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 1-13089


                        U.S. RESTAURANT PROPERTIES, INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

          Maryland                                          75-2687420
-------------------------------                      --------------------------
(State or other jurisdiction of                (I.R.S. Employer Identification
 incorporation or organization)                 No.) 

          5310 Harvest Hill Rd., Ste. 270, LB 168, Dallas, Texas 75230
          ------------------------------------------------------------
            (Address principal executive offices, including zip code)

                                 972 / 387-1487
              --------------------------------------------------- 
              (Registrant's telephone number, including area code)

 ------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report

         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

      Yes   X                                  No
          -----                                   -----
         Indicate  the  number of  shares  outstanding  of each of the  issuer's
classes of common stock, as of the latest practicable date.

As of October 30, 1998,  there were 14,347,259  shares of Common Stock $.001 par
value outstanding.


                                  Page 1 of 17

<PAGE>


                        U.S. RESTAURANT PROPERTIES, INC.


PART I.       FINANCIAL INFORMATION

  Item 1.  Financial Statements

           Condensed Consolidated Balance Sheets as of September 30, 1998
             (Unaudited) and December 31, 1997................................ 3

           Condensed Consolidated Statements of Operations for the Three
             months and Nine months ended September 30, 1998 and 1997
             (Unaudited)...................................................... 4

           Condensed Consolidated Statement of Stockholders' Equity
             for the Nine months ended September 30, 1998 (Unaudited)......... 5

           Condensed Consolidated Statements of Cash Flows for the Nine
             months ended September 30, 1998 and 1997 (Unaudited)............. 6

           Notes to Condensed Consolidated Financial Statements (Unaudited)... 8

  Item 2.  Management's Discussion and Analysis of Financial Condition
             and Results of Operations........................................13

  Item 3.  Quantitative and Qualitative Disclosures About Market Risk.........15


PART II.      OTHER INFORMATION

  Item 1.  Legal Proceedings..................................................16

  Item 2.  Changes in Securities..............................................16

  Item 3.  Defaults upon Senior Securities....................................16

  Item 4.  Submission of Matters to Vote of Security Holders..................16

  Item 5.  Other Information..................................................16

  Item 6.  Exhibits and Reports on Form 8-K...................................16


                                  Page 2 of 17

<PAGE>




                          Part I. FINANCIAL INFORMATION

Item 1.           Financial Statements

                        U.S. RESTAURANT PROPERTIES, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                    (In thousands, except per share amounts)
<TABLE>


<CAPTION>
                                                           September 30,        December 31,
                                                               1998                1997
                                                          ---------------      --------------
                                                            (Unaudited)
<S>                                                       <C>                  <C>
                                  ASSETS
Property, net
    Land                                                   $    163,679         $   109,515
    Buildings and leasehold improvements                        284,389             211,200
    Machinery and equipment                                       7,718               4,813
                                                          ---------------      --------------
                                                                455,786             325,528
    Less: Accumulated depreciation                              (23,657)            (13,438)
                                                          ---------------      --------------
                                                                432,129             312,090

Cash and cash equivalents                                           837               1,104
Restricted cash                                                   1,414                  --
Marketable securities                                               801                  --
Rent and other receivables, net
   (includes $1,231 and $523 from related parties)                7,607               4,791
Prepaid expenses and purchase deposits                           14,488               1,967
Notes receivable
   (includes $8,764 and $5,406 from related parties)             14,350               8,518
Mortgage loan receivable                                          7,510               5,947
Net investment in direct financing leases                        11,838              13,764
Intangibles and other assets, net                                12,489              10,968
                                                          ---------------      --------------
                                           TOTAL ASSETS    $    503,463         $   359,149
                                                          ===============      ==============

             LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable and accrued liabilities
   (includes $0 and $121 due to related parties)           $     13,485         $     4,193
Unearned contingent rent                                          1,544                  --
Deferred gain on sale of property                                   556                 642
Lines of credit                                                 107,000              89,196
Notes payable                                                   150,618              40,000
Mortgage note payable                                             1,070                  --
Capitalized lease obligations                                        91                 170
                                                          ---------------      --------------
                                      TOTAL LIABILITIES         274,364             134,201

Minority interest in operating partnership                       23,105              19,536
Stockholders' Equity
Preferred stock, $.001 par value per share;
   50,000 shares authorized, Series A - 3,680
   shares issued and outstanding as of
   September 30, 1998 and December 31, 1997             
   (aggregate liquidation value $92,000)                              4                   4
Common stock, $.001 par value per share;
   100,000 shares authorized, 13,645 and 12,698
   shares issued and outstanding as of September
   30, 1998 and December 31, 1997, respectively                      14                  13
Additional paid in capital                                      244,806             226,140
Excess stock, $.001 par value per share,
   15,000 shares authorized, no shares issued                        --                  --
Unrealized holding loss on investments                              (79)                 --
Distributions in excess of net income                           (38,751)            (20,745)
                                                          ---------------      --------------
                             TOTAL STOCKHOLDERS' EQUITY         205,994             205,412
                                                          ---------------      --------------
           TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY      $    503,463         $   359,149
                                                          ===============      ==============

</TABLE>

See Notes to Condensed Consolidated Financial Statements

                                  Page 3 of 17

<PAGE>


                        U.S. RESTAURANT PROPERTIES, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)
                                   (Unaudited)
<TABLE>


<CAPTION>
                                                Three months ended           Nine months ended
                                                   September 30,                September 30,
                                              ------------------------    --------------------------
                                                 1998          1997         1998            1997
                                              -----------   ----------    -----------    -----------
<S>                                           <C>           <C>           <C>            <C>
Revenues:
   Rental income                               $ 13,533      $ 9,163       $ 39,021       $ 22,850
   Interest income                                  684          237          2,012            514
   Amortization of unearned
     income on direct financing leases              289          375            889          1,232
                                              -----------   ----------    -----------    -----------
                        Total revenues           14,506        9,775         41,922         24,596
Expenses:
   Rent                                             818          684          2,286          1,873
   Depreciation and amortization                  4,061        2,618         11,121          5,984
   Taxes, general and administrative              1,153          991          3,351          2,834
   Interest expense                               4,536        3,058         11,668          6,905
                                              -----------   ----------    -----------    -----------
                       Total  expenses           10,568        7,351         28,426         17,596
                                              -----------   ----------    -----------    -----------
Income before gain on sale of
  property, unusual items and other               3,938        2,424         13,496          7,000
   Gain on sale of property                         252          183            709            450
   Equity in net loss of affiliates                 (55)          --           (112)            --
   REIT conversion costs                             --          (75)            --           (819)
   Termination of management contract            (4,991)          --         (4,991)            --
                                              -----------   ----------    -----------    -----------
Income (loss) before minority interest
  and extraordinary item                           (856)       2,532          9,102          6,631

Minority interest in (income) loss
  of operating partnership                          203           --           (300)            --
                                              -----------   ----------    -----------    -----------
Income (loss) before extraordinary item            (653)       2,532          8,802          6,631

Loss on early extinguishment of debt                 --           --           (190)            --
                                              -----------   ----------    -----------    -----------
Net income (loss)                                  (653)       2,532          8,612          6,631

Dividends on Preferred Stock/
  General Partner's interest                     (1,776)         (50)        (5,327)          (132)
                                              -----------   ----------    -----------    -----------
Net income (loss) allocable to Common
  Stockholders                                 $ (2,429)     $ 2,482       $  3,285       $  6,499
                                              ===========   ==========    ===========    ===========

Weighted average shares outstanding
  Basic                                          13,142       12,286         13,006         11,371
  Diluted                                        13,504       12,544         13,252         11,548

Net income (loss) per share
  Basic                                       $   (0.18)     $  0.20       $   0.25       $   0.57
  Diluted                                     $   (0.18)     $  0.20       $   0.25       $   0.56


</TABLE>


See Note 1 for Pro Forma effect of change in Accounting Principle.

