<PAGE>   1
 
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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
 
                                   FORM 10-Q
 
[X]             QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
 
               FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
 
                                       OR
 
[ ]            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
 
             FOR THE TRANSITION PERIOD FROM           TO
 
                        COMMISSION FILE NUMBER 333-25683
 
                            ------------------------
 
                      CAPSTAR BROADCASTING PARTNERS, INC.
 
             (Exact name of Registrant as specified in its charter)
 
<TABLE>
<S>                                            <C>
                   DELAWARE                                      75-2672663
       (State or other jurisdiction of              (I.R.S. Employer Identification No.)
        incorporation or organization)
 
             600 CONGRESS AVENUE
                  SUITE 1400
                AUSTIN, TEXAS                                      78701
   (Address of principal executive offices)                      (Zip Code)
</TABLE>
 
                                 (512) 340-7800
              (Registrant's telephone number, including area code)
 
                            ------------------------
 
     Indicate by check mark whether Capstar Broadcasting Partners, Inc.
("Capstar Partners") (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.  Yes [X]  No [ ]
 
     Indicate the number of shares outstanding of each of Capstar Partner's
classes of common stock, as of the latest practicable date: As of November 6,
1998, 279,632,180 shares of Common Stock, par value $.01 per share ("Common
Stock"), of Capstar Partners were outstanding. As of such date, there was no
public market for the Common Stock.
 
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<PAGE>   2
 
                                   FORM 10-Q
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                         PAGE
                                                                        NUMBER
                                                                        ------
<S>       <C>                                                           <C>
          PART I -- FINANCIAL INFORMATION
Item 1.   Financial Statements:
          CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
          Consolidated Balance Sheets as of December 31, 1997 and
          September 30, 1998 (unaudited)..............................     3
          Consolidated Statements of Operations for the three months
          ended September 30, 1997 and 1998 (unaudited)...............     4
          Consolidated Statements of Operations for the nine months
          ended September 30, 1997 and 1998 (unaudited)...............     5
          Condensed Consolidated Statements of Cash Flows for the nine
          months ended September 30, 1997 and 1998 (unaudited)........     6
          Consolidated Statement of Stockholder's Equity for the nine
          months ended September 30, 1998 (unaudited).................     7
          Notes to Consolidated Financial Statements (unaudited)......     8
Item 2.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations...................................    20
Item 3.   Quantitative and Qualitative Disclosure About Market Risk...    29
 
          PART II -- OTHER INFORMATION
Item 1.   Legal Proceedings...........................................    30
Item 6.   Exhibits and Reports on Form 8-K............................    31
</TABLE>
 
     As used in this Quarterly Report on Form 10-Q, unless the context otherwise
requires, (i) "Capstar Partners" refers to Capstar Broadcasting Partners, Inc.,
(ii) the "Company" collectively refers to Capstar Partners and its subsidiaries,
(iii) "Capstar Radio" refers to Capstar Radio Broadcasting Partners, Inc., a
direct wholly-owned subsidiary of Capstar Partners and (iv) "Capstar
Broadcasting" refers to Capstar Broadcasting Corporation, the parent company of
Capstar Partners who owns all of the outstanding common stock of Capstar
Partners.
 
                                        2
<PAGE>   3
 
                        PART I -- FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS.
 
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
                                  (UNAUDITED)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,    SEPTEMBER 30,
                                                                  1997            1998
                                                              ------------    -------------
<S>                                                           <C>             <C>
Current assets:
  Cash and cash equivalents.................................   $   70,059      $   14,199
  Accounts receivable, net of allowance for doubtful
     accounts of $2,889 and $8,142 at December 31, 1997 and
     September 30, 1998, respectively.......................       40,350         114,313
  Prepaid expenses and other current assets.................        4,285          52,107
                                                               ----------      ----------
          Total current assets..............................      114,694         180,619
Property and equipment, net.................................      106,717         227,892
Intangibles and other, net..................................      881,545       4,229,507
Other non-current assets....................................        3,094          14,453
                                                               ----------      ----------
          Total assets......................................   $1,106,050      $4,652,471
                                                               ==========      ==========
                           LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
  Current portion of long-term debt.........................   $    1,388      $   17,020
  Accounts payable..........................................       13,641          11,517
  Accrued liabilities.......................................       16,826          59,298
  Income taxes payable......................................        2,417          56,916
                                                               ----------      ----------
          Total current liabilities.........................       34,272         144,751
Long-term debt, net of current portion......................      593,184       1,585,125
Due to Parent...............................................        1,082          11,360
Deferred income taxes.......................................      160,150       1,164,783
                                                               ----------      ----------
          Total liabilities.................................      788,688       2,906,019
                                                               ----------      ----------
Commitments and contingencies
Redeemable preferred stock, aggregate liquidation preference
  of $106,560 and $115,460 at December 31, 1997 and
  September 30, 1998, respectively..........................      101,493         110,646
Series E Cumulative Exchangeable Preferred Stock, aggregate
  liquidation preference of $129,948........................           --         144,973
Stockholder's equity:
  Common Stock, Class A, voting, $.01 par value, 300,000,000
     shares authorized, 279,632,180 shares issued and
     outstanding at December 31, 1997 and September 30,
     1998...................................................        2,796           2,796
  Common Stock, Class B, nonvoting, $.01 par value,
     50,000,000 shares authorized, none issued..............           --              --
  Additional paid-in capital................................      262,161       1,576,253
  Unearned compensation.....................................           --            (790)
  Accumulated deficit.......................................      (49,088)        (87,426)
                                                               ----------      ----------
          Total stockholder's equity........................      215,869       1,490,833
                                                               ----------      ----------
          Total liabilities and stockholder's equity........   $1,106,050      $4,652,471
                                                               ==========      ==========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                        3
<PAGE>   4
 
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                              FOR THE THREE MONTHS
                                                               ENDED SEPTEMBER 30,
                                                              ---------------------
                                                                1997        1998
                                                              ---------   ---------
<S>                                                           <C>         <C>
Gross broadcast revenue.....................................  $ 54,101    $181,220
Less: agency commissions....................................    (2,854)    (19,314)
                                                              --------    --------
          Net broadcast revenue.............................    51,247     161,906
                                                              --------    --------
Operating expenses:
  Programming, technical and news...........................    12,292      27,703
  Sales and promotion.......................................    14,723      40,221
  General and administrative................................     7,931      20,715
Corporate expenses..........................................     4,294       6,069
LMA fees paid...............................................       306          51
Corporate expenses -- noncash compensation..................        --      (8,796)
Depreciation and amortization...............................     7,956      31,050
                                                              --------    --------
Operating income............................................     3,745      44,893
Other (income) expense:
  Interest expense..........................................    12,154      36,218
  Interest income...........................................        --        (351)
  Other income, net.........................................     7,606         (28)
                                                              --------    --------
Income (loss) before benefit for income taxes and
  extraordinary item........................................   (16,015)      9,054
Benefit for income taxes....................................    (4,964)        256
Dividends and accretion of preferred stocks of subsidiary...        --       3,649
                                                              --------    --------
Income (loss) before extraordinary item.....................   (11,051)      5,149
Extraordinary item, loss on early extinguishment of debt....     1,442          --
                                                              --------    --------
          Net income (loss).................................   (12,493)      5,149
Dividends and accretion of preferred stocks.................     8,817       3,052
                                                              --------    --------
          Net income (loss) attributable to common stock....  $(21,310)   $  2,097
                                                              ========    ========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                        4
<PAGE>   5
 
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                               FOR THE NINE MONTHS
                                                               ENDED SEPTEMBER 30,
                                                               -------------------
                                                                 1997       1998
                                                               --------   --------
<S>                                                            <C>        <C>
Gross broadcast revenue.....................................   $125,949   $375,569
Less: agency commissions....................................     (9,545)   (37,666)
                                                               --------   --------
          Net broadcast revenue.............................    116,404    337,903
                                                               --------   --------
Operating expenses:
  Programming, technical and news...........................     27,889     63,413
  Sales and promotion.......................................     32,038     89,206
  General and administrative................................     18,968     51,516
Corporate expenses..........................................      9,399     13,746
LMA fees paid...............................................      2,437      3,372
Corporate expenses -- noncash compensation..................     10,818     13,673
Depreciation and amortization...............................     17,294     61,451
                                                               --------   --------
Operating (loss) income.....................................     (2,439)    41,526
Other (income) expense:
  Interest expense..........................................     29,393     73,064
  Interest income...........................................         --     (1,636)
  Other income, net.........................................      4,155        (96)
                                                               --------   --------
Loss before benefit for income taxes and extraordinary
  item......................................................    (35,987)   (29,806)
Benefit for income taxes....................................     (7,802)    (4,825)
Dividends and accretion on preferred stock of subsidiary....         --      6,052
                                                               --------   --------
Loss before extraordinary item..............................    (28,185)   (31,033)
Extraordinary item, loss on early extinguishment of debt....      2,293      7,305
                                                               --------   --------
          Net loss..........................................    (30,478)   (38,338)
Dividends and accretion on preferred stocks.................     10,510      9,154
                                                               --------   --------
          Net loss attributable to common stock.............   $(40,988)  $(47,492)
                                                               ========   ========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                        5
<PAGE>   6
 
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                FOR THE NINE MONTHS
                                                                ENDED SEPTEMBER 30,
                                                              -----------------------
                                                                1997         1998
                                                              ---------   -----------
<S>                                                           <C>         <C>
Net cash (used in) provided by operating activities.........  $  (3,928)  $    70,608
                                                              ---------   -----------
Cash flows from investing activities:
  Proceeds on sale of broadcasting property.................     35,932       229,180
  Purchase of property and equipment........................     (8,208)      (28,005)
  Payments for acquisitions, net of cash acquired...........   (429,565)   (1,425,297)
  Payments for pending acquisitions.........................     (8,132)      (11,942)
  Other investing activities, net...........................        151        (5,494)
                                                              ---------   -----------
          Net cash used in investing activities.............   (409,822)   (1,241,558)
                                                              ---------   -----------
Cash flows from financing activities:
  Proceeds from long-term debt and credit facility..........    431,316       995,200
  Repayment of long-term debt and credit facility...........   (199,975)     (827,952)
  Payments of financing related costs.......................    (24,992)       (8,887)
  Proceeds from issuance of common stock....................    115,737            --
  Proceeds from issuance of preferred stock, net............     95,071            --
  Equity contributions by parent............................         --     1,339,165
  Redemption of preferred stock.............................       (811)     (135,207)
  Purchase of common stock..................................       (175)           --
  Dividends paid on common stock............................       (765)     (237,722)
  Dividends paid on preferred stock.........................         --        (9,507)
                                                              ---------   -----------
          Net cash provided by financing activities.........    415,406     1,115,090
                                                              ---------   -----------
Net increase (decrease) in cash and cash equivalents........      1,656       (55,860)
Cash and cash equivalents at beginning of period............      9,821        70,059
                                                              ---------   -----------
Cash and cash equivalents at end of period..................  $  11,477   $    14,199
                                                              =========   ===========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                        6
<PAGE>   7
 
