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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended September 30, 2004



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



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U.S. Restaurant Properties, Inc.

(Exact name of registrant as specified in its charter)



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



12240 Inwood Rd.,
Suite 300, Dallas, Texas 75244

(Address of principal executive offices)

(Zip Code)



(972) 387-1487

(Registrants telephone number, including area code)



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act).    Yes  x    No ̈



As of November 3, 2004, U.S. Restaurant Properties, Inc. had 22,566,639 shares of common
stock $0.001 par value outstanding.



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##### Table of Contents

U.S. RESTAURANT PROPERTIES, INC.



|        |  |         |  |                                                                                                                                         |  |   
|------- |  | ------- |  | --------------------------------------------------------------------------------------------------------------------------------------- |  | --
|PART I. |  |         |  | FINANCIAL INFORMATION                                                                                                                   |  |   
|        |  |         | 
|        |  | Item 1. |  | Financial Statements                                                                                                                    |  |   
|        |  |         | 
|        |  |         |  | Unaudited Condensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003                                          |  | 3 
|        |  |         | 
|        |  |         |  | Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2004 and 2003               |  | 5 
|        |  |         | 
|        |  |         |  | Unaudited Condensed Consolidated Statements of Comprehensive Operations for the three and nine months ended September 30, 2004 and 2003 |  | 6 
|        |  |         | 
|        |  |         |  | Unaudited Condensed Consolidated Statement of Stockholders Equity for the nine months ended September 30, 2004                         |  | 7 
|        |  |         | 
|        |  |         |  | Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003                         |  | 8 
|        |  |         | 
|        |  |         |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                                          |  | 10
|        |  |         | 
|        |  | Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                   |  | 24
|        |  |         | 
|        |  | Item 3. |  | Quantitative and Qualitative Disclosures about Market Risk                                                                              |  | 35
|        |  |         | 
|        |  | Item 4. |  | Controls and Procedures                                                                                                                 |  | 36



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. Financial Statements



U.S. Restaurant Properties, Inc.

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except per share data)



|                                                                                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                                                                                              |  | September 30,2004 |          |   | December 31,2003 |  
|Assets                                                                                                                                                                                                                                        |  |                   |          |   |                  |   |          |  
|                                                                                                                                                                                                                                              |  |                  
|Property, net                                                                                                                                                                                                                                 |  |                   |          |   |                  |   |          |  
|Land                                                                                                                                                                                                                                          |  | $                 | 211,717  |   |                  | $ | 211,862  |  
|Buildings and leasehold improvements                                                                                                                                                                                                          |  |                   | 365,690  |   |                  |   | 369,391  |  
|Machinery and equipment                                                                                                                                                                                                                       |  |                   | 12,483   |   |                  |   | 12,231   |  
|                                                                                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|                                                                                                                                                                                                                                              |  |                   | 589,890  |   |                  |   | 593,484  |  
|Less: accumulated depreciation                                                                                                                                                                                                                |  |                   | (122,437 | ) |                  |   | (109,934 | )
|                                                                                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|                                                                                                                                                                                                                                              |  |                   | 467,453  |   |                  |   | 483,550  |  
|                                                                                                                                                                                                                                              |  |                  
|Construction in progress                                                                                                                                                                                                                      |  |                   | 94       |   |                  |   | 35       |  
|Assets related to properties held for sale                                                                                                                                                                                                    |  |                   | 6,807    |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                                                                                     |  |                   | 1,971    |   |                  |   | 13,855   |  
|Restricted cash and marketable securities                                                                                                                                                                                                     |  |                   | 6,472    |   |                  |   | 3,782    |  
|Rent and other receivables, net (includes $1,094 and $1,343 allowance for doubtful accounts at September 30, 2004 and December 31, 2003,
respectively)                                                                                        |  |                   | 3,952    |   |                  |   | 7,259    |  
|Straight line rent, net (includes $200 and $440 allowance for doubtful accounts at September 30, 2004 and December 31, 2003, respectively, and
$3,514 and $3,482 of remodel grants at September 30, 2004 and December 31, 2003, respectively) |  |                   | 16,375   |   |                  |   | 15,295   |  
|Prepaid expenses and other assets                                                                                                                                                                                                             |  |                   | 708      |   |                  |   | 1,362    |  
|Inventories                                                                                                                                                                                                                                   |  |                   | 3,174    |   |                  |   | 2,986    |  
|Investments                                                                                                                                                                                                                                   |  |                   | 316      |   |                  |   | 405      |  
|Notes receivable, net (includes $2,779 and $2,887 allowance for doubtful accounts at September 30, 2004 and December 31, 2003,
respectively)                                                                                                  |  |                   | 6,255    |   |                  |   | 6,247    |  
|Mortgage loans receivable, net (includes $252 allowance for doubtful accounts at both September 30, 2004 and December 31,
2003)                                                                                                               |  |                   | 13,688   |   |                  |   | 10,170   |  
|Net investment in direct financing leases                                                                                                                                                                                                     |  |                   | 283      |   |                  |   | 256      |  
|Deferred financing costs and intangibles, net                                                                                                                                                                                                 |  |                   | 7,379    |   |                  |   | 9,327    |  
|                                                                                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|Total assets                                                                                                                                                                                                                                  |  | $                 | 534,927  |   |                  | $ | 554,529  |  
|                                                                                                                                                                                                                                              |  |                   |          |   |                  |   |          |  



Continued on next page

See Notes to Unaudited Condensed Consolidated Financial Statements.



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##### Table of Contents

U.S. Restaurant Properties, Inc.

Unaudited Condensed Consolidated Balance Sheets (continued)

(In thousands,
except per share data)



|                                                                                                                                                                                 |  |                   |          |   |                  |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                                 |  | September 30,2004 |          |   | December 31,2003 |  
|Liabilities and stockholders equity                                                                                                                                             |  |                   |          |   |                  |   |          |  
|                                                                                                                                                                                 |  |                  
|Accounts payable and accrued liabilities                                                                                                                                         |  | $                 | 19,930   |   |                  | $ | 19,458   |  
|Accrued dividends and distributions                                                                                                                                              |  |                   | 2,511    |   |                  |   | 2,491    |  
|Line of credit                                                                                                                                                                   |  |                   | 7,500    |   |                  |   | 10,300   |  
|Interest rate derivatives at fair value                                                                                                                                          |  |                   | 832      |   |                  |   | 2,671    |  
|Notes payable                                                                                                                                                                    |  |                   | 306,318  |   |                  |   | 314,696  |  
|Mortgage note payable                                                                                                                                                            |  |                   | 881      |   |                  |   | 910      |  
|                                                                                                                                                                                 |  |                   |          |   |                  |   |          |  
|Total liabilities                                                                                                                                                                |  |                   | 337,972  |   |                  |   | 350,526  |  
|                                                                                                                                                                                 |  |                   |          |   |                  |   |          |  
|Commitments, contingencies and guarantees                                                                                                                                        |  |                   |          |   |                  |   |          |  
|                                                                                                                                                                                 |  |                  
|Minority interests                                                                                                                                                               |  |                   | 1,021    |   |                  |   | 1,074    |  
|                                                                                                                                                                                 |  |                   |          |   |                  |   |          |  
|Stockholders equity                                                                                                                                                             |  |                   |          |   |                  |   |          |  
|                                                                                                                                                                                 |  |                  
|Preferred stock, $0.001 par value per share;                                                                                                                                     |  |                   |          |   |                  |   |          |  
|Series A Cumulative Convertible Preferred Stock                                                                                                                                 |  |                   |          |   |                  |   |          |  
|50,000 shares authorized, 4,084 shares issued and outstanding (aggregate liquidation value of $102,107)                                                                          |  |                   | 4        |   |                  |   | 4        |  
|Series B and Series B-1 Convertible Preferred Stock                                                                                                                             |  |                   |          |   |                  |   |          |  
|20 Series B shares authorized, 20 Series B shares issued and outstanding at September 30, 2004 and December 31, 2003, respectively (aggregate
liquidation value of $20,000); and |  |                   |         |   |                  |   |         |  
|5 Series B-1 shares authorized, 5 Series B shares issued and outstanding at September 30, 2004 and none at December 31, 2003 (aggregate
liquidation value of $5,000)             |  |                   |         |   |                  |   |         |  
|Common stock, $0.001 par value per share;                                                                                                                                        |  |                   |          |   |                  |   |          |  
|100,000 shares authorized, 22,562 and 22,527 shares issued and outstanding at September 30, 2004 and December 31, 2003,
respectively                                             |  |                   | 23       |   |                  |   | 23       |  
|Additional paid-in capital                                                                                                                                                       |  |                   | 401,048  |   |                  |   | 395,626  |  
|Excess stock, $0.001 par value per share                                                                                                                                         |  |                   |          |   |                  |   |          |  
|15,000 shares authorized, no shares issued                                                                                                                                       |  |                   |         |   |                  |   |         |  
|Accumulated other comprehensive loss                                                                                                                                             |  |                   | (832     | ) |                  |   | (2,671   | )
|Loans to stockholders for common stock                                                                                                                                           |  |                   | (224     | ) |                  |   | (299     | )
|Distributions in excess of net income                                                                                                                                            |  |                   | (204,085 | ) |                  |   | (189,754 | )
|                                                                                                                                                                                 |  |                   |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                                                       |  |                   | 195,934  |   |                  |   | 202,929  |  
|                                                                                                                                                                                 |  |                   |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                                                                       |  | $                 | 534,927  |   |                  | $ | 554,529  |  
|                                                                                                                                                                                 |  |                   |          |   |                  |   |          |  



See Notes to
Unaudited Condensed Consolidated Financial Statements.



4



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##### Table of Contents

U.S. Restaurant Properties, Inc.

Unaudited Condensed Consolidated Statements of Operations

(In thousands, except per share data)



|                                                                                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                                             |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                                                                             |  | 2004                            |        |   | 2003                           |   |        | 2004 |  |   | 2003    |  
|Revenues:                                                                                                                    |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Rental income                                                                                                                |  | $                               | 15,522 |   |                                | $ | 14,539 |      |  | $ | 46,866  |   |  | $ | 43,428  |  
|Tenant expense reimbursements                                                                                                |  |                                 | 1,086  |   |                                |   | 809    |      |  |   | 2,433   |   |  |   | 2,611   |  
|Lease termination fees                                                                                                       |  |                                 | 100    |   |                                |   |       |      |  |   | 310     |   |  |   | 997     |  
|Interest on real estate loans                                                                                                |  |                                 | 482    |   |                                |   | 579    |      |  |   | 1,370   |   |  |   | 2,342   |  
|Retail operations                                                                                                            |  |                                 | 15,918 |   |                                |   | 14,994 |      |  |   | 44,129  |   |  |   | 40,127  |  
|                                                                                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total revenues                                                                                                               |  |                                 | 33,108 |   |                                |   | 30,921 |      |  |   | 95,108  |   |  |   | 89,505  |  
|Expenses:                                                                                                                    |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Ground rent                                                                                                                  |  |                                 | 896    |   |                                |   | 890    |      |  |   | 2,640   |   |  |   | 2,674   |  
|Property taxes                                                                                                               |  |                                 | 262    |   |                                |   | 139    |      |  |   | 650     |   |  |   | 669     |  
|Other property                                                                                                               |  |                                 | 367    |   |                                |   | 351    |      |  |   | 996     |   |  |   | 970     |  
|Legal                                                                                                                        |  |                                 | 234    |   |                                |   | 905    |      |  |   | 844     |   |  |   | 1,540   |  
|Depreciation and amortization                                                                                                |  |                                 | 5,568  |   |                                |   | 5,088  |      |  |   | 16,607  |   |  |   | 15,132  |  
|Impairment of long-lived assets                                                                                              |  |                                 | 19     |   |                                |   | 444    |      |  |   | 261     |   |  |   | 674     |  
|Provision for doubtful accounts                                                                                              |  |                                 | (8     | ) |                                |   | (137   | )    |  |   | 294     |   |  |   | (307    | )
|General and administrative                                                                                                   |  |                                 | 5,249  |   |                                |   | 2,644  |      |  |   | 12,200  |   |  |   | 8,136   |  
|Retail cost of sales                                                                                                         |  |                                 | 13,238 |   |                                |   | 12,438 |      |  |   | 37,141  |   |  |   | 33,644  |  
|                                                                                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total expenses                                                                                                               |  |                                 | 25,825 |   |                                |   | 22,762 |      |  |   | 71,633  |   |  |   | 63,132  |  
|                                                                                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Income from continuing operations                                                                                            |  |                                 | 7,283  |   |                                |   | 8,159  |      |  |   | 23,475  |   |  |   | 26,373  |  
|Non-operating income                                                                                                         |  |                                 | 8      |   |                                |   | 8      |      |  |   | 21      |   |  |   | 29      |  
|Interest expense                                                                                                             |  |                                 | (4,665 | ) |                                |   | (4,607 | )    |  |   | (13,787 | ) |  |   | (15,660 | )
|Minority interest                                                                                                            |  |                                 | (7     | ) |                                |   | (1,205 | )    |  |   | (29     | ) |  |   | (3,542  | )
|                                                                                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net income from continuing operations before discontinued operations and cumulative effect of change in accounting principle |  |                                 | 2,619  |   |                                |   | 2,355  |      |  |   | 9,680   |   |  |   | 7,200   |  
|Income from discontinued operations                                                                                          |  |                                 | 1,675  |   |                                |   | 2,965  |      |  |   | 5,705   |   |  |   | 9,069   |  
|Cumulative effect of change in accounting principle                                                                          |  |                                 |       |   |                                |   |       |      |  |   |        |   |  |   | (246    | )
|                                                                                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net income                                                                                                                   |  |                                 | 4,294  |   |                                |   | 5,320  |      |  |   | 15,385  |   |  |   | 16,023  |  
|Dividends and accretion on preferred stock                                                                                   |  |                                 | (2,480 | ) |                                |   | (2,185 | )    |  |   | (7,389  | ) |  |   | (5,736  | )
|                                                                                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net income allocable to common stockholders                                                                                  |  | $                               | 1,814  |   |                                | $ | 3,135  |      |  | $ | 7,996   |   |  | $ | 10,287  |  
|                                                                                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Basic and diluted net income per share:                                                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Income from continuing operations allocable to common stockholders                                                           |  | $                               | 0.01   |   |                                | $ | 0.01   |      |  | $ | 0.10    |   |  | $ | 0.07    |  
|Income from discontinued operations                                                                                          |  |                                 | 0.07   |   |                                |   | 0.15   |      |  |   | 0.25    |   |  |   | 0.46    |  
|Cumulative effect of change in accounting principle                                                                          |  |                                 |       |   |                                |   |       |      |  |   |        |   |  |   | (0.01   | )
|                                                                                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net income per share                                                                                                         |  | $                               | 0.08   |   |                                | $ | 0.16   |      |  | $ | 0.35    |   |  | $ | 0.52    |  
|                                                                                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Weighted average shares outstanding                                                                                          |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Basic                                                                                                                        |  |                                 | 22,563 |   |                                |   | 19,909 |      |  |   | 22,552  |   |  |   | 19,871  |  
|Diluted                                                                                                                      |  |                                 | 22,656 |   |                                |   | 20,024 |      |  |   | 22,649  |   |  |   | 19,955  |  



See Notes to
Unaudited Condensed Consolidated Financial Statements.



5



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##### Table of Contents

U.S. Restaurant Properties, Inc.

Unaudited Condensed Consolidated Statements of Other Comprehensive
Operations

(In thousands)



|                                                          |  |                                 |       |   |                                |   |       |      |  |   |        |   |  |   |        |  
|--------------------------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                          |  | Three Months endedSeptember 30, |       |   | Nine Months endedSeptember 30, |  
|                                                          |  | 2004                            |       |   | 2003                           |   |       | 2004 |  |   | 2003   |  
|Net income                                                |  | $                               | 4,294 |   |                                | $ | 5,320 |      |  | $ | 15,385 |   |  | $ | 16,023 |  
|Other comprehensive income                                |  |                                 |       |   |                                |   |       |      |  |   |        |   |  |   |        |  
|Reclassification adjustment  hedge settlement adjustment |  |                                 | 518   |   |                                |   | 707   |      |  |   | 1,847  |   |  |   | 2,292  |  
|Fair value adjustment for derivatives                     |  |                                 | (319  | ) |                                |   | (57   | )    |  |   | (8     | ) |  |   | (1,201 | )
|                                                          |  |                                 |       |   |                                |   |       |      |  |   |        |   |  |   |        |  
|Comprehensive income                                      |  | $                               | 4,493 |   |                                | $ | 5,970 |      |  | $ | 17,224 |   |  | $ | 17,114 |  
|                                                          |  |                                 |       |   |                                |   |       |      |  |   |        |   |  |   |        |  



See Notes to
Unaudited Condensed Consolidated Financial Statements.