See Notes to Condensed Consolidated Financial Statements


                                  Page 4 of 17

<PAGE>


                        U.S. RESTAURANT PROPERTIES, INC.
      Condensed Consolidated Statement of Stockholders' Equity (Unaudited)
                  For the Nine months ended September 30, 1998
                                 (In thousands)
<TABLE>


<CAPTION>
                               Preferred Stock       Common Stock                       Distributions
                             ------------------   ------------------     Additional      in Excess of  Unrealized Loss
                             Shares   Par Value   Shares    Par Value  Paid in Capital    Net Income    on Investment      Total
                             -----------------------------------------------------------------------------------------------------
<S>                          <C>     <C>         <C>       <C>         <C>              <C>            <C>             <C>      
Balance December 31, 1997      3,680  $      4     12,698   $     13    $     226,140    $   (20,745)   $          --   $ 205,412
                                                               
Proceeds from exercised
 stock options                                        300                       3,099                                       3,099

Stock issued for purchase
 of ownership interest in
 another entity                                        24                         621                                         621
 
Proceeds from sale of
 common stock                                         653          1           15,699                                      15,700

Repurchased and retired
 stock                                                (30)                       (753)                                       (753)

Unrealized loss on 
 investment                                                                                                       (79)        (79)

Net income                                                                                     8,612                        8,612
Dividends on preferred 
 stock                                                                                        (5,899)                      (5,899)
Dividends on common
 stock                                                                                       (15,022)                     (15,022)
Common stock dividends
 declared                                                                                     (5,697)                      (5,697)
                             ------- ----------  --------- ----------  ---------------  -------------  --------------- -----------
Balance September 30, 1998     3,680  $      4     13,645   $     14    $     244,806    $   (38,751)   $         (79)  $ 205,994
                             ======= ==========  ========= ==========  ===============  =============  =============== ===========

</TABLE>

See Notes to Condensed Consolidated Financial Statements


                                  Page 5 of 17

<PAGE>



                        U.S. RESTAURANT PROPERTIES, INC.
           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
                                 (In thousands)
<TABLE>


<CAPTION>
                                                                     Nine months ended
                                                                        September 30,
                                                                 ---------------------------
                                                                     1998           1997
                                                                 ------------   ------------
<S>                                                              <C>            <C>
Cash flows from operating activities:
  Net income                                                      $    8,612     $    6,631
   Adjustments to reconcile net income to net
       cash from operating activities
            Depreciation and amortization                             11,121          5,984
            Non cash interest income                                     (31)            --
            Amortization of deferred financing costs                     415            245
            Amortization of discount on notes payable                     42             --
            Gain on sale of property                                    (709)          (450)
            Equity in loss of affiliates                                 112             --
            Minority interest in operating partnership                   300             --
            Loss on extinguishment of debt                               190             --
            Termination of management contract                         4,991             --
            Increase in restricted cash                               (1,414)            --
            Increase in rent and other receivables, net               (3,035)        (1,585)
            Increase in prepaid expenses                                (642)          (743)
            Reduction in net investment in direct
               financing leases                                        1,721          1,716
            Increase in accounts payable and
               accrued liabilities                                     3,114          2,044
            Increase in unearned contingent rent                       1,544             --
                                                                 ------------   ------------
                                                                      17,719          7,211
                                                                 ------------   ------------
                  Cash provided by operating activities               26,331         13,842

Cash flows used in investing activities:
            Proceeds from sale of property                             5,700          2,509
            Purchase of property                                    (119,577)      (116,870)
            Purchase of machines and equipment                        (3,055)          (833)
            Purchase deposits paid                                   (11,879)        (1,326)
            Purchase of marketable securities                           (849)            --
            Purchase of investments in partnerships                     (890)            --
            Increase in mortgage loan receivable                      (1,563)        (5,986)
            Increase in notes receivable                             (16,979)        (2,843)
                                                                 ------------   ------------
                  Cash used in investing activities                 (149,092)      (125,349)
</TABLE>


                             continued on next page

See Notes to Condensed Consolidated Financial Statements
 
                                  Page 6 of 17

<PAGE>


                        U.S. RESTAURANT PROPERTIES, INC.
           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
                                   (Unaudited)
                                 (In thousands)

<TABLE>

<CAPTION>
                                                                     Nine months ended
                                                                        September 30,
                                                                 ---------------------------
                                                                     1998           1997
                                                                 ------------   ------------
<S>                                                              <C>            <C>
Cash flows from financing activities:
            Loan origination costs and other intangibles              (1,601)          (914)
            Payments on capitalized lease obligations                    (79)          (140)
            Proceeds from line of credit                             217,786        100,989
            Payments on line of credit                              (199,986)       (40,902)
            Proceeds from notes payable                              110,576         40,000
            Proceeds from issuance of common stock                    18,799         25,775
            Repurchase and retirement of stock                          (753)            --
            Payments of preferred stock dividends                     (5,899)            --
            Cash distributions to stockholders/unit holders          (15,022)       (12,016)
            Distributions to minority interest                        (1,327)            --
                                                                 ------------   ------------
                  Cash flows provided by financing activities        122,494        112,792
                                                                 ------------   ------------
Increase (Decrease) in cash and cash equivalents                        (267)         1,285
Cash and cash equivalents at beginning of period                       1,104            381
                                                                 ------------   ------------
Cash and cash equivalents at end of period                        $      837     $    1,666
                                                                 ============   ============
Supplemental disclosure:
            Interest paid during the period                       $    8,768     $    6,112

Non-cash investing activities:
            Fair value of stock issued for ownership
                 interest in another entity                       $      621     $       --
            Fair value of stock/units issued for property         $       86     $   13,796
            Deferred gain on sale of property                     $       85     $      213
            Notes received on sale of property                    $      675     $      689
            Reduction in note receivable for
                 property acquired                                $   11,822     $       --
            Reduction in accounts receivable for
                 property acquired                                $      219     $       --
            Mortgage note assumed                                 $    1,075     $       --
            Unrealized loss on marketable securities              $       79     $       --

