<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

           [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended December 31, 1998.

                         Commission File Number 1-13089

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


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

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

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


SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<TABLE>
<CAPTION>

Title of each class                                          Name of each exchange on which registered
-------------------                                          -----------------------------------------
<S>                                                         <C>
Common Stock, par value $0.001 per share                                       New York Stock Exchange
$1.93 Series A Cumulative Convertible Preferred Stock                          New York Stock Exchange
</TABLE>


         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 if disclosure of delinquent filers pursuant to 
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  X
                             ---

         The aggregate market value of the Common Stock (based upon the closing
price of the Common Stock on March 12, 1999, on the New York Stock Exchange)
held by non-affiliates of the Registrant was $260,047,114.

         As of March 12, 1999, there were 14,347,427 shares outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Certain information in the Registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission related to the Company's 1998 Annual
Meeting of Stockholders is incorporated by reference in Part III hereof.
================================================================================


<PAGE>   2




                        U.S. RESTAURANT PROPERTIES, INC.



                                TABLE OF CONTENTS

<TABLE>
<CAPTION>

                                                                                             Page
                                                                                             ----
                                     PART I

<S>             <C>                                                                         <C>
Item 1.           Business...................................................................   3
Item 2.           Properties.................................................................   9
Item 3.           Legal Proceedings..........................................................  11
Item 4.           Submission of Matters to a Vote of Security-Holders........................  11

                                     PART II

Item 5.           Market for Registrant's Common Equity and Related Stockholder Matters......  12
Item 6.           Selected Financial Data....................................................  13
Item 7.           Management's Discussion and Analysis of Financial Condition
                  and Results of Operations..................................................  14
Item 8.           Financial Statements and Supplementary Data................................  22
Item 9.           Changes in and Disagreements with Accountants on Accounting
                  and Financial Disclosure...................................................  22

                                    PART III

Item 10.          Directors and Executive Officers of the Registrant.........................  22
Item 11.          Executive Compensation.....................................................  22
Item 12.          Security Ownership of Certain Beneficial Owners and Management.............  22
Item 13.          Certain Relationships and Related Transactions.............................  22

                                     PART IV

Item 14.          Exhibits, Financial Statement Schedules, and Reports on Form 8-K...........  23
</TABLE>


                                       2


<PAGE>   3



                                     PART I

ITEM 1.  BUSINESS

GENERAL

         U.S. Restaurant Properties, Inc. (the "Company"), a fully integrated,
self-administered real estate investment trust ("REIT"), is one of the largest
publicly-traded entities in the United States that is dedicated to acquiring,
owning, managing and selectively developing restaurant, service station and
other service retail properties. At December 31, 1998, the Company's portfolio
consisted of 854 core business properties (Properties) diversified
geographically in 48 states and operated by approximately 320 operators. In
addition, the Company also held 10 billboard properties and one office building.
The Properties are leased by the Company on a triple net basis primarily to
operators of fast food and casual dining chain restaurants affiliated with major
brands such as Burger King(R), Arby's(R), Dairy Queen(R), Hardee's(R),
Chili's(R), Pizza Hut(R) and Schlotzsky's(R) and regional franchises such as
Grandy's(R) and Taco Cabana(R), and to gasoline service station operators
affiliated with major brands such as Shell(R), Texaco(R) and Arco(R). As of
December 31, 1998, over 99% of the Properties were leased pursuant to leases
with average remaining lease terms (excluding extension options) in excess of
ten years.

         The Company is a Maryland corporation which made an election to be
taxed as a REIT for federal income tax purposes commencing with its taxable year
ended December 31, 1997. Both the common stock, par value $.001 per share (the
"Common Stock"), and the $1.93 Series A Cumulative Convertible Preferred Stock,
par value $.001 per share (the "Preferred Stock"), of the Company are traded on
the New York Stock Exchange under the symbols "USV" and "USV pA," respectively.
The principal executive offices of the Company are located at 5310 Harvest Hill
Road, Suite 270, Dallas, Texas 75230. The telephone number is (972) 387-1487.

HISTORY AND STRUCTURE OF THE COMPANY

         The Company's predecessor, U.S. Restaurant Properties Master LP
("USRP"), formerly Burger King Investors Master L.P. and U.S. Restaurant
Properties Operating L.P. (the "Operating Partnership"), formerly Burger King
Operating L.P., were formed in 1985 by Burger King Corporation ("BKC") and QSV
Properties, Inc. ("QSV"), both of which were at that time wholly-owned
subsidiaries of The Pillsbury Company. QSV acted as the general partner of USRP
and U.S. Restaurant Properties Operating L.P. BKC was a special general partner
of USRP until its withdrawal on November 30, 1994. USRP effected an initial
public offering in 1986 and the proceeds therefrom were used to buy the
Company's initial portfolio of 128 properties from BKC. From 1986 through March
1995, the partnership agreement governing USRP limited the activities of the
Company to managing the original portfolio of properties.

         In May 1994, existing management assumed control of the Company and
began implementing a number of new strategies intended to pursue Company growth.
These strategies have involved the Company in, among other things, acquiring new
properties, enhancing investment returns through merchant banking activities and
developing new co-branded service centers on a selective basis. From May 1994
through December 31, 1998, the Company acquired 763 Properties for a net
aggregate purchase price of approximately $515 million. Between December 31,
1998, and March 12, 1999, the Company has acquired an additional 13 properties
(net of 10 dispositions) for a total net investment of approximately $24
million.

         On October 15, 1997, the Company effected the conversion of USRP into a
self-administered REIT. The conversion was effected through the merger (the
"Merger") of USRP Acquisition, L.P., a partnership subsidiary of the Company,
with and into USRP. As a result of the Merger, USRP became a subsidiary of the
Company and, at the effective time of the Merger, all holders of units of
beneficial interest 

                                       3

<PAGE>   4

(the "Units") of USRP became stockholders of the Company. On October 16, 1997,
the Common Stock, in replacement of the Units, commenced trading on the NYSE
under the symbol "USV." In connection with the Conversion, QSV withdrew as
general partner of USRP and Operating Partnership, effective as of October 15,
1997, and USRP Managing, Inc., a wholly-owned subsidiary of the Company, was
substituted as the general partner for USRP and the Operating Partnership. In
exchange for its interests in USRP and the Operating Partnership and the
termination of its management contract, QSV received 126,582 shares of Common
Stock and 1,148,418 units of beneficial interest in the Operating Partnership
("Operating Partnership Units"), which are exchangeable at any time for shares
of Common Stock on a one-for-one basis, and the right to receive up to 825,000
additional Operating Partnership Units in 2001 if certain earnings targets are
met by the year 2000. The earnings targets are based upon what QSV would have
received under their prior management contract.

DIVERSIFICATION

         The Company conducts its operations in such a manner as to enhance the
predictability and sustainability of its cash flows. The Company enhances the
predictability of the operating performance of the Properties and its financial
position by diversifying its portfolio by geographic location and number of
tenants. The Company believes that geographic diversification minimizes the
effects on the Company's financial position of downturns in regional and local
economics. The Properties are further diversified by number of tenants. At
December 31, 1998, only one tenant accounts for over 6% of the Company's
properties. Sybra, Inc., the operator of 81 Arby's(R) restaurants located on the
Properties, accounted for 9% of the Company's minimum base rental revenues for
the year ended December 31, 1998.

