<PAGE>   1
 
================================================================================
 
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
 
                                   FORM 10-K
 
<TABLE>
<CAPTION>
  (MARK ONE)
  <S>        <C>
     [X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
             THE SECURITIES EXCHANGE ACT OF 1934
                FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
     [ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
             OF THE SECURITIES EXCHANGE ACT OF 1934
</TABLE>
 
       FOR THE TRANSITION PERIOD FROM                 TO
 
<TABLE>
<S>                                            <C>
        COMMISSION FILE NO. 333-25683                   COMMISSION FILE NO. 33-92732
             CAPSTAR BROADCASTING                        CAPSTAR RADIO BROADCASTING
                PARTNERS, INC.                                 PARTNERS, INC.
         (Exact name of Registrant as                   (Exact name of Registrant as
          specified in its charter)                      specified in its charter)
                   DELAWARE                                       DELAWARE
       (State or other jurisdiction of                (State or other jurisdiction of
        incorporation or organization)                 incorporation or organization)
                  75-2672663                                     13-3034720
               (I.R.S. Employer                               (I.R.S. Employer
            Identification Number)                         Identification Number)
             600 CONGRESS AVENUE                                   78701
                  SUITE 1400                                     (Zip Code)
                AUSTIN, TEXAS
   (Address of principal executive offices)
</TABLE>
 
                             ---------------------
 
       Registrants' telephone number, including area code: (512) 340-7800
 
          Securities registered pursuant to Section 12(b) of the Act:
 
                                      NONE
                                (Title of Class)
 
          Securities registered pursuant to Section 12(g) of the Act:
 
                                      NONE
                                (Title of Class)
 
     Indicate by check mark whether Capstar Broadcasting Partners, Inc. and
Capstar Radio Broadcasting Partners, Inc. (1) have 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) have been subject to such filing
requirements for the past 90 days. Yes [X]  No [ ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
 
     AT MARCH 23, 1998, 279,632,180 SHARES OF COMMON STOCK, PAR VALUE $.01 PER
SHARE ("PARTNERS COMMON STOCK"), OF CAPSTAR BROADCASTING PARTNERS, INC. WERE
OUTSTANDING. AS OF SUCH DATE, THERE WAS NO PUBLIC MARKET FOR THE PARTNERS COMMON
STOCK.
 
     AT MARCH 23, 1998, 1,051,394,410 SHARES OF COMMON STOCK, PAR VALUE $.01 PER
SHARE ("RADIO COMMON STOCK"), OF CAPSTAR RADIO BROADCASTING PARTNERS, INC. WERE
OUTSTANDING. AS OF SUCH DATE, THERE WAS NO PUBLIC MARKET FOR THE RADIO COMMON
STOCK.
 
                      Documents Incorporated by Reference
 
      NO DOCUMENTS ARE INCORPORATED BY REFERENCE INTO PARTS I, II OR III.
================================================================================
<PAGE>   2
 
                               TABLE OF CONTENTS
                                   FORM 10-K
 
<TABLE>
<CAPTION>
                                                                                PAGE NO.
                                                                                --------
<S>               <C>                                                           <C>
PART I
  Item 1.         Business....................................................      1
  Item 2.         Properties..................................................     38
  Item 3.         Legal Proceedings...........................................     39
  Item 4.         Submission of Matters to a Vote of Security Holders.........     39
PART II
  Item 5.         Market for Registrants' Common Equity and Related
                  Stockholder Matters.........................................     39
  Item 6.         Selected Historical Financial Data..........................     40
  Item 7.         Management's Discussion and Analysis of Financial Condition
                  and Results of Operations...................................     43
  Item 7A.        Quantitative and Qualitative Disclosure about Market Risk...     49
  Item 8.         Financial Statements and Supplementary Data.................     49
  Item 9.         Changes in and Disagreements With Accountants on Accounting
                  and Financial Disclosure....................................     50
PART III
  Item 10.        Directors and Executive Officers of the Registrants.........     50
  Item 11.        Executive Compensation......................................     52
  Item 12.        Security Ownership of Certain Beneficial Owners and
                  Management..................................................     58
  Item 13.        Certain Relationships and Related Transactions..............     60
PART IV
  Item 14.        Exhibits, Financial Statement Schedules, and Reports on Form
                  8-K.........................................................     66
</TABLE>
 
                                       (i)
<PAGE>   3
 
                                     PART I
 
ITEM 1. BUSINESS
 
     As used in this Annual Report on Form 10-K, unless the context otherwise
requires, (i) "Capstar Partners" refers to Capstar Broadcasting Partners, Inc.,
(ii) the "Company" collectively refers to Capstar Broadcasting Partners, Inc.
and its subsidiaries after consummation of the Pending Transactions (as
defined), (iii) "Capstar Radio" refers to Capstar Radio Broadcasting Partners,
Inc., a wholly owned subsidiary of Capstar Partners, (iv) the "Companies"
collectively refers to Capstar Partners and Capstar Radio, (v) "Atlantic Star"
refers to Atlantic Star Communications, Inc., (vi) "Southern Star" refers to
Southern Star Communications, Inc., (vii) "GulfStar" refers to GulfStar
Communications, Inc., (viii) "Central Star" refers to Central Star
Communications, Inc., and (ix) "Pacific Star" refers to Pacific Star
Communications, Inc. Certain capitalized terms used in this Annual Report on
Form 10-K and not otherwise defined are defined herein under the caption
"Glossary of Certain Terms."
 
GENERAL
 
     In October 1996, Capstar Partners was incorporated and acquired Commodore
Media, Inc., which was subsequently renamed Capstar Radio Broadcasting Partners,
Inc. In June 1997, Capstar Broadcasting Corporation ("Capstar Broadcasting")
acquired all of the outstanding common stock of Capstar Partners. The Company is
the largest radio broadcaster in the United States operating primarily in
mid-sized markets. Since its first acquisition in October 1996, the Company has
assembled, on a pro forma basis after giving effect to the Pending Transactions,
a nationwide portfolio of 240 owned and operated or programmed stations in 57
mid-sized markets. This portfolio includes clusters of four or more stations in
35 markets and comprises the leading station group, in terms of revenue share
and/or audience share, in 39 markets.
 
     R. Steven Hicks, an executive with over 30 years of experience in the radio
broadcasting industry, and Hicks, Muse, Tate & Furst Incorporated, a
Dallas-based private equity firm ("Hicks Muse"), formed the Company to
capitalize on the consolidation opportunities produced by the Telecommunications
Act of 1996 (the "Telecom Act"). R. Steven Hicks and Hicks Muse recognized that
the Telecom Act created a particularly attractive and unique opportunity to
consolidate stations in mid-sized markets and, accordingly, created a company
that was designed specifically to address this market opportunity. Because the
Telecom Act enabled operators in mid-sized markets for the first time to form
clusters of four or more stations in individual markets, R. Steven Hicks and
Hicks Muse believed that the Company could achieve the economies of scale
necessary to support an investment in higher quality managers, programming and
systems in these markets. The creation of sizable operations allows the Company
to upgrade its stations' programming, sales, promotions, engineering and
administrative operations to standards previously seen only in larger markets.
Management believes that this positions the Company to help generate revenue
growth in these markets in excess of historical growth rates, to increase its
audience and revenue shares within these markets and, by capitalizing on
economies of scale, to achieve increases in its BCF growth rates and margins.
 
     Management believes that the Company's national portfolio of 240 stations
creates significant revenue and cash flow growth opportunities for the Company,
previously unavailable to mid-sized market operators. For example, the Company
is utilizing innovative computer networking technology to distribute high
quality programming created in centralized locations to selected stations
throughout the country, while maintaining the local character of each broadcast.
This allows management to reduce staffing and programming costs while
substantially increasing the quality of programming. In addition, the Company's
national audience of 17 million listeners per week, the largest national
audience among middle market radio broadcasters, has created, for the first
time, an opportunity for national, network and regional advertisers to easily
reach listeners in mid-sized markets. Furthermore, management believes that the
Company's well-developed infrastructure allows it to efficiently acquire and
integrate additional stations.
 
     Because the Company has assembled its portfolio of 240 stations over the
past 18 months, management considers many of these newly formed station clusters
to be underdeveloped with the potential for substantial growth as the Company
capitalizes on the opportunities created by industry deregulation and the
implementation of its acquisition strategy.
 
                                        1
<PAGE>   4
 
STATION PORTFOLIO
 
     The Companies are holding companies which conduct substantially all of
their operations through their subsidiaries, Atlantic Star, Southern Star,
GulfStar, Central Star, and Pacific Star. To effectively and efficiently manage
its station portfolio, the Company has developed a flexible operating structure
designed to manage a large and growing number of radio stations throughout the
United States. The station portfolio is operationally organized into five
regions: the Northeast (Atlantic Star), the Southeast (Southern Star), the
Southwest (GulfStar), the Midwest (Central Star) and the West (Pacific Star),
each of which is managed by regional executives in conjunction with general
managers in each of the Company's markets.
 
     The following table sets forth certain information regarding the Company's
station portfolio, assuming consummation of the Pending Transactions:
 
<TABLE>
<CAPTION>
                                                                        NUMBER
                                                                          OF
                                                                       STATIONS       COMPANY         COMPANY
                                                               MSA     ---------   REVENUE SHARE   AUDIENCE SHARE
                         MARKET(1)                           RANK(2)   FM    AM       RANK(2)         RANK(3)
                         ---------                           -------   ---   ---   -------------   --------------
<S>                                                          <C>       <C>   <C>   <C>             <C>
NORTHEAST REGION (ATLANTIC STAR)
 Allentown-Bethlehem, PA....................................    65      2     2           1                1
 Harrisburg-Lebanon-Carlisle, PA............................    73      1     1           2                2
 Wilmington, DE.............................................    74      2     2           3                2
 Roanoke, VA................................................   102      4     1           2                1
 Worcester, MA..............................................   107      1     1           1                1
 Fairfield County, CT(4)....................................   112      2     2           2                4
 Portsmouth-Dover-Rochester, NH.............................   117      4     3           1                1
 Huntington, WV-Ashland, KY(5)..............................   139      5     5           1                1
 Manchester, NH.............................................   193      1     1           2                2
 Wheeling, WV(5)............................................   216      5     2           1                1
 Winchester, VA.............................................   219      2     1           1                1
 Burlington, VT.............................................   221      1    --           2                4t
 Lynchburg, VA..............................................    NA      3     1           1                1
                                                                       ---   --
       Subtotal.............................................           33    22
SOUTHEAST REGION (SOUTHERN STAR)
 Birmingham, AL.............................................    55      2     1           3                3
 Columbia, SC...............................................    90      4     2           1                1
 Melbourne-Titusville-Cocoa, FL.............................    96      3     2           1                1
 Huntsville, AL.............................................   113      4     2           1                1
 Ft. Pierce-Stuart-Vero Beach, FL(5)........................   119      5     1           1                1
 Montgomery, AL.............................................   143      3    --           2                1
 Savannah, GA...............................................   154      4     2           1                1
 Asheville, NC..............................................   176      1     1           1                1
 Tuscaloosa, AL(5)..........................................   215      3     1           1                1
 Jackson, TN................................................   260      2     1           1                1
 Statesville, NC............................................    NA      1     1          NA               NA
 Gadsden, AL................................................    NA      1     1          NA               NA
                                                                       ---   --
       Subtotal.............................................           33    15
SOUTHWEST REGION (GULFSTAR)
 Austin, TX(5)..............................................    50      2     1           1                1
 Baton Rouge, LA............................................    81      3     3           1                1
 Pensacola, FL..............................................   123      4    --           1                1
 Corpus Christi, TX.........................................   127      4     2           1                1
 Beaumont, TX...............................................   128      3     1           1                1
 Shreveport, LA.............................................   129      2     1           2                2
 Tyler-Longview, TX(5)......................................   141      4     1           1                1
 Killeen, TX(5).............................................   151      2    --           1                1
 Fayetteville, AR...........................................   156      4    --           1                1
 Ft. Smith, AR..............................................   169      2     1           1                1
 Lubbock, TX................................................   173      4     2           1                1
 Midland, TX(5).............................................   174      3    --           2                2
 Amarillo, TX(5)............................................   188      3     1           2                2
 Waco, TX...................................................   192      4     2           1                1
 Alexandria, LA(5)..........................................   200      3     1           1                1
</TABLE>
 
                                        2
<PAGE>   5
 
<TABLE>
<CAPTION>
                                                                        NUMBER
                                                                          OF
                                                                       STATIONS       COMPANY         COMPANY
                                                               MSA     ---------   REVENUE SHARE   AUDIENCE SHARE
                         MARKET(1)                           RANK(2)   FM    AM       RANK(2)         RANK(3)
                         ---------                           -------   ---   ---   -------------   --------------
<S>                                                          <C>       <C>   <C>   <C>             <C>
 Texarkana, TX(5)...........................................   241      4     2           1                1
 Lawton, OK.................................................   249      2    --           1                1
 Lufkin, TX(5)..............................................    NA      3     1          NA                1
 Victoria, TX...............................................    NA      2    --          NA                1
                                                                       ---   --
       Subtotal.............................................           58    19
MIDWEST REGION (CENTRAL STAR)
 Grand Rapids, MI...........................................    65      3     1           2                2
 Des Moines, IA.............................................    88      2     1           3                3t
 Madison, WI................................................   120      4     2           1                1
 Springfield, IL............................................   190      2     1           3                3
 Cedar Rapids, IA...........................................   199      2    --           2                2
 Battle Creek-Kalamazoo, MI.................................   232      2     2           1                1
                                                                       ---   --
       Subtotal.............................................           15     7
WEST REGION (PACIFIC STAR)
 Honolulu, HI...............................................    59      4     3           1                1
 Fresno, CA(5)..............................................    64      6     3           2                2
 Modesto-Stockton, CA(5)....................................   121      3     2           2                2
 Anchorage, AK..............................................   170      4     2           2                1
 Fairbanks, AK(4)...........................................    NA      3     1          NA                1
 Farmington, NM.............................................    NA      3     1          NA               NA
 Yuma, AZ...................................................    NA      2     1          NA                1
                                                                       ---   --
       Subtotal.............................................           25    13
       Total(6).............................................           164   76
                                                                       ===   ==
</TABLE>
 
---------------
NA   Information not available.
t    Tied with another radio station group.
 
(1)  Actual city of license may be different from metropolitan market served.
     Market may be different from market definition used under FCC multiple
     ownership rules.
 
(2)  Metropolitan Statistical Area ("MSA") rank and Company revenue share rank
     obtained from BIA Research-Master Access, Version 2.0 Radio Analysis
     Database (current as of February 27, 1998). Revenue figures based upon 1997
     gross revenue for the indicated markets.
 
(3)  Company audience share rank obtained from Arbitron's Radio Market Reports,
     based on average quarter hour estimates for the last available reporting
     period ending either Spring or Fall 1997 for the demographic of persons
     ages 25-54, listening Monday through Sunday, 6 a.m. to midnight, except for
     the Yuma, Arizona market which was obtained from AccuRatings. To account
     for listeners lost to other nearby markets, a radio station's "local"
     audience share is derived by comparing the radio station's average quarter
     hour share to the total average quarter hour share for all stations whose
     signals are heard within the MSA, excluding audience share for listeners
     who listen to stations whose signals originate outside the MSA.
 
(4)  Fairfield County, Connecticut is a custom survey area ("CSA") as defined by
     Arbitron. The CSA includes the Arbitron markets of Bridgeport,
     Stamford-Norwalk and Danbury, Connecticut with market rankings of 112, 134
     and 191, respectively. MSA rank is listed for the Bridgeport market only.
     The combined rank for the CSA has not been estimated. Fairbanks, Alaska is
     a CSA as defined by Arbitron, for which audience share rank was obtained
     from Arbitron's Fall 1997 CSA Market Report.
 
(5)  The Company provides certain sales and marketing services to stations
     WPAW-FM in Ft. Pierce-Stuart-Vero Beach, Florida, WEEL-FM in Wheeling, West
     Virginia, and KLFX-FM in Killeen, TX pursuant to JSAs (as defined). The
     Company provides certain sales, programming and marketing services to
     stations WHRD-AM in Huntington, West Virginia and KTFS-AM and KTWN-FM in
     Texarkana, Texas; and pending consummation of the respective acquisitions
     to stations KZBQ-FM in Tuscaloosa, Alabama; KKTX-AM and KKTX-FM in
     Tyler-Longview, Texas, KASE-FM, KVET-FM and KVET-AM in Austin, Texas;
     KCDQ-FM, KCHX-FM and KMRK-FM in Midland, Texas; KMML-FM, KBUY-FM, KNSY-FM
     and KIXZ-AM in Amarillo, Texas; and KRRV-FM, KKST-FM, KZMZ-FM and KDBS-AM
     in Alexandria, Louisiana; KTBQ-FM and KSFA-AM in Lufkin, Texas; KEZL-FM,
     KFSO-FM, KTHT-FM, KFSO-AM in Fresno, California; and KOSO-FM in
     Modesto-Stockton, California pursuant to LMAs (as defined). The chart
     includes these stations.
 
(6)  The table does not include the stations that the Company has under contract
     to acquire in regard to the Big Chief Acquisition, the KRNA Acquisition,
     and the Gibbons Acquisition (each as defined in "-- Glossary of Certain
     Terms"), which may not be completed due to regulatory reasons. See "-- The
     Transactions" and "-- Federal Regulation of Radio Broadcasting -- Federal
     Antitrust Laws."
 
                                        3
<PAGE>   6
 
OPERATING STRATEGY
 
     The Company's primary goals are to (i) achieve revenue growth rates at its
stations that are significantly in excess of historical growth rates achieved in
comparable markets and (ii) to increase its operating margins at these stations
at growth rates which exceed the average in operating margins growth rates being
achieved in large markets. The Company intends to achieve these goals through
the implementation of the following strategies:
 
     Enhance Revenue Growth through Multiple Station Ownership. The ownership of
multiple stations in a market allows the Company to coordinate its programming
to appeal to a broad spectrum of listeners. Once a station cluster has been
created, the Company can provide one-stop shopping to advertisers attempting to
reach a wide range of demographic groups in the Company's markets. Management
believes that simplifying the buying of advertising time for customers
encourages increased advertiser usage, thereby enhancing the Company's revenue
generating potential. The Company also believes this simplification of the
buying process is particularly effective outside the largest markets because
advertisers in smaller markets typically perform more functions in the buying
process for themselves (as opposed to outsourcing these functions to advertising
firms or other vendors). By offering broad demographic coverage, the Company can
also compete more effectively against alternative media, such as newspaper and
television, thus potentially increasing radio's share of the total advertising
dollars spent in a given market.
 
     The Company believes that multiple station ownership will allow it to be
more effective in pursuing national, network and regional advertisers, a source
of revenues which was previously limited in mid-sized markets. For example, the
Company believes that its participation in the AMFM Radio Network, a national
radio network owned by Chancellor Media Corporation ("Chancellor Media"),
illustrates the Company's ability to attract new sources of network revenues to
its stations as a result of its large audience reach.
 
     Utilize Sophisticated Revenue Generating Techniques. Following the
acquisition of a station or station group, the Company implements sophisticated
techniques such as advertising inventory management systems and centralized
sales training programs to allow such stations to serve their advertising
clients better and to compete more effectively with other media. It also
utilizes in-depth music research studies to improve the quality of the
programming and its responsiveness to the local market. Management believes that
many single station or single market operators cannot justify the costs
associated with utilizing these management techniques.
 
     Use Innovative Computer Technology to Enhance Programming. The Company is
an industry leader in using computer network technology to deliver high quality
programming. The Company's StarSystem, a Company-owned programming distribution
network, is designed to broadcast quality programming from centralized locations
to selected stations throughout its markets. With this system, a single radio
personality is able to introduce programming in multiple markets by digitally
transferring individual introductions for each local market and inserting them
into the playlist via the Company's wide area computer network. StarSystem
therefore enables the Company to make high quality on-air talent available on a
cost-effective basis in markets that previously could not afford that level of
programming while still maintaining a station's local identity. Management
believes that in addition to the cost reductions associated with this system,
StarSystem provides the Company with a competitive advantage by allowing
management to implement format changes quickly, and integrate newly acquired
stations and clusters more efficiently. To date, the Company has installed and
is utilizing StarSystem at 16 stations at a one time cost of approximately
$43,000 per station, which has resulted in average cost reductions of
approximately $44,000 at each such station on an annualized basis. The Company
intends to expand its StarSystem to an additional 133 stations by December 31,
1998. The Company plans to develop additional regionalized programming centers
to continue its expansion of StarSystem during 1999.
 
     Create Low Cost Operating Structure. Management believes that it can create
a low cost operating structure in mid-sized markets for several reasons. First,
because stations in mid-sized markets typically have less direct format
competition, the Company is less reliant on expensive on-air celebrities and
costly advertising and promotional campaigns to capture listeners. Second, the
ownership of multiple stations within a market allows the Company to achieve
substantial cost savings through the consolidation of facilities,
                                        4
<PAGE>   7
 
management, sales and administrative personnel and operating resources (such as
on-air talent, programming and music research) and through the elimination of
redundant corporate expenses. Furthermore, the Company, as a result of its large
station portfolio, combined with the consolidated purchasing power of other
companies affiliated with Hicks Muse, has realized volume discounts in such
areas as national representation commissions, employee benefits, casualty
insurance premiums and other operating expenses.
 
     Capitalize on Extensive Regional Management Experience. Each of the
Company's regional presidents and chief executive officers has extensive
industry experience, having served as a senior executive and/or owner of, or
consultant to, one or more substantial station groups in mid-sized to large
markets. The Company has capitalized on this experience by designing a regional
organizational structure to manage its station portfolio effectively and to
accommodate future in-market or station group acquisitions. Each regional
operating executive reports directly to the Company's Chief Operating Officer.
The Company believes that each of its regional executives possesses considerable
knowledge of its region's other radio broadcasters and is therefore well
situated to identify strategic acquisition candidates.
 
ACQUISITION STRATEGY
 
     The Company is the leading consolidator of radio stations in mid-sized
markets throughout the United States. Management has achieved this position
using an acquisition strategy that it believes allows the Company to develop
radio station clusters at reasonable prices. First, the Company seeks to enter
attractive new mid-sized markets by acquiring a leading station (or a group that
owns a leading station). The Company then uses the initial acquisition as a
platform to acquire additional stations. Management believes by leveraging its
existing infrastructure, knowledge of and relationships with advertisers and
substantial experience, it can improve the operating performance and financial
results of acquired stations. From time to time, management also evaluates other
acquisition opportunities in advertising related businesses that it believes
would complement the Company's radio broadcasting business. From time to time,
the Company may acquire station groups or companies with one or more stations in
large markets. Although the Company's primary acquisition strategy is to acquire
and operate stations in mid-sized markets, the Company may in the future retain
and operate such large market stations.
 
                                        5
<PAGE>   8
 
THE TRANSACTIONS
 
  Completed Transactions
 
     Since its formation in 1996, the Company has acquired 231 stations in 27
separate transactions with purchase prices ranging from $200,000 to $225.0
million, and for strategic or regulatory reasons has sold 14 stations in seven
separate transactions with sale prices ranging from $100,000 to $40.0 million.
The following table summarizes the Completed Transactions that have been
consummated by the Company.
 
<TABLE>
<CAPTION>
                                                                STATIONS
                                                               ACQUIRED/
                                                              DISPOSED OF
                                                  DATE        ------------
              TRANSACTION(1)                     CLOSED       FM       AM          REGION
              --------------                     ------       ---      ---         ------
<S>                                          <C>              <C>      <C>      <C>
Acquisitions
Commodore..................................  October 1996     18       12       NE/SE
Osborn.....................................  February 1997    12        6       NE/SE
Space Coast................................  April 1997        3        2       Southeast
Osborn Tuscaloosa..........................  April 1997        1        1       Southeast
Osborn Huntsville..........................  May 1997          1        2       Southeast
GulfStar...................................  July 1997        34       12       SW/W
Community Pacific..........................  July 1997         6        5       MW/W
Cavalier...................................  July 1997         4        1       Northeast
McForhun...................................  August 1997       1       --       Southwest
Livingston.................................  August 1997      --        1       Southwest
Benchmark..................................  August 1997      20       10       NE/SE/SW
Emerald City...............................  August 1997       1       --       Southeast
Madison....................................  August 1997       4        2       Midwest
WRIS.......................................  September 1997    1       --       Northeast
Booneville.................................  September 1997    1       --       Southwest
American General...........................  October 1997      1       --       Southwest
Ameron.....................................  October 1997      2        1       Southeast
Griffith...................................  October 1997      3       --       Southeast
KJEM.......................................  October 1997      1       --       Southwest
KLAW.......................................  October 1997      2       --       Southwest
COMCO......................................  November 1997     4        2       West
Knight.....................................  January 1998      5        3       Northeast
Quass......................................  January 1998      2       --       Midwest
East Penn..................................  January 1998     --        1       Northeast
Patterson..................................  January 1988     25       14       NE/SE/SW/MW/W
Commonwealth...............................  February 1998     2        1       West
Reynolds...................................  February 1998     1       --       Southeast
                                                              ---      --
        Total..............................                   155      76
                                                              ===      ==
Dispositions
Osborn Ft. Myers...........................  April 1997        2        1       Southeast
Wilmington.................................  September 1997    1       --       Northeast
KASH.......................................  November 1997    --        1       West
Bryan......................................  September 1997    1        1       Southwest
Allentown..................................  January 1998      1        1       Northeast
Jackson....................................  February 1998     2        2       Southeast
Dayton.....................................  February 1998     1       --       Northeast
                                                              ---      --
        Total..............................                    8        6
                                                              ===      ==
</TABLE>
 
---------------
 
(1) As defined in "-- Glossary of Certain Terms." Does not include (i) 30
    stations for which the Company currently provides services pursuant to LMAs
    and JSAs and (ii) one station for which a third party provides services
    pursuant to an LMA.
 
  Pending Transactions
 
     The Company has entered into 12 agreements to acquire 33 additional
stations (24 FM and nine AM) in 14 mid-sized markets (including 24 stations in
nine mid-sized markets for which the Company currently provides services
pursuant to an LMA) for $157.4 million (the "Pending Acquisitions"), and five
agreements to dispose of 16 stations (11 FM and five AM) for $96.9 million (the
"Pending Dispositions" and, together with the Pending Acquisitions, the "Pending
Transactions"). Upon completion of the Pending Transactions, the Company will
own and operate or program 240 radio stations in 57 mid-sized markets located
throughout
 
                                        6
<PAGE>   9
 
the United States. The Company must obtain additional financing to consummate
the Pending Transactions and there can be no assurance that such financing will
be available to the Company on terms acceptable to its management. Consummation
of each of the Pending Transactions is subject to numerous conditions, including
governmental approvals. Accordingly, the actual date of consummation of each of
the Pending Transactions may vary from the anticipated closing dates. No
assurances can be given that any or all of the Pending Transactions will be
consummated or that, if completed, they will be successful. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
 
     The following table summarizes the Pending Transactions.
 
<TABLE>
<CAPTION>
                                                 STATIONS TO BE
                                                   ACQUIRED/
                                                  DISPOSED OF                                       ESTIMATED
                                                 --------------                   EXPECTED          PURCHASE
                TRANSACTION(1)                    FM        AM      REGION      CLOSING DATE          PRICE
                --------------                   ----      ----     ------      -------------    ---------------
                                                                                                 ($ IN MILLIONS)
<S>                                              <C>       <C>     <C>          <C>              <C>
Acquisitions
Grant..........................................    1        --     Southeast    April 1998           $  3.2
KOSO...........................................    1        --     West         April 1998              8.0
Class Act......................................    1         1     Southwest    April 1998              0.9
Fairbanks......................................    1        --     West         April 1998              0.2
KDOS...........................................    1         1     Southwest    April 1998              3.4
Americom(2)....................................    3         1     West         May 1998               21.0
Austin(3)......................................    2         1     Southwest    May 1998               90.3
Shreveport-KMJJ................................    1        --     Southwest    June 1998               5.5
Pensacola-WYCL.................................    1        --     Southeast    June 1998               6.2
Portsmouth.....................................    2         2     Northeast    July 1998               6.0
Champion.......................................    9         2     Southwest    January 1999           11.3
Noalmark(4)....................................    1         1     Southwest    March 2000              1.4
                                                  --        --                                       ------
        Total..................................   24         9                                       $157.4
                                                  ==        ==                                       ======
Dispositions
Westchester....................................    2         1     Northeast    April 1998             35.0
Americom(2)....................................    2         1     West         May 1998                4.5
Salisbury-Ocean City...........................    2        --     Northeast    May 1998                7.5
Greenville(5)..................................    3         1     Southeast    May 1998               35.0
Upper Fairfield(5).............................    2         2     Northeast    May 1998               14.9
                                                  --        --                                       ------
        Total..................................   11         5                                       $ 96.9
                                                  ==        ==                                       ======
</TABLE>
 
---------------
 
(1) As hereinafter defined and/or in "-- Glossary of Certain Terms." The table
    also does not include (i) the Big Chief Acquisition, the KRNA Acquisition,
    the KATQ Acquisition or the Gibbons Acquisition (each as defined in
    "-- Glossary of Certain Terms"), each of which the Company does not
    anticipate will close due to regulatory reasons, (ii) the SFX Jackson-Biloxi
    Acquisition, which the Company expects will be terminated upon the
    consummation of the SFX Acquisition (as defined) and (iii) the McCarthy
    Acquisition (as defined), which is in litigation and is not expected to be
    consummated. See "-- Federal Regulation of Radio Broadcasting -- Federal
    Antitrust Laws."
 
(2) The Company will purchase three radio stations (two FM and one AM) from
    Americom for cash and, concurrently therewith, exchange three of the
    Company's radio stations (two FM and one AM) for another FM radio station of
    Americom.
 
(3) See " -- The SFX Transactions -- SFX Related Transactions."
 
(4) The Company has an option to acquire two stations in the Longview, Texas
    market from Noalmark Broadcasting Corp. on or before March 6, 2000. The
    Company currently provides services for such stations pursuant to an LMA and
    expects to exercise the option on or before March 6, 2000.
 
(5) The sale of such stations on or before the consummation of the SFX
    Acquisition is required to avoid violation of the multiple station ownership
    limitations under the Communications Act (as defined). If such dispositions
    cannot be consummated on or before the consummation of the SFX Acquisition,
    then, subject to the approval of the Federal Communications Commission (the
    "FCC"), the Company intends to place the assets of such stations (including
    FCC licenses) in trust pending the disposition of thereof by the trustee.
    Upon the consummation of the sale of any assets that may be placed in trust,
    the trustee would distribute the net proceeds therefrom to the Company. The
    Company cannot predict whether or when such assets, if placed in trust, will
    be sold, or if sold, whether they will be sold at a profit to the Company.
 
                                        7
<PAGE>   10
 
THE SFX TRANSACTIONS
 
  SFX Acquisition
 
     Pursuant to a merger agreement dated as of August 24, 1997, as amended (the
"Merger Agreement"), a subsidiary of SBI Holding Corporation ("SBI") will be
merged, subject to certain conditions, with and into SFX Broadcasting, Inc.
("SFX"), with SFX continuing as the surviving corporation and an indirect
wholly-owned subsidiary of Capstar Broadcasting and, perhaps, the Company (the
"SFX Acquisition"). The total cash cost of the merger and related repayment of
existing indebtedness under the existing credit facility of SFX (the "SFX Credit
Facility") is expected to be approximately $1.5 billion if completed by June
1998 and assuming that either a Spin-Off (as defined below) or an Alternative
Transaction (as defined below) is consummated on or before the effective time of
the SFX Acquisition. The Company expects that Hicks, Muse, Tate & Furst Equity
Fund III, L.P., the sole stockholder of SBI, will contribute SBI to Capstar
Broadcasting prior to the SFX Acquisition. Capstar Broadcasting has announced
that it has filed with the Securities and Exchange Commission a registration
statement for a proposed initial public offering of shares of Capstar
Broadcasting's Class A common stock, the proceeds of which would be used to
partially finance the SFX Acquisition. There are no assurances that Capstar
Broadcasting's proposed offering will be completed. If completed, however, the
Company expects that the Company will also partially finance the SFX Acquisition
with borrowings under the credit facility of Capstar Radio (the "Capstar Credit
Facility"), and that SFX, once acquired, will be contributed through Capstar
Partners to Capstar Radio. If the proposed public offering is not completed, the
Company does not expect SFX to become a subsidiary of Capstar Radio, although
the Company does expect that it will partially finance the SFX Acquisition
through a combination of borrowings under the Capstar Credit Facility and asset
sales to SFX. Except as described in "-- The Transactions -- Pending
Transactions," the Company has not specifically identified radio stations that
may be sold in connection with the consummation of the SFX Acquisition. No
assurances can be given that the SFX Acquisition will be consummated or, if
consummated, that the Company will acquire a portion or all of SFX's capital
stock or, if acquired, that such investment will be successful. R. Steven Hicks,
the Company's Chief Executive Officer, co-founded SFX and served as its chief
executive officer for three years before resigning in 1996 to form the Company
with Hicks Muse.
 
     Pursuant to the Merger Agreement, SFX has contributed all of the capital
stock of SFX Concerts, Inc. (formerly known as Delsener/Slater Enterprises,
Inc.) to SFX Entertainment, Inc., a wholly-owned subsidiary of SFX which holds
all of SFX's live entertainment business ("SFX Entertainment"). The Merger
Agreement requires SFX, prior to the consummation of the merger, to either
distribute all of the capital stock owned by SFX in SFX Entertainment to certain
of SFX's stockholders and other securityholders (the "Spin-Off") or otherwise
dispose of SFX Entertainment if the Spin-Off would violate applicable law or any
material agreement to which SFX or any of its subsidiaries is a party (an
"Alternate Transaction"). If SFX does not dispose of SFX Entertainment, whether
through a Spin-Off or Alternative Transaction, then SBI may elect whether to
consummate the SFX Acquisition (by increasing the merger consideration by an
additional $42 million) and thereby acquiring SFX Entertainment and its
subsidiaries or terminating the Merger Agreement. The Company expects that the
Spin-Off or an Alternative Transaction will occur on or before the effective
time of the SFX Acquisition.
 
     The SFX Acquisition is subject to a number of conditions which are beyond
Capstar Broadcasting's and the Company's control. The following is a summary of
certain of the material provisions of the Merger Agreement and does not purport
to be a complete description of the Merger Agreement.
 
     Merger Consideration. Pursuant to the Merger Agreement, the issued and
outstanding shares (other than shares held by persons who exercise statutory
dissenters' appraisal rights) of SFX's Class A common stock, Class B common
stock, Series C preferred stock, and Series D preferred stock will be converted
into the right to receive cash in an amount equal to approximately $1.2 billion
in the aggregate at the effective time of the merger (the "Effective Time"),
subject to adjustment as described hereinafter and assuming that a Spin-Off or
Alternative Disposition will not occur. Each issued and outstanding share of
12 5/8% Series E Cumulative Preferred Stock, par value $0.01 per share ("12 5/8%
SFX Preferred Stock"), of SFX will remain outstanding after the Effective Time.
After the consummation of the SFX Acquisition $122.3 million in aggregate
 
                                        8
<PAGE>   11
 
liquidation preference of the 12 5/8% SFX Preferred Stock may be redeemed for an
aggregate purchase price of $137.8 million, including $15.5 million in
redemption premium. Each option or warrant to purchase shares of SFX capital
stock will, at the Effective Time, represent only the right to receive cash from
SFX (net of any applicable exercise price).
 
     Closing Extension and Adjustment to Merger Consideration. The "Termination
Date" of the Merger Agreement is June 1, 1998, subject to extension by SBI for
up to three months, in one-calendar-month intervals; however, if SBI extends the
closing date beyond June 1, 1998, subject to certain exceptions, the merger
consideration payable to holders of SFX's Class A common stock ("Class A Merger
Consideration") and holders of Class B common stock ("Class B Merger
Consideration") will increase by $1.00 per share for each calendar month of
extension. Under certain circumstances, if any judicial order delaying the
merger is lifted, and if SBI fails to consummate the merger within 10 days
thereafter, then the Class A Merger Consideration and Class B Merger
Consideration will be increased by $2.00 per share for each calendar month (or
partial calendar month) between the Termination Date and the Effective Time.
 
     Covenants. SFX has agreed that, until the Effective Time, it will, and will
cause its subsidiaries to, carry on their businesses in the ordinary and usual
course, and (except as contemplated by the Merger Agreement) it will not, and
will not permit its subsidiaries to, without the consent of SBI, among other
things, (a) declare or pay dividends or other distributions or sell or acquire
any shares of its capital stock, (b) amend the certificate of incorporation or
by-laws of SFX, (c) acquire or sell any assets, (d) incur indebtedness or make
loans, (e) modify or terminate any material contract, (f) fail to act in the
ordinary course of business consistent with past practices to (i) preserve
substantially intact SFX's and each of its subsidiary's present business
organization, (ii) keep available the services of certain employees or (iii)
preserve its relationships with customers, suppliers and others, (g) fail to use
commercially reasonable efforts to maintain SFX's assets, (h) merge or
consolidate with any other entity or dissolve or liquidate any material
subsidiary, (i) materially increase the compensation or benefits of any
director, officer or employee, (j) pay, discharge or satisfy certain material
claims or liabilities, (k) enter into a local marketing agreement, joint sales
agreement or similar agreement with any entity other than SBI, (l) engage in any
transaction with any of its affiliates, other than transactions that do not
contain any ongoing obligations of SFX after the closing and would not
reasonably be expected to have a material adverse effect on SFX or to materially
delay or prevent the consummation of the transactions contemplated by the Merger
Agreement or (m) authorize, commit or agree to take any of the foregoing
transactions. None of the foregoing prohibitions prohibits the Spin-Off or an
Alternate Transaction.
 
     SBI has agreed that, until the Effective Time, it will, and will cause its
subsidiaries to, carry on their businesses in the ordinary and usual course,
unless SFX otherwise agrees in writing or except as otherwise required by the
Merger Agreement.
 
     Pursuant to the Merger Agreement, holders of options and stock appreciation
rights ("SARs") issued by SFX will receive cash equal to the merger
consideration paid to the SFX stockholders less the exercise price per option or
base price per SARs.
 
     SFX is required to cause its outstanding indebtedness as of immediately
prior to the Effective Time to consist only of borrowings under the SFX Credit
Facility and SFX's 10 3/4% Senior Subordinated Notes due 2006 and 11 3/8% Senior
Subordinated Notes due 2000. According to SFX, as of December 31, 1997,
approximately $908,000 of indebtedness must be retired by SFX prior to the
Effective Time.
 
     SFX and SBI are required to use all reasonable efforts to complete the
merger, to file an application requesting the approval of the FCC (the "FCC
Consent") for the transfer of control of SFX's radio stations resulting from the
merger and to file all documents required under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"). Without the prior written
consent of SBI, SFX is prohibited, with certain exceptions, from taking any
action that could impair or delay obtaining the FCC Consent or complying with or
satisfying the terms thereof. The FCC application was filed on September 23,
1997, and has not been granted to date. The filing under the HSR Act was made on
September 23, 1997, and the DOJ has requested additional information from SFX.
See "Item 1. Business -- Federal Regulation of Radio Broadcasting -- Federal
Antitrust Laws."
 
                                        9
<PAGE>   12
 
     The Merger Agreement contains certain additional provisions requiring the
surviving corporation to (a) provide certain employee benefits, (b) indemnify
officers, directors and employees and (c) maintain directors' and officers'
liability insurance.
 
     No Solicitation. Until the termination of the Merger Agreement, SFX, its
subsidiaries and their representatives are prohibited from soliciting,
initiating or encouraging the submission of certain takeover proposals (a
"Takeover Proposal"), or discussing, negotiating, or furnishing information
regarding any Takeover Proposal. However, prior to the receipt of stockholder
approval of the Merger Agreement and the merger, SFX and its representatives may
under certain circumstances, in order to comply with the fiduciary duties of
SFX's Board of Directors, furnish information and conduct negotiations regarding
any unsolicited Takeover Proposal meeting certain criteria. The Merger Agreement
requires SFX to keep SBI fully informed of the status and details of any
Takeover Proposal. In addition, neither SFX's Board of Directors nor the SFX's
independent committee of directors may (a) withdraw or modify, in a manner
adverse to SBI, their approval of the merger or (b) approve or recommend any
Takeover Proposal. However, this prohibition does not apply to certain Takeover
Proposals which are on more favorable terms to SFX's stockholders than the
merger, if SFX terminates the Merger Agreement.
 
     Conditions. The obligations of each party to consummate the merger are
subject to the satisfaction or waiver of the following conditions: (a) the FCC
Consent must be granted, (b) the waiting period under the HSR Act must expire or
terminate and (c) there must be no injunction or other legal restraint on the
merger. On March 26, 1998, a meeting of SFX's stockholders was held at which the
stockholders of SFX approved the Merger Agreement, the merger and certain
amendments to SFX's certificate of incorporation.
 
     The obligations of SBI and its merger subsidiary ("SBI Merger Sub") to
consummate the merger are subject to the satisfaction or waiver of the following
additional conditions: (a) the accuracy of SFX's representations and warranties
in the Merger Agreement, (b) SFX's performance of its obligations pursuant to
the Merger Agreement, (c) the finality of the FCC Consent, (d) obtaining
releases of options and SARs from SFX's executive officers and directors and
assumptions by SFX Entertainment of their employment agreements, (e)
consummation of the Spin-Off or an Alternate Transaction and (f) obtaining
material third party consents to the merger. SBI's and SBI Merger Sub's
obligations under the Merger Agreement are not subject to any conditions
regarding their ability to obtain financing.
 
     The obligations of SFX to consummate the merger are subject to the
satisfaction or waiver of the following additional conditions: (a) the accuracy
of SBI's and SBI Merger Sub's representations and warranties in the Merger
Agreement and (b) SBI's and SBI Merger Sub's performance of their obligations
pursuant to the Merger Agreement.
 
     Termination; Fees and Expenses; Letter of Credit. The Merger Agreement may
be terminated:
 
          (a) By the mutual written consent of SFX, SBI and SBI Merger Sub.
 
          (b) By either SFX or SBI if the merger is not consummated on or before
     the Termination Date as such may be extended.
 
          (c) By either SFX or SBI if the Merger is permanently prohibited or
     enjoined. If the prohibition or injunction arises from litigation involving
     SFX and its stockholders and the Merger Agreement is terminated as set
     forth in this paragraph, then SFX must pay SBI $10.0 million (and an
     additional $40.0 million if, within 1 year of the termination, either SFX
     enters into a Takeover Proposal or 50% of the capital stock of SFX is
     acquired in a tender offer) and must reimburse SBI for its reasonable
     out-of-pocket expenses (not to exceed $10.0 million).
 
          (d) By SBI if (i) SFX breaches any representation or warranty
     contained in the Merger Agreement, unless the breach has no material
     adverse effect on SFX, or (ii) SFX fails to perform its obligations under
     the Merger Agreement. However, SBI may not terminate if the breach or
     failure to perform is cured within 30 days after notice thereof.
 
          (e) By SFX if (i) SBI or its merger subsidiary breaches any
     representation or warranty contained in the Merger Agreement, unless the
     breach has no material adverse effect on SBI's ability to perform its
     obligations under the Merger Agreement, or (ii) SBI and SBI Merger Sub fail
     to perform their
 
                                       10
<PAGE>   13
 
     obligations under the Merger Agreement. However, SFX may not terminate if
     the breach or failure to perform is cured within 30 days after notice.
 
          (f) By SFX if (i) SFX notifies SBI of a superior proposal (as defined
     in the Merger Agreement), and (ii) within five business days from receipt
     of the notice, SBI does not offer to revise the terms of the merger or the
     Board of Directors determines in good faith, after receiving advice from
     its financial adviser, that the superior proposal is superior to SBI's
     revised offer. If the Merger Agreement is terminated as set forth in this
     paragraph, SFX must pay SBI a termination fee of $50.0 million and must
     reimburse SBI for its reasonable out-of-pocket expenses (not to exceed $2.5
     million).
 
          (g) By SBI if (i) a tender or exchange offer for 50% or more of the
     capital stock of SFX is commenced and SFX's Board of Directors fails to
     recommend that SFX's stockholders not tender their shares, or (ii) a
     Takeover Proposal is announced and the Board of Directors fails to reaffirm
     its recommendation of the merger. If the Merger Agreement is terminated as
     set forth in this paragraph, SFX must pay SBI a termination fee of $50.0
     million and must reimburse SBI for its reasonable out-of-pocket expenses
     (not to exceed $2.5 million).
 
     Simultaneously with the execution of the Merger Agreement, SBI placed into
escrow an irrevocable letter of credit for $100.0 million. The escrowed amount
must be released to SFX if the Merger Agreement is terminated because: (a) the
merger has not been consummated on or before the Termination Date, and, as of
that date, the FCC Consent is not granted or the applicable waiting period under
the HSR Act has not expired or been terminated, in each case other than
primarily for certain reasons that are outside SBI's control; (b) the merger is
permanently prohibited or enjoined (other in litigation involving SFX and its
stockholders); or (c) SFX terminates the Merger Agreement as described in
paragraph (e) above. The release of the letter of credit to SFX will be its sole
remedy if the Merger Agreement is terminated as discussed above. If the Merger
Agreement is terminated for reasons other than those for which the Merger
Agreement provides liquidated damages, the non-breaching party will be entitled
to recover its damages and expenses from the other party or parties.
 
     Sillerman Consulting and Non-Competition Agreement and Stockholder
Agreement. Concurrently with the execution of the Merger Agreement, Robert F.X.
Sillerman, SFX's Executive Chairman and a director of SFX, entered into a
Consulting, Non-Compete and Termination Agreement with SBI and SFX, effective as
of the Effective Time, pursuant to which Mr. Sillerman (i) tendered his
resignation as an officer and director of SFX, (ii) agreed to release SFX from
all claims he may then have against SFX, with certain specified exceptions,
(iii) agreed to serve as an adviser and consultant for a period of two years,
and (iv) agreed that, subject to certain exceptions and for a period of five
years commencing at the Effective Time, he would not engage in, manage or
operate any entity (or be connected as a stockholder, director, officer,
employee or agent of any entity) that engages in the business of owning,
operating or providing services to radio stations in certain markets. SFX agreed
to pay Mr. Sillerman, at the Effective Time, $2.0 million for his agreement to
provide consulting services to SFX and $23.0 million for his agreement not to
compete with SFX.
 
     Provisions Regarding the Spin-Off. Before the Spin-Off, SFX and SFX
Entertainment will enter into a Distribution Agreement (the "Distribution
Agreement"), a Tax Sharing Agreement (the "Tax Sharing Agreement"), and an
Employee Benefits Agreement (the "Employee Benefits Agreement"). The
Distribution Agreement, which contains the terms and conditions pursuant to
which SFX and SFX Entertainment propose to separate their businesses, will be
entered into by SFX, SFX Entertainment, and SBI before the Spin-Off. The terms
and conditions of the Distribution Agreement include the following: the manner
of effecting the Spin-Off, the transfer of certain assets to and the assumption
of liabilities by SFX Entertainment, the obligation of SFX's senior management
and certain other SFX employees to continue to devote time to the operations of
SFX if the Spin-Off occurs prior to the Effective Time, the manner of allocating
working capital (in general, current assets minus current liabilities of SFX,
subject to certain agreed on adjustments) between SFX and SFX Entertainment, and
the assignment of the use of the name "SFX" and other specific intellectual
property of SFX to SFX Entertainment no later than six months from the date of
the consummation of the merger. The Company expects that SFX Entertainment will
be obligated to pay SFX
 
                                       11
<PAGE>   14
 
approximately $3.0 million in settlement of the working capital allocation upon
the consummation of the merger.
 
     Prior to the Spin-Off, SFX and SFX Entertainment will enter into the Tax
Sharing Agreement. Under the Tax Sharing Agreement, SFX Entertainment will agree
to pay to SFX its allocable share of the amount of the tax liability of SFX and
SFX Entertainment combined, and each of SFX and SFX Entertainment will indemnify
the other for any tax adjustment made in subsequent years that relates to taxes
properly attributable to SFX Entertainment during the period prior to and
including the Spin-Off. SFX Entertainment also will be responsible for any taxes
of SFX resulting from the Spin-Off, including any income taxes that result from
gain on the distribution that exceeds the net operating losses of SFX and SFX
Entertainment available to offset gain resulting from the Spin-Off. The actual
amount of the gain will be based on the excess of the value of the SFX
Entertainment common stock distributed over the tax basis of such stock. The
Company believes that the value of the SFX Entertainment common stock for tax
purposes will be determined by no later than the first trading date following
the date on which such common stock is distributed in the Spin-Off. Increases or
decreases in the value of the SFX Entertainment common stock subsequent to such
date will not effect the amount of the tax liability. If the SFX Entertainment
common stock has a value of approximately $15 per share at the time of the
Spin-Off, the Company believes that the indemnification payment that it would be
entitled to receive from SFX Entertainment would not be material. The Company
believes that such indemnification obligation would be approximately $4.0
million at $16 per share, and would increase by approximately $7.7 million for
each $1.00 increase above $16 per share. The Company expects that any such
indemnity payment will be due on or about June 15, 1998.
 
     Prior to the Spin-Off, SFX and SFX Entertainment will enter into an
Employee Benefits Agreement in which each party agrees to take all actions
necessary or appropriate so that, as of the Spin-Off, SFX Entertainment and its
subsidiaries will no longer be participating employers and sponsors of the SFX's
employee benefit plans.
 
                                       12
<PAGE>   15
 
  SFX Related Transactions
 
     SFX has one acquisition pending to acquire three radio stations for $35.0
million and, concurrently with the consummation of the SFX Acquisition, will be
required to dispose of nine radio stations for the Company and SFX to remain in
compliance with the multiple station ownership limitations under the
Communications Act of 1934, as amended (the "Communications Act"), and with the
requirements of the U.S. Department of Justice (the "DOJ"). See "-- Federal
Regulation of Radio Broadcasting." In addition, Capstar Broadcasting has entered
into a long-term, approximately $637.5 million station exchange agreement (the
"Chancellor Exchange Agreement") with Chancellor Media, pursuant to which, if
the SFX Acquisition is consummated, among other things, (i) ten SFX stations in
the Dallas, Houston, San Diego and Pittsburgh markets will be sold to Chancellor
Media in exchange for radio stations identified by Capstar Broadcasting over a
three-year period and (ii) an SFX station in the Houston market will be sold to
Chancellor Media in exchange for two stations of Chancellor Media in the
Jacksonville, Florida market, and $90.25 million in cash, which cash would be
used to consummate the Austin Acquisition. As part of the Chancellor Exchange
Agreement, Chancellor Media would provide services to the ten SFX stations under
separate LMAs for approximately $49.4 million per year, with corresponding
decreases in the amount of the LMA fees received by the Company (assuming that
Capstar Broadcasting contributes SFX to the Company) as stations are exchanged.
No assurance can be given that SFX, if acquired, will be contributed to the
Company or, if contributed, that stations acquired in exchange for the ten SFX
stations will, either initially when such stations are acquired or thereafter,
generate cash flow comparable to the LMA fees. All of these transactions are
referred to herein as the "SFX Related Transactions" and, together with the SFX
Acquisition, are referred to herein as the "SFX Transactions." The following
table summarizes the stations that would be owned by SFX upon the consummation
of the SFX Transactions.
 
<TABLE>
<CAPTION>
                                                                        STATIONS    REVENUE   AUDIENCE
                                                                MSA     ---------    SHARE     SHARE
                         MARKET(1)                            RANK(2)   FM    AM    RANK(2)   RANK(3)
                         ---------                            -------   ---   ---   -------   --------
<S>                                                           <C>       <C>   <C>   <C>       <C>
  Milwaukee, WI.............................................     30      1     1       4          5
  Providence, RI............................................     31      2     1       2          2
  Charlotte-Gastonia-Rock Hill, NC..........................     36      3    --       2          2
  Indianapolis, IN..........................................     37      2     1       2          3
  Greensboro, NC............................................     40      2     2       4          4
  Hartford, CT..............................................     42      4     1       2          2
  Nashville, TN.............................................     44      4     1       1          1
  Raleigh-Durham, NC........................................     48      4    --       1          1
  Jacksonville, FL..........................................     51      4     2       1          1
  Richmond, VA..............................................     56      4    --       2          2
  Albany-Schenectady-Troy, NY*..............................     57      3     2       1          1
  Greenville, SC............................................     58      3     1       1          1
  Tucson, AZ*...............................................     61      2     2       1          2
  Springfield, MA...........................................     77      2     1       1          3
  Wichita, KS...............................................     89      2     1       3          2
  New Haven, CT.............................................     95      2    --       1          1
  Jackson, MS...............................................    118      3     1       1          2
  Biloxi-Gulfport-Pascagoula, MS............................    137      2    --       1          1
                                                                        ---   --
        Total...............................................            49    17
                                                                        ===   ==
</TABLE>
 
---------------
 
(1) Actual city of license may be different from metropolitan market served.
    Market may be different from market definition used under FCC multiple
    ownership rules.
 
(2) MSA rank and Company revenue share rank obtained from BIA Research-Master
    Access, Version 2.0 Radio Analysis Database (current as of February 27,
    1998). Revenue figures based upon 1997 gross revenue for the indicated
    markets.
 
(3) Company audience share rank obtained from Arbitron's Radio Market Reports,
    based on average quarter hour estimates for the last available reporting
    period ending either Spring or Fall 1997 for the demographic of persons ages
    25-54, listening Monday through Sunday, 6 a.m. to midnight. To account for
    listeners lost to other nearby markets, a radio station's "local" audience
    share is derived by comparing the radio station's average quarter hour share
    to the total average quarter hour share for all stations whose signals are
    heard within the MSA, excluding audience share for listeners who listen to
    stations whose signal originate outside the MSA.
 
                                       13
<PAGE>   16
 
  Other Transactions
 
     As part of the Company's ongoing acquisition strategy, the Company is
continually evaluating other potential acquisition opportunities. The Company
has entered into three separate nonbinding letters of intent to acquire and/or
exchange substantially all of the assets of the respective potential sellers
used or useful in the operations of each seller's radio stations, each of which
is subject to various conditions, including the ability of the Company to enter
into a definitive agreement to acquire such assets. No assurances can be given
that definitive agreements will be entered into to acquire such assets or that
such transactions will be consummated. See "-- Risks Associated with Business
Activities -- Risks of Acquisition Strategy."
 
REGIONAL OPERATING GROUPS
 
  Regional Executives
 
     Each of the regional operating groups is operated by a regional president
who has extensive industry experience, having served as a senior executive
and/or owner of, or consultant to, one or more substantial station groups in
mid-sized to large markets.
 
     Northeast Region. The Northeast Region is managed by its president and
chief executive officer, James T. Shea, Jr. Mr. Shea has over 24 years of
experience in the radio broadcasting industry. Mr. Shea's operating knowledge
and strong advertising relationships helped Commodore Media, Inc. become a
leading radio group in each of its markets prior to its acquisition by the
Company in 1996.
 
     Southeast Region. The Southeast Region is managed by its president and
chief executive officer, Rick Peters. Mr. Peters brings more than 25 years of
broadcasting experience to the Company, including, most recently, serving as the
President of Peters Communications, Inc., a programming consulting firm
affiliated with radio stations in various mid-sized and large markets.
 
     Southwest Region. The Southwest Region is managed by its president and
chief executive officer, John D. Cullen. Mr. Cullen has served as president and
chief operating officer of GulfStar since 1996 and brings more than 16 years of
radio experience to the Company. Prior to joining GulfStar, Mr. Cullen served as
a regional manager for SFX.
 
     Midwest Region. The Midwest Region is managed by its president and chief
executive officer, Mary K. Quass. Ms. Quass has more than 20 years experience in
the radio broadcasting industry in numerous roles, including, most recently,
serving as the president and chief executive officer of Quass Broadcasting
Company until its acquisition by the Company in January 1998.
 
     West Region. The West Region is managed by its president and chief
executive officer, Dex Allen, who has over 35 years of experience in the radio
broadcasting industry. Mr. Allen served as the managing member of Commonwealth
Broadcasting of Arizona, L.L.C. from 1984 until its acquisition by the Company
in February 1998.
 
     In addition to a regional president, management for each region includes a
human resources director, a controller, a director of programming, an engineer
and one or more advertising sales people.
 
                                       14
<PAGE>   17
 
  Regional Station Portfolios
 
     The following tables set forth certain information regarding to the
Company's station portfolio in each of its five regions, assuming consummation
of the Pending Transactions.
 
                        NORTHEAST REGION (ATLANTIC STAR)
 
<TABLE>
<CAPTION>
                                                                                    COMPANY   COMPANY
                                                                        TARGET      REVENUE   AUDIENCE
                MARKET AND                      SOURCE        MSA     DEMOGRAPHIC    SHARE     SHARE
         STATION CALL LETTERS(1)               COMPANY      RANK(2)      GROUP      RANK(2)   RANK(3)             FORMAT
         -----------------------               -------      -------   -----------   -------   --------            ------
<S>                                         <C>             <C>       <C>           <C>       <C>        <C>
ALLENTOWN-BETHLEHEM, PA                                       65                      1         1
 WAEB-AM..................................  Commodore                       35+                          News/Talk/Sports
 WAEB-FM..................................  Commodore                   F18-49                           Hot Adult Contemporary
 WZZO-FM..................................  Commodore                   M18-49                           Album Rock
 WKAP-AM..................................  Commodore                       35+                          Nostalgia
HARRISBURG-LEBANON-CARLISLE, PA                               73                      2         2
 WTCY-AM..................................  Patterson                    35-54                           Urban Adult Contemporary
 WNNK-FM..................................  Patterson                   F25-44                           Contemporary Hits
WILMINGTON, DE                                                74                      3         2
 WJBR-AM..................................  Commodore                   F25-54                           Nostalgia
 WDSD-FM..................................  Benchmark                    25-54                           Country
 WRDX-FM..................................  Benchmark                    25-54                           Album Rock
 WDOV-AM..................................  Benchmark                    25-54                           News/Talk
ROANOKE, VA(4)                                               102                      2         1
 WROV-AM..................................  Benchmark                    25-54                           Album Rock
 WROV-FM..................................  Benchmark                    18-49                           Album Rock
 WRDJ-FM..................................  Cavalier                     35-64                           Oldies
 WJJS-FM..................................  Cavalier                     18-34                           Contemporary Hits
 WJLM-FM..................................  WRIS                         25-54                           Country
WORCESTER, MA                                                107                      1         1
 WTAG-AM..................................  Knight Quality               35-64                           News/Talk/Sports
 WSRS-FM..................................  Knight Quality              F25-44                           Lite Rock
FAIRFIELD COUNTY, CT(4)                                      112                      2         4
 WNLK-AM..................................  Commodore                       35+                          News/Talk
 WEFX-FM..................................  Commodore                   F18-49                           Classic Hits
 WSTC-AM..................................  Commodore                    25-54                           News/Talk
 WKHL-FM..................................  Commodore                    25-54                           Oldies
PORTSMOUTH-DOVER-ROCHESTER, NH                               117                      1         1
 WHEB-FM..................................  Knight Quality              M25-44                           Album Rock
 WXHT-FM..................................  Knight Quality              F25-44                           Adult Contemporary
 WTMN-AM..................................  Knight Quality              M18-50                           Sports/Talk
 WQSO-FM..................................  ARS                          35-64                           Oldies
 WERZ-FM..................................  ARS                          18-34                           Contemporary Hits
 WMYF-AM..................................  ARS                             35+                          Big Band
 WZNN-AM..................................  ARS                             35+                          Nostalgia
HUNTINGTON, WV-ASHLAND, KY                                   139                      1         1
 WTCR-AM..................................  Commodore                    25-54                           Classic Country
 WTCR-FM..................................  Commodore                    25-54                           Country
 WIRO-AM..................................  Commodore                   M25-54                           Sports
 WHRD-AM(5)...............................  Commodore                   M25-54                           Sports
 WZZW-AM..................................  Commodore                   M25-54                           Sports
 WKEE-AM..................................  Commodore                       35+                          Big Band
 WKEE-FM..................................  Commodore                    25-54                           Adult Contemporary
 WAMX-FM..................................  Commodore                   M25-54                           Rock
 WFXN-FM..................................  Commodore                   M25-54                           Classic Rock
 WBVB-FM..................................  Commodore                   M18-49                           Oldies
MANCHESTER, NH                                               193                      2         2
 WGIR-AM..................................  Knight Quality                  35+                          News/Talk/Sports
 WGIR-FM..................................  Knight Quality              M25-49                           Album Rock
</TABLE>
 
                                       15
<PAGE>   18
 
<TABLE>
<CAPTION>
                                                                                    COMPANY   COMPANY
                                                                        TARGET      REVENUE   AUDIENCE
                MARKET AND                      SOURCE        MSA     DEMOGRAPHIC    SHARE     SHARE
         STATION CALL LETTERS(1)               COMPANY      RANK(2)      GROUP      RANK(2)   RANK(3)             FORMAT
         -----------------------               -------      -------   -----------   -------   --------            ------
<S>                                         <C>             <C>       <C>           <C>       <C>        <C>
WHEELING, WV                                                 216                      1         1
 WWVA-AM..................................  Osborn                       25-54                           Talk/Country
 WOVK-FM..................................  Osborn                       25-54                           Country
 WKWK-FM..................................  Osborn                       25-54                           Lite Rock
 WBBD-AM..................................  Osborn                       25-54                           Nostalgia
 WZNW-FM..................................  Osborn                       25-54                           Hot Adult Contemporary
 WEGW-FM..................................  Osborn                       25-54                           Rock
 WEEL-FM(5)...............................  Osborn                       25-54                           Oldies
WINCHESTER, VA                                               219                      1         1
 WUSQ-FM..................................  Benchmark                    25-54                           Country
 WFQX-FM..................................  Benchmark                    18-49                           Modern Rock
 WNTW-AM..................................  Benchmark                    25-54                           News/Sports/Talk
BURLINGTON, VT                                               221                      2         4t
 WEZF-FM..................................  Knight Quality              F25-54                           Adult Contemporary
LYNCHBURG, VA(4)                                              NA                      1         1
 WLDJ-FM..................................  Cavalier                     35-64                           Oldies
 WJJX-FM..................................  Cavalier                     18-34                           Contemporary Hits
 WJJS-AM..................................  Cavalier                     25-54                           Urban/Solid Gold
 WYYD-FM..................................  Benchmark                    25-54                           Country
</TABLE>
 
---------------
F   Female
M   Male
NA  Information not available.
 