Non-cash financing activities:
            Dividends declared to stockholders                    $    5,697     $       --
            Distributions declared to minority interest           $      481     $       --

</TABLE>


See Notes to Condensed Consolidated Financial Statements

                                  Page 7 of 17

<PAGE>


                        U.S. RESTAURANT PROPERTIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

1.  INTERIM UNAUDITED FINANCIAL INFORMATION

U.S.  Restaurant  Properties,  Inc. (the "Company") is a  self-administered  and
self-managed  real  estate  investment  trust  ("REIT"),  as  defined  under the
Internal  Revenue Code of 1986,  as amended.  As noted in the  Company's  Annual
Report on Form 10-K for the year ended December 31, 1997, the Company became the
successor entity to U.S.  Restaurant  Properties Master L.P.  (collectively with
its  subsidiaries,  "USRP").  The  business  and  operations  of the Company are
conducted primarily through U.S. Restaurant Properties Operating L.P. ("OP"). At
September  30,  1998,  the  Company  owns  92.3% of and  controls  the OP. As of
September 30, 1998, the Company owned 747 restaurant and other  properties in 48
states.

The accompanying  condensed  consolidated financial statements should be read in
conjunction  with the  condensed  consolidated  financial  statements  and notes
thereto  included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997,  which was filed with the Securities and Exchange  Commission
("SEC"). The results of operations for the nine months ended September 30, 1998,
are not necessarily indicative of the results to be expected for the year ending
December  31,  1998.  Certain  information  and  footnote  disclosures  normally
included in financial  statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in this report on Form 10-Q
pursuant to the Rules and  Regulations of the SEC. In the opinion of management,
the  disclosures  contained in this report are adequate to make the  information
presented not misleading.

The accompanying  condensed  consolidated balance sheet as of September 30, 1998
and the other condensed consolidated financial statements for the three and nine
months ended September 30, 1998, and 1997, are unaudited,  but management of the
Company  believes  that all  adjustments  (consisting  only of normal  recurring
accruals,  except for the management contract termination accrual) necessary for
a fair presentation of the Company's condensed consolidated financial statements
for the periods presented have been included therein.

The Company had 13,645,196 and 12,698,113  shares of Common Stock outstanding as
of September 30, 1998 and December 31, 1997 respectively.

In May 1998, the Financial  Accounting  Standards  Board's  Emerging Issues Task
Force issued EITF 98-9,  "Accounting  for Contingent  Rent in Interim  Financial
Periods," (EITF 98-9),  which provides  guidance on recognition of rental income
during interim  periods for leases which provide for contingent  rents (commonly
referred to as "percentage  rents").  Under EITF 98-9,  the Company  revised its
method of  accounting  for  contingent  rent on a prospective  basis.  Using the
historical basis of accounting, net income before extraordinary item, net income
and basic and  diluted per share  amounts  would have been  $340,000,  $340,000,
$(0.11) and $(0.11),  respectively,  for the three month period ended  September
30, 1998 and  $10,227,000,  $10,037,000,  $0.36 and $0.36,  respectively for the
nine month period ended September 30, 1998.

This pro forma information below was prepared based on management's estimate for
the effects of EITF 98-9 since it is  impracticable to calculate the amount on a
retroactive  basis  precisely.  Management  of the  Company  believes  that  the
estimate is not  materially  different  from what actual results would have been
under EITF 98-9.  Following  is pro forma  information  for the three months and
nine months  ended  September  30, 1997 as if the EITF 98-9 were in effect as of
January 1, 1997:

<TABLE>

<CAPTION>
                                                                 Three months ended         Nine months ended
                                                                     September 30,              September 30,
                                                               -----------------------    -----------------------
(In thousands, except per share amounts)                          1998          1997         1998          1997
                                                               ----------    ---------    ----------    ---------
<S>                                                            <C>           <C>          <C>           <C>
Income (loss) before extraordinary item as reported             $   (653)     $ 2,532      $  8,802      $ 6,631
Add: Adjustment for change in accounting policy on
     recognition of contingent lease rent                          1,655         (402)        2,214          177
                                                               ----------    ---------    ----------    ---------
Income before extraordinary item as adjusted                    $  1,002      $ 2,130      $ 11,016      $ 6,808
                                                               ==========    =========    ==========    =========
Net income as adjusted                                          $  1,002      $ 2,130      $ 10,826      $ 6,808
                                                               ==========    =========    ==========    =========
Net income available to common stockholders as adjusted         $   (774)     $ 2,080      $  5,499      $ 6,676
                                                               ==========    =========    ==========    =========
Income (loss) per share - Basic:
  Before extraordinary item, less dividends on
    Preferred Stock/General Partner's interest as reported      $  (0.18)     $  0.20      $   0.26      $  0.57
  Adjustment for effect of change in accounting policy              0.12        (0.03)         0.17         0.02
                                                               ----------    ---------    ----------    ---------
  Income before extraordinary item, less dividends on
    Preferred Stock/General Partner's interest as adjusted      $  (0.06)     $  0.17      $   0.43      $  0.59
                                                               ==========    =========    ==========    =========

  Net income available to common stockholders as reported       $  (0.18)     $  0.20      $   0.25      $  0.57
  Adjustment for effect of change in accounting policy              0.12        (0.03)         0.17         0.02
                                                               ----------    ---------    ----------    ---------
  Net income available to common stockholders as adjusted       $  (0.06)     $  0.17      $   0.42      $  0.59
                                                               ==========    =========    ==========    =========
Income (loss) per share - Diluted:
  Before extraordinary item, less dividends on
    Preferred Stock/General Partner's interest as reported      $  (0.18)     $  0.20      $   0.26      $  0.56
  Adjustment for effect of change in accounting policy              0.12        (0.03)         0.17         0.02
                                                               ----------    ---------    ----------    ---------
  Income before extraordinary item, less dividends on
    Preferred Stock/General Partner's interest as adjusted      $  (0.06)     $  0.17      $   0.43      $  0.58
                                                               ==========    =========    ==========    =========

  Net income available to common stockholders as reported       $  (0.18)     $  0.20      $   0.25      $  0.56
  Adjustment for effect of change in accounting policy              0.12        (0.03)         0.17         0.02
                                                               ----------    ---------    ----------    ---------
  Net income available to common stockholders as adjusted       $  (0.06)     $  0.17      $   0.42      $  0.58
                                                               ==========    =========    ==========    =========
</TABLE>

                                  Page 8 of 17

<PAGE>


During  the  nine  months  ended  September  30,  1998,  the  Company  purchased
investments in marketable  securities that are classified as  available-for-sale
securities.  Unrealized  holding  gains and  losses on these  available-for-sale
securities  are  excluded  from  operations  and  reported  as a net amount in a
separate component of stockholders' equity until realized.

2.   NET INCOME PER SHARE OF COMMON STOCK

Effective  December  31,  1997,  the  Company  adopted  Statement  of  Financial
Accounting  Standards No. 128;  Earnings per share (SFAS No. 128).  Earnings per
share amounts presented for the three and nine months period ended September 30,
1997 have been restated to comply with the provisions of SFAS No. 128.