LEASES WITH RESTAURANT OPERATORS

         The Company's strategy is to acquire operating restaurant properties
rather than developing new restaurant properties, although the Company has begun
to acquire newly constructed properties. Typically, the Company acquires a
property that has been operated as a fast food or casual dining restaurant and
that is subject to a lease with a remaining term of five to 20 years and a
co-terminus franchise agreement. The Company believes that this strategy reduces
the Company's financial risk because the restaurant operated on such property
has a proven operating record that mitigates the risk of default or non-renewal
under the lease.

         Substantially all of the Company's existing leases are "triple net."
Triple net leases typically require the tenants to be responsible for the
property operating costs, including property taxes, insurance and maintenance. A
majority of the Company's leases provide for a base rent plus a percentage of
the restaurant's sales in excess of a threshold amount. The triple net lease
structure is designed to provide the Company with a consistent stream of income
without the obligation to reinvest in the property. For the twelve months ended
December 31, 1998, base rental revenues and percentage rental revenues
represented 91% and 9%, respectively, of total gross rental revenues.

         The Company seeks to renew and restructure leases which will provide
for an increase in the percentage of total rental revenues derived from base
rental revenues and a decrease in the percentage of total rental revenues
derived from percentage rental revenues. For the year ended December 31, 1998,
percentage rental revenues represented 9% of total rental revenues (12% before
the effect of implementation of EITF 98-9), down from 16% in the prior year. In
addition, the Company has implemented an early renewal program pursuant to which
the Company offers remodeling financing to tenants in consideration for renewing
and restructuring leases. To date, the Company has renewed 72 leases under this
program, with an aggregate of $2.6 million paid out by the Company for
remodeling. The Company considers the remodeling financing to be prudent given
the increased sales resulting at the remodeled restaurants and the lower costs
incurred because of the early lease renewals. The early renewal 

                                       4

<PAGE>   5

program has resulted in an increase of the average remaining lease term of the
Properties to over twelve years, thus mitigating the risk of non-renewal of
leases.

         The Company generally acquires properties from third-party lessors or
from operators in sale/leaseback transactions in which the operator sells the
property to the Company and then enters into a long-term lease (typically 20
years) with the Company for such property. A sale/leaseback transaction is
attractive to the operator because it allows the operator to realize the value
of the real estate while retaining occupancy for the long term. A sale/leaseback
transaction may also provide specific accounting, earnings and market value
benefits to the selling operator. For example, the lease on the property may be
structured by the tenant as an off-balance sheet operating lease, consistent
with Financial Accounting Standards Board rules, which may increase the
operator's earnings, net worth and borrowing capacity. The following table sets
forth certain information regarding lease expirations for the Properties.


                          LEASE EXPIRATION SCHEDULE (1)
<TABLE>
<CAPTION>

                                                                         NUMBER             PERCENT
                                                                       OF LEASES             OF
                 YEAR                                                   EXPIRING            TOTAL
                 ----                                                  ---------            -------
<S>                                                                 <C>                 <C>
                 1999 to 2000........................                       49                  6%
                 2001 to 2003........................                       91                 11%
                 2004 to 2006........................                       67                  8%
                 2007 to 2009........................                       48                  6%
                 2010 to 2012........................                       38                  4%
                 2013 to 2015........................                       78                  9%
                 2016 to 2018........................                      395                 46%
                 2019 to 2021........................                       25                  3%
                 2022 to 2024........................                       10                  1%
                 Properties under development........                       17                  2%
                 Unleased operating properties.......                       14                  1%
                 Other (2)...........................                       22                  3%
                                                                           ===                ===
                 Total core business properties......                      854                100%
                                                                           ===                ===
</TABLE>

(1)  The lease expiration schedule does not include lease extension options.

(2)  Consists of 22 sandwich lease properties

OWNERSHIP OF REAL ESTATE INTERESTS

         Of the 854 Properties included in the Company's portfolio as of
December 31, 1998, the Company (i) owned both the land and the restaurant
building in fee simple on 687 of such Properties (the "Fee Properties"), (ii)
owned the land, with the tenant owning the restaurant building, on 37 of such
Properties and (iii) leased the land, the building or both from a third-party
lessor on 130 of such Properties (the "Leasehold Properties"). Of the 130
Leasehold Properties, 38 are Properties on which the Company leases from a third
party the underlying land, the restaurant building and the other improvements
thereon (the "Primary Leases") and then subleases the property to the restaurant
operator. Under the terms of the remaining 92 Leasehold Properties (the "Ground
Leases"), the Company leases the underlying land from a third party and owns the
restaurant building and the other improvements constructed thereon. Upon
expiration or termination of a Primary Lease or Ground Lease, the owner of the
underlying land generally will become the owner of the building and all
improvements thereon. The terms of the Primary Leases and 

                                       5

<PAGE>   6

Ground Leases expire from 1 to 12 years. With renewal options considered, the
terms of the Primary Leases and Ground Leases expire from 1 to 33 years, with
the average remaining term being 20 years.

         The terms and conditions of each Primary Lease and each Ground Lease
vary substantially. Such leases, however, have certain provisions in common,
including that: (i) the initial term is 20 years or less, (ii) the rentals
payable are stated amounts that may escalate over the terms of the Primary
Leases and Ground Leases (and/or during renewal terms), but normally are not
based upon a percentage of sales of the restaurants thereon, and (iii) the
Company is required to pay all taxes and operating, maintenance and insurance
expenses for the Leasehold Properties. In addition, under substantially all of
the leases the Company may renew the term one or more times at its option
(although the provisions governing any such renewal vary significantly and some
renewal options are at a fixed rental amount while others are at fair rental
value at the time of renewal). Several Primary Leases and Ground Leases also
give the owner the right to require the Company, upon the termination or
expiration thereof, to remove all improvements situated on the property.

         Although the Company, as lessee under each Primary Lease and Ground
Lease, generally has the right to freely assign or sublet all of its rights and
interests thereunder, the Company is not permitted to assign or sublet any of
its rights or interests under certain of the Primary Leases and certain of the
Ground Leases without obtaining the lessor's consent or satisfying certain other
conditions. In addition, approximately 20% of the Primary Leases and Ground
Leases require the Company to use such Leasehold Properties only for the purpose
of operating a Burger King(R) restaurant or another specified brand of
restaurant thereon. In any event, no transfer will release the Company from any
of its obligations under any Primary Lease or Ground Lease, including the
obligation to pay rent.

USE AND OTHER RESTRICTIONS ON THE OPERATION AND TRANSFER OF BURGER KING
RESTAURANT PROPERTIES

         The Company was originally formed for the purpose of acquiring all
BKC's interests in the original portfolio and leasing or subleasing them to BKC
franchisees under the leases/subleases. Accordingly, the Operating Partnership
Agreement contains provisions that state, except as expressly permitted by BKC,
that the Company may not use such properties for any purpose other than to
operate a Burger King restaurant during the term of the lease. In furtherance
thereof, the Operating Partnership Agreement: (i) requires the Company, in
certain specified circumstances, to renew or extend a lease/sublease and enter
into a new lease with another franchisee of BKC, to approve an assignment of a
lease/sublease, to permit BKC to assume a lease/sublease at any time and to
renew a Primary Lease, and (ii) imposes certain restrictions and limitations
upon the Company's ability to sell, lease or otherwise transfer any interest in
such properties. The Operating Partnership Agreement requires the Company to
provide BKC notice of default under a lease/sublease and an opportunity to cure
such default prior to taking any remedial action. The Operating Partnership
Agreement also requires the Company under certain circumstances to provide
tenants with assistance with remodeling costs. Such terms with respect to such
properties imposed on the Company by the Operating Partnership Agreement may be
less favorable than those imposed upon other lessors of Burger King restaurants.
BKC has advised the Company that it intends to waive or not impose certain of
the restrictive provisions contained in the Operating Partnership Agreement.