6



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##### Table of Contents

U.S. Restaurant Properties, Inc.

Unaudited Condensed Consolidated Statement of Stockholders Equity

For the Nine Months Ended September 30, 2004

(In thousands)



|                                                     |  |                         |  |                               |   |              |    |                            |   |        |                                      |          |  |                       |    |  |                                       |         |   |       |   |        |   |  |   |      |   |  |   |          |   |  |   |         |  
|---------------------------------------------------- |  | ----------------------- |  | ----------------------------- | - | ------------ | -- | -------------------------- | - | ------ | ------------------------------------ | -------- |  | --------------------- | -- |  | ------------------------------------- | ------- | - | ----- | - | ------ | - |  | - | ---- | - |  | - | -------- | - |  | - | ------- | -
|                                                     |  | Preferred StockSeries A |  | Preferred StockSeries B & B-1 |   | Common Stock |    | Additional Paid-in Capital |   |        | Accumulated Other Comprehensive Loss |          |  | Loans to Stockholders |    |  | Distributions In Excess of Net Income |         |   | Total |  
|                                                     |  | Shares                  |  | Par Value                     |   | Shares       |    | ParValue                   |   | Shares |                                      | ParValue |  |                       |    |  |                                      
|Balances at January 1, 2004                          |  | 4,084                   |  | $                             | 4 |              | 20 |                            | $ |       |                                      | 22,527   |  | $                     | 23 |  | $                                     | 395,626 |   |       | $ | (2,671 | ) |  | $ | (299 | ) |  | $ | (189,754 | ) |  | $ | 202,929 |  
|Net income                                           |  |                         |  |                               |   |              |    |                            |   |        |                                      |          |  |                       |    |  |                                       |         |   |       |   |        |   |  |   |      |   |  |   | 15,385   |   |  |   | 15,385  |  
|Repayment by stockholders of loans for Common Stock  |  |                         |  |                               |   |              |    |                            |   |        |                                      |          |  |                       |    |  |                                       |         |   |       |   |        |   |  |   | 75   |   |  |   |          |   |  |   | 75      |  
|Proceeds from issuance of Series B-1 Preferred Stock |  |                         |  |                               |   |              | 5  |                            |   |        |                                      |          |  |                       |    |  |                                       | 4,654   |   |       |   |        |   |  |   |      |   |  |   |          |   |  |   | 4,654   |  
|Proceeds from issuance of Series B-1 Stock warrants  |  |                         |  |                               |   |              |    |                            |   |        |                                      |          |  |                       |    |  |                                       | 95      |   |       |   |        |   |  |   |      |   |  |   |          |   |  |   | 95      |  
|Costs associated with issuance of Preferred Stock    |  |                         |  |                               |   |              |    |                            |   |        |                                      |          |  |                       |    |  |                                       | (67     | ) |       |   |        |   |  |   |      |   |  |   |          |   |  |   | (67     | )
|Common Stock issued stock-based compensation        |  |                         |  |                               |   |              |    |                            |   |        |                                      | 30       |  |                       |    |  |                                       | 351     |   |       |   |        |   |  |   |      |   |  |   |          |   |  |   | 351     |  
|Proceeds from exercised stock options                |  |                         |  |                               |   |              |    |                            |   |        |                                      | 10       |  |                       |    |  |                                       | 130     |   |       |   |        |   |  |   |      |   |  |   |          |   |  |   | 130     |  
|Series B Preferred Stock accretion                   |  |                         |  |                               |   |              |    |                            |   |        |                                      |          |  |                       |    |  |                                       | 259     |   |       |   |        |   |  |   |      |   |  |   | (259     | ) |  |   |        |  
|Other comprehensive income (loss) -                  |  |                         |  |                               |   |              |    |                            |   |        |                                      |          |  |                       |    |  |                                       |         |   |       |   |        |   |  |   |      |   |  |   |          |   |  |   |         |  
|Reclassification adjustment- hedge settlement        |  |                         |  |                               |   |              |    |                            |   |        |                                      |          |  |                       |    |  |                                       |         |   |       |   | 1,847  |   |  |   |      |   |  |   |          |   |  |   | 1,847   |  
|Fair value adjustment for derivatives                |  |                         |  |                               |   |              |    |                            |   |        |                                      |          |  |                       |    |  |                                       |         |   |       |   | (8     | ) |  |   |      |   |  |   |          |   |  |   | (8      | )
|Distributions declared on Common Stock               |  |                         |  |                               |   |              |    |                            |   |        |                                      |          |  |                       |    |  |                                       |         |   |       |   |        |   |  |   |      |   |  |   | (22,327  | ) |  |   | (22,327 | )
|Distributions declared on Preferred Stock            |  |                         |  |                               |   |              |    |                            |   |        |                                      |          |  |                       |    |  |                                       |         |   |       |   |        |   |  |   |      |   |  |   | (7,130   | ) |  |   | (7,130  | )
|                                                     |  |                         |  |                               |   |              |    |                            |   |        |                                      |          |  |                       |    |  |                                       |         |   |       |   |        |   |  |   |      |   |  |   |          |   |  |   |         |  
|Balances at September 30, 2004                       |  | 4,084                   |  | $                             | 4 |              | 25 |                            | $ |       |                                      | 22,567   |  | $                     | 23 |  | $                                     | 401,048 |   |       | $ | (832   | ) |  | $ | (224 | ) |  | $ | (204,085 | ) |  | $ | 195,934 |  
|                                                     |  |                         |  |                               |   |              |    |                            |   |        |                                      |          |  |                       |    |  |                                       |         |   |       |   |        |   |  |   |      |   |  |   |          |   |  |   |         |  



See Notes to
Unaudited Condensed Consolidated Financial Statements.



7



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##### Table of Contents

U.S. Restaurant Properties, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)



|                                                                                 |  |                                |         |   |      |   |         |  
|-------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                 |  | Nine Months EndedSeptember 30, |        
|                                                                                 |  | 2004                           |         |   | 2003 |  
|Cash flows from operating activities:                                            |  |                                |         |   |      |   |         |  
|                                                                                 |  |                               
|Net income                                                                       |  | $                              | 15,385  |   |      | $ | 16,023  |  
|Adjustments to reconcile net income to net cash flows from operating activities: |  |                                |         |   |      |   |         |  
|Depreciation and amortization                                                    |  |                                | 16,752  |   |      |   | 16,971  |  
|Cumulative effect of change in accounting principle                              |  |                                |        |   |      |   | 270     |  
|Amortization of deferred financing costs and discounts                           |  |                                | 1,261   |   |      |   | 1,317   |  
|Impairment of long-lived assets                                                  |  |                                | 332     |   |      |   | 3,872   |  
|Provision for doubtful accounts                                                  |  |                                | 294     |   |      |   | (307    | )
|Stock-based compensation                                                         |  |                                | 351     |   |      |   | 9       |  
|Accretion of interest                                                            |  |                                | 27      |   |      |   | (125    | )
|Minority interests                                                               |  |                                | 29      |   |      |   | 3,542   |  
|Gain on sales of property                                                        |  |                                | (4,605  | ) |      |   | (10,275 | )
|Gain on sales of property held for sale                                          |  |                                | (756    | ) |      |   |        |  
|Gain on disposal of asset retirement obligation                                  |  |                                |        |   |      |   | (64     | )
|Decrease in rent and other receivables, net                                      |  |                                | 2,889   |   |      |   | 2,669   |  
|Increase in straight line rent, net                                              |  |                                | (2,044  | ) |      |   | (265    | )
|Decrease (increase) in prepaid expenses                                          |  |                                | 654     |   |      |   | (282    | )
|Increase in inventories                                                          |  |                                | (525    | ) |      |   | (1,571  | )
|Increase (decrease) in net investment in direct financing leases                 |  |                                | (28     | ) |      |   | 144     |  
|Increase in accounts payable and accrued liabilities                             |  |                                | 336     |   |      |   | 2,811   |  
|Decrease in unearned contingent rent                                             |  |                                | 147     |   |      |   | 82      |  
|                                                                                 |  |                                |         |   |      |   |         |  
|Cash flows from operating activities                                             |  |                                | 30,499  |   |      |   | 34,821  |  
|                                                                                 |  |                                |         |   |      |   |         |  
|Cash flows from investing activities:                                            |  |                                |         |   |      |   |         |  
|                                                                                 |  |                               
|Proceeds from sale of property and equipment                                     |  |                                | 21,611  |   |      |   | 35,100  |  
|Purchase of property                                                             |  |                                | (11,816 | ) |      |   | (7,863  | )
|Purchase of property held for sale                                               |  |                                | (10,705 | ) |      |   |        |  
|Purchase of machinery and equipment                                              |  |                                | (1,197  | ) |      |   | (3,300  | )
|Increase in restricted cash, net                                                 |  |                                | (2,690  | ) |      |   | (3,142  | )
|Mortgage loans receivable purchased                                              |  |                                | (5,256  | ) |      |   | (11     | )
|Mortgage loans receivable principal payments                                     |  |                                | 2,407   |   |      |   | 11,676  |  
|Notes receivable issued                                                          |  |                                | (167    | ) |      |   | (63     | )
|Increase in lease acquisition premiums                                           |  |                                | (70     | ) |      |   |        |  
|Notes receivable principal payments                                              |  |                                | 1,016   |   |      |   | 2,239   |  
|Other increases                                                                  |  |                                | 89      |   |      |   | 260     |  
|                                                                                 |  |                                |         |   |      |   |         |  
|Cash flows from investing activities                                             |  |                                | (6,778  | ) |      |   | 34,896  |  
|                                                                                 |  |                                |         |   |      |   |         |  



continued on next page

See Notes to Unaudited Condensed Consolidated Financial Statements.



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##### Table of Contents

U.S. Restaurant Properties, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows (continued)

(In
thousands)



|                                                                                  |  |                                |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Nine Months EndedSeptember 30, |        
|                                                                                  |  | 2004                           |         |   | 2003 |  
|Cash flows from financing activities:                                             |  |                                |         |   |      |   |         |  
|                                                                                  |  |                               
|Proceeds from line of credit                                                      |  | $                              | 45,550  |   |      | $ | 34,950  |  
|Payments on line of credit                                                        |  |                                | (48,350 | ) |      |   | (33,950 | )
|Proceeds from issuance of series B and series B-1 preferred stock                 |  |                                | 4,654   |   |      |   | 14,406  |  
|Proceeds from issuance of series B and series B-1 preferred stock warrants        |  |                                | 95      |   |      |   | 253     |  
|Distributions to minority interest shareholders                                   |  |                                | (82     | ) |      |   | (3,576  | )
|Cash distributions to stockholders                                                |  |                                | (22,326 | ) |      |   | (19,680 | )
|Payment of preferred stock dividends                                              |  |                                | (7,112  | ) |      |   | (5,579  | )
|Proceeds from sale of stock and exercised stock options                           |  |                                | 130     |   |      |   | 1,012   |  
|Payments on notes/mortgage payable                                                |  |                                | (8,171  | ) |      |   | (57,026 | )
|Repayment by stockholders of loans for common stock                               |  |                                | 75      |   |      |   |        |  
|Financing costs                                                                   |  |                                |        |   |      |   | (271    | )
|Other decreases                                                                   |  |                                | (68     | ) |      |   |        |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Cash flows from financing activities                                              |  |                                | (35,605 | ) |      |   | (69,461 | )
|                                                                                  |  |                                |         |   |      |   |         |  
|(Decrease) increase in cash and cash equivalents                                  |  |                                | (11,884 | ) |      |   | 256     |  
|Cash and cash equivalents at beginning of period                                  |  |                                | 13,855  |   |      |   | 4,392   |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                        |  | $                              | 1,971   |   |      | $ | 4,648   |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Supplemental disclosure:                                                          |  |                                |         |   |      |   |         |  
|Interest paid during the period                                                   |  | $                              | 8,555   |   |      | $ | 11,498  |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Income taxes paid (including state income and franchise taxes)                    |  | $                              | 459     |   |      | $ | 358     |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Non-cash investing and financing activities:                                      |  |                                |         |   |      |   |         |  
|Mortgage loans receivable used for property acquisitions                          |  | $                              |        |   |      | $ | 12,000  |  
|Security deposit and note receivable written off                                  |  |                                |        |   |      |   | 1,037   |  
|Property received in exchange for Operating Partnership Units and note receivable |  |                                |        |   |      |   | 2,265   |  
|Notes received on sale of property                                                |  |                                | 616     |   |      |   |        |  



See Notes to
Unaudited Condensed Consolidated Financial Statements.



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##### Table of Contents

U.S. Restaurant Properties, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements



1. Interim Unaudited Financial Information



U.S. Restaurant Properties, Inc. (USRP and, collectively with its subsidiaries,
the Company) is a fully integrated, self-administered and self-managed real estate investment trust (REIT), as defined under the Internal Revenue Code. The Company owns, acquires, leases and manages branded chain restaurants
and select service retail properties. Additionally, from time to time, the Company makes opportunistic investments in mortgage loans, secured by leasehold interests in restaurants or real estate. The business and operations of the Company are
conducted primarily through U.S. Restaurant Properties Operating L.P. (OP). As of September 30, 2004, the Company owned 99.3% of and controlled OP. Also as of September 30, 2004, the Company owned 782 properties in 48 states.



Basis of Presentation and Estimates



The accompanying interim unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the Securities and Exchange Commission (SEC).
Operating results for the nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for the year ending December 31, 2004. Certain information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States of America have been 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.



Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end, and the results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected
for the fiscal year. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments (of a normal recurring nature) necessary to present fairly the consolidated financial position of the
Company as of September 30, 2004, the consolidated results of its operations and comprehensive operations for the three and nine months ended September 30, 2004 and 2003, the consolidated statement of stockholders equity for the nine months
ended September 30, 2004 and the consolidated statements of cash flows for the nine months ended September 30, 2004 and 2003.



The preparation of consolidated financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to
make estimates and assumptions that affect reported amounts of certain assets, liabilities, contingent assets and liabilities, revenues and expenses as of and for the reporting periods. Actual results may differ from such estimates. Any differences
from those estimates are recorded in the period in which they are identified.



Significant Accounting Policies



This section should be read
in conjunction with the more detailed information regarding the Companys significant accounting policies contained in the Companys Annual Report on Form 10-K for the year ended December 31, 2003.



Adoption of new accounting standards



FASB Interpretation 46 (FIN 46): On March 15, 2004, FIN 46, Consolidation
of Variable Interest Entities (VIEs), as amended, an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements became effective and requires VIEs to be consolidated by a company if the
company is subject to a majority of the expected losses of the VIEs activities or entitled to receive a majority of the entitys expected residual returns or both. The adoption of FIN 46 did not have an impact on the Companys
financial condition or results of operations.