The following table reflects the  calculation of basic and diluted  earnings per
share for the three and nine months period ended September 30, 1998 and 1997.

<TABLE>

<CAPTION>
                                                              Three months ended              Nine months ended
                                                                 September 30,                   September 30,
                                                           ---------------------------     ---------------------------
 (In thousands, except per share amounts)                      1998            1997            1998            1997
                                                           ------------    -----------     -----------     -----------
<S>                                                        <C>             <C>             <C>             <C>
      Net income (loss) before extraordinary item           $     (653)     $   2,532       $   8,802       $   6,631
         Loss on early extinguishment of debt                       --             --            (190)             --
                                                           ------------    -----------     -----------     -----------
      Net income (loss)                                           (653)         2,532           8,612           6,631
         Dividends on preferred stock/general 
           partner interest                                     (1,776)           (50)         (5,327)           (132)
                                                           ------------    -----------     -----------     -----------
      Net income (loss) allocable to
         common shareholders                                $   (2,429)     $   2,482       $   3,285       $   6,499
                                                           ============    ===========     ===========     ===========
      Net income (loss) per share - Basic
         Before extraordinary item less preferred
           stock dividends/general partner interest         $    (0.18)     $    0.20       $    0.26       $    0.57
         Extraordinary loss on extinguishment of debt               --             --           (0.01)             --
                                                           ------------    -----------     -----------     -----------
      Net income (loss) allocable to
         common stockholders                                $    (0.18)     $    0.20       $    0.25       $    0.57
                                                           ============    ===========     ===========     ===========
      Net income (loss) per share - Diluted
         Before extraordinary item, less preferred
           stock dividends/general partner interest         $    (0.18)     $    0.20       $    0.26       $    0.56
         Extraordinary loss on extinguishment of debt               --             --           (0.01)             --
                                                           ------------    -----------     -----------     -----------
      Net income (loss) allocable to
         common stockholders                                $    (0.18)     $    0.20       $    0.25       $    0.56
                                                           ============    ===========     ===========     ===========
      Weighted average shares outstanding (a)
         Basic                                                  13,142         12,286          13,006          11,371
         Dilutive effect of outstanding options                    165            236             179             172
         Dilutive effect of guaranteed stock                         1             22              --               5
         Dilutive effect of contingent shares                      196             --              67              --
                                                           ------------    -----------     -----------     -----------
           Diluted                                              13,504         12,544          13,252          11,548
                                                           ============    ===========     ===========     ===========
</TABLE>


         (a)  Excludes 3,679,938 shares of convertible  preferred stock, 804,338
              shares of guaranteed  stock and  1,151,630 OP units,  all of which
              are not dilutive at September 30, 1998.

3.    COMPREHENSIVE INCOME

As of January 1, 1998,  the Company  adopted  Statement of Financial  Accounting
Standards No. 130 (SFAS 130), "Reporting  Comprehensive  Income," issued in June
1997. For interim periods, SFAS 130 requires disclosure of comprehensive income,
which is  composed of net income and other  comprehensive  income  items.  Other
comprehensive income items are revenues,  expenses,  gains and losses that under
generally  accepted  accounting  principles  are  excluded  from net  income and
reflected as a component of equity. Consolidated comprehensive income (loss) was
$(732,000) and  $8,533,000 for the three and nine month periods ended  September
30, 1998, respectively,  which includes unrealized holding losses on investments
of $79,000.  Consolidated  comprehensive  income was equal to  consolidated  net
income for the three and nine month period ended September 30, 1997.

4.    PROPERTY ACQUISITIONS AND DISPOSITIONS

During the three months ended  September  30, 1998,  the Company  completed  the
purchase of 72  restaurant,  gas station and other  properties  for an aggregate
purchase price of $47,573,000.

During the three months ended June 30, 1998, the Company  completed the purchase
of 49 restaurant,  gas station and other  properties  for an aggregate  purchase
price of $38,374,000.

During the three months ended March 31, 1998, the Company completed the purchase
of 44 restaurant properties for an aggregate purchase price of $44,160,000.

During the three months ended  September 30, 1998,  seven  restaurant  and other
properties were sold for cash of $5,068,000, net of closing costs resulting in a
gain of $252,000.


                                  Page 9 of 17

<PAGE>


During the three months ended June 30, 1998, two restaurant properties were sold
for cash of $632,000,  net of closing costs resulting in a gain of $284,000. The
Company  received a note  receivable of $675,000  which bears  interest at 8.50%
with interest and principal due monthly through July 2012 in connection with the
sale of the other property. In accordance with Statement of Accounting Standards
No. 66 "Accounting  for Real Estate Sales" the Company  recorded a deferred gain
of $85,000 as a result of the sale.  In addition,  a previous  deferred  gain on
sale of $173,000 was recognized since the receivable amount was collected.

In the normal course of business,  the Company may sign purchase  agreements and
deposit earnest money to acquire restaurant  properties.  Such agreements become
binding  obligations  upon the  completion  of a due  diligence  period  ranging
usually from 15 - 30 days.

On September 30, 1998,  earnest money purchase deposits amounting to $12,400,000
were on deposit for the purchase of twenty-seven  Texaco gas station properties,
seven  Popeye's,  five Denny's,  three Burger King's,  two Arby's,  one Kentucky
Fried Chicken  restaurant  property and  twenty-nine  other  restaurant  and gas
station  properties.   The  Company  believes  it  will  either  complete  these
acquisitions or have the deposits refunded.

5.   REVOLVING CREDIT FACILITIES

On January 17, 1998 the Company entered into a credit agreement with a syndicate
of banks for an unsecured  revolving  credit line of $175  million.  This credit
agreement  replaced the Company's then existing line of credit.  As of September
30, 1998,  the Company has  approximately  $68 million  available  under the new
credit  agreement.  The Company may request advances under this credit agreement
to  finance  the  acquisition  of  restaurant  properties,  to repair and update
restaurant properties and for working capital. The banks will also issue standby
letters of credit for the  account of the Company  under this credit  agreement.
This credit  agreement  expires on January 15, 2001 and provides that borrowings
thereunder  bear  interest  at the then  current  LIBOR plus a margin  spread of
either  1.05%,  1.20% or 1.35%,  dependent on a leverage  ratio  formula.  As of
September  30,  1998,  the margin  spread was 1.20%.  There is an unused line of
credit fee of 0.25% per annum on the unused portion of the credit agreement.

On January 17, 1998, the Company's  previous  secured  revolving credit facility
was  terminated  and  the  related  unamortized  costs  were  expensed  and  the
outstanding balance thereunder of $63,782,000 was repaid with funds from the new
unsecured credit agreement.

On August 15,  1997,  a wholly owned  subsidiary  of the Company  entered into a
short term borrowing  facility (the "Pacific  Mutual  Facility") of $30 million.
This revolving  credit  facility was repaid in full during the nine month period
ending September 30, 1998 and the borrowing facility was terminated.