EMPLOYEES AND MANAGEMENT

         On February 28, 1999, the Company had approximately 45 employees. The
Company believes that relations with its employees are good.

                                       6

<PAGE>   7



COMPETITION

         The Company believes that it competes with numerous other
publicly-owned entities, some of which dedicate substantially all of their
assets and efforts to acquiring, owning and managing chain restaurant
properties. The Company also competes with numerous private firms and
individuals for the acquisition of restaurant, service station and other service
retail properties. In addition, there are other publicly owned entities that are
dedicated to acquiring, owning and managing triple net lease properties. The
majority of chain restaurant properties are owned by restaurant operators and
real estate investors. Management believes, based on its industry knowledge and
experience, that this fragmented market provides the Company with substantial
acquisition opportunities. The Company also believes that the inability of most
small service retail owners to obtain funds with which to compete for
acquisitions as timely and inexpensively as the Company provides the Company
with a competitive advantage when seeking to acquire a restaurant property.

         The restaurants operated on the Company's properties are subject to
significant competition (including, for example, competition from other national
and regional "fast food" restaurant chains, local restaurants, national and
regional restaurant chains that do not specialize in "fast food" but appeal to
many of the same customers as do "fast food" restaurants, and other competitors
such as convenience store and supermarkets that sell ready-to-eat food). The
success of the Company depends, in part, on the ability of the restaurants
operated on the properties to compete successfully with such businesses. The
Company does not anticipate that it will seek to engage directly in or meet such
competition. Instead, the Company will be dependent upon the experience and
ability of the lessees operating the restaurants located on the properties and,
with respect to its franchisee operated properties, the franchisor systems
generally, to compete with these other restaurants and similar operations. The
Company believes that the ability of its lessees to compete is affected by their
compliance with the image requirements at their restaurants.

REGULATIONS

         The Company, through its ownership of interests in and management of
real estate, is subject to various environmental, health, land-use and other
regulation by federal, state and local governments that affects the development
and regulation of restaurant properties. The Company's leases impose the primary
obligation for regulatory compliance on the operators of the restaurant
properties.

Environmental Regulation. Under various federal, state and local laws,
ordinances and regulations, an owner or operator of real property may become
liable for the costs of removal or remediation of certain hazardous substances
releases on or within its property. Such liability may be imposed without regard
to whether the owner or operator knew of, or caused the release of the hazardous
substances. In addition to liability for cleanup costs, the presence of
hazardous substances on a property could result in the owner or operator
incurring liability as a result of a claim by an employee or another person for
personal injury or a claim by an adjacent property owner for property damage.

         In connection with the Company's acquisition of a new property, a Phase
I environmental assessment is obtained. A Phase I environmental assessment
involves researching historical uses of a property, analyzing databases
containing registered underground storage tanks and other matters, and including
an on-site inspection to determine whether an environmental issue exists with
respect to the property which needs to be addressed. If the results of a Phase I
environmental assessment reveal potential issues, a Phase II assessment, which
may include soil testing, ground water monitoring or borings to locate
underground storage tanks, is ordered for further evaluation and, depending upon
the results of such assessment, the transaction is consummated or the
acquisition is terminated. The Company generally places acquired properties with
potential issues in special purpose limited liability companies to limit any
future claims concerning the properties, and requires tenants to assume
obligations relating to environmental issues.

                                       7

<PAGE>   8

         The Company is not currently a party to any litigation or
administrative proceeding with respect to any property's compliance with
environmental standards. Furthermore, the Company is not aware of nor does it
anticipate any such action, or the need to expend any of its funds, in the
foreseeable future in connection with its acquisition or ownership of existing
properties which would have a material adverse affect upon the Company's
financial position, operations or cash flow.

Americans With Disabilities Act ("ADA"). Under the ADA, all public
accommodations, including restaurants, are required to meet certain federal
requirements relating to physical access and use by disabled persons. A
determination that the Company or a property of the Company is not in compliance
with the ADA could result in the imposition of fines, injunctive relief, damages
or attorney's fees. The Company's leases contemplate that compliance with the
ADA is the responsibility of the operator. The Company is not currently a party
to any litigation or administrative proceeding with respect to a claim of
violation of the ADA and does not anticipate any such action or proceeding that
would have a material adverse effect upon the Company.

Land-use, Fire and Safety Regulations. In addition, the Company and its
restaurant operators are required to operate the properties in compliance with
various laws, land-use regulations, fire and safety regulations and building
codes as may be applicable or later adopted by the governmental body or agency
having jurisdiction over the location of the property or the matter being
regulated. The Company does not believe that the cost of compliance with such
regulations and laws will have a material adverse effect upon the Company.

Health Regulations. The restaurant industry is regulated by a variety of state
and local departments and agencies, concerned with the health and safety of
restaurant customers. These regulations vary by restaurant location and type.
The Company's leases provide for compliance by the restaurant operator with all
health regulations and inspections and require that the restaurant operator
obtain insurance to cover liability for violation of such regulations or the
interruption of business due to closure caused by failure to comply with such
regulations. The Company is not currently a party to any litigation or
administrative proceeding with respect to the compliance with health regulations
of any property it finances, and does not anticipate any such action or
proceeding that would have a material adverse effect upon the Company.

Insurance. The Company requires its lessees to maintain adequate comprehensive
liability, fire, flood and extended loss insurance provided by reputable
companies with commercially reasonable and customary deductibles. The Company
also requires that it be named as an additional insured under such policies.
Certain types and amounts of insurance are required to be carried by each
restaurant operator under the leases with the Company, and the Company actively
monitors tenant compliance with this requirement. The Company intends to require
lessees of subsequently acquired properties to obtain similar insurance
coverage. There are, however, certain types of losses generally of a
catastrophic nature, such as earthquakes and floods, that may be either
uninsurable or not economically insurable, as to which the Company's properties
are at risk depending on whether such events occur with any frequency in such
areas. An uninsured loss could result in a loss to the Company of both its
capital investment and anticipated profits from the affected property. In
addition, because of coverage limits and deductibles, insurance coverage in the
event of a substantial loss may not be sufficient to pay the full current market
value or current replacement cost of the Company's investment. Inflation,
changes in building codes and ordinances, environmental considerations and other
factors also might make using insurance proceeds to replace a facility after it
has been damaged or destroyed infeasible. Under such circumstances, the
insurance proceeds received by the Company might be inadequate to restore its
economic position with respect to such property.

                                       8

<PAGE>   9

ITEM 2.  PROPERTIES

GENERAL

         The Company acquires, owns, manages and selectively develops
restaurant, service station and other service retail properties that it leases
on a triple net basis primarily to operators of fast food and casual dining
chain restaurants affiliated with national brands such as Burger King(R),
Arby's(R), Dairy Queen(R), Hardee's(R), Chili's(R), Pizza Hut(R) and
Schlotzsky's(R) and regional brands such as Grandy's(R) and Taco Cabana(R).
During the first year following acquisition by the Company, the Properties have
historically provided the Company with an aggregate first year return on total
investment in excess of 11%. Management believes that the long-term, triple net
structure of its leases results in a more predictable and sustainable income
stream than other forms of real estate investments.