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##### Table of Contents

Earnings Per Share of Common Stock



Basic earnings per share is computed based on the weighted average number of common shares outstanding. Diluted earnings per share reflects
the dilutive effect of stock options, units of beneficial interest in the OP (OP Units) and convertible preferred stock and stock warrants. A reconciliation of the basic and diluted weighted average shares is as follows (in thousands,
except per share amounts):



|                                                                                                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                             |  | Three months endedSeptember 30, |        |   | Nine months endedSeptember 30, |  
|                                                                                                                             |  | 2004                            |        |   | 2003                           |   |        | 2004 |  |   | 2003   |  
|Net income from continuing operations before discontinued operations and cumulative effect of change in accounting principle |  | $                               | 2,619  |   |                                | $ | 2,355  |      |  | $ | 9,680  |   |  | $ | 7,200  |  
|Dividends and accretion on preferred stock                                                                                   |  |                                 | (2,480 | ) |                                |   | (2,185 | )    |  |   | (7,389 | ) |  |   | (5,736 | )
|                                                                                                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Income from continuing operations allocable to common stockholders                                                           |  |                                 | 139    |   |                                |   | 170    |      |  |   | 2,291  |   |  |   | 1,464  |  
|Income from discontinued operations                                                                                          |  |                                 | 1,675  |   |                                |   | 2,965  |      |  |   | 5,705  |   |  |   | 9,069  |  
|Cumulative effect of change in accounting principle                                                                          |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   | (246   | )
|                                                                                                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Net income allocable to common stockholders                                                                                  |  | $                               | 1,814  |   |                                | $ | 3,135  |      |  | $ | 7,996  |   |  | $ | 10,287 |  
|                                                                                                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Basic and diluted net income per share:                                                                                      |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Income from continuing operations allocable to common stockholders                                                           |  | $                               | 0.01   |   |                                | $ | 0.01   |      |  | $ | 0.10   |   |  | $ | 0.07   |  
|Income from discontinued operations                                                                                          |  |                                 | 0.07   |   |                                |   | 0.15   |      |  |   | 0.25   |   |  |   | 0.46   |  
|Cumulative effect of change in accounting principle                                                                          |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   | (0.01  | )
|                                                                                                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Net income per share                                                                                                         |  | $                               | 0.08   |   |                                | $ | 0.16   |      |  | $ | 0.35   |   |  | $ | 0.52   |  
|                                                                                                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Weighted average shares outstanding:                                                                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Basic                                                                                                                        |  |                                 | 22,563 |   |                                |   | 19,909 |      |  |   | 22,552 |   |  |   | 19,871 |  
|Dilutive effect of OP units                                                                                                  |  |                                 | 80     |   |                                |   | 80     |      |  |   | 80     |   |  |   | 54     |  
|Dilutive effect of stock options                                                                                             |  |                                 | 13     |   |                                |   | 20     |      |  |   | 16     |   |  |   | 15     |  
|Dilutive effect of preferred stock                                                                                           |  |                                 |       |   |                                |   | 15     |      |  |   |       |   |  |   | 15     |  
|Dilutive effect of preferred stock warrants                                                                                  |  |                                 |       |   |                                |   |       |      |  |   | 1      |   |  |   |       |  
|                                                                                                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Diluted                                                                                                                      |  |                                 | 22,656 |   |                                |   | 20,024 |      |  |   | 22,649 |   |  |   | 19,955 |  
|                                                                                                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Antidilutive securities:                                                                                                     |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Stock options                                                                                                                |  |                                 | 14     |   |                                |   | 14     |      |  |   | 14     |   |  |   | 41     |  
|Convertible preferred stock                                                                                                  |  |                                 | 5,369  |   |                                |   | 4,438  |      |  |   | 5,369  |   |  |   | 4,438  |  
|Convertible preferred stock warrants                                                                                         |  |                                 | 65     |   |                                |   | 206    |      |  |   | 65     |   |  |   | 206    |  



Revenue Recognition



The Companys revenues primarily include rental income on real estate properties and
operating revenue from retail operations.



The Company leases properties on a
triple net basis primarily to operators of quick-service and full-service chain restaurants affiliated with major national or regional brands as well as to certain convenience stores and gas stations. Triple net leases typically require the tenants
to be responsible for property operating costs, including property taxes, insurance, maintenance and ground rents, where applicable. The triple net structure is designed to provide a predictable stream of income while minimizing ongoing property
operating costs. Accordingly, the accompanying unaudited condensed consolidated financial statements do not reflect property taxes and insurance costs or reimbursements when the tenant has legally assumed responsibility for these liabilities. As the
Company remains legally responsible for ground rents under its ground leases and receives payment from its tenants for these costs, amounts reimbursed from tenants for ground rents are recorded as rent revenue. The Company recognized revenues
associated with ground lease reimbursements of $896,000 and $2.7 million for the three and nine months ended September 30, 2004, respectively, as compared to $1.1 million and $3.3 million for the three and nine months ended



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##### Table of Contents

September 30, 2003. Of the ground lease reimbursements, $15,200 and $71,000 for the three and nine months ended September
30, 2004, respectively, and $186,000 and $600,000 for the three and nine months ended September 30, 2003, respectively, are reflected as Income from discontinued operations in the Companys Unaudited Condensed Consolidated
Statements of Operations. Rent revenues and ground rent expense are recognized on a straight-line basis unless significant collection problems occur with the tenant, at which time rents are recognized on a cash basis. In addition, if the Company has
collected no payments on a particular receivable for over five months, revenue is recorded on a cash basis. Once a tenant has been placed on cash basis accounting, it will remain on that basis until there have been several months of on-time payments
received.



The Company periodically provides lease concessions such as
remodeling grants or rent abatements, which are included in the straight-lining of revenue, to tenants in consideration for early renewal and restructure of existing leases or for other business reasons. Straight-line rent revenues for the three and
nine months ended September 30, 2004 were $653,000 and $2.0 million, respectively, and for the three and nine months ended September 30, 2003 were $515,000 and $1.7 million, respectively. Of the straight-line rent revenue, $24,000 and $175,000 for
the three and nine months ended September 30, 2003, respectively, are reflected as Income from discontinued operations in the Companys Unaudited Condensed Consolidated Statements of Operations.



The Company recognizes contingent rent as revenue after the contractual sales targets are
achieved. The Company recognized contingent rent revenues of $804,000 and $2.2 million for the three and nine months ended September 30, 2004, respectively, and $838,000 and $2.4 million for the three and nine months ended September 30, 2003,
respectively. Of the 2003 contingent rent revenues, $74,000 and $120,000 for the three and nine months ended September 30, 2003, respectively, are reflected as Income from discontinued operations in the Companys Unaudited Condensed
Consolidated Statements of Operations.



Interest income on notes and mortgages
receivable is recorded on an accrual basis. However, when circumstances indicate that the ultimate collection of interest is doubtful, interest is recorded on a cash basis.



Retail revenues are derived from gasoline sales, car washes, convenience store merchandise sales and food sales at facilities operated by
the Company. Revenue is recognized upon the sale of gasoline, merchandise or food or upon the delivery of services.



The Company also acquires properties with the intention of reselling them rather than holding them as investment properties. Consequently, these properties are classified
as held for sale at the date of acquisition and are not depreciated. In accordance with Statement of Financial Accounting Standards No 144 (SFAS No. 144), Accounting for the Impairment or Disposal of Long-Lived Assets, the
operations of properties held for sale are classified as income from discontinued operations in the Unaudited Condensed Consolidated Statements of Operations.



Derivative Financial Instruments



All derivative financial instruments are recognized as either assets or liabilities on the balance sheet at their fair values. Accounting for the changes in the fair
value of the derivatives is dependent on the intended use of the derivatives and their resulting designations. If the derivative is designated as a fair-value hedge, the changes in the fair value of the derivative and the hedged item are recognized
currently in earnings. If the derivative is designated as a cash flow hedge, changes in fair value of the derivative are recorded as Other comprehensive income and are recognized in the Unaudited Condensed Consolidated Statements of
Operations when the hedged item affects earnings. The ineffective portion of a cash flow or fair value hedge is recognized in earnings. Changes in the fair value of a derivative that does not qualify as a hedge or is not designated as a hedge are
recognized in earnings. As of September 30, 2004, all of the Companys hedges are designated as cash flow hedges.



Concentration of Risk



The Company mitigates its concentration of risk by diversifying the number of restaurant concepts operating on its properties, with no one concept except Burger King® (16.2%) and Captain Ds® (11.9%) accounting for more than 10% of the total rental revenues earned from the
Companys properties. The properties are further diversified by the number of tenants, with no single tenant, except an owner of certain Captain Ds (11.7%), providing more than 10% of the total rental revenues earned. Geographically, the
Company has properties located in 48 states, with no state except Texas (21.9%) accounting for more than 10% of the total rental revenues earned.



12



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##### Table of Contents

Income Taxes



Income tax expense of $16,000 and $384,000 for the three and nine months ended September 30, 2004, respectively, and $94,000 and $371,000 for the three and nine months
ended September 30, 2003, respectively, was included as General and administrative expenses in the Unaudited Condensed Consolidated Statements of Operations. The Company has a deferred tax asset of approximately $102,000 and an estimated
$1.8 million net operating loss carry-forward (NOL) that management believes will be utilized prior to its expiration. Income taxes primarily relate to operating income from the Companys taxable REIT subsidiary.



Discussions with Internal Revenue Service



On April 8, 2004, the Company submitted a request to the Internal Revenue Service for a
closing agreement with respect to a third party agreement entered into by the Company with one of its borrowers in 2000. Management believes, based on its understanding of the manner in which other REITs have resolved similar potential technical
REIT compliance violations, it is likely that a closing agreement can be reached. Management cannot provide complete assurance that the Internal Revenue Service will agree to enter into such a closing agreement. However, the Company has received,
through its tax advisor, execution documents for the closing agreement with the Internal Revenue Service. The Company expects to execute the documents shortly and return them for the Internal Revenue Services signature.



Equity-Based Compensation(1)



SFAS No. 148, Accounting for Stock-Based Compensation -Transition and Disclosures, amends SFAS No. 123, Accounting for Stock-Based Compensation, and provides new transition methods if an entity
adopts the fair-value based method of valuing stock-based compensation as well as requiring additional disclosures in interim and annual financial statements. At this time, the Company intends to continue to utilize the intrinsic value model of
accounting for options, which results in compensation costs equal to the excess of the fair value of the Companys common stock at the measurement date above the stock options strike price. Pro-forma disclosures as if fair value had been
used are as follows (in thousands, except per share data):



|                                                           |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |        |  
|---------------------------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ----- | ---- |  | - | ----- | - |  | - | ------ | -
|                                                           |  | Three months endedSeptember 30, |       |   | Nine months endedSeptember 30, |  
|                                                           |  | 2004                            |       |   | 2003                           |   |       | 2004 |  |   | 2003  |  
|Net income allocable to common stockholders, as reported   |  | $                               | 1,814 |   |                                | $ | 3,135 |      |  | $ | 7,996 |   |  | $ | 10,287 |  
|Stock-based compensation recognized                        |  |                                 | 159   |   |                                |   |      |      |  |   | 351   |   |  |   | 9      |  
|                                                           |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |        |  
|                                                           |  |                                 | 1,973 |   |                                |   | 3,135 |      |  |   | 8,347 |   |  |   | 10,296 |  
|Pro-forma stock-based compensation                         |  |                                 | (159  | ) |                                |   | (2    | )    |  |   | (374  | ) |  |   | (27    | )
|                                                           |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |        |  
|Pro-forma net income allocable to common stockholders      |  | $                               | 1,814 |   |                                | $ | 3,133 |      |  | $ | 7,973 |   |  | $ | 10,269 |  
|                                                           |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |        |  
|Basic and diluted income per share:                        |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |        |  
|As reported  basic and diluted                            |  | $                               | 0.08  |   |                                | $ | 0.16  |      |  | $ | 0.35  |   |  | $ | 0.52   |  
|Pro-forma  basic                                          |  | $                               | 0.08  |   |                                | $ | 0.16  |      |  | $ | 0.35  |   |  | $ | 0.52   |  
|Pro-forma  diluted                                        |  | $                               | 0.08  |   |                                | $ | 0.16  |      |  | $ | 0.35  |   |  | $ | 0.51   |  
|Stock options:                                             |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |        |  
|Pro-forma estimated compensation value per options granted |  | $                               |      |   |                                | $ | 2.06  |      |  | $ | 1.87  |   |  | $ | 2.10   |  

---

|(1) | During the three and nine months ended September 30, 2004, the Company granted zero and
12,287 shares, respectively, of restricted stock to the non-employee members of its Board of Directors. Compensation expense in the amount of $147,000 is included in the accompanying Unaudited Condensed Consolidated Financial Statements of
Operations based on the fair market value of the stock at the dates of the grant of $15.73 and $17.21, per share for all shares vested through September 30, 2004. During the first quarter of 2004, the Company granted 15,000 shares of restricted
stock to the chief executive officer which represent a value of $276,000 upon vesting. These shares are scheduled to vest on July 1, 2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

2. Property



Acquisitions



During the quarter, the Company acquired 4 properties, of which 3 were designated as held for investment and 1 was designated as held for sale. During the corresponding prior year quarter, the Company acquired 9
properties, all of which were designated as held for investment. During the nine months ended September 30, 2004, the Company acquired 28 properties, of which 15 were designated as held for investment and 13 were designated as held for sale. During
nine months ended September 30, 2003, the Company acquired 31 properties, all of which were designated as held for investment. Properties in the held for sale portfolio were purchased by the Companys taxable REIT subsidiary (TRS).
In accordance with SFAS No. 144, properties in the held for sale portfolio at September 30, 2004, were included in the Unaudited Condensed Consolidated Balance Sheets as assets related to properties held for sale. At September 30, 2004,
assets related to properties held for sale included 8 properties, with land totaling $3.1 million and buildings and leasehold improvements totaling $3.7 million. The purchase price paid by the Company for investment properties purchased in 2004 and
2003 approximates fair value.



|                                            |  |                                  |  |                                 |       |                |   |               |   |                |  |               |  |                |        |               |    |  |   |       
|------------------------------------------- |  | -------------------------------- |  | ------------------------------- | ----- | -------------- | - | ------------- | - | -------------- |  | ------------- |  | -------------- | ------ | ------------- | -- |  | - | ------
|                                            |  | Three months ended September 30, |  | Nine months ended September 30,
|                                            |  | 2004                             |  | 2003                            |       | 2004           |   | 2003         
|Properties purchased (dollars in
thousands) |  | NumberAcquired                   |  | PurchasePrice                   |       | NumberAcquired |   | PurchasePrice |   | NumberAcquired |  | PurchasePrice |  | NumberAcquired |        | PurchasePrice
|Held for investment                         |  | 3                                |  | $                               | 2,718 |                | 9 |               | $ | 8,755          |  | 15            |  | $              | 11,297 |               | 31 |  | $ | 21,553
|Held for sale                               |  | 1                                |  |                                 | 829   |                |  |               |   |               |  | 13            |  |                | 10,699 |               |   |  |   |      
|                                            |  |                                  |  |                                 |       |                |   |               |   |                |  |               |  |                |        |               |    |  |   |       
|Total                                       |  | 4                                |  | $                               | 3,547 |                | 9 |               | $ | 8,755          |  | 28            |  | $              | 21,996 |               | 31 |  | $ | 21,553
|                                            |  |                                  |  |                                 |       |                |   |               |   |                |  |               |  |                |        |               |    |  |   |       



Dispositions



SFAS No. 144 requires that the results of operations of assets sold or held for sale, and
any gains or losses recognized on assets sold and held for sale, be classified separately in the Companys Unaudited Condensed Consolidated Statements of Operations. In accordance with SFAS No. 144, the results of operations of the assets sold
or held for sale have been presented as Income from discontinued operations in the accompanying Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2004 and 2003.



Results of discontinued operations relate to the sale, disposal or held for sale
categorization of 9 and 41 properties during the three and nine months ended September 30, 2004, respectively, and 89 properties during 2003. During the three and nine months ended September 30, 2004, the cash proceeds from the sale of properties
were $7.2 million and $21.6 million, respectively, net of closing costs. During the three and nine months ended September 30, 2003, the Company completed the sale or disposal of 25 and 62 properties, respectively, for cash proceeds of $14.1 million
and $35.1 million, respectively, net of closing costs. The operating results of these properties as well as the net gain on disposal are included in the Unaudited Condensed Consolidated Statements of Operations as Income from discontinued
operations as follows (in thousands):



|                                       |  |                                 |       |   |                                |   |        |      |  |   |       |   |  |   |        |  
|-------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ------ | ---- |  | - | ----- | - |  | - | ------ | -
|                                       |  | Three months endedSeptember 30, |       |   | Nine months endedSeptember 30, |  
|                                       |  | 2004                            |       |   | 2003                           |   |        | 2004 |  |   | 2003  |  
|Revenues                               |  | $                               | 238   |   |                                | $ | 2,139  |      |  | $ | 1,344 |   |  | $ | 9,711  |  
|Depreciation and amortization          |  |                                 | (11   | ) |                                |   | (753   | )    |  |   | (145  | ) |  |   | (1,839 | )
|Impairment of long-lived assets        |  |                                 |      |   |                                |   | (1,081 | )    |  |   | (71   | ) |  |   | (3,198 | )
|Other expenses                         |  |                                 | (57   | ) |                                |   | (911   | )    |  |   | (784  | ) |  |   | (5,880 | )
|                                       |  |                                 |       |   |                                |   |        |      |  |   |       |   |  |   |        |  
|                                       |  |                                 | 170   |   |                                |   | (606   | )    |  |   | 344   |   |  |   | (1,206 | )
|Gain on sales of property              |  |                                 | 910   |   |                                |   | 3,571  |      |  |   | 4,605 |   |  |   | 10,275 |  
|Gain on sale of property held for sale |  |                                 | 595   |   |                                |   |       |      |  |   | 756   |   |  |   |       |  
|                                       |  |                                 |       |   |                                |   |        |      |  |   |       |   |  |   |        |  
|Income from discontinued operations    |  | $                               | 1,675 |   |                                | $ | 2,965  |      |  | $ | 5,705 |   |  | $ | 9,069  |  
|                                       |  |                                 |       |   |                                |   |        |      |  |   |       |   |  |   |        |  