(1) Actual city of license may be different from metropolitan market served.
    Market may be different from market definition used under FCC multiple
    ownership rules.
 
(2) MSA rank and Company revenue share rank obtained from BIA Research-Master
    Access Version 2.0 Radio Analysis Database (current as of February 27,
    1998). Revenue figures based upon 1997 gross revenue for the indicated
    markets.
 
(3) Company audience share rank obtained from Arbitron's Radio Market Reports,
    based on average quarter hour estimates for the last available reporting
    period ending Fall 1997, for the demographic of persons ages 25-54,
    listening Monday through Sunday, 6 a.m. to midnight. To account for
    listeners lost to other nearby markets, a radio station's "local" audience
    share is derived by comparing the radio station's average quarter hour share
    to the total average quarter hour share for all stations whose signals are
    heard within the MSA, excluding audience share for listeners who listen to
    stations whose signal originate outside the MSA.
 
(4) Fairfield County is a CSA as defined by Arbitron. The CSA includes the
    Arbitron markets of Bridgeport, Stamford-Norwalk, and Danbury, Connecticut
    with market rankings of 112, 134, and 191, respectively. MSA Rank is listed
    for the Bridgeport market only. The combined rank for the CSA has not been
    estimated. Fairfield County, Connecticut audience share and revenues
    obtained from Arbitron's Custom Survey Area Report for the Fall 1997 period.
    Rankings for Roanoke, Virginia, and Lynchburg, Virginia markets were
    determined separately, using the City of License to determine the split of
    the market.
 
(5) The Company provides certain sales and marketing services to station WEEL-FM
    in Wheeling, West Virginia pursuant to a JSA. The Company provides certain
    sales, programming and marketing services to station WHRD-AM in Huntington,
    West Virginia pursuant to an LMA.
 
                                       16
<PAGE>   19
 
                        SOUTHEAST REGION (SOUTHERN STAR)
 
<TABLE>
<CAPTION>
                                                                                    COMPANY   COMPANY
                                                                        TARGET      REVENUE   AUDIENCE
                 MARKET AND                      SOURCE       MSA     DEMOGRAPHIC    SHARE     SHARE
              CALL LETTERS(1)                   COMPANY     RANK(2)      GROUP      RANK(2)   RANK(3)             FORMAT
              ---------------                   -------     -------   -----------   -------   --------            ------
<S>                                           <C>           <C>       <C>           <C>       <C>        <C>
BIRMINGHAM, AL                                                55                      3         3
 WMJJ-FM....................................  Ameron                    F25-54                           Adult Contemporary
 WERC-AM....................................  Ameron                    M35-54                           News/Talk
 WOWC-FM....................................  Ameron                     18-44                           Country
COLUMBIA, SC                                                  90                      1         1
 WCOS-FM....................................  Benchmark                  25-54                           Country
 WHKZ-FM....................................  Benchmark                  25-54                           Country
 WVOC-AM....................................  Benchmark                  35-64                           News/Talk
 WSCQ-FM....................................  Benchmark                  25-54                           Adult Standards
 WCOS-AM....................................  Benchmark                  25-54                           Country
 WNOK-FM....................................  Emerald City               25-54                           Contemporary Hits
MELBOURNE-TITUSVILLE-COCOA, FL                                96                      1         1
 WMMB-AM....................................  City                          50+                          Nostalgia
 WBVD-FM....................................  City                       35-64                           Classic Rock
 WMMV-AM....................................  EZY                        35-64                           Nostalgia
 WLRQ-FM....................................  EZY                        25-54                           Adult Contemporary
 WHKR-FM....................................  Roper                      25-54                           Country
HUNTSVILLE, AL                                               113                      1         1
 WDRM-FM....................................  Dixie                      25-54                           Country
 WHOS-AM....................................  Dixie                      25-54                           News
 WBHP-AM....................................  Dixie                      25-54                           CNN News
 WTAK-FM....................................  Griffith                  M25-54                           Classic Rock
 WXQW-FM....................................  Griffith                   25-54                           Oldies
 WWXQ-FM....................................  Griffith                   25-54                           Oldies
FT. PIERCE-STUART-VERO BEACH, FL                             119                      1         1
 WZZR-FM....................................  Commodore                 M18-49                           Classic Rock
 WQOL-FM....................................  Commodore                  25-54                           Oldies
 WPAW-FM(4).................................  Commodore                  25-54                           Country
 WBBE-FM....................................  Commodore                  25-54                           Adult Contemporary
 WAVW-FM....................................  Commodore                  25-54                           Country
 WAXE-AM....................................  Commodore                     35+                          News/Talk/Financial
MONTGOMERY, AL                                               143                      2         1
 WZHT-FM....................................  Benchmark                  25-54                           Urban
 WMCZ-FM....................................  Benchmark                  25-54                           Urban/Adult Contemporary
 WMHS-FM....................................  Benchmark                  25-54                           R&B/Gospel
SAVANNAH, GA                                                 154                      1         1
 WCHY-AM....................................  Patterson                  35-54                           Country
 WCHY-FM....................................  Patterson                  25-54                           Country
 WYKZ-FM....................................  Patterson                  25-54                           Soft Adult Contemporary
 WAEV-FM....................................  Patterson                  18-49                           Adult Contemporary
 WSOK-AM....................................  Patterson                  25-54                           Gospel
 WLVH-FM....................................  Patterson                  25-54                           Urban Adult Contemporary
ASHEVILLE, NC                                                176                      1         1
 WWNC-AM....................................  Osborn                     25-54                           Country
 WKSF-FM....................................  Osborn                     25-54                           Country
TUSCALOOSA, AL                                               215                      1         1
 WACT-AM....................................  Osborn                     25-54                           Gospel
 WRTR-FM....................................  Osborn                     25-54                           Classic Rock
 WTXT-FM....................................  Osborn                     25-54                           Country
 WZBQ-FM(5).................................  Grant                      18-34                           Contemporary Hits
JACKSON, TN                                                  260                      1         1
 WTJS-AM....................................  Osborn                     25-54                           News/Talk
 WTNV-FM....................................  Osborn                     25-54                           Country
 WYNU-FM....................................  Osborn                     25-54                           Classic Rock
</TABLE>
 
                                       17
<PAGE>   20
 
<TABLE>
<CAPTION>
                                                                                    COMPANY   COMPANY
                                                                        TARGET      REVENUE   AUDIENCE
                 MARKET AND                      SOURCE       MSA     DEMOGRAPHIC    SHARE     SHARE
              CALL LETTERS(1)                   COMPANY     RANK(2)      GROUP      RANK(2)   RANK(3)             FORMAT
              ---------------                   -------     -------   -----------   -------   --------            ------
<S>                                           <C>           <C>       <C>           <C>       <C>        <C>
STATESVILLE, NC                                               NA                     NA         NA
 WFMX-FM....................................  Benchmark                  25-54                           Country
 WSIC-AM....................................  Benchmark                  25-54                           News/Talk
GADSDEN, AL                                                   NA                     NA         NA
 WAAX-AM....................................  Osborn                     25-54                           News/Talk
 WQEN-FM....................................  Osborn                     25-54                           Adult Contemporary
</TABLE>
 
---------------
F   Female
M   Male
NA  Information not available.
 
(1) Actual city of license may be different from metropolitan market served.
    Market may be different from market definition used under FCC multiple
    ownership rules.
 
(2) MSA rank and Company revenue share rank obtained from BIA Research-Master
    Access, Version 2.0 Radio Analysis Database (current as of February 27,
    1998). Revenue figures based upon 1997 gross revenue for the indicated
    markets.
 
(3) Company audience share rank obtained from Arbitron's Radio Market Reports,
    based on average quarter hour estimates for the last available reporting
    period ending Fall 1997, for the demographic of persons ages 25-54,
    listening Monday through Sunday, 6 a.m. to midnight. To account for
    listeners lost to other nearby markets, a radio station's "local" audience
    share is derived by comparing the radio station's average quarter hour share
    to the total average quarter hour share for all stations whose signals are
    heard within the MSA, excluding audience share for listeners who listen to
    stations whose signal originate outside the MSA.
 
(4) The Company provides certain sales and marketing services to station WPAW-FM
    in Ft. Pierce-Stuart-Vero Beach, Florida, pursuant to a JSA. The Company
    provides certain sales, programming and marketing services to station
    WZBQ-FM in Tuscaloosa, Alabama pursuant to a LMA.
 
                          SOUTHWEST REGION (GULFSTAR)
 
<TABLE>
<CAPTION>
                                                                                    COMPANY   COMPANY
                                                                        TARGET      REVENUE   AUDIENCE
               MARKET AND                      SOURCE         MSA     DEMOGRAPHIC    SHARE     SHARE
        STATION CALL LETTERS(1)               COMPANY       RANK(2)      GROUP      RANK(2)   RANK(3)             FORMAT
        -----------------------               -------       -------   -----------   -------   --------            ------
<S>                                       <C>               <C>       <C>           <C>       <C>        <C>
AUSTIN, TX                                                    50                      1         1
 KASE-FM(4).............................  Butler                         25-54                           Country
 KVET-FM(4).............................  Butler                         25-54                           Country
 KVET-AM(4).............................  Butler                         25-54                           News/Talk/Sports
BATON ROUGE, LA                                               81                      1         1
 WYNK-FM................................  GulfStar                       25-54                           Country
 WYNK-AM................................  GulfStar                          12+                          Disney
 WJBO-AM................................  GulfStar                      M35-64                           News/Talk/Sports
 WLSS-FM................................  GulfStar                      F18-35                           Contemporary Hits
 KRVE-FM................................  McForhun                      F25-54                           Adult Contemporary
 WSKR-AM................................  Livingston                        65+                          Sports
PENSACOLA, FL                                                123                      1         1
 WMEZ-FM................................  Patterson                     F25-54                           Soft Adult Contemporary
 WXBM-FM................................  Patterson                      25-54                           Country
 WWSF-FM................................  Patterson                      35-54                           Oldies
 WYCL-FM................................  Paxon                          35-54                           Oldies
CORPUS CHRISTI, TX                                           127                      1         1
 KRYS-FM................................  GulfStar                       25-54                           Country
 KRYS-AM................................  GulfStar                          12+                          Disney
 KMXR-FM................................  GulfStar                      F20-45                           Hot Adult Contemporary
 KNCN-FM................................  GulfStar                      M18-44                           Active Rock
 KUNO-AM................................  KDOS                           25-54                           Spanish
 KSAB-FM................................  KDOS                           25-54                           Tejano
BEAUMONT, TX                                                 128                      1         1
 KLVI-AM................................  GulfStar                          30+                          News/Talk
 KYKR-FM................................  GulfStar                       25-54                           Country
 KKMY-FM................................  GulfStar                       30-54                           Adult Contemporary
 KIOC-FM................................  GulfStar                       18-34                           Contemporary Hits
</TABLE>
 
                                       18
<PAGE>   21
 
<TABLE>
<CAPTION>
                                                                                    COMPANY   COMPANY
                                                                        TARGET      REVENUE   AUDIENCE
               MARKET AND                      SOURCE         MSA     DEMOGRAPHIC    SHARE     SHARE
        STATION CALL LETTERS(1)               COMPANY       RANK(2)      GROUP      RANK(2)   RANK(3)             FORMAT
        -----------------------               -------       -------   -----------   -------   --------            ------
<S>                                       <C>               <C>       <C>           <C>       <C>        <C>
SHREVEPORT, LA                                               129                      2         2
 KRMD-FM................................  Benchmark                      25-54                           Country
 KRMD-AM................................  Benchmark                      25-54                           Sports
 KMJJ-FM................................  Sunburst                       25-54                           Urban
TYLER-LONGVIEW, TX                                           141                      1         1
 KNUE-FM................................  GulfStar                       25-54                           Country
 KISX-FM................................  GulfStar                       18-34                           Adult Contemporary
 KTYL-FM................................  GulfStar                      F30-54                           Adult Contemporary
 KKTX-AM(4).............................  Noalmark                      M30-49                           Classic Rock
 KKTX-FM(4).............................  Noalmark                      M30-49                           Classic Rock
KILLEEN, TX                                                  151                      1         1
 KIIZ-FM................................  GulfStar                       25-54                           Urban
 KLFX-FM(5).............................  GulfStar                       18-34                           Active Rock
FAYETTEVILLE, AR                                             156                      1         1
 KEZA-FM................................  GulfStar                       25-54                           Soft Adult Contemporary
 KKIX-FM................................  GulfStar                       25-54                           Country
 KMXF-FM................................  GulfStar                       25-54                           Hot Adult Contemporary
 KJEM-FM................................  KJEM                           35-64                           Classic Rock
FT. SMITH, AR                                                169                      1         1
 KWHN-AM................................  GulfStar                       35-64                           News/Talk
 KMAG-FM................................  GulfStar                       25-59                           Country
 KZBB-FM................................  Booneville                     25-54                           Contemporary Hits
LUBBOCK, TX                                                  173                      1         1
 KFMX-FM................................  GulfStar                      M18-34                           Active Rock
 KKAM-AM................................  GulfStar                          18+                          Talk
 KZII-FM................................  GulfStar                       12-34                           Contemporary Hits
 KFYO-AM................................  GulfStar                          35+                          News/Talk/Sports
 KCRM-FM................................  GulfStar                      F18-49                           Classic Rock
 KKCL-FM................................  American General               35-64                           Oldies
MIDLAND, TX                                                  174                      2         2
 KCDQ-FM(4).............................  Champion                       18-34                           Classic Rock
 KCHX-FM(4).............................  Champion                       18-34                           Contemporary Hits Radio
 KMRK-FM(4).............................  Champion                       25-54                           Tejano
AMARILLO, TX                                                 188                      2         2
 KMML-FM(4).............................  Champion                       25-54                           Country
 KBUY-FM(4).............................  Champion                       25-54                           Country
 KNSY-FM(4).............................  Champion                       18-34                           Hot Adult Contemporary
 KIXZ-AM(4).............................  Champion                       35-64                           Nostalgia
WACO, TX                                                     192                      1         1
 KBRQ-FM................................  GulfStar                      M25-54                           Classic Rock
 KKTK-AM................................  GulfStar                      M18-49                           Sports
 WACO-FM................................  GulfStar                       25-54                           Country
 KCKR-FM................................  GulfStar                       18-49                           New Country
 KWTX-FM................................  GulfStar                      F25-54                           Contemporary Hits
 KWTX-AM................................  GulfStar                       25-54                           News/Talk
ALEXANDRIA, LA                                               200                      1         1
 KRRV-FM(4).............................  Champion                       25-54                           Country
 KKST-FM(4).............................  Champion                       18-34                           Adult Contemporary
 KZMZ-FM(4).............................  Champion                       18-34                           Classic Rock
 KDBS-AM(4).............................  Champion                       25-54                           News/Talk
TEXARKANA, TX                                                241                      1         1
 KKYR-AM................................  GulfStar                       25-54                           Country
 KKYR-FM................................  GulfStar                       25-54                           Country
 KTHN-FM................................  GulfStar                       18-49                           Contemporary Hits
 KYGL-FM................................  GulfStar                       35-49                           Classic Rock
 KTFS-AM(4).............................  KATQ                           25-54                           Talk
 KTWN-FM(4).............................  KATQ                           18-34                           Hot-Adult Contemporary
LAWTON, OK                                                   249                      1         1
 KLAW-FM................................  KLAW                           25-54                           Country
 KZCD-FM................................  KLAW                          M25-54                           Rock
</TABLE>
 
                                       19
<PAGE>   22
 
<TABLE>
<CAPTION>
                                                                                    COMPANY   COMPANY
                                                                        TARGET      REVENUE   AUDIENCE
               MARKET AND                      SOURCE         MSA     DEMOGRAPHIC    SHARE     SHARE
        STATION CALL LETTERS(1)               COMPANY       RANK(2)      GROUP      RANK(2)   RANK(3)             FORMAT
        -----------------------               -------       -------   -----------   -------   --------            ------
<S>                                       <C>               <C>       <C>           <C>       <C>        <C>
LUFKIN, TX                                                    NA                     NA         1
 KYKS-FM................................  GulfStar                          12+                          Country
 KAFX-FM................................  GulfStar                       18-49                           Contemporary Hits
 KTBQ-FM(5).............................  Class Act                      18-34                           Classic Rock
 KSFA-AM(5).............................  Class Act                      25-54                           News/Talk/Sports
VICTORIA, TX                                                  NA                     NA         1
 KIXS-FM................................  GulfStar                       25-54                           Country
 KLUB-FM................................  GulfStar                       25-49                           Classic Rock
</TABLE>
 
---------------
 
F   Female
M   Male
NA  Information not available.
 
(1) Actual city of license may be different from metropolitan market served.
    Market may be different from market definition used under FCC multiple
    ownership rules.
 
(2) MSA rank and Company revenue share rank obtained from BIA Research-Master
    Access, Version 2.0 Radio Analysis Database (current as of February 27,
    1998). Revenues figures based upon 1997 gross revenue for the indicated
    markets.
 
(3) Company audience share rank obtained from Arbitron's Radio Market Reports,
    based on average quarter hour estimates for the last available reporting
    period ending Fall 1997, except for Lufkin, Texas, and Victoria, Texas,
    which are reported as of Spring 1997 because the markets were not rated for
    the Fall 1997 period, for the demographic of persons ages 25-54, listening
    Monday through Sunday, 6 a.m. to midnight. To account for listeners lost to
    other nearby markets, a radio station's "local" audience share is derived by
    comparing the radio station's average quarter hour share to the total
    average quarter hour share for all stations whose signals are heard within
    the MSA, excluding audience share for listeners who listen to stations whose
    signal originate outside the MSA.
 
(4) The Company provides certain sales, programming and marketing services to
    stations KTFS-AM and KTWN-FM in Texarkana, Texas and pending the
    consummation of the respective Pending Acquisitions, the Company provides
    certain sales, programming and marketing services pursuant to LMAs to
    stations KASE-FM, KVET-FM, and KVET-AM in Austin, Texas; KKTX-FM and KKTX-AM
    in Tyler-Longview, Texas; KTBQ-FM and KSFA-AM in Lufkin, Texas; KCDQ-FM,
    KCHX-FM and KMRK-FM in Midland, Texas; KMML-FM, KBUY-FM, KNSY-FM and KIXZ-AM
    in Amarillo, Texas; and KRRV-FM, KKST-FM, KZMZ-FM and KDBS-AM in Alexandria,
    Louisiana.
 
(5) The Company provides certain sales and marketing services to station KLFX-FM
    in Killeen, Texas, pursuant to a JSA.
 
                         MIDWEST REGION (CENTRAL STAR)
 
<TABLE>
<CAPTION>
                                                                                    COMPANY   COMPANY
                                                                        TARGET      REVENUE   AUDIENCE
              MARKET AND                      SOURCE          MSA     DEMOGRAPHIC    SHARE     SHARE
        STATION CALL LETTERS(1)               COMPANY       RANK(2)      GROUP      RANK(2)   RANK(3)             FORMAT
        -----------------------               -------       -------   -----------   -------   --------            ------
<S>                                      <C>                <C>       <C>           <C>       <C>        <C>
GRAND RAPIDS, MI                                               65                     2         2
 WGRD-FM...............................  Patterson                       18-34                           Modern Rock
 WRCV-AM...............................  Patterson                          35+                          Country
 WLHT-FM...............................  Patterson                       25-54                           Adult Contemporary
 WQFN-FM...............................  Patterson                      F25-54                           Soft Adult Contemporary
DES MOINES, IA                                                 88                     3         3t
 KHKI-FM...............................  Community Pacific               25-54                           Country
 KGGO-FM...............................  Community Pacific               25-54                           Album Rock
 KDMI-AM...............................  Community Pacific                  NA                           Gospel/Talk
MADISON, WI                                                   120                     1         1
 WIBA-AM...............................  Madison                         35-64                           News/Talk
 WIBA-FM...............................  Madison                         25-54                           Classic Rock
 WMAD-FM...............................  Madison                         18-34                           Modern Rock
 WTSO-AM...............................  Madison                         35-64                           Nostalgia
 WZEE-FM...............................  Madison                         18-49                           Contemporary Hits
 WMLI-FM...............................  Madison                        F25-54                           Soft Adult Contemporary
SPRINGFIELD, IL                                               190                     3         3
 WFMB-AM...............................  Patterson                      M35-64                           News/Talk/Sports
 WFMB-FM...............................  Patterson                       25-54                           Country
 WCVS-FM...............................  Patterson                       25-54                           Classic Hits
</TABLE>
 
                                       20
<PAGE>   23
 
<TABLE>
<CAPTION>
                                                                                    COMPANY   COMPANY
                                                                        TARGET      REVENUE   AUDIENCE
              MARKET AND                      SOURCE          MSA     DEMOGRAPHIC    SHARE     SHARE
        STATION CALL LETTERS(1)               COMPANY       RANK(2)      GROUP      RANK(2)   RANK(3)             FORMAT
        -----------------------               -------       -------   -----------   -------   --------            ------
<S>                                      <C>                <C>       <C>           <C>       <C>        <C>
CEDAR RAPIDS, IA                                              199                     2         2
 KHAK-FM...............................  Quass                           25-54                           Country
 KDAT-FM...............................  Quass                           25-54                           Soft Rock
BATTLE CREEK/KALAMAZOO, MI                                    232                     1         1
 WBCK-AM...............................  Patterson                       35-64                           News/Talk
 WBXX-FM...............................  Patterson                       25-54                           Adult Contemporary
 WRCC-AM...............................  Patterson                          45+                          Nostalgia
 WWKN-FM...............................  Patterson                       35-64                           Oldies
</TABLE>
 
---------------
 
F   Female
M   Male
NA  Information not available.
t   Tied with another company.
 
(1) Actual city of license may be different from metropolitan market served.
    Market may be different from market definition used under FCC multiple
    ownership rules.
 
(2) MSA rank and Company revenue share rank obtained from BIA Research-Master
    Access, Version 2.0 Radio Analysis Database (current as of February 27,
    1998). Revenue figures based upon 1997 gross revenue for the indicated
    markets.
 
(3) Company audience share rank obtained from Arbitron's Radio Market Reports,
    based on average quarter hour estimates for the last available reporting
    period ending Fall 1997, for the demographic of persons ages 25-54,
    listening Monday through Sunday, 6 a.m. to midnight. To account for
    listeners lost to other nearby markets, a radio station's "local" audience
    share is derived by comparing the radio station's average quarter hour share
    to the total average quarter hour share for all stations whose signals are
    heard within the MSA, excluding audience share for listeners who listen to
    stations whose signal originate outside the MSA.
 
                           WEST REGION (PACIFIC STAR)
 
<TABLE>
<CAPTION>
                                                                                   COMPANY   COMPANY
                                                                       TARGET      REVENUE   AUDIENCE
              MARKET AND                     SOURCE          MSA     DEMOGRAPHIC    SHARE     SHARE
       STATION CALL LETTERS(1)               COMPANY       RANK(2)      GROUP      RANK(2)   RANK(3)             FORMAT
       -----------------------               -------       -------   -----------   -------   --------            ------
<S>                                     <C>                <C>       <C>           <C>       <C>        <C>
HONOLULU, HI                                                 59                      1         1
 KSSK-AM..............................  Patterson                       25-54                           Hot Adult Contemporary
 KSSK-FM..............................  Patterson                       25-54                           Hot Adult Contemporary
 KUCD-FM..............................  Patterson                       35-54                           Modern Adult Contemporary
 KHVH-AM..............................  Patterson                       35-64                           News/Talk
 KKLV-FM..............................  Patterson                      M35-54                           Classic Rock
 KIKI-AM..............................  Patterson                       18-34                           Country
 KIKI-FM..............................  Patterson                       18-34                           Urban
FRESNO, CA                                                   64                      2         2
 KBOS-FM..............................  Patterson                       18-34                           Contemporary Hits
 KCBL-AM..............................  Patterson                      M18-49                           Sports/Talk
 KRZR-FM..............................  Patterson                      M18-49                           Album Rock
 KRDU-AM..............................  Patterson                       35-64                           Religion
 KSOF-FM..............................  Patterson                       25-54                           Soft Rock
 KEZL-FM(5)...........................  Americom                        35-54                           Smooth Jazz
 KFSO-FM(5)...........................  Americom                        25-54                           Oldies
 KTHT-FM(5)...........................  Americom                        25-54                           Adult Contemporary
 KFSO-AM(5)...........................  Americom                           NA                           Oldies
MODESTO-STOCKTON, CA                                        121                      2         2
 KFRY-FM..............................  Community Pacific               18-49                           Country
 KJAX-AM..............................  Community Pacific               35-64                           News/Talk
 KJSN-FM..............................  Community Pacific               25-54                           Adult Contemporary
 KFIV-AM..............................  Community Pacific               35-64                           News/Talk
 KOSO-FM(5)...........................  KOSO                            25-54                           Adult Contemporary
</TABLE>
 
                                       21
<PAGE>   24
 
<TABLE>
<CAPTION>
                                                                                   COMPANY   COMPANY
                                                                       TARGET      REVENUE   AUDIENCE
              MARKET AND                     SOURCE          MSA     DEMOGRAPHIC    SHARE     SHARE
       STATION CALL LETTERS(1)               COMPANY       RANK(2)      GROUP      RANK(2)   RANK(3)             FORMAT
       -----------------------               -------       -------   -----------   -------   --------            ------
<S>                                     <C>                <C>       <C>           <C>       <C>        <C>
ANCHORAGE, AK                                               170                      2         1
 KBFX-FM..............................  Community Pacific               18-49                           Classic Rock
 KASH-FM..............................  Community Pacific               25-54                           Country
 KENI-AM..............................  Community Pacific               25-54                           News/Talk
 KYAK-AM..............................  COMCO                           25-54                           Sports/Talk
 KGOT-FM..............................  COMCO                           25-54                           Contemporary Hits
 KYMG-FM..............................  COMCO                           25-54                           Adult Contemporary
FAIRBANKS, AK(4)                                             NA                     NA         1
 KIAK-FM..............................  COMCO                           25-54                           Country
 KIAK-AM..............................  COMCO                           25-54                           News/Talk
 KAKQ-FM..............................  COMCO                           25-54                           Adult Contemporary
 KUAB-FM..............................  Univ. of Alaska                 25-54                           Classic Hits
FARMINGTON, NM                                               NA                     NA         NA
 KKFG-FM..............................  GulfStar                        25-54                           Country
 KDAG-FM..............................  GulfStar                       M25-54                           Classic Rock
 KCQL-AM..............................  GulfStar                           35+                          Oldies/Talk
 KTRA-FM..............................  GulfStar                        18-49                           Traditional Country
YUMA, AZ                                                     NA                     NA         1
 KYJT-FM..............................  Commonwealth                    25-49                           Classic Rock
 KTTI-FM..............................  Commonwealth                    25-54                           Country
 KBLU-AM..............................  Commonwealth                    35-64                           News/Talk/Sports
</TABLE>
 
---------------
 
F   Female
M   Male
NA  Information not available.
 
(1) Actual city of license may be different from metropolitan market served.
    Market may be different from market definition used under FCC multiple
    ownership rules.
 
(2) MSA rank and Company revenue share obtained from BIA Research-Master Access,
    Version 2.0 Radio Analysis Database (current as of February 27, 1998).
    Revenue figures based upon 1997 gross revenue for the indicated markets.
 
(3) Company audience share rank obtained from Arbitron's Radio Market Reports,
    based on average quarter hour estimates for the last available reporting
    period ending Fall 1997, for the demographic of persons ages 25-54,
    listening Monday through Sunday, 6 a.m. to midnight, except for the Yuma,
    Arizona market which was obtained from AccuRatings, Spring 1997. To account
    for listeners lost to other nearby markets, a radio station's "local"
    audience share is derived by comparing the radio station's average quarter
    hour share to the total average quarter hour share for all stations whose
    signals are heard within the MSA, excluding audience share for listeners who
    listen to stations whose signal originate outside the MSA.
 
(4) Fairbanks, Alaska is a CSA as defined by Arbitron. Audience share and
    audience share rank obtained from Arbitron's Fall 1997 CSA Market Report.
 
(5) Pending the consummation of the respective Pending Acquisitions, the Company
    provides certain sales, programming and marketing services pursuant to LMAs
    to stations KEZL-FM, KFSO-FM, KTHT-FM and KFSO-AM in Fresno, California and
    KOSO-FM in Modesto-Stockton, California.
 
COMPETITION; CHANGES IN BROADCASTING INDUSTRY
 
     The radio broadcasting industry is highly competitive. The success of each
of the Company's stations depends largely upon its audience ratings and its
share of the overall advertising revenue within its market. The Company's
stations compete for listeners and advertising revenue directly with other radio
stations within their respective markets. Radio stations compete for listeners
primarily on the basis of program content that appeals to a particular
demographic group. By building a strong listener base consisting of a specific
demographic group in each of its markets, the Company is able to attract
advertisers seeking to reach those listeners.
 
     Factors that are material to a radio station's competitive position include
management experience, the station's local audience rank in its market,
transmitter power, assigned frequency, audience characteristics, local program
acceptance and the number and characteristics of other radio stations and other
advertising media in the market area. The Company attempts to improve its
competitive position with promotional campaigns aimed at the demographic groups
targeted by its stations and by sales efforts designed to attract advertisers.
Recent changes in the FCC's policies and rules permit increased ownership and
operation of
 
                                       22
<PAGE>   25
 
multiple local radio stations. Management believes that radio stations that
elect to take advantage of joint arrangements such as LMAs or JSAs may in
certain circumstances have lower operating costs and may be able to offer
advertisers more attractive rates and services. Although the Company currently
operates several multiple station groups and intends to pursue the creation of
additional multiple station groups, the Company's competitors in certain markets
include operators of multiple stations or operators who already have entered
into LMAs or JSAs.
 
     Barriers to entry into the radio broadcasting industry exist. The operation
of a radio broadcast station requires a license from the FCC and the number of
radio stations that can operate in a given market is limited by the availability
of FM and AM radio frequencies allotted by the FCC to communities in that
market, as well as by the FCC's multiple ownership rules that regulate the
number of stations that may be owned and controlled by a single entity. See "--
Federal Regulation of Radio Broadcasting."
 
     The Company's stations also compete for audiences and advertising revenues
within their respective markets directly with other radio stations, as well as
with other media, newspapers, magazines, cable television, outdoor advertising
and direct mail. In addition, the radio broadcasting industry is subject to
competition from new media technologies that are being developed or introduced,
such as the delivery of audio programming by cable television systems, by
satellite and by digital audio broadcast ("DAB"). DAB may deliver by satellite
to nationwide and regional audiences, multi-channel, multi-format, digital radio
services with sound quality equivalent to compact discs. The delivery of
information through the presently unregulated Internet also could create a new
form of competition. The radio broadcasting industry historically has grown
despite the introduction of new technologies for the delivery of entertainment
and information, such as television broadcasting, cable television, audio tapes
and compact discs. A growing population and greater availability of radios,
particularly car and portable radios, have contributed to this growth. There can
be no assurance, however, that the development or introduction in the future of
any new media technology will not have an adverse effect on the radio
broadcasting industry.
 
     The FCC has allocated spectrum for a new technology, digital audio radio
services ("DARS"), to deliver audio programming. The FCC has adopted licensing
and operating rules for DARS and in April 1997 awarded two licenses for this
service. DARS may provide a medium for the delivery by satellite or terrestrial
means of multiple new audio programming formats to local and/or national
audiences. Digital technology also may be used in the future by terrestrial
radio broadcast stations either on existing or alternate broadcasting
frequencies, and the FCC has stated that it will consider making changes to its
rules to permit AM and FM radio stations to offer digital sound following
industry analysis of technical standards. In addition, the FCC has authorized an
additional 100 kHz of bandwidth for the AM band and has allotted frequencies in
this new band to certain existing AM station licensees that applied for
migration to the expanded AM band prior to the FCC's cut-off date, subject to
the requirement that such licensees apply to the FCC to implement operations on
their expanded band frequencies. At the end of a transition period, those
licensees will be required to return to the FCC either the license for their
existing AM band station or the license for the expanded AM band station.
 
     The Company cannot predict what other matters might be considered in the
future by the FCC, nor can it assess in advance what impact, if any, the
implementation of any of these proposals or changes might have on its business.
 
     The Company employs a number of on-air personalities and generally enters
into employment agreements with certain of these personalities to protect its
interests in those relationships that it believes to be valuable. The loss of
certain of these personalities could result in a short-term loss of audience
share, but the Company does not believe that any such loss would have a material
adverse effect on the Company.
 
FEDERAL REGULATION OF RADIO BROADCASTING
 
     The ownership, operation and sale of radio stations are subject to the
jurisdiction of the FCC, which acts under authority granted by the
Communications Act. Among other things, the FCC assigns frequency bands for
broadcasting; determines the particular frequencies, locations and operating
power of stations; issues, renews, revokes and modifies station licenses;
determines whether to approve changes in ownership or control of station
licenses; regulates equipment used by stations; and adopts and implements
regulations and policies
 
                                       23
<PAGE>   26
 
that directly affect the ownership, operation and employment practices of
stations. The FCC has the power to impose penalties for violation of its rules
or the Communications Act.
 
     The following is a brief summary of certain provisions of the
Communications Act and of specific FCC regulations and policies. Reference
should be made to the Communications Act, FCC rules and the public notices and
rulings of the FCC for further information concerning the nature and extent of
federal regulation of radio stations.
 
     FCC Licenses. Radio stations operate pursuant to broadcasting licenses that
are ordinarily granted by the FCC for maximum terms of eight years and are
subject to renewal upon application to the FCC. The FCC licenses for the
Company's stations are held by certain of the Company's subsidiaries. During
certain periods when renewal applications are pending, petitions to deny license
renewals can be filed by interested parties, including members of the public.
Historically, the Company's management has not experienced any material
difficulty in renewing any licenses for stations under its control. The FCC is
required to hold hearings on a station's renewal application if a substantial or
material question of fact exists as to whether (i) the station has served the
public interest, convenience and necessity, (ii) there have been serious
violations by the licensee of the Communications Act or the FCC rules thereunder
or (iii) there have been other violations by the licensee of the Communications
Act or the FCC rules thereunder that, taken together, constitute a pattern of
abuse. Historically, FCC licenses have generally been renewed. The Company has
no reason to believe that its licenses will not be renewed in the ordinary
course, although there can be no assurance to that effect. The nonrenewal of one
or more of the Company's licenses could have a material adverse effect on the
Company.
 
     The FCC classifies each AM and FM station. An AM station operates on either
a clear channel, regional channel or local channel. A clear channel is one on
which AM stations are assigned to serve wide areas. Clear channel AM stations
are classified as either: Class A stations, which operate on an unlimited time
basis and are designated to render primary and secondary service over an
extended area; Class B stations, which operate on an unlimited time basis and
are designed to render service only over a primary service area; and Class D
stations, which operate either during daytime hours only, during limited times
only or on an unlimited time basis with low nighttime power. A regional channel
is one on which Class B and Class D AM stations may operate and serve primarily
a principal center of population and the rural areas contiguous to it. A local
channel is one on which AM stations operate on an unlimited time basis and serve
primarily a community and the suburban and rural areas immediately contiguous
thereto. Class C AM stations operate on a local channel and are designed to
render service only over a primary service area that may be reduced as a
consequence of interference.
 
     The minimum and maximum facilities requirements for an FM station are
determined by its class. FM class designations depend upon the geographic zone
in which the transmitter of the FM station is located. In general, commercial FM
stations are classified as follows, in order of increasing power and antenna
height: Class A, B1, C3, B, C2, C1 and C.
 
     Ownership Matters. The Communications Act prohibits the assignment of a
broadcast license or the transfer of control of a broadcast licensee without the
prior approval of the FCC. In determining whether to grant such approval, the
FCC considers a number of factors pertaining to the licensee, including
compliance with the various rules limiting common ownership of media properties,
the "character" of the licensee and those persons holding "attributable"
interests therein, and compliance with the Communications Act's limitations on
alien ownership as well as compliance with other FCC policies, including FCC
equal employment opportunity requirements.
 
     A transfer of control of a corporation controlling a broadcast license may
occur in various ways. For example, a transfer of control occurs if an
individual stockholder gains or loses "affirmative" or "negative" control of
such corporation through issuance, redemption or conversion of stock.
"Affirmative" control would consist of control of more than 50% of such
corporation's outstanding voting power and "negative" control would consist of
control of exactly 50% of such voting power. To obtain the FCC's prior consent
to assign or transfer control of a broadcast license, appropriate applications
must be filed with the FCC. If the application involves a "substantial change"
in ownership or control, the application must be placed on public notice for a
period of approximately 30 days during which petitions to deny the application
may be filed by interested
                                       24
<PAGE>   27
 
parties, including members of the public. If the application does not involve a
"substantial change" in ownership or control, it is a "pro forma" application.
The "pro forma" application is nevertheless subject to having informal
objections filed against it. If the FCC grants an assignment or transfer
application, interested parties have approximately 30 days from public notice of
the grant to seek reconsideration of that grant. Generally, parties that do not
file initial petitions to deny or informal objections against the application
face a high hurdle in seeking reconsideration of the grant. The FCC normally has
approximately an additional ten days to set aside such grant on its own motion.
When passing on an assignment or transfer application, the FCC is prohibited
from considering whether the public interest might be served by an assignment or
transfer of the broadcast license to any party other than the assignee or
transferee specified in the application.
 
     In response to the Telecom Act, the FCC amended its multiple ownership
rules to eliminate the national limits on ownership of AM and FM stations.
Additionally, it established new local ownership rules that use a sliding scale
of permissible ownership, depending on market size. In radio markets with 45 or
more commercial radio stations, a licensee may own up to eight stations, no more
than five of which can be in a single radio service (i.e., no more than five AM
or five FM). In radio markets with 30 to 44 commercial radio stations, a
licensee may own up to seven stations, no more than four of which can be in a
single radio service. In radio markets having 15 to 29 commercial radio
stations, a licensee may own up to six radio stations, no more than four of
which can be in a single radio service. Finally, in radio markets having 14 or
fewer commercial radio stations, a licensee may own up to five radio stations,
no more than three of which can be in the same service; provided that the
licensee may not own more than one half of the radio stations in the market. FCC
ownership rules continue to permit an entity to own one FM and one AM station in
a local market regardless of market size.
 
     The Communications Act and FCC rules also prohibit the common ownership,
operation or control of a radio broadcast station and a television broadcast
station serving the same geographic market (subject to a waiver of such
prohibition if certain conditions are satisfied) and of a radio broadcast
station and a daily newspaper serving the same geographic market. Under these
rules, absent waivers, the Company would not be permitted to acquire any daily
newspaper or television broadcast station (other than low-power television) in
any geographic market in which it now owns radio broadcast properties. On
October 1, 1996, the FCC commenced a proceeding to explore possible revisions of
its policies concerning waiver of the newspaper/radio cross-ownership
restrictions. The FCC generally applies its ownership limits to "attributable"
interests held by an individual, corporation, partnership or other association.
In the case of corporations holding, or through subsidiaries controlling,
broadcast licenses, the interests of officers, directors and those who, directly
or indirectly, have the right to vote 5% or more of the corporation's voting
stock (or 10% or more of such stock in the case of insurance companies,
investment companies and bank trust departments that are passive investors) are
generally attributable.
 
     Thomas O. Hicks, a director of the Company, is the President, the sole
director and the sole shareholder of HM2/Chancellor, which through its
subsidiaries, including Chancellor Media, holds attributable interests in radio
stations in various markets in the States of Arizona, California, Colorado,
Florida, Georgia, Illinois, Massachusetts, Michigan, Minnesota, New York, Ohio,
Pennsylvania, and Texas, as well as in Washington, D.C. Thomas O. Hicks is also
the President, the sole director and the sole shareholder of HM3/Sunrise, which
through its subsidiaries owns television stations in California, Michigan, New
York and Ohio and is seeking to acquire an attributable interest in television
stations in Vermont, Texas and Rhode Island. In addition, Thomas O. Hicks is the
sole member of TOH/Ranger LLC, which controls LIN Holdings Corporation ("LHC"),
which has recently acquired LIN Television Corporation ("LIN"), and is a
director and Chairman of LHC and LIN. LIN and its subsidiaries own television
stations in Connecticut, New York, Virginia, Indiana, Illinois, and Texas, and
have agreements to acquire interests in television stations in Alabama,
California and Michigan. Lawrence D. Stuart, Jr. and Eric C. Neuman, directors
of the Company, also serve as directors of LHC and LIN.
 
     In determining whether the Company is in compliance with the local
ownership limits on AM and FM stations, the FCC will consider the Company's AM
and FM holdings as well as the attributable broadcast interests of the Company's
officers, directors and attributable stockholders. Accordingly, the attributable
broadcast interests of the Company's officers and directors described in the
preceding paragraph will limit the
                                       25
<PAGE>   28
 
number of radio stations the Company may acquire or own in any market in which
such officers or directors hold or acquire attributable broadcast interests. In
addition, the Company's officers and directors may from time to time hold
various nonattributable interests in media properties.
 
     The FCC "one-to-a-market" rule generally prohibits an entity from holding
an attributable interest in both a television station and radio stations in the
same market. The FCC has granted waivers of this rule in certain circumstances.
Some such waivers (including one recently granted for the Company's stations in
the Fairfield County, Connecticut market) have been conditioned on the outcome
of a pending rulemaking proceeding in which the FCC is considering whether to
modify the rule and/or the current waiver policy. Requests for similar
"one-to-a-market" waivers in other markets are pending before the FCC in the
application for approval of the Austin Acquisition. There can be no assurance
that these waiver requests will be granted. Likewise, depending on the outcome
of the pending FCC rulemaking, the Company may in the future have to divest
stations for which "one-to-a-market" waivers were previously granted.
 
     Under its "cross-interest" policy, the FCC considers certain "meaningful"
relationships among competing media outlets in the same market, even if the
ownership rules do not specifically prohibit the relationship. Under the
cross-interest policy, the FCC in certain instances may prohibit one party from
acquiring an attributable interest in one media outlet and a substantial
non-attributable economic interest in another media outlet in the same market.
Under this policy, the FCC may consider significant equity interests combined
with an attributable interest in a media outlet in the same market, joint
ventures, and common key employees among competitors. The cross-interest policy
does not necessarily prohibit all of these interests, but requires that the FCC
consider whether, in a particular market, the "meaningful" relationships between
competitors could have a significant adverse effect upon economic competition
and program diversity. Heretofore, the FCC has not applied its cross-interest
policy to LMAs and JSAs between broadcast stations. In its ongoing rulemaking
proceeding concerning the attribution rules described below, the FCC has sought
comment on, among other things, (i) whether the cross-interest policy should be
applied only in smaller markets and (ii) whether non-equity financial
relationships such as debt, when combined with multiple business
interrelationships such as LMAs and JSAs, raise concerns under the
cross-interest policy.
 
     The Communications Act prohibits the issuance of broadcast licenses to, or
the holding of broadcast licenses by, any corporation of which more than 20% of
the capital stock is owned of record or voted by non-U.S. citizens or their
representatives or by a foreign government or a representative thereof, or by
any corporation organized under the laws of a foreign country (collectively,
"Aliens"). The Communications Act also authorizes the FCC, if the FCC determines
that it would be in the public interest, to prohibit the issuance of a broadcast
license to, or the holding of a broadcast license by, any corporation directly
or indirectly controlled by any other corporation of which more than 25% of the
capital stock is owned of record or voted by Aliens. The Company has been
advised that the FCC staff has interpreted this provision to require a public
interest finding in favor of such a grant or holding before a broadcast license
may be granted to or held by any such corporation and has made such a finding
only in limited circumstances generally involving licenses other than broadcast
licenses. The FCC has issued interpretations of existing law (i) under which
these restrictions in modified form apply to other forms of business
organizations, including partnerships and (ii) indicating how alien interests in
a company that are held directly through intermediate entities should be
considered in determining whether that company is in compliance with these alien
ownership restrictions. As a result of these provisions, the licenses granted to
the radio station subsidiaries of the Company by the FCC could be revoked if,
among other restrictions imposed by the FCC, more than 25% of the Company's
stock were directly or indirectly owned or voted by Aliens. Capstar
Broadcasting's Certificate of Incorporation restricts the ownership, voting and
transfer of Capstar Broadcasting's capital stock in accordance with the
Communications Act and the rules of the FCC, and prohibits ownership of more
than 25% of Capstar Broadcasting's outstanding capital stock (or more than 25%
of the voting rights it represents) by or for the account of Aliens or
corporations otherwise subject to domination or control by Aliens. The
Certificate of Incorporation of Capstar Broadcasting authorizes Capstar
Broadcasting's Board of Directors to adopt such provisions as it deems necessary
to enforce these prohibitions. In addition, the Certificate of Incorporation of
Capstar Broadcasting provides that shares of capital stock of Capstar
Broadcasting determined by Capstar Broadcasting's Board of Directors to be owned
beneficially by an Alien or an entity directly or indirectly owned by
 
                                       26
<PAGE>   29
 
Aliens in whole or in part shall always be subject to redemption by Capstar
Broadcasting by action of its Board of Directors to the extent necessary, in the
judgment of the Board of Directors of Capstar Broadcasting, to comply with these
alien ownership restrictions.
 
     Local Marketing Agreements. Over the past few years, a number of radio
stations have entered into what have commonly been referred to as local
marketing agreements or LMAs. While these agreements may take varying forms,
under a typical LMA, separately owned and licensed radio stations agree to enter
into cooperative arrangements of varying sorts, subject to compliance with the
requirements of antitrust laws and with the FCC's rules and policies. Under
these arrangements, separately-owned stations could agree to function
cooperatively in programming, advertising sales and similar matters, subject to
the requirement that the licensee of each station maintain independent control
over the programming and operations of its own station. One typical type of LMA
is a programming agreement between two separately-owned radio stations serving a
common service area, whereby the licensee of one station programs substantial
portions of the broadcast day on the other licensee's station, subject to
ultimate editorial and other controls being exercised by the latter licensee,
and sells advertising time during those program segments. Such arrangements are
an extension of the concept of "time brokerage" agreements, under which a
licensee of a station sells blocks of time on its station to an entity or
entities that program the blocks of time and sell commercial advertising
announcements during the time periods in question.
 
     The FCC has specifically revised its "cross-interest" policy to make that
policy inapplicable to time brokerage arrangements. Furthermore, the staff of
the FCC's Mass Media Bureau has held that LMAs are not contrary to the
Communications Act provided that the licensee of the station that is being
substantially programmed by another entity maintains complete responsibility
for, and control over, programming and operations of its broadcast station and
assures compliance with applicable FCC rules and policies.
 
     The FCC's multiple ownership rules specifically permit radio station LMAs
to continue to be entered into and implemented, but provide that a licensee or a
radio station that brokers more than 15% of the weekly broadcast time on another
station serving the same market will be considered to have an attributable
ownership interest in the brokered station for purposes of the FCC's multiple
ownership rules. As a result, in a market where it owns a radio station, the
Company would not be permitted to enter into an LMA with another local radio
station in the same market that it could not own under the revised local
ownership rules, unless the Company's programming constituted 15% or less of the
other local station's programming time on a weekly basis. The FCC rules also
prohibit a broadcast licensee from simulcasting more than 25% of its programming
on another station in the same broadcast service (i.e., AM-AM or FM-FM) through
a time brokerage or LMA arrangement where the brokered and brokering stations
which it owns or programs serve substantially the same area. Such 25%
simulcasting limitation also applies to commonly owned stations in the same
broadcast service that serve substantially the same area.
 
     Joint Sales Agreements. Over the past few years, a number of radio stations
have entered into cooperative arrangements commonly known as joint sales
agreements or JSAs. While these agreements may take varying forms, under the
typical JSA, a station licensee obtains, for a fee, the right to sell
substantially all of the commercial advertising on a separately-owned and
licensed station in the same market. The typical JSA also customarily involves
the provision by the selling licensee of certain sales, accounting and "back
office" services to the station whose advertising is being sold. The typical JSA
is distinct from an LMA in that a JSA normally does not involve programming.
 
     The FCC has determined that issues of joint advertising sales should be
left to enforcement by antitrust authorities, and therefore does not generally
regulate joint sales practices between stations. Currently, stations for which a
licensee sells time under a JSA are not deemed by the FCC to be attributable
interests of that licensee. However, in connection with its ongoing rulemaking
proceeding concerning the attribution rules, the FCC is considering whether JSAs
should be considered attributable interests or within the scope of the FCC's
cross-interest policy, particularly when JSAs contain provisions for the supply
of programming services and/or other elements typically associated with LMAs. If
JSAs become attributable interests as a result of changes in the FCC rules, the
Company may be required to terminate any JSA it might have with a radio station
which the Company could not own under the FCC's multiple ownership rules.
 
                                       27
<PAGE>   30
 
     Programming and Operation. The Communications Act requires broadcasters to
serve the "public interest." The FCC gradually has relaxed or eliminated many of
the more formalized procedures it had developed in the past to promote the
broadcast of certain types of programming responsive to the needs of a station's
community of license. A licensee continues to be required, however, to present
programming that is responsive to issues of the station's community and to
maintain certain records demonstrating such responsiveness. Complaints from
listeners concerning a station's programming often will be considered by the FCC
when it evaluates renewal applications of a licensee, although listener
complaints may be filed at any time and generally may be considered by the FCC
at any time. Stations also must pay regulatory and application fees and follow
various rules promulgated under the Communications Act that regulate, among
other things, political advertising, sponsorship identifications, the
advertisement of contests and lotteries, obscene and indecent broadcasts, and
technical operations, including limits on human exposure to radio frequency
radiation. In addition, licensees must develop and implement affirmative action
programs designed to promote equal employment opportunities and must submit
reports to the FCC with respect to these matters on an annual basis and in
connection with a renewal application.
 
     Failure to observe these or other rules and policies can result in the
imposition of various sanctions, including monetary forfeitures, the grant of
"short term" (less than the full term) license renewal or, for particularly
egregious violations, the denial of a license renewal application or the
revocation of a license.
 
     Proposed and Recent Changes. The FCC has pending a rulemaking proceeding
that seeks, among other things, comment on whether the FCC should modify its
radio and television broadcast ownership "attribution" rules by (i) raising the
basic benchmark for attributing ownership in a corporate licensee from 5% to 10%
of the licensee's outstanding voting power, (ii) increasing from 10% to 20% of
the licensee's outstanding voting power the attribution benchmark for "passive
investors" in corporate licensees, (iii) attributing certain minority
stockholdings in corporations with a single majority shareholder and (iv)
attributing certain LMA, JSA, debt or non-voting stock interests that have
heretofore been non-attributable.
 
     Moreover, Congress and the FCC have under consideration, and in the future
may consider and adopt, new laws, regulations and policies regarding a wide
variety of matters that could affect, directly or indirectly, the operation,
ownership and profitability of the Company's radio stations, result in the loss
of audience share and advertising revenues for the Company's radio stations, and
affect the ability of the Company to acquire additional radio stations or to
finance those acquisitions. Such matters may include spectrum use or other fees
on FCC licenses; foreign ownership of broadcast licenses; revisions to the FCC's
equal employment opportunity rules and rules relating to political broadcasting;
technical and frequency allocation matters; proposals to restrict or prohibit
the advertising of beer, wine and other alcoholic beverages on radio; changes in
the FCC's cross-interest, multiple ownership and attribution policies; new
technologies such as DAB; and proposals to auction the right to use the radio
broadcast spectrum to the highest bidder.
 
     The Company cannot predict what other matters might be considered in the
future by the FCC or Congress, nor can it judge in advance what impact, if any,
the implementation of any of these proposals or changes might have on its
business.
 
     Federal Antitrust Laws. In addition to the risks associated with the
acquisition of radio stations, the Company is also aware of the possibility that
certain acquisitions it proposes to make may be investigated by the FTC or the
DOJ, which are the agencies responsible for enforcing the federal antitrust
laws. The agencies have recently investigated several radio station acquisitions
where an operator proposed to acquire new stations in its existing markets,
including the Patterson Acquisition. The DOJ's investigation with respect to the
Patterson Acquisition was closed, however, when the DOJ granted early
termination of the applicable waiting period under the HSR Act in January 1998
after the Company agreed to sell two stations in Allentown, Pennsylvania that
were to be acquired in the Patterson Acquisition. The Company cannot predict the
outcome of any specific DOJ or FTC investigation, which are necessarily fact
specific. Any decision by the FTC or the DOJ to challenge a proposed acquisition
could affect the ability of the Company to consummate the acquisition or to
consummate it on the proposed terms.
 
     For an acquisition meeting certain size thresholds, the HSR Act and the
rules promulgated thereunder require the parties to file Notification and Report
Forms with the FTC and the DOJ and to observe specified
                                       28
<PAGE>   31
 
waiting period requirements before consummating the acquisition. During the
initial 30-day period after the filing, the agencies decide which of them will
investigate the transaction. If the investigating agency determines that the
transaction does not raise significant antitrust issues, then it will either
terminate the waiting period or allow it to expire after the initial 30 days. On
the other hand, if the agency determines that the transaction requires a more
detailed investigation, then at the conclusion of the initial 30-day period, it
will issue a formal request for additional information ("Second Request"). The
issuance of a Second Request extends the waiting period until the twentieth
calendar day after the date of substantial compliance by all parties to the
acquisition. Thereafter, such waiting period may only be extended by court order
or with the consent of the parties. In practice, complying with a Second Request
can take a significant amount of time. In addition, if the investigating agency
raises substantive issues in connection with a proposed transaction, then the
parties frequently engage in lengthy discussions or negotiations with the
investigating agency concerning possible means of addressing those issues,
including but not limited to persuading the agency that the proposed acquisition
would not violate the antitrust laws, restructuring the proposed acquisition,
divestiture of other assets of one or more parties, or abandonment of the
transaction. Such discussions and negotiations can be time-consuming, and the
parties may agree to delay consummation of the acquisition during their
pendency.
 
     At any time before or after the consummation of a proposed acquisition, the
FTC or the DOJ could take such action under the antitrust laws as it deems
necessary or desirable in the public interest, including seeking to enjoin the
acquisition or seeking divestiture of the business acquired or other assets of
the Company. Acquisitions that are not required to be reported under the HSR Act
may be investigated by the FTC or the DOJ under the antitrust laws before or
after consummation. In addition, private parties may under certain circumstances
bring legal action to challenge an acquisition under the antitrust laws.
 
     Except as described hereinafter, the Company does not believe that any
Pending Transaction will be adversely affected in any material respect by review
under the HSR Act. Although no filing under the HSR Act is required for each of
the Big Chief, KRNA, KATQ and Gibbons Acquisitions, the DOJ is investigating the
competitive effects of combining the stations with the Company's currently owned
stations in each of the Fort Smith, Arkansas; Baton Rouge, Louisiana; Cedar
Rapids, Iowa; Texarkana, Texas; and Roanoke, Virginia areas. See "The
Transactions."
 
     The Company is currently subject to two consent decrees and a letter
agreement with the DOJ with respect to certain markets. As a result of the
GulfStar Acquisition, the Company is subject to a letter agreement in the
northwest Arkansas area which requires the Company to notify the DOJ at least 30
days prior to the consummation of an acquisition in such area for a ten-year
period beginning on March 4, 1997. SFX has entered into a consent decree (the
"Long Island Consent Decree") with the DOJ and Chancellor Media with respect to
the Long Island, New York market under which SFX agreed not to acquire WALK-FM.
The Company will become subject to the Long Island Consent Decree as a result of
the SFX Acquisition. Capstar Broadcasting and SFX executed a consent decree (the
"SFX Consent Decree") with the DOJ, which required the Company to agree to
divest the stations that are the subject of the Long Island, Houston-KKPN,
Pittsburgh-WTAE, Greenville and Jackson-WJDX Dispositions before the DOJ would
permit the consummation of the SFX Acquisition. The SFX Consent Decree also
requires the Company to give the DOJ notice of any acquisition in the Long
Island, New York; Houston, Texas; Pittsburgh, Pennsylvania; Greenville, South
Carolina; and Jackson, Mississippi areas at least 30 days prior to the
consummation thereof for a period of up to ten years unless the Company and
Chancellor Media do not own stations in these areas at the time of the proposed
acquisitions.
 
     As part of its increased scrutiny of radio station acquisitions, the DOJ
has stated publicly that it believes that LMAs, JSAs and other similar
agreements customarily entered into in connection with radio station transfers
if such agreements take effect prior to the expiration of the waiting period
under the HSR Act could violate the HSR Act. Furthermore, the DOJ has noted that
JSAs may raise antitrust concerns under Section 1 of the Sherman Act and has
challenged JSAs in certain locations.
 
                                       29
<PAGE>   32
 
EMPLOYEES
 
     At December 31, 1997, the Company had a staff of 1,871 full-time employees
and 793 part-time employees. There are no collective bargaining agreements
between the Company and its employees. The Company does have, however, one union
member employed in connection with its Muzak franchise in Atlanta, Georgia. The
Company believes that its relations with its employees are good.
 
SEASONALITY
 
     Seasonal revenue fluctuations are common in the radio broadcasting industry
and are due primarily to fluctuations in advertising expenditures by retailers.
The Company's revenues and broadcast cash flows are typically lowest in the
first quarter and highest in the second and fourth quarters.
 
RISKS ASSOCIATED WITH BUSINESS ACTIVITIES
 
  Substantial Leverage
 
     The Companies have, and, will continue to have, consolidated indebtedness
that is substantial in relation to their stockholders' equity. As of December
31, 1997, Capstar Partners had outstanding, on a consolidated basis, long-term
indebtedness (including current portions) of $594.6 million and stockholders'
equity of approximately $215.9 million, and Capstar Radio had outstanding, on a
consolidated basis, long-term indebtedness (including current portions) of
$427.6 million and stockholders' equity of $461.3 million. The Indentures (as
defined), the Certificate of Designation (the "Certificate of Designation") that
governs the outstanding shares of 12% Senior Exchangeable Preferred Stock, par
value $.01 per share (the "12% Capstar Preferred Stock"), of Capstar Partners
and the Capstar Credit Facility limit the incurrence of additional indebtedness
by the Company, in each case subject to certain exceptions.
 