PROPERTIES

         As of December 31, 1998, the Company owned 854 core business
properties, including 208 Burger King(R) Properties (out of approximately 6,400
U.S. locations), 87 Arby's(R) Properties (out of approximately 2,890 U.S.
locations), 41 Dairy Queen(R) Properties (out of approximately 6,000 U.S.
locations), 27 Hardee's(R) Properties (out of approximately 2,300 U.S.
locations), 20 Pizza Hut(R) Properties (out of approximately 9,570 U.S.
locations), 28 Schlotzsky's(R) Properties (out of approximately 560 U.S.
locations) and eight Chili's(R) Properties (out of approximately 110 U.S.
locations). The Properties are diversified geographically in 48 states, with no
state, except Texas (32%), accounting for greater than 8% of the Properties. Of
the 854 Properties, approximately 99% were leased on a triple net basis as of
December 31, 1998.

                                       9

<PAGE>   10



         The following table contains information by state regarding the
Properties owned by the Company as of December 31, 1998.

<TABLE>
<CAPTION>

                                                     NUMBER OF    PERCENT OF
                  LOCATION BY STATE                  PROPERTIES     TOTAL
            ---------------------------------------  ----------   ----------  
<S>                                                    <C>          <C>    
            Texas .................................     273          32%   
            Georgia ...............................      72           8%   
            Florida ...............................      38           5%   
            New York ..............................      35           4%   
            Illinois ..............................      34           4%   
            Michigan ..............................      33           4%   
            California ............................      31           4%   
            Oklahoma ..............................      26           3%   
            Arizona ...............................      24           3%   
            Minnesota .............................      23           3%   
            North Carolina ........................      22           3%   
            Pennsylvania ..........................      20           2%   
            Tennessee .............................      19           2%   
            Iowa ..................................      18           2%   
            Indiana ...............................      16           2%   
            South Carolina ........................      15           2%   
            Maryland ..............................      12           1%   
            Louisiana .............................      11           1%   
            Missouri ..............................      11           1%   
            Arkansas ..............................      10           1%   
            Ohio ..................................      10           1%   
            Wisconsin .............................      10           1%   
            Other states (less than 10 properties).      91          11%   
                                                        ---         ---        
            Total core business properties.........     854         100%   
                                                        ===         ===        
</TABLE>


         The Company intends to continue to acquire properties affiliated with
major national brands such as Burger King(R), Arby's(R), Dairy Queen(R),
Hardee's(R), Chili's(R), Pizza Hut(R) and Schlotzsky's(R) and regional brands
such as Grandy's(R) and Taco Cabana(R), operated by competent,
financially-stable multi-unit restaurant operators. The Company believes that
successful restaurants operated under these types of brands will continue to
offer stable, consistent income to the Company with reduced risk of default or
non-renewal of the lease and franchise agreements. The Company believes its
income stream is further protected through the increasing diversification of the
Properties by brand affiliation. Since existing management assumed control of
the Company in May 1994, the Company has significantly expanded the number of
its brand affiliations. Of the 763 Properties acquired since May 1994, only 104
are Burger King(R) restaurants and the balance are affiliated with other
national and regional chain restaurants.

                                       10

<PAGE>   11

         The following table contains information by brand regarding the
Properties owned by the Company as of December 31, 1998.

<TABLE>
<CAPTION>
                                               NUMBER OF      PERCENT OF
                        BRAND NAME             PROPERTIES      TOTAL
              ------------------------------   ----------     ----------
<S>                                              <C>           <C>
              Burger King ....................     208           24%
              Arby's .........................      87           10%
              Fina ...........................      53            6%
              Dairy Queen ....................      41            5%
              Grandy's .......................      30            4%
              Schlotzsky's ...................      28            3%
              Hardee's .......................      27            3%
              Conoco .........................      27            3%
              El Chico .......................      22            3%
              Popeye's .......................      20            2%
              Pizza Hut ......................      20            2%
              Kettle .........................      19            2%
              Bruegger's Bagel ...............      17            2%
              Applebee's .....................      12            1%
              Phillip 66 .....................      10            1%
              Citgo ..........................       9            1%
              Chili's ........................       8            1%
              Wendy's ........................       8            1%
              Denny's ........................       6            1%
              Kentucky Fried Chicken .........       5            1%
              Taco Bell ......................       5            1%
              Mobil ..........................       4            1%
              Chevron ........................       2            0%
              Other brands ...................     186           22%
                                                   ---          ---
              Total core business properties..     854          100%
                                                   ===          ===
</TABLE>

ITEM 3.  LEGAL PROCEEDINGS

         The Company is not presently involved in any material litigation, nor
to its knowledge is any material litigation threatened against the Company or
its Properties, other than routine litigation arising in the ordinary course of
business.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         There were no matters submitted to stockholders in the quarter ended
December 31, 1998.

                                       11

<PAGE>   12



                                     PART II


ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         The Company's Common Stock is traded on the New York Stock Exchange
under the symbol "USV". The high and low sales prices of the shares and the
distributions paid during each calendar quarter of 1997 and 1998, and through
March 12, 1999 are set forth below (market prices and distributions per share
have been adjusted to reflect the impact of the three-for-two stock split
effected on October 30, 1997):

<TABLE>
<CAPTION>

                                                        DIVIDENDS AND
                               MARKET PRICE             DISTRIBUTIONS   
                     HIGH         LOW         CLOSE        PAID
                   --------     --------     --------     --------
      1997
<S>                <C>          <C>          <C>          <C>     
First Quarter      $20.5833     $17.8333     $18.0000     $ 0.3333
Second Quarter      19.7917      17.6667      19.6667       0.3433
Third Quarter       23.4167      19.6667      22.9583       0.3500
Fourth Quarter      25.6667      21.6250      23.9375       0.3575
                                                          --------
                                                          $ 1.3841

      1998

First Quarter      $28.2500     $23.6875     $27.3750     $ 0.3700
Second Quarter      30.1250      26.8125      27.0625       0.3850
Third Quarter       29.2500      23.1250      25.4375       0.4000
Fourth Quarter      25.8125      21.8125      24.3125       0.4175
                                                          --------
                                                          $ 1.5725

     1999

First Quarter      $24.6250     $17.7500     $17.8750     $ 0.4300
 (Through March 12)
</TABLE>


As of March 12, 1999, the Common Stock was held by 1,735 stockholders of record.
The Company makes quarterly distributions in the form of dividends to common
stockholders and distributions to holders of Operating Partnership units. As a
REIT, the Company is required to distribute 95% of taxable income to
shareholders in the form of dividends. Of the $1.5725 per share distributed in
1998, $1.0064, or 64%, represented ordinary dividend income, and $0.5661, or
36%, represented return of capital.

                                       12

<PAGE>   13



ITEM 6.  SELECTED FINANCIAL DATA.

The following information should be read in conjunction with the Company's
consolidated financial statements and notes thereto.