14



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##### Table of Contents

Impairment



Management performs a review of the Companys real estate related investments during each reporting period to determine if circumstances indicate that the carrying
amount of an asset may not be recoverable. Impairment charges on assets sold or held for sale are presented as Discontinued Operations in the Companys condensed consolidated statements of operations; otherwise, impairment charges
are presented as an expense in the determination of operating income. Impairment charges are as follows:



|                                           |  |                                  |  |                                 |    |                |    |            |   |                |  |            |  |                |     |            |    |  |   |      
|------------------------------------------ |  | -------------------------------- |  | ------------------------------- | -- | -------------- | -- | ---------- | - | -------------- |  | ---------- |  | -------------- | --- | ---------- | -- |  | - | -----
|                                           |  | Three months ended September 30, |  | Nine months ended September 30,
|                                           |  | 2004                             |  | 2003                            |    | 2004           |    | 2003      
|Properties impaired (dollars in
thousands) |  | NumberImpaired                   |  | Impairment                      |    | NumberImpaired |    | Impairment |   | NumberImpaired |  | Impairment |  | NumberImpaired |     | Impairment
|Impairment in continuing operations        |  | 2                                |  | $                               | 19 |                | 10 |            | $ | 444            |  | 16         |  | $              | 261 |            | 18 |  | $ | 674  
|Impairment in discontinued operations      |  |                                 |  |                                 |   |                | 8  |            |   | 1,081          |  | 3          |  |                | 71  |            | 25 |  |   | 3,198
|                                           |  |                                  |  |                                 |    |                |    |            |   |                |  |            |  |                |     |            |    |  |   |      
|Total                                      |  | 2                                |  | $                               | 19 |                | 18 |            | $ | 1,525          |  | 19         |  | $              | 332 |            | 43 |  | $ | 3,872
|                                           |  |                                  |  |                                 |    |                |    |            |   |                |  |            |  |                |     |            |    |  |   |      



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##### Table of Contents

3. Revolving Credit Facility and Notes Payable



The Companys debt is summarized as follows (in thousands):



|                                                                   |  |               |  |               |   |  |                   |         |                  |   |        
|------------------------------------------------------------------ |  | ------------- |  | ------------- | - |  | ----------------- | ------- | ---------------- | - | -------
|                                                                   |  | Maturity Date |  | Interest Rate |   |  | September 30,2004 |         | December 31,2003
|Revolving credit facility                                          |  | October 2006  |  | LIBOR + 3.0   | % |  | $                 | 7,500   |                  | $ | 10,300 
|                                                                   |  |               |  |              
|Notes payable                                                      |  |               |  |               |   |  |                   |         |                  |   |        
|Senior unsecured notes, interest-only payable semiannually         |  | May 2005      |  | 7.15          | % |  |                   | 111,000 |                  |   | 111,000
|Variable rate certificates, principal and interest payable monthly |  | August 2006   |  | LIBOR + 0.48  | % |  |                   | 148,636 |                  |   | 156,274
|Term loan, interest-only payable monthly                           |  | November 2008 |  | LIBOR + 3.5   | % |  |                   | 35,000  |                  |   | 35,000 
|Term loan, principal and interest payable monthly                  |  | December 2011 |  | LIBOR + 2.5   | % |  |                   | 11,492  |                  |   | 12,000 
|Debt premium, net                                                  |  |               |  |               |   |  |                   | 190     |                  |   | 422    
|                                                                   |  |               |  |               |   |  |                   |         |                  |   |        
|Total notes payable                                                |  |               |  |               |   |  |                   | 306,318 |                  |   | 314,696
|                                                                   |  |               |  |               |   |  |                   |         |                  |   |        
|Mortgage note payable                                              |  | June 2007     |  | 8.00          | % |  |                   | 881     |                  |   | 910    
|                                                                   |  |               |  |               |   |  |                   |         |                  |   |        
|Total debt                                                         |  |               |  |               |   |  | $                 | 314,699 |                  | $ | 325,906
|                                                                   |  |               |  |               |   |  |                   |         |                  |   |        



LIBOR as of September 30, 2004 and
December 31, 2003 was 1.84% and 1.12%, respectively. As of September 30, 2004, funds available under the Companys revolving credit facility were $46.9 million. As of November 3, 2004, funds available under the credit facility were $46.4
million.



In November 2004, the Company and the lender for the Revolver and the
Term loan entered into an amendment (the Amendment) to the credit agreements effective September 30, 2004. The Amendment modifies the calculation of the Companys distribution allowance to more appropriately reflect current and
expected distributions levels as outlined in the revolving credit agreement and the term loan agreement for quarters ending September 30, 2004, December 31, 2004, March 31, 2005 and June 30, 2005.



The Company is in compliance with all covenants associated with its debt and credit
facilities at September 30, 2004.



On October 29, 2004, the Company signed a
commitment letter for a bridge loan facility (the Facility) in the amount of $60 million. In the event of a delay or cancellation of the merger with CNL Restaurant Properties, Inc., the Facility would be used for the partial refinance of
the Companys existing senior unsecured notes, which become due and payable on May 1, 2005. The Facility would mature 12 months from the date of funding, carry an interest rate of LIBOR plus 3.5% and be secured by a negative pledge from the
borrowing base entity. The Company paid a 1% up-front commitment fee of $600,000 which will be amortized over the 180-day commitment period.



Management believes that cash flow from operations, anticipated sales of properties, the $60 million bridge facility and the Companys anticipated ability to obtain
financing will provide the Company with the ability to repay or refinance the senior unsecured notes that mature in May 2005.



16



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##### Table of Contents

4. Derivative Instruments



The Companys derivative instruments at September 30, 2004 are summarized as follows (in thousands):



|                     |  |                  |  |             |  |                |        |                    |      |   |              |      |   |         |      |   |                   |   |     |   |  |   |      
|-------------------- |  | ---------------- |  | ----------- |  | -------------- | ------ | ------------------ | ---- | - | ------------ | ---- | - | ------- | ---- | - | ----------------- | - | --- | - |  | - | -----
|                     |  | SettlementPeriod |  | Maturity    |  | NotionalAmount |        | FixedSwapRate Paid |      |   | FloorRate    |      |   | CapRate |      |   | Liability (Asset)
|Type                 |  |                  |  |             |  |                |        | Sept. 30,2004      |      |   | Dec. 31,2003
|Interest rate collar |  | Monthly          |  | August 2005 |  | $              | 54,411 |                    |     |   |              | 4.42 | % |         | 6.00 | % |                   | $ | 943 |   |  | $ | 2,375
|Interest rate swap   |  | Monthly          |  | June 2004   |  |                | 25,000 |                    | 2.42 | % |              |      |   |         |      |   |                   |   |    |   |  |   | 153  
|Interest rate swap   |  | Monthly          |  | Sept. 2005  |  |                | 30,000 |                    | 2.12 | % |              |      |   |         |      |   |                   |   | (89 | ) |  |   | 35   
|Interest rate swap   |  | Monthly          |  | Sept. 2005  |  |                | 25,000 |                    | 2.33 | % |              |      |   |         |      |   |                   |   | (22 | ) |  |   | 108  
|                     |  |                  |  |             |  |                |        |                    |      |   |              |      |   |         |      |   |                   |   |     |   |  |   |      
|                     |  |                  |  |             |  |                |        |                    |      |   |              |      |   |         |      |   |                   | $ | 832 |   |  | $ | 2,671
|                     |  |                  |  |             |  |                |        |                    |      |   |              |      |   |         |      |   |                   |   |     |   |  |   |      



Derivative financial instruments are
utilized by the Company to manage its exposure to market risks from changes in interest rates. All of the Companys derivative financial instruments are designated as cash flow hedges. The floating rate related to the interest rate collar and
interest rate swaps is the one-month LIBOR rate.



5. Stockholders
Equity and Minority Interests



Two stockholders of the Company (LSF3
Capital Investments I, LLC and LSFIII Capital Investments, L.P. (collectively, the Lone Star Investors)) owned approximately 9.9% of the outstanding Common Stock at December 31, 2003. On June 8, 2004, the Lone Star Investors completed
the sale of 2,200,000 shares of the Companys common stock. The Company received none of the proceeds from the sale of the common stock by the Lone Star Investors. As a result of the sale, Lone Star Investors ownership in the Company was
reduced to less than 1.0%.



Series B and B-1 Preferred



On September 14, 2004, the investors in the Series B Cumulative Convertible Preferred Stock
of U.S. Restaurant Properties, Inc. exercised their option to invest an additional $5 million in stated value 8% Series B-1 Convertible Preferred Stock (Series B-1 Preferred). The proceeds received by the Company, net of placement fees,
was $4.7 million, exclusive of certain transaction costs, from the sale of 5,000 shares of the Series B-1 Preferred. The Series B-1 Preferred carries an 8% cumulative dividend and is convertible into common shares at a fixed conversion price of
$17.46 per share, which represents a premium to the Companys market price for its common stock at the date of issuance. The Series B-1 Preferred has a perpetual term but is redeemable after three years at stated value plus accrued and unpaid
dividends, or in common stock based on a weighted-average conversion calculation. The Company also granted warrants to the investors to purchase 64,516 shares of Common Stock at an exercise price of $18.25 per share. The warrants have a seven-year
term.



Management evaluated the Series B-1 Preferred for
appropriate classification in the balance sheet. Management concluded that the Series B-1 Preferred is neither mandatorily redeemable, as defined in SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity, nor does it embody an unconditional obligation to transfer equity shares of the Company. The Series B-1 Preferred does contain conditional obligations to redeem in cash or shares, but the conditions or events are not
certain to occur at September 30, 2004. Accordingly, the Series B-1 Preferred does not fall under the scope of SFAS No. 150 at this time.



Since the Series B-1 Preferred is outside the scope of SFAS No. 150, management evaluated the requirements of EITF D-98, Classification and
Measurement of Preferred Securities, to determine if the securities should be classified as permanent equity. As none of the redemption requirements of the securities are outside the control of the Company, management concluded that the Series
B-1 Preferred should be classified as equity as of September 20, 2004.



Minority Interests



Minority interest activity for the nine
months ended September 30, 2004 was as follows (in thousands):



|                                       |  |   |       |  
|-------------------------------------- |  | - | ----- | -
|Balance at January 1, 2004             |  | $ | 1,074 |  
|                                       | 
|Distributions paid and accrued         |  |   | (82   | )
|Income allocated to minority interests |  |   | 29    |  
|                                       |  |   |       |  
|Balance at September 30, 2004          |  | $ | 1,021 |  
|                                       |  |   |       |  



17



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##### Table of Contents

6. Segment Information



The Company has two significant operating segments, real estate and retail. Operating segments are defined as components of an enterprise for which separate financial
information is available and which is evaluated by chief operating decision makers to allocate resources and to assess performance. Net income is the performance measure used to evaluate each segment. The accounting policies for the segments are the
same as those for the Company as a whole.



Real Estate. Real estate
activities are comprised of acquisitions, leasing, property management and related business objectives. The Company derives its revenues primarily from rental income received on its 767 restaurant and service station properties located throughout 48
states.



Retail. Revenues from this segment are generated from the sale
of gasoline and convenience store merchandise as well as food sales at restaurants operated by the Company. Retail operations are administered by Fuel Supply, Inc. (FSI), a wholly owned taxable REIT subsidiary of the Company. FSI
operates certain of the Companys non-leased properties on an interim basis and utilizes a fuel terminal in Hawaii to store fuel distributed to its Hawaii service stations. At September 30, 2004, FSI operated 2 service stations in Texas, 8 in
Hawaii, 1 in Illinois and 1 in California. In addition to the service stations currently operated, during the 2004 second quarter FSI sold fuel through 13 other operators and sold fuel on a wholesale basis to 1 operator. FSI also operated 2
restaurants, one each located in Texas and Kansas, and one laundromat in Texas.



Intersegment Charges.Intersegment charges are eliminated in consolidation and include the costs of rent and interest. The Retail segment pays market rate rents to the Real Estate segment for lease of the properties that it operates.
Interest is charged at an annual rate of 9.5% on inter-company balances and on a note issued by FSI on January 1, 2002 for the sale of the Companys interest in the Hawaii fuel terminal to FSI. Inter-company balances represent primarily the
cash advances made by the Real Estate segment to the Retail segment to fund its operations. Intersegment rent eliminated in consolidation was $303,000 and $880,000, respectively, for the three and nine months ended September 30, 2004 and $322,000
and $944,000, respectively, for the three and nine months ended September 30, 2003.



18



---

##### Table of Contents

The following tables present the Companys reportable amounts by segment as of and for the three and nine months
ended September 30, 2004 and 2003 (in thousands):



|                                                                        |  |             |        |   |        |   |         |              |  |   |              |   |  |   |         |  
|----------------------------------------------------------------------- |  | ----------- | ------ | - | ------ | - | ------- | ------------ |  | - | ------------ | - |  | - | ------- | -
|Three Months Ended September 30, 2004                                   |  | Real Estate |        |   | Retail |   |         | Eliminations |  |   | Consolidated |  
|Rental income                                                           |  | $           | 15,758 |   |        | $ | 67      |              |  | $ | (303         | ) |  | $ | 15,522  |  
|Retail operations                                                       |  |             |       |   |        |   | 15,918  |              |  |   |             |   |  |   | 15,918  |  
|Interest on real estate loans                                           |  |             | 482    |   |        |   | 8       |              |  |   | (8           | ) |  |   | 482     |  
|Tenant expense reimbursements                                           |  |             | 1,086  |   |        |   |        |              |  |   |             |   |  |   | 1,086   |  
|Lease termination fees                                                  |  |             | 100    |   |        |   |        |              |  |   |             |   |  |   | 100     |  
|                                                                        |  |             |        |   |        |   |         |              |  |   |              |   |  |   |         |  
|Total revenues                                                          |  |             | 17,426 |   |        |   | 15,993  |              |  |   | (311         | ) |  |   | 33,108  |  
|Depreciation and amortization                                           |  |             | (5,429 | ) |        |   | (139    | )            |  |   |             |   |  |   | (5,568  | )
|General and administrative                                              |  |             | (3,350 | ) |        |   | (1,899  | )            |  |   |             |   |  |   | (5,249  | )
|Retail cost of sales                                                    |  |             |       |   |        |   | (13,238 | )            |  |   |             |   |  |   | (13,238 | )
|Interest expense                                                        |  |             | (4,582 | ) |        |   | (91     | )            |  |   | 8            |   |  |   | (4,665  | )
|Other expenses, net                                                     |  |             | (1,358 | ) |        |   | (714    | )            |  |   | 303          |   |  |   | (1,769  | )
|                                                                        |  |             |        |   |        |   |         |              |  |   |              |   |  |   |         |  
|Income (loss) from continuing operations before discontinued operations |  |             | 2,707  |   |        |   | (88     | )            |  |   |             |   |  |   | 2,619   |  
|Income from discontinued operations                                     |  |             | 1,675  |   |        |   |        |              |  |   |             |   |  |   | 1,675   |  
|                                                                        |  |             |        |   |        |   |         |              |  |   |              |   |  |   |         |  
|Net income (loss)                                                       |  | $           | 4,382  |   |        | $ | (88     | )            |  | $ |             |   |  | $ | 4,294   |  
|                                                                        |  |             |        |   |        |   |         |              |  |   |              |   |  |   |         |  
|                                                                        |  |             |        |  
|Three Months Ended September 30, 2003                                   |  | Real Estate |        |   | Retail |   |         | Eliminations |  |   | Consolidated |  
|Rental income                                                           |  | $           | 14,812 |   |        | $ | 49      |              |  | $ | (322         | ) |  | $ | 14,539  |  
|Retail operations                                                       |  |             |       |   |        |   | 14,994  |              |  |   |             |   |  |   | 14,994  |  
|Interest on real estate loans                                           |  |             | 905    |   |        |   |        |              |  |   | (326         | ) |  |   | 579     |  
|Tenant expense reimbursements                                           |  |             | 809    |   |        |   |        |              |  |   |             |   |  |   | 809     |  
|Lease termination fees                                                  |  |             |       |   |        |   |        |              |  |   |             |   |  |   |        |  
|                                                                        |  |             |        |   |        |   |         |              |  |   |              |   |  |   |         |  
|Total revenues                                                          |  |             | 16,526 |   |        |   | 15,043  |              |  |   | (648         | ) |  |   | 30,921  |  
|Depreciation and amortization                                           |  |             | (5,000 | ) |        |   | (88     | )            |  |   |             |   |  |   | (5,088  | )
|General and administrative                                              |  |             | (1,430 | ) |        |   | (1,214  | )            |  |   |             |   |  |   | (2,644  | )
|Retail cost of sales                                                    |  |             |       |   |        |   | (12,438 | )            |  |   |             |   |  |   | (12,438 | )
|Interest expense                                                        |  |             | (4,605 | ) |        |   | (328    | )            |  |   | 326          |   |  |   | (4,607  | )
|Other expenses, net                                                     |  |             | (3,272 | ) |        |   | (839    | )            |  |   | 322          |   |  |   | (3,789  | )
|                                                                        |  |             |        |   |        |   |         |              |  |   |              |   |  |   |         |  
|Income from continuing operations before discontinued operations        |  |             | 2,219  |   |        |   | 136     |              |  |   |             |   |  |   | 2,355   |  
|Income (loss) from discontinued operations                              |  |             | 3,038  |   |        |   | (73     | )            |  |   |             |   |  |   | 2,965   |  
|                                                                        |  |             |        |   |        |   |         |              |  |   |              |   |  |   |         |  
|Net income                                                              |  | $           | 5,257  |   |        | $ | 63      |              |  | $ |             |   |  | $ | 5,320   |  
|                                                                        |  |             |        |   |        |   |         |              |  |   |              |   |  |   |         |  