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
                 CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                   CLASS A                CLASS B
                                 COMMON STOCK          COMMON STOCK
                             --------------------   -------------------   ADDITIONAL                                    TOTAL
                               NUMBER       PAR      NUMBER       PAR      PAID-IN       UNEARNED     ACCUMULATED   STOCKHOLDER'S
                              OF SHARES    VALUE    OF SHARES    VALUE     CAPITAL     COMPENSATION     DEFICIT        EQUITY
                             -----------   ------   ---------   -------   ----------   ------------   -----------   -------------
<S>                          <C>           <C>      <C>         <C>       <C>          <C>            <C>           <C>
Balance at January 1,
  1998.....................  279,632,180   $2,796         --         --   $  262,161         --        $(49,088)     $  215,869
  Equity contributions from
    Parent.................           --       --         --         --    1,581,852         --              --       1,581,852
  Dividends................           --       --         --         --     (272,260)        --              --        (272,260)
  Dividends and accretion
    on Preferred Stock.....           --       --         --         --       (9,154)        --              --          (9,154)
  Unearned compensation
    related to granting of
    employee stock
    options................           --       --         --         --          878       (878)             --              --
  Compensation expense.....           --       --         --         --       12,776         88              --          12,864
  Net loss.................           --       --         --         --           --         --         (38,338)        (38,338)
                             -----------   ------    -------    -------   ----------      -----        --------      ----------
Balance at September 30,
  1998.....................  279,632,180   $2,796         --         --   $1,576,253      $(790)       $(87,426)     $1,490,833
                             ===========   ======    =======    =======   ==========      =====        ========      ==========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                        7
<PAGE>   8
 
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
                                  (UNAUDITED)
 
NOTE 1 -- BASIS OF PRESENTATION
 
     Information with respect to the three and nine month periods ended
September 30, 1997 and 1998 is unaudited. The accompanying unaudited
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the unaudited interim consolidated financial
statements contain all adjustments considered necessary for a fair presentation.
Operating results for the three and nine month periods ended September 30, 1998
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998, or for any other interim period. For further
information, refer to the consolidated financial statements and footnotes
thereto for Capstar Partners included in Form 10-K for the year ended December
31, 1997.
 
     The consolidated financial statements include the accounts of Capstar
Partners, and its direct and indirect wholly-owned subsidiaries. The direct
wholly-owned subsidiary of Capstar Partners is Capstar Radio. Capstar
Broadcasting owns all of the outstanding common stock of Capstar Partners. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
 
NOTE 2 -- CHANCELLOR MERGER AGREEMENT
 
     Capstar Broadcasting has entered into an Agreement and Plan of Merger dated
August 26, 1998 (the "Chancellor Merger Agreement"), with Chancellor Media and
CBC Acquisition Company, Inc., a wholly-owned subsidiary of Capstar
Broadcasting, pursuant to which Chancellor Media will be merged (the "Chancellor
Merger") with and into CBC Acquisition Company, Inc. and will become a
wholly-owned subsidiary of Capstar Broadcasting. The Chancellor Merger Agreement
provides, among other things, that upon the consummation of the Chancellor
Merger, Capstar Broadcasting will be renamed "Chancellor Media Corporation" (as
such, the "Parent") and (i) each share of Class A Common Stock and Class C
Common Stock issued and outstanding immediately prior to the effective time of
the Chancellor Merger (the "Effective Time") (other than shares of Class A
Common Stock and Class C Common Stock held as treasury shares) will be
reclassified, changed and converted into 0.4800 of a validly issued, fully paid
and nonassessable share of the common stock, par value $.01 per share ("Parent
Voting Common Stock"), of the Parent, such exchange ratio being subject to
adjustment as described in the Chancellor Merger Agreement, (ii) each share of
Class B Common Stock issued and outstanding immediately prior to the Effective
Time (other than shares of Class B Common Stock held as treasury shares) will be
reclassified, changed and converted into 0.4800 of a validly issued, fully paid
and nonassessable share of nonvoting common stock, par value $.01 per share
("Parent Nonvoting Common Stock"), of the Parent, such exchange ratio being
subject to adjustment as described in the Chancellor Merger Agreement, (iii)
each share of common stock, par value $.01 per share ("Chancellor Common
Stock"), of Chancellor Media issued and outstanding immediately prior to the
Effective Time (other than shares of Chancellor Common Stock held as treasury
shares) will be converted into the right to receive one share of Parent Voting
Common Stock, and (iv) each share of 7% Convertible Preferred Stock, par value
$.01 per share, and $3.00 Convertible Exchangeable Preferred Stock, par value
$.01 per share, in each case of Chancellor Media, will be converted into the
right to receive one share of 7% Convertible Preferred Stock, par value $.01 per
share ("Parent 7% Convertible Preferred Stock"), and $3.00 Convertible
Exchangeable Preferred Stock, par value $.01 per share (collectively with the
Parent 7% Convertible Preferred Stock, the "Parent Convertible Preferred
Stock"), in each case of the Parent.
 
                                        8
<PAGE>   9
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Affiliates of Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse") own
approximately 65% of the equity of Capstar Broadcasting on a fully-diluted basis
and, after the Chancellor Merger, will own approximately 26% of the equity of
the Parent on a fully-diluted basis after giving effect to the consummation of
Chancellor Media's pending acquisition of Ranger Equity Holdings Corporation,
the parent company of LIN Television Corporation.
 
     Consummation of the Chancellor Merger is subject to various conditions
fully set forth in the Chancellor Merger Agreement, including, without
limitation, the approval of the Chancellor Merger by a majority of the shares of
Class A Common Stock that are present and entitled to vote on the Chancellor
Merger at a stockholders meeting to be called by Capstar Broadcasting and which
are beneficially owned by a holder other than Thomas O. Hicks, Capstar
Broadcasting's Chairman of the Board, R. Steven Hicks, Capstar Broadcasting's
Chief Executive Officer, or any of their respective affiliates, the expiration
or termination of any applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the receipt of regulatory
approval from the Federal Communications Commission.
 
     Thomas O. Hicks, R. Steven Hicks and Capstar Broadcasting Partners, L.P.,
an affiliate of Hicks Muse (collectively, the "Stockholders"), entered into a
Voting Agreement dated August 26, 1998 (the "Voting Agreement"), with Chancellor
Media, pursuant to which each of the Stockholders has agreed, among other
things, to vote in favor of the Chancellor Merger, the Chancellor Merger
Agreement and any other transactions contemplated by the Chancellor Merger
Agreement.
 
     The foregoing description of the Chancellor Merger Agreement and the Voting
Agreement does not purport to be complete and is qualified in its entirety by
the copies of the Chancellor Merger Agreement and Voting Agreement incorporated
herein by reference as exhibits to this Quarterly Report on Form 10-Q.
 
     On September 9, 1998, Capstar Broadcasting Corporation was notified of an
action filed on behalf of all owners of securities of Chancellor Media against
Chancellor Media, Hicks, Muse, Tate & Furst, Inc. ("Hicks, Muse") and the
individual directors of Hicks, Muse in the Court of Chancery of the State of
Delaware in and for New Castle County, Delaware. While the complaint does not
name Capstar Broadcasting as a defendant, the complaint alleges that Chancellor
Media and its directors breached their duties to the alleged class by entering
into an "overly generous offer for Capstar assets." The action is relevant to
Capstar Broadcasting because inter alia, the plaintiff seeks an injunction
prohibiting the proposed Chancellor Merger with Capstar Broadcasting. As Capstar
Broadcasting is not a defendant in this action, Capstar Broadcasting has no
obligation to appear or participate.
 
NOTE 3 -- RECENT ACCOUNTING PRONOUNCEMENTS
 
     In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Restated 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.
This pronouncement is effective for financial statements beginning after
December 15, 1997.
 
     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
 
                                        9
<PAGE>   10
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
SFAS Nos. 87, 88 or 106. This pronouncement is effective for financial
statements beginning after December 15, 1997.
 
     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This pronouncement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999.
 
     Management does not believe the implementation of these accounting
pronouncements will have a material effect on its consolidated financial
statements.
 
NOTE 4 -- INITIAL PUBLIC OFFERING BY CAPSTAR BROADCASTING
 
     On May 29, 1998 Capstar Broadcasting completed an initial public offering
(the "Offering") in which Capstar Broadcasting sold 31,000,000 shares of its
Class A Common Stock, par value $.01 per share ("Class A Common Stock"), at
$19.00 per share for net proceeds to Capstar Broadcasting of $551,308 after
deducting underwriting discounts and commissions and offering expenses of
$37,692. The shares sold by Capstar Broadcasting represented approximately 28.8%
of the outstanding shares of Capstar Broadcasting on May 29, 1998. Capstar
Broadcasting contributed the net proceeds from the Offering to Capstar Partners
which then contributed the net proceeds from the Offering to Capstar Radio.
Capstar Radio used this contribution to fund a portion of the acquisition of SFX
Broadcasting, Inc., a Delaware corporation ("SFX") as discussed in Note 5 below.
 
NOTE 5 -- ACQUISITIONS AND DISPOSITIONS OF BROADCASTING PROPERTIES
 
  SFX Acquisition and Related Transactions
 
     On May 29, 1998, SBI Holding Corporation, a Delaware corporation ("SFX
Parent"), acquired SFX, which has been renamed Capstar Communications, Inc.
("CCI"). The acquisition was effected through the merger (the "SFX Merger") of
SBI Radio Acquisition Corporation, a Delaware corporation and a wholly-owned
subsidiary of SFX Parent ("Sub"), with and into SFX, with SFX as the surviving
corporation. The acquisition of SFX by SFX Parent resulted in a change of
control of SFX. As a result of the SFX Merger, SFX became a direct wholly-owned
subsidiary of Capstar Radio. The total consideration paid by the Company in the
SFX Merger was approximately $1,500,000 (the "SFX Merger Consideration"),
including the repayment of the outstanding balance under the existing credit
facility of SFX (the "SFX Credit Facility") of approximately $313,000.
Consummation of the SFX Merger and related transactions increased the Company's
portfolio of stations by 67 owned and operated radio stations (50 FM and 17 AM)
and two radio stations on which the Company sells commercial time.
 
     The SFX Merger and other related transactions, including (i) certain
station acquisitions and dispositions completed contemporaneously with the SFX
Merger (as discussed below), (ii) the repayment of outstanding indebtedness of
SFX under the SFX Credit Facility, (iii) the redemption of approximately
$154,000 aggregate principal amount of CCI's 10 3/4% Senior Subordinated Notes
Due 2006 (the "10 3/4% CCI Notes") (as discussed in Note 9), and (iv) the
redemption of approximately $119,600 aggregate liquidation preference of CCI's
12 5/8% Series E Cumulative Exchangeable Preferred Stock, par value $.01 per
share ("CCI Series E Preferred Stock") (as discussed in Note 9), were financed
with (A) the net proceeds from the Offering (B) borrowings of $590,600 (the
"Capstar Loan") under the Capstar Credit Facility (as defined in Note 9), (C)
borrowings of $150,000 from Chancellor Media Corporation of Los Angeles
("Chancellor Media"), an affiliate, and (D) net proceeds of approximately
$221,429 from sales of certain assets.
 