<TABLE>
<CAPTION>

                                                                             YEARS ENDED DECEMBER 31,
                                                         ---------------------------------------------------------------------
                                                                  in thousands, (except per unit/share and property data)
                                                           1994           1995           1996           1997           1998
                                                         ---------      ---------      ---------      ---------      ---------
<S>                                                      <C>            <C>            <C>            <C>            <C>      
STATEMENT OF INCOME:
Revenues
     Rental income .................................     $   6,340      $   7,540      $  16,346      $  32,925      $  54,501
     Interest Income ...............................            94             70            194          1,091          2,855
     Amortization of unearned income on
            Direct financing leases ................         2,453          2,240          1,978          1,568          1,174
                                                         ---------      ---------      ---------      ---------      ---------
Total Revenues .....................................     $   8,887      $   9,850      $  18,518      $  35,584      $  58,530


Expenses:
     Rent ..........................................         1,348          1,405          2,080          2,488          3,158
     Depreciation and amortization .................         1,361          1,541          3,978          9,415         15,753
     General and  administrative ...................         1,144          1,419          2,299          3,590          4,793
     Interest expense ..............................            90            262          2,720         10,011         16,689
     REIT Conversion Costs .........................          --             --             --              920           --
     Termination of management contract ............          --             --             --           19,220         12,047
     Equity in net loss of contract ................          --             --             --             --              317
     Non-cash charge for impairment of
       long-lived assets ...........................            11           --             --             --              127
                                                         ---------      ---------      ---------      ---------      ---------
Total expenses .....................................     $   3,954      $   4,627      $  11,077      $  45,644      $  52,884
Gain on sale of property ...........................          --             --               32            869            403
Minority interest in operating partnership .........          --             --             --             (202)            58
Loss on early extinguishment of debt ...............          --             --             --             --             (190)
                                                         ---------      ---------      ---------      ---------      ---------
Net income (loss) ..................................     $   4,933      $   5,223      $   7,473      $  (9,393)     $   5,917
                                                         =========      =========      =========      =========      =========
Net income (loss) allocable to
     Unitholders/Shareholders(1) ...................     $   4,834      $   5,119      $   7,325      $ (10,261)     $  (1,185)
Weighted average units/shares outstanding (2):
     Basic .........................................         6,953          6,957          8,984         11,693         13,325
     Diluted .......................................         6,953          7,015          9,190         11,693         13,325
Earnings (loss) per unit/share (2):
     Basic .........................................     $    0.70      $    0.74      $    0.82      $   (0.88)     $   (0.09)
     Diluted .......................................     $    0.70      $    0.73      $    0.80      $   (0.88)     $   (0.09)
Dividends/distributions per unit/share (2) .........     $    1.07      $    1.14      $    1.25      $    1.38      $    1.57

BALANCE SHEET  DATA:
Total assets .......................................     $  62,889      $  71,483      $ 177,418      $ 359,149      $ 604,169
Line of credit and long term debt ..................          --           10,931         69,486        129,196        342,112
Capitalized lease obligations ......................           775            563            362            170             63
General partners' capital ..........................         1,308          1,241          1,163            N/A            N/A
Limited partners' capital ..........................        60,361         58,071        103,120            N/A            N/A
Stockholders' equity ...............................           N/A            N/A            N/A        205,412        209,775
Minority interest ..................................           N/A            N/A            N/A         19,536         29,567

OTHER DATA:
Funds From Operations (FFO)(3) .....................     $   7,638      $   8,314      $  13,111      $  20,744      $  30,686
Cash flow from operating activities ................     $   6,990      $   9,288      $  13,852      $  19,334      $  41,002
Cash flow from (used  in) investing activities .....     $    --        $ (12,039)     $(100,978)     $(174,040)     $(246,488)
Cash flow from (used in) financing activities ......     $  (7,569)     $   2,077      $  87,500      $ 155,429      $ 206,239
Number of properties ...............................           123            139            322            591            854
</TABLE>


--------------------
(1)  Prior to October 15, 1997 the Company operated in the form of a master
     limited partnership. Amounts shown for years prior to 1997 reflect net
     income allocable to partnership unitholders, net income per partnership
     unit, and cash distributions declared per partnership unit.

(2)  Weighted average number of units/shares outstanding,
     dividends/distributions per unit/share and earnings (loss) per unit/share
     have been adjusted to reflect the three-for-two split of the Common Stock
     and calculation of earnings (loss) per unit/share in accordance with SFAS
     128.

(3)  The Company believes that it computes FFO in accordance with the standards
     established by the National Association of Real Estate Investment Trusts
     ("NAREIT"), which may differ from the methodology for calculating FFO
     utilized by other equity REITs, and, accordingly, may not be comparable to
     such other REITs. The Company's FFO is computed as net income (loss)


                                       13

<PAGE>   14



     available to common stockholders (computed in accordance with GAAP), plus
     real estate related depreciation and amortization but excluding the effects
     of direct financing leases, minority interest, unusual charges and gains
     (or losses) from debt restructuring and sales of property, and the effect
     of EITF 98-9. The Company believes FFO enhances and is helpful to investors
     as a measure of the performance of an equity REIT because, along with the
     Company's financial condition, results of operations and cash flows, it
     provides investors with an understanding of the ability of the Company to
     incur and service debt and make capital expenditures. In evaluating FFO and
     the trends it depicts, investors should consider the major factors
     affecting FFO. Growth in FFO will result from increases in revenue or
     decreases in related operating expenses. Conversely, FFO will decline if
     revenues decline or related operating expenses increase. FFO does not
     represent amounts available for management's discretionary use because of
     needed capital replacement or expansion, debt service obligations, or other
     commitments and uncertainties. FFO should not be considered as an
     alternative to net income (determined in accordance with GAAP) as an
     indication of the Company's financial performance or to cash flows from
     operating activities (determined in accordance with GAAP) as a measure of
     the Company's liquidity, nor is it indicative of funds available to fund
     the Company's cash needs, including its ability to make distributions.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

RESULTS OF OPERATIONS.

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

         On October 15, 1997 the Company changed its form of business from a 
master limited partnership to a REIT. U.S. Restaurant Properties, Inc. became
the successor entity to U.S. Restaurant Properties Master L.P. The results of
operations for the period October 15, 1997 to December 31, 1997 and for the year
ended December 31, 1998 are presented as the continuation of the operations of
the predecessor entity.

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

Comparison of the twelve months ended December 31, 1998 to the twelve months
ended December 31, 1997

         The Company owned 591 properties prior to January 1, 1998. The Company
acquired 286 properties from January 1, 1998 to December 31, 1998, the
operations of which are included in the periods presented from their respective
dates of acquisition.

         Revenues, including income earned on direct financing leases, in the
twelve months ended December 31, 1998 totaled $58,530,000, an increase of 64%
when compared to the twelve months ended December 31, 1997. The increase was due
primarily to increases in the number of properties owned during this period as
compared to the same period in 1997. Through December 31, 1998, approximately 9%
of the Company's rental revenues resulted from percentage rents (rents
determined as a percentage of tenant sales), down from 16% for the year ended
December 31, 1997. Percentage rents for 1998 would have been approximately 12%
of the Company's rental revenues before adjustment for the impact of EITF 98-9.
Thus, during the twelve months ended December 31, 1998, the impact of
fluctuations in restaurant sales had a diminishing impact on total rental
revenues.

                                       14

<PAGE>   15

         Also included in revenues is interest income relating to secured notes
and mortgages receivable from tenants and related parties. Interest income was
$2,855,000 for the twelve months ended December 31, 1998 and $1,091,000 for the
twelve months ended December 31, 1997, an increase of 162%. The increase over
1997 resulted primarily from the increase in mortgage loan receivables during
the year ended December 31, 1998.