     The level of the Companies' indebtedness could have several important
consequences to the holders of the Notes (as defined) and the 12% Capstar
Preferred Stock, including, but not limited to, the following: (i) a substantial
portion of the Company's cash flow from operations will be dedicated to debt
service and will not be available for other purposes; (ii) the Company's ability
to obtain additional financing for working capital, capital expenditures,
acquisitions and general corporate or other purposes may be impaired in the
future; (iii) certain of the Company's borrowings are, or will be, at variable
rates of interest (including any borrowings under the Capstar Credit Facility),
which expose the Company to the risk of increased interest rates; (iv) the
Company's leveraged position and the covenants contained in the Indentures, the
Certificate of Designation and the Capstar Credit Facility could limit the
Company's ability to compete, expand and make capital improvements; and (v) the
Company's level of indebtedness could make it more vulnerable to economic
downturns, limit its ability to withstand competitive pressures and reduce its
flexibility in responding to changing business and economic conditions.
 
     The Company's ability to satisfy its debt service and other obligations
will depend upon its future financial and operating performance, which, in turn,
are subject to prevailing economic conditions and financial, business and other
factors, certain of which are beyond its control. If the Company's cash flow and
capital resources are insufficient to fund its debt service and other
obligations, the Company may be forced to reduce or delay planned expansion and
capital expenditures, sell assets, obtain additional equity capital or
restructure its debt. There can be no assurance as to the timing of such sales
or the proceeds that the Company could realize therefrom or that such sales or
other capital raising activities or debt restructuring can be effected on terms
satisfactory to the Company or at all. See "Item 7. Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Liquidity and
Capital Resources."
 
  Risks of Acquisition Strategy
 
     The Company pursues growth through the acquisition of radio broadcasting
companies, radio station groups and individual radio stations primarily in
mid-sized markets. The Company cannot predict whether it will be successful in
pursuing acquisition opportunities or what the consequences will be of any
acquisitions. Consummation of future acquisitions (including the Pending
Acquisitions) is subject to various conditions,
 
                                       30
<PAGE>   33
 
including FCC and other regulatory approval. No assurances can be given that any
future acquisitions (including the Pending Acquisitions) will be consummated or
that, if completed, they will be successful. In particular, no assurances can be
given that the SFX Acquisition will be consummated or, if consummated, that the
Company will purchase a portion or all of SFX's capital stock or that such an
investment will be successful. The Company's acquisition strategy involves
numerous risks, including increasing debt service requirements, difficulties in
the integration of operations and systems and the management of a large and
geographically diverse group of stations, the diversion of management's
attention from other business concerns and the potential loss of key employees
of acquired stations. There can be no assurance that the Company's management
will be able to manage effectively the resulting business or that such
acquisitions will benefit the Company. Depending on the nature, size and timing
of future acquisitions, the Company may be required to raise additional
financing necessary to consummate the future acquisitions (including the Pending
Acquisitions). There can be no assurance that such financing will be permitted
under the agreements that govern the outstanding indebtedness of the Company, or
any other loan agreements or indebtedness to which the Company may become a
party. Moreover, there can be no assurance that such additional financing will
be available to the Company on terms acceptable to its management. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources."
 
  History of Net Losses; Management of Growth
 
     The Company was organized in October 1996 and, consequently, has a limited
operating history upon which investors may base their evaluation of the
Company's performance. Capstar Partners had a net loss of $12.0 million and
$39.7 million for the years ended December 31, 1996 and 1997, respectively, and
Capstar Radio had a net loss of $9.1 million and $28.0 million for the years
ended December 31, 1996 and 1997, respectively. There can be no assurance that
the Company will become profitable.
 
     The Company incurred or assumed, and will incur or assume, substantial
indebtedness to finance the Completed Transactions, the Pending Acquisitions and
possibly the SFX Transactions for which it has, and will continue to have,
significant debt service requirements. In addition, the Company has, and will
continue to have, significant charges for depreciation and amortization expense
related to the fixed assets and intangibles acquired, or to be acquired, in its
acquisitions. Consequently, the Company expects that, for the foreseeable future
as it pursues its acquisition strategy, it will report net losses substantially
in excess of those experienced historically, which will result in decreases in
stockholders' equity. See "Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition."
 
     The Company has grown and expects to continue to grow through acquisitions,
which places significant demands on its administrative, operational, and
financial resources. The Company's future performance and profitability will
depend in part on its ability to make additional radio station acquisitions in
mid-sized markets, to integrate successfully the operations and systems of
acquired radio stations and radio groups, to hire additional personnel, and to
implement necessary enhancements to its management systems to respond to changes
in its business. The inability of the Company to do any of the foregoing could
have a material adverse effect on the Company.
 
  Restrictions Imposed by Terms of Indebtedness
 
     The Indentures, the Certificate of Designation, and the Capstar Credit
Facility contain certain covenants that restrict, among other things, the
ability of the Company to incur additional indebtedness, issue preferred stock,
incur liens, pay dividends or make certain other restricted payments, consummate
certain asset sales, enter into certain transactions with affiliates, merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the assets of the Company. The
Capstar Credit Facility also requires the Company to maintain specified
financial ratios and to satisfy certain financial condition tests. The ability
of the Company to meet those financial ratios and financial condition tests can
be affected by events beyond its control, and there can be no assurance that the
Company will meet those tests. A breach of any of these covenants could result
in a default under the Indentures and/or the Capstar Credit Facility. Upon an
event of default under the Indentures or the Capstar Credit Facility, the
lenders thereunder could elect to declare all amounts outstanding thereunder,
together with accrued interest, to be immediately
                                       31
<PAGE>   34
 
due and payable. In the case of the Capstar Credit Facility, if the Company were
unable to repay those amounts, the lenders thereunder could proceed against the
collateral granted to them to secure that indebtedness. Any such event of
default, therefore, could have a material adverse effect on the Company.
 
  Competition; Business Risks
 
     Radio broadcasting is a highly competitive business. The Company's radio
stations, now owned or to be acquired upon completion of the Pending
Acquisitions and possibly the SFX Transactions, compete for audiences and
advertising revenues within their respective markets directly with other radio
stations, as well as with other media, such as newspapers, magazines, cable
television, outdoor advertising and direct mail. Audience ratings and market
shares are subject to change and any adverse change in a particular market could
have a material adverse effect on the revenue of stations located in that
market. While the Company already competes with other stations with comparable
programming formats in many of its markets, if another radio station in the
market were to convert its programming format to a format similar to one of the
Company's stations, if a new station were to adopt a competitive format, or if
an existing competitor were to strengthen its operations, the Company's stations
could suffer a reduction in ratings and/or advertising revenue and could require
increased promotional and other expenses. The Telecom Act facilitates the entry
of other radio broadcasting companies into the markets in which the Company
operates or may operate in the future. Some of such companies may have more
financial resources than the Company. Future operations are further subject to
many variables which could have a material adverse effect on the Company. These
variables include economic conditions, both generally and relative to the radio
broadcasting industry; shifts in population and other demographics; the level of
competition for advertising dollars with other radio stations, television
stations, and other entertainment and communications media; fluctuations in
operating costs; technological changes and innovations; changes in labor
conditions; and changes in governmental regulations and policies and actions of
federal regulatory bodies, including the DOJ, the FTC (as defined) and the FCC.
Although the Company believes that substantially all of its radio stations, now
owned or to be acquired upon completion of the Pending Acquisitions and possibly
the SFX Transactions, are positioned to compete effectively in their respective
markets, there can be no assurance that any such station will be able to
maintain or increase its current audience ratings and advertising revenues.
 
     Radio broadcasting is also subject to competition from new media
technologies that are being developed or introduced, such as the delivery of
audio programming by cable television systems and the introduction of DAB. DAB
may deliver by satellite to nationwide and regional audiences multi-channel,
multi-format digital radio services with sound quality equivalent to compact
discs. The Company cannot predict the effect, if any, that any such new
technologies may have on the radio broadcasting industry or the Company. See
"-- Competition; Changes in Broadcasting Industry."
 
  Control of the Company
 
     Thomas O. Hicks, Capstar Broadcasting's Chairman of the Board, beneficially
owns 100.0% of the outstanding common stock of Capstar Broadcasting. Thomas O.
Hicks, through his control of Hicks Muse and its affiliates, his personal
holdings of the common stock of Capstar Broadcasting and his control of the
voting power of the remaining shares of common stock of Capstar Broadcasting
through stockholders agreements, is able to control the vote on all matters
submitted to the vote of stockholders, and, therefore, is able to direct the
management and policies of the Company, except with respect to those matters
requiring a class vote by applicable law. See "Item 12. Security Ownership of
Certain Beneficial Owners and Management" and "Item 13. Certain Relationships
and Related Transactions -- Stockholders Agreements."
 
  Dependence on Key Personnel
 
     The Company's business depends upon the continued efforts, abilities and
expertise of its executive officers and other key employees. The Company has
employment agreements with several of the Company's key employees, including R.
Steven Hicks. The Company believes that the loss of any of these individuals
could have a material adverse effect on the Company. See "Item 10. Directors and
Executive Officers of the Registrants."
                                       32
<PAGE>   35
 
  Potential Conflicts of Interest
 
     Hicks Muse is in the business of making significant investments in existing
or newly formed companies and may from time to time acquire and hold controlling
or noncontrolling interests in radio broadcasting assets (such as its investment
in Chancellor Media) other than through the Company, or in other broadcasting
businesses (such as its recent investment in LIN Television Corporation and STC
Broadcasting Corporation) that may directly or indirectly compete with the
Company for, among other things, advertising revenues and radio stations or
other broadcast related businesses. The interests of Hicks Muse (and Thomas O.
Hicks) may conflict with those of the holders of the Notes and 12% Capstar
Preferred Stock. Hicks Muse and its affiliates (including Chancellor Media) may
from time to time identify, pursue and consummate acquisitions of radio stations
or other broadcast related businesses that may be complementary to the business
of the Company and, therefore, such acquisition opportunities may not be
available to the Company. In addition, affiliates of Hicks Muse may from time to
time identify and structure acquisitions for the Company and will receive fees
in connection with such transactions. Certain affiliates of Hicks Muse have
entered, and in the future may enter, into business relationships with the
Company. See "Item 13. Certain Relationships and Related Transactions."
 
     As a result of the current or future ownership of radio and television
broadcast stations by entities in which Hicks Muse has significant equity
interests (other than through the Company), regulatory and other restrictions
may restrict or prohibit the Company from buying the stations in which those
other stations operate or intend to operate. See "-- Federal Regulation of Radio
Broadcasting." In addition, Hicks Muse (and Thomas O. Hicks) has required and in
the future, may require, the Company to divest itself of one or more radio
stations in a market to permit the ownership of radio and television broadcast
stations in such market by other entities in which Hicks Muse has significant
equity interests.
 
  Governmental Regulation of Broadcasting Industry
 
     The radio broadcasting industry is subject to extensive federal regulation
by the FCC under the Communications Act that, among other things, requires
approval by the FCC for the issuance, renewal, transfer of control and
assignment of broadcasting station operating licenses and limits the number of
broadcasting properties that the Company may acquire in any market. In addition,
the Communications Act and FCC rules impose limitations on alien ownership and
voting of the capital stock of, and participation in the affairs of, the
Company. The Company's business is dependent upon maintaining its broadcasting
licenses issued by the FCC, which are ordinarily issued for a maximum term of
eight years. Although it is rare for the FCC to deny a license renewal
application, there can be no assurance that the future renewal applications of
the Company will be approved or that such renewals will not include conditions
or qualifications that could adversely affect the Company. The non-renewal of
one or more of the Company's licenses could have a material adverse effect on
the Company. Moreover, governmental regulations and policies may change over
time and there can be no assurance that such changes would not have a material
adverse impact upon the Company.
 
     As a result of the passage of the Telecom Act, radio broadcasting companies
were permitted to increase their ownership of stations within a single market
from a maximum of four to a maximum of between five and eight stations,
depending on market size. The Telecom Act creates significant new opportunities
for broadcasting companies but also creates uncertainties as to how the FCC and
the courts will enforce and interpret the Telecom Act. Compliance with the FCC's
multiple ownership rules is expected to cause the Company and other radio
broadcasters to forego acquisition opportunities that they might otherwise wish
to pursue. Compliance with these rules by third parties may also have a
significant impact on the Company as, for example, in precluding the
consummation of swap transactions that would cause such third parties to violate
multiple ownership limitations. The consummation of radio broadcasting
acquisitions requires prior approval of the FCC with respect to the transfer of
control or assignment of the broadcast licenses of the acquired stations.
Certain of the Pending Transactions and the SFX Transactions have not yet
received FCC approval. There can be no assurance that the FCC will approve
future acquisitions or dispositions by the Company (including the Pending
Transactions and the SFX Transactions) or will not impose conditions or
qualifications in connection with such acquisitions or dispositions by the
Company (including the Pending
                                       33
<PAGE>   36
 
Transactions and the SFX Transactions). As a result of the recent consolidation
of ownership in the radio broadcast industry, the DOJ has been giving closer
scrutiny to acquisitions in the industry, including certain transactions
involving the Company. The DOJ has stated publicly that it has established
certain revenue and audience share concentration benchmarks with respect to
radio station acquisitions, above which a transaction may receive additional
antitrust scrutiny. However, to date, the DOJ has also investigated transactions
that do not meet or exceed these benchmarks and has cleared transactions that do
exceed the benchmarks. Although the Company does not believe that its
acquisition strategy as a whole will be adversely affected in any material
respect by antitrust review the HSR Act or by additional divestitures that the
Company may have to make as a result of antitrust review, there can be no
assurance that this will be the case.
 
     The number of radio stations the Company may acquire in any market is
limited by FCC rules and may vary depending upon whether the interests in other
radio stations or certain other media properties of certain individuals
affiliated with the Company are attributable to those individuals under FCC
rules. Moreover, under the FCC's cross-interest policy, the FCC in certain
instances may prohibit one party from acquiring an attributable interest in one
media outlet and a substantial non-attributable economic interest in another
media outlet in the same market, thereby prohibiting a particular acquisition by
the Company. The FCC generally applies its ownership limits to "attributable"
interests held by an individual, corporation, partnership or other association.
The interests of the Company's officers, directors, and stockholders who have
the right to vote 5%.
 
FORWARD-LOOKING STATEMENTS
 
     This Annual Report on Form 10-K contains forward-looking statements. The
words "anticipate," "believe," "expect," "plan," "intend," "estimate,"
"project," "foresee," "will," "could," "may" and similar expressions are
intended to identify forward-looking statements. Such statements reflect the
Company's current views with respect to future events and financial performance
and involve risks and uncertainties, including without limitation the risks
described in "-- Risks Associated with Business Activities." Should one or more
of these risks or uncertainties occur, or should underlying assumptions prove
incorrect, actual results may vary materially and adversely from those
indicated.
 
GLOSSARY OF CERTAIN TERMS
 
     "9 1/4% Capstar Notes" means $200.0 million in aggregate principal amount
of Capstar Radio's 9 1/4% Senior Subordinated Notes due 2007.
 
     "9 1/4% Capstar Notes Indenture" means the indenture governing the 9 1/4%
Capstar Notes.
 
     "12 3/4% Capstar Notes" means $277.0 million in aggregate principal amount
at maturity of Capstar Partners' 12 3/4% Senior Discount Notes due 2009.
 
     "12 3/4% Capstar Notes Indenture" means the indenture governing the 12 3/4%
Capstar Notes.
 
     "13 1/4% Capstar Notes" means $76.8 million in aggregate principal amount
of Capstar Radio's Senior Subordinated Notes due 2003.
 
     "13 1/4% Capstar Notes Indenture" means the indenture governing the 13 1/4%
Capstar Notes.
 
     "Allentown Disposition" means the disposition of radio stations WODS-FM and
WEEX-AM serving the Easton, Pennsylvania market to Clear Channel.
 
     "American General Acquisition" means the acquisition of radio station
KKCL-FM from American General Media of Texas, Inc. serving the Lubbock, Texas
market.
 
     "Americom Acquisition" means the Company's pending acquisition from
Americom II and Americom Las Vegas Limited Partnership of five radio stations
(four FM and one AM) serving the Fresno, California market, four of which were
acquired for cash and one of which was acquired in consideration for the
disposition of three radio stations (two FM and one AM) of the Company.
 
     "Americom Disposition" means the Company's pending disposition of three
radio stations (two FM and one AM) serving the Reno, Nevada market to Americom
Las Vegas Limited Partnership.
                                       34
<PAGE>   37
 
     "Ameron Acquisition" means the acquisition of radio stations WMJJ-FM and
WERC-AM in Birmingham, Alabama and radio station WOWC-FM from Ameron
Broadcasting, Inc. serving the Jasper, Alabama market.
 
     "Austin Acquisition" means the Company's pending acquisition of radio
stations KVET-AM, KASE-FM and KVET-FM from Butler Broadcasting Company, Ltd.
serving the Austin, Texas market.
 
     "Benchmark Acquisition" means the acquisitions of, and mergers of directly
and indirectly wholly-owned subsidiaries of HM Fund III with, Benchmark
Communications Radio Limited Partnership, L.P. and certain of its subsidiary
partnerships.
 
     "Big Chief Acquisition" means the Company's pending acquisition of radio
stations KTCS-FM/AM from Big Chief Broadcasting Co. serving the Fort Smith,
Arkansas market.
 
     "Booneville Acquisition" means the acquisition of radio station KZBB-FM
from Booneville Broadcasting Company and Oklahoma Communications Company serving
the Ft. Smith, Arkansas market.
 
     "Bryan Disposition" means the disposition of substantially all of its
assets used or useful in the operation of two of the Company's radio stations in
the College Station, Texas market.
 
     "Capstar" or "Company" means Capstar Broadcasting Corporation and its
subsidiaries after giving effect to the consummation the Pending Transactions,
unless the context otherwise requires.
 
     "Capstar Broadcasting" means Capstar Broadcasting Corporation.
 
     "Capstar Partners" means Capstar Broadcasting Partners, Inc., a Delaware
corporation and a direct subsidiary of Capstar Broadcasting.
 
     "Capstar Radio" means Capstar Radio Broadcasting Partners, Inc., a Delaware
corporation and a direct subsidiary of Capstar Partners.
 
     "Cavalier Acquisition" means the acquisition of substantially all of the
assets of Cavalier Communications, L.P.
 
     "Champion Acquisition" means the Company's pending acquisition from
Champion Broadcasting Corporation, et al of radio stations KCDQ-FM, KCHX-FM and
KMRK-FM serving the Midland, Texas market; KMML-FM, KBUY-FM, KNSY-FM and KIXZ-AM
serving the Amarillo, Texas market; and KRRV-FM, KKST-FM, KZMZ-FM and KDBS-AM
serving the Alexandria, Louisiana market.
 
     "Class Act Acquisition" means the Company's pending acquisition of KTBQ-FM
and KSFA-AM from Class Act of Texas, Inc. serving the Nacogdoches, Texas market.
 
     "COMCO Acquisition" means the acquisition of substantially all of the
assets of COMCO Broadcasting, Inc.
 
     "Commodore Acquisition" means the acquisition of Commodore Media, Inc.
 
     "Commonwealth Acquisition" means the acquisition of substantially all of
the assets of Commonwealth Broadcasting of Arizona, L.L.C.
 
     "Communications Act" means the Communications Act of 1934, as amended.
 
     "Community Pacific Acquisition" means the acquisition of substantially all
of the assets of Community Pacific Broadcasting Company L.P.
 
     "Completed Acquisitions" means the American General Acquisition, the Ameron
Acquisition, the Benchmark Acquisition, the Booneville Acquisition, the Cavalier
Acquisition, the COMCO Acquisition, the Commodore Acquisition, the Commonwealth
Acquisition, the Community Pacific Acquisition, the East Penn Acquisition, the
Emerald City Acquisition, the Griffith Acquisition, the GulfStar Acquisition,
the KJEM Acquisition, the KLAW Acquisition, the Knight Acquisition, the
Livingston Acquisition, the Madison Acquisition, the McForhun Acquisition, the
Osborn Acquisition, the Osborn Huntsville Acquisition, the
 
                                       35
<PAGE>   38
 
Osborn Tuscaloosa Acquisition, the Patterson Acquisition, the Quass Acquisition,
the Reynolds Acquisition, the Space Coast Acquisitions and the WRIS Acquisition.
 
     "Completed Dispositions" means the Allentown Disposition, the Bryan
Disposition, the Dayton Disposition, the Jackson Disposition, the KASH
Disposition, the Osborn Ft. Myers Disposition and the Wilmington Disposition.
 
     "Completed Transactions" means the Completed Acquisitions and the Completed
Dispositions.
 
     "Dayton Disposition" means the disposition of radio station WING-FM serving
the Dayton, Ohio market.
 
     "DOJ" means the United States Department of Justice.
 
     "East Penn Acquisition" means the acquisition of radio station WKAP-AM from
East Penn Broadcasting, Inc. serving the Allentown, Pennsylvania market.
 
     "Emerald City Acquisition" means the acquisition of radio station WNOK-FM
from Emerald City Radio Partners, L.P. serving the Columbia, South Carolina
market.
 
     "Fairbanks Acquisition" means the Company's pending acquisition of radio
station KUAB-FM from the University of Alaska Fairbanks serving the Fairbanks,
Alaska market.
 
     "FCC" means the United States Federal Communications Commission.
 
     "FTC" means the United States Federal Trade Commission.
 
     "Gibbons Acquisition" means the Company's pending acquisition of all of the
common stock of Jim Gibbons Radio, Inc., a Maryland corporation, and Jim Gibbons
Radio, Inc., a Virginia corporation, which own and operate four radio stations
(two FM and two AM) serving the Frederick, Maryland and Roanoke, Virginia.
 
     "Grant Acquisition" means the Company's pending acquisition of radio
station WZBQ-FM from Grant Radio Group serving the Tuscaloosa, Alabama market.
 
     "Greenville Disposition" means the Company's pending disposition of radio
stations WESC-FM, WESC-AM, WTPT-FM and WJMZ-FM serving the Greenville, South
Carolina market.
 
     "Griffith Acquisition" means the acquisition of radio stations WTAK-FM,
WXQW-FM and WWXQ-FM from Griffith Communications Corporation serving the
Huntsville, Alabama market.
 
     "GulfStar Acquisition" means the merger of GulfStar with and into a
subsidiary of Capstar Broadcasting, pursuant to which the subsidiary was the
surviving corporation and was named GulfStar Communications, Inc. and
contributed through Capstar Partners to Capstar Radio.
 
     "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
 
     "Indentures" means the 9 1/4% Capstar Notes Indenture, the 12 3/4% Capstar
Notes Indenture and the 13 1/4% Capstar Notes Indenture.
 
     "Jackson Disposition" means the disposition of radio stations WJMI-FM,
WOAD-FM, WKXI-FM and WKXI-AM serving the Jackson, Mississippi market.
 
     "JSA" refers to a joint sales agreement, whereby a station licensee
obtains, for a fee, the right to sell substantially all of the commercial
advertising on a separately-owned and licensed station. JSAs take varying forms.
A JSA, unlike an LMA, normally does not involve programming.
 
     "KASH Disposition" means the disposition of radio station KASH-AM serving
the Anchorage, Alaska market to Chinook Concert Broadcasters, Inc.
 
     "KATQ Acquisition" means the Company's pending acquisition of KTFS-AM and
KTWN-FM from KATQ Radio, Inc. serving the Texarkana, Texas and Texarkana,
Arkansas market.
 
                                       36
<PAGE>   39
 
     "KDOS Acquisition" means the Company's pending acquisition of radio
stations KSAB-FM and KUNO-AM from KDOS, Inc. serving the Corpus Christi, Texas
market.
 
     "KJEM Acquisition" means the acquisition of KJEM-FM, a limited partnership.
 
     "KLAW Acquisition" means the acquisition of radio stations KLAW-FM and
KZCD-FM from KLAW Broadcasting, Inc. serving the Lawton, Oklahoma market.
 
     "Knight Acquisition" means the acquisition of substantially all of the
assets of Knight Radio, Inc., Knight Broadcasting of New Hampshire, Inc. and
Knight Communications Corp.
 
     "KOSO Acquisition" means the Company's pending acquisition of radio station
KOSO-FM from KOSO, Inc. serving the Patterson, California market.
 
     "KRNA Acquisition" means the Company's pending acquisitions (under separate
agreements) of radio stations KRNA-FM and KXMX-FM from KRNA, Inc. serving the
Iowa City and Cedar Rapids, Iowa markets.
 
     "Livingston Acquisition" means the acquisition of radio station WBIU-AM
from Livingston Communications, Inc. serving the Denham Springs, Louisiana
market.
 
     "LMA" refers to a local marketing agreement, whereby a radio station
outsources the management of certain limited functions of its operations. LMAs
take varying forms; however, the FCC requires that, in all cases, the licensee
maintain independent control over the programming and operations of the station.
 
     "Madison Acquisition" means the acquisition of substantially all of the
assets of The Madison Radio Group which is comprised of the stations formerly
owned by Midcontinent Broadcasting Co. of Wisconsin, Inc. and Point
Communications Limited Partnership.
 
     "McCarthy Acquisition" means the Company's pending acquisition of radio
stations KNCQ-FM, KEWB-FM and KEGR-FM from McCarthy Wireless, Inc. serving the
Redding, Anderson and Red Bluff, California markets.
 
     "McForhun Acquisition" means the acquisition of radio station KRVE-FM from
McForhun, Inc. serving the Brusly, Louisiana market.
 
     "Noalmark Acquisition" means the Company's option to acquire radio stations
KKTX-FM and KKTX-AM from Noalmark Broadcasting Corporation serving the Longview,
Texas market.
 
     "Notes" means the 9 1/4% Capstar Notes, the 12 3/4% Capstar Notes and the
13 1/4% Capstar Notes.
 
     "Osborn Acquisition" means the acquisition of Osborn Communications
Corporation.
 
     "Osborn Ft. Myers Disposition" means the disposition of substantially all
of the assets used or held for use in connection with the business and
operations of Osborn's stations in the Port Charlotte and Ft. Myers, Florida
markets.
 
     "Osborn Huntsville Acquisition" means the acquisition of Dixie
Broadcasting, Inc. and Radio WBHP, Inc.
 
     "Osborn Tuscaloosa Acquisition" means the acquisition of Taylor
Communications Corporation.
 
     "Patterson Acquisition" means the acquisition of all of the outstanding
capital stock of Patterson Broadcasting, Inc.
 
     "Pending Acquisitions" means the Americom Acquisition, the Austin
Acquisition, the Champion Acquisition, the Class Act Acquisition, the Fairbanks
Acquisition, the Grant Acquisition, the KDOS Acquisition, the KOSO Acquisition,
the Noalmark Acquisition, the Pensacola-WYCL Acquisition, the Portsmouth
Acquisition and the Shreveport-KMJJ Acquisition.
 
     "Pending Dispositions" means the Americom Disposition, the Greenville
Disposition, the Salisbury-Ocean City Disposition, the Upper Fairfield
Disposition and the Westchester Disposition.
 
                                       37
<PAGE>   40
 
     "Pending Transactions" means the Pending Acquisitions and the Pending
Dispositions.
 
     "Pensacola-WYCL Acquisition" means the Company's pending acquisition of
radio station WYCL-FM from Paxon Communications Corporation serving the
Pensacola, Florida market.
 
     "Portsmouth Acquisition" the Company's pending acquisition of radio
stations WSRI-FM, WZNN-AM, WERZ-FM and WMYF-AM from American Radio Systems
serving the Portsmouth-Dover-Rochester, New York.
 
     "Quass Acquisition" means the acquisition of all of the outstanding capital
stock of Quass Broadcasting Company.
 
     "Reynolds Acquisition" means the acquisition of radio station WMHS-FM from
Joan K. Reynolds, d/b/a Brantley Broadcast Associates serving the Birmingham,
Alabama market.
 
     "Salisbury-Ocean City Disposition" means the Company's pending disposition
of radio stations WWFG-FM and WOSC-FM serving the Salisbury-Ocean City, Maryland
market.
 
     "SFX" means SFX Broadcasting, Inc.
 
     "SFX Acquisition" means Capstar Broadcasting's pending acquisition of SFX
Broadcasting, Inc.
 
     "SFX Jackson-Biloxi Acquisition" means the Company's pending acquisition of
six radio stations (five FM and one AM) from SFX serving the Jackson and Biloxi,
Mississippi markets.
 
     "SFX Transactions" means the SFX Acquisition and the SFX Related
Transactions.
 
     "Shreveport-KMJJ Acquisition" means the Company's pending acquisition of
radio station KMJJ-FM from SunGroup, Inc, et al, serving the Shreveport,
Louisiana market.
 
     "Space Coast Acquisition" collectively refers to the acquisitions of
substantially all of the assets of EZY Com, Inc., City Broadcasting Co., Inc.,
and Roper Broadcasting, Inc.
 
     "Telecom Act" means the Telecommunications Act of 1996.
 
     "Upper Fairfield Disposition" means the pending conveyance of radio
stations WKRI-FM, WAXB-FM, WPUT-AM and WINE-AM serving the Fairfield County,
Connecticut market to a limited liability company in exchange for a non-voting
membership interest in such limited liability company.
 
     "Westchester Disposition" means the pending conveyance of radio stations
WFAS-FM, WFAS-AM and WZZN-FM serving the Westchester-Putnam Counties, New York
market to a limited liability company in exchange for a non-voting membership
interest in such limited liability company.
 
     "Wilmington Disposition" means the conveyance of radio station WJBR-FM
serving the Wilmington, Delaware market to a limited liability company in
exchange for a non-voting membership interest in such limited liability company.
 
     "WRIS Acquisition" means the acquisition of WJLM-FM from WRIS, Inc. serving
the Salem, Virginia market.
 
ITEM 2. PROPERTIES
 
     The types of properties required to support each of the Company's radio
stations include offices, studios and transmitter/antenna sites. No one property
is material to the overall operations of the Company. The Company typically
leases its studio and office space with lease terms that expire in five to ten
years, although the Company does own certain of its facilities. A station's
studios are generally housed with its offices in downtown or business districts.
The Company generally considers its facilities to be suitable and of adequate
size for its current and intended purposes. The Company typically owns its
transmitter and antenna sites, although the Company does lease certain of its
transmitter/antenna sites with lease terms that expire in three to 20 years. The
transmitter/antenna site for each station is generally located so as to provide
maximum
 
                                       38
<PAGE>   41
 
market coverage, consistent with the station's FCC license. The Company does not
anticipate any difficulties in renewing any facility or transmitter/antenna site
leases or in leasing additional space or sites if required.
 
     The Company owns substantially all of its other equipment, consisting
principally of transmitting antennae, transmitters, studio equipment and general
office equipment. The towers, antennae and other transmission equipment used by
the Company's stations are generally in good condition, although opportunities
to upgrade facilities are continuously reviewed. All of the property owned by
the Company secures the Company's borrowings under the Credit Facility.
 
     The principal executive offices of the Company are located at 600 Congress
Avenue, Suite 1400, Austin, Texas 78701. The telephone number of the Company at
that address is (512) 340-7800.
 
ITEM 3. LEGAL PROCEEDINGS
 
     The Company is involved in litigation from time to time in the ordinary
course of its business. In management's opinion, the litigation in which the
Company is currently involved, individually and in the aggregate, is not
material to the Company's financial condition or results of operations.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     The Companies did not submit any matters to a vote of their securityholders
during the fourth quarter of the fiscal year ending December 31, 1997.
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     The common stock of Capstar Partners and Capstar Radio has not been
registered under the Securities Act of 1933 or the Securities Act of 1934, as
amended, and is not listed on any national securities exchange. As of December
31, 1997, there was no established public trading market for the common stock of
Capstar Partners or Capstar Radio. All of the common stock of Capstar Partners
is held by Capstar Broadcasting, and all of the common stock of Capstar Radio is
held by Capstar Partners.
 
     Cash dividends declared and paid by Capstar Partners and Capstar Radio on
their common stock for 1997 and 1996 are presented in the following table.
 
<TABLE>
<CAPTION>
                                                              CAPSTAR     CAPSTAR
                                                              PARTNERS     RADIO
                                                              --------    -------
                                                                (IN THOUSANDS)
<S>                                                           <C>         <C>
1997........................................................    $765      $9,110
1996........................................................      --          --
</TABLE>
 
     Capstar Partners and Capstar Radio are holding companies with no
significant assets other than the capital stock of their direct and indirect
subsidiaries. Consequently, the sole source of cash for each of Capstar Partners
and Capstar Radio from which to make dividend payments will be dividends
distributed or other payments made to it by its operating subsidiaries. The
right of each of Capstar Partners and Capstar Radio to participate in any
distribution of earnings or assets of its subsidiaries is subject to the prior
claims of creditors of the its subsidiaries. The Indentures, the Certificate of
Designation, and the Capstar Credit Facility contain certain covenants that
restrict or prohibit the Company's ability to pay dividends and make other
distributions.
 
                                       39
<PAGE>   42
 
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA
 
CAPSTAR PARTNERS
 
     In July 1997, Capstar Broadcasting through a wholly owned subsidiary merged
with GulfStar in a transaction between entities under common control which was
accounted for in a manner similar to a pooling of interests. The table below
presents only the financial data of GulfStar from January 1, 1993 through
October 16, 1996, the date Capstar Broadcasting commenced operations. Subsequent
to October 16, 1996, the historical financial data of Capstar Broadcasting and
GulfStar have been combined.
 
     The operating and other data in the following table have been derived from
the audited consolidated financial statements of Capstar Partners for the years
ended December 31, 1995, 1996 and 1997, all of which are included elsewhere in
this Annual Report on Form 10-K, and from the audited consolidated financial
statements for the years ended December 31, 1993 and 1994. The selected balance
sheet data in the following table have been derived from the audited
consolidated financial statements of Capstar Partners as of December 31, 1996
and 1997 which are included elsewhere in this Annual Report on Form 10-K, and
from the audited consolidated financial statements of Capstar Partners as of
December 31, 1993, 1994 and 1995.
 
<TABLE>
<CAPTION>
                                                             CAPSTAR PARTNERS
                                            ---------------------------------------------------
                                                          YEAR ENDED DECEMBER 31,
                                            ---------------------------------------------------
                                             1993     1994      1995       1996         1997
                                            ------   -------   -------   ---------   ----------
                                                          (DOLLARS IN THOUSANDS)
<S>                                         <C>      <C>       <C>       <C>         <C>
OPERATING DATA:
  Net revenue.............................  $4,002   $ 9,834   $15,797   $  42,866   $  175,445
  Station operating expenses..............   2,818     6,662    11,737      30,481      122,135
  Depreciation and amortization...........     307       712     1,134       4,141       26,415
  Corporate expenses......................     158       339       513       2,523       14,221
  Noncash compensation expense(1).........      --        --        --       6,176       10,575
  Operating income (loss).................     719     2,121     2,413        (455)       2,099
  Interest expense........................     338       965     4,078       9,741       49,531
  Net income (loss).......................     319       645     1,570     (11,957)     (39,661)
 
OTHER DATA:
  Broadcast cash flow(2)..................  $1,184   $ 3,172   $ 4,060   $  12,385   $   53,310
  Broadcast cash flow margin..............    29.6%     32.3%     25.7%       28.9%        30.4%
  EBITDA(3)...............................  $1,026   $ 2,833   $ 3,547   $   9,862   $   39,089
  Cash flows related to:
     Operating activities.................     411     1,833     1,259      (2,339)       6,699
     Investing activities.................    (324)  (11,531)  (19,648)   (155,579)    (487,002)
     Financing activities.................     180    10,325    17,696     167,519      540,541
  Capital expenditures....................     300     1,192       495       2,478       10,020
 
BALANCE SHEET DATA (AT END OF PERIOD):
  Cash and cash equivalents...............  $  286   $   913   $   220   $   9,821   $   70,059
  Intangible and other assets, net........   5,019    15,094    39,014     344,524      884,639
  Total assets............................   8,424    20,991    49,000     402,632    1,106,050
  Long-term debt, including current
     portion..............................   7,362    18,554    37,300     191,170      594,572
  Redeemable preferred stock..............      --        --       758      23,098      101,493
  Total stockholders' equity..............     323       970     2,563      93,736      215,869
</TABLE>
 
---------------
 
(1) Consists of noncash compensation charges resulting from the grant of
    warrants and stock subscriptions.
 
(2) Broadcast cash flow consists of operating income before depreciation,
    amortization, corporate expenses and noncash compensation expense. Although
    broadcast cash flow is not a measure of performance calculated in accordance
    with generally accepted accounting principles ("GAAP"), management believes
    that it is useful to an investor in evaluating the Company because it is a
    measure widely used in the broadcast industry to evaluate a radio company's
    operating performance. Nevertheless, it should not be considered in
    isolation or as a substitute for operating income, cash flows from operating
    activities or any other measure for determining the Company's operating
    performance or liquidity that is calculated in accordance with GAAP.
 
                                       40
<PAGE>   43
 
(3) EBITDA consists of operating income before depreciation, amortization and
    noncash compensation expense. Although EBITDA is not a measure of
    performance calculated in accordance with GAAP, management believes that it
    is useful to an investor in evaluating the Company because it is a measure
    widely used in the broadcast industry to evaluate a radio company's
    operating performance. Nevertheless, it should not be considered in
    isolation or as a substitute for operating income, cash flows from operating
    activities or any other measure for determining the Company's operating
    performance or liquidity that is calculated in accordance with GAAP.
 
CAPSTAR RADIO
 
     In July 1997, Capstar Broadcasting through a wholly owned Subsidiary merged
with GulfStar in a transaction between entities under common control which was
accounted for in a manner similar to a pooling of interests. The table below
presents only the financial data of GulfStar from January 1, 1993 through
October 16, 1996, the date Capstar Broadcasting commenced operations. Subsequent
to October 16, 1996, the historical financial data of Capstar Broadcasting and
GulfStar have been combined.
 
     The operating and other data in the following table have been derived from
the audited consolidated financial statements of Capstar Radio for the years
ended December 31, 1995, 1996 and 1997, all of which are included elsewhere in
this Annual Report on Form 10-K, and from the audited consolidated financial
statements for the years ended December 31, 1993 and 1994. The selected balance
sheet data in the following table have been derived from the audited
consolidated financial statements of Capstar Radio as of December 31, 1996 and
1997 which are included elsewhere in this Annual Report on Form 10-K, and from
the audited consolidated financial statements of Capstar Radio as of December
31, 1993, 1994 and 1995.
 
<TABLE>
<CAPTION>
                                                               CAPSTAR RADIO
                                            ---------------------------------------------------
                                                          YEAR ENDED DECEMBER 31,
                                            ---------------------------------------------------
                                             1993     1994      1995       1996         1997
                                            ------   -------   -------   ---------   ----------
                                                          (DOLLARS IN THOUSANDS)
<S>                                         <C>      <C>       <C>       <C>         <C>
OPERATING DATA:
Net revenue...............................  $4,002   $ 9,834   $15,797   $  42,866   $  175,445
Station operating expenses................   2,818     6,662    11,737      30,481      122,135
Depreciation and amortization.............     307       712     1,134       4,137       26,285
Corporate expenses........................     158       339       513       2,300       14,221
Noncash compensation expense(1)...........      --        --        --       6,176       10,575
Operating income (loss)...................     719     2,121     2,413        (228)       2,229
Interest expense..........................     338       965     4,078       7,064       30,559
Net income (loss).........................     319       645     1,570      (9,052)     (28,007)
 
OTHER DATA:
Broadcast cash flow(2)....................  $1,184   $ 3,172   $ 4,060   $  12,385   $   53,310
Broadcast cash flow margin................    29.6%     32.3%     25.7%       28.9%        30.4%
EBITDA(3).................................  $1,026   $ 2,833   $ 3,547   $  10,086   $   39,089
Cash flows related to:
     Operating activities.................     411     1,833     1,259      (1,390)      12,108
     Investing activities.................    (324)  (11,531)  (19,648)   (153,467)    (476,556)
     Financing activities.................     180    10,325    17,696     163,798      526,006
Capital expenditures......................     300     1,192       495       2,115        9,051
 
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents.................  $  286   $   913   $   220   $   9,161   $   70,719
Intangible and other assets, net..........   5,019    15,094    39,014     342,558      876,599
Total assets..............................   8,424    20,991    49,000     399,642    1,096,872
Long-term debt, including current
  portion.................................   7,362    18,554    37,300     156,170      427,580
Redeemable preferred stock................      --        --       758      23,098           --
Total stockholders' equity................     323       970     2,563     127,920      461,315
</TABLE>
 
                                       41
<PAGE>   44
 
---------------
 
(1) Consists of noncash compensation charges resulting from the grant of
    warrants and stock subscriptions.
 
(2) Broadcast cash flow consists of operating income before depreciation,
    amortization, corporate expenses and noncash compensation expense. Although
    broadcast cash flow is not a measure of performance calculated in accordance
    with generally accepted accounting principles ("GAAP"), management believes
    that it is useful to an investor in evaluating the Company because it is a
    measure widely used in the broadcast industry to evaluate a radio company's
    operating performance. Nevertheless, it should not be considered in
    isolation or as a substitute for operating income, cash flows from operating
    activities or any other measure for determining the Company's operating
    performance or liquidity that is calculated in accordance with GAAP.
 
(3) EBITDA consists of operating income before depreciation, amortization and
    noncash compensation expense. Although EBITDA is not a measure of
    performance calculated in accordance with GAAP, management believes that it
    is useful to an investor in evaluating the Company because it is a measure
    widely used in the broadcast industry to evaluate a radio company's
    operating performance. Nevertheless, it should not be considered in
    isolation or as a substitute for operating income, cash flows from operating
    activities or any other measure for determining the Company's operating
    performance or liquidity that is calculated in accordance with GAAP.
 
COMMODORE MEDIA, INC.
 
     The operating and other data in the following table have been derived from
the audited consolidated financial statements of operations and cash flows of
Commodore Media, Inc. and Subsidiaries for the year ended December 31, 1995, and
for the period from January 1, 1996 to October 16, 1996, all of which are
included elsewhere in this Annual Report on Form 10-K, and from audited
consolidated financial statements for the years ended December 31, 1992, 1993
and 1994. The selected balance sheet data in the following table have been
derived from the audited consolidated financial statements of Commodore Media,
Inc. as of December 31, 1992, 1993, 1994 and 1995.
 
<TABLE>
<CAPTION>
                                                        COMMODORE MEDIA, INC.
                                  -----------------------------------------------------------------
                                            YEAR ENDED DECEMBER 31,              JANUARY 1, 1996 --
                                  -------------------------------------------       OCTOBER 16,
                                    1992       1993        1994        1995           1996(1)
                                  --------    -------    --------    --------    ------------------
                                            (DOLLARS IN THOUSANDS)
<S>                               <C>         <C>        <C>         <C>         <C>
OPERATING DATA:
  Net revenue...................  $ 17,961    $19,798    $ 26,225    $ 30,795         $ 31,957
  Station operating expenses....    12,713     13,509      16,483      19,033           21,291
  Depreciation and
     amortization...............     1,676      1,129       2,145       1,926            2,158
  Corporate expenses............     1,602      2,531       2,110       2,051            1,757
  Other expense(2)..............        --      1,496       2,180       2,007           13,834
  Operating income (loss).......     1,970      1,133       3,307       5,778           (7,083)
  Interest expense..............     4,614      4,366       3,152       7,806            8,861
  Net loss......................    (2,580)    (3,782)       (527)     (2,240)         (17,836)
 
OTHER DATA:
  Broadcast cash flow(3)........  $  5,248    $ 6,289    $  9,742    $ 11,762         $ 10,666
  Broadcast cash flow
     margin(3)..................      29.2%      31.8%       37.1%       38.2%            33.4%
  EBITDA(4).....................  $  3,646    $ 3,758    $  7,632    $  9,711         $  8,909
  Cash flows related to:
     Operating activities.......      (406)       477       4,061       1,245            1,990
     Investing activities.......      (458)   (10,013)        (50)     (4,408)         (34,358)
     Financing activities.......       951      9,377      (2,855)     12,013           26,724
  Capital expenditures..........       371        333         623         321              449
 
BALANCE SHEET DATA (AT END OF
  PERIOD):
  Cash and cash equivalents.....  $  1,045    $   887    $  2,042    $ 10,891
  Intangible and other assets,
     net........................    13,819     22,419      21,096      27,422
  Total assets..................    27,508     36,192      36,283      52,811
  Long-term debt, including
     current portion............    51,934     41,773      36,962      66,261
  Redeemable preferred stock....     5,800         10       8,414          --
  Total stockholders' deficit...   (28,766)    (8,097)    (18,038)    (18,555)
</TABLE>
 
                                       42
<PAGE>   45
 
---------------
 
(1) Represents the results of operations of Commodore Media, Inc. for the period
    from January 1, 1996 through the date of the Commodore Acquisition, October
    16, 1996.
 
(2) In 1996, other expense consists of merger-related compensation charges in
    connection with Capstar Partners' acquisition of Capstar Radio (formerly
    known as Commodore Media, Inc.). Such expenses are not expected to recur. In
    1993 through 1995 other operating expenses consist of non-cash compensation
    charges resulting from the grant of employee options, warrants, and stock
    subscriptions.
 
(3) Broadcast cash flow consists of operating income before depreciation,
    amortization, corporate expenses and noncash compensation expense. Although
    broadcast cash flow is not a measure of performance calculated in accordance
    with generally accepted accounting principles ("GAAP"), management believes
    that it is useful to an investor in evaluating the Company because it is a
    measure widely used in the broadcast industry to evaluate a radio company's
    operating performance. Nevertheless, it should not be considered in
    isolation or as a substitute for operating income, cash flows from operating
    activities or any other measure for determining the Company's operating
    performance or liquidity that is calculated in accordance with GAAP.
 
(4) EBITDA consists of operating income before depreciation, amortization and
    non-cash compensation expense. Although EBITDA is not a measure of
    performance calculated in accordance with GAAP, management believes that it
    is useful to an investor in evaluating the Company because it is a measure
    widely used in the broadcast industry to evaluate a radio company's
    operating performance. Nevertheless, it should not be considered in
    isolation or as a substitute for operating income, cash flows from operating
    activities or any other measure for determining the Company's operating
    performance or liquidity that is calculated in accordance with GAAP.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
 
GENERAL
 
     The following discussion and analysis of financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and related notes thereto of the Company included elsewhere
in this Prospectus. Periodically, the Company may make statements about trends,
future plans and the Company's prospects. Actual results may differ materially
from those described in such forward looking statements based on the risks and
uncertainties facing the Company, including but not limited to, the following:
business conditions and growth in the radio broadcasting industry and the
general economy; competitive factors; changes in interest rates; the failure or
inability to renew one or more of the Company's broadcasting licenses; and the
factors described in "Risk Factors."
 
     A radio broadcast company's revenues are derived primarily from the sale of
time to local and national advertisers. Those revenues are affected by the
advertising rates that a radio station is able to charge and the number of
advertisements that can be broadcast without jeopardizing listener levels (and
resulting ratings). Advertising rates tend to be based upon demand for a
station's advertising inventory and its ability to attract audiences in targeted
demographic groups, as measured principally by Arbitron. Radio stations attempt
to maximize revenues by adjusting advertising rates based upon local market
conditions, controlling advertising inventory and creating demand and audience
ratings.
 
     Seasonal revenue fluctuations are common in the radio broadcasting industry
and are due primarily to fluctuations in advertising expenditures by local and
national advertisers, with revenues typically being lowest in the first quarter
and highest in the second and fourth quarters of each year. A radio station's
operating results in any period also may be affected by the occurrence of
advertising and promotional expenditures that do not produce commensurate
revenues in the period in which the expenditures are made. Because Arbitron
reports audience ratings on a quarterly basis, a radio station's ability to
realize revenues as a result of increased advertising and promotional expenses
and any resulting audience ratings improvements may be delayed for several
months.
 
     The Company's results of operations from period to period have not
historically been comparable because of the impact of the various acquisitions
and dispositions that the Company has completed. For a description of the
transactions completed by the Company, see "Capstar Broadcasting Partners, Inc.
and Subsidiaries -- Notes to Consolidated Financial Statements -- Acquisitions
and Dispositions of Broadcasting Properties" set forth in Part II.
 
     In the Pending Transactions, the Company has agreed to purchase 33 radio
stations serving 14 mid-sized markets and to sell 16 radio stations serving five
mid-sized markets. In the SFX Acquisition, the Company may acquire a portion or
all of the outstanding stock of SFX. The Company anticipates that it will
consummate the Pending Transactions and possibly the SFX Acquisition; however,
the closing of each such acquisition or disposition is subject to various
conditions, including FCC and other governmental approvals, which are beyond the
Company's control, and the availability of financing to the Company on
acceptable
 
                                       43
<PAGE>   46
 
terms. No assurances can be given that regulatory approval will be received,
that the Indentures, the Certificates of Designation, the Capstar Credit
Facility, the Chancellor Note or any other loan agreements to which the Company
will be a party will permit additional financing for the Pending Transactions or
the SFX Acquisition or that such financing will be available to the Company on
acceptable terms. See "Risk Factors -- Risks of Acquisition Strategy."
 
     In the following analysis, management discusses broadcast cash flow,
earnings before interest, taxes, depreciation, amortization ("EBITDA").
Broadcast cash flow consists of operating income before depreciation,
amortization, corporate expenses and noncash compensation expense. EBITDA
consists of operating income before depreciation, amortization and noncash
compensation expense. Although broadcast cash flow and EBITDA are not measures
of performance calculated in accordance with generally accepted accounting
principles ("GAAP"), management believes that they are useful to an investor in
evaluating the Company because they are measures widely used in the broadcast
industry to evaluate a radio company's operating performance. However, broadcast
cash flow and EBITDA should not be considered in isolation or as substitutes for
operating income, cash flows from operating activities and other income or cash
flow statement data prepared in accordance with GAAP or as a measure of
liquidity or profitability.
 
  Results of Operations
 
     The following table presents summary historical financial data of the
Company and should be read in conjunction with the consolidated financial
statements of the Company and, in each case, the related notes included
elsewhere in this Form 10-K.
 
<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31,
                               -------------------------------------------------------------
                                1995        %         1996        %         1997        %
                               -------    ------    --------    ------    --------    ------
                                                  (DOLLARS IN THOUSANDS)
<S>                            <C>        <C>       <C>         <C>       <C>         <C>
OPERATING DATA:
  Net revenue................  $15,797    100.0%    $ 42,866    100.0%    $175,445    100.0%
  Station operating
     expenses................   11,737     74.3%      30,481     71.1%     122,135     69.6%
  Depreciation and
     amortization............    1,134      7.2%       4,141      9.7%      26,415     15.1%
  Corporate expenses.........      513      3.2%       2,523      5.9%      14,221      8.1%
  Non-cash compensation
     expense.................       --        --       6,176     14.4%      10,575      6.0%
  Operating income (loss)....    2,413     15.3%        (455)    (1.1%)      2,099      1.2%
  Interest expense...........    4,078     25.8%       9,741     22.7%      49,531     28.2%
  Net income (loss)..........    1,570      9.9%     (11,957)   (27.9%)    (39,661)   (22.6%)
OTHER DATA:
  Broadcast cash flow........  $ 4,060     25.7%    $ 12,385     28.9%    $ 53,310     30.4%
  EBITDA.....................    3,547     22.5%       9,862     23.0%      39,089     22.3%
</TABLE>
 
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
 
     Net Revenue. Net revenue increased $132.5 million or 309.3% to $175.4
million in the year ended December 31, 1997 from $42.9 million in the year ended
December 31, 1996. This increase was attributable to the acquisition of radio
stations and revenue generated from JSAs and LMAs entered into during the years
ended December 31, 1996 and 1997. On a same station basis, for stations owned or
operated as of December 31, 1997, net revenue increased $10.6 million or 5.0% to
$221.4 million from $210.8 million in the year ended December 31, 1996. This
increase was primarily attributable to growth in the sale of time to local and
national advertisers.
 
     Station Operating Expenses. Station operating expenses increased $91.6
million or 300.7% to $121.1 million in the year ended December 31, 1997 from
$30.5 million in the year ended December 31, 1996. The increase was primarily
attributable to the station operating expenses of the radio station acquisitions
and the JSAs and the LMAs entered into during the years ended December 31, 1997
and 1996. On a same station
 
                                       44
<PAGE>   47
 
basis, for stations owned or operated as of December 31, 1997, operating
expenses decreased $1.0 million or 0.7% to $154.7 million from $155.7 million in
the year ended December 31, 1996. As a percent of revenue, historical operating
expenses declined from 71.1% in 1996 to 69.6% in 1997 as a result of (i) cost
savings measures implemented by the Company in connection with its acquisitions
and (ii) the spreading of fixed costs over a larger revenue base.
 
     Corporate Expenses. Corporate expenses increased $11.7 million or 463.6%
during 1997 to $14.2 million from $2.5 million in 1996 as a result of higher
salary expense for additional staffing.
 
     Other Operating Expenses. Depreciation and amortization increased $22.3
million or 537.9% to $26.4 million in 1997 from $4.1 million in 1996 primarily
due to radio station acquisitions consummated in 1997 and 1996. Noncash
compensation expense increased $4.4 million or 71.2% to $10.6 million in the
year ended December 31, 1997 from approximately $6.2 million in the year ended
December 31, 1996 due to compensation charges in connection with warrants issued
to the Company's Chief Executive Officer and certain stock subscriptions.
 
     Other Expenses (Income). Interest expense, net, increased $39.8 million or
408.5% to $49.5 million in the year ended December 31, 1997 from $9.7 million
during the same period in 1996 primarily due to indebtedness incurred in
connection with the Company's acquisitions. At Capstar Radio, interest expense
increased $23.5 million or 332.6% to $30.6 million in the year ended December
31, 1997 from $7.1 million during the same period in 1996, primarily due to
indebtedness incurred in connection with the Company's acquisitions. However,
this increase was not as large as the increase at Capstar Partners since the
12 3/4% Capstar Notes were issued by Capstar Partners in connection with its
acquisition of Osborn Communications, Inc. in February 1997. Other expense, net,
increased $3.8 million to $4.7 million in expense in the year ended December 31,
1997 from $0.9 million in other income in the same period in 1996. The increase
in other expense was primarily due to $3.5 million in transaction costs incurred
as a result of the GulfStar Acquisition. An extraordinary loss of $2.4 million
on extinguishment of debt was recorded in 1997, related to the write-off of
deferred financing fees associated with the GulfStar credit facility, which was
refinanced during the period.
 
     Net Loss. As a result of the factors described above, net loss increased
$27.7 million in the year ended December 31, 1997 to a net loss of $39.6 from a
net loss of $11.9 million in the year ended December 31, 1996. As a result of
the difference in interest expense described above, the net loss of Capstar
Radio was less than that of Capstar Partners. The net loss of Capstar Radio
increased $18.9 million or 209.4% to $28.0 million in the year ended December
31, 1997 from $9.1 million in the year ended December 31, 1996.
 
     Broadcast Cash Flow. As a result of the factors described above, broadcast
cash flow increased $40.9 million or 330.4% to $53.3 million in the year ended
December 31, 1997 from $12.4 million in the year ended December 31, 1996. The
broadcast cash flow margin was 30.4% in the year ended December 31, 1997 as
compared to 28.9% in the same period in 1996. The inclusion of broadcast cash
flow from acquisitions and the JSAs and the LMAs accounted for $40.1 million of
the increase. On a same station basis, for stations owned or operated as of
December 31, 1997, broadcast cash flows increased $11.6 million or 21.0% to
$66.7 million from $55.1 million in year ended December 31, 1996.
 
     EBITDA. As a result of the factors described above, EBITDA increased $29.2
million or 296.4% to $39.1 million in the year ended December 31, 1997 from $9.9
million in the year ended December 31, 1996. The EBITDA margin decreased to
22.3% in 1997 from 23.0% in 1996 as a result of higher corporate expenses as
described above.
 
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
 
     Net Revenue. Net revenue increased $27.1 million or 171.4% to $42.9 million
in the year ended December 31, 1996 from $15.8 million in the year ended
December 31, 1995. This increase was attributable to the acquisitions of radio
stations and revenue generated from JSAs and LMAs entered into during the years
ended December 31, 1996 and 1995. On a same station basis, for stations owned or
operated as of December 31, 1996, net revenue increased $13.3 million or 17.7%
to $88.8 million from $75.5 million in the
 
                                       45
<PAGE>   48
 
year ended December 31, 1995. The increase was primarily attributable to growth
in the sale of time to local and national advertisers.
 
     Station Operating Expenses. Station operating expenses increased $18.8
million or 159.7% to $30.5 million in the year ended December 31, 1996 from
$11.7 million in the year ended December 31, 1995. The increase was attributable
to the station operating expenses of the radio station acquisitions and the JSAs
and the LMAs entered into during the years ended December 31, 1996 and 1995,
which contributed $20.8 million to the increase. On a same station basis, for
stations owned or operated as of December 31, 1996, operating expenses increased
$21.0 million or 49.8% to $63.4 million from $42.4 million in the year ended
December 31, 1995. As a percent of revenue, historical operating expenses have
declined from 74.3% in 1995 to 71.1% in 1996 as a result of (i) cost savings
measures implemented by the Company in connection with its acquisitions and (ii)
the spreading of fixed costs over a larger revenue base.
 
     Corporate Expenses. Corporate expenses increased $2.0 million or 391.8% to
$2.5 million in the year ended December 31, 1996 from $0.5 million in the same
period during 1995 as a result of higher salary expense for additional staffing.
 
     Other Operating Expenses. Depreciation and amortization increased $3.0
million for 265.2% to $4.1 million in the year ended December 31, 1996 from $1.1
million in the same period in 1995 primarily due to radio station acquisitions
consummated in 1996 and 1995. The Company incurred noncash compensation expense
of $6.2 million in the year ended December 31, 1996 as a result of certain
warrants issued to the Company's Chief Executive Officer and stock
subscriptions.
 
     Other Expenses (Income). Interest expense increased $5.6 million or 138.9%
to $9.7 million in the year ended December 31, 1996 from $4.1 million in the
same period in 1995 primarily due to the interest expense associated with
indebtedness incurred in connection with the Company's acquisitions. At Capstar
Radio, interest increased $3.0 million or 73.2% to $7.1 million in the year
ended December 31, 1996 from $4.1 million during the same period in 1995,
primarily due to indebtedness incurred in connection with the Company's
acquisitions. However, this increase was not as large as the increase at Capstar
Partners since its former term loan facility was entered into by Capstar
Partners in connection with its acquisition of Commodore in October 1996. Other
expense, net, increased approximately $0.8 million to $0.9 million in the year
ended December 31, 1996 from $0.1 million in income in the same period in 1995.
An extraordinary loss of $1.2 million on extinguishment of debt was recorded in
1996, related to the write-off of deferred financing fees associated with the
GulfStar credit facility which was refinanced during the period.
 
     Net Income (Loss). As a result of the factors described above, net income
decreased $13.6 million to a $12.0 million net loss in the year ended December
31, 1996 from net income of $1.6 million in the year ended December 31, 1995. As
a result of the difference in interest expense described above, the net loss of
Capstar Radio was less than that of Capstar Partners. The net loss of Capstar
Radio increased $10.7 million or 576.6% to $9.1 million in the year ended
December 31, 1996 from net income of $1.6 million in the year ended December 31,
1995.
 
     Broadcast Cash Flow. As a result of the factors described above, broadcast
cash flow increased $8.3 million or 205% to $12.4 million in the year ended
December 31, 1996 from $4.1 million in the year ended December 31, 1995. The
broadcast cash flow margin was 28.9% in the year ended December 31, 1996 as
compared to 25.7% in the same period in 1995. The inclusion of broadcast cash
flow from acquisitions and LMAs accounted for $7.4 million of the increase. On a
same station basis, for stations owned or operated as of December 31, 1996,
broadcast cash flow decreased $7.7 million or 23.4% to $25.4 million from $33.1
million in year ended December 31, 1995.
 
     EBITDA. As a result of the factors described above, EBITDA increased $6.4
million or 178.0% to $9.9 million in the year ended December 31, 1996 from $3.5
million in the year ended December 31, 1995. The EBITDA margin increased to
23.0% in 1996 from 22.5% in 1995.
 