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|                                                                                                                                |  |             |         |   |        |   |         |              |  |   |              |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------- | - | ------ | - | ------- | ------------ |  | - | ------------ | - |  | - | ------- | -
|Nine Months Ended September 30, 2004                                                                                            |  | Real Estate |         |   | Retail |   |         | Eliminations |  |   | Consolidated |  
|Rental income                                                                                                                   |  | $           | 47,579  |   |        | $ | 167     |              |  | $ | (880         | ) |  | $ | 46,866  |  
|Retail operations                                                                                                               |  |             |        |   |        |   | 44,129  |              |  |   |             |   |  |   | 44,129  |  
|Interest on real estate loans                                                                                                   |  |             | 1,370   |   |        |   | 64      |              |  |   | (64          | ) |  |   | 1,370   |  
|Tenant expense reimbursements                                                                                                   |  |             | 2,433   |   |        |   |        |              |  |   |             |   |  |   | 2,433   |  
|Lease termination fees                                                                                                          |  |             | 310     |   |        |   |        |              |  |   |             |   |  |   | 310     |  
|                                                                                                                                |  |             |         |   |        |   |         |              |  |   |              |   |  |   |         |  
|Total revenues                                                                                                                  |  |             | 51,692  |   |        |   | 44,360  |              |  |   | (944         | ) |  |   | 95,108  |  
|Depreciation and amortization                                                                                                   |  |             | (16,235 | ) |        |   | (372    | )            |  |   |             |   |  |   | (16,607 | )
|General and administrative                                                                                                      |  |             | (7,557  | ) |        |   | (4,643  | )            |  |   |             |   |  |   | (12,200 | )
|Retail cost of sales                                                                                                            |  |             |        |   |        |   | (37,141 | )            |  |   |             |   |  |   | (37,141 | )
|Interest expense                                                                                                                |  |             | (13,501 | ) |        |   | (350    | )            |  |   | 64           |   |  |   | (13,787 | )
|Other expenses, net                                                                                                             |  |             | (4,672  | ) |        |   | (1,901  | )            |  |   | 880          |   |  |   | (5,693  | )
|                                                                                                                                |  |             |         |   |        |   |         |              |  |   |              |   |  |   |         |  
|Income (loss) from continuing operations before discontinued operations                                                         |  |             | 9,727   |   |        |   | (47     | )            |  |   |             |   |  |   | 9,680   |  
|Income (loss) from discontinued operations                                                                                      |  |             | 5,836   |   |        |   | (131    | )            |  |   |             |   |  |   | 5,705   |  
|                                                                                                                                |  |             |         |   |        |   |         |              |  |   |              |   |  |   |         |  
|Net income (loss)                                                                                                               |  | $           | 15,563  |   |        | $ | (178    | )            |  | $ |             |   |  | $ | 15,385  |  
|                                                                                                                                |  |             |         |   |        |   |         |              |  |   |              |   |  |   |         |  
|Identifiable assets                                                                                                             |  | $           | 524,794 |   |        | $ | 10,694  |              |  | $ | (2,532       | ) |  | $ | 532,956 |  
|Cash allocable to segments                                                                                                      |  |             | 1,366   |   |        |   | 605     |              |  |   |             |   |  |   | 1,971   |  
|                                                                                                                                |  |             |         |   |        |   |         |              |  |   |              |   |  |   |         |  
|Total assets                                                                                                                    |  | $           | 526,160 |   |        | $ | 11,299  |              |  | $ | (2,532       | ) |  | $ | 534,927 |  
|                                                                                                                                |  |             |         |   |        |   |         |              |  |   |              |   |  |   |         |  
|                                                                                                                                |  |             |         |  
|Nine Months Ended September 30, 2003                                                                                            |  | Real Estate |         |   | Retail |   |         | Eliminations |  |   | Consolidated |  
|Rental income                                                                                                                   |  | $           | 44,184  |   |        | $ | 188     |              |  | $ | (944         | ) |  | $ | 43,428  |  
|Retail operations                                                                                                               |  |             |        |   |        |   | 40,127  |              |  |   |             |   |  |   | 40,127  |  
|Interest on real estate                                                                                                         |  |             | 3,386   |   |        |   |        |              |  |   | (1,044       | ) |  |   | 2,342   |  
|Tenant expense reimbursements                                                                                                   |  |             | 2,611   |   |        |   |        |              |  |   |             |   |  |   | 2,611   |  
|Lease termination fees                                                                                                          |  |             | 997     |   |        |   |        |              |  |   |             |   |  |   | 997     |  
|                                                                                                                                |  |             |         |   |        |   |         |              |  |   |              |   |  |   |         |  
|Total revenues                                                                                                                  |  |             | 51,178  |   |        |   | 40,315  |              |  |   | (1,988       | ) |  |   | 89,505  |  
|Depreciation and amortization                                                                                                   |  |             | (14,899 | ) |        |   | (233    | )            |  |   |             |   |  |   | (15,132 | )
|General and administrative                                                                                                      |  |             | (4,353  | ) |        |   | (3,783  | )            |  |   |             |   |  |   | (8,136  | )
|Retail cost of sales                                                                                                            |  |             |        |   |        |   | (33,644 | )            |  |   |             |   |  |   | (33,644 | )
|Interest expense                                                                                                                |  |             | (15,649 | ) |        |   | (1,055  | )            |  |   | 1,044        |   |  |   | (15,660 | )
|Other expenses, net                                                                                                             |  |             | (8,446  | ) |        |   | (2,231  | )            |  |   | 944          |   |  |   | (9,733  | )
|                                                                                                                                |  |             |         |   |        |   |         |              |  |   |              |   |  |   |         |  
|Income (loss) from continuing operations before discontinued operations and cumulative effect of change in accounting
principle |  |             | 7,831   |   |        |   | (631    | )            |  |   |             |   |  |   | 7,200   |  
|Income (loss) from discontinued operations                                                                                      |  |             | 9,650   |   |        |   | (581    | )            |  |   |             |   |  |   | 9,069   |  
|Cumulative effect of change in accounting principle                                                                             |  |             | (217    | ) |        |   | (29     | )            |  |   |             |   |  |   | (246    | )
|                                                                                                                                |  |             |         |   |        |   |         |              |  |   |              |   |  |   |         |  
|Net income (loss)                                                                                                               |  | $           | 17,264  |   |        | $ | (1,241  | )            |  | $ |             |   |  | $ | 16,023  |  
|                                                                                                                                |  |             |         |   |        |   |         |              |  |   |              |   |  |   |         |  
|Identifiable assets                                                                                                             |  | $           | 525,199 |   |        | $ | 13,078  |              |  | $ | (11,046      | ) |  | $ | 527,231 |  
|Cash allocable to segments                                                                                                      |  |             | 3,349   |   |        |   | 1,299   |              |  |   |             |   |  |   | 4,648   |  
|                                                                                                                                |  |             |         |   |        |   |         |              |  |   |              |   |  |   |         |  
|Total assets                                                                                                                    |  | $           | 528,548 |   |        | $ | 14,377  |              |  | $ | (11,046      | ) |  | $ | 531,879 |  
|                                                                                                                                |  |             |         |   |        |   |         |              |  |   |              |   |  |   |         |  



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7. Change in Accounting Principle



On January 1, 2003, the Company adopted SFAS No. 143, Accounting for Asset Retirement Obligations. This Statement addresses
financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. As a result of adopting SFAS No. 143, the Company capitalized net asset retirement costs of
$325,000, recorded asset retirement obligations of $595,000 and recorded a cumulative effect of change in accounting principle of $270,000 on January 1, 2003. The retirement obligations recorded relate to the estimated future costs for the removal
of tanks, fuel lines and other required modifications to the Companys gas stations. The Company recognized accretion expense for the properties with asset retirement obligations of $30,000 for the nine months ended September 30, 2004.



8. Commitments, Contingencies and Guarantees



Employment Agreement



The Company entered into an employment agreement with its chief executive officer as of July
1, 2003 for an initial term of two years. This agreement provides for a minimum salary of $250,000 per year, as well as a performance bonus of up to $100,000, which is payable based on the attainment of specific goals. The agreement also provides
that 15,000 shares of restricted stock be granted to the chief executive officer by March 31, 2004. Such shares, which otherwise vest on July 1, 2005, will vest immediately if certain situations occur such as termination without cause or a change in
control of the Company. The agreement extends for one-year periods from the initial expiration date and on each anniversary date thereafter, unless either party provides notice at least 60 days prior to the expiration date. If at any time the chief
executive officer is terminated other than for cause, death or disability or as part of a change in control, he would be entitled to a severance payment equal to two times his annual salary at such time.



Severance Arrangements



The Company has entered into severance agreements with its chief operating officer and chief
financial officer as of January 1, 2004. These agreements, which each have an initial term of five years, provide for severance payments if certain situations occur, such as termination without cause or a change in control of the Company. If a
change in control of the Company occurs, each officer would be entitled to receive a payment equal to one-half of his or her annual salary at such time. In addition, if either officer were to be terminated following a change in control (other than
for cause), he or she would be entitled to an additional payment equal to his or her annual salary at such time. If at any time, either officer is terminated other than for cause or as part of a change in control, he or she would be entitled to a
severance payment equal to three-quarters of his or her annual salary at such time.



Commitments



On July 1, 2004, the Company entered into
a three-year product sales contract (the Contract). Under the Contract, the Company committed to acquire a minimum of 17.5 million gallons of gasoline over the next three years to be sold at the Companys Hawaii gas stations. The
Contract secures a readily available supply of fuel at competitive market prices.



Guarantees



FASB Interpretation 45 requires
disclosures to be made by a guarantor about its obligations under certain guarantees it has issued and also requires liability recognition for guarantees. A guarantor is required to recognize a liability at the inception of a guarantee whether or
not payment is probable, creating the concept of a stand ready obligation.



The Companys guarantees in place at September 30, 2004 are listed in the table below. With respect to the guarantees on indebtedness, no triggering events or conditions have occurred that would require payment under the guarantees.
Furthermore, management believes the assets associated with the loans that are guaranteed are sufficient to cover the maximum potential amount of future payments and therefore would not require the Company to provide additional collateral to support
the guarantees.



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|                                                                             |  |                   |    |                         |   |      
|---------------------------------------------------------------------------- |  | ----------------- | -- | ----------------------- | - | -----
|                                                                             |  | Guarantees       
|(in thousands)                                                               |  | September 30,2004 |    | MaximumGuaranteedAmount
|Debtor                                                                       |  |                   |    |                         |   |      
|U.S. Restaurant Properties Operating, LP; USRP (PAC), LP; USRP (T&C), LP (1) |  | $                 | 56 |                         | $ | 2,648
|Letters of Credit (2)                                                        |  |                   |   |                         |   | 918  
|                                                                             |  |                   |    |                         |   |      
|Total Guarantees                                                             |  | $                 | 56 |                         | $ | 3,566
|                                                                             |  |                   |    |                         |   |      

---

|(1) | A Settlement Agreement between Alon USA, L.P. (Alon) and the Company obligated USRP to potential future payments of property release prices, as defined, on former Alon
properties, whether or not owned by the Company, that do not remain open and operating under the Fina® brand during the term of the Agreement through December 2008. Contracts for sales of any of these properties by USRP to third parties may contractually obligate the purchaser to maintain
the Fina brand on the gasoline service stations, or pay the release price should a branding change be desired by the purchaser. In the event a new owner defaults on the agreement with USRP to continuously operate a store under the Fina brand, the
Company would be responsible for payment of the release price to Alon.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The Company obtains irrevocable standby letters of credit to guarantee payment of specific financial obligations. As of September 30, 2004, the Company had three letters of credit
which were collateralized with cash for FSI. Two of these secure payment to a gasoline provider and were renewed for a one-year period upon their expiration in April 2004, and one secures payment of excise taxes to the Internal Revenue Service and
expires in December 2004. If the Company defaults on its financial obligations under the stipulations of the letters of credit, the Company would be required to pay up to the maximum guaranteed amount.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



9. Related Party Transactions



In April, June and July 2004, the Company acquired the land, improvements and equipment for
21 Captain Ds restaurants from Shoneys Inc. The total combined purchase price was approximately $17.5 million, of which 4 Captain Ds totaling $3.5 million were purchased in the three months ended September 30, 2004. The purchase
price paid by the Company for the Captain Ds restaurants approximated fair value. The Companys Chief Executive Officer and two other Company board members are on the board of directors for Shoneys Inc.



10. Tenant and Other Matters



Franchisor/Tenant Bankruptcy



On August 3, 2004, one of the Companys franchisor/tenants, Schlotzskys
Corporation (Schlotzskys), filed for Chapter 11 bankruptcy protection. Schlotzskys Corporation leases 5 of the Companys properties, which represent approximately 0.7% of the Companys annualized base rent.
Schlotzskys guarantees 13 of its franchisees leases to the Company, 4 of which are vacant, with monthly guaranteed rent representing approximately 0.5% of the Companys annualized base rent. The Companys primary recourse
remains with each individual franchisee for any unpaid rent regardless of performance under Schlotzskys guarantee. As of September 30, 2004, the Companys total unpaid rent related to the Schlotzskys bankruptcy was approximately
$692,000 of which $473,000 relates to Schlotzskys guarantees of its franchisees leases. At this time, management estimates no loss to the Company as a result of the Schlotzskys bankruptcy.



Lyons of California



The Company had significant mortgage loans and notes receivable due from Lyons of
California, Inc. (Lyons), which are secured by four Lyons restaurant properties. As a result of the 2001 bankruptcy filings of Lyons, interest income associated with these notes had not been recognized since September
2001. All of the notes are valued based on the estimated fair value of the collateral, as collateral disposal is one of the primary means through which the Company will collect on its outstanding balance. At September 30, 2004, the Company had a
total $2.7 million of net mortgage loans and notes receivable due from Lyons. In April 2004, FSI entered into a management agreement with Lyons, whereby FSI would provide management oversight of the Lyons brand name and franchise
system, and would provide the employees necessary to operate the



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four Lyons corporate-operated restaurants. Compensation under the agreement includes an annual management fee, a
stipulated percentage of royalties collected from franchisees, as well as full reimbursement, including an administrative charge, for labor costs related to the employees supplied to the four corporate-operated restaurants. For the three and nine
months ended September 30, 2004, payroll and administration fees for employees at the Lyons corporate owned stores were approximately $776,000 and $1.1 million, respectively, and were included as retail operations revenue in the Unaudited
Condensed Consolidated Statements of Operations. For the three and nine months ended September 30, 2004, management fees were approximately $31,000 and $52,000, respectively, and were included in retail operations revenue on the Unaudited Condensed
Consolidated Statements of Operations. For the three and nine months ended September 30, 2004, payroll expenses related to Lyons employees were approximately $761,000 and $1.0 million, respectively, and were included in general and
administrative expense on the Unaudited Condensed Consolidated Statements of Operations.



Definitive Merger Agreement



On August
9, 2004, the Company entered into definitive agreements to merge with CNL Restaurant Properties, Inc. (CNLRP) and 18 CNL Income Funds. Pursuant to a merger agreement, CNL Restaurant Properties, Inc. will merge with and into the Company.
Additionally, pursuant to merger agreements between each CNL Income Fund and the Company, each CNL Income Fund will merge with a separate wholly owned subsidiary of the Companys operating partnership.



The new company, which will have approximately $2.7 billion in assets, will be traded on the
NYSE and will operate under the CNL Restaurant Properties name upon completion of the mergers. The Company will have financial interests in approximately 3,000 properties in 49 states, which will include leading brands such as Applebees®,
Arbys®, Bennigans®, Burger King®, Golden Corral®, IHOP®, Jack in the Box®, KFC®, Pizza Hut®, TGI Fridays® and Wendys®.



CNLRP shareholders will receive 0.7742 shares of the Companys common stock and 0.16 shares of newly issued Company 7.5% Series C
Redeemable Convertible Preferred Stock for each share of CNLRP common stock held. The 7.5% Series C Redeemable Convertible Preferred Stock has a conversion price of $19.50 per share and a liquidation value of $25.00 per share. Total consideration
for the CNL Income Fund mergers, assuming all of the Funds participate, will be approximately $540.0 million, of which approximately $450.0 million will be cash, with the balance made up of newly issued Company Series A Convertible Preferred Stock.



