, net                               (1,323)   (897)
        Asia-Pacific:
          Allowance for doubtful accounts              28      20
        Latin America:
          Other, net                                  152     152
                                                  -------  ------
                                                  $ 2,457   4,274
                                                  =======  ======
      Deferred income tax liabilities:
        Latin America:
          Other, net                              $(1,043) (1,106)
                                                  =======  ======
</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 during the periods in
which those temporary differences become deductible. 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 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
asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period are reduced.
 
                                      F-12
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The Company does not provide for 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, 1997, the Company had not provided
Federal income taxes on earnings of international subsidiaries of approximately
$62.1 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.
 
  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.
 
(7) LEASES
 
  The Company leases certain retail stores, office facilities and equipment
under operating leases which range from two to ninety-nine years and which
generally contain renewal options. Rental expense for operating leases was
approximately $4.3 million, $4.3 million and $3.1 million for the years ended
November 30, 1997, 1996 and 1995, respectively. Future minimum lease payments
under operating leases as of November 30, 1997 are as follows (in thousands):
 
<TABLE>
<CAPTION>
           YEAR ENDING
           NOVEMBER      AMOUNT
           30,           -------
           <S>           <C>
             1998        $ 3,786
             1999          2,990
             2000          2,074
             2001            609
             2002            404
            Thereafter     1,415
                         -------
                         $11,278
                         =======
</TABLE>
 
(8) CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMER INFORMATION
 
  Pacific Bell Mobile Services accounted for 12.0%, or $178.2 million, of total
revenues for the year ended November 30, 1997. CellStar Asia accounted for
11.1%, or $90.2 million, of total revenues for the year ended November 30,
1995, prior to it becoming a wholly-owned subsidiary of the Company. No other
customer accounted for 10% or more of total revenues in any of the years ended
November 30, 1997, 1996 or 1995.
 
                                      F-13
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
(9) GEOGRAPHIC AREA INFORMATION
 
  The Company operates predominantly within one business segment, wholesale and
retail sales of wireless communications products. Financial information by
geographic area as of and for the years ended November 30, 1997, 1996 and 1995,
is as follows (in thousands):
 
<TABLE>
<CAPTION>
                          UNITED   ASIA-    LATIN
                          STATES  PACIFIC  AMERICA  EUROPE  CORPORATE   TOTAL
                         -------- -------  -------  ------  --------- ---------
<S>                      <C>      <C>      <C>      <C>     <C>       <C>
November 30, 1997:
  Total revenues, net of
   intercompany amounts  $866,866 422,751  124,055  69,142         -  1,482,814
  Intercompany sales
   (purchases)             64,032   4,937  (69,340)    371         -          -
  Operating income
   (loss)                  43,796  44,535    2,627    (145)  (14,806)    76,007
  Identifiable assets     309,701 120,728   51,244  15,438         -    497,111
November 30, 1996:
  Total revenues, net of
   intercompany amounts  $568,744 248,493  119,796  10,568         -    947,601
  Intercompany sales
   (purchases)             38,802  (2,121) (36,676)     (5)        -          -
  Operating income
   (loss)                     537  20,808   (4,305)   (379)  (14,645)     2,016
  Identifiable assets     159,993  82,024   44,382  12,152         -    298,551
November 30, 1995:
  Total revenues, net of
   intercompany amounts  $478,177 183,274  150,464       -         -    811,915
  Intercompany sales
   (purchases)            103,332 (32,564) (70,768)      -         -          -
  Operating income
   (loss)                  23,176  16,995    4,291       -   (11,174)    33,288
  Identifiable assets     149,320  93,441   72,160       -         -    314,921
</TABLE>
 
(10) ACQUISITIONS
 
 (a) Purchase of CellStar Asia
 
  In October 1993, the Company purchased a 50% ownership interest in a newly-
formed company, CellStar Asia, for approximately $0.2 million. On June 2, 1995,
the Company's Chief Executive Officer acquired the remaining 50% interest in
CellStar Asia for cash of $1.0 million and 1.5 million shares of restricted
common stock with a fair value of $21.0 million. Simultaneously, the Chief
Executive Officer then transferred this ownership interest in CellStar Asia to
the Company in exchange for a note payable of $22.0 million, giving the Company
100% ownership in CellStar Asia. The acquisition of the remaining 50% interest
in CellStar Asia was accounted for as a purchase and the results of operations
of CellStar Asia have been included in the consolidated financial statements
from the date of acquisition. The Company's 50% equity interest in the
operations of CellStar Asia, prior to the date of acquisition, is included in
equity in earnings of joint ventures. Goodwill of $17.5 million is being
amortized on a straight-line basis over 20 years. The following unaudited pro
forma information presents the consolidated results of operations of the
Company as if the acquisition of CellStar Asia had occurred on December 1,
1994, with pro forma adjustments to give effect to the elimination of sales by
the Company to CellStar Asia, amortization of goodwill, interest expense on
acquisition debt, and certain other adjustments at November 30, 1995 (in
thousands, except per share amounts):
 
<TABLE>
<CAPTION>
                                   1995
                                 --------
           <S>                   <C>
           Revenues              $806,648
           Net income              24,913
           Net income per share      1.32
</TABLE>
 
                                      F-14
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Prior to the acquisition, the Company's sales to CellStar Asia were $90.2
million in 1995. Gross profit recognized by the Company on these sales was $3.6
million in 1995.
 