                                       46
<PAGE>   49
 
LIQUIDITY AND CAPITAL RESOURCES
 
     The Company's acquisition strategy has required a significant portion of
the Company's capital resources. The Completed Transactions were funded from one
or a combination of the following sources: (i) equity investments in the Company
from Hicks Muse and its affiliates and management of the Company; (ii)
assumption of indebtedness of acquired companies, including the 13 1/4% Senior
Subordinated Notes due 2003 of Commodore (the "13 1/4% Capstar Notes"); (iii)
net proceeds from the issuance of the 12 3/4% Senior Discount Notes due 2009 of
Capstar Partners (the "12 3/4% Capstar Notes") in February 1997; (iv) net
proceeds from the issuance of the 12% Capstar Preferred Stock in June 1997; (v)
net proceeds from the issuance of the 9 1/4% Senior Subordinated Notes due 2007
of Capstar Radio (the "9 1/4% Capstar Notes") in June 1997; (vi) borrowings
under the Capstar Credit Facility and other bank indebtedness of the Company;
and (vii) net proceeds from the dispositions of certain assets of the Company.
 
     In October 1996, the Company assumed the 13 1/4% Capstar Notes in
connection with the financing of the Commodore Acquisition. The 13 1/4% Capstar
Notes are limited in aggregate principal amount to $76.8 million and bear
interest at a rate of 13 1/4% per annum, of which only 7 1/2% is payable in cash
up to May 1, 1998. Beginning on May 1, 1998, the 13 1/4% Capstar Notes will bear
cash interest at a rate of 13 1/4% per annum until maturity. The 13 1/4% Capstar
Notes require semi-annual cash interest payments on each May 1 and November 1 of
$2.9 million through May 1, 1998, and $5.2 million from November 1, 1998, until
maturity on May 1, 2003.
 
     In connection with the financing of the Osborn Acquisition in February
1997, Capstar Partners issued the 12 3/4% Capstar Notes at a substantial
discount from their aggregate principal amount at maturity of $277.0 million,
generating gross proceeds to the Company of approximately $150.3 million. The
12 3/4% Capstar Notes pay no cash interest until August 1, 2002. Accordingly,
the carrying value will increase through accretion until August 1, 2002.
Thereafter interest will be payable semi-annually on February 1 and August 1 of
each year until maturity on February 1, 2009.
 
     In June 1997, Capstar Radio issued the 9 1/4% Capstar Notes in connection
with certain Completed Transactions that were completed during the third quarter
of 1997. Interest on the 9 1/4% Capstar Notes is payable semi-annually on
January 1 and July 1 of each year until maturity on July 1, 2007.
 
     In June 1997, Capstar Partners issued 1,000,000 shares of the 12% Capstar
Preferred Stock in connection with the financing of the GulfStar Acquisition.
Dividends on the 12% Capstar Preferred Stock accumulate from the date of
issuance and are payable semi-annually on January 1 of each year at a rate per
annum of 12% of the $100.00 per share liquidation preference. Dividends may be
paid, at Capstar Partners' option, on any dividend payment date occurring on or
before July 1, 2002, either in cash or in additional shares of 12% Capstar
Preferred Stock. Capstar Partners paid the required dividend on January 1, 1998
by issuing an additional 64,667 shares of 12% Capstar Preferred Stock and
intends to pay in kind dividends, rather than cash, through July 1, 2002.
 
     The Capstar Credit Facility was amended and restated in August 1997 and
consists of a $200.0 million revolving loan facility, $75.0 million of which is
available to the Company for the issuance of letters of credit for its account
or the account of its subsidiaries. The Capstar Credit Facility also provides
that under certain circumstances, the Company may request additional revolving
loan commitments in $50.0 million increments, the aggregate not to exceed $150.0
million. The availability of such additional commitments under the Capstar
Credit Facility is subject to the sole discretion of the banks then party to the
Capstar Credit Facility. The Company may not request term loan commitments after
December 31, 1998. All loans outstanding under the Capstar Credit Facility will
mature August 1, 2004. Borrowings under the Capstar Credit Facility bear
interest at floating rates and require interest payments on varying dates
depending on the interest rate option selected by the Company. As of March 24,
1998, no principal balance was outstanding under the Capstar Credit Facility,
approximately $171.3 million would have been available for borrowings thereunder
and borrowings under the Capstar Credit Facility had a weighted average
effective interest rate of 9.7% per annum.
 
     In the first quarter of 1998, Capstar Broadcasting received proceeds in the
amount of $550.0 million from equity investments of Hicks Muse and its
affiliates and contributed such amount to the Company, of which
 
                                       47
<PAGE>   50
 
$225.5 million was used to consummate the Patterson Acquisition, $137.5 million
was used to repay indebtedness under the Capstar Credit Facility, and the
remaining $187.0 million is expected to be used to consummate Pending
Acquisitions and for general corporate purposes. In addition, an affiliate of
Hicks Muse has committed to invest an additional $50.0 million in Capstar
Broadcasting during the second quarter of 1998, which amount the Company expects
to receive as an equity contribution.
 
     In addition to debt service and, possibly, the partial financing of the SFX
Transactions, the Company's principal liquidity requirements will be for working
capital and general corporate purposes, including capital expenditures estimated
at $18.0 million for fiscal year 1998, to consummate Pending Transactions and,
as appropriate opportunities arise, to acquire additional radio stations or
complementary broadcast-related businesses. Management believes that the
disposition of certain assets of the Company, cash from operating activities and
the $50.0 million investment by an affiliate of Hicks Muse, together with
available revolving credit borrowings under the Capstar Credit Facility, should
be sufficient to permit the Company to meet its obligations under the agreements
governing its existing indebtedness, to fund its operations, and to consummate
the Pending Transactions. The Company may require financing, either in the form
of additional debt or equity securities, for additional future acquisitions, if
any, and there can be no assurance that it would be able to obtain such
financing on terms considered to be favorable by management. Management
evaluates potential acquisition opportunities on an on-going basis and has had,
and continues to have, preliminary discussions concerning the purchase of
additional stations. The Company expects that in connection with the financing
of future acquisitions, it may consider disposing of stations in its markets.
The Company has no current arrangements or intentions to dispose of any of its
stations other than as described in "Item 1. Business -- The Transactions."
 
     If the SFX Acquisition is consummated and SFX becomes a subsidiary of the
Company, then the Company anticipates that it will receive approximately $49.4
million in fees pursuant to the LMAs under which Chancellor Media would provide
services to ten SFX stations, with corresponding decreases in such amount as the
ten SFX stations, which have been valued at $500.0 million in the Chancellor
Exchange Agreement, are exchanged with Chancellor Media. No assurances can be
given that the SFX Acquisition will be consummated with SFX as a subsidiary of
the Company.
 
     Net cash provided by operating activities was $6.7 million and $1.3 million
for the years ended December 31, 1997 and 1995, respectively, and net cash used
by operating activities was $2.3 million for the year ended December 31, 1996.
Changes in the Company's net cash provided by operating activities are primarily
the result of the Company's completed acquisitions and station operating
agreements entered into during the periods and their effects on income from
operations and working capital requirements.
 
     Net cash used in investing activities was $487.0 million, $155.6 million,
and $19.6 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Net cash provided by financing activities was $540.5 million,
$167.5 million, and $17.7 million for the years ended December 31, 1997, 1996
and 1995, respectively. These cash flows primarily reflect the borrowings,
capital contributions and expenditures for station acquisitions and
dispositions.
 
RECENT PRONOUNCEMENTS
 
     In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements.
 
     In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers.
 
                                       48
<PAGE>   51
 
     In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which significantly changes
current financial statement disclosure requirements form those that were
required under SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132 does
not change the existing measurement or recognition provision of SFAS Nos. 87, 88
or 106.
 
     These pronouncements are effective for fiscal years beginning after
December 31, 1997. Management does not believe the implementation of these
accounting pronouncements will have a material effect on its consolidated
financial statements.
 
IMPACT OF THE YEAR 2000 ISSUE
 
     The Year 2000 Issue is whether the Company's computer systems will properly
recognize date sensitive information when the year changes to 2000, or "00."
Systems that do not properly recognize such information could generate erroneous
data or cause a system to fail. The Company uses purchased software programs for
a variety of functions, including general ledger, accounts payable and accounts
receivable accounting packages. Responsibility for Year 2000 compliance has been
analyzed and testing is currently ongoing for many of the financial
applications, individual work stations, and broadcasting systems. Preliminary
tests on applications have proven them to be compliant, but further testing is
warranted. The Company believes that the Year 2000 Issue will not pose
significant operational problems for the Company's computer systems and,
therefore, will not have a material impact on the financial position or the
operations of the Company.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
     The information called for by this Item is not applicable.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The information called for by this item is included on pages F-1 through
F-70 of this annual report on Form 10-K.
 
                                       49
<PAGE>   52
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
     None.
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
 
     The directors and executive officers of Capstar Partners and Capstar Radio
are listed below. Except as indicated below, each person holds the positions set
forth opposite his or her name for both Capstar Partners and Capstar Radio.
 
     Each director will hold office until the next annual meeting of
stockholders or until his successor has been duly elected and qualified.
Executive officers are generally appointed annually by the board of directors of
Capstar Radio and Capstar Partners to serve, subject to the discretion of the
sole director, until their successors are appointed.
 
<TABLE>
<CAPTION>
            NAME               AGE                           POSITION
            ----               ---                           --------
<S>                            <C>   <C>
R. Steven Hicks(1)...........  48    Chief Executive Officer
William S. Banowsky, Jr......  36    Executive Vice President, General Counsel and Secretary
Paul D. Stone................  37    Executive Vice President, Chief Financial Officer and
                                     Assistant Secretary
James T. Shea, Jr............  44    President and Chief Executive Officer of Atlantic Star
                                     (Northeast Region)
John D. Cullen...............  44    Interim Chief Operating Officer; President and Chief
                                     Executive Officer of GulfStar (Southwest Region)
Dex Allen....................  55    President and Chief Executive Officer of Pacific Star
                                     (West Region)
Mary K. Quass................  48    President and Chief Executive Officer of Central Star
                                     (Midwest Region)
Rick Peters..................  45    President and Chief Executive Officer of Southern Star
                                     (Southeast Region)
Eric C. Neuman...............  53    Director
Lawrence D. Stuart, Jr.......  53    Director of Capstar Partners
Thomas O. Hicks..............  52    Director of Capstar Partners
</TABLE>
 
---------------
 
(1) Mr. R. Steven Hicks also serves as the Chairman of the Board and a Director
    of Capstar Partners.
 
     R. Steven Hicks has served as the Chief Executive Officer of the Companies
since October 1996. In addition, Mr. Hicks has served in several other positions
with the Companies, including Chairman of the Board, President and director.
Since May 1997, Mr. Hicks has held various positions with Capstar Broadcasting,
including Chairman of the Board, President, Chief Executive Officer and
director. Mr. Hicks has also served as Chairman of the Board and Chief Executive
Officer of GulfStar from January 1987 to July 1997. From November 1993 to May
1996, he was President and Chief Executive Officer of SFX. Mr. Hicks is a
30-year veteran of the radio broadcasting industry, including 18 years as a
station owner. Mr. Hicks is the brother of Thomas O. Hicks.
 
     William S. Banowsky, Jr. has served as Executive Vice President, General
Counsel and Secretary of the Companies since February 1997. Mr. Banowsky has
served as an Executive Vice President and the General Counsel of Capstar
Broadcasting since May 1997. Mr. Banowsky was an attorney with Snell, Banowsky &
Trent, P.C., Dallas, Texas, for six years before joining the Companies. Prior to
that time, he was an attorney for Johnson & Gibbs, P.C., Dallas, Texas, for four
years.
 
                                       50
<PAGE>   53
 
     Paul D. Stone has served as Chief Financial Officer, Executive Vice
President and Assistant Secretary of the Companies since February 1997. Mr.
Stone has served as an Executive Vice President and the Chief Financial Officer
of Capstar Broadcasting since May 1997. Mr. Stone was an Executive Vice
President and the Chief Financial Officer of GulfStar from April 1996 until
January 1997. Prior to January 1997, Mr. Stone was Vice President and Controller
of Hicks Muse for six years. He is a Certified Public Accountant.
 
     James T. Shea, Jr. is the President and Chief Executive Officer of Atlantic
Star and has served in such position since June 1997. He previously served as
President of Capstar Radio from October 1996 to June 1997. Prior to serving as
President of Capstar Radio, Mr. Shea served as Chief Operating Officer of
Capstar Radio's predecessor, Commodore, from January 1995 to October 1996. Mr.
Shea joined Commodore as the President of its MidAtlantic Region in March 1992.
He joined Wilks-Schwartz in 1980 and served in various positions, including
Executive Vice President, General Manager and Partner, until 1992.
 
     John D. Cullen has served as the interim Chief Operating Officer of the
Companies since March 1998 and has served as the President and Chief Operating
Officer of GulfStar since March 1996. From 1992 to February 1996, Mr. Cullen
served as a regional manager of SFX's radio stations in the Greenville-
Spartanburg, Raleigh-Durham, Charlotte and Greensboro-Winston-Salem markets. Mr.
Cullen is a 16-year veteran of the radio broadcasting industry.
 
     Dex Allen has served as the President and Chief Executive Officer of
Pacific Star since January 1997. From 1984 until January 1997, Mr. Allen served
as the managing member of Commonwealth. Prior to 1984, Mr. Allen was Vice
President/General Manager of KOGO-AM and KPRI-FM in San Diego, California and
the Sales Manager of KCBQ-AM in San Diego, California. Mr. Allen is a 29-year
veteran of the radio broadcasting industry, including 12 years as a station
owner.
 
     Mary K. Quass has served as the President and Chief Executive Officer of
Central Star since January 1998. She previously served as the President and
Chief Executive Officer of Quass from 1988 to January 1998. From 1982 to 1988,
Ms. Quass served as Vice President/General Manager of stations KHAK-AM and
KHAK-FM in Cedar Rapids, Iowa. Ms. Quass is a 19-year veteran of the radio
broadcasting industry, including nine years as a station owner.
 
     Rick Peters has served as President and Chief Executive Officer of Southern
Star since November 1997. From February 1986 to November 1997, Mr. Peters served
as president of Peters Communications, Inc., a programming consultancy
affiliated with radio stations in various mid-sized and large markets. Prior to
February 1986, Mr. Peters was Vice President -- Programming for TK
Communications and Sconnix Broadcasting. Mr. Peters has over 25 years of
experience in the radio industry.
 
     Eric C. Neuman has served as a director of the Companies since October
1996. Mr. Neuman served as a Vice President of Capstar Radio from October 1996
to May 1997 and as an Executive Vice President of Capstar Partners from October
1996 to June 1997. Mr. Neuman has served as a director of Capstar Broadcasting
since May 1997. Mr. Neuman has served as an officer of Hicks Muse since 1993 and
as a Senior Vice President thereof since 1996. Before joining Hicks Muse, Mr.
Neuman served for eight years as Managing General Partner of Communications
Partners, Ltd., a Dallas-based private investment firm. Mr. Neuman is a director
of Chancellor Media.
 
     Thomas O. Hicks has been a director of Capstar Partners since October 1996
and served as a director of Capstar Radio from October 1996 to August 1997. Mr.
Hicks has been Chairman and Chief Executive Officer of Hicks Muse since
co-founding the firm in 1989. Prior to forming Hicks Muse, Mr. Hicks co-founded
Hicks & Haas Incorporated in 1983 and served as its Co-Chairman and Co-Chief
Executive Officer through 1989. Mr. Hicks also serves as a director of
Chancellor Media Corporation, Berg Electronics Corp., Syborn International
Corporation, International Home Foods, Inc., CorpGroup Limited and Group MVS,
S.A. de C.V.
 
     Lawrence D. Stuart, Jr. has been a director of Capstar Partners since
January 1997 and served as a director of Capstar Radio from February to August
1997. Mr. Stuart has been a Managing Director and Principal of Hicks Muse since
1995. Prior to joining Hicks Muse, Mr. Stuart served for over 20 years as the
principal outside legal counsel for the investment firms and portfolio companies
led by Thomas O. Hicks.
                                       51
<PAGE>   54
 
From 1989 to 1995, Mr. Stuart was the Managing Partner of the Dallas office of
Weil, Gotshal & Manges LLP. Mr. Stuart is a director of Chancellor Media.
 
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
     Neither Capstar Partners nor Capstar Radio has a class of equity securities
registered pursuant to Section 12 of the Exchange Act. Therefore, no reporting
persons have filed or been required to file reports required by Section 16(a) of
the Exchange Act during the year ended December 31, 1997.
 
ITEM 11. EXECUTIVE COMPENSATION
 
     The following table sets forth certain information concerning compensation
paid to or earned in 1997, 1996, and 1995 by the Chief Executive Officer of the
Company and the other highly compensated executive officers of the Company for
services rendered during the three fiscal years ended December 31, 1997 (the
"Named Executive Officers"):
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                               LONG TERM
                                                                           COMPENSATION AWARD
                                                                        ------------------------
                                                                        SECURITIES
                                                ANNUAL COMPENSATION     UNDERLYING     PAYOUTS
              NAME AND                         ---------------------     OPTIONS/        LTIP          ALL OTHER
         PRINCIPAL POSITION            YEAR    SALARY($)    BONUS($)     SARS(#)      PAYOUTS($)    COMPENSATION($)
         ------------------            ----    ---------    --------    ----------    ----------    ---------------
<S>                                    <C>     <C>          <C>         <C>           <C>           <C>
R. Steven Hicks......................  1997     500,000     750,000     7,484,385(1)        --                --
  Chief Executive Officer              1996     135,400          --     9,300,000(1)        --                --
                                       1995          --          --            --           --                --
William S. Banowsky, Jr..............  1997     200,000     300,000     1,700,000           --                --
  Executive Vice President, General    1996          --          --            --           --                --
    Counsel and Secretary              1995          --          --            --           --                --
Paul D. Stone........................  1997     200,000     300,000     1,700,000           --                --
  Executive Vice President, Chief      1996          --          --            --           --                --
    Financial Officer and              1995          --          --            --           --                --
    Assistant Secretary
James T. Shea, Jr....................  1997     282,692     150,000            --           --                --
  President and Chief Executive
    Officer                            1996     262,500          --       720,880      170,000         3,412,495
    of Atlantic Star                   1995     242,361     144,500            --      183,000                --
John D. Cullen.......................  1997     204,575      70,000       500,000           --                --
  Interim Chief Operating Officer;
    President and Chief Executive
    Officer                            1996     112,500      35,000            --           --                --
    of GulfStar                        1995          --          --            --           --                --
Frank D. Osborn......................  1997     375,000     250,000     1,500,000           --         3,511,327(2)
  Former President and Chief
    Executive                          1996     387,000     300,000            --           --         1,778,375
  Officer of Southern Star(3)          1995     378,490     300,000        35,000           --            16,000
</TABLE>
 
---------------
 
(1) Represents warrants in 1996 and options and warrants in 1997. See "Item 13.
    Certain Relationships and Related Transactions -- Warrants."
 
(2) Represents (i) $3,220,000 received by Mr. Osborn pursuant to his employment
    agreement with Osborn prior to the Osborn Acquisition to which Mr. Osborn
    was entitled upon the occurrence of a change of control, (ii) $276,375
    received by Mr. Osborn in connection with the Osborn Acquisition in
    settlement of his outstanding options to purchase shares of common stock of
    Osborn and (iii) $14,952 for tax preparation expenses paid on behalf of Mr.
    Osborn pursuant to the terms of his previous employment agreement with
    Osborn.
 
(3) Mr. Osborn served as President of Southern Star from February 1997 to
    November 1997.
 
                                       52
<PAGE>   55
 
     The following table sets forth certain information concerning stock option
grants during the year ended December 31, 1997, to the Named Executive Officers
pursuant to the Stock Option Plan (as defined).
 
                       OPTION GRANTS IN LAST FISCAL YEAR
 
<TABLE>
<CAPTION>
                                                          INDIVIDUAL GRANTS                      POTENTIAL REALIZABLE
                                         ---------------------------------------------------       VALUE AT ASSUMED
                                         NUMBER OF     % OF TOTAL                                ANNUAL RATES OF STOCK
                                         SECURITIES     OPTIONS                                 PRICE APPRECIATION FOR
                                         UNDERLYING    GRANTED TO    EXERCISE                       OPTION TERM(1)
                                          OPTIONS      EMPLOYEES     PRICE PER    EXPIRATION    -----------------------
                 NAME                    GRANTED(#)     IN 1997        SHARE         DATE         5%($)        10%($)
                 ----                    ----------    ----------    ---------    ----------    ----------    ---------
<S>                                      <C>           <C>           <C>          <C>           <C>           <C>
R. Steven Hicks........................  2,553,182(2)    44.14%        $1.10       2-20-07      (1,476,290)   1,233,485
                                         3,231,203(2)    55.86%         1.33       7-08-07      (2,273,378)   1,873,056
                                           850,000        6.04%         1.10       2-20-03         317,989      721,410
                                           850,000        6.04%         1.33       9-10-03         384,478      872,250
William S. Banowsky, Jr ...............    850,000        6.04%         1.10       2-20-03         317,989      721,410
                                           850,000        6.04%         1.33       9-10-03         384,478      872,250
Paul D. Stone..........................    850,000        6.04%         1.10       2-20-03         317,989      721,410
                                           850,000        6.04%         1.33       9-10-03         384,478      872,250
James T. Shea, Jr .....................         --          --            --            --              --           --
John D. Cullen.........................    500,000        3.55%         1.33       9-10-03         226,164      513,088
Frank D. Osborn........................  1,500,000       10.66%         1.10       2-20-03         561,158    1,273,076
</TABLE>
 
---------------
 
(1) See "Item 13. Certain Relationships and Related Transactions -- Warrants."
 
     The following table provides information about the number of shares issued
upon option exercises under the Stock Option Plan by the Named Executive
Officers during 1997, and the value realized by such Named Executive Officers.
 
                 AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
                       AND FISCAL YEAR-END OPTION VALUES
 
<TABLE>
<CAPTION>
                                      NUMBER OF SECURITIES UNDERLYING
                                           UNEXERCISED OPTIONS AT         VALUE OF UNEXERCISED IN-THE-MONEY
                                             DECEMBER 31, 1997             OPTIONS AT DECEMBER 31, 1997(1)
                                      --------------------------------    ----------------------------------
               NAME                    EXERCISABLE      UNEXERCISABLE     EXERCISABLE($)    UNEXERCISABLE($)
               ----                   -------------    ---------------    --------------    ----------------
<S>                                   <C>              <C>                <C>               <C>
R. Steven Hicks...................      7,440,000(2)     1,860,000(2)       1,860,000           465,000
                                        2,042,546(2)       510,636(2)         379,914            94,978
                                          987,970(2)     2,243,233(2)              --                --
                                               --           1,700,000              --           195,500
William S. Banowsky, Jr. .........             --           1,700,000              --           195,500
Paul D. Stone.....................             --           1,700,000              --           195,500
James T. Shea, Jr.................        240,293             480,587          72,297           158,594
John D. Cullen....................             --             500,000              --                --
Frank D. Osborn...................             --           1,500,000              --           345,000
</TABLE>
 
---------------
 
(1) Based upon an assumed fair market price of $1.33 per share.
 
(2) See "Item 13. Certain Relationships and Related Transactions -- Warrants."
 
DIRECTORS COMPENSATION
 
     The directors of the Companies do not receive compensation for their
services as directors. Each director of the Companies, however, is entitled to
reimbursement of his reasonable out-of-pocket expenses in connection with his
services.
 
                                       53
<PAGE>   56
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     The Company does not currently have a compensation committee. During 1997,
the Compensation Committee of Capstar Broadcasting established the compensation
of the Company's executive officers. From January to July 1997, the Compensation
Committee of Capstar Broadcasting consisted of Thomas O. Hicks, Lawrence D.
Stuart, Jr. and R. Steven Hicks, the Chief Executive Officer of each of the
Companies. Mr. R. Gerald Turner replaced R. Steven Hicks as a member of the
Compensation Committee in July 1997. The Compensation Committee is currently
comprised of Thomas O. Hicks, Lawrence D. Stuart, Jr. and R. Gerald Turner.
 
EMPLOYMENT AGREEMENTS
 
     R. Steven Hicks Employment Agreement. Capstar Broadcasting has entered into
an employment agreement with R. Steven Hicks pursuant to which Mr. Hicks serves
as President and Chief Executive Officer of Capstar Broadcasting. Mr. Hicks'
employment agreement terminates on December 31, 2001, and will be automatically
renewed for successive one-year terms unless Mr. Hicks or Capstar Broadcasting
gives the other party written notice of his or its intention not to renew the
employment agreement at least six months prior to the date the employment
agreement would otherwise expire (but no more than 12 months prior to such
expiration date). Mr. Hicks' annual base salary for 1998 is $550,000 per year
and is subject to annual increases at least equal to five percent of the then
current base salary. He is also entitled to receive such annual performance
bonuses as Capstar Broadcasting's Board of Directors may determine. Further, Mr.
Hicks is eligible to receive stock options to purchase shares of Class A Common
Stock. If Capstar Broadcasting terminates Mr. Hicks' employment for cause or Mr.
Hicks terminates his employment for other than good reason, Capstar Broadcasting
must pay Mr. Hicks all accrued obligations and other benefits earned prior to
the date of termination. If Capstar Broadcasting terminates Mr. Hicks'
employment agreement other than for cause or Mr. Hicks terminates his employment
agreement for good reason, Mr. Hicks' employment agreement provides for (A) a
lump sum payment of (x) two times Mr. Hicks' then current annual salary and (y)
any accrued obligations and other benefits earned prior to the date of
termination and (B) unless the Board of Directors of Capstar Broadcasting
determines that Mr. Hicks has not satisfactorily performed his obligations and
duties under the agreement, the immediate vesting of all stock options between
Capstar Broadcasting and Mr. Hicks and the right to exercise those options until
the earlier of (x) the expiration date of those options or (y) the 90th day
after Mr. Hicks' termination.
 
     William S. Banowsky, Jr. Employment Agreement. Capstar Broadcasting has
entered into an employment agreement with William S. Banowsky, Jr. pursuant to
which Mr. Banowsky serves as an Executive Vice President and the General Counsel
of Capstar Broadcasting. Mr. Banowsky's employment agreement terminates on
December 31, 2001, and will be renewed automatically for successive one-year
terms unless Mr. Banowsky or Capstar Broadcasting gives the other party written
notice of his or its intention not to renew the employment agreement at least
six months prior to the date the employment agreement would otherwise expire
(but not more than 12 months prior to such expiration date). Mr. Banowsky's
annual base salary for 1998 is $275,000, subject to annual increases at least
equal to five percent of the then current base salary. Mr. Banowsky is also
eligible to receive such annual bonuses as Capstar Broadcasting's Board of
Directors may determine. Further, Mr. Banowsky is entitled to receive stock
options to purchase shares of Class A Common Stock. If Capstar Broadcasting
terminates Mr. Banowsky's employment for cause or Mr. Banowsky terminates his
employment for other than good reason, Capstar Broadcasting must pay Mr.
Banowsky all accrued obligations and other benefits earned prior to the date of
termination. If Capstar Broadcasting terminates Mr. Banowsky's employment
agreement other than for cause or Mr. Banowsky terminates his employment
agreement for good reason, Mr. Banowsky's employment agreement provides for (A)
a lump sum payment of (x) two times Mr. Banowsky's then current annual salary
and (y) any accrued obligations and other benefits earned prior to the date of
termination and (B) unless the Board of Directors of Capstar Broadcasting
determines that Mr. Banowsky has not satisfactorily performed his obligations
and duties under the agreement, the immediate vesting of all stock options
between Capstar Broadcasting and Mr. Banowsky and the right to exercise those
options until the earlier of (x) the expiration date of those options or (y) the
90th day after Mr. Banowsky's termination.
 
                                       54
<PAGE>   57
 
     Paul D. Stone Employment Agreement. Capstar Broadcasting has entered into
an employment agreement with Paul D. Stone pursuant to which Mr. Stone serves as
an Executive Vice President and the Chief Financial Officer of Capstar
Broadcasting. Mr. Stone's employment agreement terminates on December 31, 2001,
and will be renewed automatically for successive one year terms unless Mr. Stone
or Capstar Broadcasting gives the other party written notice of his or its
intention not to renew the employment agreement at least six months prior to the
date the employment agreement would otherwise expire (but no more than 12 months
prior to such expiration date). Mr. Stone's annual base salary for 1998 is
$275,000, subject to annual increases at least equal to five percent of the then
current base salary. Mr. Stone is also eligible to receive such annual bonuses
as Capstar Broadcasting's Board of Directors may determine. Further, Mr. Stone
is entitled to receive stock options to purchase shares of Class A Common Stock.
If Capstar Broadcasting terminates Mr. Stone's employment for cause or Mr. Stone
terminates his employment for other than good reason, Capstar Broadcasting must
pay Mr. Stone all accrued obligations and other benefits earned prior to the
date of termination. If Capstar Broadcasting terminates Mr. Stone's employment
agreement other than for cause or Mr. Stone terminates his employment agreement
for good reason, Mr. Stone's employment agreement provides for (A) a lump sum
payment of (x) two times Mr. Stone's then current annual salary and (y) any
accrued obligations and other benefits earned prior to the date of termination
and (B) unless the Board of Directors of Capstar Broadcasting determines that
Mr. Stone has not satisfactorily performed his obligations and duties under the
agreement, the immediate vesting of all stock options between Capstar
Broadcasting and Mr. Stone and the right to exercise those options until the
earlier of (x) the expiration date of those options or (y) the 90th day after
Mr. Stone's termination.
 
     James T. Shea, Jr. Employment Agreement. The Companies have entered into an
employment agreement with James T. Shea, Jr. Mr. Shea's employment agreement
terminates on April 30, 1999. Mr. Shea's annual base salary for 1998 is
$288,750, which increases at the beginning of each calendar year by an amount
not less than five percent of his then current base salary. Mr. Shea is also
entitled to receive annual bonuses as the Board of Directors of Capstar Radio
may determine, provided that the bonus shall not be less than $150,000. In
addition, the employment agreement provides for an automobile allowance,
participation in the retirement, savings, and welfare benefit plans of Capstar
Radio and a life insurance policy of $650,000. If the Company terminates Mr.
Shea's employment for cause, the Company is obligated to pay Mr. Shea's then
accrued base salary, reimbursable expenses, and any other compensation then due
and owing. In addition, the Company must continue to fund Mr. Shea's life
insurance policy. If the employment agreement is terminated due to death or
disability, without cause or by Mr. Shea for good reason, Mr. Shea will be
entitled to (i) the continuation of his annual base salary, as then in effect,
for a period equal to (A) if the termination date occurs after April 21, 1998
but prior to April 30, 1999, a 12-month period commencing on the termination
date or (B) if the termination date occurs on or prior to April 21, 1998, the
lesser of (x) a 24-month period commencing on the termination date and (y) the
period starting on the termination date and ending on April 30, 1999, (ii) a pro
rata amount of his annual bonus, (iii) any annual base salary and annual bonus
then accrued but not yet paid, (iv) the continuation of his welfare benefits for
a period equal to (A) if the termination date occurs after April 21, 1998 but
prior to April 30, 1999, a 12-month period commencing on the termination date or
(B) if the termination date occurs on or prior to April 21, 1998, the lesser of
(x) a 24-month period commencing on the termination date and (y) the period
starting on the termination date and ending on April 30, 1999, (v) the
continuation of his life insurance policy, (vi) any other compensation and
benefits as may be provided in accordance with the terms and provisions of any
applicable plans and programs, (vii) reimbursement for certain expenses incurred
as of the termination date but not yet paid as of the date of termination and
(viii) any other rights afforded to him under other written agreements between
Mr. Shea and the Company.
 
     John D. Cullen Employment Agreement. GulfStar has entered into an
employment agreement with John D. Cullen pursuant to which Mr. Cullen serves as
the President and Chief Executive Officer of GulfStar. Mr. Cullen's employment
agreement terminates on March 31, 2001 unless sooner terminated in accordance
with the terms of the employment agreement. Mr. Cullen's annual base salary for
1998 is $225,000 subject to annual increases as determined by the Board of
Directors of GulfStar. Mr. Cullen is also entitled to receive annual bonuses of
at least $35,000 if GulfStar achieves certain annual broadcast cash flow
projections established by the board of directors of GulfStar. If GulfStar
terminates Mr. Cullen's employment for cause
                                       55
<PAGE>   58
 
(as defined in the employment agreement) or Mr. Cullen resigns (and GulfStar has
not breached the employment agreement), GulfStar must pay Mr. Cullen all accrued
obligations and other benefits earned prior to the date of termination. If
GulfStar terminates Mr. Cullen's employment without cause or Mr. Cullen
terminates his employment due to a material breach of the employment agreement
by GulfStar (which breach is not cured within 30 days after receipt of notice of
breach), then GulfStar must pay Mr. Cullen his current salary (in equal monthly
installments) for a one year period, plus a pro rata portion of any bonuses that
would otherwise have been payable to Mr. Cullen.
 
     Frank D. Osborn Consulting Agreement. Southern Star has entered into a
consulting, non-compete and separation agreement with Frank D. Osborn pursuant
to which Mr. Osborn serves as a consultant to Southern Star. The agreement
provides that (i) Mr. Osborn's resign as an officer of Southern Star, (ii) Mr.
Osborn will not compete with Southern Star and its subsidiaries until after
February 28, 2002 and (iii) Mr. Osborn will serve as a consultant to Southern
Star until February 28, 2001. Mr. Osborn receives $100,000 per year for his
consulting services and $375,000 per year for his agreement not to compete with
Southern Star. Upon execution of the agreement, Mr. Osborn also received a lump
sum payment of $730,000, and Mr. Osborn's 1,500,000 options to purchase Class A
common stock, par value $0.01 per share, of Capstar Broadcasting ("Class A
Common Stock") under the Stock Option Plan immediately vested. The stock options
may be exercised until the earlier to occur of (i) February 28, 2001 or (ii) the
90th day after the termination of the agreement.
 
BENEFIT PLANS
 
  Capstar Broadcasting Stock Option Plan
 
     Capstar Broadcasting's 1997 Stock Option Plan (the "Stock Option Plan")
gives certain individuals and key employees of Capstar Broadcasting and any
parent corporation or subsidiary corporation thereof (such parent and subsidiary
corporations are referred to as "Related Entities") who are responsible for the
continued growth of Capstar Broadcasting an opportunity to acquire a proprietary
interest in Capstar Broadcasting, and thus to create in such persons an
increased interest in and a greater concern for the welfare of Capstar
Broadcasting and any Related Entities. The Stock Option Plan provides for the
grant of options to acquire up to 22,000,000 shares of Class A Common Stock. As
of December 31, 1997, grants of stock options with respect to 16,739,021 shares
of Class A Common Stock have been made under the Stock Option Plan.
 
     The Stock Option Plan is administered by Capstar Broadcasting's
Compensation Committee, which is currently comprised of Thomas O. Hicks,
Lawrence D. Stuart, Jr. and R. Gerald Turner, a director of Capstar
Broadcasting. The Compensation Committee has authority, subject to the terms of
the Stock Option Plan (including the formula grant provisions and the provisions
relating to incentive stock options contained therein), to determine when and to
whom to make grants or awards under the Stock Option Plan, the number of shares
to be covered by the grants or awards, the types and terms of the grants and
awards, and in the case of grants of stock options, the exercise price of stock
options. Moreover, the Compensation Committee has the authority, subject to the
provisions of the Stock Option Plan, to establish such rules and regulations as
it deems necessary for the proper administration of the Stock Option Plan and to
make such determinations and interpretations and to take such action in
connection with the Stock Option Plan and any grants and awards thereunder as it
deems necessary or advisable. The Compensation Committee's determinations and
interpretations under the Stock Option Plan are final, binding and conclusive on
all participants and need not be uniform and may be made by the Compensation
Committee selectively among persons who receive, or are eligible to receive,
grants and awards under the Stock Option Plan.
 
     Grants of "incentive stock options" within the meaning of section 422 of
the Internal Revenue Code of 1986, as amended (the "Code") and non-qualified
stock options (options which do not qualify under section 422 of the Code) may
be made under the Stock Option Plan to key employees. Grants of non-qualified
stock options may be made to eligible nonemployees (as defined in the Stock
Option Plan). No incentive stock option may be granted pursuant to the Stock
Option Plan after October 16, 2006.
 
     The exercise price per share of the Class A Common Stock, under each option
is fixed by the Compensation Committee at the time of grant and must equal at
least 100% of the fair market value (as
 
                                       56
<PAGE>   59
 
defined in the Stock Option Plan) of a share of Class A Common Stock on the date
of grant; provided, however, that the exercise price of an incentive stock
option granted to a person who, at the time of grant, owns shares of Capstar
Broadcasting or any Related Entity which possess more than 10% of the total
combined voting power of all classes of stock of Capstar Broadcasting or of any
Related Entity may not be less than 110% of the fair market value of a share of
Class A Common Stock on the date of grant. No option is exercisable after the
expiration of ten years from the date of grant, unless, as to any non-qualified
stock option, otherwise expressly provided in the option agreement; provided,
however, that no incentive stock option granted to a person who, at the time of
grant, owns stock of Capstar Broadcasting, or any Related Entity, possessing
more than 10% of the total combined voting power of all classes of stock of
Capstar Broadcasting, or any Related Entity, is exercisable after the expiration
of five years from the date of grant.
 
     In the event of a change of control or sale of Capstar Broadcasting, all
outstanding stock options may, subject to the sole discretion of the
Compensation Committee, become exercisable in full at such time or times as the
Compensation Committee may determine. Each stock option accelerated by the
Compensation Committee would terminate on such date (not later than the stated
exercise date) as the Compensation Committee determines.
 
     Unless an option or other agreement provides otherwise, upon the date of
death of an optionee (or upon the termination of an optionee because of such
optionee's disability), the person who acquires the right to exercise the option
of such optionee (or the optionee in the case of disability) must exercise such
option within 180 days after the date of death (or termination in the case of
disability), unless a longer period is expressly provided in such incentive
stock option or a shorter period is established by the Compensation Committee,
but in no event after the expiration date of such option. Following an
optionee's termination of employment for cause, all stock options held by such
optionee will immediately be canceled as of the date of termination of
employment. Following an optionee's termination of employment for other than
cause, such optionee must exercise his stock option within 30 days after the
date of such termination, unless a longer period is expressly provided in such
stock option or a shorter period is established by the Compensation Committee,
provided that no incentive stock option shall be exercisable more than three
months after such termination.
 
     The option exercise price may be paid in cash or, in the discretion of the
Compensation Committee, by the delivery of shares of Class A Common Stock then
owned by the participant, or by a combination of these methods. Also, in the
discretion of the Compensation Committee, payment may also be made by delivering
a properly executed exercise notice to Capstar Broadcasting together with a copy
of irrevocable instructions to a broker to deliver promptly to Capstar
Broadcasting the amount of sale or loan proceeds to pay the exercise price.
 
     Except as otherwise expressly provided in any non-qualified stock option,
stock options may be transferred by a participant only by will or by the laws of
descent and distribution and may be exercised only by the participant during his
lifetime.
 
     If an optionee's employment is terminated for any reason or a change of
control occurs, Capstar Broadcasting, or its designee, may purchase the
remaining options and/or shares of Class A Common Stock held by such optionee at
a price per share equal to fair market value. Prior to the transfer by an
optionee of any shares of Class A Common Stock issued to such optionee upon
exercise of a stock option, Capstar Broadcasting or its designee has the right
to acquire such shares of Class A Common Stock on the same terms and conditions
as the proposed transfer.
 
  Capstar Broadcasting Stock Purchase Plan
 
     Capstar Broadcasting's 1997 Stock Purchase Plan (the "Stock Purchase Plan")
gives certain key employees of Capstar Broadcasting and any Related Entities who
are expected to contribute materially to the success of Capstar Broadcasting and
any Related Entities an opportunity to acquire a proprietary interest in Capstar
Broadcasting, and thus to retain such persons and create in such persons an
increased interest in and a greater concern for the welfare of Capstar
Broadcasting and any Related Entities. The Stock Purchase Plan provides for the
grant of stock purchase rights to acquire up to 3,000,000 shares of Class A
Common Stock. To
 
                                       57
<PAGE>   60
 
date, grants of stock purchase rights with respect to 630,000 shares of Class A
Common Stock have been made under the Stock Purchase Plan, all of which have
been exercised.
 
LIMITATIONS ON DIRECTORS AND OFFICERS LIABILITY
 
     Each of Capstar Radio's and Capstar Partner's Certificates of Incorporation
provides that, to the fullest extent permitted by law, no director shall be
personally liable to Capstar Radio or Capstar Partners or its stockholders, as
applicable, for monetary damages for breach of his fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
Capstar Radio or Capstar Partners or its stockholders, as applicable, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) in respect of certain unlawful dividend payments
or stock redemption's or purchases or (iv) for any transaction from which the
director derived an improper personal benefit. The effect of these provisions is
to eliminate the rights of Capstar Radio or Capstar Partners and its
stockholders, as applicable, (through stockholders' derivative suits on behalf
of the Capstar Radio or Capstar Partners, as applicable) to recover monetary
damages against a director for breach of fiduciary duty as a director (including
breaches resulting from grossly negligent behavior), except in the situations
described above.
 
     Each of the companies' directors have entered into indemnification
agreements with Capstar Broadcasting. The indemnification agreements provide
that Capstar Broadcasting will indemnify the director to the fullest extent
permitted by law and to advance certain expenses to such director.
 
     The Companies believe that these provisions and agreements will assist the
Companies in attracting and retaining qualified individuals to serve as
directors and officers.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     Capstar Partners is a subsidiary of Capstar Broadcasting, and Capstar Radio
is a wholly-owned subsidiary of Capstar Partners. As of March 23, 1998, Capstar
Broadcasting owned 279,632,180 shares of the Class A common stock, par value
$0.01 per share, of Capstar Partners, which represented all of the outstanding
common stock of Capstar Partners. As of March 23, 1998, Capstar Partners owned
1,051,394,410 shares of the common stock, par value $0.01 per share, of Capstar
Radio, which represents all of the outstanding common stock of Capstar Radio.
 
                                       58
<PAGE>   61
 
     The following table sets forth certain information regarding (i) the
beneficial ownership of each class of the common stock of Capstar Broadcasting
as of March 23, 1998 (a) each person or group beneficially owning five percent
or more of any class of the Common Stock of Capstar Broadcasting, (b) each
director of the Companies, (c) each Named Executive Officer, and (d) all
directors and executive officers of the Companies as a group and (ii) the
combined percentage of all classes of the capital stock of Capstar Broadcasting
that is beneficially owned by each of such person or group of persons. Except as
noted below and pursuant to applicable community property laws, the Companies
believe that each individual or entity named below is believed to have sole
investment and voting power with respect to all the shares of capital stock
reflected below.
 
<TABLE>
<CAPTION>
                                          CLASS A                CLASS B                 CLASS C
                                        COMMON STOCK         COMMON STOCK(1)         COMMON STOCK(2)
                                    --------------------   --------------------   ---------------------
                                      NUMBER     PERCENT     NUMBER     PERCENT     NUMBER      PERCENT   PERCENT OF   PERCENTAGE
                                        OF         OF          OF         OF          OF          OF       ECONOMIC    OF VOTING
     NAME OF BENEFICIAL OWNER       SHARES(3)     CLASS    SHARES(3)     CLASS     SHARES(3)     CLASS     INTEREST      POWER
     ------------------------       ----------   -------   ----------   -------   -----------   -------   ----------   ----------
<S>                                 <C>          <C>       <C>          <C>       <C>           <C>       <C>          <C>
Hicks Muse Parties(4).............   2,727,272    10.72%   32,144,223    59.79%   581,031,144    92.17%     86.80%       91.85%
  200 Crescent Court, Suite 1600
  Dallas, Texas 75201
Thomas O. Hicks(4)(5).............  26,306,750    100.0%   53,764,859    100.0%   630,374,109    100.0%      6.53%       100.0%
  200 Crescent Court, Suite 1600
  Dallas, Texas 75201
BT Capital Partners, Inc..........          --       --     9,619,995    17.89%            --       --       1.36%          --
  130 Liberty Street, 25th Floor
  New York, New York 10006
John D. Cullen....................   3,292,989    12.95%           --       --             --       --       *            *
  600 Congress Avenue, Suite 1400
  Austin, Texas 78701
D. Geoff Armstrong................   2,969,867    11.68%           --       --             --       --       *            *
  600 Congress Avenue, Suite 1270
  Austin, Texas 78701
Frank D. Osborn(6)................   3,136,361    11.65%           --       --             --       --       *            *
  130 S. Mason Street
  Greenwich, Connecticut 06830
Eric C. Neuman(7).................   2,613,410    10.28%           --       --             --       --       *            *
  200 Crescent Court, Suite 1600
  Dallas, Texas 75201
William R. Hicks..................   2,580,220    10.15%           --       --             --       --       *            *
  2700 Bypass, Suite 5000
  College Station, Texas 77845
Paul D. Stone(8)..................   2,483,855     9.69%           --       --             --       --       *            *
  600 Congress Avenue, Suite 1400
  Austin, Texas 78701
Joseph Mathias....................   1,615,385     6.35%           --       --             --       --          *            *
  600 Congress Avenue, Suite 1400
  Austin, Texas 78701
R. Steven Hicks(9)................     212,500     *               --       --     25,444,986     3.97%      3.54%        3.96%
William S. Banowsky, Jr.(10)......     712,500     2.78%           --       --             --       --       *            *
Lawrence D. Stuart, Jr............     637,928     2.51%           --       --             --       --       *            *
James T. Shea, Jr.(11)............     590,293     2.30%           --       --             --       --       *            *
All directors and executive
  officers as a group (12
  persons)(12)....................  26,306,750    100.0%   53,764,859    100.0%   630,374,109    100.0%     11.60%       100.0%
</TABLE>
 
---------------
 
  *  Less than one percent.
 
 (1) The holders of shares of Class B common stock, par value $0.01 per share,
     of Capstar Broadcasting ("Class B Common Stock") are not entitled to vote,
     except as required by law. The shares of Class B Common Stock are
     convertible in whole but not in part, at the option of the holder or
     holders thereof, into the same number of shares of Class A Common Stock,
     subject to certain conditions.
 
 (2) The holders of the Class C common stock, par value $0.01 per share, of
     Capstar Broadcasting ("Class C Common Stock" and together with the Class A
     Common Stock and the Class B Common Stock, the "Common Stock") are entitled
     to vote with the holders of the Class A Common Stock on all matters
     submitted to a vote of stockholders of Capstar Broadcasting, except with
     respect to the election of the Class A directors of Capstar Broadcasting,
     certain "going private" transactions and as otherwise required by law. Each
     share of Class C Common Stock is entitled to ten votes per share on all
     matters submitted to a vote of stockholders of Capstar Broadcasting. The
     shares of Class C Common Stock are convertible in whole but not in part, at
     the option of the holder or holders thereof, into the same number of shares
     of Class A Common Stock, subject to certain conditions.
 
 (3) Shares beneficially owned and percentage ownership are based on 25,429,757
     shares of Class A Common Stock outstanding, 53,746,859 shares of Class B
     Common Stock outstanding, and 630,374,109 shares of Class C Common Stock
     outstanding.
 
                                       59
<PAGE>   62
 
 (4) Includes (i) 2,727,272 shares of Class A Common Stock owned of record by
     Capstar Boston Partners, L.L.C., a limited liability company of which the
     manager is a limited partnership whose ultimate general partner is Hicks,
     Muse Fund III Incorporated ("Fund III Inc."); (ii) 32,144,223 shares of
     Class B Common Stock owned of record by Capstar BT Partners, L.P., a
     limited partnership of which the ultimate general partner is Fund III Inc.;
     and (iii) 581,031,144 shares of Class C Common Stock owned of record by
     Capstar Broadcasting Partners, L.P. ("Capstar L.P."), a limited partnership
     of which the ultimate general partner is HM3/Capstar, Inc. ("HM3/Capstar").
     Thomas O. Hicks is a controlling stockholder and serves as Chief Executive
     Officer, Chief Operating Officer, President and Chairman of the Boards of
     Directors of Fund III Inc. and HM3/Capstar. Accordingly, Thomas O. Hicks
     may be deemed to be the beneficial owner of the Common Stock held by
     Capstar L.P., Capstar BT Partners, L.P., and Capstar Boston Partners,
     L.L.C. Mr. Thomas O. Hicks disclaims beneficial ownership of the shares of
     Common Stock not owned of record by him.
 
 (5) Includes 12,000,641 shares of Class B Common Stock and 34,368,495 shares of
     Class C Common Stock owned of record by Thomas O. Hicks. In addition, the
     number of shares of Class A Common Stock includes 6,530,789 shares that are
     subject to a voting agreement in the Management Stockholders Agreement,
     2,732,272 shares that are subject to a voting agreement in the Affiliate
     Stockholders Agreement and 16,166,696 shares that are subject to a voting
     agreement in the GulfStar Stockholders Agreement. The number of Class A
     Common Stock also includes 792,794 shares issuable upon the exercise of
     stock options that are currently vested and 84,199 shares subject to stock
     options that are exercisable within 60 days, which shares would be subject
     to the Affiliate Stockholders Agreement. In addition, the number of shares
     of Class B Common Stock includes 32,144,223 shares that are subject to a
     voting agreement in the Affiliate Stockholders Agreement and 9,619,995
     shares that are subject to a voting agreement in the GulfStar Stockholders
     Agreement. The number of shares of Class C Common Stock also includes
     596,005,614 shares that are subject to a voting agreement in the Affiliate
     Stockholders Agreement. Hicks Muse is a party to the Affiliate Stockholders
     Agreement, the Management Stockholders Agreement and the GulfStar
     Stockholders Agreement, which agreements require the parties to such
     agreements to vote their shares (i) in favor of the election to Capstar
     Broadcasting's Board of Directors of such individuals as may be designated
     by Hicks Muse and its affiliates (including Capstar L.P.) and (ii) on other
     matters as the holders of a majority of the voting power of the outstanding
     shares of Common Stock vote on such matters. Thomas O. Hicks is the
     controlling stockholder of Hicks Muse and serves as its Chairman of the
     Board, President, Chief Executive Officer, Chief Operating Officer and
     Secretary. Accordingly, Thomas O. Hicks may be deemed to be the beneficial
     owners of all of the Common Stock subject to the Affiliate Stockholders
     Agreement, the Management Stockholders Agreement and the GulfStar
     Stockholders Agreement. Thomas O. Hicks disclaims beneficial ownership of
     the shares of Common Stock not owned by him of record.
 
 (6) The number of shares of Class A Common Stock includes (i) 1,561,176 shares
     owned of record by Mr. Osborn, (ii) 1,500,000 shares of issuable upon the
     exercise of stock options that are currently vested, and (iii) 75,185
     shares owned of record by Frank D. Osborn's children.
 
 (7) Includes (i) 112,782 shares owned of record by Mr. Neuman and (ii)
     2,500,628 shares owned of record by the Eric C. Neuman Special Trust.
 
 (8) Includes (i) 184,167 shares issuable upon the exercise of stock options
     that are currently vested and (ii) 28,333 shares subject to stock options
     that are exercisable within 60 days.
 
 (9) The number of shares of Class A Common Stock includes (i) 184,167 shares
     issuable upon the exercise of stock options that are currently vested and
     (ii) 28,333 shares subject to stock options that are exercisable within 60
     days. The number of shares of Class C Common Stock includes (i) 100,000
     shares owned of record by R. Steven Hicks' children and (ii) 10,470,516
     shares purchasable by R. Steven Hicks pursuant to the terms of the
     Warrants. See "Item 13. Certain Relationships and Related Transactions --
     Warrants." R. Steven Hicks has voting rights to the shares owned by his
     children under the terms of the Affiliate Stockholders Agreement. R. Steven
     Hicks disclaims beneficial ownership of the shares of Common Stock not
     owned by him of record. The shares owned of record by R. Steven Hicks and
     his children are subject to a voting agreement as described in the
     Affiliate Stockholders Agreement. See "Item 13. Certain Relationships and
     Related Transactions -- Stockholders Agreements -- Affiliate Stockholders
     Agreement."
 
(10) Includes (i) 184,167 shares issuable upon the exercise of stock options
     that are currently vested and (ii) 28,333 shares subject to stock options
     that are exercisable within 60 days.
 
(11) Includes 240,293 shares issuable upon the exercise of stock options that
     are currently vested.
 
(12) Includes 792,794 shares of Class A Common Stock issuable upon the exercise
     of stock options that are currently vested and (ii) 84,999 shares subject
     to stock options that are exercisable within 60 days.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
MONITORING AND OVERSIGHT AGREEMENT
 
     Capstar Partners has entered into a monitoring and oversight agreement (the
"Capstar Partners Monitoring and Oversight Agreement") with Hicks Muse Partners,
L.P. ("Hicks Muse Partners"). Pursuant thereto, Capstar Partners has agreed to
pay to Hicks Muse Partners an annual fee for ongoing financial oversight and
monitoring services. The annual fee is adjustable upward or downward at the end
of each fiscal year to an amount equal to 0.2% of the budgeted consolidated
annual net sales of Capstar Partners for the then-current fiscal year; provided,
that such fee shall at no time be less than $100,000 per year. Capstar Partners
paid approximately $256,000 in 1997 and has paid approximately $122,000 in 1998
to Hicks Muse under the Capstar Partners Monitoring and Oversight Agreement.
Hicks Muse Partners is also entitled to reimbursement for any out-of-pocket
expenses incurred by it in connection with rendering services under the Capstar
Partners Monitoring and Oversight Agreement. In addition, Capstar Partners has
agreed to indemnify
 
                                       60
<PAGE>   63
 
Hicks Muse Partners, its affiliates and shareholders, and their respective
directors, officers, agents, employees and affiliates from and against all
claims, actions, proceedings, demands, liabilities, damages, judgments,
assessments, losses and costs, including fees and expenses, arising out of or in
connection with the services rendered by Hicks Muse Partners in connection with
the Capstar Partners Monitoring and Oversight Agreement. Hicks Muse Partners has
reserved the right to seek an increase in the amount of its annual fee based on
the increased scope of Capstar Partner's operations. Any such increase will be
subject to the approval of the Board of Directors of Capstar Partners, including
a majority of the disinterested directors, based on the exercise of their
independent judgment.
 
     The Capstar Partners Monitoring and Oversight Agreement makes available on
an ongoing basis the resources of Hicks Muse Partners concerning a variety of
financial matters. The services that have been and will continue to be provided
by Hicks Muse Partners could not otherwise be obtained by Capstar Partners
without the addition of personnel or the engagement of outside professional
advisors. The Capstar Partners Monitoring and Oversight Agreement expires on the
earlier to occur of (i) October 16, 2006 or (ii) the date on which HM Fund III
and its affiliates cease to own beneficially, directly or indirectly, any
securities of Capstar Partners or its successors.
 
FINANCIAL ADVISORY AGREEMENT
 
     Capstar Partners is a party to a financial advisory agreement (the "Capstar
Partners Financial Advisory Agreement") with Hicks Muse Partners. Pursuant to
the Capstar Partners Financial Advisory Agreement, Hicks Muse Partners is
entitled to receive a fee equal to 1.5% of the transaction value (as defined in
the Capstar Partners Financial Advisory Agreement) for each add-on transaction
(as defined) in which Capstar Partners or any of its subsidiaries is involved.
Hicks Muse Partners is also entitled to reimbursement for any out-of-pocket
expenses incurred by it in connection with rendering services under the Capstar
Partners Financial Advisory Agreement. The term "transaction value" means the
total value of any add-on transaction, including, without limitation, the
aggregate amount of the funds required to complete the add-on transaction
(excluding any fees payable pursuant to the Capstar Partners Financial Advisory
Agreement, but including the amount of any indebtedness, preferred stock or
similar items assumed or remaining outstanding). The term "add-on transaction"
means any future proposal for a tender offer, acquisition, sale, merger,
exchange offer, recapitalization, restructuring, or other similar transaction
directly or indirectly involving Capstar Partners or any of its subsidiaries and
any other person or entity. In addition, Capstar Partners has agreed to
indemnify Hicks Muse Partners, its affiliates and partners, and their respective
directors, officers, agents, employees and affiliates from and against all
claims, actions, proceedings, demands, liabilities, damages, judgments,
assessments, losses and costs, including fees and expenses, arising out of or in
connection with the services rendered by Hicks Muse Partners in connection with
the Capstar Partners Financial Advisory Agreement.
 
     Pursuant to the Capstar Partners Financial Advisory Agreement, Hicks Muse
Partners provides investment banking, financial advisory and other similar
services with respect to the add-on transactions in which Capstar Partners is
involved. Such transactions require additional attention beyond that required to
monitor and advise Capstar Partners on an ongoing basis and accordingly Capstar
Partners pays separate Capstar Partners advisory fees with respect to such
matters in addition to those paid in connection with the Capstar Partners
Monitoring and Oversight Agreement. The services that have been and will
continue to be provided by Hicks Muse Partners could not otherwise be obtained
by Capstar Partners without the addition of personnel or the engagement of
outside professional advisors. The Capstar Partners Financial Advisory Agreement
will terminate concurrently with the termination of the Capstar Partners
Monitoring and Oversight Agreement. Capstar Partners paid Hicks Muse Partners
financial advisory fees of approximately $10.9 million in 1997 and approximately
$4.6 million in 1998.
 
STOCKHOLDERS AGREEMENTS
 
     Affiliate Stockholders Agreement. R. Steven Hicks, five of his children,
Capstar BT Partners, L.P., Capstar Boston Partners, L.L.C. and Capstar L.P. (the
"Affiliate Stockholders") have entered into the Affiliate Stockholders Agreement
with Capstar Broadcasting and Hicks Muse which provides, among other
                                       61
<PAGE>   64
 
things, that the Affiliate Stockholders may require Capstar Broadcasting,
subject to certain registration volume limitations, to effect up to three demand
registrations of their Common Stock under the Securities Act at any time after
consummation of a qualified IPO (as defined in the Affiliate Stockholders
Agreement). The Affiliate Stockholders Agreement also provides that in the event
Capstar Broadcasting proposes to register any shares of its Common Stock under
the Securities Act, whether or not for its own account, the Affiliate
Stockholders will be entitled, with certain exceptions, to include their shares
of Common Stock in such registration.
 
     The Affiliate Stockholders Agreement also requires the Affiliate
Stockholders, subject to certain conditions, to vote their shares (i) in favor
of the election to Capstar Broadcasting's Board of Directors of such individuals
as may be designated by Hicks Muse and its affiliates (including Capstar L.P.)
and (ii) on other matters so as to give effect to the agreements contained in
the Affiliate Stockholders Agreement. If certain conditions are met, including
Mr. Hicks serving as the President and Chief Executive Officer of Capstar
Broadcasting or holding not less than 3% of the fully-diluted Common Stock of
Capstar Broadcasting, the Affiliate Stockholders Agreement provides that Mr.
Hicks shall be one of such designees to serve on Capstar Broadcasting's Board of
Directors.
 
     The Affiliate Stockholders Agreement provides that, in connection with any
transfer of Capstar Broadcasting's securities held by Hicks Muse and its
affiliates (which would constitute a "sale" thereof within the meaning of the
Securities Act) representing more than 50% of the shares of Common Stock then
held by Hicks Muse and its affiliates, Hicks Muse and its affiliates have the
right to require the Affiliate Stockholders to also transfer a portion of their
shares of Common Stock. If Hicks Muse and its affiliates desire to effect a sale
of more than 50% of the shares of Common Stock then held by Hicks Muse and its
affiliates, such stockholders may "tag along" and sell a portion of their shares
of Common Stock on the same terms.
 
     Prior to the transfer of any securities subject to the Affiliate
Stockholders Agreement by any stockholder other than an affiliate of Hicks Muse,
Hicks Muse has the right to acquire such securities on the same terms and
conditions as the proposed transfer. If R. Steven Hicks is no longer an officer,
director or employee of Capstar Broadcasting or any of its subsidiaries or a
change of control (as defined in the Affiliate Stockholders Agreement) occurs,
Capstar Broadcasting has the option to purchase all or any portion of Capstar
Broadcasting's securities held by Mr. Hicks and his children. The Affiliate
Stockholders Agreement provides that (i) R. Steven Hicks shall retain the voting
rights of any securities (subject to such agreement) which he transfers,
conveys, assigns or hypothecates to an affiliate or any of his family members
and (ii) Mr. Hicks may not transfer, convey, assign or hypothecate any of his
securities (subject to the Affiliate Stockholders Agreement) to an affiliate or
any family member of Mr. Hicks unless such affiliate or family member joins in
the Affiliate Stockholders Agreement.
 