         Rent expense for the twelve months ended December 31, 1998 totaled
$3,158,000, an increase of 27% when compared to the twelve months ended December
31, 1997. Depreciation and amortization expenses in the twelve months ended
December 31, 1998 totaled $15,753,000, an increase of 67% when compared to the
twelve months ended December 31, 1997. The increase in rent expense and
depreciation and amortization expenses directly relate to the property
acquisitions.

         General and administrative expenses for the twelve months ended
December 31, 1998 totaled $4,793,000, an increase of 34% when compared to the
twelve months ended December 31, 1997. The increase was a result of the costs of
the increased infrastructure, including additional employees, required by the
Company to manage and maintain the Company's rate of growth, and to replace
management functions performed under the management contract prior to October
15, 1997, and an increase in bad debt reserves that relate to the increase in
the number of properties managed.

         Interest expense for the twelve months ended December 31, 1998 totaled
$16,689,000, an increase of 67%, when compared to the twelve months ended
December 31, 1997. The increase in interest expense directly relates to the
additional debt associated with the acquisitions.

         A non-cash accounting charge of $12,047,000 relating to the termination
of the management contract with QSV was recorded for the year ended December 31,
1998. This charge represents the market value, based on the market value of a
share of the Common Stock at December 31, 1998, of 495,509 contingent Operating
Partnership Units which would be earned by QSV at December 31, 1998 under the
terms of the terminated management contract. A total of 825,000 shares of Common
Stock of the Company or their equivalent in Operating Partnership Units will be
issued to QSV if certain earnings targets are met by the year 2000. These
Operating Partnership Units have not been issued, and will not participate in
any income (loss) or receive any distributions from the Operating Partnership
until they have been earned and issued.

         Equity in net loss of affiliates of $317,000 for the twelve months
ended December 31, 1998 relates to the Company's share of net losses from its
investments in other entities in which the Company holds a minority interest.
The non-cash charge for impairment of long-lived assets of $127,000 for the
twelve months ended December 31, 1998 relates to the Company's routine review of
the carrying value of real estate, direct financing leases and intangibles.

         Minority interest in net income of the Operating Partnership of $58,000
for 1998 related to Operating Partnership units held by QSV and other minority
interest holders. Gain on sale of properties of $403,000 in 1998 related
primarily to the sale of 12 restaurant properties for cash of $6,679,000 net of
closing costs. The loss on early extinguishment of debt of $190,000 for the year
ended December 31, 1998 relates to the write off of unamortized deferred
financing costs in conjunction with the termination of the Company's secured
revolving credit facility in January, 1998.

Comparison of the twelve months ended December 31, 1997 to the twelve months
ended December 31, 1996

         The Company owned 322 properties prior to January 1, 1997. The Company
acquired 277 properties and sold eight properties from January 1, 1997 to
December 31, 1997, the operations of which are included in the periods presented
from their respective dates of acquisition.

                                       15

<PAGE>   16

         Revenues, including income earned on direct financing leases, in the
twelve months ended December 31, 1997 totaled $35,584,000, an increase of 92%
when compared to the twelve months ended December 31, 1996. The increase was due
primarily to increases in the number of properties owned during this period as
compared to the same period in 1996. Through December 31, 1997, approximately
16% of the Company's rental revenues resulted from percentage rents (rents
determined as a percentage of tenant sales), down from 33% for the year ended
December 31, 1996. Thus, during the twelve months ended December 31, 1997, the
impact of fluctuations in restaurant sales had a diminishing impact on total
rental revenues. Also included in revenues is interest income relating to
secured notes and mortgages receivable from tenants and related parties.
Interest income was $1,091,000 in 1997.

         Rent expense for the twelve months ended December 31, 1997 totaled
$2,488,000, an increase of 20% when compared to the twelve months ended December
31, 1996. Depreciation and amortization expenses in the twelve months ended
December 31, 1997 totaled $9,415,000, an increase of 137% when compared to the
twelve months ended December 31, 1996. The increase in rent expense and
depreciation and amortization expenses directly relates to the property
acquisitions.

         General and administrative expenses for the twelve months ended
December 31, 1997 totaled $3,590,000, an increase of 56% when compared to the
twelve months ended December 31, 1996. The increase was a result of the costs of
the increased infrastructure, including additional employees, required by the
Company to manage and maintain the Company's rate of growth and an increase in
management fees paid to the managing general partner prior to October 15, 1997.

         Interest expense for the twelve months ended December 31, 1997 totaled
$10,011,000, an increase of 268%, when compared to the twelve months ended
December 31, 1996. The increase in interest expense directly relates to the
additional debt associated with the acquisitions.

         Minority interest in net income of the Operating Partnership of
$202,000 for 1997 related to Operating Partnership Units held by QSV after
October 15, 1997. Gain on sale of properties of $869,000 in 1997 related
primarily to the sale of five restaurant properties for cash of $3,960,000. REIT
conversion costs of $920,000 consisted of direct costs associated with the
conversion of the Company to a REIT on October 15, 1997.

         A non-cash accounting charge of $19.2 million relating to the
termination of the management contract was recorded on October 15, 1997. The
management contract termination cost was computed as the fair market value of
the Operating Partnership Units issued upon conversion from a master limited
partnership to a REIT less QSV's existing investment basis in USRP. The fair
market value of the Operating Partnership Units ($19.00 based on the market
value of a share of Common Stock at that time) was determined by the average
unit price for the five trading days before and after the announcement of the
conversion. This accounting charge increased expenses by $19,220,000 and was the
direct cause of the net loss incurred by the Company for the twelve months ended
December 31, 1997.

LIQUIDITY AND CAPITAL RESOURCES.

         The Company's principal source of cash to meet its short term cash
requirements is rental revenues generated by the Company's properties. Cash
generated by the portfolio in excess of operating needs is used to pay dividends
and reduce amounts outstanding under the Company's credit agreements. As of
December 31, 1998, the Company has non-binding contracts for acquisitions of
approximately $113.1 million. The terms of the Company's leases ("triple net
leases") generally require that the tenant is responsible for maintenance and
improvements to the property. Thus the Company is generally not required to
expend funds for remodels and renovation. However, the Company expects to spend
approximately $1 million a year to renovate and remodel currently owned
properties. At December 31, 1998 the Company had 17 properties in various stages
of development. As of December 31, 1998 the Company had commitments of
approximately $13 million representing construction contract costs not yet
incurred.

                                       16

<PAGE>   17

         During 1998 the Company paid dividends of $1.5725 per share, or an
aggregate of $22,824,000 to common stockholders and minority interests. In
addition, the Company paid dividends of $1.93 per share, or an aggregate of
$7,675,000 to holders of the Company's Preferred Stock. On March 15, 1999, the
Company paid a dividend of $0.43 per share to common stockholders and minority
interests and $0.4825 per share to preferred stockholders. In addition, on
February 15, 1999, the Company declared a dividend of $0.4425 per share to
common stockholders and minority interests and $0.4825 per share to preferred
stockholders to be paid on June 15, 1999.