The combined companys main lines of business will include sale/leaseback
financing, property management, lease and loan servicing, mergers and acquisitions advisory services, investment and merchant banking, restaurant real estate development, and trading restaurant properties in the growing IRS Code Section1031 exchange
market. The combined company will also offer a broad array of complementary financial services such as portfolio lending and treasury and cash management.



The 18 CNL Income Funds specialize in owning triple-net lease restaurant properties. The CNL Income Funds, which were formed between 1986 and 1997, own approximately 500
triple-net lease restaurant properties, including restaurants operating under the Jack in the Box, Golden Corral, and Checkers Drive-In brands.



The transactions are subject to approval from the CNLRP stockholders, the Company stockholders and the limited partners of each of the 18 CNL Income Funds. The
transactions are also subject to securing adequate financing and customary regulatory approvals.



11. Subsequent Events



Bridge Loan



On October 29, 2004, the Company signed a commitment letter for a bridge
loan facility (the Facility) in the amount of $60 million. In the event of a delay or cancellation of the merger with CNL Restaurant Properties, Inc., the Facility would be used for the partial refinance of the Companys existing
senior unsecured notes, which become due and payable on May 1, 2005. The Facility would mature 12 months from the date of funding, carry an interest rate of LIBOR plus 3.5% and be secured by a negative pledge from the borrowing base entity. The
Company paid a 1% up-front commitment fee of $600,000 which will be amortized over the 180-day commitment period.



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



Risks Associated with Forward-Looking Statements included in this Form 10-Q



Certain statements contained in the Form 10-Q, including without limitation statements regarding the objectives of management for future
operations and statements containing the words believe, may, will, estimate, continue, anticipate, intend, expect and similar expressions, are
forward-looking statements within the meaning of the federal securities laws. Such forward-looking statements are subject to known and unknown risks, uncertainties and assumptions which may cause the Companys actual results, performance or
achievements to differ materially from those anticipated or implied by the forward-looking statements. The Company disclaims any obligation to update any such statements or publicly announce any updates or revisions to any of the forward-looking
statements contained herein to reflect any change in the Companys expectation with regard thereto or any change in events, conditions, circumstances or assumptions underlying such statements. Reference is hereby made to the disclosures
contained in the Companys filings with the Securities and Exchange Commission, including, but not limited to, the disclosures under the headings Risks Associated with Forward-Looking Statements included in this Form 10-Q and
Factors Affecting the Companys Business and Prospects in Item 1. Business of the Companys Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2004.



Managements discussion and analysis of financial condition and results of operations is
based on the Companys consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management of
the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On a regular basis, the Company evaluates these estimates,
including asset impairment and provision for doubtful accounts. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these
estimates.



RESULTS OF OPERATIONS - OVERVIEW



The Companys results of operations are presented in two segments, real estate and
retail. Properties in these combined segments are located in 48 states. Real estate revenue is derived primarily from the leasing of quick service and full service restaurant properties to operators on a triple net basis. Triple net
leases typically require the tenants to be responsible for property operating costs, including property taxes, insurance, maintenance and ground rents, where applicable. Approximately 45.5% of the Companys leases provide for a base rent plus a
percentage of the sales in excess of a threshold amount. As a result, the Companys rental income revenue is partly a function of the number of properties in operation and their level of sales, which have both increased in 2004. In addition,
the Companys retail operating revenue is derived primarily from fuel sales and service station properties operated by the Company. Sales at individual properties are influenced by, among other things, local market conditions, the efforts of
specific operators, marketing, new product programs, support of the franchisor and the general state of the economy. During 2004, the Companys fuel margins declined. Primary reasons for the decline were price competition and record high fuel
costs, made worse by time delays in passing all or part of the cost increases on to the consumer. This competition, along with uncertainties regarding future volatility in fuel prices, may create additional pricing challenges for management in its
gas station portfolio. In addition, uncertainties related to the potential increase in the minimum wage could have an effect on profits related to stores that the Company operates in its TRS. During the 2004 second quarter, the Company also began
acquiring properties with the intention of reselling them rather than holding them for investment properties. Consequently, these properties are classified as held for sale at the date of acquisition and are not depreciated. In accordance with SFAS
No. 144, the operations of properties held for sale are classified as income from discontinued operations in the Unaudited Condensed Consolidated Statements of Operations.



The Company generated net income of $4.3 million and $15.4 million for the three and nine months ended September 30, 2004, respectively, as
compared to $5.3 million and $16.0 million for the comparable periods in 2003. Net income decreased 19% for the three months ended September 30, 2004 as compared to the same quarter in 2003, and the nine months ended September 30, 2004 posted a 4%
decrease in net income over the comparable period in 2003 as a result of several factors. The decline in net income during the three months ended September 30, 2004 was primarily due to a $2.0 million decrease in gains on sales of property as a
result of 16 fewer dispositions and a $1.1 million increase in professional fees associated with a proposed merger with CNL Restaurant Properties, all of which are further described below. The decline in net income for the quarter was partially
offset by a $1.2 million decrease in minority interests in earnings and a $425,000 decrease in impairment losses. The decline in net income during the nine months ended



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##### Table of Contents

September 30, 2004 as compared with the same period in 2003 was primarily due to a $4.9 million decrease in gains on
sales of property as a result of 21 fewer dispositions, a $1.1 million increase in professional fees associated with a proposed merger with CNL Restaurant Properties and a $402,000 increase in professional fees related to implementation of the
Sarbanes-Oxley Act initiatives. The decline in net income was partially offset by a $3.5 million decrease in minority interests in earnings and a $1.9 million decrease in interest expense.



The following discussion considers the specific impact of such factors on the results of
operations of the Company.



The following selected financial statement
information related to the Companys continuing operations is provided to assist in the comparisons between periods for revenues and expenses.



|                                                    |  |                                          |        |   |      |   |        |        |  |   |       |  
|--------------------------------------------------- |  | ---------------------------------------- | ------ | - | ---- | - | ------ | ------ |  | - | ----- | -
|                                                    |  | For the three months ended September 30, |       
|Selected Financial Statement Amounts (in
thousands) |  | 2004                                     |        |   | 2003 |   |        | Change | 
|Lease termination fees                              |  | $                                        | 100    |   |      | $ |       |        |  | $ | 100   |  
|Tenant expense reimbursements                       |  |                                          | 1,086  |   |      |   | 809    |        |  |   | 277   |  
|Interest on real estate loans                       |  |                                          | 482    |   |      |   | 579    |        |  |   | (97   | )
|Rental income                                       |  |                                          | 15,522 |   |      |   | 14,539 |        |  |   | 983   |  
|Retail operations                                   |  |                                          | 15,918 |   |      |   | 14,994 |        |  |   | 924   |  
|                                                    |  |                                          |        |   |      |   |        |        |  |   |       |  
|Total revenues                                      |  | $                                        | 33,108 |   |      | $ | 30,921 |        |  | $ | 2,187 |  
|                                                    |  |                                          |        |   |      |   |        |        |  |   |       |  
|Property costs                                      |  | $                                        | 1,525  |   |      | $ | 1,380  |        |  |   | 145   |  
|Depreciation and amortization                       |  |                                          | 5,568  |   |      |   | 5,088  |        |  |   | 480   |  
|Impairment of long-lived assets                     |  |                                          | 19     |   |      |   | 444    |        |  |   | (425  | )
|Provision for doubtful accounts                     |  |                                          | (8     | ) |      |   | (137   | )      |  |   | 129   |  
|General administrative and legal expenses           |  |                                          | 5,483  |   |      |   | 3,549  |        |  |   | 1,934 |  
|Retail cost of sales                                |  |                                          | 13,238 |   |      |   | 12,438 |        |  |   | 800   |  
|                                                    |  |                                          |        |   |      |   |        |        |  |   |       |  
|Total expenses                                      |  | $                                        | 25,825 |   |      | $ | 22,762 |        |  | $ | 3,063 |  
|                                                    |  |                                          |        |   |      |   |        |        |  |   |       |  
|                                                    | 
|                                                    |  | For the nine months ended September 30,  |       
|Selected Financial Statement Amounts (in
thousands) |  | 2004                                     |        |   | 2003 |   |        | Change | 
|Lease termination fees                              |  | $                                        | 310    |   |      | $ | 997    |        |  | $ | (687  | )
|Tenant expense reimbursements                       |  |                                          | 2,433  |   |      |   | 2,611  |        |  |   | (178  | )
|Interest on real estate loans                       |  |                                          | 1,370  |   |      |   | 2,342  |        |  |   | (972  | )
|Rental income                                       |  |                                          | 46,866 |   |      |   | 43,428 |        |  |   | 3,438 |  
|Retail operations                                   |  |                                          | 44,129 |   |      |   | 40,127 |        |  |   | 4,002 |  
|                                                    |  |                                          |        |   |      |   |        |        |  |   |       |  
|Total revenues                                      |  | $                                        | 95,108 |   |      | $ | 89,505 |        |  | $ | 5,603 |  
|                                                    |  |                                          |        |   |      |   |        |        |  |   |       |  
|Property costs                                      |  | $                                        | 4,286  |   |      | $ | 4,313  |        |  | $ | (27   | )
|Depreciation and amortization                       |  |                                          | 16,607 |   |      |   | 15,132 |        |  |   | 1,475 |  
|Impairment of long-lived assets                     |  |                                          | 261    |   |      |   | 674    |        |  |   | (413  | )
|Provision for doubtful accounts                     |  |                                          | 294    |   |      |   | (307   | )      |  |   | 601   |  
|General administrative and legal expenses           |  |                                          | 13,044 |   |      |   | 9,676  |        |  |   | 3,368 |  
|Retail cost of sales                                |  |                                          | 37,141 |   |      |   | 33,644 |        |  |   | 3,497 |  
|                                                    |  |                                          |        |   |      |   |        |        |  |   |       |  
|Total expenses                                      |  | $                                        | 71,633 |   |      | $ | 63,132 |        |  | $ | 8,501 |  
|                                                    |  |                                          |        |   |      |   |        |        |  |   |       |  



25



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##### Table of Contents

Comparison of the three months ended September 30, 2004 to the three months ended September 30, 2003



Revenues



Revenues from real estate properties include rental income, tenant expense reimbursements, lease termination fees and other fees associated
with lease events and interest on real estate loans. Revenues from retail operations are derived primarily from fuel sales and sales at properties operated by the Company, including restaurants, service stations, car washes and convenience stores.
Retail operations revenues also include the reimbursement for Lyons payroll-related costs including a 2% administrative fee. For the three months ended September 30, 2004, total revenues increased 7.1% due primarily to the following:



| | a $1.0 million increase in rental income related to $1.5 million in rent received from 9 Shoneys and 73 Captain Ds properties acquired since the third quarter of 2003,
partly offset by a decrease in rental income of $314,000 due to the sale of FINA stores in 2003 and 2004;
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a $924,000 increase in retail operations revenue attributable to:
|- | -----------------------------------------------------------------



| |  | a $267,000 increase in fuel revenues compared to the prior year third quarter resulting from higher average pump prices; and
| | - | ----------------------------------------------------------------------------------------------------------------------------



| |  | a $776,000 increase related to payroll reimbursement from Lyons for employee related costs. In April 2004, the Company executed a management agreement with Lyons whereby
the Company, for a specified fee, would provide management oversight of the operations of the Lyons brand name and four restaurants operated by Lyons. Under the agreement, the Lyons employees were placed on the
Companys payroll and are billed back to Lyons at cost plus a 2% administrative fee;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a $277,000 increase in tenant expense reimbursements on real estate leases; and
|- | -------------------------------------------------------------------------------



| | a $100,000 increase in lease termination fees due to the termination of one lease for which there was no corresponding terminations in the corresponding prior year quarter; offset
partially by
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a $97,000 decrease in interest on real estate loans due to the liquidation of two mortgage loans receivable during the fourth quarter of 2003.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------



Expenses



Expenses consist of real-estate related expenses such as ground rents, property taxes and depreciation on the Companys real estate
investments, as well as cost of sales for the retail segment, which include Lyons payroll expenses. Expenses from continuing operations increased $3.1 million, or 13.5%. These increases were attributable to the following:



| | a $1.9 million increase in general, administrative and legal expenses due primarily to:
|- | ---------------------------------------------------------------------------------------



| |  | a $1.1 million increase in professional fees associated with a proposed merger with CNL Restaurant Properties (CNLRP). On August 9, 2004, the Company entered into
definitive agreements to merge with CNRLP and 18 CNL Income Funds. In accordance with Statement of Financial Accounting Standards No. 141, Business Combinations, only one company may capitalize merger-related costs. Since this transaction is deemed
to be a reverse merger, USRP is required to expense its merger costs;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | a $761,000 increase in salaries releated to Lyons employee costs; and
| | - | ----------------------------------------------------------------------



| |  | a $224,000 increase in professional fees related to implementation of the Sarbanes-Oxley Act initiatives;
| | - | ---------------------------------------------------------------------------------------------------------



| | a $800,000 increase in retail cost of sales, due mainly to a $1.0 million increase in the cost of fuel sold during the 2004 third quarter. The average cost of fuel sold by the
Company increased by 49% in the 2004 third quarter compared to the corresponding quarter in the prior year;
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a $480,000 increase in depreciation and amortization, which was due to sales and dispositions of properties with a lower basis being replaced with purchases of new properties with a
higher basis; and
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



26



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##### Table of Contents

| | a $274,000 increase in provision for doubtful accounts and property costs, primarily due to:
|- | --------------------------------------------------------------------------------------------



| |  | a net recovery of doubtful accounts related to tenants in the 2003 third quarter; and
| | - | -------------------------------------------------------------------------------------



| |  | an increase in property taxes during the 2004 third quarter related to costs now absorbed by the Company because of a tenant bankruptcy and for which the Company will seek recovery
through claims filed with the bankruptcy court.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



These increases
were partially offset by a $425,000 decrease in impairment of long-lived assets, which was due to the impairment of ten properties during the 2003 third quarter compared to two properties in the 2004 third quarter.



Gains on sales of property for the three months ended September 30, 2004 were $1.5 million
resulting from the sale of 9 properties, compared to gains of $3.6 million for the prior year quarter from the sale of 25 properties. These gains are reflected in the Companys Unaudited Condensed Consolidated Statements of Operations as
Income from discontinued operations in accordance with the requirements of Statement of Financial Accounting Standards No. 144 (SFAS No. 144), Accounting for the Impairment or Disposal of Long-Lived Assets.



Minority interests in earnings decreased $1.2 million as a result of the
November 2003 redemption of a preferred partnership interest in one of the Companys operating subsidiaries.



Retail operations are administered by FSI, which, for federal income tax purposes, had incurred net operating losses (NOLs) since its inception. Management
believes these NOLs, which are estimated to be $1.8 million, will be used to offset future taxable income of the Company. The Company has $102,000 of deferred tax assets as of September 30, 2004, which is included in prepaid expenses and other
assets on the Unaudited Condensed Consolidated Balance Sheets.