     Subject to certain exceptions, if Capstar Broadcasting proposes to issue or
sell any shares of Common Stock to Hicks Muse or any of its affiliates, Mr.
Hicks has the right to purchase a pro rata share of such shares of Common Stock.
Mr. Hicks is entitled to receive, for no additional consideration, a warrant to
acquire additional shares of Class C Common Stock (determined as provided in the
Affiliate Stockholders Agreement) if Hicks Muse or any of its affiliates
otherwise acquires additional shares of Common Stock. See "-- Warrants" and
"-- Management and Affiliate Equity Investments."
 
     Management Stockholders Agreement. Certain stockholders of Capstar
Broadcasting have entered into the Management Stockholders Agreement (the
"Management Stockholders Agreement") with Capstar Broadcasting and Hicks Muse
that provides, among other things, that in the event Capstar Broadcasting
proposes to register any shares of its Common Stock under the Securities Act,
whether or not for its own account, the stockholders that are parties to the
Management Stockholders Agreement will be entitled, with certain exceptions, to
include their shares of Common Stock in such registration. The Management
Stockholders Agreement also requires the parties thereto to vote their shares in
favor of the election to Capstar Broadcasting's Board of Directors of such
individuals as may be designated by Hicks Muse and its affiliates.
 
     The Management Stockholders Agreement provides that, in connection with any
transfer of Capstar Broadcasting's securities held by Hicks Muse and its
affiliates (which would constitute a "sale" thereof within the meaning of the
Securities Act) representing more than 50% of the shares of Common Stock then
held by
                                       62
<PAGE>   65
 
Hicks Muse and its affiliates, Hicks Muse and its affiliates have the right to
require the stockholders subject to the Management Stockholders Agreement also
to transfer a portion of their shares of Common Stock. If Hicks Muse and its
affiliates desire to effect a sale of more than 50% of the shares of Common
Stock then held by Hicks Muse and its affiliates, such stockholders may "tag
along" and sell a portion of their shares of Common Stock on the same terms.
 
     Prior to the transfer of any securities subject to the Management
Stockholders Agreement by any stockholder other than an affiliate of Hicks Muse,
Hicks Muse has the right to acquire such securities on the same terms and
conditions as the proposed transferee. If at any time a stockholder subject to
the Management Stockholders Agreement is no longer an officer, director or
employee of Capstar Broadcasting or any of its subsidiaries or a change of
control (as defined in the Management Stockholders Agreement) of Capstar
Broadcasting occurs, Capstar Broadcasting has the option to purchase all or any
portion of Capstar Broadcasting's securities held by such stockholder.
 
     GulfStar Stockholders Agreement. Certain stockholders of Capstar
Broadcasting have entered into the GulfStar Stockholders Agreement with Capstar
Broadcasting and Hicks Muse that provides, among other things, that such persons
may require Capstar Broadcasting, subject to certain registration volume
limitations, to effect up to three demand registrations of their Common Stock
under the Securities Act one year following the consummation of a Qualified IPO
(as defined in the GulfStar Stockholders Agreement). The GulfStar Stockholders
Agreement also provides that in the event Capstar Broadcasting proposes to
register any shares of its Common Stock under the Securities Act, whether or not
for its own account, the parties will be entitled, with certain exceptions, to
include their shares of Common Stock in such registration.
 
     The GulfStar Stockholders Agreement also requires the parties, subject to
certain conditions, to vote their shares (i) in favor of the election to Capstar
Broadcasting's Board of Directors of such individuals as may be designated by
Hicks Muse and its affiliates (including Capstar L.P.) and (ii) on other matters
so as to give effect to the agreements contained in the GulfStar Stockholders
Agreement.
 
     The GulfStar Stockholders Agreement provides that, in connection with any
transfer of Capstar Broadcasting's securities held by Hicks Muse and its
affiliates (which would constitute a "sale" thereof within the meaning of the
Securities Act) representing more than 50% of the shares of Common Stock then
held by Hicks Muse and its affiliates, Hicks Muse and its affiliates have the
right to require the GulfStar Stockholders to also transfer a portion of their
shares of Common Stock. If Hicks Muse and its affiliates desire to effect a sale
of more than 50% of the shares of Common Stock then held by Hicks Muse and its
affiliates, such stockholders may "tag along" and sell a portion of their shares
of Common Stock on the same terms.
 
     Prior to the transfer of any securities subject to the GulfStar
Stockholders Agreement by any stockholder other than an affiliate of Hicks Muse,
Hicks Muse has the right to acquire such securities on the same terms and
conditions as the proposed transferee. The GulfStar Stockholders Agreement
provides that (i) a party shall retain the voting rights of any securities
(subject to such agreement) which he transfers, conveys, assigns or hypothecates
to an affiliate or any of his family members and (ii) a party may not transfer,
convey, assign or hypothecate any of his securities (subject to the GulfStar
Stockholders Agreement) to an affiliate or any family member of such party
unless such affiliate or family member joins in the GulfStar Stockholders
Agreement.
 
REGISTRATION RIGHTS AGREEMENT
 
     Frank D. Osborn is a party to a registration rights agreement with Capstar
Broadcasting which provides, among other things, that Mr. Osborn may require
Capstar Broadcasting to effect a demand registration of his Common Stock under
the Securities Act at any time within 30 days after the tenth anniversary of the
date of the registration rights agreement. Mr. Osborn's right to demand a
registration will terminate upon the first to occur of a qualified IPO or a
change of control (both as defined in the registration rights agreement). After
receipt of a demand for registration of Common Stock by Mr. Osborn pursuant to
the registration rights agreement, Capstar Broadcasting has the option to
purchase all of the shares of Common Stock, then held by Mr. Osborn for a 30-day
period, at appraised value (as defined in the registration rights agreement).
 
                                       63
<PAGE>   66
 
WARRANTS
 
     Under the terms of the Affiliate Stockholders Agreement, Capstar
Broadcasting has issued three warrants (each of the warrants a "Regular Warrant"
and collectively, the "Regular Warrants") to R. Steven Hicks. Pursuant to the
terms of the Regular Warrants, Mr. Hicks is entitled to purchase 7,440,000,
2,042,546 and 987,970 shares, respectively, of Class C Common Stock at any time
or from time to time and, upon the fulfillment of certain triggering events
(which are based on the achievement of a 30% internal rate of return on the
respective investments in Capstar Broadcasting of Hicks Muse and its
affiliates), Mr. Hicks may purchase an additional 1,860,000, 510,636, and
2,243,333 shares, respectively, of Class C Common Stock. See "-- Management and
Affiliate Equity Investments." The exercise price of the Regular Warrants is
equal to $1.00, $1.10, and $1.33 per share, respectively. The exercise prices of
each Regular Warrant will increase by an annual rate of interest equal to 8% per
year commencing on the date of grant of the Regular Warrant. The Regular
Warrants terminate 10 years from the date of grant. The Regular Warrants and the
shares of Class C Common Stock issuable thereunder are subject to the Affiliate
Stockholders Agreement. See "-- Affiliate Stockholders Agreement."
 
MANAGEMENT AND AFFILIATE EQUITY INVESTMENTS
 
     Hicks Muse and its affiliates (excluding Capstar BT Partners, L.P. and
Capstar Boston Partners, L.L.C.) have invested $749.8 million in Common Stock,
including $90.0 million for 90,000,000 shares of Class C Common Stock in
connection with the Commodore Acquisition, $34.8 million for 31,634,527 shares
of Class C Common Stock in connection with the Osborn Acquisition, $75.0 million
for 56,390,977 shares of Class C Common Stock in connection with the GulfStar
Acquisition, $250.0 million for 187,969,925 shares of Class C Common Stock in
connection with the Patterson Acquisition and $300.0 million for 212,285,714
shares of Class C Common Stock in connection with the repayment of indebtedness
under the Capstar Credit Facility, to consummate the Pending Acquisitions and
for general corporate purposes. In addition, an affiliate of Hicks Muse has
committed to invest an additional $50.0 million in Capstar Broadcasting during
the second quarter of 1998, which the Company expects to receive as an equity
contribution. Capstar BT Partners, L.P., an entity controlled by Hicks Muse, has
invested $20.0 million for 18,181,818 shares of Class B Common Stock in
connection with the Osborn Acquisition, $11.1 million for 8,377,443 shares of
Class B Common Stock in connection with the GulfStar Acquisition and $7.4
million for 5,584,962 shares of Class B Common Stock in connection with the
Patterson Acquisition. Capstar Boston Partners, L.L.C., an entity controlled by
Hicks Muse, has invested $3.0 million for 2,727,272 shares of Class A Common
Stock.
 
     In January 1997, William S. Banowsky, Jr. purchased 500,000 shares of Class
A Common Stock for $500,000 and R. Steven Hicks purchased 100,000 shares of
Class A Common Stock for $100,000. In February 1997, Dex Allen, president of
Pacific Star, purchased 363,636 shares Class A Common Stock for $400,000. In
June 1997, Mary K. Quass, president of Central Star, purchased 909,091 shares of
Class A Common Stock for $1.0 million.
 
INDEBTEDNESS OF MANAGEMENT
 
     Dex Allen, the president and chief executive officer of Pacific Star,
purchased 363,636 shares of common stock of Capstar Partners, which were
subsequently exchanged for the same number of shares of Class A Common Stock, in
exchange for $200,000 in cash and a promissory note payable to Capstar Partners
in the principal amount of $200,000. Mr. Allen repaid the promissory note in
February 1998.
 
     Mary K. Quass, the president and chief executive officer of Central Star,
purchased 909,091 shares of common stock of Capstar Partners, which were
subsequently exchanged for the same number of shares of Class A Common Stock, in
exchange for cash in the amount of $9,091 and a promissory note payable to
Capstar Partners in the principal amount of $990,909. Ms. Quass repaid the
promissory note in January 1998.
 
     Each of the Eric C. Neuman Special Trust, Paul D. Stone, and John D. Cullen
acquired shares of common stock of GulfStar in exchange for non-recourse
promissory notes payable and recourse promissory notes payable to GulfStar in
aggregate principal amounts of approximately $147,000, $497,000, and $921,000,
respectively. Before the GulfStar Acquisition, the notes were secured by the
common stock of GulfStar. In
                                       64
<PAGE>   67
 
connection with the GulfStar Acquisition, the common stock of GulfStar was
exchanged for Common Stock. The Common Stock held of record by each of the Eric
C. Neuman Special Trust, Paul D. Stone and John D. Cullen now secures such
person's obligation under the notes. Two notes of Paul D. Stone (with an
aggregate principal balance of $36,777) and the note of the Eric C. Neuman
Special Trust bear interest at a rate of 9% per annum, and Paul D. Stone's other
notes and John D. Cullen's note bear interest at 7.6% per annum, each with
principal and interest payments payable annually in arrears. Each of the notes
matures 10 years after the date of the note.
 
GULFSTAR TRANSACTION
 
     In September 1997, William R. Hicks, the brother of Thomas O. Hicks, sold
1,059,649 shares of Class A Common Stock to Capstar Broadcasting for $682,380.
In connection with the sale and pursuant to the GulfStar Stockholders Agreement,
Hicks Muse waived its right of first refusal to purchase William R. Hicks' Class
A Common Stock. Concurrently with the sale of William R. Hick's Class A Common
Stock, GulfStar Communications Holdings, Inc., an indirect subsidiary of Capstar
Broadcasting, sold all of the outstanding stock of Bryan Broadcasting Operating
Company, Inc. ("BBOC") to Mr. Hicks and another purchaser for a purchase price
of $580,000. In connection with the sale, Capstar Broadcasting entered into a
Right of First Refusal Agreement with William R. Hicks that provides Capstar
Broadcasting the right of first refusal, subject to certain permitted transfers,
to repurchase the stock of BBOC if William R. Hicks attempts to sell the radio
stations operated by BBOC.
 
GULFSTAR ACQUISITION
 
     On July 8, 1997, GulfStar Communications, Inc. merged with and into a
wholly-owned subsidiary of Capstar Broadcasting (the "GulfStar Acquisition"). In
the merger, all of the outstanding common stock of GulfStar was exchanged for
Common Stock having a deemed value of approximately $113.0 million. Concurrently
with the merger, the Company redeemed all outstanding preferred stock of
GulfStar for approximately $29.4 million and repaid in full the outstanding
indebtedness of GulfStar of approximately $90.7 million. The conversion ratio
used to determine the amount of Common Stock received by the stockholders of
GulfStar was calculated by the parties based on the relative value of Capstar
Broadcasting and GulfStar principally determined by utilizing projected
broadcast cash flows for the year ending December 31, 1998.
 
     Thomas O. Hicks beneficially owned 87.3% of the voting power of GulfStar
before the GulfStar Acquisition. In addition, Thomas O. Hicks and R. Steven
Hicks served as two of the four directors of GulfStar, and R. Steven Hicks was
the Chief Executive Officer of GulfStar. Pursuant to the GulfStar Acquisition,
R. Steven Hicks received 11,879,470 shares of Class C Common Stock; Thomas O.
Hicks received 12,000,641 shares and 34,368,495 shares of Class B Common Stock
and Class C Common Stock, respectively; and Eric C. Neuman, Paul D. Stone,
Lawrence D. Stuart, Jr. and John D. Cullen received 2,500,628 shares, 2,271,355
shares, 637,928 shares, and 3,292,989 shares, respectively, of Class A Common
Stock.
 
CHANCELLOR MEDIA TRANSACTIONS
 
     The Company has retained Katz Media Group, Inc. ("Katz") as its media
representative to sell national spot advertising air time. Katz is a
wholly-owned subsidiary of Chancellor Media, and Thomas O. Hicks serves as
Chairman of the Board of Chancellor Media. In addition, Eric C. Neuman and
Lawrence D. Stuart, Jr. serve on the board of Chancellor Media. In 1997 and year
to date in 1998, the Company has paid Katz $1,403,000 and $597,000,
respectively, for media representation services.
 
     The Company broadcasts advertising over the Company's portfolio of stations
from The AMFM Radio Network (the "Network"). The Network is owned and operated
by Chancellor Media. Thus far in 1998, the Company has paid Chancellor Media
$70,000 for the use of the Network.
 
                                       65
<PAGE>   68
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
     (a)(1) and (2) Consolidated Financial Statements
 
     The financial statements and schedules are listed under Item 8 herein and
are hereby incorporated herein by reference.
 
     (a)(3) Exhibits:
 
<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                    DESCRIPTION
        -------                                  -----------
<C>                      <S>
         2.1.1           -- Agreement and Plan of Merger, dated June 21, 1996, by and
                            among CMI Acquisition Company, Inc., Commodore Media,
                            Inc. ("Commodore") and the stockholders and other
                            signatories thereto.(1)
         2.1.2           -- First Amendment to Agreement and Plan of Merger, dated
                            September 3, 1996.(2)
         2.1.3           -- Second Amendment to Agreement and Plan of Merger, dated
                            October 16, 1996.(2)
         3.1.1           -- Certificate of Incorporation of Capstar Partners.(3)
         3.1.2           -- Certificate of Amendment to Certificate of Incorporation
                            of Capstar Partners, dated June 17, 1997.(4)
         3.2             -- Amended and Restated By-Laws of Capstar Partners.*
         3.3.1           -- Amended and Restated Certificate of Incorporation of
                            Capstar Radio.(6)
         3.3.2           -- Certificate of Amendment to Amended and Restated
                            Certificate of Incorporation of Capstar Radio dated April
                            29, 1996.(18)
         3.3.3           -- Certificate of Amendment to Amended and Restated
                            Certificate of Incorporation of Capstar Radio dated
                            February 17, 1997.(19)
         3.3.4           -- Certificate of Amendment to Amended and Restated
                            Certificate of Incorporation of Capstar Radio dated
                            February 20, 1997.(19)
         3.3.5           -- Certificate of Amendment to Amended and Restated
                            Certificate of Incorporation of Capstar Radio dated April
                            30, 1997.(19)
         3.3.6           -- Certificate of Amendment to Amended and Restated
                            Certificate of Incorporation of Capstar Radio dated June
                            26, 1997.(19)
         3.4.1           -- By-Laws of Capstar Radio.(20)
         3.4.2           -- Certificate of Amendment to By-Laws of Capstar Radio.(18)
         4.2.1           -- Indenture, dated February 20, 1997, between Capstar
                            Partners and U.S. Trust Company of Texas, governing
                            Capstar Partners' outstanding 12 3/4% Senior Discount
                            Notes due 2009 (the "12 3/4% Capstar Indenture").
         4.2.2           -- First Supplemental to 12 3/4% Capstar Indenture*.
         4.3.1           -- Indenture, dated as of April 21, 1995, among Capstar
                            Radio, IBJ Schroder Bank & Trust Company, as trustee, and
                            the guarantors named therein, governing Capstar Radio's
                            13 1/4% Senior Subordinated Notes (the "13 1/4% Capstar
                            Indenture").(6)
         4.3.2           -- Amendment No. 1 to 13 1/4% Capstar Indenture.(6)
         4.3.3           -- Amendment No. 2 to 13 1/4% Capstar Indenture.(7)
         4.3.4           -- Amendment No. 3 to 13 1/4% Capstar Indenture.(7)
         4.3.5           -- Amendment No. 4 to 13 1/4% Capstar Indenture.(8)
         4.3.6           -- Amendment No. 5 to 13 1/4% Capstar Indenture.(9)
         4.3.7           -- Amendment No. 6 to 13 1/4% Capstar Indenture.(5)
         4.3.8           -- Amendment No. 7 to 13 1/4% Capstar Indenture.(12)
</TABLE>
 
                                       66
<PAGE>   69
 
<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                    DESCRIPTION
        -------                                  -----------
<C>                      <S>
         4.3.9           -- Amendment No. 8 to 13 1/4% Capstar Indenture.(4)
         4.3.10          -- Amendment No. 9 to 13 1/4% Capstar Indenture.(11)
         4.3.11          -- Amendment No. 10 to 13 1/4% Capstar Indenture.(12)
         4.3.12          -- Amendment No. 11 to 13 1/4% Capstar Indenture.(13)
         4.3.13          -- Amendment No. 12 to 13 1/4% Capstar Indenture.*
         4.3.14          -- Amendment No. 13 to 13 1/4% Capstar Indenture.*
         4.3.15          -- Amendment No. 14 to 13 1/4% Capstar Indenture.*
         4.3.16          -- Amendment No. 15 to 13 1/4% Capstar Indenture.*
         4.4             -- Indenture, dated June 17, 1997, between Capstar Radio and
                            U.S. Trust Company of Texas, N.A governing Capstar
                            Radio's outstanding 9 1/4% Senior Subordinated Notes due
                            2007.(4)
         4.5             -- Indenture, dated June 17, 1997, between Capstar Partners
                            and U.S. Trust Company of Texas, N.A governing Capstar
                            Partners's 12% Subordinated Exchange Debentures due
                            2009.(4)
         4.6             -- Certificate of Designation of the Powers, Preferences and
                            Relative, Participating, Optional and Other Special
                            Rights of 12% Senior Exchangeable Preferred Stock and
                            Qualifications, Limitations and Restrictions Thereof of
                            Capstar Partners, dated June 17, 1997.(4)
        10.1.1           -- Amended and Restated Credit Agreement, dated February 20,
                            1997 and amended and restated August 12, 1997 (the
                            "Credit Agreement"), among Capstar Broadcasting, Capstar
                            Partners, Capstar Radio, and various banks signatory
                            thereto.(14)
        10.1.2           -- First Amendment to the Credit Agreement, dated August 21,
                            1997.(14)
        10.1.3           -- Second Amendment to the Credit Agreement, dated September
                            26, 1997.(14)
        10.1.4           -- Third Amendment to the Credit Agreement, dated January
                            28, 1998.*
        10.1.5           -- Fourth Amendment to the Credit Agreement, dated February
                            6, 1998.*
        10.2.1           -- Financial Advisory Agreement, dated as of October 16,
                            1996, between Capstar Partners and Hicks, Muse & Co.
                            Partners, L.P. ("HMCo").(5)
        10.3.1           -- Monitoring and Oversight Agreement, dated as of October
                            16, 1996, between Capstar Partners and HMCo.(5)
        10.4             -- Form of Indemnification Agreement between Capstar
                            Broadcasting and each of its directors and officers.(4)
        10.5.1           -- Employment Agreement, dated February 14, 1997, between
                            Capstar Partners and R. Steven Hicks.(5)+
        10.5.2           -- First Amendment to Employment Agreement, effective July
                            1, 1997, between R. Steven Hicks, Capstar Partners, and
                            Capstar Broadcasting.(13)+
        10.6             -- Employment Agreement, dated July 1, 1997, between Capstar
                            Broadcasting and Paul D. Stone.(4)+
        10.7             -- Employment Agreement dated July 1, 1997, between Capstar
                            Broadcasting and William S. Banowsky, Jr.(4)+
        10.8             -- Amended and Restated Employment Agreement, dated October
                            16, 1996, between Commodore, Capstar Partners and James
                            T. Shea, Jr.(5)+
        10.9             -- Employment Agreement, dated January 27, 1997, between
                            Pacific Star and Claude C. Turner (also known as Dex
                            Allen).(5)+
</TABLE>
 
                                       67
<PAGE>   70
 
<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                    DESCRIPTION
        -------                                  -----------
<C>                      <S>
        10.10.1          -- Employment Agreement between GulfStar Communications,
                            Inc. and John D. Cullen.(11)+
        10.10.2          -- First Amendment to Employment Agreement between GulfStar
                            Communications and John D. Cullen.*+
        10.11            -- Employment Agreement, dated January 16, 1998, among
                            Central Star Communications, Inc., Capstar Broadcasting,
                            and Mary K. Quass.*+
        10.13            -- Not used.
        10.14            -- Employment Agreement, dated September 22, 1997, between
                            Capstar Partners and Eric W. Neumann.(13)+
        10.15            -- Consulting, Non-Compete and Separation Agreement, dated
                            March 1, 1998, between Southern Star and Frank D.
                            Osborn.*+
        10.16            -- 1997 Stock Option Plan of Capstar Broadcasting.(4)+
        10.17.1          -- Form of Incentive Stock Option Agreement.(4)+
        10.17.2          -- Form of Non-Qualified Stock Option Agreement for
                            Employees.(4)+
        10.17.3          -- Form of Non-Qualified Stock Option Agreement for
                            Non-Employees.(11)+
        10.18            -- 1997 Stock Purchase Plan of Capstar Broadcasting.(4)+
        10.19.1          -- Affiliate Stockholders Agreement, dated October 16, 1996,
                            among Capstar Partners, Hicks Muse, R. Steven Hicks and
                            the security holders listed therein.(5)
        10.19.2          -- First Amendment and Supplement to Affiliate Stockholders
                            Agreement, dated January 27, 1997, by and among Capstar
                            Partners, the securityholders listed therein and Hicks
                            Muse.(5)
        10.19.3          -- Second Amendment to Affiliate Stockholders Agreement,
                            dated February 20, 1997, by and among Capstar Partners,
                            the security holders listed therein and Hicks Muse.(3)
        10.19.4          -- Third Amendment to Affiliate Stockholders Agreement,
                            dated June 20, 1997, by and among Capstar Broadcasting,
                            Capstar Partners, the security holders listed therein and
                            Hicks Muse.(4)
        10.20.1          -- Management Stockholders Agreement, dated November 26,
                            1996, among Capstar Partners, the securityholders listed
                            therein and Hicks Muse.(5)
        10.20.2          -- First Amendment to Management Stockholders Agreement,
                            dated January 27, 1997, by and among Capstar Partners and
                            the securityholders listed therein.(5)
        10.20.3          -- Second Amendment to Management Stockholders Agreement,
                            dated June 20, 1997, by and among Capstar Broadcasting,
                            Capstar Partners, the security holders listed therein and
                            Hicks Muse.(4)
        10.21            -- GulfStar Stockholders Agreement, dated July 8, 1997, by
                            and among Capstar Broadcasting, the security holders
                            listed therein, and Hicks Muse.(11)
        10.22.1          -- Registration Rights Agreement, dated February 20, 1997,
                            between Capstar Partners and Frank D. Osborn.(5)
        10.22.2          -- First Amendment to Registration Rights Agreement, dated
                            July 1, 1997, between Capstar Partners, Capstar
                            Broadcasting, and Frank D. Osborn.(4)
        10.23            -- Warrant, dated October 16, 1996, issued to R. Steven
                            Hicks.(5)
        10.24            -- Warrant, dated February 20, 1997, issued to R. Steven
                            Hicks.(5)
        10.25            -- Warrant, dated July 8, 1997, issued to R. Steven
                            Hicks.(11)
</TABLE>
 
                                       68
<PAGE>   71
 
<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                    DESCRIPTION
        -------                                  -----------
<C>                      <S>
        10.26.1          -- Stock Purchase Agreement, dated June 12, 1997, by and
                            among Capstar Acquisition Company, Inc., Capstar
                            Partners, Patterson Broadcasting, Inc. and the selling
                            stockholders named therein (the "Patterson Stock Purchase
                            Agreement").(4)
        10.26.2          -- First Amendment to Patterson Stock Purchase
                            Agreement.(11)
        10.26.3          -- Second Amendment to Patterson Stock Purchase
                            Agreement.(15)
        10.26.4          -- Third Amendment to Patterson Stock Purchase
                            Agreement.(15)
        10.26.5          -- Fourth Amendment to Patterson Stock Purchase
                            Agreement.(15)
        10.27            -- Agreement and Plan of Merger, dated June 16, 1997, by and
                            among GulfStar Communications, Inc., Capstar
                            Broadcasting, CBC-GulfStar Merger Sub, Inc. and the
                            stockholders listed therein.(4)
        10.28.1          -- Agreement and Plan of Merger, dated July 23, 1997, by and
                            among OCC Acquisition Corporation, Osborn Communications
                            Corporation, and OCC Holding Corporation (the "Osborn
                            Merger Agreement").(16)
        10.28.2          -- First Amendment to Osborn Merger Agreement.(16)
        10.29.1          -- Agreement and Plan of Merger, dated as of December 9,
                            1996, by and among Benchmark Communications Radio Limited
                            Partnership, Benchmark Acquisition, Inc., Benchmark Radio
                            Acquisition Fund I Limited Partnership, Benchmark Radio
                            Acquisition Fund IV Limited Partnership, Benchmark Radio
                            Acquisition Fund VII Limited Partnership, Benchmark Radio
                            Acquisition Fund VIII Limited Partnership, Joe L. Mathis
                            IV, Bruce R. Spector, Capstar Partners and BCR Holding,
                            Inc. ("Benchmark Merger Agreement").(3)
        10.29.2          -- Letter Agreement Amending Benchmark Merger Agreement.(3)
        10.29.3          -- Letter Agreement amending Benchmark Merger Agreement.(3)
        10.29.4          -- Letter Agreement amending Benchmark Merger Agreement.(3)
        10.29.5          -- First Amendment to the Benchmark Merger Agreement.(17)
        10.29.6          -- Second Amendment to the Benchmark Merger Agreement.(17)
        10.30.1          -- Agreement and Plan of Merger, dated August 24, 1997, by
                            and among SBI Holding Corporation, SBI Radio Acquisition
                            Corporation and SFX Broadcasting, Inc. (the "SFX Merger
                            Agreement")(21)
        10.30.2          -- Amendment No. 1 to SFX Merger Agreement.(22)
        10.30.3          -- Amendment No. 2 to the SFX Merger Agreement.(23)
        21.1             -- List of Subsidiaries.*
        27.1             -- Financial Data Schedule.*
</TABLE>
 
---------------
 
  *  Filed herewith.
 
  +   Management contract or compensatory plan or arrangement.
 
 (1) Incorporated by reference to Commodore Media, Inc.'s ("Commodore")
     Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, File No.
     33-92732.
 
 (2) Incorporated by reference to Commodore's Quarterly Report on Form 10-Q for
     the quarter ended September 30, 1996, File No. 33-92732.
 
 (3) Incorporated by reference to Capstar Partners's Quarterly Report on Form
     10-Q for the quarter ended March 31, 1997, File No. 333-25638.
 
 (4) Incorporated by reference to Capstar Partners's Amendment No. 1 to
     Registration Statement on Form S-4, dated July 8, 1997, File No. 333-25638.
 
                                       69
<PAGE>   72
 
 (5) Incorporated by reference to Capstar Partners's Registration Statement on
     Form S-1, dated April 16, 1997, File No. 333-25263.
 
 (6) Incorporated by reference to Commodore's Registration Statement on Form
     S-4, dated July 26, 1995, File No. 33-92732.
 
 (7) Incorporated by reference to Commodore's Annual Report on Form 10-K for the
     year ended December 31, 1995, File No. 33-92732.
 
 (8) Incorporated by reference to Commodore's Quarterly Report on Form 10-Q for
     the quarter ended March 31, 1996, File No. 33-92732.
 
 (9) Incorporated by reference to Commodore's Annual Report on Form 10-K for the
     year ended December 31, 1996, File No. 33-92732.
 
(10) Incorporated by reference to Commodore's Quarterly Report on Form 10-Q for
     the quarter ended March 31, 1997, File No. 33-92732.
 
(11) Incorporated by reference to Capstar Partners's Amendment No. 2 to
     Registration Statement on Form S-4, dated August 5, 1997, File No.
     333-25638.
 
(12) Incorporated by reference to Capstar Radio's Quarterly Report on Form 10-Q
     for the quarter ended June 30, 1997, File No. 33-92732.
 
(13) Incorporated by reference to Capstar Partners's Quarterly Report on Form
     10-Q for the quarter ended September 30, 1997, File No. 333-25638.
 
(14) Incorporated by reference to Capstar Radio's Current Report on Form 8-K,
     dated November 26, 1997, File No. 33-92732.
 
(15) Incorporated by reference to Capstar Radio's Current Report on Form 8-K,
     dated February 13, 1998, File No. 333-25683.
 
(16) Incorporated by reference to Commodore's Current Report on Form 8-K, dated
     March 6, 1997, File No. 33-92732.
 
(17) Incorporated by reference to Capstar Radio's Current Report on Form 8-K,
     dated August 6, 1997, File No. 33-92732.
 
(18) Incorporated by reference to Capstar Radio's Annual Report on Form 10-K for
     the year ended December 31, 1996, File No. 33-02732.
 
(19) Incorporated by reference to Capstar Radio's Registration Statement on Form
     S-4, dated August 6, 1997, File No. 33-02732.
 
(20) Incorporated by reference to Commodore's Registration Statement on Form
     S-4, dated July 26, 1995, File No. 33-02732.
 
(21) Incorporated by reference to SFX's Current Report on Form 8-K, dated August
     26, 1997, File No. 000-22486.
 
(22) Incorporated by reference to SFX's Annual Report on Form 10-K for the year
     ended December 31, 1997, File No. 000-22486.
 
(23) Incorporated by reference to SFX's Current Report on Form 8-K, dated
     February 17, 1998, File No. 000-22486.
 
                                       70
<PAGE>   73
 
     (b) Reports on Form 8-K
 
     The following report on Form 8-K was filed by Capstar Partners during the
last quarter of the period covered by this Annual Report on Form 10-K:
 
    Current Report on Form 8-K, dated November 26, 1997, relating to the Credit
    Agreement. Item 7 was reported.
 
     The following report on Form 8-K was filed by Capstar Radio during the last
quarter of the period covered by this Annual Report on Form 10-K:
 
    Current Report on Form 8-K, dated November 26, 1997, relating to the Credit
    Agreement. Item 7 was reported.
 
                                       71
<PAGE>   74
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Capstar Radio Broadcasting Partners, Inc. has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
                                            CAPSTAR RADIO BROADCASTING
                                            PARTNERS, INC.
 
                                            By:     /s/ PAUL D. STONE
 
                                             -----------------------------------
                                                        Paul D. Stone
                                                  Executive Vice President
                                                 and Chief Financial Officer
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Capstar Radio
Broadcasting Partners, Inc. and in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                      SIGNATURE                                   TITLE                        DATE
                      ---------                                   -----                        ----
<C>                                                      <S>                         <C>
 
                 /s/ R. STEVEN HICKS                     Chief Executive Officer          March 27, 1998
-----------------------------------------------------      (Principal Executive
                   R. Steven Hicks                         Officer)
 
                  /s/ PAUL D. STONE                      Executive Vice President         March 27, 1998
-----------------------------------------------------      and Chief Financial
                    Paul D. Stone                          Officer (Principal
                                                           Financial and
                                                           Accounting Officer)
 
                 /s/ ERIC C. NEUMAN                      Director                         March 27, 1998
-----------------------------------------------------
                   Eric C. Neuman
</TABLE>
 
                                       72
<PAGE>   75
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Capstar Broadcasting Partners, Inc. duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
                                            CAPSTAR BROADCASTING
                                            PARTNERS, INC.
 
                                            By:     /s/ PAUL D. STONE
 
                                             -----------------------------------
                                                        Paul D. Stone
                                                Executive Vice President and
                                                   Chief Financial Officer
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Capstar
Broadcasting Partners, Inc. and in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                      SIGNATURE                                   TITLE                        PAGE
                      ---------                                   -----                        ----
<C>                                                      <S>                         <C>
 
                 /s/ R. STEVEN HICKS                     Chief Executive Officer          March 27, 1998
-----------------------------------------------------      and Director
                   R. Steven Hicks                         (Principal Executive
                                                           Officer)
 
                  /s/ PAUL D. STONE                      Executive Vice President         March 27, 1998
-----------------------------------------------------      and Chief Financial
                    Paul D. Stone                          Officer (Principal
                                                           Financial and
                                                           Accounting Officer)
 
                 /s/ ERIC C. NEUMAN                      Director                         March 27, 1998
-----------------------------------------------------
                   Eric C. Neuman
 
                 /s/ THOMAS O. HICKS                     Director                         March 27, 1998
-----------------------------------------------------
                   Thomas O. Hicks
 
             /s/ LAWRENCE D. STUART, JR.                 Director                         March 27, 1998
-----------------------------------------------------
               Lawrence D. Stuart, Jr.
</TABLE>
 
                                       73
<PAGE>   76
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                                 (ITEM 14(A) 1)
 
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
<TABLE>
<CAPTION>
                                                                PAGE
                                                                ----
<S>                                                             <C>
Report of Independent Accountants...........................    F-2
Consolidated Balance Sheets as of December 31, 1996 and
  1997......................................................    F-3
Consolidated Statements of Operations for each of the three
  years in the period ended December 31, 1997...............    F-4
Consolidated Statements of Stockholder's Equity for each of
  the three years in the period ended December 31, 1997.....    F-5
Consolidated Statements of Cash Flows for each of the three
  years in the period ended December 31, 1997...............    F-6
Notes to Consolidated Financial Statements..................    F-7
 
     CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
Report of Independent Accountants...........................    F-29
Consolidated Balance Sheets as of December 31, 1996 and
  1997......................................................    F-30
Consolidated Statements of Operations for each of the three
  years in the period ended December 31, 1997...............    F-31
Consolidated Statements of Stockholder's Equity for each of
  the three years in the period ended December 31, 1997.....    F-32
Consolidated Statements of Cash Flows for each of the three
  years in the period ended December 31, 1997...............    F-33
Notes to Consolidated Financial Statements..................    F-34
 
               COMMODORE MEDIA, INC. AND SUBSIDIARIES
 
Report of Independent Auditors..............................    F-53
Consolidated Statements of Operations for the year ended
  December 31, 1995 and the period from January 1, 1996 to
  October 16, 1996..........................................    F-54
Consolidated Statements of Cash Flows for the year ended
  December 31, 1995 and the period from January 1, 1996 to
  October 16, 1996..........................................    F-55
Notes to Consolidated Statements of Operations and Cash
  Flows.....................................................    F-56
 
               INDEX TO FINANCIAL STATEMENT SCHEDULES
                           (ITEM 14(A) 2)
        CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
Report of Independent Accountants...........................    F-63
Schedule I:
  Parent Company Condensed Balance Sheets as of December 31,
     1996 and 1997..........................................    F-64
  Parent Company Condensed Statements of Operations for the
     period from inception through December 31, 1996 and the
     year ended December 31, 1997...........................    F-65
  Parent Company Condensed Statements of Cash Flows for the
     period from inception through December 31, 1996 and the
     year ended December 31, 1997...........................    F-66
  Notes to Parent Company Condensed Financial Statements....    F-67
Schedule II - Valuation and Qualifying Accounts.............    F-68
 
     CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
Report of Independent Accountants...........................    F-69
Schedule II - Valuation and Qualifying Accounts.............    F-70
</TABLE>
 
                                       F-1
<PAGE>   77
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors
Capstar Broadcasting Partners, Inc.
 
     We have audited the accompanying consolidated balance sheets of Capstar
Broadcasting Partners, Inc. and Subsidiaries as of December 31, 1996 and 1997,
and the related consolidated statements of operations, stockholder's equity and
cash flows for each of the three years in the period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements 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 consolidated financial position of
Capstar Broadcasting Partners, Inc. and Subsidiaries as of December 31, 1996 and
1997, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
 
     As described in Note 1, in July 1997, the Company's parent was merged with
GulfStar Communications, Inc. The exchange of shares between these entities
under common control has been accounted for in a manner similar to a
pooling-of-interests. The accompanying consolidated financial statements of the
Company have been restated for all periods presented to give retroactive effect
to the merger.
 
                                            COOPERS & LYBRAND L.L.P.
 
Austin, Texas
March 26, 1998
 
                                       F-2
<PAGE>   78
 
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              -----------------------
                                                                 1996         1997
                                                              ----------   ----------
                                                              (RESTATED)
<S>                                                           <C>          <C>
Current assets:
  Cash and cash equivalents.................................   $  9,821    $   70,059
  Accounts receivable, net of allowance for doubtful
     accounts of $1,167 and $2,889, respectively............     17,249        40,350
  Refundable income taxes...................................      1,112            --
  Prepaid expenses and other current assets.................        600         4,285
                                                               --------    ----------
          Total current assets..............................     28,782       114,694
  Property and equipment, net...............................     29,326       106,717
  Intangibles and other, net................................    341,076       881,545
  Other non-current assets..................................      3,448         3,094
                                                               --------    ----------
          Total assets......................................   $402,632    $1,106,050
                                                               ========    ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
  Current portion of long-term debt.........................   $  3,936    $    1,388
  Accounts payable..........................................      5,474        13,641
  Accrued liabilities.......................................      5,546        16,826
  Income taxes payable......................................         --         2,417
                                                               --------    ----------
          Total current liabilities.........................     14,956        34,272
  Long-term debt, net of current portion....................    187,234       593,184
  Due to parent.............................................         --         1,082
  Deferred income taxes.....................................     83,608       160,150
                                                               --------    ----------
          Total liabilities.................................    285,798       788,688
Commitments and contingencies (Note 12)
Redeemable preferred stock:
  Capstar Broadcasting Partners, Inc., $.01 par value,
     10,000,000 shares authorized, 1,000,000 shares issued
     and outstanding, aggregate liquidation preference of
     $106,560...............................................         --       101,493
  Gulfstar Communications, Inc., $.01 par value, 507,500
     shares authorized, issued and outstanding, aggregate
     liquidation preference of $27,053......................     23,098            --
Stockholder's equity:
  CAPSTAR BROADCASTING PARTNERS, INC.:
     Common stock, Class A, voting $.01 par value,
      200,000,000 and 300,000,000 shares authorized;
      94,155,000 and 279,632,180 shares issued and
      outstanding, respectively.............................        942         2,796
     Common stock, Class B, nonvoting, $.01 par value,
      50,000,000 shares authorized, none issued.............         --            --
     Additional paid-in capital.............................     93,957       262,161
  GULFSTAR COMMUNICATIONS, INC.:
     Common stock, voting, $.01 par value, 100,000 and
      2,000,000 shares authorized, 10,986 shares issued and
      outstanding in 1996...................................          1            --
     Common stock, Class A, nonvoting, $.01 par value,
      60,000 and 600,000 shares authorized, 49,033 shares
      issued and outstanding in 1996........................          1            --
     Common stock, Class B, nonvoting, $.01 par value,
      10,000 shares authorized, no shares issued and
      outstanding...........................................         --            --
     Common stock, Class C, voting, $.01 par value, 100,000
      shares authorized, 3,172 shares issued and outstanding
      in 1996...............................................          1            --
     Additional paid-in capital.............................     11,869            --
     Stock subscriptions receivable.........................     (2,090)           --
     Unearned compensation..................................     (1,518)           --
  ACCUMULATED DEFICIT.......................................     (9,427)      (49,088)
                                                               --------    ----------
          Total stockholder's equity........................     93,736       215,869
                                                               --------    ----------
          Total liabilities and stockholder's equity........   $402,632    $1,106,050
                                                               ========    ==========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       F-3
<PAGE>   79
 
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                              -------------------------------
                                                               1995        1996        1997
                                                              -------    --------    --------
                                                                  (RESTATED)
<S>                                                           <C>        <C>         <C>
Gross broadcast revenue.....................................  $17,322    $ 47,200    $189,820
Less: agency commissions....................................   (1,525)     (4,334)    (14,375)
                                                              -------    --------    --------
  Net broadcast revenue.....................................   15,797      42,866     175,445
                                                              -------    --------    --------
Operating expenses:
  Programming, technical and news...........................    2,874       9,313      43,073
  Sales and promotion.......................................    4,638      12,808      48,156
  General and administrative................................    4,225       8,360      30,906
Corporate expenses..........................................      513       2,523      14,221
Corporate expenses -- noncash compensation..................       --       6,176      10,575
Depreciation and amortization...............................    1,134       4,141      26,415
                                                              -------    --------    --------
Operating income (loss).....................................    2,413        (455)      2,099
Other income (expense):
  Interest expense..........................................   (4,078)     (9,741)    (49,531)
  Interest income...........................................    1,932          34       3,819
  Gain (loss) on sale of broadcasting property..............    2,389          --        (908)
  Other.....................................................      (54)       (929)     (4,729)
                                                              -------    --------    --------
Income (loss) before provision (benefit) for income taxes
  and extraordinary item....................................    2,602     (11,091)    (49,250)
Provision (benefit) for income taxes........................    1,032        (322)    (11,992)
                                                              -------    --------    --------
Income (loss) before extraordinary item.....................    1,570     (10,769)    (37,258)
Extraordinary loss on early extinguishment of debt, net of
  tax benefit of $707 and $1,473, respectively..............       --      (1,188)     (2,403)
                                                              -------    --------    --------
Net income (loss)...........................................    1,570     (11,957)    (39,661)
Dividends, accretion and redemption of preferred stocks.....       (8)     (1,350)    (13,631)
                                                              -------    --------    --------
Net income (loss) attributable to common stock..............  $ 1,562    $(13,307)   $(53,292)
                                                              =======    ========    ========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       F-4
<PAGE>   80
 
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
                                                                         GULFSTAR COMMUNICATIONS, INC.
                                               ---------------------------------------------------------------------------------
                                                                         CLASS A              CLASS B              CLASS C
                                                  COMMON STOCK         COMMON STOCK         COMMON STOCK         COMMON STOCK
                                               ------------------   ------------------   ------------------   ------------------
                                               NUMBER OF    PAR     NUMBER OF    PAR     NUMBER OF    PAR     NUMBER OF    PAR
                                                SHARES     VALUE     SHARES     VALUE     SHARES     VALUE     SHARES     VALUE
                                               ---------   ------   ---------   ------   ---------   ------   ---------   ------
<S>                                            <C>         <C>      <C>         <C>      <C>         <C>      <C>         <C>
GULFSTAR COMMUNICATIONS, INC.:
Balance at January 1, 1995 (Restated)........    10,000    $    1     40,000    $    1        --     $   --         --    $   --
 Shares of Class A Common stock contributed
   to the company by a stockholder...........        --        --     (2,500)       --        --         --         --        --
 Issuance of voting Common stock.............  151.....        --         --        --        --         --         --        --
 Issuance of Class B Common stock............        --        --         --        --     6,081         --         --        --
 Accrued interest on Stock subscriptions
   receivable................................  -- .....        --         --        --        --         --         --        --
 Dividends on Redeemable preferred stock.....        --        --         --        --        --         --         --        --
 Net income..................................        --        --         --        --        --         --         --        --
                                                -------    ------    -------    ------    ------     ------    -------    ------
Balance at December 31, 1995.................    10,151         1     37,500         1     6,081         --         --        --
 Issuance of Common stock....................     4,504        --         --        --        --         --         --        --
 Issuance of Class A Common stock............        --        --      1,626        --        --         --         --        --
 Issuance of Class B Common stock............        --        --         --        --       157         --         --        --
 Issuance of Class C Common stock............        --        --         --        --        --         --      3,172         1
 Conversion of Common stock to Class A Common
   stock.....................................   (10,151)       --     10,151        --        --         --         --        --
 Conversion of Class A and B Common stock to
   Common stock..............................     6,482        --       (244)       --    (6,238)        --         --        --
 Issuance of warrants........................  -- .....        --         --        --        --         --         --        --
 Accrued interest on Stock subscriptions
   receivable................................        --        --         --        --        --         --         --        --
 Dividends and accretion on Redeemable
   preferred stock...........................        --        --         --        --        --         --         --        --
 Unearned compensation-stock issued for
   nonrecourse notes.........................        --        --         --        --        --         --         --        --
CAPSTAR BROADCASTING PARTNERS, INC.:
 Issuance of common stock....................        --        --         --        --        --         --         --        --
 Issuance of warrants........................        --        --         --        --        --         --         --        --
 Net loss....................................        --        --         --        --        --         --         --        --
                                                -------    ------    -------    ------    ------     ------    -------    ------
Balance at December 31, 1996.................    10,986         1     49,033         1        --         --      3,172         1
GULFSTAR COMMUNICATIONS, INC.:
 Issuance of Common stock....................       356        --         --        --        --         --         --        --
 Conversion of Class A Common stock to Class
   C Common stock............................        --        --    (39,033)       --        --         --     39,033        --
 Conversion of Class C Common stock to Class
   A Common stock............................        --        --     10,102        --        --         --    (10,102)       --
 Dividends and accretion on Redeemable
   preferred stock...........................        --        --         --        --        --         --         --        --
 Accrued interest on Stock subscriptions
   receivable................................        --        --         --        --        --         --         --        --
 Payments received on Stock subscriptions
   receivable................................        --        --         --        --        --         --         --        --
 Compensation expense........................        --        --         --        --        --         --         --        --
CAPSTAR BROADCASTING PARTNERS, INC.:
 Issuances of Common stock...................        --        --         --        --        --         --         --        --
 Repurchase of Common stock..................        --        --         --        --        --         --         --        --
 Conversion of Class B Common stock to Class
   A Common stock............................        --        --         --        --        --         --         --        --
 Compensation expense........................        --        --         --        --        --         --         --        --
 Issuance of shares in connection with
   merger....................................   (11,342)       (1)   (20,102)       (1)       --         --    (32,103)       (1)
 Redemption of Redeemable preferred stock by
   Parent....................................        --        --         --        --        --         --         --        --
 Equity contribution from parent.............        --        --         --        --        --         --         --        --
 Dividends and accretion on Redeemable
   preferred stock...........................        --        --         --        --        --         --         --        --
 Payments on stock subscriptions
   receivable................................        --        --         --        --        --         --         --        --
 Transfer of Stock subscriptions receivable
   to parent.................................        --        --         --        --        --         --         --        --
 Dividends...................................        --        --         --        --        --         --         --        --
 Net loss....................................        --        --         --        --        --         --         --        --
                                                -------    ------    -------    ------    ------     ------    -------    ------
Balance at December 31, 1997.................        --    $   --         --    $   --        --     $   --         --    $   --
                                                =======    ======    =======    ======    ======     ======    =======    ======
 
<CAPTION>
                                                     GULFSTAR COMMUNICATIONS, INC.
                                               -----------------------------------------
 
                                               ADDITIONAL       STOCK
                                                PAID-IN     SUBSCRIPTIONS     UNEARNED
                                                CAPITAL      RECEIVABLE     COMPENSATION
                                               ----------   -------------   ------------
<S>                                            <C>          <C>             <C>
GULFSTAR COMMUNICATIONS, INC.:
Balance at January 1, 1995 (Restated)........   $     --       $    --        $    --
 Shares of Class A Common stock contributed
   to the company by a stockholder...........         --            --             --
 Issuance of voting Common stock.............          9            (4)            --
 Issuance of Class B Common stock............        331          (304)            --
 Accrued interest on Stock subscriptions
   receivable................................         25           (25)            --
 Dividends on Redeemable preferred stock.....         --            --             --
 Net income..................................         --            --             --
                                                --------       -------        -------
Balance at December 31, 1995.................        365          (333)            --
 Issuance of Common stock....................      1,378        (1,390)            --
 Issuance of Class A Common stock............        184            --             --
 Issuance of Class B Common stock............         31            --             --
 Issuance of Class C Common stock............        358          (298)            --
 Conversion of Common stock to Class A Common
   stock.....................................         --            --             --
 Conversion of Class A and B Common stock to
   Common stock..............................         --            --             --
 Issuance of warrants........................      3,884            --             --
 Accrued interest on Stock subscriptions
   receivable................................         69           (69)            --
 Dividends and accretion on Redeemable
   preferred stock...........................     (1,350)           --             --
 Unearned compensation-stock issued for
   nonrecourse notes.........................      6,950            --         (1,518)
CAPSTAR BROADCASTING PARTNERS, INC.:
 Issuance of common stock....................         --            --             --
 Issuance of warrants........................         --            --             --
 Net loss....................................         --            --             --
                                                --------       -------        -------
Balance at December 31, 1996.................     11,869        (2,090)        (1,518)
GULFSTAR COMMUNICATIONS, INC.:
 Issuance of Common stock....................        300          (300)            --
 Conversion of Class A Common stock to Class
   C Common stock............................         --            --             --
 Conversion of Class C Common stock to Class
   A Common stock............................         --            --             --
 Dividends and accretion on Redeemable
   preferred stock...........................     (1,693)           --             --
 Accrued interest on Stock subscriptions
   receivable................................        131          (131)            --
 Payments received on Stock subscriptions
   receivable................................         --            36             --
 Compensation expense........................      7,232            --          1,518
CAPSTAR BROADCASTING PARTNERS, INC.:
 Issuances of Common stock...................         --            --             --
 Repurchase of Common stock..................         --            --             --
 Conversion of Class B Common stock to Class
   A Common stock............................         --            --             --
 Compensation expense........................         --            --             --
 Issuance of shares in connection with
   merger....................................    (12,461)        2,485             --
 Redemption of Redeemable preferred stock by
   Parent....................................     (5,378)           --             --
 Equity contribution from parent.............         --            --             --
 Dividends and accretion on Redeemable
   preferred stock...........................         --            --             --
 Payments on stock subscriptions
   receivable................................         --            --             --
 Transfer of Stock subscriptions receivable
   to parent.................................         --            --             --
 Dividends...................................         --            --             --
 Net loss....................................         --            --             --
                                                --------       -------        -------
Balance at December 31, 1997.................   $     --       $    --        $    --
                                                ========       =======        =======
 
<CAPTION>
                                                                 CAPSTAR BROADCASTING PARTNERS, INC.
                                               ------------------------------------------------------------------------
                                                     CLASS A                CLASS B
                                                   COMMON STOCK           COMMON STOCK
                                               --------------------   --------------------   ADDITIONAL       STOCK
                                                NUMBER OF     PAR      NUMBER OF     PAR      PAID-IN     SUBSCRIPTIONS
                                                 SHARES      VALUE      SHARES      VALUE     CAPITAL      RECEIVABLE
                                               -----------   ------   -----------   ------   ----------   -------------
<S>                                            <C>           <C>      <C>           <C>      <C>          <C>
GULFSTAR COMMUNICATIONS, INC.:
Balance at January 1, 1995 (Restated)........           --   $   --            --   $   --    $     --       $   --
 Shares of Class A Common stock contributed
   to the company by a stockholder...........           --       --            --       --          --           --
 Issuance of voting Common stock.............           --       --            --       --          --           --
 Issuance of Class B Common stock............           --       --            --       --          --           --
 Accrued interest on Stock subscriptions
   receivable................................           --       --            --       --          --           --
 Dividends on Redeemable preferred stock.....           --       --            --       --          --           --
 Net income..................................           --       --            --       --          --           --
                                               -----------   ------   -----------   ------    --------       ------
Balance at December 31, 1995.................           --       --            --       --          --           --
 Issuance of Common stock....................           --       --            --       --          --           --
 Issuance of Class A Common stock............           --       --            --       --          --           --
 Issuance of Class B Common stock............           --       --            --       --          --           --
 Issuance of Class C Common stock............           --       --            --       --          --           --
 Conversion of Common stock to Class A Common
   stock.....................................           --       --                                 --
 Conversion of Class A and B Common stock to
   Common stock..............................           --       --            --       --          --           --
 Issuance of warrants........................           --       --                                 --
 Accrued interest on Stock subscriptions
   receivable................................           --       --            --       --          --           --
 Dividends and accretion on Redeemable
   preferred stock...........................           --       --            --       --          --           --
 Unearned compensation-stock issued for
   nonrecourse notes.........................           --       --            --       --          --           --
CAPSTAR BROADCASTING PARTNERS, INC.:
 Issuance of common stock....................   94,155,000      942            --       --      93,213           --
 Issuance of warrants........................           --       --            --       --         744           --
 Net loss....................................           --       --            --       --          --           --
                                               -----------   ------   -----------   ------    --------       ------
Balance at December 31, 1996.................   94,155,000      942            --       --      93,957           --
GULFSTAR COMMUNICATIONS, INC.:
 Issuance of Common stock....................           --       --            --       --          --           --
 Conversion of Class A Common stock to Class
   C Common stock............................           --       --            --       --          --           --
 Conversion of Class C Common stock to Class
   A Common stock............................           --       --            --       --          --           --
 Dividends and accretion on Redeemable
   preferred stock...........................           --       --            --       --          --           --
 Accrued interest on Stock subscriptions
   receivable................................           --       --            --       --          --           --
 Payments received on Stock subscriptions
   receivable................................           --       --            --       --          --           --
 Compensation expense........................           --       --            --       --          --           --
CAPSTAR BROADCASTING PARTNERS, INC.:
 Issuances of Common stock...................   82,507,956      825    18,181,818      181     119,875       (1,596)
 Repurchase of Common stock..................     (175,000)      (2)           --       --        (173)          --
 Conversion of Class B Common stock to Class
   A Common stock............................   18,181,818      181   (18,181,818)    (181)         --           --
 Compensation expense........................           --       --            --       --       1,825           --
 Issuance of shares in connection with
   merger....................................   84,962,406      850            --       --      40,572           --
 Redemption of Redeemable preferred stock by
   Parent....................................           --       --            --       --          --           --
 Equity contribution from parent.............           --       --            --       --      29,358           --
 Dividends and accretion on Redeemable
   preferred stock...........................           --       --            --       --      (6,560)          --
 Payments on stock subscriptions
   receivable................................           --       --            --       --          --          405
 Transfer of Stock subscriptions receivable
   to parent.................................           --       --            --       --      (1,191)       1,191
 Dividends...................................           --       --            --       --     (15,502)          --
 Net loss....................................           --       --            --       --          --           --
                                               -----------   ------   -----------   ------    --------       ------
Balance at December 31, 1997.................  279,632,180   $2,796            --       --    $262,161           --
                                               ===========   ======   ===========   ======    ========       ======
 
<CAPTION>
 
                                                 RETAINED
                                                 EARNINGS         TOTAL
                                               (ACCUMULATED   STOCKHOLDER'S
                                                 DEFICIT)        EQUITY
                                               ------------   -------------
<S>                                            <C>            <C>
GULFSTAR COMMUNICATIONS, INC.:
Balance at January 1, 1995 (Restated)........    $    968       $    970
 Shares of Class A Common stock contributed
   to the company by a stockholder...........          --             --
 Issuance of voting Common stock.............          --              5
 Issuance of Class B Common stock............          --             27
 Accrued interest on Stock subscriptions
   receivable................................          --             --
 Dividends on Redeemable preferred stock.....          (8)            (8)
 Net income..................................       1,570          1,570
                                                 --------       --------
Balance at December 31, 1995.................       2,530          2,564
 Issuance of Common stock....................          --            (12)
 Issuance of Class A Common stock............          --            184
 Issuance of Class B Common stock............          --             31
 Issuance of Class C Common stock............          --             61
 Conversion of Common stock to Class A Common
   stock.....................................          --             --
 Conversion of Class A and B Common stock to
   Common stock..............................          --             --
 Issuance of warrants........................          --          3,884
 Accrued interest on Stock subscriptions
   receivable................................          --             --
 Dividends and accretion on Redeemable
   preferred stock...........................          --         (1,350)
 Unearned compensation-stock issued for
   nonrecourse notes.........................          --          5,432
CAPSTAR BROADCASTING PARTNERS, INC.:
 Issuance of common stock....................          --         94,155
 Issuance of warrants........................          --            744
 Net loss....................................     (11,957)       (11,957)
                                                 --------       --------
Balance at December 31, 1996.................      (9,427)        93,736
GULFSTAR COMMUNICATIONS, INC.:
 Issuance of Common stock....................          --             --
 Conversion of Class A Common stock to Class
   C Common stock............................          --             --
 Conversion of Class C Common stock to Class
   A Common stock............................          --             --
 Dividends and accretion on Redeemable
   preferred stock...........................          --         (1,693)
 Accrued interest on Stock subscriptions
   receivable................................          --             --
 Payments received on Stock subscriptions
   receivable................................          --             36
 Compensation expense........................          --          8,750
CAPSTAR BROADCASTING PARTNERS, INC.:
 Issuances of Common stock...................          --        119,285
 Repurchase of Common stock..................          --           (175)
 Conversion of Class B Common stock to Class
   A Common stock............................          --             --
 Compensation expense........................          --          1,825
 Issuance of shares in connection with
   merger....................................          --         31,443
 Redemption of Redeemable preferred stock by
   Parent....................................          --         (5,378)
 Equity contribution from parent.............          --         29,358
 Dividends and accretion on Redeemable
   preferred stock...........................          --         (6,560)
 Payments on stock subscriptions
   receivable................................          --            405
 Transfer of Stock subscriptions receivable
   to parent.................................          --             --
 Dividends...................................          --        (15,502)
 Net loss....................................     (39,661)       (39,661)
                                                 --------       --------
Balance at December 31, 1997.................    $(49,088)      $215,869
                                                 ========       ========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       F-5
<PAGE>   81
 
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                            ----------------------------------
                                                              1995        1996         1997
                                                            --------    ---------    ---------
                                                                 (RESTATED)
<S>                                                         <C>         <C>          <C>
Cash flows from operating activities:
  Net income (loss).......................................  $  1,570    $ (11,957)   $ (39,661)
  Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:
     Loss on early extinguishment of debt.................        --        1,188        2,403
     Depreciation and amortization........................     1,134        4,141       26,415
     Noncash interest.....................................       323        2,626       24,047
     Deferred income taxes................................        --          547      (12,470)
     Noncash compensation expense.........................        --        6,176       10,575
     Write-off of pending acquisition costs...............        --          105           --
     Provision for uncollectible accounts receivable......       195          661        2,044
     (Gain) loss on sale of broadcasting property.........    (2,389)          --          908
     Changes in assets and liabilities, net of effects of
       acquisitions:
       Accounts receivable................................    (1,690)      (5,331)     (12,029)
       Prepaid expenses and other current assets..........       159       (1,002)         250
       Accounts payable and accrued expenses..............     2,021          507        1,800
       Income taxes payable...............................       (64)          --        2,417
                                                            --------    ---------    ---------
          Net cash provided by (used in) operating
            activities....................................     1,259       (2,339)       6,699
                                                            --------    ---------    ---------
Cash flows from investing activities:
  Proceeds from sale of broadcasting property.............     3,650           --       35,932
  Purchase of property and equipment......................      (495)      (2,478)     (10,020)
  Payments for acquisitions, net of cash acquired.........   (20,227)    (149,612)    (505,375)
  Payments for pending acquisitions.......................    (1,968)      (3,342)      (6,895)
  Other investing activities, net.........................      (608)        (147)        (644)
                                                            --------    ---------    ---------
          Net cash used in investing activities...........   (19,648)    (155,579)    (487,002)
                                                            --------    ---------    ---------
Cash flows from financing activities:
  Proceeds from issuance of long-term debt................        --           --      349,496
  Proceeds from credit facilities.........................    36,146       64,647      207,406
  Repayment of long-term debt.............................   (17,584)     (13,210)    (200,249)
  Payments of financing related costs.....................      (897)      (2,936)     (25,169)
  Net proceeds from issuance of common stock..............        31       94,155      115,737
  Net proceeds from issuance of preferred stock...........        --       20,979       95,071
  Net proceeds from issuance of warrants..................        --        3,884           --
  Redemption of preferred stock...........................        --           --         (811)
  Purchase of common stock................................        --           --         (175)
  Dividends paid..........................................        --           --         (765)
                                                            --------    ---------    ---------
          Net cash provided by financing activities.......    17,696      167,519      540,541
                                                            --------    ---------    ---------
Net increase (decrease) in cash and cash equivalents......      (693)       9,601       60,238
Cash and cash equivalents at beginning of period..........       913          220        9,821
                                                            --------    ---------    ---------
Cash and cash equivalents at end of period................  $    220    $   9,821    $  70,059
                                                            ========    =========    =========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       F-6
<PAGE>   82
 
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
1. ORGANIZATION AND BUSINESS:
 
     Capstar Broadcasting Partners, Inc. ("Capstar Partners"), a holding company
controlled by Hicks, Muse, Tate & Furst Equity Fund III, L.P. ("HM Fund III"),
and its direct and indirect wholly owned subsidiaries operate in a single
industry segment, which segment encompasses the ownership and management of
radio broadcast stations located primarily in mid-sized markets throughout the
United States. At December 31, 1997, Capstar Partners owned and operated,
provided programming to or sold advertising on behalf of 124 FM stations and 59
AM stations.
 