     On February 20, 1998, Capstar Broadcasting and Chancellor Media entered
into a Letter Agreement (the "Chancellor Exchange Agreement") pursuant to which
Capstar Broadcasting agreed to exchange
 
                                       10
<PAGE>   11
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
11 SFX stations in the Dallas, Houston, San Diego and Pittsburgh markets
("Chancellor Exchange Stations") having an aggregate deemed market value of
$637,500 for certain stations to be acquired by Chancellor Media during the
three-year period ending February 20, 2001 (the "Exchange Period"). SFX station
KODA-FM, which is a Chancellor Exchange Station, was exchanged for certain radio
stations in the Austin, Texas and the Jacksonville, Florida markets concurrently
with the consummation of the SFX Merger. The remaining Chancellor Exchange
Stations will be exchanged for mid-sized market radio stations to be identified
by Capstar Broadcasting and paid for by Chancellor Media. Capstar Broadcasting
and Chancellor Media intend for the exchange transactions to qualify as
like-kind exchanges under Section 1031 of the Internal Revenue Code of 1986, as
amended (the "Code"). Capstar Broadcasting, however, bears all risks related to
the tax treatment of the exchanges. Capstar Broadcasting has agreed not to
solicit, initiate or encourage the submission of proposals for the acquisition
of the Chancellor Exchange Stations or to participate in any discussions for
such purpose during the Exchange Period, other than as contemplated under the
Chancellor Exchange Agreement. Concurrently with the consummation of the SFX
Merger, Chancellor Media began providing services to the Chancellor Exchange
Stations (other than KODA-FM, which was acquired, via a like-kind exchange by
Chancellor Media) pursuant to separate local marketing agreements ("LMAs") until
such stations are exchanged. Chancellor Media retains the advertising revenues
it generates while it provides services to the Chancellor Exchange Stations
under such LMAs. As of September 30, 1998, the Company earned LMA fees of
approximately $16,500 from the Chancellor Exchange Stations. The LMA fees earned
by the Company will decrease as Chancellor Exchange Stations are exchanged.
During the pendency of the Chancellor Merger (as defined), the Company does not
anticipate effecting any exchanges with Chancellor Media.
 
     On May 21, 1998, SFX completed the acquisition of three radio stations (two
FM and one AM) in the Nashville, Tennessee market from Sinclair Broadcasting
Group for an aggregate purchase price of approximately $35,000 in cash (the
"Nashville Purchase Price"). SFX funded the Nashville Purchase Price with excess
cash on hand.
 
     On May 29, 1998, CCI exchanged station KODA-FM in Houston, Texas for
Chancellor Media radio stations WAPE-FM and WFYV-FM in Jacksonville, Florida and
approximately $90,250 in cash (the "KODA Exchange"). In an exchange under
section 1031 of the Code, the indirect, wholly-owned subsidiaries of CCI,
through a qualified intermediary, used the $90,250 in cash received from
Chancellor Media to acquire radio stations KASE-FM, KVET-AM and KVET-FM in
Austin, Texas. The deemed value of the KODA Exchange was $143,250.
 
     On May 29, 1998, due to governmental restrictions on multiple station
ownership, the Company completed the sale of the assets of four radio stations
(three FM and one AM) in the Greenville, South Carolina market for approximately
$35,000 in cash to Clear Channel Radio, Inc.
 
     On May 29, 1998, due to governmental restrictions on multiple station
ownership, the Company assigned the assets of four radio stations (two FM and
two AM) in the Fairfield, Connecticut market, subject to a right of repurchase,
with an aggregate fair market value at such date of approximately $15,000 to a
trust, whose trustee is Henry M. Rivera (the "Trustee") and whose beneficiary is
Capstar Broadcasting. Concurrently with such assignment, the Company contributed
its right to repurchase such assets to Upper Fairfield Radio, L.L.C. ("Upper
Fairfield") in exchange for all of the outstanding ownership interests in Upper
Fairfield. Subject to approval by the Federal Communications Commission ("FCC"),
it is expected that the Trustee will sell the assets to Upper Fairfield for
approximately $14,900 and the Company will sell its voting interest in Upper
Fairfield to BBR II, L.L.C. for $150. After the sale of the assets to Upper
Fairfield, the Trustee will distribute the proceeds to the Company. The Company
will retain a non-voting interest in Upper Fairfield.
 
     On May 29, 1998, due to governmental restrictions on multiple station
ownership, CCI completed the sale of the assets of one FM radio station in the
Daytona Beach, Florida market for consideration of approximately $11,500 in cash
to Clear Channel Metroplex, Inc. and Clear Channel Metroplex Licensee, Inc.
                                       11
<PAGE>   12
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     On May 29, 1998, due to governmental restrictions on multiple station
ownership, CCI completed the sale of the assets of four radio stations (three FM
and one AM) in the Long Island, New York market for an aggregate sale price of
$46,000 in cash to Cox Radio, Inc.
 
     On May 29, 1998, due to governmental restrictions on multiple station
ownership, CCI completed the sale of the assets of one FM radio station in the
Houston, Texas market for $54,000 in cash to HBC Houston, Inc. and HBC Houston
License Corporation. Pursuant to an agreement with Chancellor Media, CCI paid
50% of the sale proceeds in excess of $50,000, approximately $1,700, to
Chancellor Media.
 
  Other Acquisitions and Dispositions
 
     In addition to the SFX Merger and the other related transactions described
above, during the nine months ended September 30, 1998, the Company acquired 27
AM and 50 FM radio stations and related broadcast equipment through several
acquisitions, 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 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.
 
     Acquisition activity during the nine months ended September 30, 1998 was as
follows. All consideration paid for the acquisitions scheduled below consisted
solely of cash and promissory notes, except for one of the stations acquired
from Americom, the Jacor acquisition and the Boswell acquisition which were
exchanged for like-kind assets.
 
<TABLE>
<CAPTION>
                                          STATIONS
                                          ACQUIRED
                                         -----------     DATE OF
TRANSACTION                              AM      FM    ACQUISITION   PURCHASE OF       COST
-----------                              ---     ---   -----------   ------------   ----------
<S>                                      <C>     <C>   <C>           <C>            <C>
Patterson Broadcasting.................  14      25    January       Common Stock   $  227,186
Quass Broadcasting.....................   1       2    January       Common Stock       16,281
Knight Radio...........................   3       5    January       Assets             66,180
East Penn Broadcasting.................   1      --    January       Assets              2,010
Commonwealth Broadcasting..............   1       2    February      Assets              5,514
Brantly Broadcast Associates...........  --       1    February      Assets              1,735
KOSO...................................  --       1    April         Assets              8,472
Americom...............................   1       3    April         Assets             26,662
KDOS LP................................   1       1    April         Assets              3,532
Grant..................................   1      --    May           Assets              3,440
SFX....................................  17      50    May           Common Stock    1,274,656
Class Act..............................  --       1    June          Assets              1,068
KRNA...................................  --       1    June          Assets              6,398
University of Alaska...................  --       1    June          Assets                221
ARS....................................   2       2    July          Assets              6,505
Dynacom................................  --       2    July          Assets              5,923
Jacor..................................   1      --    August        Assets              5,000
Ogallala Broadcasting..................   1       2    September     Assets              3,850
Boswell................................  --       1    September     Assets             11,750
                                                                                    ----------
                                                                                    $1,676,383
                                                                                    ==========
</TABLE>
 
     Additionally, in April 1998, the Company acquired Prophet Systems, Inc., a
manufacturer, seller and distributor of combination hardware-software devices
which permit the remote programming of radio station
 
                                       12
<PAGE>   13
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
broadcasts, for aggregate consideration of approximately $15,000 in cash.
Pursuant to the asset purchase agreement, Capstar Broadcasting will issue
285,714 shares of Class A Common Stock upon the satisfaction of certain
conditions contained in the asset purchase agreement.
 
     The acquisitions during the nine months ended September 30, 1998 are
summarized in the aggregate as follows:
 
<TABLE>
<CAPTION>
                                                                  FOR THE NINE
                                                                  MONTHS ENDED
                                                               SEPTEMBER 30, 1998
                                                               ------------------
<S>                                                            <C>
Consideration:
  Cash and notes............................................       $1,583,053
  Acquisition costs.........................................           72,149
  Assets exchanged..........................................           21,181
                                                                   ----------
          Total.............................................       $1,676,383
                                                                   ==========
Assets acquired and liabilities assumed:
  Cash......................................................       $   16,488
  Accounts receivable.......................................           89,642
  Prepaid expenses and other................................          111,938
  Property and equipment....................................          125,360
  Intangible assets.........................................        3,614,399
  Accounts payable..........................................          (11,960)
  Accrued liabilities.......................................         (135,257)
  Deferred income taxes.....................................       (1,038,369)
  Long-term debt............................................         (812,253)
  Preferred stock...........................................         (283,605)
                                                                   ----------
          Total.............................................       $1,676,383
                                                                   ==========
</TABLE>
 
     In addition to the SFX Merger and other related transactions described
above, during the nine months ended September 30, 1998, the Company disposed of
6 AM and 11 FM radio stations and related broadcast equipment through several
dispositions for aggregate consideration of approximately $116,369, including
$85,038 in cash, $10,150 in notes and $21,181 in broadcast properties. The
carrying value of net assets sold related to these stations approximated the
consideration received.
 
     The following unaudited proforma summary presents the consolidated results
of operations for the nine months ended September 30, 1997 and 1998 as if the
acquisitions and dispositions completed through September, 1998 had occurred at
the beginning of 1997. 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.
 
<TABLE>
<CAPTION>
                                                              FOR THE NINE MONTHS
                                                              ENDED SEPTEMBER 30,
                                                              -------------------
                                                                1997       1998
                                                              --------   --------
<S>                                                           <C>        <C>
Net revenue.................................................  $415,415   $459,001
                                                              ========   ========
Loss before extraordinary item..............................   (91,763)   (79,016)
                                                              ========   ========
Net loss....................................................   (94,056)   (86,321)
                                                              ========   ========
</TABLE>
 
                                       13
<PAGE>   14
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Subsequent to September 30, 1998, the Company acquired 1 AM and 3 FM radio
stations and related broadcast equipment through several acquisitions for
aggregate consideration in cash of approximately $24,935. The acquisitions were
funded with borrowings under the Capstar Credit Facility (as defined) and
available cash on hand.
 
     On July 23, 1998, Capstar Radio agreed to acquire Triathlon Broadcasting
Corporation ("Triathlon"; Nasdaq: TBCOA, TBCOL) in a transaction valued at
approximately $190,000. Capstar Radio will pay approximately $130,000 in cash to
acquire all of the outstanding shares of common and preferred stock of Triathlon
and will assume approximately $60,000 of debt. Triathlon owns and operates or
programs 32 stations in six markets: Wichita, Kansas (4 FM and 2 AM); Colorado
Springs, Colorado (2 FM/2 AM); Lincoln, Nebraska (4 FM); Omaha, Nebraska (3 FM/1
AM); Spokane, Washington (5 FM/3 AM); and Tri-Cities, Washington (4 FM/2 AM).
Triathlon also owns Pinnacle Sports Productions, L.L.C., a regional sports
network that controls the rights to University of Nebraska football and other
sports events.
 