         On December 30, 1998 the Company financed part of a property
acquisition with the seller in the amount of $6,550,000. The note bears interest
at the rate of prime plus 1% per annum (8.75% as of December 31, 1998) and is
due in two installments of $3,275,000 plus accrued interest on June 15, 1999 and
December 30, 1999. On January 9, 1999, the Company issued a $20 million note
payable to Pacific Life Insurance Company to fund the acquisition of properties.
The note bears interest at the rate of LIBOR plus a margin of 300 basis points
and is due on December 15, 1999. On March 10, 1999 the Company issued a $15
million short-term unsecured note payable to Equilon Enterprises to fund the
acquisition of properties. The note must be repaid on or before May 10, 1999.

The Company's long-term capital needs include the refinancing of various debt
facilities. Lines of credit and notes payable principal debt maturities for the
next five years at December 31, 1998 are as follows (in thousands):

<TABLE>

<S>                                             <C>     
                       1999 ...............     $  6,574
                       2000 ...............       12,528
                       2001 ...............      136,031
                       2002 ...............       27,533
                       2003 ...............       47,536
                       Later ..............      111,910
                                                --------
                       Total ..............     $342,112
                                                ========
</TABLE>

         On January 17, 1998 the Company entered into a credit agreement with a
syndicate of banks for an unsecured revolving credit line of $175 million. This
line of credit replaced the Company's existing line of credit. As of March 12,
1999, the Company has approximately $11 million available under the new
unsecured line of credit. The Company may request advances under this line of
credit to finance the acquisition of restaurant properties, to repair and update
restaurant properties and for working capital. The banks will also issue standby
letters of credit up to an aggregate of $30 million for the account of the
Company under this loan facility. Letters of credit will generally not reduce
availability under the terms of the agreement. This credit agreement expires on
January 15, 2001 and provides that borrowings thereunder bear interest at the
then current LIBOR plus a margin spread of either 1.05%, 1.20% or 1.35%,
dependent on a leverage ratio formula. As of March 12, 1999 the margin spread
was 1.35%.

         In January, 1998 the note holders of the Company's 8.06% Series A
Senior Secured Guaranteed Notes due January 31, 2000 in the amount of
$12,500,000, and 8.30% Series B Senior Secured Guaranteed Notes due January 31,
2002 in the amount of $27,500,000, agreed to release the collateral for these
notes. The proceeds were used to fund acquisitions and to pay down the revolving
credit line.

         The Company has signed an agreement with Credit Lyonnais for an
additional credit facility of up to $50 million, which is expected to close
before the end of March, 1999. The facility will bear interest at the rate of
LIBOR plus a margin of between 200 and 275 basis points and will be due in
March, 2002. 

                                       17

<PAGE>   18

Proceeds from this facility will be used to refinance the $15 million short-term
note due on or before May 10, 1999, pay down the balance of the unsecured
revolving credit line and for general corporate purposes.

         Management believes that cash from operations and the existing debt
facilities, along with the Company's ability to raise additional debt and
equity, including the issuance of Operating Partnership Units in exchange for
properties, will provide the Company with sufficient liquidity to meet its
short-term and long-term capital needs. However, there can be no assurance that
the terms at which existing debt is refinanced will be as favorable to the
company as under the existing facilities.

FUNDS FROM OPERATIONS (FFO)

         The Company believes that it computes FFO in accordance with the
standards established by the National Association of Real Estate Investment
Trusts ("NAREIT"), which may differ from the methodology for calculating FFO
utilized by other equity REITs, and, accordingly, may not be comparable to such
other REITs. The Company's FFO is computed as net income (loss) available to
common stockholders (computed in accordance with GAAP), plus real estate related
depreciation and amortization but excluding the effects of direct financing
leases, minority interest, unusual charges and gains (or losses) from debt
restructuring and sales of property, and the effect of EITF 98-9. The Company
believes FFO enhances and is helpful to investors as a measure of the
performance of an equity REIT because, along with the Company's financial
condition, results of operations and cash flows, it provides investors with an
understanding of the ability of the Company to incur and service debt and make
capital expenditures. In evaluating FFO and the trends it depicts, investors
should consider the major factors affecting FFO. Growth in FFO will result from
increases in revenue or decreases in related operating expenses. Conversely, FFO
will decline if revenues decline or related operating expenses increase. FFO
does not represent amounts available for management's discretionary use because
of needed capital replacement or expansion, debt service obligations, or other
commitments and uncertainties. FFO should not be considered as an alternative to
net income (determined in accordance with GAAP) as an indication of the
Company's financial performance or to cash flows from operating activities
(determined in accordance with GAAP) as a measure of the Company's liquidity,
nor is it indicative of funds available to fund the Company's cash needs,
including its ability to make distributions.

         The following table sets forth, for the years ended December 31, the
calculation of FFO:

<TABLE>
<CAPTION>

(AMOUNTS IN THOUSANDS)                         1996          1997          1998
<S>                                          <C>           <C>           <C>      
Net income (loss) allocable to
     Common stock/unit holders               $  7,325      $(10,261)     $ (1,185)

Direct financing lease payments                 2,041         2,286         2,250
Capital lease principal payments                 (201)         (169)         (107)
Depreciation and amortization                   3,978         9,415        15,677
Income allocable to minority interest            --             202           (58)
Gain on sale of property                          (32)         (869)         (403)
REIT Conversion costs                            --             920          --
Termination of management contract (1)           --          19,220        12,047
Loss on early extinguishment of debt             --            --             190
Non-cash impairment of long-lived assets         --            --             127
Effect of EITF 98-9 (2)                          --            --           2,148
                                             --------      --------      --------
Funds from operations (FFO)                  $ 13,111      $ 20,744      $ 30,686
                                             ========      ========      ========
Total shares/units applicable to FFO            9,190        12,179        14,641
                                             ========      ========      ========
</TABLE>

                                       18

<PAGE>   19

(1)  The charge for the management contract is an unusual non-cash charge
     against earnings. The Company has no other management contracts and the
     termination of this contract is a one time event and does not relate to the
     ongoing business activity of the Company. The 1998 charge relates to
     contingent Operating Partnership Units that would be earned by QSV at
     December 31, 1998 under the terms of the terminated management contract.
     Since FFO is intended as a supplementary measure of operating performance,
     this charge has been added back to net income in arriving at FFO.

(2)  Net income (loss) for 1998 reflects the implementation of EITF Issue 98-9,
     effective May 21, 1998. The adjustment for EITF 98-9 represents a deferral
     of revenue to future periods for which cash has been received. Since FFO is
     intended as a supplementary measure of operating performance, the impact of
     adoption of EITF Issue 98-9 has been added back to net income in arriving
     at FFO.

INFLATION

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

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

SEASONALITY

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

NEW ACCOUNTING PRONOUNCEMENTS

         In May 1998, the Financial Accounting Standards Board's Emerging Issues
Task Force issued EITF 98-9, "Accounting for Contingent Rent in Interim
Financial Periods," (EITF 98-9), which provides guidance on recognition of
rental income during interim periods for leases which provide for contingent
rents (commonly referred to as "percentage rents"). In accordance with the
initial consensus reached in EITF 98-9, the Company revised its method of
accounting for contingent rent on a prospective basis effective May 21, 1998.

         In 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", was issued. This standard establishes new accounting and
reporting standards for derivative financial instruments and must be adopted no
later than January 2000. The Company is currently evaluating the effect of this
standard and does not expect it to have a material effect on its results of
operations, financial position or cash flows.