6.   NOTES PAYABLE

On February 26, 1997,  the Company issued  $40,000,000 in privately  placed debt
which consists of $12,500,000  Series A Senior Secured  Guaranteed  Notes with a
8.06% interest rate and due date of January 31, 2000; and  $27,500,000  Series B
Senior  Secured  Guaranteed  Notes  with a 8.30%  interest  rate and due date of
January  31,  2002.  In January  1998 the note  holders  agreed to  release  the
collateral for these notes.

On May 12,  1998 the  Company  issued  $111  million of 7 year fixed rate senior
unsecured notes payable in a private  placement.  The notes bear interest at the
rate of 7.15% per annum and are due May 1, 2005.  The net  proceeds of the notes
were used to repay a portion of the revolving  credit  agreement and for general
corporate purposes.

The Company has in principle  entered into an agreement  subsequent to September
30, 1998 to issue  $47,500,000  in senior notes payable in a private  placement.
The notes when issued will bear interest at the rate of 8.22% per annum. The net
proceeds will be used to repay a portion of the revolving  credit  agreement and
for general corporate purposes.

7.   RELATED PARTY TRANSACTIONS

Prior to October 15, 1997, QSV Properties,  Inc, the Managing General Partner of
USRP ("QSV") was responsible for managing the business and affairs of USRP. USRP
paid QSV a  non-accountable  annual  allowance  (adjusted  annually  to  reflect
increases in the Consumer Price Index and additions to the property  portfolio),
plus reimbursement of out-of-pocket costs incurred to other parties for services
rendered to USRP.  The  allowance  for the three  months and nine  months  ended
September  30, 1997 was $722,000 and  $1,695,000,  respectively.  The  Company's
accounts payable balance includes $121,000 for this allowance as of December 31,
1997. In addition QSV was paid a one-time  acquisition  fee equal to one percent
of the  purchase  price for  additional  property  purchases  which  amounted to
$521,000 and $1,341,000 for the three months and nine months ended September 30,
1997,  respectively.  This  contract  was  terminated  in  conjunction  with the
Company's conversion to a REIT on October 15, 1997 (See Note 8).

A note receivable of $394,000 and $261,000 is due from Arkansas  Restaurants #10
L.P.  ("ARLP") at September  30, 1998 and December 31, 1997,  respectively.  The
note  receivable  is due on September 1, 1999,  and has an interest rate of 9.0%
per annum.  At September  30, 1998 a note  receivable  of $40,000 is due from an
owner of ARLP.  This note is due on October 21, 1998 and has an interest rate of
6.0% per annum.  At September  30, 1998 and December 31, 1997,  tenant and other
receivables  from ARLP were  $434,000 and $158,000,  respectively.  The managing
general  partner of ARLP is owned by an officer of the Company,  who receives no
compensation for this role.

As of September 30, 1998 and December 31, 1997,  notes  receivable of $1,070,000
were due from Southeast Fast Food Partners,  L.P. ("SFF").  The notes receivable
are due on  July 1,  1999  and  have an  interest  rate of 9.0%  per  annum.  At
September  30, 1998 and December 31, 1997 a note  receivable  of $136,000 is due
from the owners of SFF.  This note is due on July 1, 1999,  and has an  interest
rate of 9.0% per annum.  As of September 30, 1998 and December 31, 1997,  tenant
and other  receivables  from SFF were $525,000 and $362,000,  respectively.  The
Managing  General  Partner  of SFF is owned by an officer  of the  Company,  who
receives no compensation for this role.

During 1996, the Company agreed to make available to USRP Development  Company a
revolving  line of credit in the  principal  amount  of  $5,000,000,  to be used
solely for paying for the acquisition and development of restaurant  properties,
which will be purchased by the Company upon completion of development.  The line
of credit is secured by certain development  properties and bears interest at an
annual  rate of 9.0%.  In  April  1998,  the line of  credit  was  increased  to
$15,000,000  with interest  only  payments due on November 1, 1998,  and on each
anniversary  thereof  throughout  the  term of the  note  with  all  outstanding
principal  and accrued but unpaid  interest  due on October  31,  2001,  when it
matures. At September 30, 1998, the outstanding balance was $6,594,000.

                                 Page 10 of 17

<PAGE>


As of April 29, 1998,  two affiliates of the Company , U.S.  Restaurant  Lending
GP, Inc.  (the  "General  Partner")  and U.S.  Restaurant  Lending LP, Inc. (the
"Limited Partner") entered into joint venture and limited partnership agreements
with MLQ  Investors,  L.P.,  an affiliate  of Goldman,  Sachs & Co., to form two
limited  partnerships.  The two  limited  partnerships  will  engage in  lending
activities  to  owners  and  operators  of  quick  service  franchises  and  gas
station/convenience  store outlets. The Company has indirect ownership interests
(through the General  Partner and Limited  Partner  interests it owns) of 71.25%
and 47.5%,  respectively,  in these two partnerships.  As of September 30, 1998,
the Company had other receivables from the two lending  partnerships of $272,000
and a note receivable of $531,000 from the General Partner and Limited Partner.

8.   STOCKHOLDERS' EQUITY AND MINORITY INTEREST

COMMON STOCK

As reported in the Company's Annual Report on Form 10-K as of December 31, 1997,
the  Company  effected  the  conversion  of USRP  into a  self-administered  and
self-managed REIT on October 15, 1997. As a result of the Merger,  USRP became a
subsidiary of the Company and, at the effective time of the Merger,  all holders
of units of  beneficial  interest of USRP became  stockholders  of the  Company.
Accordingly,  information  contained in these condensed  consolidated  financial
statements related to the equity ownership of USRP following October 15, 1997 is
presented as ownership of shares of Common Stock of the Company.  On October 30,
1997, the Company  effected a three-for-two  stock split.  All of the historical
Units and per unit information has been restated to reflect this stock split and
conversion of the units to Common Stock.

The Company  announced on August 5, 1998 that the Board of Directors  authorized
the Company to repurchase up to 500,000 shares of the Company's Common Stock and
Convertible  Preferred  Stock. Any purchases made under the program will be made
from  time to time in open  market or  privately  negotiated  transactions.  The
repurchase  program will continue until the Company acquires 500,000 shares,  or
until  such  time as the  Board  of  Directors  terminates  the  program.  As of
September 30, 1998,  the Company has  repurchased  and retired  29,700 shares of
common stock under this program.