     Additionally, the Company has entered into five agreements to acquire 17
additional radio stations (4 AM and 13 FM) and related broadcast equipment for
aggregate consideration in cash of approximately $29,200. The Company currently
operates 13 of these stations under either LMA's or joint sales agreements.
 
NOTE 6 -- PROPERTY AND EQUIPMENT
 
     Property and equipment consists of the following:
 
<TABLE>
<CAPTION>
                                                     DEPRECIABLE
                                     DEPRECIATION       LIFE       DECEMBER 31,   SEPTEMBER 30,
                                        METHOD         (YEARS)         1997           1998
                                     -------------   -----------   ------------   -------------
<S>                                  <C>             <C>           <C>            <C>
Buildings and improvements.........  Straight-line      5-20         $ 17,006       $ 39,813
Broadcasting and other Equipment...  Straight-line      3-20           85,481        192,270
Equipment under capital lease
  Obligations......................  Straight-line       3-5            1,356          1,012
                                                                     --------       --------
                                                                      103,843        233,095
Accumulated depreciation and
  Amortization.....................                                   (10,336)       (22,189)
                                                                     --------       --------
                                                                       93,507        210,906
Land...............................                                    13,210         16,986
                                                                     --------       --------
                                                                     $106,717       $227,892
                                                                     ========       ========
</TABLE>
 
     Depreciation and amortization expense of property and equipment for the
nine months ended September 30, 1997 and 1998 was approximately $6,398 and
$12,165, respectively.
 
                                       14
<PAGE>   15
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 7 -- INTANGIBLES
 
     Intangibles consist of the following:
 
<TABLE>
<CAPTION>
                                                    AMORTIZABLE
                                   AMORTIZATION        LIFE       DECEMBER 31,   SEPTEMBER 30,
                                      METHOD          (YEARS)         1997           1998
                                  ---------------   -----------   ------------   -------------
<S>                               <C>               <C>           <C>            <C>
FCC licenses....................  Straight-line          40         $861,502      $4,163,666
Goodwill........................  Straight-line          40            2,784          65,844
Noncompete agreements...........  Straight-line         1-3            6,115          14,282
Organization costs..............  Straight-line           5            3,040             453
Deferred financing costs........  Interest Method        --           21,358          26,364
Other...........................  Straight-line         3-5            6,700           8,608
                                                                    --------      ----------
                                                                     901,499       4,279,217
Accumulated amortization........                                     (25,888)        (70,152)
                                                                    --------      ----------
                                                                     875,611       4,209,065
Pending acquisition costs.......                                       5,934          20,442
                                                                    --------      ----------
                                                                    $881,545      $4,229,507
                                                                    ========      ==========
</TABLE>
 
     Amortization expense of intangible assets for the nine months ended
September 30, 1997 and 1998 was approximately $10,896 and $49,286, respectively.
 
NOTE 8 -- ACCRUED LIABILITIES
 
     Accrued liabilities consists of the following:
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,   SEPTEMBER 30,
                                                                  1997           1998
                                                              ------------   -------------
<S>                                                           <C>            <C>
Accrued compensation........................................    $ 4,252         $ 2,125
Accrued acquisition costs...................................      5,284           5,118
Accrued interest............................................        960          20,533
Accrued commissions.........................................      2,403           9,340
Barter payable..............................................      1,082           4,531
Deferred revenues...........................................        537           2,476
Accrued music license fees..................................        425           1,719
Other.......................................................      1,883          13,456
                                                                -------         -------
                                                                $16,826         $59,298
                                                                =======         =======
</TABLE>
 
                                       15
<PAGE>   16
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 9 -- LONG-TERM DEBT AND REDEEMABLE PREFERRED STOCK
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,   SEPTEMBER 30,
                                                                  1997           1998
                                                              ------------   -------------
<S>                                                           <C>            <C>
Capstar Credit Facility.....................................    $141,700      $  886,000
12 3/4% Capstar Partners Notes, $277,000 principal,
  including unamortized discount of $93,728, due 2009.......     166,991         183,272
9 1/4% Capstar Radio Notes, $200,000 principal, including
  unamortized discount of $724, due 2007....................     199,238         199,276
13 1/4% Capstar Radio Notes.................................      79,816              --
10 3/4% CCI Notes, $450,000 principal, including unamortized
  premium of $30,100, due 2006..............................          --         324,234
Capital lease obligation and other notes payable at Various
  interest rates............................................       6,827           9,363
                                                                --------      ----------
                                                                 594,572       1,602,145
Less current portion........................................      (1,388)        (17,020)
                                                                --------      ----------
                                                                $593,184      $1,585,125
                                                                ========      ==========
</TABLE>
 
     In connection with the SFX Merger, Capstar Radio, as the borrower, entered
into a new credit agreement, dated as of May 29, 1998 (the "Capstar Credit
Facility"), with Capstar Broadcasting, Capstar Partners, and the financial
institutions party thereto. The Capstar Credit Facility consists of a $500,000
revolving loan, a $450,000 term loan facility (the "A Term Loan") and a $400,000
term loan (the "B Term Loan"). The Capstar Credit Facility also contains
mechanisms that permit Capstar Radio to request additional term loans and
revolving credit loans in an aggregate amount up to $550,000; provided, however,
that all such additional loans are subject to future commitment availability and
approval from the banks and are not currently available under the Capstar Credit
Facility. The revolving loan matures on November 30, 2004. The A Term Loan
provides for scheduled loan repayments from August 31, 1999 to November 30,
2004. The B Term Loan provides for scheduled loan repayments from August 31,
1998 to May 31, 2005. Up to $150,000 of the revolving loan commitment is
available to Capstar Radio for the issuance of letters of credit. As of
September 30, 1998, $451,590 was available for borrowing under the Capstar
Credit Facility. Due to the Company replacing its previous credit facility with
the Capstar Credit Facility, an extraordinary loss, net of tax, of approximately
$2,605 was recognized in the second quarter of 1998.
 
     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 September 30, 1998 was 7.9%. Capstar
Radio pays fees ranging from 0.25% 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 Capstar 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 Capstar Credit
Facility limits the ability of Capstar Radio and its subsidiaries to make
additional acquisitions in excess of $200,000 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 Capstar Credit
Facility, Capstar Radio is also required to satisfy certain financial covenants,
which require Capstar Radio and its subsidiaries to
 
                                       16
<PAGE>   17
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
maintain specified financial ratios and to comply with certain financial tests,
such as maximum leverage ratio and minimum consolidated EBITDA to consolidated
net cash interest expense.
 
     Capstar Radio has collateralized the Capstar Credit Facility by granting a
first priority perfected pledge of Capstar Radio's assets, including the capital
stock of its subsidiaries, excluding the assets of CCI. Capstar Partners,
Capstar Broadcasting and all of the direct and indirect subsidiaries of Capstar
Partners (other than CCI) have guaranteed the Capstar Credit Facility and have
collateralized their guarantees by granting a first priority perfected pledge of
substantially all of their assets.
 
     After the consummation of the SFX Merger, CCI remained liable for the
$450,000 in aggregate principal amount of the 10 3/4% CCI Notes. Interest is
payable semi-annually on May 15 and November 15 of each year until maturity on
May 15, 2006. The notes are unsecured obligations of CCI and are subordinate to
all senior debt of CCI.
 
     All 2,392,022 shares of CCI Series E Preferred Stock remained outstanding
after the consummation of the Merger. Dividends on the CCI Series E Preferred
Stock accumulate from the date of issuance at the rate per share of $12.625 per
annum, and are payable semi-annually on January 15 and July 15 of each year.
Dividends may be paid, at CCI's option, on any dividend payment date occurring
on or before January 15, 2002, either in cash or in additional shares of CCI
Series E Preferred Stock having a liquidation preference equal to the amount of
such dividend. Subject to certain conditions, the shares of the CCI Series E
Preferred Stock are exchangeable in whole or in part, on a pro rata basis, at
the option of CCI, on any dividend payment date, for CCI's 12 5/8% Senior
Subordinated Exchangeable Debentures due 2006 ("CCI Exchange Notes"), provided
that immediately after giving effect to any partial exchange, there shall be
outstanding CCI Series E Preferred Stock with an aggregate liquidation
preference of not less than $50,000 and not less than $50,000 in aggregate
principal amount of CCI Exchange Notes. CCI is required, subject to certain
conditions, to redeem all of the CCI Series E Preferred Stock outstanding on
October 31, 2006.
 
     On March 30, 1998, Capstar Radio announced an offer to purchase for cash
any and all of its $76,808 in aggregate principal amount of its 13 1/4% Senior
Subordinated Notes due 2003 (the "13 1/4% Capstar Radio Notes"). On April 28,
1998, Capstar Radio purchased all of the outstanding 13 1/4% Capstar Radio Notes
for an aggregate purchase price of $90,200, including a $10,700 purchase premium
and $2,700 of accrued interest, resulting in an extraordinary loss, net of tax,
of approximately $4,700, which was recognized in the second quarter of 1998.
 
     On July 3, 1998, (i) pursuant to the terms of the indenture governing the
10 3/4% CCI Notes, CCI redeemed $154,000 aggregate principal amount of the
10 3/4% CCI Notes for an aggregate purchase price of $172,800 including a
$16,600 redemption premium and $2,200 of accrued interest (The carrying value of
the 10 3/4% CCI Notes approximate their fair value at the date of the SFX
Merger.) and (ii) pursuant to the terms of the Certificate of Designation that
governs the CCI Series E Preferred Stock (the "CCI Certificate of Designation"),
CCI redeemed $119,600 aggregate liquidation preference, or 1,196,011 shares, of
the CCI Series E Preferred Stock for an aggregate purchase price of $141,800,
including a $15,100 redemption premium and $7,000 of accrued dividends (The
carrying value of the CCI Series E Preferred Stock approximated its fair value
on the date of the SFX Merger.).
 
     The SFX Merger resulted in a change of control under the indentures
governing the 10 3/4% CCI Notes and CCI's 11 3/8% Senior Subordinated Notes due
2000 (the "CCI 11 3/8% Notes") and under the CCI Certificate of Designation.
Pursuant to change of control offers to acquire all of the outstanding 10 3/4%
CCI Notes, CCI 11 3/8% Notes and CCI Series E Preferred Stock, each of which
commenced on June 8, 1998, CCI purchased on July 10, 1998 (i) $1,866 aggregate
principal amount of the 10 3/4% CCI Notes for an aggregate purchase price of
$1,915, including a $18 purchase premium and $31 of accrued interest (The
carrying value of the 10 3/4% CCI Notes approximated their fair value at the
date of the SFX merger.) and (ii) $500 aggregate liquidation preference, or
5,004 shares, of the CCI Series E Preferred Stock for an aggregate
 
                                       17
<PAGE>   18
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
purchase price of $536, including a $5 purchase premium and $31 of accrued
dividends (The carrying value of the CCI Series E preferred Stock approximated
its fair value on the date of the SFX Merger.). No 11 3/8% CCI Notes were
tendered for repurchase.
 
