<PAGE>   1



                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-Q/A

[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
 incorporation or organization)                            Identification 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>   2



                        U.S. RESTAURANT PROPERTIES, INC.


   
EXPLANATORY NOTE

U.S. Restaurant Properties, Inc., a Maryland corporation, hereby amends its
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998.
The Company hereby submits Exhibit 12 Ratio of Earnings to Fixed Charges and
revisions to the Form 10-Q as filed in response to a revision request received
from the Securities and Exchange Commission on November 30, 1998.
    


<TABLE>
<CAPTION>
PART I.       FINANCIAL INFORMATION

<S>               <S>                                                                           <C>
         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
</TABLE>

                                  Page 2 of 17

<PAGE>   3



                          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>   4
                        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
    Termination of management contract                      4,991             --          4,991             --
    Equity in net loss of affiliates                           55             --            112             --
    REIT conversion costs                                      --             75             --            819
                                                        ---------      ---------      ---------      ---------
                                     TOTAL EXPENSES        15,614          7,426         33,529         18,415

                                                        ---------      ---------      ---------      ---------
INCOME (LOSS) BEFORE GAIN ON SALE OF PROPERTY,               
MINORITY INTEREST IN OPERATING PARTNERSHIP AND 
EXTRAORDINARY ITEM                                         (1,108)         2,349          8,393          6,181
Gain on sale of property                                      252            183            709            450 
                                                        ---------      ---------      ---------      ---------
INCOME (LOSS) BEFORE MINORITY INTEREST IN OPERATING
PARTNERSHIP 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>   5

                        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                     
                                -----------------------------------------  ADDITIONAL PAID
                                 SHARES   PAR VALUE   SHARES    PAR VALUE    IN CAPITAL   
                                ----------------------------------------------------------
<S>                               <C>      <C>        <C>       <C>              <C>       
Balance December 31, 1997         3,680    $     4    12,698    $     13         $ 226,140 

Proceeds from exercised stock                            300                         3,099 
options

Stock issued for purchase of
ownership                                                 24                           621 
interest in another entity

Proceeds from sale of common                             653           1            15,699 
stock

Repurchased and retired stock                            (30)                         (753)

Unrealized loss on investment                                                               

Net income                                                                                  
Dividends on preferred stock                                                                
Dividends on common stock                                                                   
Common stock dividends declared                                                             
                                ----------------------------------------------------------

Balance September 30, 1998        3,680    $     4    13,645    $     14         $ 244,806    
                                ==========================================================
<CAPTION>
                                 DISTRIBUTIONS IN  
                                   EXCESS OF NET    UNREALIZED LOSS
                                       INCOME        ON INVESTMENT     TOTAL
                                 --------------------------------------------
<S>                                  <C>             <C>            <C>      
Balance December 31, 1997            $  (20,745)     $     --       $ 205,412
                                   
Proceeds from exercised stock                                           3,099
options                            
                                   
Stock issued for purchase of       
ownership                                                                 621
interest in another entity         
                                   
Proceeds from sale of common                                           15,700
stock                              
                                   
Repurchased and retired stock                                            (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           $  (38,751)     $    (79)      $ 205,994
                                 ============================================
</TABLE>

See Notes to Condensed Consolidated Financial Statements

                                  Page 5 of 17

<PAGE>   6




                        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>   7



                        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>   8



                        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>   9

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>   10

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>   11

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):


<TABLE>
<S>                                                             <C>
                       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
                                                                ===========
</TABLE>


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>   12



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.

<TABLE>
<CAPTION>
                                             NINE MONTHS ENDED SEPTEMBER 30,
                                             -------------------------------
(In thousands, except per share amounts)           1998           1997
                                                ---------      ---------
<S>                                             <C>            <C>      
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
</TABLE>

                                 Page 12 of 17

<PAGE>   13



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 a non-cash accrual for 196,212 OP units at
$25.44 per unit (based on the closing market price if a share if the Company's
common stock on September 10, 1998) that would be issuable based on the
financial targets that have been achieved by the Company as of September 30,
1998 under the terms of the October 15, 1997 management contract termination
agreement between QSV and USRP.
    

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>   14

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 a non-cash accrual for 196,212 OP units at
$25.44 per unit (based on the closing market price if a share if the Company's
common stock on September 10, 1998) that would be issuable based on the
financial targets that have been achieved by the Company as of September 30,
1998 under the terms of the October 15, 1997 management contract termination
agreement between QSV and USRP. This non-cash charge expense was the direct
cause of the net loss incurred by the Company for the three months ended
September 30, 1998.
    

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. The Company has plans to
acquire approximately $200 million in new property acquisitions a year with
approximately $20 million representing development properties. As of September
30, 1998, the Company has paid approximately $138 million for the acquisition
and development of properties and has non-binding contracts for acquisitions of
approximately $88 million with approximately $13 million representing planned
construction costs. In addition, the Company expects to spend approximately $1
million a year to renovate and remodel currently owned properties. The Company
anticipates meeting its future long-term capital needs through the use of its
existing revolving line of credit and 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.

                                 Page 14 of 17

<PAGE>   15
FUNDS FROM OPERATIONS (FFO)

   
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. The Company's 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 Company believes FFO enhances and is helpful to investors
as a measure of the performance of an equity REIT because, along with the
Company's financial condition, results of operations and cash flows, it provides
investors with an understanding of the ability of the Company to incur and
service debt and make capital expenditures. In evaluating FFO and the trends it
depicts, investors should consider the major factors affecting FFO. Growth in
FFO will result from increases in revenue or decreases in related operating
expenses. Conversely, FFO will decline if revenues decline or related operating
expenses increase. 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:

<TABLE>
<CAPTION>
        (in thousands)                                                   NINE MONTHS ENDED
                                                                           SEPTEMBER 30,
                                                                ------------------------------------
        FUNDS FROM OPERATIONS                                        1998                 1997
                                                                ------------         ------------

<S>                                                             <C>                  <C>         
        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 (b)                         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                   --
                                                                ------------         ------------

        Funds from operations (FFO) (a)                         $     20,764         $     14,320
                                                                ============         ============

        Total shares applicable to FFO                                14,337               11,548
                                                                ============         ============
</TABLE>


(a)  FFO for the nine months ended September 30, 1998 is after the effect of
     applying the conclusion reached in EITF 98-9 "Accounting for Contingent
     Rent in Interim Financial Periods", which was issued in May 1998. Under the
     provisions of EITF 98-9, which was adopted prospectively, the Company
     recorded deferred revenue of approximately $1,544,000 and reduced
     percentage rent revenue for the nine months ended September 30, 1998. The
     EITF ruling reflects a change in the timing of percentage rent recognition
     and has no impact on the underlying cash flow or economics of the Company.
     Had the Company recorded percentage rents on a consistent basis with the
     prior year FFO, would have been $22,308,000 for the nine months ended
     September 30, 1998.

(b)  This unusual non-cash charge against earnings relates to the termination of
     the management contract that occurred on October 15, 1997 and does not
     relate to the ongoing business activity of the Company. Since FFO is
     intended as a supplementary measure of operating performance, this charge
     has been added back to net income in arriving at FFO.
    


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>   16



                           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 12 - Ratio of Earnings to Combined Fixed
                          Charges and Preferred Stock Dividends

    


                  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>   17



                                   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:  December 18, 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

<PAGE>   18



                               INDEX TO EXHIBITS


<TABLE>
<CAPTION>
Exhibit
Number                Description
------                -----------

<S>                   <C>
Exhibit 12            - Ratio of Earnings to Combined Fixed Charges
                        and Preferred Stock Dividends
</TABLE>