MINORITY INTEREST

As reported in the Company's Annual Report on Form 10-K as of December 31, 1997,
the  management  contract  between  QSV and USRP was  terminated.  The  contract
termination  and QSV's  partnership  interests in USRP were converted to 126,582
shares of Common  Stock of the  Company  and  1,148,418  units of the OP. The OP
units  represent  a  minority  interest  in the OP of the  REIT.  Each  OP  unit
participates  in any income  (loss) of the OP based on the percent  ownership in
the OP and the OP  units  held  by QSV  receive  a cash  dividend  in an  amount
equivalent to a share of Common Stock. Each OP unit held by QSV may be exchanged
for one share of Common Stock of the Company.  With each exchange of outstanding
OP units for Common Stock, the Company's  percentage  ownership  interest in the
OP,  directly or  indirectly,  will  increase.  An additional  825,000 shares of
Common Stock of the Company or its  equivalent  in OP units may be issued to QSV
if certain  earnings  targets  are met by the  Company  by the year 2000.  As of
September   30,  1998,   the  Company  has  accrued   approximately   $4,991,000
representing  196,212 OP units based on earning  targets that have been met. The
196,212 OP units have not been  issued  and will not  participate  in any income
(loss) or receive any distributions  from the OP until such units are issued. In
addition,  the  Company has issued  3,212 OP units for the  purchase of property
during the three months ended September 30, 1998.

Minority interest in the OP consists of the following (in thousands):


       Balance December 31, 1997                $      19,536
       Distributions paid and declared                 (1,808)
       Termination of management contract               4,991
       OP units issued for property                        86
       Income allocated to minority interest              300
                                               ---------------
       Balance at September 30, 1998            $      23,105
                                               ===============

SHELF REGISTRATION

On August  22,  1997,  the  Company  filed a shelf  registration  statement  for
$150,000,000  registering shares of Common and Preferred Stock.  During the nine
months ended September 30, 1998, the Company sold 653,000 shares of Common Stock
under this registration  statement. In addition, the Company sold 706,063 shares
of Common Stock under this  registration  statement  subsequent to September 30,
1998.  The  amount  of  securities  available  for  issuance  under  this  shelf
registration is approximately $25,025,000.

On October 30, 1998,  the Company filed a shelf  registration  for  $175,000,000
registering  shares of Common and Preferred Stock. This  registration  statement
has not been declared effective as of the date of this Form 10-Q.


                                 Page 11 of 17

<PAGE>


9.   PRO FORMA (UNAUDITED)

The  following  pro forma  information  was  prepared  by  adjusting  the actual
condensed  consolidated  results of operations of the Company for the nine month
periods ended September 30, 1998 and 1997 for the effects of:

         a.       the purchase of 165  properties  on various dates from January
                  1, 1998 through  September 30, 1998 for an aggregate  purchase
                  price of $130,107,000,  the sale of nine restaurant properties
                  for $6,493,000 and related financing transactions; and

         b.       the purchase of 277  restaurant  properties  on various  dates
                  during 1997 for an aggregate  purchase  price of  $182,396,000
                  including  the value of 680,696  shares of Common Stock issued
                  to  sellers;  the  sale of  eight  restaurant  properties  for
                  $5,822,000;  the Preferred  Stock  dividends  required and the
                  reduction  of  interest  expense as a result of the  Preferred
                  Stock  offering   proceeds  used  to  reduce  the  total  debt
                  outstanding by $87,622,000;  the three-for-two  stock split on
                  October 30, 1997;  and other related  financing  transactions,
                  including  the sale of  1,434,831  shares of Common  Stock for
                  $25,000,000.

These  pro  forma  operating  results  are  based  on the  historical  basis  of
accounting  and are not  necessarily  indicative  of what the actual  results of
operations of the Company would have been  assuming all of the  properties  were
acquired  as of January 1, 1997 and do not purport to  represent  the results of
operations for future periods.

                                              Nine months ended September 30,
                                              ---------------------------------
(In thousands, except per share amounts)          1998               1997
                                              --------------   ----------------
Total Revenues                                 $    46,222      $      44,735
                                              ==============   ================
Net Income                                           9,040             11,698

Dividends on Preferred Stock                        (5,327)            (5,327)
                                              --------------   ----------------
Net income allocable to Common Shareholders    $     3,713      $       6,371
                                              ==============   ================
Weighted average shares outstanding
         Basic                                      13,615             13,271
         Diluted                                    13,824             13,586

Net income per share
         Basic                                       $0.27              $0.48
         Diluted                                     $0.27              $0.47


                                 Page 12 of 17

<PAGE>


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

RESULTS OF OPERATIONS.

The Company  derives its revenue from the leasing of its Properties to operators
(primarily  restaurants)  on a "triple net" basis.  Triple net leases  typically
require the tenants to be responsible for property  operating  costs,  including
property taxes,  insurance and  maintenance.  A majority of the Company's leases
provide for a base rent plus a percentage of the restaurant's sales in excess of
a  threshold  amount.  As a result,  a portion of the  Company's  revenues  is a
function of the number of  restaurants  in  operation  and their level of sales.
Sales at individual  restaurants are influenced by local market  conditions,  by
the efforts of  specific  restaurant  operators,  by  marketing,  by new product
programs, support by the franchisor and by the general state of the economy.

On October  15, 1997 the  Company  changed  its form of  business  from a master
limited  partnership to a REIT. U. S.  Restaurant  Properties,  Inc.  became the
successor  entity to U.S.  Restaurant  Properties  Master  L.P.  The  results of
operations for the three and nine months ended  September 30, 1998 are presented
as the continuation of the operations of the predecessor entity.

Certain  statements  in the  analysis  of  financial  condition  and  results of
operations   constitute   "forward-looking   statements"   and  involve   risks,
uncertainties  and other factors which may cause the actual  performance of U.S.
Restaurant  Properties,  Inc. to be materially  different  from the  performance
expressed or implied by such statements.  These risks include interest rates and
other general economic  conditions,  income  fluctuations in U.S. households and
the general health of the fast food and casual dining industry segments.

The results of operations of the Company,  together with its  predecessors,  for
the periods discussed below have been affected by the growth in the total number
of  Properties  owned by the Company,  as well as by increases in rental  income
across the portfolio, over such time periods. The following discussion considers
the specific  impact of such factors on the results of operations of the Company
for the following periods.

COMPARISON OF THE NINE MONTHS ENDED  SEPTEMBER 30, 1998 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997.

The Company owned 322 properties  prior to January 1, 1997. The Company acquired
277 properties  and sold 8 properties  from January 1, 1997 to December 31, 1997
and the Company acquired 165 properties and sold nine  properties,  from January
1, 1998 to September 30, 1998,  the rentals of which are included in the periods
presented from their respective dates of acquisition.

Revenues for the nine months ended September 30, 1998 totaled  $41,922,000 up 70
% from the  $24,596,000  recorded for the nine months ended  September 30, 1997.
The  increase  in  revenues  is  primarily  due to  increases  in the  number of
properties  owned  during the  period as  compared  to the same  period in 1997.
Through  September  30,  1998,  approximately  9% (13% before the effect of EITF
98-9) of the Company's  rental revenues  resulted from  percentage  rents (rents
determined as a percentage of tenant  sales),  down from 17% for the nine months
ended  September  30,  1997.  The  decrease  is due  in  part  to  the  deferred
recognition of percent rent under the provisions of EITF 98-9, which was adopted
in May 1998, and in part due to the diminishing  impact restaurant sales have on
total  rental  revenues.  The  Company's  deferred  percentage  rent  under  the
provisions of EITF 98-9 for the nine months ended September 30, 1998 amounted to
approximately $1,544,000.  Also included in revenues is interest income relating
primarily  to secured  notes and  mortgage  receivable  from tenants and related
parties.  Interest income was $2,012,000 for the nine months ended September 30,
1998 compared with $514,000 for the nine months ended September 30, 1997.