NOTE 10 -- STOCKHOLDER'S EQUITY
 
     During the nine months ended September 30, 1998, Capstar Broadcasting
contributed $1,581,852 in cash to Capstar Partners, including $551,308 of the
net proceeds from the Offering. The proceeds from Capstar Broadcasting's capital
contributions were used in part to fund a portion of the acquisitions described
in Note 4. Additionally, Capstar Broadcasting contributed assets in the amount
of $224,187 to Capstar Partners representing the carrying value and fair value
of numerous radio stations.
 
     During the nine months ended September 30, 1998, Capstar Partners declared
and paid to Capstar Broadcasting cash dividends totaling $258,372 primarily to
finance certain radio station acquisitions.
 
     In April 1998, Capstar Broadcasting (i) amended and restated three warrants
(the "Original Warrants") to purchase up to 1,508,437 shares of Capstar
Broadcasting's Class C Common Stock, par value $.01 per share ("Class C Common
Stock"), that were previously granted to R. Steven Hicks, Capstar Broadcasting's
President and Chief Executive Officer, (ii) granted two additional warrants to
Mr. Hicks to purchase up to 187,969 shares and 500,000 shares of Class C Common
Stock, respectively, and (iii) granted warrants to two other executive officers
of Capstar Broadcasting to purchase up to an aggregate of 300,000 shares of
Class A Common Stock.
 
     The terms of these warrants give rise to variable treatment for accounting
purposes. As a result, compensation expense is measured at each reporting period
and recognized based on the specific terms of the warrants.
 
     On April 1, 1998, Capstar Broadcasting granted stock options under its
stock option plan to certain key employees and eligible non-employees, which
stock options are exercisable for the purchase of up to 585,340 shares of Class
A Common Stock at a per share exercise price of $17.50. A total non-cash
compensation charge of $878 will be charged ratably over the five-year vesting
period of such stock options.
 
     On June 15, 1998, Capstar Broadcasting granted stock options under its
stock option plan to certain key employees and eligible non-employees, which
stock options are exercisable for the purchase of up to 1,922,240 shares of
Class A Common Stock at a per share exercise price of $19.00.
 
     On July 5, 1998, a director of Capstar Broadcasting was granted a warrant
to purchase 200,000 shares of Class A Common Stock at an exercise price of
$14.00 per share. The terms of this warrant are the same as the terms of the
warrants granted in April 1998 to the two executive officers of Capstar
Broadcasting.
 
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
 
     In October 1996, Cardinal Communications Partners, L.P. ("Cardinal") filed
a complaint in the United States District Court, Northern District of Texas,
Dallas Division, against SFX, its Executive Chairman and other defendants. The
complaint concerns Cardinal's sale of radio station KTCK-AM to SFX in 1995. The
claims asserted in the complaint include breach of contract, fraud, negligent
misrepresentation, quantum meruit and unjust enrichment. The complaint seeks
declaratory relief, actual and punitive damages and attorneys' fees all in
unspecified amount. SFX reached an agreement with Cardinal effective August 1,
1997, that settled and resolved the claims asserted in the lawsuit. As a result
of the settlement agreement, all of the claims have been dismissed against all
of the defendants, with prejudice, except for one claim. This one claim,
alleging breach of contract related to deferred payments which SFX may be
required to pay to Cardinal in 1998, was dismissed without prejudice, subject to
renewal by Cardinal through an agreed arbitration procedure. In October 1998,
the parties completed an arbitration regarding the 1998 deferred payment. In
 
                                       18
<PAGE>   19
              CAPSTAR BROADCASTING PARTNERS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
November 1998, the parties settled the claim for approximately $3.1 million,
excluding legal fees of approximately $0.2 million.
 
     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.
 
NOTE 12 -- INCOME TAXES
 
     The Company's operating results are included in the consolidated federal
income tax return of its parent. Tax provisions in the accompanying financial
statements have been prepared on a stand-alone basis with any net current tax
liability due to federal taxing authorities resulting from inclusion of the
Company's activities in its parents consolidated tax return being reflected as
due to its parent.
 
NOTE 13 -- IMPACT OF THE YEAR 2000 ISSUE
 
     The Year 2000 Issue concerns the inability of computer programs and
embedded computer chips to properly recognize and process 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 causing a disruption in the operations of a company.
 
     A Company-wide assessment of systems and operations is underway to identify
any computer systems, including equipment with embedded chips, which do not
properly recognize dates after December 31, 1999. The Company uses purchased
software programs for a variety of financial applications, including general
ledger, accounts payable and accounts receivable accounting packages. The
companies providing these software programs are Year 2000 compliant, and the
Company has received Year 2000 compliance certificates from these software
vendors. Substantially all of the Company's advertising scheduling and billing
systems are Year 2000 compliant. Unrelated to the Year 2000 Issue, the Company
expects to begin implementation of a new integrated software package called
"Galaxy" in November 1998, which will bring the remainder of the advertising
scheduling and billing systems into Year 2000 compliance by the end of 1999. The
Company believes that its other financial applications are Year 2000 compliant.
 
     The Company's Year 2000 implementation plan also includes the actual
remediation and replacement of computer systems and other equipment with
embedded chips or processors (i.e. individual work stations, phone systems,
etc.) that are not Year 2000 compliant.
 
     In addition, the Company is assessing its exposure from external sources to
Year 2000 failures. These efforts are partially complete. The Company does rely
on third-party providers for key services such as telecommunications and
utilities. Interruption of these services could, in management's view, have a
material impact on the operations of the Company. The Company is in the process
of developing contingency plans intended to mitigate the possible disruption in
business operations that may result from certain of the Company's or
third-parties' critical or necessary systems that are not Year 2000 compliant,
and is developing cost estimates for such plans. Through September 30, 1998, the
Company has incurred minimal costs specifically related to the Year 2000 Issue
and estimates spending an aggregate cost of less than $1.0 million. Funding of
these costs is anticipated to come from cash generated in business operations.
 
     Based on the nature of the Company's business and dispersed geographical
locations, the Company believes that it may experience some disruption in its
business due to the impact of Year 2000 Issue. However, the Company's management
presently believes the Company is taking appropriate steps to assess and control
its Year 2000 issues. Due to the general uncertainty inherent in the Year 2000
Issue, due in part from the uncertainty of the Year 2000 readiness of third
parties, the Company is unable to determine at this time whether Year 2000
issues will have a material adverse effect on the Company's results of
operations or financial condition.
                                       19
<PAGE>   20
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
 
     The following discussion of the consolidated 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 Quarterly Report on Form 10-Q.
 
     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 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 calendar
quarter and highest in the second and fourth calendar quarters of each year. A
radio station's operating results in any period may be affected by the
occurrence of advertising and promotion expenses 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.
 
     As of September 30, 1998, the Company currently owns and operates, provides
programming to or sells advertising on behalf of 312 radio stations located in
77 markets. Following completion of the pending acquisitions and the pending
dispositions, the Company will own and operate, provide programming to or sell
advertising on behalf of 352 radio stations located in 83 markets. The Company
anticipates that it will consummate the pending acquisitions and dispositions;
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 terms. No assurances can be given that regulatory approval will be
received, or that the terms of the Company's existing indebtedness or any other
instruments of indebtedness to which the Company may in the future become a
party will permit additional financing for the pending transactions or that such
financing will be available to the Company on acceptable terms.
 
     In the following analysis, management discusses broadcast cash flow and
EBITDA (before noncash compensation expense and LMA fees). Broadcast cash flow
consists of operating income before depreciation, amortization, corporate
expenses, LMA fees and noncash compensation expense. EBITDA (before noncash
compensation expense and LMA fees) consists of operating income before
depreciation, amortization, LMA fees and noncash compensation expense. Although
broadcast cash flow and EBITDA (before noncash compensation expense and LMA
fees) 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 it is a measure widely
used in the broadcasting industry to evaluate a radio company's operating
performance. However, broadcast cash flow and EBITDA (before noncash
compensation expense and LMA fees) should not be considered in isolation or as
substitutes for operating income, cash flows from operating activities and other
income or cash flow statements prepared in accordance with GAAP or as a measure
of liquidity or profitability.
 
RESULTS OF OPERATIONS
 
     The following table presents summary supplemental historical consolidated
financial data of the Company for the three months ended September 30, 1997 and
1998 and should be read in conjunction with
 
                                       20
<PAGE>   21
 
the consolidated financial statements of the Company and the related notes
included elsewhere in this Quarterly Report on Form 10-Q.
 
<TABLE>
<CAPTION>
                                                                FOR THE THREE MONTHS
                                                                 ENDED SEPTEMBER 30,
                                                               -----------------------
                                                                  1997         1998
                                                               ----------   ----------
                                                               (DOLLARS IN THOUSANDS)
<S>                                                            <C>          <C>
Operating Data:
  Net revenue...............................................    $ 51,247     $161,906
  Station operating expenses................................      34,946       88,639
  Depreciation and amortization.............................       7,956       31,050
  Corporate expenses........................................       4,294        6,069
  LMA fees..................................................         306           51
  Noncash compensation expense..............................          --       (8,796)
  Operating income..........................................       3,745       44,893
  Interest expense..........................................      12,154       36,218
  Net income (loss).........................................    $(12,493)    $  5,149
  Net income (loss) attributable to common stock............    $(21,310)    $  2,097
Other Data:
  Broadcast cash flow(1)....................................    $ 16,301     $ 73,267
  Broadcast cash flow margin................................        31.8%        45,3%
  EBITDA (before noncash compensation expense and LMA
     fees)(2)...............................................      12,007       67,198
</TABLE>
 
---------------
 
(1) Broadcast cash flow consists of operating income before depreciation,
    amortization, corporate expenses, LMA fees and noncash compensation expense.
    Although broadcast cash flow 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
    broadcasting 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. As broadcast cash flow is not a
    measure calculated in accordance with GAAP, this measure may not be compared
    to similarly titled measures employed by other companies.
 
(2) EBITDA (before noncash compensation expense and LMA fees) consists of
    operating income before depreciation, amortization, LMA fees and noncash
    compensation expense. Although EBITDA (before noncash compensation expense
    and LMA fees) 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 broadcasting 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. As EBITDA (before noncash compensation expense and LMA
    fees) is not a measure calculated in accordance with GAAP, this measure may
    not be compared to similarly titled measures employed by other companies.
 
  Three Months Ended September 30, 1997 Compared to Three Months Ended
September, 1998
 
     Net Revenue. Due to the impact of the various acquisitions and dispositions
that the Company has completed, net revenue increased $110.7 million or 215.9%
to $161.9 million for the three months ended September 30, 1998 from $51.2
million for the three months ended September 30, 1997. This increase was
attributable to the acquisition of radio stations and revenue generated from and
LMAs entered into during 1998. On a same station basis, for stations owned or
operated as of September 30, 1998, net revenue increased $17.9 million or 12.1%
to $165.8 million from $147.9 million in the three months ended September 30,
1997. This increase was primarily attributable to growth in the sale of time to
local and national advertisers.
 