     On October 16, 1996, Capstar Partners acquired Capstar Radio Broadcasting
Partners, Inc. ("Capstar Radio") and its wholly owned subsidiaries pursuant to a
merger agreement dated June 21, 1996.
 
     In June 1997, Capstar Broadcasting Corporation ("Capstar Broadcasting"), a
holding company controlled by HM Fund III, acquired, on a share-for-share basis,
all of the issued and outstanding common stock of Capstar Partners in exchange
for shares of its common stock.
 
     In July 1997, Capstar Broadcasting, through a wholly owned subsidiary, was
merged with GulfStar Communications, Inc. ("Former GulfStar"), a company
controlled by the general partner of HM Fund III. The acquisition was effected
through a merger of Former GulfStar with and into a newly formed wholly owned
subsidiary of Capstar Broadcasting, with this subsidiary designated as the
surviving corporation. Pursuant to the merger agreement, each share of Former
GulfStar's common stock was converted into the right to receive shares of
Capstar Broadcasting, subject to a conversion ratio calculated based on the
relative value of Capstar Broadcasting and Former GulfStar, principally
determined by utilizing projected broadcast cash flows for the year ending
December 31, 1998. Concurrently with the merger: (i) the surviving corporation
was renamed GulfStar Communications, Inc. ("GulfStar"), (ii) Capstar
Broadcasting exchanged its shares of GulfStar for additional shares of Capstar
Partners (iii) Capstar Partners exchanged its shares of GulfStar for additional
shares of Capstar Radio. As a result of the merger and its related transactions,
GulfStar became a wholly owned indirect subsidiary of Capstar Broadcasting. Due
to the fact that Capstar Broadcasting and GulfStar were under common control,
the transfer of the assets and liabilities of GulfStar has been accounted for at
historical cost in a manner similar to a pooling-of-interests except that the
acquisition by Capstar Broadcasting of the minority interest of Former GulfStar
has been accounted for by the purchase method. The accompanying consolidated
financial statements have been restated for all periods presented to give
retroactive effect to the merger and present the financial statements of Former
Gulfstar as the historical consolidated financial statements of Capstar Radio
for the periods prior to Capstar Partners' acquisition of Capstar Radio on
October 16, 1996, and the combined consolidated results of operations for the
periods that Capstar Broadcasting and its direct and indirect wholly owned
subsidiaries and GulfStar (collectively, the "Company") were under common
control. The restated consolidated financial statements also reflect the
application of "Push Down" accounting for the new basis of the purchased assets
and assumed liabilities in connection with Capstar Partners' acquisition of
Capstar Radio on October 16, 1996.
 
                                       F-7
<PAGE>   83
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     Separate results of operations of the combining entities to the date of the
merger are as follows:
 
<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,      SIX MONTHS
                                                   -----------------------    ENDED JUNE 30,
                                                     1995          1996            1997
                                                   ---------    ----------    --------------
                                                                               (UNAUDITED)
<S>                                                <C>          <C>           <C>
Net broadcast revenue:
  Capstar Partners...............................   $    --      $ 10,303        $ 41,862
  GulfStar.......................................    15,797        32,563          23,294
                                                    -------      --------        --------
                                                    $15,797      $ 42,866        $ 65,156
                                                    =======      ========        ========
Extraordinary item:
  Capstar Partners...............................   $    --      $     --        $    851
  GulfStar.......................................        --         1,188              --
                                                    -------      --------        --------
                                                    $    --      $  1,188        $    851
                                                    =======      ========        ========
Net income (loss):
  Capstar Partners...............................   $    --      $ (3,757)       $(12,503)
  GulfStar.......................................     1,570        (8,200)         (8,842)
                                                    -------      --------        --------
                                                    $ 1,570      $(11,957)       $(21,345)
                                                    =======      ========        ========
</TABLE>
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
  Basis of Presentation
 
     The consolidated financial statements include the accounts of the Company
and its direct and indirect wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
 
  Cash Equivalents
 
     For purposes of the accompanying consolidated statement of cash flows, the
Company considers highly liquid investments with original maturities of three
months or less to be cash equivalents.
 
  Property and Equipment
 
     Property and equipment are stated at cost, less accumulated depreciation
and amortization. Equipment under capital lease obligations is recorded at the
lower of cost or fair market value at the inception of the lease. The costs of
assets retired or otherwise disposed of and the related accumulated depreciation
and amortization balances are removed from the accounts and any resulting gain
or loss is included in income. Leasehold improvements are amortized over the
shorter of their useful lives or the terms of the related leases. Amortization
of assets recorded under capital leases is included in depreciation expense.
 
  Intangible Assets
 
     FCC licenses and goodwill represent the excess of cost over the fair values
of the identifiable tangible and other intangible net assets acquired. Other
intangible assets comprise costs incurred for pending acquisitions, noncompete
agreements, organization costs incurred in the incorporation of the Company,
deferred financing costs and costs related to favorable tower and facility
leases. Pending acquisition costs are deferred and capitalized as part of
completed acquisitions or expensed in the period in which the pending
acquisition is terminated. Approximately $897, $2,936 and $25,169 of new
financing costs were incurred for the years ended December 31, 1995, 1996 and
1997, respectively. Accumulated amortization related to deferred financing costs
at December 31, 1996 and 1997 was approximately $13 and $1,209, respectively.
 
                                       F-8
<PAGE>   84
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     The Company periodically evaluates intangible assets for potential
impairment by analyzing the operating results, future cash flows on an
undiscounted basis, trends and prospects of the Company's stations, as well as
by comparing them to their competitors. The Company also takes into
consideration recent acquisition patterns within the broadcast industry, the
impact of recently enacted or potential FCC rules and regulations and any other
events or circumstances which might indicate potential impact. At this time, in
the opinion of management, no impairment has occurred.
 
  Income Taxes
 
     Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period-end based on enacted tax laws and
statutory tax rates applicable to the period in which the differences are
expected to affect taxable earnings. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount more likely than not to be
realized. Income tax expense is the tax payable for the period and the change
during the period in deferred tax assets and liabilities.
 
  Stock Subscriptions Receivable
 
     Stock subscriptions receivable represent promissory notes issued in
connection with the purchase of capital stock. Capital stock issued in
connection with such promissory notes is reported as issued and outstanding and
included in capital stock and additional paid-in capital in the accompanying
consolidated financial statements in the amount of the related promissory note
plus accrued interest. The promissory notes and related accrued interest
receivable are classified as stock subscriptions receivable and included as a
reduction of consolidated stockholder's equity.
 
  Revenue Recognition
 
     Broadcasting operations derive revenue primarily from the sale of program
time and commercial announcements to local, regional and national advertisers.
Revenue is recognized when the programs and commercial announcements are
broadcast.
 
  Advertising Costs
 
     The Company incurs various marketing and promotional costs to add and
maintain listenership. These are expensed as incurred and totaled approximately
$575, $2,668 and $5,731 for the years ended December 31, 1995, 1996 and 1997,
respectively.
 
  Local Marketing Agreements ("LMA")/Joint Sales Agreements ("JSA")
 
     From time to time, the Company enters into LMAs and JSAs, with respect to
radio stations owned by third parties including radio stations that it intends
to acquire. Terms of the agreements generally require the Company to pay a
monthly fee in exchange for the right to provide station programming and sell
related advertising time in the case of an LMA or sell advertising in the case
of a JSA. The agreements terminate upon the acquisition of the property. The
fees are expensed as incurred. The Company classifies the LMA fees as interest
expense to the extent interest is imputed based on the purchase price of the
broadcast property. The Company accounts for payments received pursuant to LMAs
of owned stations as net revenue to the extent that the payment received
represents a reimbursement of the Company's ownership costs.
 
                                       F-9
<PAGE>   85
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
  Barter Transactions
 
     The Company barters unsold advertising time for products and services. Such
transactions are recorded at the estimated fair value of the products or
services received. Barter revenue is recorded when commercials are broadcast and
related expenses are recorded when the bartered product or service is used.
 
  Concentration of Credit Risk
 
     It is the Company's policy to place its cash with high credit quality
financial institutions, which, at times, may exceed federally insured limits.
Management believes that credit risk in these deposits is minimal and has not
experienced any losses in such accounts.
 
     The Company's revenue and accounts receivable primarily relates to
advertising of products and services within the radio stations' broadcast areas.
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. Credit
losses have been within management's expectations and adequate allowances for
any uncollectible accounts receivables are maintained.
 
  Uncertainties and Use of Estimates and Assumptions
 
     The radio broadcasting industry is subject to federal regulation by the
Federal Communications Commission. These governmental regulations and policies
could change over time and there can be no assurance that such changes would not
have a material impact upon the Company.
 
     The Company's pending acquisition, exchange and merger agreements are
subject to various governmental approvals, including the Department of Justice
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
the Federal Communications Commission under the Communications Act of 1934, as
amended.
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
 
  New Accounting Pronouncements
 
     In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements.
 
     In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers.
 
     In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which significantly changes
current financial statement disclosure requirements from those that were
required under SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132 does
not change the existing measurement or recognition provision of SFAS Nos. 87, 88
or 106.
 
                                      F-10
<PAGE>   86
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     These pronouncements are effective for financial statements issued for
periods beginning after December 15, 1997. Management does not believe the
implementation of these accounting pronouncements will have a material effect on
its consolidated financial statements.
 
  Reclassifications
 
     Certain amounts in 1995 and 1996 have been reclassified to conform to the
1997 presentation.
 
3. ACQUISITIONS AND DISPOSITIONS OF BROADCASTING PROPERTIES:
 
     During the years ended December 31, 1995, 1996 and 1997, the Company
acquired numerous radio stations and related broadcasting property and
equipment, all of which have been accounted for under the purchase method of
accounting. Accordingly, the purchase price has been allocated to the assets and
liabilities acquired based upon their fair values at the date of acquisition.
The excess of purchase price over the fair value of net tangible assets acquired
is allocated to intangible assets, primarily FCC licenses. The results of
operations associated with the acquired radio stations have been included in the
accompanying consolidated financial statements from the dates of acquisition.
The acquisition activity was funded primarily through equity infusions by the
Company's parent and long-term borrowings.
 
                                      F-11
<PAGE>   87
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     Acquisition activity during the periods is as follows:
 
<TABLE>
<CAPTION>
               STATIONS ACQUIRED                  DATE OF ACQUISITION    PURCHASE OF       COST
               -----------------                  -------------------    -----------     --------
<S>                                               <C>                    <C>             <C>
1995:
  1 AM and 1 FM.................................  November               Common stock    $  8,025
  1 AM and 1 FM.................................  November               Assets            11,908
  1 FM..........................................  November               Assets             1,586
                                                                                         --------
                                                                                         $ 21,519
                                                                                         ========
1996:
  2 AM and 6 FM.................................  April                  Common stock    $  1,065
  1 AM and 1 FM.................................  July                   Assets             4,038
  1 AM and 2 FM.................................  July                   Assets             6,305
  1 FM..........................................  July                   Assets               315
  1 FM..........................................  August                 Assets               728
  1 FM..........................................  August                 Assets             2,061
  1 FM..........................................  September              Assets             1,551
  1 FM..........................................  September              Assets             1,812
  12 AM and 18 FM...............................  October                Common stock     122,016
  3 AM and 4 FM.................................  October                Assets            12,600
  1 AM and 1 FM.................................  November               Assets             4,172
  1 FM..........................................  December               Assets             6,385
                                                                                         --------
                                                                                         $163,048
                                                                                         ========
1997:
  1 FM..........................................  January                Assets          $  2,490
  1 AM and 1 FM.................................  February               Assets             3,166
  1 AM and 3 FM.................................  February               Assets             6,292
  6 AM and 12 FM................................  February               Common stock     102,923
  2 FM..........................................  March                  Assets            11,471
  2 AM and 3 FM.................................  April                  Assets            12,038
  1 AM and 1 FM.................................  April                  Assets             1,308
  1 AM and 1 FM.................................  May                    Assets             3,456
  2 FM..........................................  May                    Common stock       4,967
  2 AM and 1 FM.................................  May                    Common stock      23,442
  1 AM and 4 FM.................................  July                   Assets             8,267
  5 AM and 6 FM.................................  July                   Assets            35,907
  1 FM..........................................  July                   Common stock       2,647
  1 AM and 1 FM.................................  August                 Assets             7,968
  10 AM and 20 FM...............................  August                 Assets           192,128
  1 FM..........................................  August                 Assets            10,024
  2 AM and 4 FM.................................  August                 Assets            41,662
  1 FM..........................................  September              Assets             1,648
  1 FM..........................................  September              Assets             3,374
  1 FM..........................................  October                Assets             3,409
  3 FM..........................................  October                Assets             5,789
  2 FM..........................................  October                Assets             2,539
  1 AM and 2 FM.................................  October                Assets            32,606
  1 FM..........................................  October                Assets             1,986
  2 AM and 4 FM.................................  November               Assets             7,160
                                                                                         --------
                                                                                          528,667
  Acquisition of GulfStar minority interest.....  July                   Stock             31,443
                                                                                         --------
                                                                                         $560,110
                                                                                         ========
</TABLE>
 
                                      F-12
<PAGE>   88
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     The acquisitions are summarized in the aggregate by period as follows:
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                       -------------------------------
                                                        1995        1996        1997
                                                       -------    --------    --------
<S>                                                    <C>        <C>         <C>
Consideration:
  Cash and notes.....................................  $19,629    $153,050    $493,353
  Common stock (2,325 Former GulfStar shares and
     26,721,805 shares in 1996 and 1997,
     respectively)...................................       --         276      35,343
  Preferred stock (7,500 Former GulfStar shares).....      750          --          --
  Acquisition costs..................................    1,140       9,251      31,414
  Exchange of assets.................................       --         471          --
                                                       -------    --------    --------
          Total......................................  $21,519    $163,048    $560,110
                                                       =======    ========    ========
Assets acquired and liabilities assumed:
  Cash...............................................  $    --    $  6,120    $ 12,297
  Accounts receivable................................       29       9,020      14,657
  Prepaid expenses and other.........................      152         590       2,853
  Property and equipment.............................    3,353      23,471      76,050
  Intangible assets..................................   21,087     290,243     577,885
  Other assets.......................................       --         704       1,051
  Accounts payable...................................       --      (5,811)     (7,843)
  Accrued liabilities................................     (250)       (882)     (5,242)
  Long-term debt.....................................       --     (82,706)    (20,711)
  Capital lease obligations..........................      (44)       (127)       (465)
  Deferred income taxes..............................   (2,808)    (77,574)    (90,422)
                                                       -------    --------    --------
          Total......................................  $21,519    $163,048    $560,110
                                                       =======    ========    ========
</TABLE>
 
     During the years ended December 31, 1995 and 1997, the Company sold or
otherwise disposed of radio stations and related broadcasting property and
equipment as follows:
 
<TABLE>
<CAPTION>
           STATIONS DISPOSED              DATE OF DISPOSITION      SALE OF       SALES PRICE
           -----------------              -------------------      -------       -----------
<S>                                       <C>                    <C>             <C>
1995:
  1 FM..................................  June                      Assets         $ 3,650
1997:
  1 AM and 2 FM.........................  April                     Assets          11,000
  1 AM and 1 FM.........................  September              Common stock          600
  1 FM..................................  September                 Assets          40,000
  1 AM..................................  November                  Assets             135
</TABLE>
 
     The following unaudited pro forma summary presents the consolidated results
of operations for the years ended December 31, 1996 and 1997 as if the
acquisitions and dispositions completed as of December 31, 1997 had occurred at
the beginning of 1996. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what would have
occurred had the acquisitions and dispositions been made as of that date or of
results which may occur in the future.
 
                                      F-13
<PAGE>   89
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                    PRO FORMA
                                                              YEAR ENDED DECEMBER 31
                                                              ----------------------
                                                                1996         1997
                                                              ---------    ---------
                                                                   (UNAUDITED)
<S>                                                           <C>          <C>
Net broadcast revenue.......................................  $210,809     $221,189
Loss before extraordinary loss..............................   (55,837)     (43,529)
Net loss....................................................   (57,025)     (45,932)
Net loss attributable to common stock.......................   (58,375)     (59,563)
</TABLE>
 
     Subsequent to December 31, 1997, the Company acquired 20 AM and 35 FM radio
stations and related broadcast equipment through several acquisitions for
aggregate consideration of approximately $299,141. The acquisitions were funded
primarily through equity infusions by the Company's parent. The Company
previously operated 2 of these stations under either LMA's or JSA's.
 
     In addition to the matter discussed in Note 16, the Company has entered
into numerous agreements to acquire additional radio stations (9 AM and 24 FM)
and related broadcast equipment for aggregate consideration of approximately
$157,000. The Company currently operates 13 of the stations under either LMA's
or JSA's.
 
     Subsequent to December 31, 1997, the Company disposed of 3 AM and 4 FM
radio stations and related broadcast equipment through several dispositions for
aggregate consideration of approximately $52,100. The carrying value of net
assets to be sold related to these stations approximated the contract sales
price.
 
     The Company has also entered into agreements for the disposition of 5 AM
and 11 FM stations for aggregate consideration of approximately $97,000. The
carrying value of net assets to be sold related to these stations approximated
the contract sales price.
 
4. PROPERTY AND EQUIPMENT:
 
     Property and equipment consists of the following:
 
<TABLE>
<CAPTION>
                                                             DEPRECIABLE      DECEMBER 31,
                                              DEPRECIATION      LIFE       ------------------
                                                 METHOD        (YEARS)      1996       1997
                                              -------------  -----------   -------   --------
<S>                                           <C>            <C>           <C>       <C>
Buildings and improvements..................  Straight-line     5-20       $ 4,991   $ 17,006
Broadcasting and other equipment............  Straight-line     3-20        23,723     85,481
Equipment under capital lease obligations...  Straight-line      3-5           463      1,356
                                                                           -------   --------
                                                                            29,177    103,843
Accumulated depreciation and amortization...                                (3,426)   (10,336)
                                                                           -------   --------
                                                                            25,751     93,507
Land........................................                                 3,575     13,210
                                                                           -------   --------
                                                                           $29,326   $106,717
                                                                           =======   ========
</TABLE>
 
     Depreciation and amortization expense for the years ended December 31,
1995, 1996 and 1997 was approximately $580, $1,535 and $8,137, respectively.
 
                                      F-14
<PAGE>   90
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
5. INTANGIBLES:
 
     Intangibles consists of the following:
 
<TABLE>
<CAPTION>
                                                       AMORTIZABLE        DECEMBER 31,
                                     AMORTIZATION         LIFE        --------------------
                                        METHOD           (YEARS)        1996        1997
                                    ---------------    -----------    --------    --------
<S>                                 <C>                <C>            <C>         <C>
FCC licenses and goodwill.........    Straight-line         40        $337,479    $864,286
Noncompete agreements.............    Straight-line        1-3           1,422       6,115
Organization costs................    Straight-line          5             361       3,040
Deferred financing costs..........  Interest Method         --           2,030      21,358
Other.............................    Straight-line        3-5           1,081       6,700
                                                                      --------    --------
                                                                       342,373     901,499
Less accumulated amortization.....                                      (3,961)    (25,888)
                                                                      --------    --------
                                                                       338,412     875,611
Pending acquisition costs.........                                       2,664       5,934
                                                                      --------    --------
                                                                      $341,076    $881,545
                                                                      ========    ========
</TABLE>
 
     Amortization expense of intangible assets for the years ended December 31,
1995, 1996 and 1997 was approximately $554, $2,606 and $18,278, respectively.
 
6. ACCRUED LIABILITIES:
 
     Accrued liabilities consists of the following:
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                               ------------------
                                                                1996       1997
                                                               -------    -------
<S>                                                            <C>        <C>
Accrued compensation........................................   $   642    $ 4,252
Accrued acquisition costs...................................       954      5,284
Accrued interest............................................     1,847        960
Accrued commissions.........................................       873      2,403
Other.......................................................     1,230      3,927
                                                               -------    -------
                                                               $ 5,546    $16,826
                                                               =======    =======
</TABLE>
 
                                      F-15
<PAGE>   91
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
7. LONG-TERM DEBT:
 
     Long-term debt consists of the following:
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                               --------------------
                                                                 1996        1997
                                                               --------    --------
<S>                                                            <C>         <C>
Credit Facility.............................................   $     --    $141,700
1997 Capstar Partners Notes, $277,000 principal, including
  unamortized discount of $110,009, due 2009................         --     166,991
1997 Capstar Radio Notes, $200,000 principal, including
  unamortized discount of $762, due 2007....................         --     199,238
1995 Capstar Radio Notes, $76,808 principal, including
  unamortized discount of $3,008 at December 31, 1997, due
  2003......................................................     76,672      79,816
Former Credit Facility, bearing interest at 3.5% over
  LIBOR.....................................................     24,700          --
Reducing revolver loans, bearing variable interest (8.7% at
  December 31, 1996)........................................     53,794          --
Former Term Loan Facility...................................     35,000          --
Capital lease obligations and other notes payable at various
  interest rates............................................      1,004       6,827
                                                               --------    --------
                                                                191,170     594,572
Less current portion........................................     (3,936)     (1,388)
                                                               --------    --------
                                                               $187,234    $593,184
                                                               ========    ========
</TABLE>
 
  Credit Facility
 
     Capstar Radio entered into an amended and restated credit agreement with
various banks in August 1997 (the "Credit Facility"). The Credit Facility
consists of a $200 million revolving loan facility (the "Revolving Loans") and
an additional $150 million of multiple advancing term loans (the "Term Loans").
The Credit Facility matures seven years from the initial borrowing date with the
Revolving Loans then outstanding to be repaid in full on such date. Up to $75
million of the Revolving Loan commitment is available to Capstar Radio for the
issuance of letters of credit.
 
     At any time on or after August 12, 1998 (the "Effective Date") and prior to
December 31, 1998, Capstar Radio may request one or more of the banks to make
Term Loans under the Credit Facility, up to an aggregate amount equal to $150
million in up to two advances with a minimum of $50 million for each such
advance. The Term Loans are subject to scheduled annual principal repayments,
payable in equal quarterly installments. The Term Loans mature on the seventh
anniversary of the Effective Date of the Credit Facility. Term loans may not be
reborrowed after payment.
 
     The Revolving Loans and the Term Loans bear interest at a rate based, at
the option of Capstar Radio, on (i) a base rate defined as the higher of 1/2 of
1% in excess of the federal reserve reported certificate of deposit rate or the
administrative agent bank's prime lending rate, plus an incremental rate or (ii)
the Eurodollar rate, plus an incremental rate. The weighted-average interest
rates on Revolving Loans outstanding at December 31, 1996 (Former Credit
Facility) and December 31, 1997 were 10.2% and 9.7%, based on prime rates,
respectively. Capstar Radio pays fees ranging from 0.375% to 0.50% per annum on
the aggregate unused portion of the loan commitment based on the leverage ratio
for the most recent quarter end. In addition, Capstar Radio is required to pay
letter of credit fees.
 
     The Credit Facility contains customary restrictive covenants, which, among
other things and with certain exceptions, limit the ability of Capstar Radio to
incur additional indebtedness and liens in connection therewith, enter into
certain transactions with affiliates, pay dividends, consolidate, merge or
effect certain asset sales, issue additional stock, make capital expenditures
and enter new lines of business. The Credit
 
                                      F-16
<PAGE>   92
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
Facility limits Capstar Radio and its subsidiaries ability to make additional
acquisitions in excess of $100 million on an individual basis without the prior
consent of a majority of the banks. Substantially all the assets of Capstar
Radio and its subsidiaries are restricted. Under the Credit Facility, Capstar
Radio is also required to satisfy certain financial covenants, which require
Capstar Radio and its subsidiaries to maintain specified financial ratios and to
comply with certain financial tests, such as maximum leverage ratio, minimum
consolidated EBITDA and minimum consolidated EBITDA to consolidated net cash
interest expense.
 
     Capstar Radio has collateralized the Credit Facility by granting a first
priority perfected pledge of Capstar Radio's assets, including, without
limitation, the capital stock of its subsidiaries. Capstar Partners, Capstar
Broadcasting and all of the direct and indirect subsidiaries of Capstar Partners
(other than the Capstar Radio) have guaranteed the Credit Facility and have
collateralized their guarantees by granting a first priority perfected pledge of
substantially all of their assets.
 
  1997 Capstar Partners Notes
 
     On February 20, 1997, Capstar Partners issued $277.0 million in aggregate
principal amount at maturity of its 12 3/4% Senior Discount Notes due 2009. The
1997 Capstar Partners Notes were issued at a substantial discount from their
aggregate principal amount at maturity, generating gross proceeds to Capstar
Partners of approximately $150.3 million. On September 12, 1997, Capstar
Partners exchanged its 12 3/4% Senior Discount Notes due 2009 (the "1997 Capstar
Partners Notes"), which were registered under the Securities Act of 1933, for
all of the outstanding 12 3/4% Senior Discount Notes due 2009 previously issued
on February 20, 1997. The terms of the 1997 Capstar Partners Notes are identical
in all material respects to the discount notes issued on February 20, 1997. The
1997 Capstar Partners Notes are unsecured, senior obligations of Capstar
Partners and are limited to $277.0 million aggregate principal amount at
maturity and will mature on February 1, 2009. No interest will accrue on the
1997 Capstar Partners Notes prior to February 1, 2002. Thereafter, interest on
the 1997 Capstar Partners Notes will accrue at the rate of 12 3/4% and will be
payable in cash semiannually on February 1 and August 1 commencing on August 1,
2002. The yield to maturity of the 1997 Capstar Partners Notes is 12 3/4%
(computed on a semi-annual bond equivalent basis), calculated from February 20,
1997.
 
     The 1997 Capstar Partners Notes may be redeemed at any time on or after
February 1, 2002, in whole or in part, at the option of Capstar Partners at
prices ranging from 106.375% at February 1, 2002 and declining to 100% on
February 1, 2007 (expressed as a percentage of the accreted value in the
redemption date), plus in each case accrued and unpaid interest. In addition,
prior to February 1, 2001, Capstar Partners may, at its option, redeem up to 25%
of the principal amount at maturity of the 1997 Capstar Partners Notes at a
redemption price of 112.75% of the accreted value, out of the proceeds of one or
more public equity offering or major asset sales. Upon the occurrence of a
change in control (as defined in the 1997 Capstar Partners Note Indenture), the
holders of the Capstar Partners Notes have the right to require Capstar Partners
to purchase all or a portion of the 1997 Capstar Partners Notes at a purchase
price equal to (i) 101% of the accreted value if the change in control occurs
before February 1, 2002 or (ii) 101% of the principal amount at maturity, plus
accrued and unpaid interest, if the change in control occurs after February 1,
2002. The 1997 Capstar Partners indenture contains limitations on incurrence of
additional indebtedness, issuance of preferred stock of subsidiaries and
restricted payments, as well as other restrictive covenants.
 
  1997 Capstar Radio Notes
 
     On June 17, 1997, Capstar Radio issued $200.0 million in aggregate
principal amount of its 9 1/4% Senior Subordinated Notes due July 1, 2007. On
September 16, 1997, Capstar Radio exchanged its 9 1/4% Senior Subordinated Notes
due 2007 (the "1997 Capstar Radio Notes"), which were registered under the
Securities Act, for all of the outstanding notes issued on June 17, 1997. The
1997 Capstar Radio Notes are general unsecured obligations of Capstar Radio and
are subordinated to all senior indebtedness of Capstar Radio. The
 
                                      F-17
<PAGE>   93
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
1997 Capstar Radio Notes may be redeemed at anytime on or after July 1, 2002, in
whole or in part, at the option of Capstar Radio at prices ranging from 104.625%
at July 1, 2002 and declining to 100% on or after July 1, 2005, plus in each
case accrued and unpaid interest. In addition, prior to July 1, 2001, Capstar
Radio may redeem up to 25% of the original aggregate principal amount of the
1997 Capstar Radio Notes at a redemption price of 109.25% plus accrued and
unpaid interest with net proceeds of one or more public equity offerings or
major asset sales. Upon the occurrence of a change of control (as defined in the
1997 Capstar Radio Notes indenture), the holders of the 1997 Capstar Radio Notes
have the right to require Capstar Radio to purchase all or a portion of the 1997
Capstar Radio Notes at a price equal to 101% plus accrued and unpaid interest.
The 1997 Capstar Radio Notes indenture contains limitations on incurrence of
additional indebtedness, issuance of preferred stock of subsidiaries and
restricted payments, as well as other restrictive covenants.
 
  1995 Capstar Radio Notes
 
     The 1995 Capstar Radio Notes in the aggregate principal amount of $76,808
bear interest at a rate of 7 1/2% per annum through May 1, 1998 and 13 1/4% per
annum through maturity on May 1, 2003, resulting in an effective interest rate
of approximately 12.1% per annum. The 1995 Capstar Radio Notes are general
unsecured obligations of Capstar Radio, subordinated to all senior indebtedness
of Capstar Radio, and are guaranteed on a senior subordinated basis, jointly and
severally, by all of Capstar Radio's subsidiaries. The subsidiary guarantors are
wholly owned subsidiaries of Capstar Radio. Capstar Radio may redeem the 1995
Capstar Radio Notes, in whole or in part, at any time on or after May 1, 1999 at
prices ranging from 107.5% at May 1, 1999 and declining to 100% after May 1,
2002, plus in each case accrued and unpaid interest. In addition, prior to May
1, 1998, Capstar Radio may redeem in the aggregate up to one third of the
original principal amount of the 1995 Capstar Radio Notes at a price equal to
108% of the accreted value, plus accrued and unpaid interest, out of the
proceeds of one or more public equity offerings. Upon the occurrence of a change
in control (as defined in the 1995 Capstar Radio Notes indenture), Capstar Radio
will be required to make an offer to purchase the outstanding 1995 Capstar Radio
Notes at a price equal to 101% of their accreted value, plus accrued and unpaid
interest. The 1995 Capstar Radio Notes indenture contains limitations of
additional indebtedness and restricted payments, as well as other restrictive
covenants.
 
     During 1996, Capstar Radio significantly modified the terms of its existing
reducing revolver loans and accelerated the maturity date from March 31, 2003 to
December 31, 1996. In connection with this modification, Capstar Radio
recognized an extraordinary charge in the accompanying consolidated statement of
operations for 1996 relating to the write off of approximately $1,895 ($1,188,
net of income tax benefit) of unamortized deferred financing costs.
 
     The scheduled maturities of the Company's outstanding long-term debt at
December 31, 1997 for each of the next five years and thereafter are as follows:
 
<TABLE>
<CAPTION>
 
<S>                                                 <C>
1998..............................................  $  1,388
1999..............................................     2,658
2000..............................................       819
2001..............................................       400
2002..............................................     1,215
Thereafter........................................   588,092
                                                    --------
                                                    $594,572
                                                    ========
</TABLE>
 
8. REDEEMABLE PREFERRED STOCK:
 
     On June 17, 1997, the Company issued 1,000,000 shares of its cumulative
(after July 1, 2002) par value $.01 per share 12% Senior Exchangeable Preferred
Stock (the "Preferred Stock Offering"). All of the
 
                                      F-18
<PAGE>   94
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
proceeds from the Preferred Stock Offering were used to finance the GulfStar
merger. On September 12, 1997, the Company exchanged its 12% Senior Exchangeable
Preferred Stock (the "Senior Exchangeable Preferred Stock"), which was
registered under the Securities Act, for all of the outstanding 12% Senior
Exchangeable Preferred Stock previously issued on June 17, 1997. The Company has
authorized 10,000,000 shares of the Senior Exchangeable Preferred Stock.
Dividends on the Senior Exchangeable Preferred Stock accumulate from the date of
issuance and are payable semi-annually, commencing January 1, 1998, at a rate
per annum of 12% of the liquidation preference per share. Dividends may be paid,
at the Company's option, on any dividend payment date occurring on or prior to
July 1, 2002 either in cash or in additional shares of the Senior Exchangeable
Preferred Stock. The liquidation preference of the Senior Exchangeable Preferred
Stock is $100.00 per share. The Senior Exchangeable Preferred Stock is
redeemable at the Company's option, in whole or in part at any time on or after
July 1, 2002, at prices ranging from 106% at July 1, 2002 and declining to 100%
after July 1, 2007, plus, without duplication, accumulated and unpaid dividends
to the date of redemption. In addition, subject to certain exceptions, prior to
July 1, 2001, the Company may, at its option, redeem up to 25% of the Senior
Exchangeable Preferred Stock with the net cash proceeds from one or more Public
Equity or Major Asset Sales (both as defined in the Certificate of Designation
governing the Senior Exchangeable Preferred Stock), at the redemption prices set
forth in the Certificate of Designation, plus, without duplication, accumulated
and unpaid dividends to the redemption date. The Senior Exchangeable Preferred
Stock is subject to mandatory redemption in whole on July 1, 2009 at a price
equal to 100% of the liquidation preference thereof, plus all accrued and unpaid
dividends.
 
     The Senior Exchangeable Preferred Stock was recorded at the amount of the
net proceeds of approximately $95 million. The carrying amount is accreted,
using the interest method, to equal the mandatory redemption amount at the
mandatory redemption date. The dividend due January 1, 1998 was declared and
paid in the form of issuance of 64,667 additional shares of the Senior
Exchangeable Preferred Stock.
 
     The Company may, at its option, subject to certain conditions, on any
scheduled dividend payment date, exchange the Senior Exchangeable Preferred
Stock, in whole but not in part, for 12% Capstar Exchange Debentures. Holders of
the Senior Exchangeable Preferred Stock will be entitled to receive $1.00
principal amount of 12% Capstar Exchange Debentures for each $1.00 in
liquidation preference of Senior Exchangeable Preferred Stock.
 
     The Certificate of Designation provides that, upon the occurrence of a
change of control (as defined in the Capstar Certificate of Designation), each
holder has the right to require the Company to repurchase all or a portion of
such holder's Senior Exchangeable Preferred Stock in cash at a purchase price
equal to 101% of the liquidation preference thereof, plus, without duplication,
an amount in cash equal to all accumulated and unpaid dividends per share to the
date of repurchase.
 
     In addition, the Certificate of Designation provides that, prior to July 1,
2002, upon the occurrence of a change of control, the Company has the option to
redeem the Senior Exchangeable Preferred Stock in whole but not in part (a
"Change of Control Redemption") at a redemption price equal to 100% of the
liquidation preference thereof, plus the applicable premium (as defined in the
Certificate of Designation).
 
     The Certificate of Designation contains restrictive provisions that, among
other things, limit the ability of the Company and its subsidiaries to incur
additional indebtedness, pay dividends or make certain other restricted
payments, or merge or consolidate with or sell all or substantially all of their
assets to any other person.
 
     The Senior Exchangeable Preferred Stock, with respect to dividend rights
and rights on liquidation, winding-up and dissolution, ranks (a) senior to all
classes of common stock of the Company and to each other series of preferred
stock established after June 17, 1997 (the "Preferred Stock Issuance Date") by
the Board
 
                                      F-19
<PAGE>   95
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
of Directors of the Company the terms of which expressly provide that such class
or series will rank junior to the Senior Exchangeable Preferred Stock (the
"Junior Stock"), subject to certain conditions, (b) on a parity with each other
class of preferred stock established after the Preferred Stock Issuance Date by
the Board of Directors of the Company the terms of which expressly provide that
such class or series will rank on a parity with the Senior Exchangeable
Preferred Stock and (c) subject to certain conditions, junior to each class of
Preferred Stock established after the Preferred Stock Issuance Date by the Board
of Directors of the Company the terms of which expressly provide that such class
will rank senior to the Senior Exchangeable Preferred Stock.
 
  GulfStar Preferred
 
     In connection with issuance of its 12% redeemable preferred shares, Former
GulfStar granted, to the holders of the preferred shares, warrants for the
purchase of 8,098 shares of Former GulfStar's common stock at a rate of $.01 per
share.
 
     Of the proceeds received from issuance of the preferred shares, $3,884 was
assigned to the warrants and credited to additional paid-in capital in the
accompanying consolidated financial statements. Such value is being accreted to
redeemable preferred stock using the interest method over the period from
issuance to mandatory redemption. These warrants were exercised in 1997 in
connection with the GulfStar merger.
 
     In conjunction with the merger of GulfStar into a direct subsidiary of
Capstar Broadcasting in July 1997, Capstar Radio redeemed all of the outstanding
shares of redeemable preferred stock of GulfStar. The liquidation value as of
the date of redemption was approximately $29 million, which included $2,817 in
accumulated dividends. The redemption resulted in a charge to additional paid-in
capital of $5,378, for the amount that the liquidation value exceeded the
carrying value.
 
9. NONCASH COMPENSATION EXPENSE:
 
  Warrants
 
     During 1996 and 1997, the Company issued warrants (which were assumed by
Capstar Broadcasting) and Capstar Broadcasting issued warrants to the Company's
Chief Executive Officer pursuant to the terms of a stockholder's agreement
executed on October 16, 1996 between the Company (assumed by Capstar
Broadcasting), the Company's Chief Executive Officer and Capstar Broadcasting's
principal stockholder. Under the terms of the agreement, upon the sale of
additional shares of Capstar Broadcasting common stock to its principal
stockholder, the Company's Chief Executive Officer is entitled to receive, for
no additional consideration, warrants entitling him to purchase additional
shares of Capstar Broadcasting common stock (Class C). The warrants were issued
at an exercise price equal to the fair market value of the underlying stock at
the date of issue, increased at an annual rate of 8% per year. The warrants
expire ten years from the date of issue. Certain of the warrants can be
exercised at any time prior to the expiration date. The remaining warrants
cannot be exercised prior to the date upon which distributions (cash or
marketable securities) have been made to Capstar Broadcasting's principal
stockholder equal to an internal rate of return of at least 30% on each
 
                                      F-20
<PAGE>   96
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
investment (the "Triggering Event"). Following is a summary of the warrants
issued in connection with this agreement.
 
<TABLE>
<CAPTION>
                                                             NUMBER OF SHARES
                                                      ------------------------------
                                 EXERCISE PRICE                        EXERCISABLE       PRINCIPAL
                                   PER SHARE                         UPON TRIGGERING    STOCKHOLDER
        DATE ISSUED           (EXCLUDING INTEREST)    EXERCISABLE         EVENT         INVESTMENT
        -----------           --------------------    -----------    ---------------    -----------
<S>                           <C>                     <C>            <C>                <C>
October 16, 1996............         $1.00               7,444            1,860           $90,000
February 20, 1997...........          1.10               2,042              511            34,800
July 8, 1997................          1.33                 988            2,243            75,000
                                                        ------            -----
                                                        10,474            4,614
                                                        ======            =====
</TABLE>
 
     Capstar Broadcasting has accounted for these warrants as variable in
accordance with Accounting Principles Board ("APB") Opinion No. 25 and
recognized noncash compensation expense of approximately $744 and $1,825 in 1996
and 1997, respectively. The expense has been allocated to the Company and
recorded as a charge to expense and payable to the parent.
 
     During 1998, Capstar Broadcasting's principal shareholder contributed
additional equity totaling $550,000. At this time, Capstar Broadcasting has not
issued additional warrants for this contribution.
 
  Stock Subscriptions
 
     Former GulfStar issued 1,101 and 7,134 shares of common stock in 1995 and
1996, respectively, for prices ranging from $28 to $309 per share. In each case,
Former GulfStar received recourse and non-recourse notes for 25% and 75% of the
purchase price, respectively.
 
     Former GulfStar applied APB Opinion No. 25 in accounting for the stock
issued for non-recourse notes. The compensation cost charged against income was
approximately $5,432 and $8,750 in 1996 and 1997, respectively. For certain of
the sales to employees during 1996, compensation expense is considered unearned
until Former GulfStar's rights to repurchase the shares expire in accordance
with the terms of underlying securities purchase agreement. Such rights expired
during 1997 upon the merger of Former GulfStar and the Company.
 
     In conjunction with the acquisition of Former GulfStar by Capstar
Broadcasting in July 1997, all of Former GulfStar's then outstanding common
stock and stock subscriptions were exchanged for Capstar Broadcasting common
stock and stock subscriptions.
 
10. STOCK OPTIONS:
 
     In June 1997, Capstar Broadcasting adopted the 1997 Stock Option Plan (the
"Plan") providing for the granting of options to purchase shares of Capstar
Broadcasting's common stock to the Company's key employees and eligible
non-employees, as defined by the Plan and determined by Capstar Broadcasting's
Board Directors. The Plan replaced the prior stock option plan. Capstar
Broadcasting applies APB Opinion No. 25 and related interpretations in
accounting for the Plan. In 1995, the FASB issued SFAS No. 123 "Accounting for
Stock-Based Compensation," which, if adopted by Capstar Broadcasting, would
change the methods Capstar Broadcasting applies in recognizing the cost of the
Plan. Adoption of the cost recognition provisions of SFAS No. 123 is optional
and Capstar Broadcasting has decided not to elect these provisions of SFAS No.
123. However, pro forma disclosures as if Capstar Broadcasting adopted the cost
recognition provisions of SFAS No. 123 in 1995 are required by SFAS No. 123 and
are presented below.
 
     As of December 31, 1997, an aggregate of 22,000,000 shares was approved for
issuance under the Plan. The Plan provides for the issuance of both Incentive
Stock Options ("ISOs") as well as options not qualifying
 
                                      F-21
<PAGE>   97
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
as ISOs within the meaning of the Internal Revenue Code of 1986, as amended. At
the time of the grant, Capstar Broadcasting's Board of Directors determines the
exercise price and vesting schedules. Under the terms of the Plan, the option
price per share of ISOs to a person who, at the time such ISO is granted, owns
shares of Capstar Broadcasting or any Related Entity, which possess more than
10% of the total combined voting power of all classes of shares of Capstar
Broadcasting or of any related entity, the option exercise price shall not be
less than 110% of the fair market value per share of common stock at the date
the option is granted. Options may not be granted with a term beyond June 2007.
Generally, 20% of each option is exercisable one year after the grant and an
additional 1/60th becomes exercisable each month thereafter.
 
     A summary of the status of Capstar Broadcasting's option activity under the
Plan and related information follows:
 
<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31,
                                          ------------------------------------------------
                                                   1996                     1997
                                          ----------------------   -----------------------
                                                       WEIGHTED-                 WEIGHTED-
                                                        AVERAGE                   AVERAGE
                                                       EXERCISE                  EXERCISE
                                            SHARES       PRICE       SHARES        PRICE
                                          ----------   ---------   -----------   ---------
<S>                                       <C>          <C>         <C>           <C>
Outstanding at beginning of year........          --     $  --       3,737,430     $1.00
Granted.................................   3,737,430      1.00      14,073,839      1.24
Exercised...............................          --        --              --        --
Expired.................................          --        --       1,072,248      1.03
                                          ----------     -----     -----------     -----
Outstanding at end of year..............   3,737,430     $1.00      16,739,021     $1.20
                                          ==========               ===========
Options exercisable at end of year......          --                   922,043
                                          ==========               ===========
Weighted-average grant-date fair value
  of options granted....................  $      .16               $       .34
                                          ==========               ===========
</TABLE>
 
     As required by SFAS No. 123, pro forma information regarding net loss has
been determined as if Capstar Broadcasting had accounted for its stock options
under the fair value method. The fair value for these options was estimated as
of the date of grant using a minimum value option pricing model with the
following weighted-average assumptions for 1996 and 1997, respectively; risk
free interest rates of 5.84% and 6.16%; no dividend; and weighted-average
expected lives of the options of three and five years.
 
     The minimum value option valuation model with a near zero volatility
results in an option value similar to the option value that would result from
using the Black-Scholes option valuation model with a near zero volatility. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and which are
fully transferable. In addition, option valuation models, in general, require
the input of highly subjective assumptions, including the expected stock price
volatility. Because Capstar Broadcasting's stock options have characteristics
significantly different than those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
 
     For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The impact on
the pro forma results which follow may not be representative of compensation
expense in future years when the effect of the amortization of multiple awards
may be reflected in the amounts. Had Capstar Broadcasting adopted the cost
provision of SFAS No. 123 and allocated these
 
                                      F-22
<PAGE>   98
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
costs to the Company, the Company's net loss for 1996 and 1997 would approximate
the pro forma amounts below:
 
<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                                 ------------------------
                                                    1996          1997
                                                 ----------    ----------
<S>                                              <C>           <C>
Net loss:
  As reported..................................   $ 11,957      $ 39,661
  Pro forma....................................     12,158        40,893
</TABLE>
 
     The following table summarizes information about Capstar Broadcasting's
options outstanding at December 31, 1997:
 
<TABLE>
<CAPTION>
                          OPTIONS OUTSTANDING                               OPTIONS EXERCISABLE
  --------------------------------------------------------------------    ------------------------
                                                WEIGHTED-                    NUMBER
                                 NUMBER          AVERAGE      WEIGHTED    EXERCISABLE     WEIGHTED
   RANGE OF                  OUTSTANDING AT     REMAINING     AVERAGE          AT         AVERAGE
   EXERCISE                   DECEMBER 31,     CONTRACTUAL    EXERCISE    DECEMBER 31,    EXERCISE
    PRICES                        1997            LIFE         PRICE          1997         PRICE
  -----------                --------------    -----------    --------    ------------    --------
  <S>         <C>            <C>               <C>            <C>         <C>             <C>
  $ .71-$ .71..............       465,675(1)       4.2         $ .71             --        $  --
   1.00- 1.00..............      2,793,500         8.9          1.00        922,043         1.00
   1.10- 1.10..............      4,435,360         5.1          1.10             --           --
   1.33- 1.33..............      9,044,486         5.7          1.33             --           --
                               ----------          ---         -----        -------        -----
                               16,739,021          6.0         $1.20        922,043        $1.00
                               ==========                                   =======
</TABLE>
 
---------------
 
(1) These options were assumed by Capstar Broadcasting as part of the merger
    with Former GulfStar and were accounted for as a portion of the acquisition
    of minority interest.
 
11. INCOME TAXES:
 
     All of the Company's revenues were generated in the United States. The
components of the provision (benefit) for income taxes are as follows:
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                        -----------------------------
                                                         1995      1996        1997
                                                        ------    -------    --------
<S>                                                     <C>       <C>        <C>
Current:
  Federal.............................................  $  999    $(1,112)   $    162
  State...............................................      98        243         316
Deferred:
  Federal.............................................     (59)       503     (11,440)
  State...............................................      (6)        44      (1,030)
                                                        ------    -------    --------
Total provision (benefit).............................  $1,032    $  (322)   $(11,992)
                                                        ======    =======    ========
</TABLE>
 
     Approximately $707 and $1,473 of benefit for income taxes was allocated to
an extraordinary loss on early extinguishment of debt in the accompanying
consolidated statements of operations for the years ended December 31, 1996 and
1997, respectively. For purposes of the foregoing components of provision
(benefit) for income taxes, such intra-period allocation is treated to have
affected the deferred components.
 
                                      F-23
<PAGE>   99
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     Income tax expense (benefit) differs from the amount computed by applying
the federal statutory income tax rate of 35% to income (loss) before income
taxes and extraordinary items for the following reasons:
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                        -----------------------------
                                                         1995      1996        1997
                                                        ------    -------    --------
<S>                                                     <C>       <C>        <C>
U.S. federal income tax at statutory rate.............  $  911    $(3,882)   $(17,237)
State income taxes, net of federal benefit............      61        189      (1,478)
Nondeductible compensation expense....................      --      1,847       3,325
Other items, primarily nondeductible expenses and
  deferred tax adjustments............................      60      1,524       3,398
                                                        ------    -------    --------
                                                        $1,032    $  (322)   $(11,992)
                                                        ======    =======    ========
</TABLE>
 
     The net deferred tax liability consists of the following:
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1996        1997
                                                              --------    --------
<S>                                                           <C>         <C>
Deferred tax liabilities:
  Property and equipment and intangible asset basis
     differences and related depreciation and
     amortization...........................................  $106,132    $197,753
Deferred tax assets:
  Miscellaneous.............................................     1,055       4,307
  Unamortized discount on long-term debt....................        54       8,150
  Net operating loss carryforwards..........................    22,974      32,351
                                                              --------    --------
          Total deferred tax assets.........................    24,083      44,808
  Valuation allowance for deferred tax assets...............    (1,559)     (7,205)
                                                              --------    --------
          Net deferred tax asset............................    22,524      37,603
                                                              --------    --------
          Net deferred tax liability........................  $ 83,608    $160,150
                                                              ========    ========
</TABLE>
 
     In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred 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 tax liabilities and projected future taxable
income in making this assessment. The Company expects the majority of deferred
tax assets at December 31, 1997 to be realized as a result of the reversal
during the carryforward period of existing taxable temporary differences giving
rise to deferred tax liabilities and the generation of taxable income in the
carryforward period.
 
     At December 31, 1997, the Company had net operating loss carryforwards of
approximately $82,000, including approximately $69,500 acquired in connection
with the acquisition of certain subsidiaries. The acquired net operating losses
are SRLY to the acquired subsidiaries that generated the losses. If not
previously utilized, net operating loss carryforwards expire at various dates
from 1999 through 2012. Management considers that it is more likely than not
that a portion of these loss carryforwards will not ultimately be realized, and
has recorded a related valuation allowance as of December 31, 1997.
 
12. COMMITMENTS AND CONTINGENCIES:
 
  Employee Benefit Plan
 
     During 1997, the Company established a 401(k) Plan for the benefit of all
eligible employees. Eligible participants under this plan are defined as all
full-time employees with three months of service. All eligible
 
                                      F-24
<PAGE>   100
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
participants may elect to contribute a portion of their compensation to the plan
subject to Internal Revenue Service limitations. The Company makes matching
contributions to the plan at a rate of 25%, to an annual maximum of 6% of each
participant's annual salary. Contribution expense under the plan was $300 for
the year ended December 31, 1997.
 
  Leases
 
     The Company leases real property, office space, broadcasting and office
equipment under various noncancelable operating leases. Certain of the Company's
operating leases contain escalation clauses, renewal options and/or purchase
options. Rent expense was approximately $290, $913 and $2,490 for the years
ended December 31, 1995, 1996 and 1997, respectively.
 
     Future minimum payments under noncancelable operating lease are as follows:
 
<TABLE>
<CAPTION>
                                                   OPERATING
                                                    LEASES
                                                   ---------
<S>                                                <C>
1998.............................................  $   3,186
1999.............................................      2,745
2000.............................................      2,276
2001.............................................      1,819
2002.............................................      1,520
Thereafter.......................................      4,544
                                                   ---------
          Total minimum lease payments...........  $  16,090
                                                   =========
</TABLE>
 
  Employment Agreements
 
     The Company has employment agreements with its executive officers and
certain members of management, the terms of which expire at various times
through December 2002. Such agreements provide for minimum salary levels, which
may be adjusted from time to time, as well as for incentive bonuses which are
payable if specified management goals are attained. The aggregate commitment for
future salaries at December 31, 1997, excluding bonuses, was approximately
$5,870.
 
  Legal
 
     The Company is subject to various legal proceedings and claims that arise
in the ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to these actions will not have a material
impact on the consolidated financial position or results of operations or cash
flows of the Company.
 
  Impact of the Year 2000 Issue
 
     The Year 2000 Issue is whether the Company's computer systems will properly
recognize date sensitive information when the year changes to 2000, or "00."
Systems that do not properly recognize such information could generate erroneous
data or cause a system to fail. The Company uses purchased software programs for
a variety of functions, including general ledger, accounts payable and accounts
receivable accounting packages. Responsibility for Year 2000 compliance has been
analyzed and testing is currently ongoing for many of the financial
applications, individual work stations, and broadcasting systems. Preliminary
tests on applications have proven them to be compliant, but further testing is
warranted. The Company believes that the Year 2000 Issue will not pose
significant operational problems for the Company's computer systems and,
therefore, will not have a material impact on the financial position or the
operations of the Company.
 
                                      F-25
<PAGE>   101
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
  Other
 
     The Company is partially self-insured for employee medical insurance risks,
subject to specific retention levels. Self-insurance costs are accrued based
upon the aggregate of the estimated liability for reported claims and estimated
liabilities for claims incurred but not reported. The Company has recorded
approximately $183, $516 and $2,658 for self-insurance costs for the years ended
December 31, 1995, 1996 and 1997, respectively.
 
13. RELATED PARTY TRANSACTIONS:
 
  Monitoring and Oversight Agreement
 
     The Company has entered into a monitoring and oversight agreement (the
"Monitoring and Oversight Agreement") with Hicks, Muse & Co. Partners, L.P.
("Hicks Muse Partners"). Pursuant thereto, the Company has agreed to pay to
Hicks Muse Partners an annual fee for ongoing financial oversight and monitoring
services. The annual fee is adjustable upward or downward at the end of each
fiscal year to an amount equal to 0.2% of the budgeted consolidated annual net
sales of the Company for the then-current fiscal year; provided, that such fee
shall at no time be less that $100 per year.
 
     The Monitoring and Oversight Agreement makes available on an ongoing basis
the resources of Hicks Muse Partners concerning a variety of financial matters.
The services that have been and will continue to be provided by Hicks Muse
Partners could not otherwise be obtained by the Company without the addition of
personnel or the engagement of outside professional advisors.
 
  Financial Advisory Agreement
 
     The Company is a party to a financial advisory agreement (the "Financial
Advisory Agreement") with Hicks Muse Partners. Pursuant to the Financial
Advisory Agreement, Hicks Muse Partners is entitled to receive a fee equal to
1.5% of the transaction value (as defined in the Financial Advisory Agreement)
for each add-on transaction (as defined) in which the Company or any of its
subsidiaries is involved.
 
     Pursuant to the Financial Advisory Agreement, Hicks Muse Partners provides
investment banking, financial advisory and other similar services with respect
to the add-on transactions in which the Company is involved. Such transactions
require additional attention beyond that required to monitor and advise the
Company on an ongoing basis and accordingly the Company pays separate financial
advisory fees with respect to such matters in addition to those paid in
connection with the Monitoring and Oversight Agreement. The services that have
been and will continue to be provided by Hicks Muse Partners could not have
otherwise been obtained by the Company without the addition of personnel or the
engagement of outside professional advisors. The Company paid or accrued a
financial advisory fee to Hicks Muse Partners in the amount of approximately
$3,475 and $10,947 for the years ended December 31, 1996 and 1997, respectively.
 
  Former GulfStar
 
     On April 16, 1996, Former GulfStar acquired all of the outstanding capital
stock of Sonance Communications, Inc. ("Sonance") in exchange for 542 shares of
Former GulfStar's Class C common stock, 1,626 shares of Former GulfStar's Class
A common stock and approximately $619 of cash. Total consideration for the
acquisition, including acquisition costs, was approximately $1,065. The primary
assets of Sonance were broadcasting properties. Liabilities of Sonance assumed
by Former GulfStar in connection with the acquisition were approximately $7,627.
The controlling stockholder of Former GulfStar is a family member of the
controlling stockholder of Sonance. The majority stockholder of Former GulfStar,
who is a family member of both the controlling stockholder of Former GulfStar
and the controlling stockholder of Sonance, was also the majority stockholder of
Sonance.
 
                                      F-26
<PAGE>   102
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     Former GulfStar recorded a charge of approximately $771 during 1996 in
connection with the write-off of a receivable from an entity owned by a family
member of the controlling stockholder of Former GulfStar. The charge is included
in other expense in the accompanying consolidated statement of operations.
 
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments for which the estimated fair value of the
instrument differs significantly from its carrying amount at December 31, 1996
and 1997. The fair value of a financial instrument is defined as the amount at
which the instrument could be exchanged in a current transaction between willing
parties.
 
<TABLE>
<CAPTION>
                                                        1996                     1997
                                                --------------------    ----------------------
                                                CARRYING      FAIR      CARRYING       FAIR
                                                 VALUE       VALUE        VALUE        VALUE
                                                --------    --------    ---------    ---------
<S>                                             <C>         <C>         <C>          <C>
Long-term debt -- 1997 Capstar Partners, and
  1997 and 1995 Capstar Radio Notes...........  $(76,672)   $(76,672)   $(446,044)   $(494,596)
Interest rate swap............................        --          --           --         (320)
Redeemable preferred stock....................        --          --     (101,493)    (116,000)
</TABLE>
 
     The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
 
          Cash and short-term debt, and accounts receivable and payable: the
     carrying amount approximates fair value because of the short maturity of
     these instruments.
 
          Long-term debt: The fair value of the Company's 1997 Capstar Partners
     and 1997 and 1995 Capstar Radio Notes are based on quoted market prices. As
     amounts outstanding under the Company's Credit Facility agreements bear
     interest at current market rates, their carrying amounts approximate fair
     market value.
 
          Interest rate swaps: The fair value of the interest rate swap is
     estimated by obtaining quotations from brokers. The fair value is an
     estimate of the amounts that the Company would receive (pay) at the
     reporting date if the contracts were transferred to other parties or
     canceled by the broker.
 
          Redeemable preferred stock of Former GulfStar: The fair value is
     estimated based on quoted market prices.
 
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                              -------------------------------
                                                               1995        1996        1997
                                                              ------      ------      -------
<S>                                                           <C>         <C>         <C>
Cash paid during the period for:
  Interest..................................................  $1,394      $8,392      $25,388
  Income taxes..............................................     200         999          230
Noncash investing and financing activities:
  Financed property and equipment purchases.................      --          89        2,537
  Book value of assets exchanged in connection with
     broadcast property acquisition.........................      --         471           --
  Dividends and accretion on preferred stock................       8       1,350        7,071
  Notes receivable and accrued interest taken in connection
     with subscribed stock..................................     333       1,757        1,896
  Redemption of preferred stock by Company's parent.........      --          --       29,358
  Noncash dividends on common stock.........................      --          --       14,501
  Financed or accrued acquisition costs.....................     542       6,569        7,095
</TABLE>
 
                                      F-27
<PAGE>   103
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
16. SUBSEQUENT EVENT:
 
     Pursuant to a merger agreement, dated August 24, 1997, between certain
affiliates of Capstar Partners' parent and SFX Broadcasting, Inc. ("SFX"),
Capstar Broadcasting may acquire SFX for a total cash cost to Capstar
Broadcasting of the merger, related repayment of SFX's existing indebtedness and
redemption of SFX's preferred stock of approximately $2.1 billion, if completed
by May 31, 1998. Upon consummation of the merger, SFX and its subsidiaries will
own and operate or provide services to or have the right to acquire 85 radio
stations (65 FM and 20 AM) in 28 markets.
 
                                      F-28
<PAGE>   104
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors
Capstar Radio Broadcasting Partners, Inc.
 
     We have audited the accompanying consolidated balance sheets of Capstar
Radio Broadcasting Partners, Inc. and Subsidiaries as of December 31, 1996 and
1997, and the related consolidated statements of operations, stockholder's
equity and cash flows for each of the three years in the period ended December
31, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements 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 consolidated financial position of
Capstar Radio Broadcasting Partners, Inc. and Subsidiaries as of December 31,
1996 and 1997, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
 
     As described in Note 1, in July 1997, the Company's parent was merged with
GulfStar Communications, Inc. The exchange of shares between these entities
under common control has been accounted for in a manner similar to a
pooling-of-interests. The accompanying consolidated financial statements of the
Company have been restated for all periods presented to give retroactive effect
to the merger and to reflect the application of "push-down" accounting for the
new basis of the purchased assets and assumed liabilities in connection with
Capstar Broadcasting Partners' acquisition of Capstar Radio Broadcasting
Partners on October 16, 1996.
 