 (b) Acquisition of Minority Interest in CellStar Pacific
 
  On February 1, 1995, the Company entered into a joint venture agreement with
Leap International PTE LTD. ("Leap"), a Singapore company, and A. S. Horng
("Mr. Horng"), an individual who was also the Company's joint venture partner
in CellStar Asia. Under the terms of the joint venture agreement, the parties
formed CellStar Pacific PTE LTD ("CellStar Pacific"), a Singapore company,
which was owned 75% by the Company, 20% by Leap and 5% by Mr. Horng. The
Company's initial investment was $0.2 million. An additional 5% of CellStar
Pacific was purchased by the Company in fiscal 1995.
 
  On May 30, 1997, the Company acquired the remaining 20% minority interest of
CellStar Pacific, which conducts operations in Singapore, The Philippines, and
Malaysia, for common stock valued at $2.7 million and $0.5 million in cash.
 
(11) STOCKHOLDERS' EQUITY
 
 (a) Common Stock Warrants and Options
 
  In December 1993, the Company issued warrants for 660,000 shares of its
common stock. The warrants are exercisable at $9.20 per share, subject to
adjustment in certain events, and expire in December 1998.
 
  The Company has a stock option plan ("the Plan") covering 3.1 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, other than
options granted to the Company's Chief Executive Officer, have vesting
schedules ranging from 100% on the first anniversary of the date of grant to
vesting 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 (the
"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 75,000 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 value of stock options granted during
1997 and 1996 was $14.498 and $6.861, respectively, on the date of grant using
the Black Scholes option-pricing model with the following weighted-average
assumptions:
 
<TABLE>
<CAPTION>
                                           1997  1996
                                           ----  ----
      <S>                                  <C>   <C>
      Dividend yield                        0.0%  0.0%
      Volatility                           77.0% 77.0%
      Risk-free interest rate               6.0%  5.2%
      Expected term of options (in years)   3.7   2.6
</TABLE>
 
                                      F-15
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The Company applies Opinion 25 in accounting for its plan and, accordingly,
no compensation cost has been recognized for its stock options in the 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 indicated
below (in thousands):
 
<TABLE>
<CAPTION>
                                           1997    1996
                                          ------- ------
           <S>                <C>         <C>     <C>
           Net income (loss)  As reported $53,633 (6,413)
                              Pro forma    51,380 (8,068)
</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.
 
  Stock option activity during the periods indicated is as follows:
 
<TABLE>
<CAPTION>
                                 1997                1996                1995
                          ------------------- ------------------- -------------------
                                    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                   1,224,250  $24.999    707,501  $13.888   897,900   $12.378
Exercised                   167,203  $12.968          -        -    25,687    $8.360
Forfeited                    81,250  $13.977    606,636  $12.698    20,625   $11.061
Outstanding, end of year  2,067,005  $19.930  1,091,208  $12.733   990,343   $11.887
Exercisable, end of year    596,438  $12.749    270,704  $13.981    14,625    $8.950
Reserved for future
 grants under the Plan      833,855
Reserved for future
 grants under the
 Directors' Option Plan      56,250
</TABLE>
 
  For options outstanding and exercisable as of November 30, 1997, the exercise
prices and remaining lives were:
 
<TABLE>
<CAPTION>
                          OPTIONS OUTSTANDING            OPTIONS EXERCISABLE
                 ------------------------------------- ---------------------
                                WEIGHTED-    WEIGHTED-             WEIGHTED-
                                 AVERAGE      AVERAGE               AVERAGE
RANGE OF           NUMBER       REMAINING    EXERCISE    NUMBER    EXERCISE
EXERCISE PRICES  OUTSTANDING LIFE (IN YEARS)  PRICES   EXERCISABLE  PRICES
---------------  ----------- --------------- --------- ----------- ---------
<S>              <C>         <C>             <C>       <C>         <C>
$4.333-7.667        110,628        8.1        $ 6.814     30,937    $ 6.434
$11.250-17.709    1,483,877        7.8        $13.191    565,501    $13.095
$29.938-39.750       72,500        9.8        $34.733          -          -
$45.875             400,000        9.9        $45.875          -          -
                  ---------        ---        -------    -------    -------
                  2,067,005        8.2        $19.930    596,438    $12.749
                  =========        ===        =======    =======    =======
</TABLE>
 
 (b) Stockholder Rights Plan
 
  The Company adopted a Stockholder Rights Plan, which provides that the
holders of the Company's common stock receive two-thirds of a right ("Right")
for each share of the Company's common stock they
 
                                      F-16
<PAGE>
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
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 20, 1997, the Board of Directors approved a three-for-two common stock
split, which split was effected in the form of a stock dividend that was
distributed on June 17, 1997 to stockholders of record on June 2, 1997. All
weighted average historical share, net income (loss) per share and common stock
amounts have been retroactively adjusted for the stock split.
 