                                       21
<PAGE>   22
 
     Station Operating Expenses. Due to the impact of the various acquisitions
and dispositions that the Company has completed, station operating expenses
increased $53.7 million or 153.6% to $88.6 million for the three months ended
September 30, 1998 from $34.9 million for the three months ended June 30, 1997.
The increase was attributable to the station operating expenses of the radio
acquisitions and the LMAs entered into during 1998. On a same station basis, for
stations owned or operated as of September 30, 1998, operating expenses
increased $4.6 million or 5.3% to $92.2 million from $87.6 million in the period
ended September 30, 1997, and as a percentage of revenue, on a same station
basis, operating expenses declined from 59.2% in 1997 to 55.6% in 1998 as a
result of (i) cost saving measures implemented by the Company in connection with
its acquisitions and (ii) the spreading of fixed costs over a larger revenue
base.
 
     Corporate Expenses. Due to the impact of the various acquisitions and
dispositions that the Company has completed, corporate expenses increased $1.8
million or 41.3% to $6.1 million for the three months ended September 30, 1998
from approximately $4.3 million for the three months ended September 30, 1997
primarily as a result of higher salary expense for additional staffing.
 
     Other Operating Expenses. Depreciation and amortization increased $23.1
million or 290.3% to $31.1 million for the three months ended September 30, 1998
from $8.0 million for the three months ended September 30, 1997 primarily due to
the various acquisitions consummated during 1997 and 1998. Non cash compensation
expense related to certain options, warrants, and stockholder non-recourse notes
was a credit of $8,796 in the three months ended September 30, 1998 due to the
decrease in market value from June 30, 1998 to September 30, 1998 of Capstar
Broadcasting's Class A Common Stock.
 
     Other Expenses (Income). Interest expense increased $24.1 million or 198.0%
to $36.2 million in the three months ended September 30, 1998 from $12.1 million
during the same period in 1997 primarily due to indebtedness incurred in
connection with the Company's acquisitions.
 
     Net Income (Loss). Due to the impact of the various acquisitions and
dispositions that the Company has completed, net income increased $17.6 million
to $5.1 million for the three months ended September 30, 1998 from a net loss of
$(12.5) million for the three months ended September 30, 1997.
 
     Broadcast Cash Flow. Due to the impact of the various acquisitions and
dispositions that the Company has completed, broadcast cash flow increased $57.0
million or 349.5% to $73.3 million for the three months ended September 30, 1998
from $16.3 million for the three months ended September 30, 1997. The broadcast
cash flow margin was 45.3% for the three months ended September 30, 1998
compared to 31.8% for the three months ended September 30, 1997.
 
     EBITDA (before noncash compensation expense and LMA fees). Due to the
impact of the various acquisitions and dispositions that the Company has
completed, EBITDA (before noncash compensation expense and LMA fees) increased
$55.2 million or 459.7% to $67.2 million for the three months ended September
30, 1998 from $12.0 million for the three months ended September 30, 1997. The
EBITDA (before noncash compensation expense and LMA fees) margin for the three
months ended September 30, 1998 was 41.5% compared to 23.4% for the three months
ended September 30, 1997.
 
                                       22
<PAGE>   23
 
     The following table presents summary supplemental historical consolidated
financial data of the Company for the nine months ended September 30, 1997 and
1998 and should be read in conjunction with the consolidated financial
statements of the Company and the related notes included elsewhere in this
Quarterly Report on Form 10-Q.
 
<TABLE>
<CAPTION>
                                                                FOR THE NINE MONTHS
                                                                ENDED SEPTEMBER 30,
                                                              -----------------------
                                                                1997         1998
                                                              ---------   -----------
                                                              (DOLLARS IN THOUSANDS)
<S>                                                           <C>         <C>
Operating Data:
  Net revenue...............................................  $ 116,404   $   337,903
  Station operating expenses................................     78,895       204,135
  Depreciation and amortization.............................     17,294        61,451
  Corporate expenses........................................      9,399        13,746
  LMA fees..................................................      2,437         3,372
  Noncash compensation expense..............................     10,818        13,673
  Operating loss............................................     (2,439)       41,526
  Interest expense..........................................     29,393        73,064
  Net loss..................................................  $ (30,478)  $   (38,338)
  Net loss attributable to common stock.....................  $ (40,988)  $   (47,492)
Other Data:
  Broadcast cash flow(1)....................................  $  37,509   $   133,768
  Broadcast cash flow margin................................       32.2%         39.6%
  EBITDA (before noncash compensation expense and LMA
     fees)(2)...............................................     28,110       120,022
  Cash Flows Related To:
     Operating activities...................................     (3,928)       70,608
     Investing activities...................................   (409,822)   (1,241,558)
     Financing activities...................................    415,406     1,115,090
     Capital expenditures...................................  $   8,208   $    28,005
</TABLE>
 
---------------
 
(1) Broadcast cash flow consists of operating income before depreciation,
    amortization, corporate expenses, LMA fees and noncash compensation expense.
    Although broadcast cash flow 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
    broadcasting 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. As broadcast cash flow is not a
    measure calculated in accordance with GAAP, this measure may not be compared
    to similarly titled measures employed by other companies.
 
(2) EBITDA (before noncash compensation expense and LMA fees) consists of
    operating income before depreciation, amortization, LMA fees and noncash
    compensation expense. Although EBITDA (before noncash compensation expense
    and LMA fees) 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 broadcasting 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. As EBITDA (before noncash compensation expense and LMA
    fees) is not a measure calculated in accordance with GAAP, this measure may
    not be compared to similarly titled measures employed by other companies.
 
                                       23
<PAGE>   24
 
  Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1998
 
     Net Revenue. Due to the impact of the various acquisitions and dispositions
that the Company has completed, net revenue increased $221.5 million or 190.3%
to $337.9 million for the nine months ended September 30, 1998 from $116.4
million for the nine months ended September 30, 1997. This increase was
attributable to the acquisition of radio stations and revenue generated from and
LMAs entered into during 1998. On a same station basis, for stations owned or
operated as of September 30, 1998, net revenue increased $43.6 million or 10.5%
to $459.0 million from $415.4 million in the nine months ended September 30,
1997. This increase was primarily attributable to growth in the sale of time to
local and national advertisers.
 
     Station Operating Expenses. Due to the impact of the various acquisitions
and dispositions that the Company has completed, station operating expenses
increased $125.2 million or 158.7% to $204.1 million for the nine months ended
September 30, 1998 from $78.9 million for the nine months ended September 30,
1997. The increase was attributable to the station operating expenses of the
radio acquisitions and the JSAs and the LMAs entered into during 1998. On a same
station basis, for stations owned or operated as of September 30, 1998,
operating expenses increased $15.0 million or 5.9 % to $268.9 million from
$253.9 million in the period ended September 30, 1997, and as a percentage of
revenue, on a same station basis, operating expenses declined from 61.1% in 1997
to 58.6% in 1998 as a result of (i) cost saving measures implemented by the
Company in connection with its acquisitions and (ii) the spreading of fixed
costs over a larger revenue base.
 
     Corporate Expenses. Due to the impact of the various acquisitions and
dispositions that the Company has completed, corporate expenses increased $4.3
million or 46.2% to $13.7 million for the nine months ended September 30, 1998
from approximately $9.4 million for the nine months ended September 30, 1997
primarily as a result of higher salary expense for additional staffing.
 
     Other Operating Expenses. Depreciation and amortization increased $44.2
million or 255.3% to $61.5 million for the nine months ended September 30, 1998
from $17.3 million for the nine months ended September 30, 1997 primarily due to
the various acquisitions consummated during 1997 and 1998. Noncash compensation
expense related to certain options, warrants, and stockholder non-recourse notes
increased $2.9 million or 26.4% to $13.7 million in the nine months ended
September 30, 1998 from $10.8 million in the nine months ended September 30,
1997 due to the increase in the fair value of Capstar Broadcasting's Class A
Common Stock.
 
     Other Expenses (Income). Interest expense increased $43.7 million or 148.6%
to $73.1 million in the nine months ended September 30, 1998 from $29.4 million
during the same period in 1997 primarily due to indebtedness incurred in
connection with the Company's acquisitions.
 
     In 1998, the Company recorded an extraordinary loss of $7.3 million
relating to the purchase of the 13 1/4% Capstar Radio Notes and the termination
of the Company's prior credit facility.
 
     Net Loss. Due to the impact of the various acquisitions and dispositions
that the Company has completed, net loss increased $7.9 million to $38.3 million
for the nine months ended September 30, 1998 from $30.4 million for the nine
months ended September 30, 1997.
 
     Broadcast Cash Flow. Due to the impact of the various acquisitions and
dispositions that the Company has completed, broadcast cash flow increased $96.3
million or 256.6% to $133.8 million for the nine months ended September 30, 1998
from $37.5 million for the nine months ended September 30, 1997. The broadcast
cash flow margin was 39.6% for the nine months ended September 30, 1998 compared
to 32.2% for the nine months ended September 30, 1997.
 
     EBITDA (before noncash compensation expense and LMA fees). Due to the
impact of the various acquisitions and dispositions that the Company has
completed, EBITDA (before noncash compensation expense and LMA fees) increased
$91.9 million or 327.0% to $120.0 million for the nine months ended September
30, 1998 from $28.1 million for the nine months ended September 30, 1997. The
EBITDA (before noncash compensation expense and LMA fees) margin for the nine
months ended September 30, 1998 was 35.5% compared to 24.1% for the nine months
ended September 30, 1997.
 
                                       24
<PAGE>   25
 
LIQUIDITY AND CAPITAL RESOURCES
 
     The Company's acquisition strategy has required a significant portion of
the Company's capital resources. The acquisitions that have been completed by
the Company were funded from one or a combination of the following sources: (i)
equity investments in the Company from Hicks, Muse, Tate & Furst Incorporated
("Hicks Muse") and its affiliates and management of the Company of approximately
$872.7 million; (ii) assumption of indebtedness of acquired companies, including
the 13 1/4% Capstar Radio Notes, the 10 3/4% CCI Notes, and the 11 3/8% CCI
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 Partners Notes") in February
1997 of approximately $150.3 million; (iv) net proceeds from the issuance of the
12% Senior Exchangeable Preferred Stock, par value $0.01 per share, of Capstar
Partners (the "12% Capstar Partners Preferred Stock") in June 1997 of
approximately $100.0 million; (v) net proceeds from the issuance of the 9 1/4%
Senior Subordinated Notes due 2007 of Capstar Radio (the "9 1/4% Capstar Radio
Notes") in June 1997 of approximately $199.2 million; (vi) the Chancellor Loan;
(vii) net proceeds of approximately $551.3 million (after deducting underwriting
discounts and commissions and offering expenses of $37.7 million), from the
Offering; (viii) borrowings under the Capstar Credit Facility and other bank
indebtedness of the Company of approximately $886.0 million; (ix) net proceeds
from dispositions of certain assets of the Company of approximately $265.2
million; and (x) cash flows from operating activities.
 
     As a result of the financing of its acquisitions, the Company has a
substantial amount of long-term indebtedness, and for the foreseeable future,
the Company will use a large percentage of its cash to make payments under such
indebtedness.
 
     In October 1996, the Company assumed the 13 1/4% Capstar Radio Notes in
connection with the financing of the acquisition of Commodore Media, Inc. (now
known as Capstar Radio). On April 28, 1998, Capstar Radio purchased all of the
outstanding 13 1/4% Capstar Radio Notes for an aggregate purchase price of $90.2
million, including a $10.7 million purchase premium and $2.7 million of accrued
interest, which amount was funded with the proceeds of an equity investment in
the Company by an affiliate of Hicks Muse in 1998.
 