Comparison
of the nine months ended September 30, 2004 to the nine months ended September 30, 2003



Revenues



For the nine months ended
September 30, 2004, revenues from continuing operations increased 6.3% due primarily to the following:



| |  | a $4.0 million increase in retail operations revenue attributable to the following:
| | - | -----------------------------------------------------------------------------------



| |  | a $3.1 million increase in fuel revenues compared to the prior year third quarter resulting from higher average pump prices; and
| | - | --------------------------------------------------------------------------------------------------------------------------------



| |  | a $1.2 million increase related to payroll reimbursement from Lyons for employee related costs and management fees; partially offset by
| | - | ----------------------------------------------------------------------------------------------------------------------------------------



| |  | a $300,000 decrease in merchandise and other revenue;
| | - | -----------------------------------------------------



| |  | a $3.4 million increase in rental income due primarily to $4.5 million of rent received from 9 Shoneys and 73 Captain Ds properties acquired since the third quarter of
2003, offset by a decrease in rental income of $1.5 million from the sale of FINA stores in 2003 and 2004;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | a $1.0 million decrease in interest on real estate loans due to the liquidation of two mortgage loans receivable during the fourth quarter of 2003; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | a $687,000 decrease in lease termination fees due to termination fees earned on three tenant leases in the 2003 second and third quarters and the fees earned in connection with an
early termination agreement entered into with respect to 51 Fina stations in the 2003 first quarter for which there were not corresponding terminations during the first nine months of 2004. As these properties are sold or otherwise disposed, the
termination fee revenue is reclassified under the caption, Income from discontinued operations, in the Unaudited Condensed Consolidated Statements of Operations.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Expenses



Expenses consist of real-estate related expenses such as ground rents, property taxes and depreciation on real estate investments held by the Company, as well as cost of
sales for the retail segment. Expenses from continuing operations increased $8.5 million or 13.5% and were attributable to the following:



| |  | a $3.5 million increase in retail cost of sales, due mainly to a $3.7 million increase in the cost of fuel sold during the nine months ended September 30, 2004. The average cost of
fuel sold by the Company increased by 18% in the nine months ended September 30, 2004 compared to the corresponding nine months in the prior year. The increase in cost of fuel sold is offset by a decrease of approximately $200,000 in cost of
merchandise sold;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | a $3.4 million increase in general, administrative and legal expenses due primarily to:
| | - | ---------------------------------------------------------------------------------------



| |  | a $402,000 increase in professional fees related to implementation of the Sarbanes-Oxley Act initiatives;
| | - | ---------------------------------------------------------------------------------------------------------



| |  | a $1.1 million increase in professional fees associated with a proposed merger with CNLRP;
| | - | ------------------------------------------------------------------------------------------



| |  | a $1.0 million increase in salaries related to Lyons employee costs; and
| | - | -------------------------------------------------------------------------



| |  | an increase in personal property tax expense and various other expenses.
| | - | ------------------------------------------------------------------------



| |  | a $1.5 million increase in depreciation and amortization, which was due to sales and dispositions of properties with a lower basis being replaced with purchases of new properties
with a higher basis; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | a $601,000 increase in provision for doubtful accounts primarily due to write-offs associated with the bankruptcy of a single tenant and to a net recovery of doubtful accounts
related to two tenants in 2003.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The increases were partially
offset by a $413,000 decrease in impairment of long-lived assets, which was due to the impairment of 18 properties during the nine months ended September 30, 2003 compared to 16 properties in the same period in 2004.



Gains on sales of property for the nine months ended September 30, 2004 were $5.4 million
resulting from the sale of 41 properties, compared to gains of $10.3 million for the prior year quarter from the sale of 62 properties. These gains are reflected in the Companys Unaudited Condensed Consolidated Statements of Operations as
Income from discontinued operations in accordance with the requirements of SFAS No. 144.



Interest expense decreased $1.9 million or 12% due to a $7.1 million lower average balance of the Companys outstanding line of credit, notes and mortgage payables and due to the replacement of senior unsecured
notes, revolver and term loan with a new credit facility bearing a lower interest rate in November of 2003.



Minority interests in earnings decreased $3.5 million as a result of the November 2003 redemption of a preferred partnership interest in one of the Companys operating subsidiaries.



28



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##### Table of Contents

Discontinued Operations



The following table presents supplemental information regarding the changes in the number of properties owned or operated by the Company during the relevant periods
discussed below:



|                                                       |  |                                 |  |              |  |              |   |  |                           
|------------------------------------------------------ |  | ------------------------------- |  | ------------ |  | ------------ | - |  | --------------------------
|                                                       |  | Properties atBeginning ofPeriod |  | Acquisitions |  | Dispositions |   |  | Properties At End ofPeriod
|Three months ended September 30, 2004                  |  | 787                             |  | 4            |  | (9           | ) |  | 782                       
|Nine months ended September 30, 2004                   |  | 795                             |  | 28           |  | (41          | ) |  | 782                       
|Three months ended September 30, 2003                  |  | 801                             |  | 9            |  | (25          | ) |  | 785                       
|Nine months ended September 30, 2003                   |  | 816                             |  | 31           |  | (62          | ) |  | 785                       
|Period from January 1, 2003 through September 30, 2004 |  | 816                             |  | 96           |  | (130         | ) |  | 782                       



In accordance with SFAS No. 144,
discontinued operations are presented in the Companys Unaudited Condensed Consolidated Statements of Operations as a separate line item after income from continuing operations. Income from discontinued operations represents, in
part, the operations of properties sold or held for sale, as well as any gain or loss recognized on their disposition. The Company acquires certain properties with the intention of reselling them rather than holding them as investment properties.
Consequently, these properties are classified as held for sale at the date of acquisition and are not depreciated. The operations of properties held for sale are recorded as Income from discontinued operations. For the three and nine
months ended September 30, 2004, Income from discontinued operations includes 8 properties that were classified as held for sale as of September 30, 2004. Income from discontinued operations for the three and nine months ended September 30, 2004
also includes the operating results of the 9 and 41 properties, respectively, which were sold or otherwise disposed of during the first three quarters of 2004. Income from discontinued operations for the three and nine months ended
September 30, 2003 includes the operating results for the same 9 and 41 properties, respectively, and also includes operating results for 89 properties sold during the year ended December 31, 2003, for a total of 130 properties as shown in the table
above. No properties were classified as held for sale in 2003.



|                                              |  |                                 |       |   |                                |   |        |      |  |   |       |   |  |   |        |  
|--------------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ------ | ---- |  | - | ----- | - |  | - | ------ | -
|                                              |  | Three months endedSeptember 30, |       |   | Nine months endedSeptember 30, |  
|Discontinued Operations (in
thousands)        |  | 2004                            |       |   | 2003                           |   |        | 2004 |  |   | 2003  |  
|Revenues                                      |  | $                               | 238   |   |                                | $ | 2,139  |      |  | $ | 1,344 |   |  | $ | 9,711  |  
|Depreciation and amortization                 |  |                                 | (11   | ) |                                |   | (753   | )    |  |   | (145  | ) |  |   | (1,839 | )
|Impairment of long-lived assets               |  |                                 |      |   |                                |   | (1,081 | )    |  |   | (71   | ) |  |   | (3,198 | )
|Other expenses                                |  |                                 | (57   | ) |                                |   | (911   | )    |  |   | (784  | ) |  |   | (5,880 | )
|                                              |  |                                 |       |   |                                |   |        |      |  |   |       |   |  |   |        |  
|                                              |  |                                 | 170   |   |                                |   | (606   | )    |  |   | 344   |   |  |   | (1,206 | )
|Gain on sales of property held for investment |  |                                 | 910   |   |                                |   | 3,571  |      |  |   | 4,605 |   |  |   | 10,275 |  
|Gain on sales of property held for sale       |  |                                 | 595   |   |                                |   |       |      |  |   | 756   |   |  |   |       |  
|                                              |  |                                 |       |   |                                |   |        |      |  |   |       |   |  |   |        |  
|Income from discontinued operations           |  | $                               | 1,675 |   |                                | $ | 2,965  |      |  | $ | 5,705 |   |  | $ | 9,069  |  
|                                              |  |                                 |       |   |                                |   |        |      |  |   |       |   |  |   |        |  



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##### Table of Contents

LIQUIDITY AND CAPITAL RESOURCES



Summary of Sources and Uses of Cash



|                                               |  |                                                  |         |  
|---------------------------------------------- |  | ------------------------------------------------ | ------- | -
|                                               |  | Nine MonthsEndedSeptember 30,2004 (in thousands) |        
|Cash flows from operating activities           |  | $                                                | 30,499  |  
|Cash flows from investing activities           |  |                                                  | (6,778  | )
|Cash flows from financing activities           |  |                                                  | (35,605 | )
|                                               |  |                                                  |         |  
|Decrease in cash and cash equivalents          |  |                                                  | (11,884 | )
|Cash and cash equivalents, beginning of period |  |                                                  | 13,855  |  
|                                               |  |                                                  |         |  
|Cash and cash equivalents, end of period       |  | $                                                | 1,971   |  
|                                               |  |                                                  |         |  



Liquidity Requirements



The Company is organized to operate as an equity REIT to acquire, lease
and manage properties and distribute to stockholders, in the form of cash distributions, a substantial portion of its net cash flow generated from its real estate and retail activities. Management intends to maintain appropriate levels of cash
reserves for working capital based on its estimate of cash requirements. At September 30, 2004, the Company had cash and cash equivalents totaling $2.0 million and restricted cash and marketable securities totaling $6.5 million.



The Companys primary requirements for cash during the remainder of 2004 are expected to
be as follows: (1) debt service in the approximate amount of $6.4 million, which includes interest of $3.5 million; (2) anticipated property acquisitions and other investments of approximately $4.7 million; and (3) the payment of dividends of
approximately $9.9 million. Cash requirements for capital expenditures are expected to be nominal for income-generating investments. Management expects to meet its short-term liquidity requirements consisting of normal recurring operating expenses,
debt service requirements, property improvements and distributions to stockholders primarily through cash flows provided from real estate and retail operations, along with proceeds from sales of selected properties. To the extent the Companys
cash flow from real estate and retail operating activities is not sufficient to finance such short-term liquidity requirements, the Company may utilize its credit facility. At September 30, 2004, the funds available to the Company under its credit
facility were $46.9 million. The Companys long-term liquidity requirements at September 30, 2004, consist primarily of future debt maturities totaling approximately $193.4 million, which include maturities through December 2011 and leases
totaling approximately $18.2 million which includes maturities up to 20 years. The Company expects to meet these long-term liquidity requirements primarily through long-term secured and unsecured borrowings, other debt and equity financing
alternatives, as well as cash proceeds from operations and from the sale of properties. The Companys short-term liquidity requirements over the next year consist primarily of the maturity of the $111 million senior unsecured notes in May 2005
and payments on other long-term debt and leases. Management believes that cash flow from operations, anticipated sales of properties, the existing credit facility and a new senior forward bridge loan facility (the Facility), if needed,
will provide the Company the ability to repay the senior unsecured notes. A commitment letter for the new Facility in the amount of $60 million was signed on October 29, 2004. In the event of a delay or cancellation of the merger with CNL Restaurant
Properties, Inc., the Facility would be used for the partial refinance of the Companys existing senior unsecured notes, which become due and payable on May 1, 2005. The Facility would mature 12 months from the date of funding, carry an
interest rate of LIBOR plus 3.5% and be secured by a negative pledge from the borrowing base entity. The Company paid a 1% up-front commitment fee of $600,000 which will be amortized over the 180-day commitment period.



30



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##### Table of Contents

Management believes that cash flow from operations, along with the Companys ability to raise additional equity,
anticipated sales of properties, funds available under its $60 million line of credit and the Companys anticipated ability to obtain financing will provide the Company with sufficient liquidity to meet its foreseeable capital needs. However,
there can be no assurance that such additional financing will be available at the time the Company needs it or that the terms of anticipated financing will be as favorable to the Company as under the existing facilities.



A summary of the cash activities for the nine months ended September 30, 2004 follows.



Operating Activities



The principal sources of cash to meet working capital and dividend requirements were $98.4
million of rental revenue produced by the Companys real estate properties and operating revenue collected from the Companys retail segment. Cash receipts were offset by $67.9 million of operating cash outflows related to the real estate
and retail segments, leaving net cash from operations of $30.5 million for the period.



Investing Activities



Cash generated in excess of operating
and dividend payment requirements was generally used to acquire additional properties or to reduce amounts outstanding under the Companys credit agreement.



The Companys cash flows used in investing activities of $6.8 million were primarily attributable to the following:



| | $21.6 million of net proceeds from 41 property sales;
|- | -----------------------------------------------------



| | $2.4 million of proceeds from receipts on mortgage loans receivable;
|- | --------------------------------------------------------------------



| | $1.0 million of proceeds from receipts on notes receivable;
|- | -----------------------------------------------------------



The cash flows from investing activities were offset by:



| | $11.8 million for the acquisition of investment properties;
|- | -----------------------------------------------------------



| | $10.7 million for the acquisition of properties held for sale;
|- | --------------------------------------------------------------



| | $5.3 million purchase of mortgage loans receivable;
|- | ---------------------------------------------------



| | $2.7 million increase in restricted cash and marketable securities primarily due to funds held in a 1031 exchange account; and
|- | ------------------------------------------------------------------------------------------------------------------------------



| | $1.2 million for the acquisition of machinery and equipment.
|- | ------------------------------------------------------------



Financing Activities



The Companys cash flows used in financing activities of $35.6 million were primarily attributable to $4.7 million in proceeds from issuance of Series B-1 preferred stock.



The cash flows from financing activities were offset by:



| | $22.3 million in Common Stock dividend distributions;
|- | -----------------------------------------------------



| | $8.2 million in payments on notes and mortgages resulting in an overall decrease in debt outstanding, primarily related to $7.9 million in payments on the variable rate certificates
and $262,000 on the term loans;
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | $7.1 million in Series A and Series B preferred stock dividend distributions; and
|- | ---------------------------------------------------------------------------------



| | $2.8 million in net payments under the Companys line of credit.
|- | ----------------------------------------------------------------



Discussions with the Internal Revenue Service



On April 8, 2004, the Company submitted a request to the Internal Revenue Service for a closing agreement with respect to a third party agreement entered into by the
Company with one of its borrowers in 2000. Management believes, based on its understanding of the manner in which other REITs have resolved similar potential technical REIT compliance violations, it is likely that a closing agreement can be reached.
Management cannot provide complete assurance that the Internal Revenue Service will agree to enter into such a closing agreement. However, the Company has received, through its tax advisor, execution documents for the closing agreement with the
Internal Revenue Service. The Company expects to execute the documents shortly and return them for the Internal Revenue Services signature.



31



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##### Table of Contents

Company Debt and Derivatives



The Companys debt is summarized as follows (in thousands):



|                                                                   |  |               |  |               |   |  |                   |         |                  |   |        
|------------------------------------------------------------------ |  | ------------- |  | ------------- | - |  | ----------------- | ------- | ---------------- | - | -------
|                                                                   |  | Maturity Date |  | Interest Rate |   |  | September 30,2004 |         | December 31,2003
|Revolving credit facility                                          |  | October 2006  |  | LIBOR + 3.0   | % |  | $                 | 7,500   |                  | $ | 10,300 
|                                                                   |  |               |  |              
|Notes payable                                                      |  |               |  |               |   |  |                   |         |                  |   |        
|Senior unsecured notes, interest-only payable semiannually         |  | May 2005      |  | 7.15          | % |  | $                 | 111,000 |                  | $ | 111,000
|Variable rate certificates, principal and interest payable monthly |  | August 2006   |  | LIBOR + .48   | % |  |                   | 148,636 |                  |   | 156,274
|Term loan, interest-only paid monthly                              |  | November 2008 |  | LIBOR + 3.5   | % |  |                   | 35,000  |                  |   | 35,000 
|Term loan, principal and interest payable monthly                  |  | December 2011 |  | LIBOR + 2.5   | % |  |                   | 11,492  |                  |   | 12,000 
|Debt premium, net                                                  |  |               |  |               |   |  |                   | 190     |                  |   | 422    
|                                                                   |  |               |  |               |   |  |                   |         |                  |   |        
|Total notes payable                                                |  |               |  |               |   |  |                   | 306,318 |                  |   | 314,696
|                                                                   |  |               |  |               |   |  |                   |         |                  |   |        
|Mortgage note payable                                              |  | June 2007     |  | 8.00          | % |  |                   | 881     |                  |   | 910    
|                                                                   |  |               |  |               |   |  |                   |         |                  |   |        
|Total debt                                                         |  |               |  |               |   |  | $                 | 314,699 |                  | $ | 325,906
|                                                                   |  |               |  |               |   |  |                   |         |                  |   |        



As of September 30, 2004, funds
available under the revolving credit facility were $46.9 million. As of November 3, 2004, funds available under the credit facility were $46.4 million.



The Company is subject to a number of financial debt covenants which management monitors on a regular basis. Failure to comply with these covenants could result in
adverse consequences and could potentially affect the Companys ability to pay dividends. The Company was in compliance with all covenants associated with its debt and credit facilities at September 30, 2004.



Management believes that cash flow from operations, anticipated sales of properties and the
Companys anticipated ability to obtain financing will provide the Company with the ability to repay or refinance the senior unsecured notes that mature in May 2005.