                                            COOPERS & LYBRAND L.L.P.
 
Austin, Texas
March 26, 1998
 
                                      F-29
<PAGE>   105
 
           CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              -----------------------
                                                                 1996         1997
                                                              ----------   ----------
                                                              (RESTATED)
<S>                                                           <C>          <C>
Current assets:
  Cash and cash equivalents.................................   $  9,161    $   70,719
  Accounts receivable, net of allowance for doubtful
     accounts of $1,167 and
     $2,889, respectively...................................     17,249        40,350
  Refundable income taxes...................................      1,112            --
  Prepaid expenses and other current assets.................        600         3,699
                                                               --------    ----------
          Total current assets..............................     28,122       114,768
  Property and equipment, net...............................     28,962       105,505
  Intangibles and other, net................................    339,276       873,544
  Other non-current assets..................................      3,282         3,055
                                                               --------    ----------
          Total assets......................................   $399,642    $1,096,872
                                                               ========    ==========
                        LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
  Current portion of long-term debt.........................   $  3,936    $    1,388
  Accounts payable..........................................      4,688        10,770
  Accrued liabilities.......................................      4,158        15,977
  Income taxes payable......................................         --         2,417
                                                               --------    ----------
     Total current liabilities..............................     12,782        30,552
  Long-term debt, net of current portion....................    152,234       426,192
  Due to parent.............................................         --        11,580
  Deferred income taxes.....................................     83,608       167,233
                                                               --------    ----------
          Total liabilities.................................    248,624       635,557
                                                               --------    ----------
Commitments and contingencies (Note 12)
Redeemable preferred stock, $.01 par value, 507,500 shares
  authorized, issued and outstanding, aggregate liquidation
  preference of $27,053 in 1996.............................     23,098            --
Stockholder's equity:
  CAPSTAR RADIO BROADCASTING PARTNERS, INC.:
     Common Stock, $.01 par value, 350,000,000 and
      500,000,000 shares authorized; 106,757,000 and
      475,874,792 shares issued and outstanding,
      respectively..........................................      1,068         4,759
     Additional paid-in capital.............................    125,110       491,085
  GULFSTAR COMMUNICATIONS, INC.:
     Common stock, voting, $.01 par value, 100,000 shares
      authorized, 10,986 shares issued and outstanding in
      1996..................................................          1            --
     Common stock, Class A, nonvoting, $.01 par value,
      60,000 shares authorized, 49,033 shares issued and
      outstanding in 1996...................................          1            --
     Common stock, Class B, nonvoting, $.01 par value,
      10,000 shares authorized, no shares issued and
      outstanding...........................................         --            --
     Common stock, Class C, voting, $.01 par value, 100,000
      shares authorized, 3,172 shares issued and outstanding
      in 1996...............................................          1            --
     Additional paid-in capital.............................     11,869            --
     Stock subscriptions receivable.........................     (2,090)           --
     Unearned compensation..................................     (1,518)           --
  ACCUMULATED DEFICIT.......................................     (6,522)      (34,529)
                                                               --------    ----------
          Total stockholder's equity........................    127,920       461,315
                                                               --------    ----------
          Total liabilities and stockholder's equity........   $399,642    $1,096,872
                                                               ========    ==========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                      F-30
<PAGE>   106
 
           CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              -----------------------------
                                                               1995       1996       1997
                                                              -------   --------   --------
                                                                  (RESTATED)
<S>                                                           <C>       <C>        <C>
Gross broadcast revenue.....................................  $17,322   $ 47,200   $189,820
Less: agency commissions....................................   (1,525)    (4,334)   (14,375)
                                                              -------   --------   --------
  Net broadcast revenue.....................................   15,797     42,866    175,445
                                                              -------   --------   --------
Operating expenses:
  Programming, technical and news...........................    2,874      9,313     43,073
  Sales and promotion.......................................    4,638     12,808     48,156
  General and administrative................................    4,225      8,360     30,906
  Corporate expenses........................................      513      2,300     14,221
  Corporate expenses -- noncash compensation................       --      6,176     10,575
  Depreciation and amortization.............................    1,134      4,137     26,285
                                                              -------   --------   --------
  Operating income (loss)...................................    2,413       (228)     2,229
Other income (expense):
  Interest expense..........................................   (4,078)    (7,064)   (30,559)
  Interest income...........................................    1,932         34      3,453
  Gain (loss) on sale of broadcasting property..............    2,389         --       (908)
  Other.....................................................      (54)      (929)    (4,729)
                                                              -------   --------   --------
Income (loss) before provision (benefit) for income taxes
  and extraordinary item....................................    2,602     (8,187)   (30,514)
Provision (benefit) for income taxes........................    1,032       (323)    (4,910)
                                                              -------   --------   --------
Income (loss) before extraordinary item.....................    1,570     (7,864)   (25,604)
Extraordinary loss on early extinguishment of debt, net of
  income tax benefit of $707 and $1,473, respectively.......       --     (1,188)    (2,403)
                                                              -------   --------   --------
  Net income (loss).........................................    1,570     (9,052)   (28,007)
Dividends, accretion and redemption of preferred stocks.....       (8)    (1,350)    (7,071)
                                                              -------   --------   --------
  Net income (loss) attributable to common stock............  $ 1,562   $(10,402)  $(35,078)
                                                              =======   ========   ========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                      F-31
<PAGE>   107
 
           CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
 
                                                                        GULFSTAR COMMUNICATIONS, INC.
                                                 ---------------------------------------------------------------------------
 
                                                                             CLASS A               CLASS B          CLASS C
                                                    COMMON STOCK          COMMON STOCK          COMMON STOCK       COMMON STOCK
                                                 -------------------   -------------------   -------------------   ---------
                                                 NUMBER OF     PAR     NUMBER OF     PAR     NUMBER OF     PAR     NUMBER OF
                                                  SHARES      VALUE     SHARES      VALUE     SHARES      VALUE     SHARES
                                                 ---------   -------   ---------   -------   ---------   -------   ---------
<S>                                              <C>         <C>       <C>         <C>       <C>         <C>       <C>
GULFSTAR COMMUNICATIONS, INC.:
Balance at January 1, 1995 (Restated)..........    10,000          1     40,000    $     1         --    $    --         --
 Shares of Class A Common stock contributed to
   the company by a stockholder................        --         --     (2,500)        --         --         --         --
 Issuance of voting Common stock...............  151.....         --         --         --         --         --         --
 Issuance of Class B Common stock..............        --         --         --         --      6,081         --         --
 Accrued interest on Stock subscriptions
   receivable..................................  -- .....         --         --         --         --         --         --
 Dividends on Redeemable preferred stock.......        --         --         --         --         --         --         --
 Net income....................................        --         --         --         --         --         --         --
                                                  -------    -------    -------    -------    -------    -------    -------
Balance at December 31, 1995...................    10,151          1     37,500          1      6,081         --         --
 Issuance of Common stock......................     4,504         --         --         --         --         --         --
 Issuance of Class A Common stock..............        --         --      1,626         --         --         --         --
 Issuance of Class B Common stock..............        --         --         --         --        157         --         --
 Issuance of Class C Common stock..............        --         --         --         --         --         --      3,172
 Conversion of Common stock to Class A Common
   stock.......................................   (10,151)        --     10,151         --         --         --         --
 Conversion of Class A and B Common stock to
   Common stock................................     6,482         --       (244)        --     (6,238)        --         --
 Issuance of warrants..........................  -- .....         --         --         --         --         --         --
 Accrued interest on Stock subscriptions
   receivable..................................        --         --         --         --         --         --         --
 Dividends and accretion on Redeemable
   preferred stock.............................        --         --         --         --         --         --         --
 Unearned compensation-stock issued for
   nonrecourse notes...........................        --         --         --         --         --         --         --
CAPSTAR RADIO BROADCASTING PARTNERS, INC.:
Balance at October 17, 1996....................        --         --         --         --         --         --         --
 Net loss......................................        --         --         --         --         --         --         --
                                                  -------    -------    -------    -------    -------    -------    -------
Balance at December 31, 1996...................    10,986          1     49,033          1         --         --      3,172
GULFSTAR COMMUNICATIONS, INC.:
 Issuance of Common stock......................       356         --         --         --         --         --         --
 Conversion of Class A Common stock to Class C
   Common stock................................        --         --    (39,033)        --         --         --     39,033
 Conversion of Class C Common stock to Class A
   Common stock................................        --         --     10,102         --         --         --    (10,102)
 Dividends and accretion on Redeemable
   preferred stock.............................        --         --         --         --         --         --         --
 Accrued interest on Stock subscriptions
   receivable..................................        --         --         --         --         --         --         --
 Payments received on Stock subscriptions
   receivable..................................        --         --         --         --         --         --         --
 Compensation expense..........................        --         --         --         --         --         --         --
CAPSTAR RADIO BROADCASTING PARTNERS, INC.:
 Issuances of Common stock.....................        --         --         --         --         --         --         --
 Equity contribution from Parent...............        --         --         --         --         --         --         --
 Compensation expense..........................        --         --         --         --         --         --         --
 Issuance of shares in connection with
   merger......................................   (11,342)        (1)   (20,102)        (1)        --         --    (32,103)
 Redemption of Redeemable preferred stock by
   Parent......................................        --         --         --         --         --         --         --
 Dividends.....................................        --         --         --         --         --         --         --
 Net loss......................................        --         --         --         --         --         --         --
                                                  -------    -------    -------    -------    -------    -------    -------
Balance at December 31, 1997...................        --    $    --         --    $    --         --    $    --         --
                                                  =======    =======    =======    =======    =======    =======    =======
 
<CAPTION>
 
                                                                GULFSTAR COMMUNICATIONS, INC.
                                                    ------------------------------------------------------
 
                                                      CLASS C
                                                    COMMON STOCK
                                                    ------------ ADDITIONAL       STOCK
                                                         PAR      PAID-IN     SUBSCRIPTIONS     UNEARNED
                                                        VALUE     CAPITAL      RECEIVABLE     COMPENSATION
                                                       -------   ----------   -------------   ------------
<S>                                                    <C>       <C>          <C>             <C>
GULFSTAR COMMUNICATIONS, INC.:
Balance at January 1, 1995 (Restated)..........        $    --    $    --        $    --        $    --
 Shares of Class A Common stock contributed to
   the company by a stockholder................             --         --             --             --
 Issuance of voting Common stock...............             --          9             (4)            --
 Issuance of Class B Common stock..............             --        331           (304)            --
 Accrued interest on Stock subscriptions
   receivable..................................             --         25            (25)            --
 Dividends on Redeemable preferred stock.......             --         --             --             --
 Net income....................................             --         --             --             --
                                                       -------    -------        -------        -------
Balance at December 31, 1995...................             --        365           (333)            --
 Issuance of Common stock......................             --      1,378         (1,390)            --
 Issuance of Class A Common stock..............             --        184             --             --
 Issuance of Class B Common stock..............             --         31             --             --
 Issuance of Class C Common stock..............              1        358           (298)            --
 Conversion of Common stock to Class A Common
   stock.......................................             --         --             --             --
 Conversion of Class A and B Common stock to
   Common stock................................             --         --             --             --
 Issuance of warrants..........................             --      3,884             --             --
 Accrued interest on Stock subscriptions
   receivable..................................             --         69            (69)            --
 Dividends and accretion on Redeemable
   preferred stock.............................             --     (1,350)            --             --
 Unearned compensation-stock issued for
   nonrecourse notes...........................             --      6,950             --         (1,518)
CAPSTAR RADIO BROADCASTING PARTNERS, INC.:
Balance at October 17, 1996....................             --         --             --             --
 Net loss......................................             --         --             --             --
                                                       -------    -------        -------        -------
Balance at December 31, 1996...................              1     11,869         (2,090)        (1,518)
GULFSTAR COMMUNICATIONS, INC.:
 Issuance of Common stock......................             --        300           (300)            --
 Conversion of Class A Common stock to Class C
   Common stock................................             --         --             --             --
 Conversion of Class C Common stock to Class A
   Common stock................................             --         --             --             --
 Dividends and accretion on Redeemable
   preferred stock.............................             --     (1,693)            --             --
 Accrued interest on Stock subscriptions
   receivable..................................             --        131           (131)            --
 Payments received on Stock subscriptions
   receivable..................................             --         --             36             --
 Compensation expense..........................             --      7,232             --          1,518
CAPSTAR RADIO BROADCASTING PARTNERS, INC.:
 Issuances of Common stock.....................             --         --             --             --
 Equity contribution from Parent...............             --         --             --             --
 Compensation expense..........................             --         --             --             --
 Issuance of shares in connection with
   merger......................................             (1)   (12,461)         2,485             --
 Redemption of Redeemable preferred stock by
   Parent......................................             --     (5,378)            --             --
 Dividends.....................................             --         --             --             --
 Net loss......................................             --         --             --             --
                                                       -------    -------        -------        -------
Balance at December 31, 1997...................        $    --    $    --        $    --        $    --
                                                       =======    =======        =======        =======
 
<CAPTION>
                                                           CAPSTAR RADIO
                                                    BROADCASTING PARTNERS, INC.
                                                 ----------------------------------
                                                            COMMON STOCK
                                                 ----------------------------------
                                                                                        RETAINED
                                                                         ADDITIONAL     EARNINGS         TOTAL
                                                  NUMBER OF      PAR      PAID-IN     (ACCUMULATED   STOCKHOLDER'S
                                                   SHARES       VALUE     CAPITAL       DEFICIT)        EQUITY
                                                 -----------   -------   ----------   ------------   -------------
<S>                                              <C>           <C>       <C>          <C>            <C>
GULFSTAR COMMUNICATIONS, INC.:
Balance at January 1, 1995 (Restated)..........           --        --          --      $    968       $    970
 Shares of Class A Common stock contributed to
   the company by a stockholder................           --        --          --            --             --
 Issuance of voting Common stock...............           --        --          --            --              5
 Issuance of Class B Common stock..............           --        --          --            --             27
 Accrued interest on Stock subscriptions
   receivable..................................           --        --          --            --             --
 Dividends on Redeemable preferred stock.......           --        --          --            (8)            (8)
 Net income....................................           --        --          --         1,570          1,570
                                                 -----------   -------    --------      --------       --------
Balance at December 31, 1995...................           --        --          --         2,530          2,564
 Issuance of Common stock......................           --        --          --            --            (12)
 Issuance of Class A Common stock..............           --        --          --            --            184
 Issuance of Class B Common stock..............           --        --          --            --             31
 Issuance of Class C Common stock..............           --        --          --            --             61
 Conversion of Common stock to Class A Common
   stock.......................................           --        --          --            --             --
 Conversion of Class A and B Common stock to
   Common stock................................           --        --          --            --             --
 Issuance of warrants..........................           --        --          --            --          3,884
 Accrued interest on Stock subscriptions
   receivable..................................           --        --          --            --             --
 Dividends and accretion on Redeemable
   preferred stock.............................           --        --          --            --         (1,350)
 Unearned compensation-stock issued for
   nonrecourse notes...........................           --        --          --            --          5,432
CAPSTAR RADIO BROADCASTING PARTNERS, INC.:
Balance at October 17, 1996....................  106,757,000     1,068     125,110            --        126,178
 Net loss......................................           --        --          --        (9,052)        (9,052)
                                                 -----------   -------    --------      --------       --------
Balance at December 31, 1996...................  106,757,000     1,068     125,110        (6,522)       127,920
GULFSTAR COMMUNICATIONS, INC.:
 Issuance of Common stock......................           --        --          --            --             --
 Conversion of Class A Common stock to Class C
   Common stock................................           --        --          --            --             --
 Conversion of Class C Common stock to Class A
   Common stock................................           --        --          --            --             --
 Dividends and accretion on Redeemable
   preferred stock.............................           --        --          --            --         (1,693)
 Accrued interest on Stock subscriptions
   receivable..................................           --        --          --            --             --
 Payments received on Stock subscriptions
   receivable..................................           --        --          --            --             36
 Compensation expense..........................           --        --          --            --          8,750
CAPSTAR RADIO BROADCASTING PARTNERS, INC.:
 Issuances of Common stock.....................  284,155,386     2,841     342,173            --        345,014
 Equity contribution from Parent...............           --        --      39,233            --         39,233
 Compensation expense..........................           --        --       1,825            --          1,825
 Issuance of shares in connection with
   merger......................................   84,962,406       850      40,572            --         31,443
 Redemption of Redeemable preferred stock by
   Parent......................................           --        --          --            --         (5,378)
 Dividends.....................................           --        --     (57,828)           --        (57,828)
 Net loss......................................           --        --          --       (28,007)       (28,007)
                                                 -----------   -------    --------      --------       --------
Balance at December 31, 1997...................  475,874,792   $ 4,759    $491,085      $(34,529)      $461,315
                                                 ===========   =======    ========      ========       ========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                      F-32
<PAGE>   108
 
           CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                           ----------------------------------
                                                             1995        1996         1997
                                                           --------    ---------    ---------
                                                                (RESTATED)
<S>                                                        <C>         <C>          <C>
Cash flows from operating activities:
  Net income (loss)......................................  $  1,570    $  (9,052)   $ (28,007)
  Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:
     Loss on early extinguishment of debt................        --        1,188        2,403
     Depreciation and amortization.......................     1,134        4,137       26,285
     Noncash interest....................................       323        2,626        4,735
     Deferred income taxes...............................       (65)         546       (5,388)
     Noncash compensation expense........................        --        6,176       10,575
     Allocated expenses from parent......................        --           --        7,075
     Write-off of pending acquisition costs..............        --          105           --
     Provision for uncollectible accounts receivable.....       195          661        2,044
     (Gain) loss on sale of broadcasting property........    (2,389)          --          908
  Changes in assets and liabilities, net of effects of
     acquisitions:
       Accounts receivable...............................    (1,690)      (5,331)     (12,029)
       Prepaid expenses and other current assets.........       159         (784)         837
       Accounts payable and accrued liabilities..........     2,021       (1,662)         253
       Income taxes payable..............................         1           --        2,417
                                                           --------    ---------    ---------
          Net cash provided by (used in) operating
            activities...................................     1,259       (1,390)      12,108
                                                           --------    ---------    ---------
Cash flows from investing activities:
  Proceeds from sale of broadcasting property ...........     3,650           --       35,932
  Purchase of property and equipment.....................      (495)      (2,115)      (9,051)
  Payments for acquisitions, net of cash acquired........   (20,227)    (149,612)    (495,775)
  Payments for pending acquisitions......................    (1,968)      (1,542)      (6,840)
  Other investing activities, net........................      (608)        (198)        (822)
                                                           --------    ---------    ---------
          Net cash used in investing activities..........   (19,648)    (153,467)    (476,556)
                                                           --------    ---------    ---------
Cash flows from financing activities:
  Proceeds from issuance of long-term debt...............        --           --      199,212
  Proceeds from credit facilities........................    36,146       29,647      207,406
  Net proceeds from issuance of common stock.............        31      125,434      308,934
  Net proceeds from issuance of preferred stock..........        --       20,979           --
  Net proceeds from issuance of warrants.................        --        3,884           --
  Redemption of preferred stock..........................        --           --         (811)
  Repayment of long-term debt............................   (17,584)     (13,210)    (165,249)
  Payments of financing related costs....................      (897)      (2,936)     (16,614)
  Advances from parent...................................        --           --        2,238
  Dividends paid.........................................        --           --       (9,110)
                                                           --------    ---------    ---------
  Net cash provided by financing activities..............    17,696      163,798      526,006
                                                           --------    ---------    ---------
Net increase (decrease) in cash and cash equivalents.....      (693)       8,941       61,558
Cash and cash equivalents at beginning of period.........       913          220        9,161
                                                           --------    ---------    ---------
Cash and cash equivalents at end of period...............  $    220    $   9,161    $  70,719
                                                           ========    =========    =========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                      F-33
<PAGE>   109
 
           CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
1. ORGANIZATION AND BUSINESS:
 
     On October 16, 1996, Capstar Radio Broadcasting Partners, Inc. ("Capstar
Radio") was acquired pursuant to a merger agreement dated June 21, 1996 with
Capstar Broadcasting Partners, Inc. ("Capstar Partners"), a holding company
controlled by Hicks, Muse, Tate & Furst Equity Fund III, L.P. ("HM Fund III").
 
     In June 1997, Capstar Broadcasting Corporation ("Capstar Broadcasting"), a
holding company controlled by HM Fund III, acquired all of the issued and
outstanding common stock of Capstar Partners in exchange for shares of its
common stock.
 
     In July 1997, Capstar Broadcasting, through a wholly owned subsidiary, was
merged with GulfStar Communications, Inc. ("Former GulfStar"), a company
controlled by the general partner of HM Fund III. The acquisition was effected
through a merger of Former GulfStar with and into a newly formed wholly owned
subsidiary of Capstar Broadcasting, with this subsidiary designated as the
surviving corporation. Pursuant to the merger agreement, each share of Former
GulfStar's common stock was converted into the right to receive shares of
Capstar Broadcasting, subject to a conversion ratio calculated based on the
relative value of Capstar Broadcasting and Former GulfStar, principally
determined by utilizing projected broadcast cash flows for the year ending
December 31, 1998. Concurrently with the merger: (i) the surviving corporation
was renamed GulfStar Communications, Inc. ("GulfStar"), (ii) Capstar
Broadcasting exchanged its shares of GulfStar for additional shares of Capstar
Partners (iii) Capstar Partners exchanged its shares of GulfStar for additional
shares of Capstar Radio. As a result of the merger and its related transactions,
GulfStar became a wholly owned indirect subsidiary of Capstar Broadcasting. Due
to the fact that Capstar Broadcasting and GulfStar were under common control,
the transfer of the assets and liabilities of GulfStar has been accounted for at
historical cost in a manner similar to a pooling-of-interests except that the
acquisition by Capstar Broadcasting of the minority interest of Former GulfStar
has been accounted for by the purchase method. The accompanying consolidated
financial statements have been restated for all periods presented to give
retroactive effect to the merger and present the combined consolidated results
of operations for the periods that Capstar Radio and its wholly owned
subsidiaries and Former GulfStar were under common control. The accompanying
restated consolidated financial statements are comprised of the combined
historical consolidated financial statements of Former GulfStar, for all periods
presented, and Capstar Radio and its wholly-owned subsidiaries, from the date of
its acquisition by Capstar Partners on October 16, 1996 through December 31,
1997, (collectively, the "Company").
 
                                      F-34
<PAGE>   110
           CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     Separate results of operations of the combining entities to the date of the
merger are as follows:
 
<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,      SIX MONTHS
                                                   -----------------------    ENDED JUNE 30,
                                                     1995          1996            1997
                                                   ---------    ----------    --------------
                                                                               (UNAUDITED)
<S>                                                <C>          <C>           <C>
Net broadcast revenue:
  Capstar Radio..................................   $    --      $ 10,303        $ 41,862
  GulfStar.......................................    15,797        32,563          23,294
                                                    -------      --------        --------
                                                    $15,797      $ 42,866        $ 65,156
                                                    =======      ========        ========
Extraordinary item:
  Capstar Radio..................................   $    --      $     --        $    851
  GulfStar.......................................        --         1,188              --
                                                    -------      --------        --------
                                                    $    --      $  1,188        $    851
                                                    =======      ========        ========
Net income (loss):
  Capstar Radio..................................   $    --      $   (852)       $ (6,981)
  GulfStar.......................................     1,570        (8,200)         (8,842)
                                                    -------      --------        --------
                                                    $ 1,570      $ (9,052)       $(15,823)
                                                    =======      ========        ========
</TABLE>
 
     The Company operates in a single industry segment, which segment
encompasses the ownership and management of radio broadcast stations located in
mid-sized markets throughout the United States. The Company generally defines
mid-sized markets as those Metropolitan Statistical Areas ranked between 30 and
250. At December 31, 1997, the Company owned and operated, provided programming
to or sold advertising on behalf of 124 FM stations and 59 AM stations.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
  Basis of Presentation
 
     The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
 
     Separate financial statements of the Company's wholly owned subsidiaries
have been omitted since all of such subsidiaries guarantee of the Company's 1995
Capstar Radio Notes and Credit Facility is on a full, unconditional and joint
and several basis. (see Note 7)
 
  Recapitalization Transaction
 
     On February 20, 1997, Capstar Radio amended its Certificate of
Incorporation to reflect a new capital structure consisting of 350,000,000
authorized shares of common stock, par value $.01 per share. Immediately upon
the filing of the amendment, each previously issued share of Class A common
stock, par value $.01 per share, and Class B common stock, par value $.01 per
share, of Capstar Radio was converted into 106,757,000 shares of common stock.
The accompanying consolidated financial statements have been adjusted
retroactively for all periods presented. In June 1997, the Company amended its
Certificate of Incorporation to increase its authorized shares to 500,000,000.
 
  Cash Equivalents
 
     For purposes of the accompanying consolidated statement of cash flows, the
Company considers highly liquid investments with original maturities of three
months or less to be cash equivalents.
 
                                      F-35
<PAGE>   111
           CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
  Property and Equipment
 
     Property and equipment are stated at cost, less accumulated depreciation
and amortization. Equipment under capital lease obligations is recorded at the
lower of cost or fair market value at the inception of the lease. The costs of
assets retired or otherwise disposed of and the related accumulated depreciation
and amortization balances are removed from the accounts and any resulting gain
or loss is included in income. Leasehold improvements are amortized over the
shorter of their useful lives or the terms of the related leases. Amortization
of assets recorded under capital leases is included in depreciation expense.
 
  Intangible Assets
 
     FCC licenses and goodwill represent the excess of cost over the fair values
of the identifiable tangible and other intangible net assets acquired. Other
intangible assets comprise costs incurred for pending acquisitions, noncompete
agreements, organization costs incurred in the incorporation of the Company,
deferred financing costs and costs related to favorable tower and facility
leases. Pending acquisition costs are deferred and capitalized as part of
completed acquisitions or expensed in the period in which the pending
acquisition is terminated. Approximately $897, $2,936 and $16,614 of new
financing costs were incurred for the years ended December 31, 1995, 1996 and
1997, respectively. Accumulated amortization related to deferred financing costs
at December 31, 1996 and 1997 was approximately $13 and $569, respectively.
 
     The Company periodically evaluates intangible assets for potential
impairment by analyzing the operating results, future cash flows on an
undiscounted basis, trends and prospects of the Company's stations, as well as
by comparing them to their competitors. The Company also takes into
consideration recent acquisition patterns within the broadcast industry, the
impact of recently enacted or potential FCC rules and regulations and any other
events or circumstances which might indicate potential impact. At this time, in
the opinion of management, no impairment has occurred.
 
  Income Taxes
 
     Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period-end based on enacted tax laws and
statutory tax rates applicable to the period in which the differences are
expected to affect taxable earnings. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount more likely than not to be
realized. Income tax expense is the tax payable for the period and the change
during the period in deferred tax assets and liabilities.
 
  Stock Subscriptions Receivable
 
     Stock subscriptions receivable represent promissory notes issued in
connection with the purchase of capital stock. Capital stock issued in
connection with such promissory notes is reported as issued and outstanding and
included in capital stock and additional paid-in capital in the accompanying
consolidated financial statements in the amount of the related promissory note
plus accrued interest. The promissory notes and related accrued interest
receivable are classified as stock subscriptions receivable and included as a
reduction of consolidated stockholder's equity.
 
  Revenue Recognition
 
     Broadcasting operations derive revenue primarily from the sale of program
time and commercial announcements to local, regional and national advertisers.
Revenue is recognized when the programs and commercial announcements are
broadcast.
 
                                      F-36
<PAGE>   112
           CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
  Advertising Costs
 
     The Company incurs various marketing and promotional costs to add and
maintain listenership. These are expensed as incurred and totaled approximately
$575, $2,668 and $5,731 for the years ended December 31, 1995, 1996 and 1997,
respectively.
 
  Local Marketing Agreements ("LMA")/Joint Sales Agreements ("JSA")
 
     From time to time, the Company enters into LMAs and JSAs, with respect to
radio stations owned by third parties including radio stations that it intends
to acquire. Terms of the agreements generally require the Company to pay a
monthly fee in exchange for the right to provide station programming and sell
related advertising time in the case of an LMA or sell advertising in the case
of a JSA. The agreements terminate upon the acquisition of the property. The
fees are expensed as incurred. The Company classifies the LMA fees as interest
expense to the extent interest is imputed based on the purchase price of the
broadcast property. The Company accounts for payments received pursuant to LMAs
of owned stations as net revenue to the extent that the payment received
represents a reimbursement of the Company's ownership costs.
 
  Barter Transactions
 
     The Company barters unsold advertising time for products and services. Such
transactions are recorded at the estimated fair value of the products or
services received. Barter revenue is recorded when commercials are broadcast and
related expenses are recorded when the bartered product or service is used.
 
  Concentration of Credit Risk
 
     It is the Company's policy to place its cash with high credit quality
financial institutions, which, at times, may exceed federally insured limits.
Management believes that credit risk in these deposits is minimal and has not
experienced any losses in such accounts.
 
     The Company's revenue and accounts receivable primarily relates to
advertising of products and services within the radio stations' broadcast areas.
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. Credit
losses have been within management's expectations and adequate allowances for
any uncollectible accounts receivables are maintained.
 
  Uncertainties and Use of Estimates and Assumptions
 
     The radio broadcasting industry is subject to federal regulation by the
Federal Communications Commission. These governmental regulations and policies
could change over time and there can be no assurance that such changes would not
have a material impact upon the Company.
 
     The Company's pending acquisition, exchange and merger agreements are
subject to various governmental approvals, including the Department of Justice
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
the Federal Communications Commission.
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
 
  New Accounting Pronouncements
 
     In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which establishes standards
 
                                      F-37
<PAGE>   113
           CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
for reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements.
 
     In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers.
 
     In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which significantly changes
current financial statement disclosure requirements from those that were
required under SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132 does
not change the existing measurement or recognition provision of SFAS Nos. 87, 88
or 106.
 
     These pronouncements are effective for financial statements issued for
periods beginning after December 15, 1997. Management does not believe the
implementation of these accounting pronouncements will have a material effect on
its consolidated financial statements.
 
  Reclassifications
 
     Certain amounts in 1995 and 1996 have been reclassified to conform to the
1997 presentation.
 
3. ACQUISITIONS AND DISPOSITIONS OF BROADCASTING PROPERTIES:
 
     During the years ended December 31, 1995, 1996 and 1997, the Company
acquired numerous radio stations and related broadcasting property and
equipment, all of which have been accounted for under the purchase method of
accounting. Accordingly, the purchase price has been allocated to the assets and
liabilities acquired based upon their fair values at the date of acquisition.
The excess of purchase price over the fair value of net tangible assets acquired
is allocated to intangible assets, primarily FCC licenses. The results of
operations associated with the acquired radio stations have been included in the
accompanying consolidated financial statements from the dates of acquisition.
The acquisition activity was funded primarily through equity infusions by the
Company's parent and long-term borrowings.
 
                                      F-38
<PAGE>   114
           CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     Acquisition activity during the periods is as follows:
 
<TABLE>
<CAPTION>
               STATIONS ACQUIRED                  DATE OF ACQUISITION    PURCHASE OF       COST
               -----------------                  -------------------    -----------     --------
<S>                                               <C>                    <C>             <C>
1995:
  1 AM and 1 FM.................................  November               Common stock    $  8,025
  1 AM and 1 FM.................................  November               Assets            11,908
  1 FM..........................................  November               Assets             1,586
                                                                                         --------
                                                                                         $ 21,519
                                                                                         ========
1996:
  2 AM and 6 FM.................................  April                  Common stock    $  1,065
  1 AM and 1 FM.................................  July                   Assets             4,038
  1 AM and 2 FM.................................  July                   Assets             6,305
  1 FM..........................................  July                   Assets               315
  1 FM..........................................  August                 Assets               728
  1 FM..........................................  August                 Assets             2,061
  1 FM..........................................  September              Assets             1,551
  1 FM..........................................  September              Assets             1,812
  12 AM and 18 FM...............................  October                Common stock     122,016
  3 AM and 4 FM.................................  October                Assets            12,600
  1 AM and 1 FM.................................  November               Assets             4,172
  1 FM..........................................  December               Assets             6,385
                                                                                         --------
                                                                                         $163,048
                                                                                         ========
1997:
  1 FM..........................................  January                Assets          $  2,490
  1 AM and 1 FM.................................  February               Assets             3,166
  1 AM and 3 FM.................................  February               Assets             6,292
  6 AM and 12 FM................................  February               Common stock     102,923
  2 FM..........................................  March                  Assets            11,471
  2 AM and 3 FM.................................  April                  Assets            12,038
  1 AM and 1 FM.................................  April                  Assets             1,308
  1 AM and 1 FM.................................  May                    Assets             3,456
  2 FM..........................................  May                    Common stock       4,967
  2 AM and 1 FM.................................  May                    Common stock      23,442
  1 AM and 4 FM.................................  July                   Assets             8,267
  5 AM and 6 FM.................................  July                   Assets            35,907
  1 FM..........................................  July                   Common stock       2,647
  1 AM and 1 FM.................................  August                 Assets             7,968
  10 AM and 20 FM...............................  August                 Assets           192,128
  1 FM..........................................  August                 Assets            10,024
  2 AM and 4 FM.................................  August                 Assets            41,662
  1 FM..........................................  September              Assets             1,648
  1 FM..........................................  September              Assets             3,374
  1 FM..........................................  October                Assets             3,409
  3 FM..........................................  October                Assets             5,789
  2 FM..........................................  October                Assets             2,539
  1 AM and 2 FM.................................  October                Assets            32,606
  1 FM..........................................  October                Assets             1,986
  2 AM and 4 FM.................................  November               Assets             7,160
                                                                                         --------
                                                                                          528,667
  Acquisition of GulfStar minority interest.....  July                   Stock             31,443
                                                                                         --------
                                                                                         $560,110
                                                                                         ========
</TABLE>
 
                                      F-39
<PAGE>   115
           CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     The acquisitions are summarized in the aggregate by period as follows:
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                       -------------------------------
                                                        1995        1996        1997
                                                       -------    --------    --------
<S>                                                    <C>        <C>         <C>
Consideration:
  Cash and notes.....................................  $19,629    $153,050    $493,353
  Common stock (2,325 Former GulfStar shares and
     26,721,805 shares in 1996 and 1997,
     respectively)...................................       --         276      35,343
  Preferred stock (7,500 Former GulfStar shares).....      750          --          --
  Acquisition costs..................................    1,140       9,251      31,414
  Exchange of assets.................................       --         471          --
                                                       -------    --------    --------
          Total......................................  $21,519    $163,048    $560,110
                                                       =======    ========    ========
Assets acquired and liabilities assumed:
  Cash...............................................  $    --    $  6,120    $ 12,297
  Accounts receivable................................       29       9,020      14,657
  Prepaid expenses and other.........................      152         590       2,853
  Property and equipment.............................    3,353      23,471      76,050
  Intangible assets..................................   21,087     290,243     577,885
  Other assets.......................................       --         704       1,051
  Accounts payable...................................       --      (5,811)     (7,843)
  Accrued liabilities................................     (250)       (882)     (5,242)
  Long-term debt.....................................       --     (82,706)    (20,711)
  Capital lease obligations..........................      (44)       (127)       (465)
  Deferred income taxes..............................   (2,808)    (77,574)    (90,422)
                                                       -------    --------    --------
          Total......................................  $21,519    $163,048    $560,110
                                                       =======    ========    ========
</TABLE>
 
     During the years ended December 31, 1995 and 1997, the Company sold or
otherwise disposed of radio stations and related broadcasting property and
equipment as follows:
 
<TABLE>
<CAPTION>
           STATIONS DISPOSED              DATE OF DISPOSITION      SALE OF       SALES PRICE
           -----------------              -------------------      -------       -----------
<S>                                       <C>                    <C>             <C>
1995:
  1 FM..................................  June                      Assets         $ 3,650
1997:
  1 AM and 2 FM.........................  April                     Assets          11,000
  1 AM and 1 FM.........................  September              Common stock          600
  1 FM..................................  September                 Assets          40,000
  1 AM..................................  November                  Assets             135
</TABLE>
 
     The following unaudited pro forma summary presents the consolidated results
of operations for the years ended December 31, 1996 and 1997 as if the
acquisitions and dispositions completed as of December 31, 1997 had occurred at
the beginning of 1996. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what would have
occurred had the acquisitions and dispositions been made as of that date or of
results which may occur in the future.
 
                                      F-40
<PAGE>   116
           CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                    PRO FORMA
                                                              YEAR ENDED DECEMBER 31
                                                              ----------------------
                                                                1996         1997
                                                              ---------    ---------
                                                                   (UNAUDITED)
<S>                                                           <C>          <C>
Net broadcast revenue.......................................  $210,809     $221,189
Loss before extraordinary loss..............................   (33,572)     (28,936)
Net loss....................................................   (34,760)     (31,339)
Net loss attributable to common stock.......................   (36,110)     (38,410)
</TABLE>
 
     Subsequent to December 31, 1997, the Company acquired 20 AM and 35 FM radio
stations and related broadcast equipment through several acquisitions for
aggregate consideration of approximately $299,141. The acquisitions were funded
primarily through equity infusions by the Company's parent. The Company
previously operated 2 of these stations under either LMA's or JSA's.
 
     In addition to the matter discussed in Note 16, the Company has entered
into numerous agreements to acquire additional radio stations (9 AM and 24 FM)
and related broadcast equipment for aggregate consideration of approximately
$157,000. The Company currently operates 13 of the stations under either LMA's
or JSA's.
 
     Subsequent to December 31, 1997, the Company disposed of 3 AM and 4 FM
radio stations and related broadcast equipment through several dispositions for
aggregate consideration of approximately $52,100. The carrying value of net
assets to be sold related to these stations approximated the contract sales
price.
 
     The Company has also entered into agreements for the disposition of 5 AM
and 11 FM stations for aggregate consideration of approximately $96,900. The
carrying value of net assets to be sold related to these stations approximated
the contract sales price.
 
4. PROPERTY AND EQUIPMENT:
 
     Property and equipment consists of the following:
 
<TABLE>
<CAPTION>
                                                             DEPRECIABLE      DECEMBER 31,
                                              DEPRECIATION      LIFE       ------------------
                                                 METHOD        (YEARS)      1996       1997
                                              -------------  -----------   -------   --------
<S>                                           <C>            <C>           <C>       <C>
Buildings and improvements..................  Straight-line     5-20       $ 4,810   $ 16,819
Broadcasting and other equipment............  Straight-line     3-20        23,535     84,331
Equipment under capital lease obligations...  Straight-line      3-5           463      1,356
                                                                           -------   --------
                                                                            28,808    102,506
Accumulated depreciation and amortization...                                (3,421)   (10,211)
                                                                           -------   --------
                                                                            25,387     92,295
Land........................................                                 3,575     13,210
                                                                           -------   --------
                                                                           $28,962   $105,505
                                                                           =======   ========
</TABLE>
 
     Depreciation and amortization expense for the years ended December 31,
1995, 1996 and 1997 was approximately $580, $1,531 and $8,017, respectively.
 
                                      F-41
<PAGE>   117
           CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
5. INTANGIBLES:
 
     Intangibles consists of the following:
 
<TABLE>
<CAPTION>
                                                       AMORTIZABLE        DECEMBER 31,
                                     AMORTIZATION         LIFE        --------------------
                                        METHOD           (YEARS)        1996        1997
                                    ---------------    -----------    --------    --------
<S>                                 <C>                <C>            <C>         <C>
FCC licenses and goodwill.........    Straight-line         40        $337,479    $864,091
Noncompete agreements.............    Straight-line        1-3           1,422       6,115
Organization costs................    Straight-line          5             361       3,040
Deferred financing costs..........  Interest Method         --             230      12,967
Other.............................    Straight-line        3-5           1,081       6,700
                                                                      --------    --------
                                                                       340,573     892,913
Less accumulated amortization.....                                      (3,961)    (25,248)
                                                                      --------    --------
                                                                       336,612     867,665
Pending acquisition costs.........                                       2,664       5,879
                                                                      --------    --------
                                                                      $339,276    $873,544
                                                                      ========    ========
</TABLE>
 
     Amortization expense of intangible assets for the years ended December 31,
1995, 1996 and 1997 was approximately $554, $2,606 and $18,268, respectively.
 
6. ACCRUED LIABILITIES:
 
     Accrued liabilities consists of the following:
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                               ------------------
                                                                1996       1997
                                                               -------    -------
<S>                                                            <C>        <C>
Accrued compensation........................................   $   642    $ 4,221
Accrued acquisition costs...................................       954      5,284
Accrued interest............................................       997        960
Accrued commissions.........................................       873      2,403
Other.......................................................       692      3,109
                                                               -------    -------
                                                               $ 4,158    $15,977
                                                               =======    =======
</TABLE>
 
7. LONG-TERM DEBT:
 
     Long-term debt consists of the following:
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                               --------------------
                                                                 1996        1997
                                                               --------    --------
<S>                                                            <C>         <C>
Credit Facility.............................................   $     --    $141,700
1997 Capstar Radio Notes, $200,000 principal, including
  unamortized discount of $762, due 2007....................         --     199,238
1995 Capstar Radio Notes, $76,808 principal, including
  unamortized discount of $3,008 at December 31, 1997, due
  2003......................................................     76,672      79,816
Former Credit Facility, bearing interest at 3.5% over
  LIBOR.....................................................     24,700          --
Reducing revolver loans, bearing variable interest (8.7% at
  December 31, 1996)........................................     53,794          --
Capital lease obligations and other notes payable at various
  interest rates............................................      1,004       6,826
                                                               --------    --------
                                                                156,170     427,580
Less current portion........................................     (3,936)     (1,388)
                                                               --------    --------
                                                               $152,234    $426,192
                                                               ========    ========
</TABLE>
 
                                      F-42
<PAGE>   118
           CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
  Credit Facility
 
     The Company entered into an amended and restated credit agreement with
various banks in August 1997 (the "Credit Facility"). The Credit Facility
consists of a $200 million revolving loan facility (the "Revolving Loans") and
an additional $150 million of multiple advancing term loans (the "Term Loans").
The Credit Facility matures seven years from the initial borrowing date with the
Revolving Loans then outstanding to be repaid in full on such date. Up to $75
million of the Revolving Loan commitment is available to the Company for the
issuance of letters of credit.
 
     At any time on or after August 12, 1998 (the "Effective Date") and prior to
December 31, 1998, the Company many request one or more of the banks to make
Term Loans under the Credit Facility, up to an aggregate amount equal to $150
million in up to two advances with a minimum of $50 million for each such
advance. The Term Loans are subject to scheduled annual principal repayments,
payable in equal quarterly installments. The Term Loans mature on the seventh
anniversary of the Effective Date of the Credit Facility. Term loans may not be
reborrowed after payment.
 
     The Revolving Loans and the Term Loans bear interest at a rate based, at
the option of the Company, on (i) a base rate defined as the higher of 1/2 of 1%
in excess of the federal reserve reported certificate of deposit rate or the
administrative agent bank's prime lending rate, plus an incremental rate or (ii)
the Eurodollar rate, plus an incremental rate. The weighted-average interest
rates on Revolving Loans outstanding at December 31, 1996 (Former Credit
Facility) and December 31, 1997 were 10.2% and 9.7%, based on prime rates,
respectively. The company pays fees ranging from 0.375% to 0.50% per annum on
the aggregate unused portion of the loan commitment based on the leverage ratio
for the most recent quarter end. In addition, the Company is required to pay
letter of credit fees.
 
     The Credit Facility contains customary restrictive covenants, which, among
other things and with certain exceptions, limit the ability of the Company to
incur additional indebtedness and liens in connection therewith, enter into
certain transactions with affiliates, pay dividends, consolidate, merge or
effect certain asset sales, issue additional stock, make capital expenditures
and enter new lines of business. The credit Facility limits the Company's
ability to make additional acquisitions in excess of $100 million on an
individual basis without the prior consent of a majority of the banks. Under the
Credit Facility, the Company is also required to satisfy certain financial
covenants, which require the Company to maintain specified financial ratios and
to comply with certain financial tests, such as maximum leverage ratio, minimum
consolidated EBITDA and minimum consolidated EBITDA to consolidated net cash
interest expense.
 
     The Company has collateralized the Credit Facility by granting a first
priority perfected pledge of the Company's assets, including, without
limitation, the capital stock of its subsidiaries. Capstar Partners, Capstar
Broadcasting and all of the direct and indirect subsidiaries of Capstar Partners
(other than the Company) have guaranteed the Credit Facility and have
collateralized their guarantees by granting a first priority perfected pledge of
substantially all of their assets.
 
  1997 Capstar Radio Notes
 
     On June 17, 1997, the Company issued $200 million in aggregate principal
amount of its 9 1/4% Senior Subordinated Notes due July 1, 2007. On September
16, 1997, the Company exchanged its 9 1/4% Senior Subordinated Notes due 2007
(the "1997 Capstar Radio Notes"), which were registered under the Securities
Act, for all of the outstanding notes issued on June 17, 1997. The 1997 Capstar
Radio Notes are general unsecured obligations of the Company and are
subordinated to all senior indebtedness of the Company. The 1997 Capstar Radio
Notes may be redeemed at anytime on or after July 1, 2002, in whole or in part,
at the option of the Company at prices ranging from 104.625% at July 1, 2002 and
declining to 100% on or after July 1, 2005, plus in each case accrued and unpaid
interest. In addition, prior to July 1, 2001, the Company
 
                                      F-43
<PAGE>   119
           CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
may redeem up to 25% of the original aggregate principal amount of the 1997
Capstar Radio Notes at a redemption price of 109.25% plus accrued and unpaid
interest with net proceeds of one or more public equity offerings or major asset
sales. Upon the occurrence of a change of control (as defined in the 1997
Capstar Radio Notes indenture), the holders of the 1997 Capstar Radio Notes have
the right to require the Company to purchase all or a portion of the 1997
Capstar Radio Notes at a price equal to 101% plus accrued and unpaid interest.
The 1997 Capstar Radio Notes indenture contains limitations on incurrence of
additional indebtedness, issuance of preferred stock of subsidiaries and
restricted payments, as well as other restrictive covenants.
 
  1995 Capstar Radio Notes
 
     The 1995 Capstar Radio Notes in the aggregate principal amount of $76,808
bear interest at a rate of 7 1/2% per annum through May 1, 1998 and 13 1/4% per
annum through maturity on May 1, 2003, resulting in an effective interest rate
of approximately 12.1% per annum. The 1995 Capstar Radio Notes are general
unsecured obligations of the Company, subordinated to all senior indebtedness of
the Company, and are guaranteed on a senior subordinated basis, jointly and
severally, by all of the Company's subsidiaries. The subsidiary guarantors are
wholly owned subsidiaries of the Company. The Company may redeem the 1995
Capstar Radio Notes, in whole or in part, at any time on or after May 1, 1999 at
prices ranging from 107.5% at May 1, 1999 and declining to 100% after May 1,
2002, plus in each case accrued and unpaid interest. In addition, prior to May
1, 1998, the company may redeem in the aggregate up to one third of the original
principal amount of the 1995 Capstar Radio Notes at a price equal to 108% of the
accreted value, plus accrued and unpaid interest, out of the proceeds of one or
more public equity offerings. Upon the occurrence of a change in control (as
defined in the 1995 Capstar Radio Notes indenture), the Company will be required
to make an offer to purchase the outstanding 1995 Capstar Radio Notes at a price
equal to 101% of their accreted value, plus accrued and unpaid interest. The
1995 Capstar Radio Notes indenture contains limitations of additional
indebtedness and restricted payments, as well as other restrictive covenants.
 
     During 1996, the Company significantly modified the terms of its existing
reducing revolver loans and accelerated the maturity date from March 31, 2003 to
December 31, 1996. In connection with this modification, the Company recognized
an extraordinary charge in the accompanying consolidated statement of operations
for 1996 relating to the write off of approximately $1,895 ($1,188, net of
income tax benefit) of unamortized deferred financing costs.
 
     The scheduled maturities of the Company's outstanding long-term debt at
December 31, 1997 for each of the next five years and thereafter are as follows:
 
<TABLE>
<CAPTION>
 
<S>                                                 <C>
1998..............................................  $  1,388
1999..............................................     2,658
2000..............................................       819
2001..............................................       400
2002..............................................     1,215
Thereafter........................................   421,100
                                                    --------
                                                    $427,580
                                                    ========
</TABLE>
 
8. REDEEMABLE PREFERRED STOCK-GULFSTAR:
 
     In connection with issuance of its 12% redeemable preferred shares, Former
GulfStar granted, to the holders of the preferred shares, warrants for the
purchase of 8,098 shares of Former GulfStar's common stock at a rate of $.01 per
share.
 
                                      F-44
<PAGE>   120
           CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     Of the proceeds received from issuance of the preferred shares, $3,884 was
assigned to the warrants and credited to additional paid-in capital in the
accompanying consolidated financial statements. Such value is being accreted to
redeemable preferred stock using the interest method over the period from
issuance to mandatory redemption. These warrants were exercised in 1997 in
connection with the GulfStar merger.
 
     In conjunction with the merger of GulfStar into a direct subsidiary of
Capstar Broadcasting in July 1997, the Company redeemed all of the outstanding
shares of redeemable preferred stock of GulfStar. The liquidation value as of
the date of redemption was approximately $29 million, which included $2,817 in
accumulated dividends. The redemption resulted in a charge to additional paid-in
capital of $5,378, for the amount that the liquidation value exceeded the
carrying value.
 
9. NONCASH COMPENSATION EXPENSE:
 
  Warrants
 
     During 1996 and 1997, Capstar Partners issued warrants (which were assumed
by Capstar Broadcasting) and Capstar Broadcasting issued warrants to the
Company's Chief Executive Officer pursuant to the terms of a stockholder's
agreement executed on October 16, 1996 between Capstar Partners (assumed by
Capstar Broadcasting), the Company's Chief Executive Officer and Capstar
Broadcasting's principal stockholder. Under the terms of the agreement, upon the
sale of additional shares of Capstar Broadcasting common stock to its principal
stockholder, the Company's Chief Executive Officer is entitled to receive, for
no additional consideration, warrants entitling him to purchase additional
shares of Capstar Broadcasting common stock (Class C). The warrants were issued
at an exercise price equal to the fair market value of the underlying stock at
the date of issue, increased at an annual rate of 8% per year. The warrants
expire ten years from the date of issue. Certain of the warrants can be
exercised at any time prior to the expiration date. The remaining warrants
cannot be exercised prior to the date upon which distributions (cash or
marketable securities) have been made to Capstar Broadcasting's principal
stockholder equal to an internal rate of return of at least 30 percent on each
investment (the "Triggering Event"). Following is a summary of the warrants
issued in connection with this agreement.
 
<TABLE>
<CAPTION>
                                                             NUMBER OF SHARES
                                                      ------------------------------
                                 EXERCISE PRICE                        EXERCISABLE       PRINCIPAL
                                   PER SHARE                         UPON TRIGGERING    STOCKHOLDER
        DATE ISSUED           (EXCLUDING INTEREST)    EXERCISABLE         EVENT         INVESTMENT
        -----------           --------------------    -----------    ---------------    -----------
<S>                           <C>                     <C>            <C>                <C>
October 16, 1996............         $1.00               7,444            1,860           $90,000
February 20, 1997...........          1.10               2,042              511            34,800
July 8, 1997................          1.33                 988            2,243            75,000
                                                        ------            -----
                                                        10,474            4,614
                                                        ======            =====
</TABLE>
 
     Capstar Broadcasting has accounted for these warrants as variable in
accordance with Accounting Principles Board ("APB") Opinion No. 25 and
recognized noncash compensation expense of approximately $744 and $1,825 in 1996
and 1997, respectively. The expense has been allocated to the Company and
recorded as a charge to expense and payable to the parent.
 
     During 1998 Capstar Broadcasting's principal shareholder contributed
additional equity totaling $550,000. At this time, Capstar Broadcasting has not
issued additional warrants for this contribution.
 
                                      F-45
<PAGE>   121
           CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
  Stock Subscriptions
 
     Former GulfStar has issued 1,101 and 7,134 shares of common stock in 1995
and 1996, respectively, for prices ranging from $28 to $309 per share. In each
case, Former GulfStar received recourse and non-recourse notes for 25% and 75%
of the purchase price, respectively.
 
     Former GulfStar has applied APB Opinion No. 25 in accounting for the stock
issued for non-recourse notes. The compensation cost charged against income was
approximately $5,432 and $8,750 in 1996 and 1997, respectively. For certain of
the sales to employees during 1996, compensation expense is considered unearned
until Former GulfStar's rights to repurchase the shares expire in accordance
with the terms of underlying securities purchase agreement. Such rights expired
during 1997 upon the merger of Former GulfStar and the Company.
 
     In conjunction with the acquisition of Former GulfStar by Capstar
Broadcasting in July 1997, all of Former GulfStar's then outstanding common
stock and stock subscriptions were exchanged for Capstar Broadcasting common
stock and stock subscriptions.
 
10. STOCK OPTIONS:
 
     In June 1997, Capstar Broadcasting adopted the 1997 Stock Option Plan (the
"Plan") providing for the granting of options to purchase shares of Capstar
Broadcasting's common stock to the Company's key employees and eligible
non-employees, as defined by the Plan and determined by Capstar Broadcasting's
Board Directors. The Plan replaced the prior stock option plan. Capstar
Broadcasting applies APB Opinion No. 25 and related interpretations in
accounting for the Plan. In 1995, the FASB issued SFAS No. 123 "Accounting for
Stock-Based Compensation," which, if adopted by Capstar Broadcasting, would
change the methods Capstar Broadcasting applies in recognizing the cost of the
Plan. Adoption of the cost recognition provisions of SFAS No. 123 is optional
and Capstar Broadcasting has decided not to elect these provisions of SFAS No.
123. However, pro forma disclosures as if Capstar Broadcasting adopted the cost
recognition provisions of SFAS No. 123 in 1995 are required by SFAS No. 123 and
are presented below.
 
     As of December 31, 1997, an aggregate of 22,000,000 shares was approved for
issuance under the Plan. The Plan provides for the issuance of both Incentive
Stock Options ("ISOs") as well as options not qualifying as ISOs within the
meaning of the Internal Revenue Code of 1986, as amended. At the time of the
grant, Capstar Broadcasting's Board of Directors determines the exercise price
and vesting schedules. Under the terms of the Plan, the option price per share
of ISOs to a person who, at the time such ISO is granted, owns shares of the
Company or any Related Entity, which possess more than 10% of the total combined
voting power of all classes of shares of Capstar Broadcasting or of any related
entity, the option exercise price shall not be less than 110% of the fair market
value per share of common stock at the date the option is granted. Options may
not be granted with a term beyond June 2007. Generally, 20% of each option is
exercisable one year after the grant and an additional 1/60th becomes
exercisable each month thereafter.
 
                                      F-46
<PAGE>   122
           CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     A summary of the status of Capstar Broadcasting's option activity under the
Plan and related information follows:
 
<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31,
                                          ------------------------------------------------
                                                   1996                     1997
                                          ----------------------   -----------------------
                                                       WEIGHTED-                 WEIGHTED-
                                                        AVERAGE                   AVERAGE
                                                       EXERCISE                  EXERCISE
                                            SHARES       PRICE       SHARES        PRICE
                                          ----------   ---------   -----------   ---------
<S>                                       <C>          <C>         <C>           <C>
Outstanding at beginning of year........          --     $  --       3,737,430     $1.00
Granted.................................   3,737,430      1.00      14,073,839      1.24
Exercised...............................          --        --              --        --
Expired.................................          --        --       1,072,248      1.03
                                          ----------     -----     -----------     -----
Outstanding at end of year..............   3,737,430     $1.00      16,739,021     $1.20
                                          ==========               ===========
Options exercisable at end of year......          --                   922,043
                                          ==========               ===========
Weighted-average grant-date fair value
  of options granted....................  $      .16               $       .34
                                          ==========               ===========
</TABLE>
 
     As required by SFAS No. 123, pro forma information regarding net loss has
been determined as if Capstar Broadcasting had accounted for its stock options
under the fair value method. The fair value for these options was estimated as
of the date of grant using a minimum value option pricing model with the
following weighted-average assumptions for 1996 and 1997, respectively; risk
free interest rates of 5.84% and 6.16%; no dividend; and weighted-average
expected lives of the options of three and five years.
 
     The minimum value option valuation model with a near zero volatility
results in an option value similar to the option value that would result from
using the Black-Scholes option valuation model with a near zero volatility. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and which are
fully transferable. In addition, option valuation models, in general, require
the input of highly subjective assumptions, including the expected stock price
volatility. Because Capstar Broadcasting's stock options have characteristics
significantly different than those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
 
     For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The impact on
the pro forma results which follow may not be representative of compensation
expense in future years when the effect of the amortization of multiple awards
may be reflected in the amounts. Had Capstar Broadcasting adopted the cost
provision of SFAS No. 123, and allocated these costs to the Company, the
Company's net loss for 1996 and 1997 would approximate the pro forma amounts
below:
 
<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31,
                                                  -----------------------
                                                    1996          1997
                                                  ---------    ----------
<S>                                               <C>          <C>
Net loss:
  As reported...................................   $(9,052)     $(28,007)
  Pro forma.....................................    (9,253)      (29,239)
</TABLE>
 
                                      F-47
<PAGE>   123
           CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     The following table summarizes information about Capstar Broadcasting's
options outstanding at December 31, 1997:
 
<TABLE>
<CAPTION>
                          OPTIONS OUTSTANDING                               OPTIONS EXERCISABLE
  --------------------------------------------------------------------    ------------------------
                                                WEIGHTED-                    NUMBER
                                 NUMBER          AVERAGE      WEIGHTED    EXERCISABLE     WEIGHTED
   RANGE OF                  OUTSTANDING AT     REMAINING     AVERAGE          AT         AVERAGE
   EXERCISE                   DECEMBER 31,     CONTRACTUAL    EXERCISE    DECEMBER 31,    EXERCISE
    PRICES                        1997            LIFE         PRICE          1997         PRICE
  -----------                --------------    -----------    --------    ------------    --------
  <S>         <C>            <C>               <C>            <C>         <C>             <C>
  $ .71-$ .71..............       465,675(1)       4.2         $ .71             --        $  --
   1.00- 1.00..............      2,793,500         8.9          1.00        922,043         1.00
   1.10- 1.10..............      4,435,360         5.1          1.10             --           --
   1.33- 1.33..............      9,044,486         5.7          1.33             --           --
                               ----------          ---         -----        -------        -----
                               16,739,021          6.0         $1.20        922,043        $1.00
                               ==========                                   =======
</TABLE>
 
---------------
 
(1) These options were assumed by Capstar Broadcasting as part of the merger
    with Former GulfStar and were accounted for as a portion of the acquisition
    of minority interest.
 
11. INCOME TAXES:
 
     All of the Company's revenues were generated in the United States. The
components of the provision (benefit) for income taxes are as follows:
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                         ----------------------------
                                                          1995      1996       1997
                                                         ------    -------    -------
<S>                                                      <C>       <C>        <C>
Current:
  Federal..............................................  $  999    $(1,112)   $   162
  State................................................      98        243        316
Deferred:
  Federal..............................................     (59)       503     (4,942)
  State................................................      (6)        43       (446)
                                                         ------    -------    -------
Total provision (benefit)..............................  $1,032    $  (323)   $(4,910)
                                                         ======    =======    =======
</TABLE>
 
     Approximately $707 and $1,473 of benefit for income taxes was allocated to
an extraordinary loss on early extinguishment of debt in the accompanying
consolidated statements of operations for the years ended December 31, 1996 and
1997, respectively. For purposes of the foregoing components of provision
(benefit) for income taxes, such intra-period allocation is treated to have
affected the deferred components.
 