     In connection with the financing of the acquisition of Osborn
Communications Corporation in February 1997, Capstar Partners issued the 12 3/4%
Capstar Partners 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 Partners Notes pay no cash
interest until August 1, 2002. Accordingly, the carrying value will increase
through accretion until August 1, 2002. As of September 30, 1998, the
outstanding principal balance was $183.3 million. On August 1, 2002 and
thereafter, interest of approximately $17.7 million 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 Radio Notes in
connection with certain acquisitions that were completed during the third
quarter of 1997. As of September 30, 1998, the outstanding principal balance was
$199.3 million. Interest payments of $9.25 million on the 9 1/4% Capstar Radio
Notes are 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
Partners Preferred Stock in connection with the financing of the acquisition of
GulfStar Communications, Inc. Dividends on the 12% Capstar Partners Preferred
Stock accumulate from the date of issuance and are payable semi-annually on
January 1 and July 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 Partners Preferred Stock. Capstar
Partners paid the required dividend on January 1, 1998 and July 1, 1998 by
issuing an additional 64,658 shares and 63,872 shares, respectively, of 12%
Capstar Partners Preferred Stock and intends to pay in kind dividends, rather
than cash, through July 1, 2002. As of October 31, 1998, 1,128,530 shares of the
12% Capstar Partners Preferred Stock were issued and outstanding.
 
     CCI remained liable after the consummation of the SFX Merger for the
outstanding indebtedness of SFX under the 10 3/4% CCI Notes and the 11 3/8% CCI
Notes. On July 3, 1998, pursuant to the terms of the
 
                                       25
<PAGE>   26
 
indenture governing the 10 3/4% CCI Notes, CCI redeemed $154 million aggregate
principal amount of the 10 3/4% CCI Notes for an aggregate purchase price of
$172.8 million, including a $16.6 million redemption premium and $2.2 million of
accrued interest. The SFX Merger resulted in a change of control under the
indentures governing the 10 3/4% CCI Notes and the CCI 11 3/8% Notes. Pursuant
to change of control offers to acquire all of the outstanding 10 3/4% CCI Notes
and CCI 11 3/8% Notes, each of which commenced on June 8, 1998, CCI purchased on
July 10, 1998, $1.9 million aggregate principal amount of the 10 3/4% CCI Notes
for an aggregate purchase price of $1.9 million, including a $18,000 purchase
premium and $31,000 of accrued interest. No 11 3/8% CCI Notes were tendered for
repurchase. The partial redemption and the change of control offers were funded
with borrowings under the Capstar Credit Facility. Interest payments of
approximately $15.8 million are payable on the 10 3/4% CCI Notes semi-annually
on May 15 and November 15 of each year until maturity on May 15, 2006. Interest
payments of approximately $32,000 are payable on the 11 3/8% CCI Notes
semi-annually on April 1 and October 1 of each year until maturity on October 1,
2000.
 
     Upon completion of the SFX Merger, all 2,392,022 shares of CCI Series E
Preferred Stock remained outstanding. Dividends on the CCI Series E Preferred
Stock accumulate from the date of issuance at the rate per share of $12.625 per
annum, and are payable semi-annually on January 15 and July 15 of each year.
Dividends may be paid, at CCI's option, on any dividend payment date occurring
on or before January 15, 2002, either in cash or in additional shares of CCI
Series E Preferred Stock having a liquidation preference equal to the amount of
such dividend. CCI paid the required dividend on July 15, 1998 by issuing an
additional 75,169 shares of CCI Series E Preferred Stock, and CCI intends to pay
in kind dividends, rather than cash dividends, through January 15, 2002. On July
3, 1998, pursuant to the terms of the CCI Certificate of Designation, CCI
redeemed $119.6 million aggregate liquidation preference, or 1,196,011 shares,
of the CCI Series E Preferred Stock for an aggregate purchase price of $141.8
million, including a $15.1 million redemption premium and $7.0 million of
accrued dividends. The SFX Merger resulted in a change of control under the CCI
Certificate of Designation. Pursuant to a change of control offer to acquire all
of the outstanding CCI Series E Preferred Stock, which commenced on June 8,
1998, CCI purchased on July 10, 1998, $500,400 aggregate liquidation preference,
or 5,004 shares, of the CCI Series E Preferred Stock for an aggregate purchase
price of $536,000, including a $5,000 purchase premium and $31,000 of accrued
dividends. The partial redemption and the change of control offer were funded
with borrowings under the Capstar Credit Facility. As of October 31, 1998,
1,266,716 shares of the CCI Series E Preferred Stock were issued and
outstanding.
 
     In 1998, the Company received (through capital contributions from Capstar
Broadcasting) proceeds in the amount of $634.1 million from equity investments
in Capstar Broadcasting of Hicks Muse and its affiliates, of which (i)
approximately $467.7 million was used to consummate station acquisitions, to
repay indebtedness under the Capstar Credit Facility, and to purchase all of the
outstanding 13 1/4% Capstar Radio Notes and (ii) approximately $166.4 million
was used to consummate in part the SFX Merger and related transactions.
 
     Concurrently with the Offering, Capstar Radio entered into the Capstar
Credit Facility and terminated its existing credit facility. The Capstar Credit
Facility consists of a $500 million revolving loan, a $450 million A Term Loan
and a $400 million B Term Loan. The Capstar Credit Facility also contains
mechanisms that permit Capstar Radio to request additional term loans and
revolving credit loans in an aggregate amount up to $550 million; provided
however, that all such additional loans are subject to future commitment
availability and approval from the banks and are not currently available under
the Capstar Credit Facility. 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. The Company as of
October 31, 1998 had borrowings of approximately $903.0 million outstanding
under the Capstar Credit Facility comprised of $54.0 million in revolving loans,
$450 million under the A Term Loan and $399 million under the B Term Loan, with
a weighted average effective interest rate of 7.7% per annum. As of October 31,
1998, $435.9 million was available for borrowing. Beginning August 31, 1999, the
A Term Loan will require scheduled annual principal payments, payable quarterly,
of $45 million for the first year, $67.5 million in the second and third years,
$90 million for the fourth and fifth years, and two quarterly payments of $45
million during the final year commencing August 31, 2004. Beginning August 31,
1998, the B Term Loan will require
 
                                       26
<PAGE>   27
 
scheduled annual principal payments, payable quarterly, of $4 million in the
first, second, third, fourth and fifth years following the Closing Date (as
defined in the Capstar Credit Facility), $180 million in the sixth year
following the Closing Date and $200 million in the seventh year following the
Closing Date.
 
     Concurrently with the Offering, Capstar Broadcasting borrowed $150 million
from Chancellor Media pursuant to a Note (the "Chancellor Note"). The Chancellor
Note imposes certain limitations on the ability of the Company to incur
additional indebtedness by restricting the ability of Capstar Broadcasting and
its subsidiaries to incur additional indebtedness.
 
     CCI estimates that in connection with (i) SFX's distribution on April 27,
1998 of all the capital stock owned by SFX in SFX Entertainment, Inc. ("SFX
Entertainment") to certain of SFX's stockholders and other security holders (the
"Spin-Off") and (ii) certain other intercompany transactions engaged in by SFX
Entertainment prior to the Spin-Off, SFX incurred a federal income tax liability
of approximately $94.0 million. SFX Entertainment has agreed to fully indemnify
CCI from and against such tax liability (including any tax liability of CCI
arising from such indemnification payments), which full indemnity payments are
presently estimated to be approximately $105 million. On June 30 and September
30, 1998, CCI received approximately $52.5 million and $26.2 million,
respectively, in cash from SFX Entertainment in partial payment of SFX
Entertainment's indemnity obligation. It is anticipated that CCI will receive
the remaining balance of approximately $26.3 million in cash from SFX
Entertainment on December 31, 1998. In connection with certain asset divestiture
transactions occurring immediately after the SFX Merger, CCI incurred a federal
income tax liability of approximately $26.0 million. These federal income taxes
resulting from the Spin-Off and the divestiture transactions will be due in full
by March 15, 1999.
 
     Chancellor Media has agreed to provide services for ten large market CCI
stations under separate LMAs with the Company for approximately $49.4 million
per year for up to three years after the consummation of the Merger. In
addition, Chancellor Media has agreed to acquire such stations in exchange for
radio stations to be identified by the Company over a three-year period, with
corresponding decreases in the amount of the LMA fees received by the Company as
stations are exchanged. No assurances can be given that stations acquired by the
Company will generate cash flows comparable to the LMA fees to be received from
Chancellor Media in connection therewith, either initially when such stations
are acquired or at all. As of September 30, 1998, Chancellor Media had paid the
Company approximately $16.5 million pursuant to such LMAs. During the pendency
of the Chancellor Merger, the Company does not anticipate effecting any
exchanges with Chancellor Media. Chancellor Media is currently assessing whether
the terms of the letter agreement will be modified upon the consummation of the
Chancellor Merger.
 
     In addition to debt service, the Company's principal liquidity requirements
will be for working capital and general corporate purposes, including capital
expenditures estimated at $51.0 million for fiscal year 1998 and payment of the
federal income tax liabilities resulting from the Spin-Off, which is
indemnified, and the asset divestiture transactions occurring immediately after
the SFX Merger, to consummate its pending acquisitions 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, LMA fees from
Chancellor Media and SFX Entertainment's satisfaction of its indemnity
obligation to pay CCI for CCI's tax liability resulting from the Spin-Off,
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 its pending acquisitions. 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
will 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.
 
     Net cash provided by (used in) operating activities was approximately $70.6
million and $(3.9 million) for the nine month periods ended September 30, 1998
and 1997, respectively. Net cash used in investing activities was $1,241.6
million and $409.8 million for the nine month periods ended September 30, 1998
and
 
                                       27
<PAGE>   28
 
1997, respectively. Net cash provided by financing activities was $1,115.1
million and $415.4 for the nine month periods ended September 30, 1998 and 1997,
respectively. These cash flows primarily reflect the borrowings, capital
contribution and expenditures for stations acquisitions and dispositions.
 
FORWARD LOOKING STATEMENTS
 
     This Quarterly Report on Form 10-Q 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 business
conditions and growth in the 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 regulatory developments
affecting the Company's operations and the acquisitions and dispositions
described elsewhere in this Quarterly Report on Form 10-Q. 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.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
     In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Restated 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.
This pronouncement is effective for financial statements beginning after
December 15, 1997.
 
     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. This pronouncement is effective for financial statements beginning after
December 15, 1997.
 
     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This pronouncement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999.
 
     Management does not believe the implementation of these accounting
pronouncements will have a material effect on its consolidated financial
statements.
 
EXTRAORDINARY ITEMS
 
     On February 20, 1997, in connection with the financing of the acquisition
of Osborn Communications Corporation, the Company repaid its outstanding loan
balance (including principal and interest) under the Company's senior credit
facility (the "AT&T Credit Facility") with AT&T Commercial Finance Corporation
and recognized an extraordinary loss of $.9 million as a result of the write off
of unamortized deferred financing costs plus a prepayment penalty. In 1998,
extraordinary loss comprises approximately $2.6 million from the write-off of
deferred fees associated with the Company's previous credit facility, which was
terminated on May 29, 1998, and approximately $4.7 million from the purchase of
the 13 1/4% Notes on April 28, 1998.
 