The Companys derivative instruments are summarized as follows (in thousands):



|                     |  |                  |  |             |  |                |               |                    |      |              |           |      |   |         |      |   |           |   |     |   |  |   |      
|-------------------- |  | ---------------- |  | ----------- |  | -------------- | ------------- | ------------------ | ---- | ------------ | --------- | ---- | - | ------- | ---- | - | --------- | - | --- | - |  | - | -----
|Type                 |  | SettlementPeriod |  | Maturity    |  | NotionalAmount |               | FixedSwapRate Paid |      |              | FloorRate |      |   | CapRate |      |   | Liability
|                     |  |                  |  |             |  |                | Sept. 30,2004 |                    |      | Dec. 31,2003
|Interest rate collar |  | Monthly          |  | August 2005 |  | $              | 54,411        |                    |     |              |           | 4.42 | % |         | 6.00 | % |           | $ | 943 |   |  | $ | 2,375
|Interest rate swap   |  | Monthly          |  | June 2004   |  |                | 25,000        |                    | 2.42 | %            |           |      |   |         |      |   |           |   |    |   |  |   | 153  
|Interest rate swap   |  | Monthly          |  | Sept. 2005  |  |                | 30,000        |                    | 2.12 | %            |           |      |   |         |      |   |           |   | (89 | ) |  |   | 35   
|Interest rate swap   |  | Monthly          |  | Sept. 2005  |  |                | 25,000        |                    | 2.33 | %            |           |      |   |         |      |   |           |   | (22 | ) |  |   | 108  
|                     |  |                  |  |             |  |                |               |                    |      |              |           |      |   |         |      |   |           |   |     |   |  |   |      
|                     |  |                  |  |             |  |                |               |                    |      |              |           |      |   |         |      |   |           | $ | 832 |   |  | $ | 2,671
|                     |  |                  |  |             |  |                |               |                    |      |              |           |      |   |         |      |   |           |   |     |   |  |   |      



Derivative financial instruments are
utilized by the Company to manage its exposure to market risks from changes in interest rates. All of the Companys derivative financial instruments are designated as cash flow hedges. The floating rate related to the interest rate collar and
interest rate swaps is the one-month LIBOR rate.



32



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##### Table of Contents

Contractual Obligations



Set forth below are the Companys contractual obligations at September 30, 2004 (in thousands):



|                        |  |                        |         |                 |   |           |  |           |         |                  |   |        |  |   |       
|----------------------- |  | ---------------------- | ------- | --------------- | - | --------- |  | --------- | ------- | ---------------- | - | ------ |  | - | ------
|                        |  | Payments Due by Period
|Contractual Obligations |  | Total                  |         | Less than1 Year |   | 1-3 Years |  | 3-5 Years |         | More than5 Years
|Line of credit          |  | $                      | 7,500   |                 | $ |          |  | $         | 7,500   |                  | $ |       |  | $ |      
|Long-term debt          |  |                        | 306,128 |                 |   | 121,046   |  |           | 140,498 |                  |   | 36,399 |  |   | 8,185 
|Ground leases           |  |                        | 18,174  |                 |   | 4,629     |  |           | 7,291   |                  |   | 3,462  |  |   | 2,792 
|Mortgage note payable   |  |                        | 881     |                 |   | 41        |  |           | 89      |                  |   | 751    |  |   |      
|                        |  |                        |         |                 |   |           |  |           |         |                  |   |        |  |   |       
|Total                   |  | $                      | 332,683 |                 | $ | 125,716   |  | $         | 155,378 |                  | $ | 40,612 |  | $ | 10,977
|                        |  |                        |         |                 |   |           |  |           |         |                  |   |        |  |   |       



The Companys significant cash
requirements that are expected to be incurred, include interest on debt, dividends and purchase obligations such as audit and tax fees. The Company expects to pay interest of approximately $3.5 million during the remainder of the year, which
includes interest on long-term debt and derivative costs. The Company expects to pay common and preferred dividends of approximately $9.9 million over the remainder of the year. The Company also expects to incur audit or audit and tax-related fees
of approximately $200,000 over the remainder of the year.



Minimum future
receipts at September 30, 2004 are as follows (in thousands):



|                        |  |                        |         |                  |   |           |  |           |         |                  |   |         |  |   |        
|----------------------- |  | ---------------------- | ------- | ---------------- | - | --------- |  | --------- | ------- | ---------------- | - | ------- |  | - | -------
|                        |  | Payments Due by Period
|Contractual Obligations |  | Total                  |         | Less than 1 Year |   | 1-3 Years |  | 3-5 Years |         | More than5 Years
|Operating leases        |  | $                      | 770,720 |                  | $ | 61,359    |  | $         | 117,628 |                  | $ | 110,628 |  | $ | 481,105
|Direct financing leases |  |                        | 1,164   |                  |   | 128       |  |           | 179     |                  |   | 179     |  |   | 678    
|                        |  |                        |         |                  |   |           |  |           |         |                  |   |         |  |   |        
|Total                   |  | $                      | 771,884 |                  | $ | 61,487    |  | $         | 117,807 |                  | $ | 117,807 |  | $ | 481,783
|                        |  |                        |         |                  |   |           |  |           |         |                  |   |         |  |   |        



Funds From Operations (FFO)



The Company believes the supplemental non-GAAP measure FFO is a useful
indicator of the Companys operating performance and that the most directly comparable GAAP financial measure to FFO is net income. Management uses FFO as a supplemental measure to conduct and evaluate the business because there are certain
limitations associated with using GAAP net income by itself as the primary measure of the Companys operating performance. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real
estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, management believes that the presentation of operating results for real estate companies that use historical
cost accounting is insufficient by itself. The National Association of Real Estate Investment Trusts (NAREIT) created FFO as a supplemental performance measure to exclude historical cost depreciation, among other items, from GAAP net
income. The Companys FFO is computed as net income (loss) available to common stockholders (computed in accordance with accounting principles generally accepted in the United States of America), plus real estate related depreciation and
amortization, excluding gains (or losses) from sales of investment property, income/loss allocable to minority interest holders and extraordinary items and is computed in accordance with the NAREIT White Paper definition of FFO. The
Company believes that the use of FFO, combined with the required primary GAAP presentations, has improved managements and the investing publics understanding of REIT operating results. Further, the use of FFO has made comparisons of
those results more meaningful and has enabled the evaluation of the Companys operating performance compared to other REITs that use the NAREIT definition in order to make more informed business decisions based on industry trends or conditions.
Therefore, the Company considers FFO a useful measure for reviewing its comparative operating and financial performance because, by excluding gains or losses related to sales of previously depreciated operating real estate assets and excluding real
estate asset depreciation and amortization, FFO assists in the comparison of the operating performance of real estate between periods or as compared to other REITs. FFO should not be considered as an alternative to net income as the primary
indicator of the Companys operating performance or as an alternative to cash flow as a measure of liquidity. While the Company adheres to the NAREIT definition of FFO in making its calculation, the Companys method of calculating FFO may
not be comparable to the methods used by other REITs and accordingly may be different from similarly titled measures reported by other companies.



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The following table sets forth, for the three and nine months ended September 30, 2004 and 2003, the calculation of FFO.



|                                                    |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |         |  
|--------------------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                    |  | Three months endedSeptember 30, |       |   | Nine months endedSeptember 30, |  
|(in thousands)                                      |  | 2004                            |       |   | 2003                           |   |        | 2004 |  |   | 2003   |  
|Net income allocable to common stockholders         |  | $                               | 1,814 |   |                                | $ | 3,135  |      |  | $ | 7,996  |   |  | $ | 10,287  |  
|Real estate depreciation and amortization:          |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Continuing operations                               |  |                                 | 5,545 |   |                                |   | 5,060  |      |  |   | 16,531 |   |  |   | 15,045  |  
|Discontinued operations                             |  |                                 | 11    |   |                                |   | 753    |      |  |   | 145    |   |  |   | 1,839   |  
|Gain on sale of property:                           |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Discontinued operations (1)                         |  |                                 | (910  | ) |                                |   | (3,571 | )    |  |   | (4,605 | ) |  |   | (10,275 | )
|Adjustments allocable to minority interests         |  |                                 | (15   | ) |                                |   | (8     | )    |  |   | (43    | ) |  |   | (23     | )
|Cumulative effect of change in accounting principle |  |                                 |      |   |                                |   |       |      |  |   |       |   |  |   | 270     |  
|                                                    |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |         |  
|FFO (Basic) (2)                                     |  |                                 | 6,445 |   |                                |   | 5,369  |      |  |   | 20,024 |   |  |   | 17,143  |  
|Income allocable to minority interest               |  |                                 | 7     |   |                                |   |       |      |  |   | 29     |   |  |   |        |  
|Adjustments allocable to minority interests         |  |                                 | 15    |   |                                |   | 8      |      |  |   | 43     |   |  |   | 23      |  
|                                                    |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |         |  
|FFO (Diluted) (2)                                   |  | $                               | 6,467 |   |                                | $ | 5,377  |      |  | $ | 20,096 |   |  | $ | 17,166  |  
|                                                    |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |         |  

---

|(1) | Beginning in the second quarter of 2004 the Company began a program of purchasing real estate with the intent of re-sale. Gains on sale associated with this program totaling
approximately $595,000 and $756,000 for the three and nine months ended September 30, 2004, respectively, have not been excluded from the calculation of FFO as these gains represent the principal activity of this program.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Through of September 30, 2004 the Company had expensed $1.1 million of one-time costs related to the definitive agreements to merge with CNL Restaurant Properties, Inc. In
accordance with SFAS No. 141, only the acquiring entity may capitalize merger-related costs. Since this transaction is a reverse merger for accounting purposes, CNL Restaurant Properties, Inc. is deemed to be the acquiring entity. Therefore, USRP is
required to expense its merger-related costs which are included in the calculation of FFO.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Significant Tenant Negotiations and Other Matters



Tenants



Schlotzskys



On August 3, 2004, one of the Companys franchisor/tenants,
Schlotzskys Corporation (Schlotzskys), filed for Chapter 11 bankruptcy protection. Schlotzskys Corporation leases 5 of the Companys properties, which represent approximately 0.7% of the Companys annualized
base rent. Schlotzskys guarantees 13 of its franchisees leases to the Company, 4 of which are vacant, with monthly guaranteed rent representing approximately 0.5% of the Companys annualized base rent. The Companys primary
recourse remains with each individual franchisee for any unpaid rent regardless of performance under Schlotzskys guarantee. As of September 30, 2004, the Companys total unpaid rent related to the Schlotzskys bankruptcy was
approximately $692,000 of which $473,000 relates to Schlotzskys guarantees of its franchisees leases. At this time, management estimates no loss to the Company as a result of the Schlotzskys bankruptcy.



Other Matters



Lyons of California



The Company had significant mortgage loans and notes receivable due from Lyons of California, Inc. (Lyons), which are secured by certain
Lyons restaurant properties. As a result of the 2001 bankruptcy filings of Lyons, interest income associated with these notes had not been recognized since September 2001. All of the notes are valued based on the estimated fair value of
the collateral, as collateral disposal is the primary means through which the Company will collect proceeds. At September 30, 2004, the Company had $2.7 million of net mortgage loans and notes receivable due from Lyons.



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In April 2004, FSI entered into a management agreement with Lyons, whereby FSI would provide management oversight
of the Lyons brand name and franchise system, and would provide the employees necessary to operate the four Lyons corporate-operated restaurants. Compensation under the agreement includes an annual management fee, a stipulated percentage
of royalties collected from franchisees, as well as full reimbursement, including an administrative charge, for labor costs related to the employees supplied to the four corporate-operated restaurants. For the three and nine months ended September
30, 2004, payroll administration fees which are reimbursements for payroll expense for employees at the Lyons corporate owned stores were approximately $776,000 and $1.1 million, respectively, and were included as retail operations revenue in
the Unaudited Condensed Consolidated Statements of Operations. For the three and nine months ended September 30, 2004, management fees were approximately $31,000 and $52,000, respectively, and were included in retail operations revenue on the
Unaudited Condensed Consolidated Statements of Operations.



Inflation



While a few of the Companys leases are subject to adjustments for
increases in the Consumer Price Index, the majority of the leases contain fixed escalation clauses which reduce the risk to the Company of the adverse effects of inflation. Additionally, to the extent inflation increases tenants 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 (including
environmental costs) and insurance, some or all of the inflationary impact of these expenses will be borne by the property operator and not by the Company. Inflation does impact the Company through the purchase of gasoline by the retail segment.



Seasonality



Restaurant operations historically have been seasonal in nature, reflecting higher unit
sales during the second and third quarters due to warmer weather and increased leisure travel. This seasonality can be expected to cause fluctuations in the Companys quarterly revenue to the extent it recognizes percentage rent.



Item 3. Quantitative and Qualitative Disclosures about Market Risk



The Company is exposed to certain market risks that arise in the ordinary course of business. The Company may enter into derivative financial instrument transactions to manage or reduce market risk, but does not enter
into derivative financial instrument transactions for trading purposes, nor does the Company have any foreign operations and thus is not exposed to foreign currency fluctuations. A discussion of the Companys primary market risk exposure is
presented below.



Market Risk on Investments



The fair value of the Companys investments would be negatively affected by an increase
in interest rates as the majority of the investments are interest-bearing, and therefore subject to the market risk of loss from a increase in interest rates which could impact future earnings and cash flows. All other things being equal, the fair
market value of the Companys investment portfolio will decrease as interest rates increase and will increase as interest rates decrease. However, the Companys investment portfolio of $316,000 is relatively small, and changes in value
relating to market risks would not significantly impact the Companys operations. The Company also had investments in fixed rate notes and mortgage loans receivable. Changes in interest rates do not have a direct impact on interest income
related to these notes and loans.



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Market Risk on Variable Rate Debt



The Companys interest rate risk is sensitive to interest rate changes on its variable rate debt. The Company had total outstanding
debt of $314.7 million at September 30, 2004, of which approximately $202.6 million was variable rate debt. Of this amount, $93.2 million, or 46% was unhedged. All other things being equal, the interest expense on the Companys unhedged
variable rate debt will decrease as interest rates decline and will increase as rates rise. This exposure to interest rate risk is generally managed using derivative financial instruments such as interest rate swaps in conjunction with a portion of
the Companys variable rate debt to mitigate the interest rate risk on an associated financial instrument or to lock in an interest rate on its variable rate debt under its Revolving Credit Facility with Bank of America and its Triple Net Lease
Mortgage Certificates. As it relates to unhedged variable rate debt, if market interest rates average 1% more than in 2003, the impact related to additional annual interest expense would decrease net income and cash flows by $1.0 million for 2004.
This amount was determined by calculating the effect of a hypothetical interest rate on the Companys unhedged variable rate debt. This sensitivity analysis assumes that there are no changes in the Companys financial structure. Management
believes the fair value of its variable rate debt equals its carrying value as of September 30, 2004.



Market Risk on Fixed Rate Debt



The
Companys long-term fixed interest rate debt is also subject to market risk. Fixed rate debt outstanding at September 30, 2004 was $111.9 million with a weighted average interest rate of 7.2%. All other things being equal, the fair market value
of the Companys fixed interest rate debt will increase as rates decline and will decrease as rates rise. The fixed rate notes payable and the mortgage note payable totaling $111.9 million at September 30, 2004 had a fair value of $113.6
million based on interest rates for notes with similar terms and remaining maturities which management believes the Company could obtain.



Item 4. Controls and Procedures



As of September 30, 2004, the Companys management, including the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness
of the Companys disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(d)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and
procedures are effective in timely alerting them to material information required to be included in the Companys periodic SEC filings. There have been no changes during the last quarter that have materially affected, or are reasonably likely
to materially affect, the Companys internal controls over financial reporting.



During the nine months ended September 30, 2004, there were no changes to the internal controls over financial reporting of the Company identified in connection with the Companys evaluation or otherwise that has materially affected,
or is reasonably likely to materially affect, the Companys internal controls over financial reporting.



Section 404 of the Sarbanes Oxley Act of 2002 requires companies to do a comprehensive evaluation of their internal controls over financial reporting. Beginning with our fiscal year ending December 31, 2004, we must
include in our annual report our assessment of the effectiveness of our internal controls over financial reporting, along with an attestation from our external auditors regarding our assessment. We have been working on an evaluation of our internal
controls pursuant to an internal plan of action that calls for completion before the end of our fiscal year. However, it is difficult for us to predict how long it will actually take to complete the evaluation, including the final assessment of the
significance of any control deficiencies that may be found. If we fail to complete the evaluation on time, or if our external auditors cannot attest to our assessment, we could be subject to regulatory scrutiny and a loss of public confidence in our
internal controls, which could have an adverse effect on our stock price. If we are unable to timely satisfy new regulatory requirements relating to internal controls, our stock price could suffer.



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SIGNATURE



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 9, 2004 |  | By:                              |  | /s/ Stacy M. Riffe     
|                        |  |                                  |  | Stacy M. Riffe         
|                        |  |                                  |  | Chief Financial Officer



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Index to Exhibits



|              |  |                                                                                          
|------------- |  | -----------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                              
|31.1          |  | Section 302 Certification by Robert J. Stetson Pursuant to the Sarbanes-Oxley Act of 2002
|              | 
|31.2          |  | Section 302 Certification by Stacy M. Riffe Pursuant to the Sarbanes-Oxley Act of 2002   
|              | 
|32.1          |  | Section 906 Certification by Robert J. Stetson Pursuant to the Sarbanes-Oxley Act of 2002
|              | 
|32.2          |  | Section 906 Certification by Stacy M. Riffe Pursuant to the Sarbanes-Oxley Act of 2002   



38