     Income tax expense (benefit) differs from the amount computed by applying
the federal statutory income tax rate of 35% to income (loss) before income
taxes and extraordinary items for the following reasons:
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                        -----------------------------
                                                         1995      1996        1997
                                                        ------    -------    --------
<S>                                                     <C>       <C>        <C>
U.S. federal income tax at statutory rate.............  $  911    $(2,865)   $(10,680)
State income taxes, net of federal benefit............      61        189        (915)
Nondeductible compensation expense....................      --      1,847       3,325
Other items, primarily nondeductible expenses and
  deferred tax adjustments............................      60        506       3,360
                                                        ------    -------    --------
                                                        $1,032    $  (323)   $ (4,910)
                                                        ======    =======    ========
</TABLE>
 
                                      F-48
<PAGE>   124
           CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     The net deferred tax liability consists of the following:
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1996        1997
                                                              --------    --------
<S>                                                           <C>         <C>
Deferred tax liabilities:
  Property and equipment and intangible asset basis
     differences and related depreciation and
     amortization...........................................  $106,132    $197,712
Deferred tax assets:
  Miscellaneous.............................................     1,055       4,193
  Unamortized discount on long-term debt....................        54       1,582
  Net operating loss carryforwards..........................    22,974      30,800
                                                              --------    --------
          Total deferred tax assets.........................    24,083      36,575
  Valuation allowance for deferred tax assets...............    (1,559)     (6,096)
                                                              --------    --------
          Net deferred tax asset............................    22,524      30,479
                                                              --------    --------
          Net deferred tax liability........................  $ 83,608    $167,233
                                                              ========    ========
</TABLE>
 
     In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred 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 tax liabilities and projected future taxable
income in making this assessment. The Company expects the majority of deferred
tax assets at December 31, 1997 to be realized as a result of the reversal
during the carryforward period of existing taxable temporary differences giving
rise to deferred tax liabilities and the generation of taxable income in the
carryforward period.
 
     At December 31, 1997, the Company had net operating loss carryforwards of
approximately $78,500, including approximately $69,500 acquired in connection
with the acquisition of certain subsidiaries. The acquired net operating losses
are SRLY to the acquired subsidiaries that generated the losses. If not
previously utilized, net operating loss carryforwards expire at various dates
from 1999 through 2012. Management considers that it is more likely than not
that a portion of these loss carryforwards will not ultimately be realized, and
has recorded a related valuation allowance as of December 31, 1997.
 
12. COMMITMENTS AND CONTINGENCIES:
 
  Employee Benefit Plan
 
     During 1997, the Company established a 401(k) Plan for the benefit of all
eligible employees. Eligible participants under this plan are defined as all
full-time employees with three months of service. All eligible participants may
elect to contribute a portion of their compensation to the plan subject to
Internal Revenue Service limitations. The Company makes matching contributions
to the plan at a rate of 25%, to an annual maximum of 6% of each participant's
annual salary. Contribution expense under the plan was $300 for the year ended
December 31, 1997.
 
  Leases
 
     The Company leases real property, office space, broadcasting and office
equipment under various noncancelable operating leases. Certain of the Company's
operating leases contain escalation clauses, renewal options and/or purchase
options. Rent expense was approximately $290, $913 and $2,490 for the years
ended December 31, 1995, 1996 and 1997, respectively.
 
                                      F-49
<PAGE>   125
           CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
     Future minimum payments under noncancelable operating lease are as follows:
 
<TABLE>
<CAPTION>
                                                   OPERATING
                                                    LEASES
                                                   ---------
<S>                                                <C>
1998.............................................  $   3,186
1999.............................................      2,745
2000.............................................      2,276
2001.............................................      1,819
2002.............................................      1,520
Thereafter.......................................      4,544
                                                   ---------
          Total minimum lease payments...........  $  16,090
                                                   =========
</TABLE>
 
  Employment Agreements
 
     The Company has employment agreements with its executive officers and
certain members of management, the terms of which expire at various times
through December 2002. Such agreements provide for minimum salary levels, which
may be adjusted from time to time, as well as for incentive bonuses which are
payable if specified management goals are attained. The aggregate commitment for
future salaries at December 31, 1997, excluding bonuses, was approximately
$5,870.
 
  Legal
 
     The Company is subject to various legal proceedings and claims that arise
in the ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to these actions will not have a material
impact on the consolidated financial position or results of operations or cash
flows of the Company.
 
  Impact of the Year 2000 Issue
 
     The Year 2000 Issue is whether the Company's computer systems will properly
recognize date sensitive information when the year changes to 2000, or "00."
Systems that do not properly recognize such information could generate erroneous
data or cause a system to fail. The Company uses purchased software programs for
a variety of functions, including general ledger, accounts payable and accounts
receivable accounting packages. Responsibility for Year 2000 compliance has been
analyzed and testing is currently ongoing for many of the financial
applications, individual work stations, and broadcasting systems. Preliminary
tests on applications have proven them to be compliant, but further testing is
warranted. The Company believes that the Year 2000 Issue will not pose
significant operational problems for the Company's computer systems and,
therefore, will not have a material impact on the financial position or the
operations of the Company.
 
  Other
 
     The Company is partially self-insured for employee medical insurance risks,
subject to specific retention levels. Self-insurance costs are accrued based
upon the aggregate of the estimated liability for reported claims and estimated
liabilities for claims incurred but not reported. The Company has recorded
approximately $183, $516 and $2,658 for self-insurance costs for the years ended
December 31, 1995, 1996 and 1997, respectively.
 
                                      F-50
<PAGE>   126
           CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
13. RELATED PARTY TRANSACTIONS:
 
  Allocated Expenses
 
     All expenses, excluding interest expense, incurred by Capstar Partners and
Capstar Broadcasting are allocated to the Company. These costs totaled
approximately $8,900 in 1997, of which $1,825 represented noncash compensation
and $744 in 1996, all of which represented noncash compensation.
 
  GulfStar
 
     On April 16, 1996, Former GulfStar acquired all of the outstanding capital
stock of Sonance Communications, Inc. ("Sonance") in exchange for 542 shares of
Former GulfStar's Class C common stock, 1,626 shares of Former GulfStar's Class
A common stock and approximately $619 of cash. Total consideration for the
acquisition, including acquisition costs, was approximately $1,065. The primary
assets of Sonance were broadcasting properties. Liabilities of Sonance assumed
by Former GulfStar in connection with the acquisition were approximately $7,627.
The controlling stockholder of Former GulfStar is a family member of the
controlling stockholder of Sonance. The majority stockholder of Former GulfStar,
who is a family member of both the controlling stockholder of Former GulfStar
and the controlling stockholder of Sonance, was also the majority stockholder of
Sonance.
 
     Former GulfStar recorded a charge of approximately $771 during 1996 in
connection with the write-off of a receivable from an entity owned by a family
member of the controlling stockholder of Former GulfStar. The charge is included
in other expense in the accompanying consolidated statement of operations.
 
14. FAIR VALUE OF FINANCIAL INSTRUMENTS:
 
     The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments for which the estimated fair value of the
instrument differs significantly from its carrying amount at December 31, 1996
and 1997. The fair value of a financial instrument is defined as the amount at
which the instrument could be exchanged in a current transaction between willing
parties.
 
<TABLE>
<CAPTION>
                                                         1996                     1997
                                                  -------------------     ---------------------
                                                  CARRYING     FAIR       CARRYING      FAIR
                                                   VALUE      VALUE         VALUE       VALUE
                                                  --------    -----       ---------     -----
<S>                                               <C>        <C>          <C>         <C>
Long-term debt -- 1997 and 1995 Capstar Radio
  Notes.........................................  $(76,672)  $(76,672)    $(279,054)  $(295,098)
Interest rate swap..............................        --         --            --        (320)
</TABLE>
 
     The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
 
          Cash and short-term debt, and accounts receivable and payable: the
     carrying amount approximates fair value because of the short maturity of
     these instruments.
 
          Long-term debt: The fair value of the 1997 and 1995 Capstar Radio
     Notes are based on quoted market prices. As amounts outstanding under the
     company's credit facility agreements bear interest at current market rates,
     their carrying amounts approximate fair market value.
 
          Interest rate swaps: The fair value of the interest rate swap is
     estimated by obtaining quotations from brokers. The fair value is an
     estimate of the amounts that the Company would receive (pay) at the
     reporting date if the contracts were transferred to other parties or
     canceled by the broker.
 
          Redeemable preferred stock is not traded in the open market, and as
     such, a market price is not readily available.
 
                                      F-51
<PAGE>   127
           CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                              -------------------------------
                                                               1995        1996        1997
                                                              ------      ------      -------
<S>                                                           <C>         <C>         <C>
Cash paid during the period for:
  Interest..................................................  $1,394      $8,392      $23,932
  Income taxes..............................................     200         999          230
Noncash investing and financing activities:
  Financed property and equipment purchases.................      --          89        2,537
  Book value of assets exchanged in connection with
     broadcast property acquisition.........................      --         471           --
  Dividends and accretion on preferred stock................       8       1,350        7,071
  Notes receivable and accrued interest taken in connection
     with subscribed stock..................................     333       1,757          431
  Redemption of preferred stock by Company's parent.........      --          --       29,358
  Noncash dividends on common stock.........................      --          --       14,501
  Dividend of broadcasting property to the Company's
     parent.................................................      --          --       34,982
  Contribution of broadcasting property by the Company's
     parent.................................................      --          --       34,982
  Financed or accrued acquisition costs.....................     542       6,569       16,695
</TABLE>
 
16. SUBSEQUENT EVENT:
 
     Pursuant to a merger agreement, dated August 24, 1997, between certain
affiliates of Capstar Radio's indirect parent and SFX Broadcasting, Inc.
("SFX"), Capstar Broadcasting may acquire SFX for a total cash cost to Capstar
Broadcasting of the merger, related repayment of SFX's existing indebtedness and
redemption of SFX's preferred stock of approximately $2.1 billion, if completed
by May 31, 1998. Upon consummation of the merger, SFX and its subsidiaries will
own and operate or provide services to or have the right to acquire 85 radio
stations (65 FM and 20 AM) in 28 markets.
 
                                      F-52
<PAGE>   128
 
                         REPORT OF INDEPENDENT AUDITORS
 
To the Board of Directors
Commodore Media, Inc.
 
     We have audited the accompanying consolidated statements of operations and
cash flows of Commodore Media, Inc. and Subsidiaries for the period from January
1, 1996 to October 16, 1996 and for the year ended December 31, 1995. These
consolidated statements of operations and cash flows are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated statements of operations and cash flows 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 consolidated statements of operations and
cash flows are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
statement of operations and cash flows. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated statement of operations and cash flows
presentation. We believe that our audits of the consolidated statements of
operations and cash flows provide a reasonable basis for our opinion.
 
     In our opinion, the consolidated statements of operations and cash flows
referred to above present fairly, in all material respects the consolidated
statements of operations and cash flows of Commodore Media, Inc. and
Subsidiaries for the period from January 1, 1996 to October 16, 1996 and for the
year ended December 31, 1995, in conformity with generally accepted accounting
principles.
 
                                        ERNST & YOUNG LLP
 
New York, New York
February 10, 1997
 
                                      F-53
<PAGE>   129
 
                     COMMODORE MEDIA, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                PERIOD FROM
                                                              JANUARY 1, 1996
                                                              TO OCTOBER 16,        YEAR ENDED
                                                                   1996          DECEMBER 31, 1995
                                                              ---------------    -----------------
<S>                                                           <C>                <C>
Total revenue...............................................   $ 34,826,060         $33,652,677
Less agency commissions.....................................     (2,869,014)         (2,857,912)
                                                               ------------         -----------
Net revenue.................................................     31,957,046          30,794,765
Operating expenses:
  Programming, technical and news...........................      5,906,967           5,365,686
  Sales and promotion.......................................      9,303,914           8,796,481
  General and administrative................................      6,081,262           4,870,463
Corporate expenses..........................................      1,756,797           2,051,181
Depreciation and amortization...............................      2,157,750           1,926,250
Other expense...............................................     13,833,728           2,006,550
                                                               ------------         -----------
Operating (loss) income.....................................     (7,083,372)          5,778,154
Interest expense............................................      8,860,958           7,805,525
Interest income.............................................        221,806             420,659
Other expenses, net.........................................      1,980,908              48,796
                                                               ------------         -----------
Loss before provision for income taxes and extraordinary
  loss......................................................    (17,703,432)         (1,655,508)
Provision for income taxes..................................        133,000             140,634
                                                               ------------         -----------
Loss before extraordinary loss..............................    (17,836,432)         (1,796,142)
Extraordinary loss on extinguishment of debt................             --            (443,521)
                                                               ------------         -----------
Net loss....................................................   $(17,836,432)        $(2,239,663)
                                                               ============         ===========
</TABLE>
 
                            See accompanying notes.
 
                                      F-54
<PAGE>   130
 
                     COMMODORE MEDIA, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                 PERIOD FROM           YEAR ENDED
                                                              JANUARY 1, 1996 TO      DECEMBER 31,
                                                               OCTOBER 16, 1996           1995
                                                              ------------------    -----------------
<S>                                                           <C>                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss....................................................     $(17,836,432)        $ (2,239,663)
Adjustments to reconcile net loss to net cash provided by
  operating activities:
  Loss on extinguishment of debt............................               --              443,521
  Depreciation and amortization.............................        2,157,750            1,926,250
  Noncash interest..........................................        3,315,669            2,673,829
  Long-term incentive compensation..........................        1,066,893               79,000
  Non-cash compensation.....................................       12,731,587                   --
  Provision for uncollectible accounts and notes
    receivable..............................................          488,320              556,137
  Loss on disposition of assets.............................               --                9,819
  Net barter income.........................................         (222,645)            (184,300)
  Initial public offering and pending merger expenses.......        1,909,648                   --
  Changes in assets and liabilities, net of amounts
    acquired:
    Increase in accounts receivable.........................       (2,351,753)          (1,847,015)
    Increase in prepaid expenses and other current assets...         (208,462)             (88,787)
    Decrease in accounts payable and accrued expenses.......         (337,896)            (158,855)
    Decrease in accrued compensation........................         (496,177)            (230,645)
    Increase in accrued interest............................        1,752,172              582,525
    Increase (decrease) in accrued income taxes.............           20,952             (277,135)
                                                                 ------------         ------------
         Total adjustments..................................       19,826,058            3,484,344
                                                                 ------------         ------------
Net cash provided by operating activities...................        1,989,626            1,244,681
CASH FLOWS FROM INVESTING ACTIVITIES
Repayment of loan by stockholder............................          250,375              182,988
Purchase of property, plant and equipment...................         (448,677)            (320,980)
Payments for acquisitions...................................      (31,900,000)          (3,100,000)
Deferred acquisition costs incurred.........................       (1,326,673)            (417,020)
Deposits on pending acquisitions............................         (745,000)            (525,000)
Loans to employees..........................................               --             (315,863)
Other investing activities, net.............................         (187,528)              87,528
                                                                 ------------         ------------
Net cash used in investing activities.......................      (34,357,503)          (4,408,347)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Senior Notes and warrants.........               --           64,956,422
Proceeds from Existing Credit Facility......................       18,700,000                   --
Net proceeds from issuance of preferred stock...............        9,822,520                   --
Proceeds from issuance of common stock......................               --                  100
Payment of initial public offering and merger expenses......       (1,007,297)                  --
Repayment of amounts borrowed...............................               --          (39,014,833)
Payment of financing related costs..........................         (781,170)          (4,226,762)
Redemption of preferred stock...............................               --           (8,665,835)
Purchase of redeemable warrant..............................               --           (1,000,000)
Repurchase of common stock..................................               --              (25,000)
Principal payments on capital leases........................           (9,812)             (11,186)
                                                                 ------------         ------------
Net cash provided by financing activities...................       26,724,241           12,012,906
                                                                 ------------         ------------
Net (decrease) increase in cash and short-term cash
  investments...............................................       (5,643,636)           8,849,240
Cash and short-term cash investments at beginning of
  period....................................................       10,891,489            2,042,249
                                                                 ------------         ------------
Cash and short-term cash investments at end of period.......     $  5,247,853         $ 10,891,489
                                                                 ============         ============
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for interest......................................     $  3,793,117         $  4,474,789
Cash paid for income taxes..................................     $    112,049         $    417,769
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Asset acquisitions recorded in connection with barter
  transactions..............................................     $    189,982         $    112,636
</TABLE>
 
                            See accompanying notes.
 
                                      F-55
<PAGE>   131
 
                     COMMODORE MEDIA, INC. AND SUBSIDIARIES
 
         NOTES TO CONSOLIDATED STATEMENTS OF OPERATIONS AND CASH FLOWS
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND MERGER AGREEMENT
 
  Organization and Nature of Business
 
     Commodore Media, Inc. and Subsidiaries (the "Company") is comprised of
radio stations that derive their revenue from local, regional and national
advertisers. The radio stations are located in the following markets:
Wilmington, Delaware; Hartsdale, Brewster, Patterson, Mt. Kisco, New York;
Huntington, West Virginia -- Ashland, Kentucky; Allentown -- Bethlehem,
Pennsylvania; Fort Pierce -- Stuart -- Vero Beach, Florida; and Fairfield
County, Connecticut. The Company extends credit to its customers in the normal
course of business.
 
MERGER AGREEMENT
 
     On October 16, 1996, the Company was acquired pursuant to a merger
agreement dated June 21, 1996 with Capstar Broadcasting Partners, Inc.
("Capstar") (the "Merger"), which is an indirect subsidiary of Hicks, Muse, Tate
& Furst Equity Fund III, L.P. The holders of Class A Common Stock and Class B
Common Stock, the holders of employee stock options and the holders of warrants
received $140 per share as consideration for the merger less, in the case of
option and warrant holders, the exercise price per share. In addition, the
Senior Exchangeable Redeemable Preferred Stock, Series A, $.01 par value per
share was redeemed, including all accrued and unpaid dividends.
 
     The Company recognized as other expense approximately $12.7 million in
stock option compensation expense, and approximately $1.4 million of merger
related fees and expenses during the period ended October 16, 1996 in connection
with the Merger.
 
     As a result of the Merger and the change of control effected thereby, the
Company was obligated to satisfy the existing deferred compensation and
employment agreements with its then President and Chief Executive Officer and
its deferred compensation agreement with its then Chief Operating Officer
resulting in a charge to other expense of approximately $1.1 million during the
period ended October 16, 1996. Furthermore, the Company was required to make an
offer to purchase the outstanding 13 1/4% Senior Subordinated Notes due 2003 at
a purchase price equal to 101% of their accreted value, plus any accrued and
unpaid interest. No requests for repurchase were made by the note holders.
 
     As a result of the Merger, the Company did not proceed with its previously
announced intention to undertake an initial public equity offering and has,
therefore, withdrawn its registration statement filed on Form S-1 on May 17,
1996 with the Securities and Exchange Commission. Included in other expenses
during the period ended October 16, 1996 are approximately $525,000 in various
fees and expenses incurred in connection with this filing.
 
  Principles of Consolidation
 
     The consolidated financial statements include the accounts of the Company
and all subsidiaries, after elimination of intercompany accounts and
transactions.
 
  Short-Term Cash Investments
 
     The Company considers investments which have a remaining maturity of three
months or less at the time of purchase to be short-term cash investments.
 
  Income Taxes
 
     The Company accounts for income taxes in accordance with FASB Statement No.
109, "Accounting for Income Taxes." Under this method, deferred income taxes are
provided for differences between the book and tax bases of assets and
liabilities.
 
                                      F-56
<PAGE>   132
                     COMMODORE MEDIA, INC. AND SUBSIDIARIES
 
               NOTES TO CONSOLIDATED STATEMENTS OF OPERATIONS AND
                           CASH FLOWS -- (CONTINUED)
 
  Risks and Uncertainties
 
     The preparation of consolidated statements of operations and cash flows in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
 
     The Company's revenue is principally derived from local broadcast
advertisers who are impacted by the local economy. The Company routinely
assesses the financial strength of its customers. Credit losses are provided for
in the consolidated statements of operations and cash flows in the form of an
allowance for doubtful accounts.
 
  Accounting Periods
 
     The Company maintains its interim consolidated statements of operations and
cash flows based upon the broadcast month end which always ends on the last
Sunday of the calendar month or quarter. The Company's fiscal year end and
fourth quarter ends on December 31.
 
  Property, Plant and Equipment
 
     Depreciation is provided for property, plant and equipment on the
straight-line method based on the following estimated useful lives:
 
<TABLE>
<CAPTION>
                                                              ESTIMATED LIFE
                       CLASSIFICATION                            (YEARS)
                       --------------                         --------------
<S>                                                           <C>
Land improvements...........................................     20
Buildings...................................................     20
Furniture, fixtures and equipment...........................    7-10
Broadcasting and technical equipment........................    7-10
Towers and antennas.........................................     20
Music library...............................................      7
Leasehold improvements......................................    10-20
Vehicles....................................................      3
</TABLE>
 
     Expenditures for maintenance and repairs are charged to operations as
incurred. Depreciation as a charge to income amounted to approximately $730,000
for the period ended October 16, 1996, and approximately $832,000 for the year
ended December 31, 1995.
 
  Property Held Under Capital Leases
 
     The Company is the lessee of office equipment under capital leases expiring
in various years through 2004. The capital leases are depreciated over their
estimated productive lives of seven to ten years. Total rent expense was
approximately $383,000 for the period ended October 16, 1996 and approximately
$332,000 for the year ended December 31, 1995.
 
  Revenue Recognition
 
     The Company recognizes revenue upon the airing of advertisements.
 
                                      F-57
<PAGE>   133
                     COMMODORE MEDIA, INC. AND SUBSIDIARIES
 
               NOTES TO CONSOLIDATED STATEMENTS OF OPERATIONS AND
                           CASH FLOWS -- (CONTINUED)
 
  Intangible Assets
 
     Intangible assets are being amortized by the straight-line method over the
following estimated useful lives:
 
<TABLE>
<CAPTION>
                                                              ESTIMATED LIFE
                       CLASSIFICATION                            (YEARS)
                       --------------                         --------------
<S>                                                           <C>
FCC licenses and goodwill...................................     40
Organization expenses.......................................      5
Network affiliation agreement...............................      5
Covenant not to compete.....................................      5
Tower site lease............................................      3
Contract rights.............................................      3
Software....................................................      3
Pre-sold advertising contracts..............................      1
</TABLE>
 
     Amortization of the aforementioned intangible assets included as a charge
to income amounted to approximately $592,000 for the period ended October 16,
1996, and approximately $506,000 for the year ended December 31, 1995.
Amortization of FCC licenses and goodwill amounted to approximately $501,000 for
the period ended October 16, 1996, and approximately $588,000 for the year ended
December 31, 1995.
 
  Deferred Charges
 
     Legal fees, bank loan closing costs and other expenses associated with debt
financing are being amortized using the effective interest rate method.
Amortization of debt expense charged to operations and included in interest
expense amounted to approximately $450,000 for the period ended October 16, 1996
and approximately $385,000) for the year ended December 31, 1995.
 
  Advertising Costs
 
     The Company expenses advertising costs related to its radio station
operations as incurred. Advertising expense amounted to approximately $557,000
for the period ended October 16, 1996 and approximately $754,000 for the year
ended December 31, 1995.
 
  Barter Transactions
 
     The fair value of barter and trade-out transactions is included in
broadcast revenue and sales and promotion expense. Barter revenue is recorded
when advertisements are broadcast and barter expense is recorded when
merchandise or services are received. Barter transactions charged to operations
were as follows:
 
<TABLE>
<CAPTION>
                                                              PERIOD FROM
                                                              JANUARY 1,
                                                                1996 TO      YEAR ENDED
                                                              OCTOBER 16,   DECEMBER 31,
                                                                 1996           1995
                                                              -----------   ------------
<S>                                                           <C>           <C>
Trade sales.................................................  $ 3,204,468   $ 3,238,111
Trade expense...............................................   (2,981,823)   (3,053,811)
                                                              -----------   -----------
Net barter transactions.....................................  $   222,645   $   184,300
                                                              ===========   ===========
</TABLE>
 
                                      F-58
<PAGE>   134
                     COMMODORE MEDIA, INC. AND SUBSIDIARIES
 
               NOTES TO CONSOLIDATED STATEMENTS OF OPERATIONS AND
                           CASH FLOWS -- (CONTINUED)
 
2. LONG-TERM DEBT
 
  AT&T Senior Credit Facility
 
     On March 13, 1996, the Company entered into a Senior Credit Facility with
AT&T Commercial Finance Corporation ("AT&T") pursuant to which AT&T will make
available to the Company senior secured (i) revolving loans in an amount up to
$30.0 million and (ii) accounts receivable loans in an amount which shall be the
lesser of (a) $5.0 million or (b) 85% of the net book value of the accounts
receivable of the Company (the "AT&T Senior Credit Facility"). The indebtedness
to AT&T is collateralized by the tangible and intangible assets and the capital
stock of all the Company's subsidiaries. Interest is payable monthly at a rate
of 3.5% over LIBOR (8.94% at October 16, 1996) and principal amortization of the
revolving loans and accounts receivable loans begins June 1, 1998 and November
30, 1997, respectively. The Company pays a commitment fee of .25% every six
months on the unused commitment.
 
  Senior Subordinated Notes
 
     The Senior Subordinated Notes bear cash interest at a rate of 7 1/2% per
annum on the principal amount until May 1, 1998 then at a rate of 13 1/4% per
annum until maturity, with interest payment dates on May 1 and November 1.
 
     In 1995, the Company wrote off the balance of the unamortized deferred
financing costs on its retired debt of $443,521. Inasmuch as the Company had no
current federal taxable income and had fully reserved for its net deferred tax
assets, there was no tax effect attributable to this extraordinary item.
 
3. PREFERRED STOCK
 
SENIOR EXCHANGEABLE REDEEMABLE PREFERRED STOCK
 
     On May 1, 1996, the Company entered into a Securities Purchase Agreement
with CIBC WG Argosy Merchant Fund 2, LLC ("CIBC Merchant Fund"), pursuant to
which the CIBC Merchant Fund agreed to purchase from the Company, if and when
requested by the Company, up to an aggregate liquidation value of $12,500,000 of
Senior Exchangeable Redeemable Preferred Stock, Series A, $.01 par value per
share, of the Company in such amounts as the Company requested (the "Preferred
Stock Facility"). In connection with the Stamford Acquisition on May 30, 1996
and the Florida Acquisition on May 31, 1996 (see Note 4), the Company issued
5,700 shares and 4,300 shares, respectively, of Preferred Stock for an aggregate
purchase price of $10,000,000. The Preferred Stock accrued cash dividends at the
rate of 8% per annum and was redeemed, including accrued dividends, in
connection with the Merger on October 16, 1996. In connection with the Preferred
Stock Facility, the Company issued to the CIBC Merchant Fund a warrant to
purchase 7,550 shares of the Company's Class A Common Stock, at an exercise
price of $.01 per warrant, which were valued in the aggregate at the date of
issue at $981,500. This warrant was redeemed in connection with the Merger for
$140 per share less the exercise price.
 
4. CONSUMMATED ACQUISITIONS
 
     On October 16, 1996, the Company purchased certain defined assets of radio
stations WKEE-FM and WKEE-AM in Huntington, West Virginia, WZZW-AM in Milton,
West Virginia, WBVB-FM in Coal Grove, Ohio and WIRO-AM in Ironton, Ohio from
Adventure Communications, Inc. for approximately $7.7 million and certain
defined assets of WFXN-FM in Milton, West Virginia and WMLV-FM in Ironton, Ohio
for approximately $4.3 million. The transactions were funded with borrowings
from the AT&T Senior Credit Facility and with funds provided from Capstar. The
Company provided programming to these stations under Local Marketing Agreement
("LMA") effective April 1996 until the purchase date. In addition, the
 
                                      F-59
<PAGE>   135
                     COMMODORE MEDIA, INC. AND SUBSIDIARIES
 
               NOTES TO CONSOLIDATED STATEMENTS OF OPERATIONS AND
                           CASH FLOWS -- (CONTINUED)
 
Company has an option to purchase WHRD-AM in Huntington, West Virginia and
provides programming services to the station under an LMA arrangement.
 
     On May 31, 1996, the Company purchased certain defined assets of radio
stations WBBE-FM (formerly WKQS-FM), WAVW-FM and WAXE-AM in the Fort
Pierce-Stuart-Vero Beach, Florida market from Media VI for $8.0 million (the
"Florida Acquisition"). The transaction was funded with borrowings from the AT&T
Senior Credit Facility and funds from the Preferred Stock Facility. The Company
sold advertising time on these stations under a Joint Service Agreement from
February 1996 until the purchase date.
 
     On May 30, 1996, the Company purchased certain defined assets of radio
stations WKHL-FM and WSTC-AM in Stamford, Connecticut from Q Broadcasting, Inc.
for $9.5 million (the "Stamford Acquisition"). The transaction was financed with
borrowings from the AT&T Senior Credit Facility and funds from the Preferred
Stock Facility.
 
     On March 27, 1996, the Company purchased (i) certain defined assets of
radio stations WZZN-FM in Mount Kisco, New York, WAXB-FM in Patterson, New York
and WPUT-AM in Brewster, New York from Hudson Valley Growth, L.P. for $5.0
million and (ii) all of the issued and outstanding common stock of Danbury
Broadcasting, Inc., owner of WRKI-FM, and WINE-AM in Brookfield, Connecticut,
plus certain real property for $10.0 million. The transaction was financed with
the Company's existing cash and borrowings under the AT&T Senior Credit
Facility. The Company provided programming to these stations under LMAs from
October 1995 until the purchase date.
 
     On June 27, 1995, the Company purchased the assets (excluding cash and
accounts receivable) and broadcasting license of radio broadcast station WQOL-FM
in Vero Beach, Florida for a total purchase price of approximately $3.0 million.
 
     Unaudited pro forma results of operations for the Company as if the
aforementioned acquisitions had been consummated on January 1, 1995 are as
follows (in thousands):
 
<TABLE>
<CAPTION>
                                                              PERIOD FROM
                                                              JANUARY 1,
                                                                1996 TO      YEAR ENDED
                                                              OCTOBER 16,   DECEMBER 31,
                                                                 1996           1995
                                                              -----------   ------------
<S>                                                           <C>           <C>
Net revenue.................................................   $ 31,505      $  38,483
Net loss before extraordinary loss..........................     (4,037)        (3,673)
Net loss....................................................     (4,037)        (4,117)
</TABLE>
 
5. INCOME TAXES
 
     The Company has recorded a provision for income taxes as follows:
 
<TABLE>
<CAPTION>
                                                              PERIOD FROM
                                                              JANUARY 1,
                                                                1996 TO       YEAR ENDED
                                                              OCTOBER 16,    DECEMBER 31,
                                                                 1996            1995
                                                              -----------    ------------
<S>                                                           <C>            <C>
Current:
  Federal...................................................   $     --        $     --
  State and local...........................................    133,000         140,634
Deferred:
  Federal...................................................         --              --
  State and local...........................................         --              --
                                                               --------        --------
          Total.............................................   $$133,000       $140,634
                                                               ========        ========
</TABLE>
 
                                      F-60
<PAGE>   136
                     COMMODORE MEDIA, INC. AND SUBSIDIARIES
 
               NOTES TO CONSOLIDATED STATEMENTS OF OPERATIONS AND
                           CASH FLOWS -- (CONTINUED)
 
     The Company did not record a federal tax benefit on the taxable loss for
the period ended October 16, 1996 or for the year ended December 31, 1995 since
it was not assured that they could realize a benefit for such losses in the
future.
 
     The Company received Internal Revenue Service approval and changed its tax
method of accounting for Federal Communications Commission ("the FCC") licenses
for the tax year ended December 31, 1995. The aggregate amount of cumulative
amortization that will be deductible ratably over six taxable years for the
Company and for tax purposes is approximately $12.1 million.
 
     The reconciliation of income tax computed at the U.S. federal statutory
rates to effective income tax expense is as follows:
 
<TABLE>
<CAPTION>
                                                            PERIOD FROM
                                                            JANUARY 1,
                                                              1996 TO       YEAR ENDED
                                                            OCTOBER 16,    DECEMBER 31,
                                                               1996            1995
                                                            -----------    ------------
<S>                                                         <C>            <C>
Provision at statutory rate...............................  $(1,184,000)   $  (734,695)
State and local taxes.....................................      133,000        140,634
Nondeductible expense.....................................       33,800          8,286
Increase in valuation allowance, net of rate changes......    1,150,200        726,409
Alternative minimum tax...................................           --             --
                                                            -----------    -----------
Total.....................................................  $   133,000    $   140,634
                                                            ===========    ===========
</TABLE>
 
6. EMPLOYMENT AGREEMENTS
 
     The Company has entered into employment agreements with several executives
of the Company including its President and Chief Executive Officer, its
Executive Vice President and Chief Financial Officer and its Executive Vice
President and General Counsel. The agreements generally provide for terms of
employment, annual salaries, bonuses, eligibility for option awards and
severance benefits.
 
     Effective January 1, 1994, the Company entered into an agreement with its
then President and Chief Executive Officer under which he would be employed in
that capacity through 1996 and provided for annual salary requirements and
bonuses, and a Long-Term Incentive Payment ("LTIP"). In lieu of the LTIP, the
Company paid the then President $1.5 million in cash, issued $1.3 million
principal ($1.1 million net of discount) of Senior Subordinated Notes to a trust
for his benefit and agreed to provide $1.5 million in deferred compensation
which accrues interest at a rate of 7% and is payable in 2003. The Company
recorded the deferred compensation on April 21, 1995 at its calculated net
present value of $921,000. The aggregate effect of the employment agreement
restructuring was to charge $1.8 million to long-term incentive compensation
expense during 1995. In addition, the then President's amended employment
agreement extended his date of employment through April 30, 1998, granted stock
options to him to acquire 28,313 shares of Class A Common Stock at an exercise
price of $45 per share and provided for annual bonuses based upon specific
operating results of Capstar Radio.
 
     The Company also amended its then existing employment agreement with its
then Chief Operating Officer on April 21, 1995. The prior employment agreement
provided for a long-term incentive based upon the increase in certain station
values. The amended employment agreement provided for a cash payment of $400,000
on April 21, 1995 and deferred compensation of $346,000 which accrues interest
at a rate of 7% and is payable in 2003. The Company recorded the deferred
compensation on April 21, 1995 at its calculated net present value of $213,000.
The aggregate effect of the employment agreement restructuring was to charge
$188,800 to long-term incentive compensation expense during 1995. In addition,
the amended employment agreement extended his date of employment through April
30, 1999, granted stock options to acquire
 
                                      F-61
<PAGE>   137
                     COMMODORE MEDIA, INC. AND SUBSIDIARIES
 
               NOTES TO CONSOLIDATED STATEMENTS OF OPERATIONS AND
                           CASH FLOWS -- (CONTINUED)
 
28,313 shares of Class A Common Stock at an exercise price of $45 per share and
provides for annual bonuses based upon specific operating results of the
Company.
 
     As a result of the Merger and the change of control effected thereby, the
Company was obligated to satisfy the existing deferred compensation and
employment agreements with its then President and Chief Executive Officer and
its deferred compensation agreement with its then Chief Operating Officer,
resulting in an additional charge to operations of approximately $1.1 million
which was recorded in the period ended October 16, 1996. Furthermore, all stock
options for the aforementioned officers, as well as for all holders, were
redeemed at $140 per share, less the exercise price of $45 per share at the time
of the Merger. The Company's then President and Chief Executive Officer resigned
his position effective October 16, 1996 as required by the Merger Agreement.
 
7. RELATED PARTY TRANSACTIONS
 
     During the period ended October 16, 1996 and the year ended December 31,
1995, the Company paid the majority stockholder a salary of approximately
$185,000 and $175,000, respectively.
 
                                      F-62
<PAGE>   138
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors
Capstar Broadcasting Partners, Inc.
 
     Our report on the consolidated financial statements of Capstar Broadcasting
Partners, Inc. and Subsidiaries is included in this Form 10-K. In connection
with our audits of such consolidated financial statements, we have also audited
the related financial statement schedules of Capstar Broadcasting Partners, Inc.
and Subsidiaries herein.
 
     In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
 
                                            COOPERS & LYBRAND L.L.P.
 
Austin, Texas
March 26, 1998
 
                                      F-63
<PAGE>   139
 
                      CAPSTAR BROADCASTING PARTNERS, INC.
 
                                   SCHEDULE I
 
                    PARENT COMPANY CONDENSED BALANCE SHEETS
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1996        1997
                                                              --------    --------
<S>                                                           <C>         <C>
Cash and cash equivalents...................................  $    660    $     --
                                                              --------    --------
          Total current assets..............................       660          --
Investment in subsidiaries, at equity.......................   127,920     461,315
Due from subsidiaries.......................................        --       7,785
Property and equipment, net.................................       351       1,212
Intangible assets, net......................................     1,800       8,001
Deferred income taxes.......................................        --       7,084
Other assets................................................       179          37
                                                              --------    --------
          Total assets......................................  $130,910    $485,434
                                                              ========    ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accrued interest payable....................................  $    850    $     --
                                                              --------    --------
          Total current liabilities.........................       850          --
Due to subsidiaries.........................................     1,324          --
Due to parent company.......................................        --       1,081
Long-term debt..............................................    35,000     166,991
                                                              --------    --------
          Total liabilities.................................    37,174     168,072
                                                              --------    --------
Redeemable preferred stock..................................        --     101,493
Stockholder's equity:
  CAPSTAR BROADCASTING PARTNERS, INC.:
     Common Stock, Class A, voting..........................       942       2,796
     Additional paid-in capital.............................    93,957     262,161
  GULFSTAR COMMUNICATIONS, INC.:
     Common stock, voting...................................         1          --
     Common stock, Class A..................................         1          --
     Common stock, Class B..................................        --          --
     Common stock, Class C..................................         1          --
  Additional paid-in capital................................    11,869          --
  Stock subscriptions receivable............................    (2,090)         --
  Unearned compensation.....................................    (1,518)         --
  ACCUMULATED DEFICIT.......................................    (9,427)    (49,088)
                                                              --------    --------
          Total stockholder's equity........................    93,736     215,869
                                                              --------    --------
          Total liabilities and stockholder's equity........  $130,910    $485,434
                                                              ========    ========
</TABLE>
 
     The accompanying notes are an integral part of the condensed financial
                                  statements.
 
                                      F-64
<PAGE>   140
 
                      CAPSTAR BROADCASTING PARTNERS, INC.
 
                                   SCHEDULE I
 
               PARENT COMPANY CONDENSED STATEMENTS OF OPERATIONS
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                             PERIOD FROM INCEPTION
                                                              (OCTOBER 11, 1996)
                                                                    THROUGH             YEAR ENDED
                                                               DECEMBER 31, 1996     DECEMBER 31, 1997
                                                             ---------------------   -----------------
<S>                                                          <C>                     <C>
Equity in losses of consolidated subsidiaries..............         $(6,710)             $(28,007)
Interest expense, net......................................          (2,421)              (18,607)
Depreciation and amortization..............................            (296)                 (131)
                                                                    -------              --------
          Loss before benefit for income taxes.............          (9,427)              (46,745)
Benefit for income taxes...................................              --                 7,084
                                                                    -------              --------
          Net Loss.........................................         $(9,427)             $(39,661)
                                                                    =======              ========
</TABLE>
 
     The accompanying notes are an integral part of the condensed financial
                                  statements.
 
                                      F-65
<PAGE>   141
 
                      CAPSTAR BROADCASTING PARTNERS, INC.
 
                                   SCHEDULE I
 
               PARENT COMPANY CONDENSED STATEMENTS OF CASH FLOWS
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                PERIOD FROM
                                                                 INCEPTION
                                                            (OCTOBER 11, 1996)
                                                                  THROUGH             YEAR ENDED
                                                             DECEMBER 31, 1996     DECEMBER 31, 1997
                                                            -------------------    -----------------
<S>                                                         <C>                    <C>
Net cash provided by (used in) operating activities.......       $   3,085             $    (363)
                                                                 ---------             ---------
Cash flows from investing activities:
  Investment in subsidiaries..............................              --              (317,279)
  Acquisition of subsidiary...............................        (128,339)                   --
  Purchase of property and equipment......................            (535)                 (719)
                                                                 ---------             ---------
          Net cash used in investing activities...........        (128,874)             (317,998)
                                                                 ---------             ---------
Cash flows from financing activities:
  Proceeds from issuance of long-term debt................          35,000               150,284
  Repayment of long-term debt.............................              --               (35,000)
  Proceeds from issuance of preferred stock...............              --                95,071
  Proceeds from issuance of common stock..................          94,155               115,737
  Payment of financing related costs......................          (2,706)               (8,391)
                                                                 ---------             ---------
          Net cash provided by financing activities.......         126,449               317,701
                                                                 ---------             ---------
Net increase (decrease) in cash and cash equivalents......             660                  (660)
Cash and cash equivalents at beginning of period..........              --                   660
                                                                 ---------             ---------
Cash and cash equivalents at end of period................       $     660             $      --
                                                                 =========             =========
</TABLE>
 
     The accompanying notes are an integral part of the condensed financial
                                  statements.
 
                                      F-66
<PAGE>   142
 
                      CAPSTAR BROADCASTING PARTNERS, INC.
 
                                   SCHEDULE I
 
             NOTES TO PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
1. GENERAL
 
     The accompanying condensed financial statements of Capstar Broadcasting
Partners, Inc. (the "Company") should be read in conjunction with the
consolidated financial statements of the Company and its subsidiaries included
in the Company's Annual Report on Form 10-K.
 
2. OBLIGATIONS, GUARANTEES AND COMMITMENTS
 
     The Company has guaranteed the obligations under a senior credit facility
of its subsidiary Capstar Radio Broadcasting Partners, Inc. Such obligations
prohibit the subsidiary from making loans or transfers or paying dividends to
the Company without the consent of the lenders subject to certain provisions in
the senior credit facility. See Note 7 to consolidated financial statements
regarding these obligations.
 
3. OTHER
 
     See Notes 7 and 8, respectively, to consolidated financial statements for a
description of the long-term debt and redeemable preferred stock of the Company.
 
                                      F-67
<PAGE>   143
 
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
                                  SCHEDULE II
                       VALUATION AND QUALIFYING ACCOUNTS
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                               ADDITIONS         DEDUCTIONS
                                              BALANCE    ---------------------   ----------
                                                AT       CHARGED TO                            BALANCE
                                             BEGINNING   COSTS AND    AMOUNTS      DIRECT      AT END
                DESCRIPTION                  OF PERIOD    EXPENSES    ACQUIRED   WRITE-OFFS   OF PERIOD
                -----------                  ---------   ----------   --------   ----------   ---------
<S>                                          <C>         <C>          <C>        <C>          <C>
Allowance for doubtful accounts 12/31/95...   $   65       $  195      $   --      $  124      $  136
Allowance for doubtful accounts 12/31/96...      136          661         733         363       1,167
Allowance for doubtful accounts 12/31/97...    1,167        2,044       1,355       1,677       2,889
</TABLE>
 
                                      F-68
<PAGE>   144
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors
Capstar Radio Broadcasting Partners, Inc.
 
     Our report on the consolidated financial statements of Capstar Radio
Broadcasting Partners, Inc. and Subsidiaries is included in this Form 10-K. In
connection with our audits of such consolidated financial statements, we have
also audited the related financial statement schedule of Capstar Radio
Broadcasting Partners, Inc. and Subsidiaries herein.
 
     In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
 
                                            COOPERS & LYBRAND L.L.P.
Austin, Texas
March 26, 1998
 
                                      F-69
<PAGE>   145
 
           CAPSTAR RADIO BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
                                  SCHEDULE II
                       VALUATION AND QUALIFYING ACCOUNTS
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                               ADDITIONS         DEDUCTIONS
                                              BALANCE    ---------------------   ----------
                                                AT       CHARGED TO                            BALANCE
                                             BEGINNING   COSTS AND    AMOUNTS      DIRECT      AT END
                DESCRIPTION                  OF PERIOD    EXPENSES    ACQUIRED   WRITE-OFFS   OF PERIOD
                -----------                  ---------   ----------   --------   ----------   ---------
<S>                                          <C>         <C>          <C>        <C>          <C>
Allowance for doubtful accounts 12/31/95...   $   65       $  195      $   --      $  124      $  136
Allowance for doubtful accounts 12/31/96...      136          661         733         363       1,167
Allowance for doubtful accounts 12/31/97...    1,167        2,044       1,355       1,677       2,889
</TABLE>
 
                                      F-70
<PAGE>   146
 
                               INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                    DESCRIPTION
        -------                                  -----------
<C>                      <S>
         2.1.1           -- Agreement and Plan of Merger, dated June 21, 1996, by and
                            among CMI Acquisition Company, Inc., Commodore Media,
                            Inc. ("Commodore") and the stockholders and other
                            signatories thereto.(1)
         2.1.2           -- First Amendment to Agreement and Plan of Merger, dated
                            September 3, 1996.(2)
         2.1.3           -- Second Amendment to Agreement and Plan of Merger, dated
                            October 16, 1996.(2)
         3.1.1           -- Certificate of Incorporation of Capstar Partners.(3)
         3.1.2           -- Certificate of Amendment to Certificate of Incorporation
                            of Capstar Partners, dated June 17, 1997.(4)
         3.2             -- Amended and Restated By-Laws of Capstar Partners.*
         3.3.1           -- Amended and Restated Certificate of Incorporation of
                            Capstar Radio.(6)
         3.3.2           -- Certificate of Amendment to Amended and Restated
                            Certificate of Incorporation of Capstar Radio dated April
                            29, 1996.(18)
         3.3.3           -- Certificate of Amendment to Amended and Restated
                            Certificate of Incorporation of Capstar Radio dated
                            February 17, 1997.(19)
         3.3.4           -- Certificate of Amendment to Amended and Restated
                            Certificate of Incorporation of Capstar Radio dated
                            February 20, 1997.(19)
         3.3.5           -- Certificate of Amendment to Amended and Restated
                            Certificate of Incorporation of Capstar Radio dated April
                            30, 1997.(19)
         3.3.6           -- Certificate of Amendment to Amended and Restated
                            Certificate of Incorporation of Capstar Radio dated June
                            26, 1997.(19)
         3.4.1           -- By-Laws of Capstar Radio.(20)
         3.4.2           -- Certificate of Amendment to By-Laws of Capstar Radio.(18)
         4.2.1           -- Indenture, dated February 20, 1997, between Capstar
                            Partners and U.S. Trust Company of Texas, governing
                            Capstar Partners' outstanding 12 3/4% Senior Discount
                            Notes due 2009 (the "12 3/4% Capstar Indenture").
         4.2.2           -- First Supplemental to 12 3/4% Capstar Indenture*.
         4.3.1           -- Indenture, dated as of April 21, 1995, among Capstar
                            Radio, IBJ Schroder Bank & Trust Company, as trustee, and
                            the guarantors named therein, governing Capstar Radio's
                            13 1/4% Senior Subordinated Notes (the "13 1/4% Capstar
                            Indenture").(6)
         4.3.2           -- Amendment No. 1 to 13 1/4% Capstar Indenture.(6)
         4.3.3           -- Amendment No. 2 to 13 1/4% Capstar Indenture.(7)
         4.3.4           -- Amendment No. 3 to 13 1/4% Capstar Indenture.(7)
         4.3.5           -- Amendment No. 4 to 13 1/4% Capstar Indenture.(8)
         4.3.6           -- Amendment No. 5 to 13 1/4% Capstar Indenture.(9)
         4.3.7           -- Amendment No. 6 to 13 1/4% Capstar Indenture.(5)
         4.3.8           -- Amendment No. 7 to 13 1/4% Capstar Indenture.(12)
         4.3.9           -- Amendment No. 8 to 13 1/4% Capstar Indenture.(4)
         4.3.10          -- Amendment No. 9 to 13 1/4% Capstar Indenture.(11)
         4.3.11          -- Amendment No. 10 to 13 1/4% Capstar Indenture.(12)
         4.3.12          -- Amendment No. 11 to 13 1/4% Capstar Indenture.(13)
         4.3.13          -- Amendment No. 12 to 13 1/4% Capstar Indenture.*
</TABLE>
<PAGE>   147
 
<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                    DESCRIPTION
        -------                                  -----------
<C>                      <S>
         4.3.14          -- Amendment No. 13 to 13 1/4% Capstar Indenture.*
         4.3.15          -- Amendment No. 14 to 13 1/4% Capstar Indenture.*
         4.3.16          -- Amendment No. 15 to 13 1/4% Capstar Indenture.*
         4.4             -- Indenture, dated June 17, 1997, between Capstar Radio and
                            U.S. Trust Company of Texas, N.A governing Capstar
                            Radio's outstanding 9 1/4% Senior Subordinated Notes due
                            2007.(4)
         4.5             -- Indenture, dated June 17, 1997, between Capstar Partners
                            and U.S. Trust Company of Texas, N.A governing Capstar
                            Partners's 12% Subordinated Exchange Debentures due
                            2009.(4)
         4.6             -- Certificate of Designation of the Powers, Preferences and
                            Relative, Participating, Optional and Other Special
                            Rights of 12% Senior Exchangeable Preferred Stock and
                            Qualifications, Limitations and Restrictions Thereof of
                            Capstar Partners, dated June 17, 1997.(4)
        10.1.1           -- Amended and Restated Credit Agreement, dated February 20,
                            1997 and amended and restated August 12, 1997 (the
                            "Credit Agreement"), among Capstar Broadcasting, Capstar
                            Partners, Capstar Radio, and various banks signatory
                            thereto.(14)
        10.1.2           -- First Amendment to the Credit Agreement, dated August 21,
                            1997.(14)
        10.1.3           -- Second Amendment to the Credit Agreement, dated September
                            26, 1997.(14)
        10.1.4           -- Third Amendment to the Credit Agreement, dated January
                            28, 1998.*
        10.1.5           -- Fourth Amendment to the Credit Agreement, dated February
                            6, 1998.*
        10.2.1           -- Financial Advisory Agreement, dated as of October 16,
                            1996, between Capstar Partners and Hicks, Muse & Co.
                            Partners, L.P. ("HMCo").(5)
        10.3.1           -- Monitoring and Oversight Agreement, dated as of October
                            16, 1996, between Capstar Partners and HMCo.(5)
        10.4             -- Form of Indemnification Agreement between Capstar
                            Broadcasting and each of its directors and officers.(4)
        10.5.1           -- Employment Agreement, dated February 14, 1997, between
                            Capstar Partners and R. Steven Hicks.(5)+
        10.5.2           -- First Amendment to Employment Agreement, effective July
                            1, 1997, between R. Steven Hicks, Capstar Partners, and
                            Capstar Broadcasting.(13)+
        10.6             -- Employment Agreement, dated July 1, 1997, between Capstar
                            Broadcasting and Paul D. Stone.(4)+
        10.7             -- Employment Agreement dated July 1, 1997, between Capstar
                            Broadcasting and William S. Banowsky, Jr.(4)+
        10.8             -- Amended and Restated Employment Agreement, dated October
                            16, 1996, between Commodore, Capstar Partners and James
                            T. Shea, Jr.(5)+
        10.9             -- Employment Agreement, dated January 27, 1997, between
                            Pacific Star and Claude C. Turner (also known as Dex
                            Allen).(5)+
        10.10.1          -- Employment Agreement between GulfStar Communications,
                            Inc. and John D. Cullen.(11)+
        10.10.2          -- First Amendment to Employment Agreement between GulfStar
                            Communications and John D. Cullen.*+
        10.11            -- Employment Agreement, dated January 16, 1998, among
                            Central Star Communications, Inc., Capstar Broadcasting,
                            and Mary K. Quass.*+
</TABLE>
<PAGE>   148
 
<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                    DESCRIPTION
        -------                                  -----------
<C>                      <S>
        10.13            -- Not used.
        10.14            -- Employment Agreement, dated September 22, 1997, between
                            Capstar Partners and Eric W. Neumann.(13)+
        10.15            -- Consulting, Non-Compete and Separation Agreement, dated
                            March 1, 1998, between Southern Star and Frank D.
                            Osborn.*+
        10.16            -- 1997 Stock Option Plan of Capstar Broadcasting.(4)+
        10.17.1          -- Form of Incentive Stock Option Agreement.(4)+
        10.17.2          -- Form of Non-Qualified Stock Option Agreement for
                            Employees.(4)+
        10.17.3          -- Form of Non-Qualified Stock Option Agreement for
                            Non-Employees.(11)+
        10.18            -- 1997 Stock Purchase Plan of Capstar Broadcasting.(4)+
        10.19.1          -- Affiliate Stockholders Agreement, dated October 16, 1996,
                            among Capstar Partners, Hicks Muse, R. Steven Hicks and
                            the security holders listed therein.(5)
        10.19.2          -- First Amendment and Supplement to Affiliate Stockholders
                            Agreement, dated January 27, 1997, by and among Capstar
                            Partners, the securityholders listed therein and Hicks
                            Muse.(5)
        10.19.3          -- Second Amendment to Affiliate Stockholders Agreement,
                            dated February 20, 1997, by and among Capstar Partners,
                            the security holders listed therein and Hicks Muse.(3)
        10.19.4          -- Third Amendment to Affiliate Stockholders Agreement,
                            dated June 20, 1997, by and among Capstar Broadcasting,
                            Capstar Partners, the security holders listed therein and
                            Hicks Muse.(4)
        10.20.1          -- Management Stockholders Agreement, dated November 26,
                            1996, among Capstar Partners, the securityholders listed
                            therein and Hicks Muse.(5)
        10.20.2          -- First Amendment to Management Stockholders Agreement,
                            dated January 27, 1997, by and among Capstar Partners and
                            the securityholders listed therein.(5)
        10.20.3          -- Second Amendment to Management Stockholders Agreement,
                            dated June 20, 1997, by and among Capstar Broadcasting,
                            Capstar Partners, the security holders listed therein and
                            Hicks Muse.(4)
        10.21            -- GulfStar Stockholders Agreement, dated July 8, 1997, by
                            and among Capstar Broadcasting, the security holders
                            listed therein, and Hicks Muse.(11)
        10.22.1          -- Registration Rights Agreement, dated February 20, 1997,
                            between Capstar Partners and Frank D. Osborn.(5)
        10.22.2          -- First Amendment to Registration Rights Agreement, dated
                            July 1, 1997, between Capstar Partners, Capstar
                            Broadcasting, and Frank D. Osborn.(4)
        10.23            -- Warrant, dated October 16, 1996, issued to R. Steven
                            Hicks.(5)
        10.24            -- Warrant, dated February 20, 1997, issued to R. Steven
                            Hicks.(5)
        10.25            -- Warrant, dated July 8, 1997, issued to R. Steven
                            Hicks.(11)
        10.26.1          -- Stock Purchase Agreement, dated June 12, 1997, by and
                            among Capstar Acquisition Company, Inc., Capstar
                            Partners, Patterson Broadcasting, Inc. and the selling
                            stockholders named therein (the "Patterson Stock Purchase
                            Agreement").(4)
        10.26.2          -- First Amendment to Patterson Stock Purchase
                            Agreement.(11)
        10.26.3          -- Second Amendment to Patterson Stock Purchase
                            Agreement.(15)
        10.26.4          -- Third Amendment to Patterson Stock Purchase
                            Agreement.(15)
        10.26.5          -- Fourth Amendment to Patterson Stock Purchase
                            Agreement.(15)
</TABLE>
<PAGE>   149
 
<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                    DESCRIPTION
        -------                                  -----------
<C>                      <S>
        10.27            -- Agreement and Plan of Merger, dated June 16, 1997, by and
                            among GulfStar Communications, Inc., Capstar
                            Broadcasting, CBC-GulfStar Merger Sub, Inc. and the
                            stockholders listed therein.(4)
        10.28.1          -- Agreement and Plan of Merger, dated July 23, 1997, by and
                            among OCC Acquisition Corporation, Osborn Communications
                            Corporation, and OCC Holding Corporation (the "Osborn
                            Merger Agreement").(16)
        10.28.2          -- First Amendment to Osborn Merger Agreement.(16)
        10.29.1          -- Agreement and Plan of Merger, dated as of December 9,
                            1996, by and among Benchmark Communications Radio Limited
                            Partnership, Benchmark Acquisition, Inc., Benchmark Radio
                            Acquisition Fund I Limited Partnership, Benchmark Radio
                            Acquisition Fund IV Limited Partnership, Benchmark Radio
                            Acquisition Fund VII Limited Partnership, Benchmark Radio
                            Acquisition Fund VIII Limited Partnership, Joe L. Mathis
                            IV, Bruce R. Spector, Capstar Partners and BCR Holding,
                            Inc. ("Benchmark Merger Agreement").(3)
        10.29.2          -- Letter Agreement Amending Benchmark Merger Agreement.(3)
        10.29.3          -- Letter Agreement amending Benchmark Merger Agreement.(3)
        10.29.4          -- Letter Agreement amending Benchmark Merger Agreement.(3)
        10.29.5          -- First Amendment to the Benchmark Merger Agreement.(17)
        10.29.6          -- Second Amendment to the Benchmark Merger Agreement.(17)
        10.30.1          -- Agreement and Plan of Merger, dated August 24, 1997, by
                            and among SBI Holding Corporation, SBI Radio Acquisition
                            Corporation and SFX Broadcasting, Inc. (the "SFX Merger
                            Agreement")(21)
        10.30.2          -- Amendment No. 1 to SFX Merger Agreement.(22)
        10.30.3          -- Amendment No. 2 to the SFX Merger Agreement.(23)
        21.1             -- List of Subsidiaries.*
        27.1             -- Financial Data Schedule.*
</TABLE>
 
---------------
 
  *  Filed herewith.
 
  +   Management contract or compensatory plan or arrangement.
 
 (1) Incorporated by reference to Commodore Media, Inc.'s ("Commodore")
     Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, File No.
     33-92732.
 
 (2) Incorporated by reference to Commodore's Quarterly Report on Form 10-Q for
     the quarter ended September 30, 1996, File No. 33-92732.
 
 (3) Incorporated by reference to Capstar Partners's Quarterly Report on Form
     10-Q for the quarter ended March 31, 1997, File No. 333-25638.
 
 (4) Incorporated by reference to Capstar Partners's Amendment No. 1 to
     Registration Statement on Form S-4, dated July 8, 1997, File No. 333-25638.
 
 (5) Incorporated by reference to Capstar Partners's Registration Statement on
     Form S-1, dated April 16, 1997, File No. 333-25263.
 
 (6) Incorporated by reference to Commodore's Registration Statement on Form
     S-4, dated July 26, 1995, File No. 33-92732.
 
 (7) Incorporated by reference to Commodore's Annual Report on Form 10-K for the
     year ended December 31, 1995, File No. 33-92732.
 
 (8) Incorporated by reference to Commodore's Quarterly Report on Form 10-Q for
     the quarter ended March 31, 1996, File No. 33-92732.
<PAGE>   150
 
 (9) Incorporated by reference to Commodore's Annual Report on Form 10-K for the
     year ended December 31, 1996, File No. 33-92732.
 
(10) Incorporated by reference to Commodore's Quarterly Report on Form 10-Q for
     the quarter ended March 31, 1997, File No. 33-92732.
 
(11) Incorporated by reference to Capstar Partners's Amendment No. 2 to
     Registration Statement on Form S-4, dated August 5, 1997, File No.
     333-25638.
 
(12) Incorporated by reference to Capstar Radio's Quarterly Report on Form 10-Q
     for the quarter ended June 30, 1997, File No. 33-92732.
 
(13) Incorporated by reference to Capstar Partners's Quarterly Report on Form
     10-Q for the quarter ended September 30, 1997, File No. 333-25638.
 
(14) Incorporated by reference to Capstar Radio's Current Report on Form 8-K,
     dated November 26, 1997, File No. 33-92732.
 
(15) Incorporated by reference to Capstar Radio's Current Report on Form 8-K,
     dated February 13, 1998, File No. 333-25683.
 
(16) Incorporated by reference to Commodore's Current Report on Form 8-K, dated
     March 6, 1997, File No. 33-92732.
 
(17) Incorporated by reference to Capstar Radio's Current Report on Form 8-K,
     dated August 6, 1997, File No. 33-92732.
 
(18) Incorporated by reference to Capstar Radio's Annual Report on Form 10-K for
     the year ended December 31, 1996, File No. 33-02732.
 
(19) Incorporated by reference to Capstar Radio's Registration Statement on Form
     S-4, dated August 6, 1997, File No. 33-02732.
 
(20) Incorporated by reference to Commodore's Registration Statement on Form
     S-4, dated July 26, 1995, File No. 33-02732.
 
(21) Incorporated by reference to SFX's Current Report on Form 8-K, dated August
     26, 1997, File No. 000-22486.
 
(22) Incorporated by reference to SFX's Annual Report on Form 10-K for the year
     ended December 31, 1997, File No. 000-22486.
 
(23) Incorporated by reference to SFX's Current Report on Form 8-K, dated
     February 17, 1998, File No. 000-22486.