                                       28
<PAGE>   29
 
IMPACT OF THE YEAR 2000 ISSUE
 
     The Year 2000 Issue concerns the inability of computer programs and
embedded computer chips to properly recognize and process 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 causing a disruption in the operations of a company.
 
     A Company-wide assessment of systems and operations is underway to identify
any computer systems, including equipment with embedded chips, which do not
properly recognize dates after December 31, 1999. The Company uses purchased
software programs for a variety of financial applications, including general
ledger, accounts payable and accounts receivable accounting packages. The
companies providing these software programs are Year 2000 compliant, and the
Company has received Year 2000 compliance certificates from these software
vendors. Substantially all of the Company's advertising scheduling and billing
systems are Year 2000 compliant. Unrelated to the Year 2000 Issue, the Company
expects to begin implementation of a new integrated software package called
"Galaxy" in November 1998, which will bring the remainder of the advertising
scheduling and billing systems into Year 2000 compliance by the end of 1999. The
Company believes that its other financial applications are Year 2000 compliant.
 
     The Company's Year 2000 implementation plan also includes the actual
remediation and replacement of computer systems and other equipment with
embedded chips or processors (i.e. individual work stations, phone systems,
etc.) that are not Year 2000 compliant.
 
     In addition, the Company is assessing its exposure from external sources to
Year 2000 failures. These efforts are partially complete. The Company does rely
on third-party providers for key services such as telecommunications and
utilities. Interruption of these services could, in management's view, have a
material impact on the operations of the Company. The Company is in the process
of developing contingency plans intended to mitigate the possible disruption in
business operations that may result from certain of the Company's or
third-parties' critical or necessary systems that are not Year 2000 compliant,
and is developing cost estimates for such plans. Through September 30, 1998, the
Company has incurred minimal costs specifically related to the Year 2000 Issue
and estimates spending an aggregate cost of less than $1.0 million. Funding of
these costs is anticipated to come from cash generated in business operations.
 
     Based on the nature of the Company's business and dispersed geographical
locations, the Company believes that it may experience some disruption in its
business due to the impact of Year 2000 Issue. However, the Company's management
presently believes the Company is taking appropriate steps to assess and control
its Year 2000 issues. Due to the general uncertainty inherent in the Year 2000
Issue, due in part from the uncertainty of the Year 2000 readiness of third
parties, the Company is unable to determine at this time whether Year 2000
issues will have a material adverse effect on the Company's results of
operations or financial condition.
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
     Not applicable.
 
                                       29
<PAGE>   30
 
                          PART II -- OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS.
 
     In October 1996, Cardinal Communications Partners, L.P. ("Cardinal") filed
a complaint in the United States District Court, Northern District of Texas,
Dallas Division, against SFX, its Executive Chairman and other defendants. The
complaint concerns Cardinal's sale of radio station KTCK-AM to SFX in 1995. The
claims asserted in the complaint include breach of contract, fraud, negligent
misrepresentation, quantum meruit and unjust enrichment. The complaint seeks
declaratory relief, actual and punitive damages and attorneys' fees all in
unspecified amount. SFX reached an agreement with Cardinal effective August 1,
1997, that settled and resolved the claims asserted in the lawsuit. As a result
of the settlement agreement, all of the claims have been dismissed against all
of the defendants, with prejudice, except for one claim. This one claim,
alleging breach of contract related to deferred payments which SFX may be
required to pay to Cardinal in 1998, was dismissed without prejudice, subject to
renewal by Cardinal through an agreed arbitration procedure. In October 1998,
the parties completed an arbitration regarding the 1998 deferred payment. In
November 1998, the parties settled the claim for approximately $3.1 million,
excluding legal fees of approximately $0.2 million.
 
     On August 29, 1997, two lawsuits were commenced against SFX and its
directors in the Court of Chancery of the State of Delaware (New Castle County).
The plaintiffs in the lawsuits are Harbor Finance Partners (C.A. No. 15891) and
Steven Lieberman (C.A. No. 15901). The complaints are identical and allege that
the consideration to be paid as a result of the SFX Merger to the holders of the
CCI Class A Common Stock is unfair and that the individual defendants have
breached their fiduciary duties. Both complaints seek to have the actions
certified as class actions and seek to enjoin the SFX Merger or, in the
alternative, monetary damages. The defendants have filed answers denying the
allegations, and discovery has commenced. The parties have agreed that the
lawsuits may be consolidated in one action entitled In Re SFX Broadcasting, Inc.
Shareholders Litigation (C.A. No. 15891).
 
     On March 17, 1998, the parties entered into a Memorandum of Understanding,
pursuant to which the parties reached an agreement providing for a settlement of
the action (the "Settlement"). Pursuant to the Settlement, SFX agreed not to
seek an amendment to the SFX Merger agreement to reduce the consideration to be
received by the stockholders of SFX in the SFX Merger in order to offset SFX
Entertainment's indemnity obligations. The Settlement also provides for SFX to
pay plaintiff's counsel an aggregate of $950,000, including all fees and
expenses as approved by the court. The Settlement is conditioned on the (a)
consummation of the SFX Merger, (b) completion of the confirmatory discovery and
(c) approval of the court. Pursuant to the Settlement, the defendants have
denied, and continue to deny, that they have acted in bad faith or breached any
fiduciary duty. There can be no assurance that the court will approve the
Settlement on the terms and conditions provided for therein, or at all. The
parties currently are engaging in confirmatory discovery.
 
     On July 13, 1998, Noddings Investment Group, Inc. and Noddings Warrant
Limited Partnership ("Noddings") filed Civil Action No. 16538 in the Court of
Chancery of the State of Delaware in and for New Castle County against CCI.
Noddings alleges that CCI breached a March 23, 1994, Warrant Agreement that
Noddings contends requires CCI to permit Noddings to exercise warrants in
exchange for cash and shares of stock of SFX Entertainment, Inc. ("SFX
Entertainment"), a former subsidiary of SFX which was spun-off prior to the SFX
Merger. Specifically, Noddings alleges that CCI has violated the Warrant
Agreement by permitting Noddings to receive cash in exchange for its warrants,
but refusing to convey shares of stock of SFX Entertainment. In addition to
suing on its own behalf, Noddings is seeking to prosecute the action on behalf
of a putative class comprised of all persons who owned equivalent warrants on
April 21, 1998, (the date immediately following the record date of the
distribution of stock of SFX Entertainment to holders of the stock of SFX) and
their transferees and successors in interest. Noddings has requested that the
Court (i) declare that on the exercise of its warrants CCI transmit to
plaintiffs and members of the class that it seeks to represent $22.3725 in cash
per warrant and .2983 shares of common stock of SFX Entertainment per warrant,
(ii) require CCI to pay .2983 shares of common stock of SFX Entertainment per
warrant and, (if not
 
                                       30
<PAGE>   31
 
previously paid) $22.3725 in cash, to any putative class member that has
exercised or exercises warrants after April 20, 1998, (iii) in the alternative,
award plaintiffs and members of the putative class monetary damages in an amount
to be determined at trial, and (iv) award costs and attorneys' fees. CCI has
filed a motion to dismiss this lawsuit. A response from the plaintiffs is due in
November 1998.
 
     On July 24, 1998 in connection with Capstar Broadcasting's pending
acquisition of Triathlon, Capstar Broadcasting was notified of an action filed
on behalf of all holders of depository shares of Triathlon against Triathlon,
its directors, and Capstar Broadcasting. The action was filed in the Court of
Chancery of the State of Delaware in and for New Castle County, Delaware. The
complaint alleges that Triathlon and its directors breached their fiduciary
duties to the class of depository shareholders by agreeing to a transaction with
Capstar Broadcasting that allegedly favored the Class A common shareholders at
the expense of the depository shareholders. Capstar Broadcasting is accused of
knowingly aiding and abetting the breaches of fiduciary duties allegedly
committed by the other defendants. On September 18, 1998, Capstar Broadcasting
filed a motion to dismiss.
 
     On September 9, 1998, Capstar Broadcasting Corporation was notified of an
action filed on behalf of all owners of securities of Chancellor Media against
Chancellor Media, Hicks, Muse, Tate & Furst, Inc. ("Hicks, Muse") and the
individual directors of Hicks, Muse in the Court of Chancery of the State of
Delaware in and for New Castle County, Delaware. While the complaint does not
name Capstar Broadcasting as a defendant, the complaint alleges that Chancellor
Media and its directors breached their duties to the alleged class by entering
into an "overly generous offer for Capstar assets." The action is relevant to
Capstar Broadcasting because inter alia, the plaintiff seeks an injunction
prohibiting the proposed Chancellor Merger with Capstar Broadcasting. As Capstar
Broadcasting is not a defendant in this action, Capstar Broadcasting has no
obligation to appear or participate.
 
     See Part I Item 1 Note 10 to the September 30, 1998 unaudited financial
statements.
 
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
 
     (a) Exhibits
 
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
           2.1           -- Agreement and Plan of Merger, dated August 26, 1998,
                            among Chancellor Media, Capstar Broadcasting and CBC
                            Acquisition Company, Inc.(1)
           2.2           -- Voting Agreement, dated August 26, 1998, among Chancellor
                            Media, Capstar Broadcasting Partners, L.P., Thomas O.
                            Hicks and Steven R. Hicks.(1)
          27.1           -- Financial Data Schedule.*
</TABLE>
 
---------------
 
 *  Filed herewith.
 
(1) Incorporated by reference to Schedule 13D/A filed by Thomas O. Hicks, et al.
    on September 3, 1998, File No. 000-54151.
 
     (b) Reports on Form 8-K
 
     The following reports on Form 8-K were filed by Capstar Partners during the
three months ended September 30, 1998:
 
          Amendment No. 1 to Current Report on Form 8-K, filed August 14, 1998,
     relating to the acquisition of CCI. Item 7(b) was reported.
 
          Current Report on Form 8-K, filed September 10, 1998, relating to the
     execution of a merger agreement with Chancellor Media. Item 1 was reported.
 
                                       31
<PAGE>   32
 
                                   SIGNATURES
 
     Pursuant to the requirements of the Securities Exchange Act of 1934,
Capstar Broadcasting Partners, Inc. has 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
 
Date: November 13, 1998
 
                                       32
<PAGE>   33
 
                               INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                    DESCRIPTION
        -------                                    -----------
<C>                        <S>
           2.1             -- Agreement and Plan of Merger, dated August 26, 1998,
                              among Chancellor Media, Capstar Broadcasting and CBC
                              Acquisition Company, Inc.(1)
           2.2             -- Voting Agreement, dated August 26, 1998, among Chancellor
                              Media, Capstar Broadcasting Partners, L.P., Thomas O.
                              Hicks and Steven R. Hicks.(1)
          27.1             -- Financial Data Schedule.*
</TABLE>
 
---------------
 
* Filed herewith.
 
(1) Incorporated by reference to Schedule 13D/A filed by Thomas O. Hicks, et al.
    on September 3, 1998, File No. 000-54151.