Rent expense for the nine months ended September 30, 1998 totaled  $2,286,000 an
increase of 22% when  compared  to the nine months  ended  September  30,  1998.
Depreciation  and  amortization  expenses in the nine months ended September 30,
1998 totaled  $11,121,000;  an increase of 86% when  compared to the nine months
ended  September  30, 1997.  The increase in rent expense and  depreciation  and
amortization expenses directly relates to the property acquisitions.

Taxes,  general and administrative  expenses for the nine months ended September
30, 1998 totaled  $3,351,000 an increase of 18% when compared to the nine months
ended  September  30,  1997.  The  increase  was a  result  of the  costs of the
increased  infrastructure,  including  additional  employees,  required  by  the
Company to manage and maintain the Company's rate of growth.

Interest   expense  for  the  nine  months  ended  September  30,  1998  totaled
$11,668,000,  an  increase  of 69%,  when  compared  to the  nine  months  ended
September 30, 1997.  The increase in interest  expense  directly  relates to the
additional debt associated with the acquisitions.

Gain on sale of property  for the nine months ended  September  30, 1998 totaled
$709,000 an increase of 58% when compared to the nine months ended September 30,
1997. The increase in the gain directly  relates to the sale of five  additional
properties  when compared to property sales for the nine months ended  September
30, 1997.

Termination of management  contract for the nine months ended September 30, 1998
totaled  $4,991,000.  This  represents the accrual for 196,212 OP units based on
earning  targets  that have  been met by QSV  under the terms of the  management
contract termination agreement between QSV and USRP on October 15, 1997.

Equity in net loss of affiliates of $112,000 for the nine months ended September
30, 1998 related to the  Company's  equity share of net loss in the Anz Company,
LLC, U.S. Restaurant Lending GP, Inc. and U.S. Restaurant Lending LP, Inc.

Minority  interest in net income of the OP of $300,000 for the nine months ended
September 30, 1998 related to OP units held by QSV and other OP unit holders.

Loss on debt  extinguishment of $190,000 for the nine months ended September 30,
1998 related to the termination of the Company's previous line of credit.

COMPARISON  OF THE THREE  MONTHS  ENDED  SEPTEMBER  30, 1998 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1997.

Revenues for the three months ended  September 30, 1998 totaled  $14,506,000  up
48% from the $9,775,000  recorded for the three months ended September 30, 1997.
The  increase  in  revenues  is  primarily  due to  increases  in the  number of
properties  owned during the period as compared to the same period in 1997. Also
included in revenues is interest income relating  primarily to secured notes and
a mortgage  receivable  from tenants and related  parties.  Interest  income was
$684,000 for the three months ended  September  30, 1998  compared with $237,000
for the three months ended September 30, 1997.

                                 Page 13 of 17
<PAGE>


Rent expense for the three months ended September 30, 1998 totaled $818,000,  an
increase of 20% when  compared to the three  months  ended  September  30, 1997.
Depreciation and  amortization  expenses in the three months ended September 30,
1998 totaled  $4,061,000;  an increase of 55% when  compared to the three months
ended  September  30, 1997.  The increase in rent expense and  depreciation  and
amortization expenses directly relates to the property acquisitions.

Taxes, general and administrative  expenses for the three months ended September
30, 1998 totaled $1,153,000 an increase of 16% when compared to the three months
ended  September  30,  1997.  The  increase  was a  result  of the  costs of the
increased  infrastructure,  including  additional  employees,  required  by  the
Company to manage and maintain the Company's rate of growth.

Interest  expense  for  the  three  months  ended  September  30,  1998  totaled
$4,536,000,  an  increase  of 48%,  when  compared  to the  three  months  ended
September 30, 1997.  The increase in interest  expense  directly  relates to the
additional debt associated with the acquisitions.

Gain on sale of property for the three months ended  September  30, 1998 totaled
$252,000 an increase of 38% when  compared to the three months  ended  September
30,  1997.  The  increase  in the  gain  directly  relates  to the  sale of four
additional properties when compared to property sales for the three months ended
September 30, 1997.

Termination of management contract for the three months ended September 30, 1998
totaled  $4,991,000.  This  represents the accrual for 196,212 OP units based on
earning  targets  that have  been met by QSV  under the terms of the  management
contract termination agreement between QSV and USRP on October 15, 1997.

Equity in net loss of affiliates of $55,000 for the three months ended September
30, 1998 related to the  Company's  share of net loss in the Anz  Company,  LLC,
U.S. Restaurant Lending GP, Inc. and U.S. Restaurant Lending LP, Inc.

Minority  interest in net loss of the OP of $203,000  for the three months ended
September 30, 1998 related to OP units held by QSV and other OP unit holders.

LIQUIDITY OF CAPITAL RESOURCES.

The Company's  principal source of cash to meet its short term cash requirements
is rental revenues generated by the Company's properties.  Cash generated by the
portfolio  in  excess  of  operating  needs is used to  reduce  amounts  of debt
outstanding  under the Company's  credit  agreements.  Currently,  the Company's
primary  source of funding for  acquisitions  is its existing  revolving line of
credit.  The Company  anticipates  meeting its future  long-term  capital  needs
through the issuance of  additional  debt or equity,  including  the issuance of
additional OP units, along with cash generated from internal operations.  During
the nine months ended  September  30, 1998 the Company paid  dividends of $1.155
per share,  or an aggregate of $16,349,000 to common  stockholders  and minority
interests.  In addition,  the Company paid  dividends of $1.60 per share,  or an
aggregate $5,899,000 to preferred  stockholders covering the period November 17,
1997 to September 15, 1998.

On January 17, 1998 the Company entered into a credit agreement with a syndicate
of banks for an unsecured  revolving  credit line of $175  million.  This credit
agreement  replaced the Company's then existing line of credit.  As of September
30, 1998,  the Company has  approximately  $68 million  available  under the new
credit  agreement.  The Company may request advances under this credit agreement
to  finance  the  acquisition  of  restaurant  properties,  to repair and update
restaurant  properties and for working capital.  This credit agreement  provides
that borrowings thereunder bear interest at LIBOR plus a margin spread which was
1.20 per annum at September 30.

On May 12,  1998 the  Company  issued  $111  million of 7 year fixed rate senior
unsecured notes payable in a private  placement.  The notes bear interest at the
rate of 7.15% per annum and are due May 1, 2005.  The net  proceeds of the notes
were used to repay a portion of the revolving  credit  agreement and for general
corporate purposes.