(12) COMMITMENTS AND CONTINGENCIES
 
 (a) Litigation
 
  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 have been consolidated, and
the State of Wisconsin Investment Board has been appointed as lead plaintiff in
the consolidated action.
 
  A Consolidated Amended Complaint has been filed, which asserts claims for
violations of Section 10(b) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and Rule 10b-5 promulgated thereunder, violations of
Section 20(a) of the Exchange Act, state statutory fraud, common law fraud,
negligent misrepresentation and breach of fiduciary duty. The Consolidated
Amended Complaint alleges that the defendants made untrue statements of
material fact and/or omitted to state material facts about 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. Plaintiffs seek compensatory damages,
exemplary damages and costs and expenses, including attorneys' fees and expert
fees.
 
  All defendants have filed motions to dismiss all claims asserted in the
Consolidated Amended Complaint. The motions are pending. The Company believes
it has meritorious defenses to these claims and is vigorously defending this
action. The ultimate outcome is not currently predictable.
 
  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.
 
 (b) Financial Guarantee
 
  The Company has guaranteed up to RM6.37 million (Malaysian ringgits), $1.8
million as of November 30, 1997, for bank borrowings of its Malaysian joint
venture.
 
                                      F-17
<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>
1997
  Total 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            0.20    0.48     0.53     0.57
1996
  Total revenues              $204,975 225,571  223,590  293,465
  Gross profit                  32,005  29,628   30,792   45,176
  Net income (loss)                738  (3,052) (12,331)   8,232
  Net income (loss) per share     0.03   (0.11)   (0.43)    0.29
</TABLE>
 
                                      F-18
<PAGE>
 
                                  SCHEDULE II
 
                     CELLSTAR CORPORATION AND SUBSIDIARIES
 
                       VALUATION AND QUALIFYING ACCOUNTS
                                (In thousands)
 
<TABLE>
<CAPTION>
                        BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS, BALANCE AT
                        BEGINNING  COSTS AND  ACTIVATION   NET OF      END OF
                        OF PERIOD   EXPENSES  INCOME(A)  RECOVERIES    PERIOD
                        ---------- ---------- ---------- ----------- ----------
<S>                     <C>        <C>        <C>        <C>         <C>
Allowance for doubtful
 accounts:
  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
  November 30, 1995        2,889      1,839     4,115       (5,105)     3,738
Reserve for inventory
 obsolescence:
  November 30, 1997      $ 8,322      4,830         -      (10,357)     2,795
  November 30, 1996          804      8,718         -       (1,200)     8,322
  November 30, 1995        2,741        466         -       (2,403)       804
</TABLE>
 
(a) The Company, under agent agreements in connection with its retail
    operations, earns activation commissions from cellular service providers
    upon engaging subscribers for cellular phone services. The agent
    agreements also provide for the reduction or elimination of activation
    commissions if the subscribers deactivate service within a stipulated
    period. The Company provides an allowance for estimated cellular
    deactivations to activation income.
 
                                      S-1
<PAGE>
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
 EXHIBIT
   NO.                                 DESCRIPTION
 -------                               -----------
 <C>     <S>
   3.1   Amended and Restated Certificate of Incorporation of CellStar
         Corporation.(1)
   3.2   Amended and Restated Bylaws of CellStar Corporation.(14)
   4.1   The Amended and Restated Certificate of Incorporation and Amended and
         Restated Bylaws of CellStar Corporation filed in response to items 3.1
         and 3.2 are incorporated in this item by reference.(1)(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)(15)
  10.2   Employment Agreement, effective as of May 24, 1996, by and between
         CellStar, Ltd., CellStar Corporation and Richard M. Gozia.(5)(15)
  10.3   Employment Agreement by and between CellStar, Ltd., CellStar
         Corporation and Mark Q. Huggins, effective as of January 15,
         1997.(6)(15)
  10.4   Employment Agreement, effective January 22, 1998, by and between
         CellStar (Asia) Corporation Limited, CellStar Corporation and Hong An-
         Hsien.(14)(15)
  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)(16)
  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)(16)
  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)(15)
  10.9   Exclusive Cellular Subagent Agreement by and between National Auto
         Center and Alan H. Goldfield d/b/a National Tape.(10)(15)
  10.10  Registration Rights Agreement by and between the Company and Audiovox
         Corporation.(10)
  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)(15)
  10.16  CellStar Corporation Amended and Restated Annual Incentive
         Compensation Plan. (6)(15)
  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)(15)
</TABLE>
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT
   NO.                                 DESCRIPTION
 -------                               -----------
 <C>     <S>
  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)
  21.1   Subsidiaries of the Company. (14)
  23.1   Consent of KPMG Peat Marwick LLP. (14)
 27      Financial Data Schedule (14)
  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) Filed herewith.
(15) The exhibit is a management contract or compensatory plan or arrangement.
(16) Certain provisions of this exhibit are subject to a request for
     confidential treatment filed with the Securities and Exchange Commission.