The Company has in principle  entered into an agreement  subsequent to September
30, 1998 to issue  $47,500,000  in senior notes payable in a private  placement.
The notes when issued will bear interest at the rate of 8.22% per annum. The net
proceeds will be used to repay a portion of the revolving  credit  agreement and
for general corporate purposes.

Management believes that the existing debt facilities,  along with the Company's
ability  to raise  additional  equity,  including  the  issuance  of OP units in
exchange for properties,  will provide the Company with sufficient  liquidity to
meet operating and growth requirements.

YEAR 2000 COMPLIANCE

The Company has recognized the need to ensure that its data  processing  systems
and operations will not be adversely affected by the change to the calendar year
2000.  The Company's  information  system  consists of a dual server  Windows NT
network with  Windows 95  workstations.  All  accounting  systems are  processed
through Solomon IV, a nationally  recognized provider of accounting software and
has been  represented to the Company by the vendor as Year 2000  compliant.  All
owned property  information  is maintained on an Access  database which has been
tested and is Year 2000 compliant.  The Company currently  processes its payroll
through ADP a third party  processor.  ADP has  represented  that its processing
system is Year 2000 compliant.  The Company has  additionally  identified  those
vendors it believes  could have an impact on its  day-to-day  operations and has
developed a short questionnaire  regarding the vendor's Year 2000 status.  These
questionnaires have been sent to the vendors, all of which have not yet replied.
It is expected  that the  responses  will be  received  or the  vendors  will be
contacted by January 1, 1999 to determine their Year 2000 status.

The Company  believes its information  systems are fully  compliant,  however it
will obtain verification of Year 2000 compliance through internal testing.  More
than 50 percent of the testing has been  performed.  All systems tested are Year
2000 compliant.  Verification of the remaining systems will continue through the
Company's internal  operations.  The cost of such verification is expected to be
less than $25,000.

In the event that any of the Company's  significant tenants,  suppliers or third
party  processors do not  successfully  and timely achieve Year 2000 compliance,
the  Company's  operations  may be  affected.  The Company  has not  finalized a
contingency plan if such condition were to occur.  However, a formal contingency
plan will be developed as any risks come to the Company's attention. The Company
does not  anticipate any material  impact on its results from  operations or its
financial condition as a result of any Year 2000 compliance issues.

FUNDS FROM OPERATIONS (FFO)

FFO is computed as net income (loss) available to common stockholders  (computed
in  accordance  with GAAP),  excluding the effects of direct  financing  leases,
minority interest, unusual charges and gains (or losses) from debt restructuring
and sales of property,  plus real estate related  depreciation and amortization.
The


                                 Page 14 of 17

<PAGE>


Company believes FFO is helpful to investors as a measure of the performance
of an equity REIT because,  along with cash flows from operating,  financing and
investing activities, it provides investors with an understanding of the ability
of the  Company to incur and service  debt and make  capital  expenditures.  The
Company  believes  that  it  computes  FFO  in  accordance  with  the  standards
established  by the  National  Association  of  Real  Estate  Investment  Trusts
("NAREIT"),  which may differ from the  methodology for calculating FFO utilized
by other equity  REITs,  and,  accordingly,  may not be comparable to such other
REITs.  Further,  FFO does not  represent  amounts  available  for  management's
discretionary  use because of needed  capital  replacement  or  expansion,  debt
service obligations,  or other commitments and uncertainties.  FFO should not be
considered as an alternative to net income  (determined in accordance with GAAP)
as an indication of the Company's  financial  performance  or to cash flows from
operating  activities  (determined in accordance  with GAAP) as a measure of the
Company's  liquidity,  nor is it  indicative  of  funds  available  to fund  the
Company's cash needs, including its ability to make distributions.

The following table sets forth, for the nine months ended September 30, 1998 and
1997, the calculation of FFO:


(in thousands)                                           Nine months ended
                                                           September 30,
                                                   ----------------------------
Funds From Operations                                 1998              1997
                                                   -----------     ------------

Net income allocable to common stockholders         $   3,285       $    6,499
    Direct financing lease payments                     1,721            1,716
    Capital lease principal payments                      (79)            (140)
    Depreciation and amortization                      11,065            5,984
    Gain on sale of property                             (709)            (450)
    REIT conversion costs                                  --              819
    Termination of management contract                  4,991               --
    Income allocable to minority interest                 300               --
    Income allocable to general partner                    --              132
    Distributions to general partner                       --              240
    Loss on early extinguishment of debt                  190               --
                                                   -----------     ------------
    EITF 98-9 adjusted Funds from operations (FFO)     20,764           14,320

    Effect of EITF 98-9                                 1,544               --
                                                   -----------     ------------
    FFO on a basis comparable with prior periods    $  22,308       $   14,320
                                                   ===========     ============
    Total shares applicable to FFO                     14,337           11,548
                                                   ===========     ============


INFLATION

Some of the  Company's  leases are subject to  adjustments  for increases in the
Consumer  Price  Index,  which  reduces  the risk to the  Company of the adverse
effects of inflation.  Additionally,  to the extent  inflation  increases  sales
volume,  percentage  rents may tend to offset the  effects of  inflation  on the
Company.  Because triple net leases also require the restaurant  operator to pay
for  some  or all  operating  expenses,  property  taxes,  property  repair  and
maintenance costs and insurance, some or all of the inflationary impact of these
expenses will be borne by the restaurant operator and not by the Company.

Operators of restaurants,  in general, possess the ability to adjust menu prices
quickly.  However,  competitive  pressures  may  limit a  restaurant  operator's
ability to raise prices in the face of inflation.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Not applicable



                                  Page 15 of 17

<PAGE>


                           Part II. OTHER INFORMATION


Item 1.           Legal Proceedings

                  None

Item 2.           Changes in Securities

                  None

Item 3.           Defaults upon Senior Securities

                  None

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

                  None

Item 5.           Other Information

                  None

Item 6.           Exhibits and Reports on Form 8-K

                  a)   Exhibits

                      1)   Exhibit 27 - Financial data schedule

                  b)   Reports on Form 8-K

                      1)   A report  on Form 8-K dated  June 24,  1998 was filed
                           with the Securities  and Exchange  Commission on July
                           7, 1998 and  amended  on August 21,  1998,  reporting
                           financial  information  regarding the  acquisition of
                           property.

                      2)   A report on Form 8-K  dated  August 7, 1998 was filed
                           with the Securities and Exchange Commission on August
                           21, 1998, reporting the acquisition of property.


                                 Page 16 of 17

<PAGE>


                                   SIGNATURES


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
the  Registrant  has duly  caused  this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                                      U.S. RESTAURANT PROPERTIES, INC.




Dated:  November 12, 1998             By    /s/ Robert J. Stetson
                                        --------------------------------------
                                         Robert J. Stetson
                                         President and Chief Executive Officer




                                      By    /s/ Michael D. Warren
                                        --------------------------------------
                                         Michael D. Warren
                                         Director of Finance



                                 Page 17 of 17