YEAR 2000 SYSTEMS CONVERSION

         The Company recognizes the need to ensure that its data processing
systems and operations are not adversely affected by the change to the calendar
year 2000. All software currently in use at U. S. Restaurant Properties, Inc. is
represented by the respective manufacturer to be compliant. In addition, the
Information Technology Association of America certifies through its ITAA*2000
program, that our accounting software and the software used by our outside
payroll processor are Year 2000 compliant. All owned-property information is
maintained in a database that mandates use of 4-digit year input, thus removing
any Year 2000 ambiguity.

                                       19

<PAGE>   20

Hardware in current use has been tested and found to be compliant or to support
manual rollover. Two older workstations retained for historical data retrieval
from retired systems are not compliant. However, such non-compliance is not
believed to effect retrieval of the data and no upgrade is planned. All hardware
not related to information processing (e.g., copiers, faxes, phones, etc.) is
represented by the respective manufacturer to be compliant with the exception of
one fax machine. No upgrade is planned. Ongoing verification of Company systems
will continue throughout 1999.

All major vendors and all tenants were surveyed to determine the extent of their
preparedness to meet Y2K challenges and to assess any possible impact on USRP
from a material third-party failure. Vendor responses received do not identify
any major potential problems. Several vendors, including an insurance provider,
an attorney, a printer and a stock-handling agency, have not responded to our
inquiries. Services provided by these vendors can be easily obtained from other
sources. No problems are anticipated in securing these services.

Tenant responses to the survey have to date been limited. Of 309 requested
responses, 33 have been received. The Company is sending additional surveys to
major tenants to try to determine preparedness. Should adequate assurances that
tenants are prepared not be received, a contingency plan will be formulated to
deal with any payment defaults.

In the event of information system failure, the Company would continue to
process transactions manually, assisted by any systems still correctly
functioning. The primary costs associated with such a scenario would be time
delays associated with handling of information and any additional personnel
required to process the data. We believe the costs associated with such
personnel would not exceed $150,000.

The Company has not finalized its contingency plan as of this date. However, a
formal contingency plan will be developed as any risks are identified during
1999. The Company does not anticipate any material impact on its results from
operations or its financial condition as a result of any Year 2000 compliance
issues. The estimated remaining costs of compliance, consisting primarily of
verification and testing costs, are not expected to exceed $25,000.

The most reasonably likely worst case scenario would involve some or all of the
following elements, none of which pose a serious threat to the operations of
USRP:

1.   The operation of some of the properties will be inconvenienced due to the
     failure of alarm and safe systems which may temporarily prevent the timely
     opening of the restaurant or service station on January 1, 2000. The
     operator may be able to bypass the systems involved to overcome these
     inconveniences.

2.   Isolated utility outages may occur, preventing the operation of some
     properties. Since these outages will also affect residential and government
     users of these services, they will likely be corrected quickly.

3.   Some properties may experience cash shortages due to failure of local banks
     to become Y2K compliant. This may impede the ability of the operator to
     conduct business and/or pay rent timely until the Federal Reserve has taken
     steps to overcome the problem. This is also likely to be corrected quickly
     to preserve the integrity of the banking system.

                                       20

<PAGE>   21


4.   Some properties may experience delays or lack of food supplies due to
     disruption in the distribution system. Such problems may decrease the
     volume of business at the property until corrected.

If some or all of the above conditions become severe or sustained for any
individual tenant, that tenant may become unable to pay rents on a timely basis.
Should this affect a number of tenants, USRP could experience a reduction of
cash receipts and could issue default notices to those tenants. A default due to
non-payment of rent arising from non-compliance issues could result in the
termination of a lease. Correcting any non-compliant systems could require
additional capital expenditures on the part of the Company in order to prepare
the property for re-lease. These expenditures, should they be required, are not
expected to be significant. Availability of resources to correct deficiencies
could be limited depending on the extent of failures experienced in the
industry.

RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-K.

         This Form 10-K contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Act of 1934, which are intended to be covered by the safe harbors
created thereby. These statements include the plans and objectives of management
for future operations, including plans and objectives relating to property
acquisitions. The forward-looking statements included herein are based on
current expectations that involve numerous risks and uncertainties. Assumptions
relating to the foregoing involve judgments with respect to, among other things,
future economic, competitive and market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond the control of the Company. Although the Company
believes that the assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could be inaccurate and, therefore there can
be no assurance that the forward-looking statements included in this Form 10-K
will prove to be accurate. In light of the significant uncertainties inherent in
the forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         The Company has limited exposure to financial market risks, including
changes in interest rates and other relevant market prices. The Company does not
have any foreign operations and thus is not exposed to foreign currency
fluctuations.

         The fair value of the Company's investments would be affected by an
increase or decrease in interest rates as the majority of the investments are
interest denominated instruments. However the Company's investment portfolio of
$3 million is relatively small, and changes in value relating to market risks
would not significantly impact the Company's earnings. The Company also has
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, and are not a significant factor in the board of directors'
determination of the fair value of these loans.

         An increase or decrease in interest rates would affect interest costs
relating to the Company's variable rate revolving line of credit. At December
31, 1998 there was $136,000,000 of variable rate debt outstanding on this
facility. This facility is priced with a floating interest rate based on LIBOR
plus a margin of between 105 and 135 basis points. The Company has no interest
rate swap or other hedging agreements relating to this facility. This facility
represents approximately 40% of the Company's outstanding long term debt. A 10%
increase or decrease in interest rates would result in an increase or decrease
in interest charges relating to this facility of approximately $680,000 for a
full year. Changes in interest rates do not have a direct impact on interest
expense relating to the remaining fixed rate debt facilities.

                                       21

<PAGE>   22

         The Company has on occasion issued shares of Common Stock or Operating
Partnership Units in exchange for property, and has guaranteed a minimum value
for those shares/units. Should the market value of the Common Stock not reach
the guaranteed value by a specified date (usually two or three years after
issue), then the Company may be obligated to issue additional shares/units under
the guarantee agreements. At December 31, 1998 there were 568,944 shares of
Common Stock and 14,254 Operating Partnership Units with guaranteed market
prices of between $15.33 and $30.00 per share/unit. The dilutive equivalent of
these guarantees at the end of 1998 represented an additional 3,791 shares.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The financial information and supplementary data begin on page F-1 of
this Annual Report on Form 10-K. Such information is incorporated by reference
into this Item 8.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         The information required by this item will be incorporated by reference
from the Company's definitive Proxy Statement for its 1999 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A under the Securities Exchange Act of 1934.


ITEM 11. EXECUTIVE COMPENSATION.

         The information required by this item will be incorporated by reference
from the Company's definitive Proxy Statement for its 1999 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A under the Securities Exchange Act of 1934.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The information required by this item will be incorporated by reference
from the Company's definitive Proxy Statement for its 1999 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A under the Securities Exchange Act of 1934.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The information required by this item will be incorporated by reference
from the Company's definitive Proxy Statement for its 1999 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A under the Securities Exchange Act of 1934.

                                       22

<PAGE>   23



                                     PART IV


ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a)(1)   Financial Statements.

               For a list of the consolidated financial statements of the
               Registrant filed as part of this Annual Report on Form 10-K, see
               page F-1, herein.


(a)(2)   Financial Statement Schedules.

               Schedule III Real Estate and Accumulated Depreciation.

               All other schedules have been omitted because the required
               information of such other schedules is not present, is not
               present in amounts sufficient to require submission of the
               schedule or is included in the consolidated financial statements.


(b)      Reports on Form 8-K.

               A report on Form 8-K/A dated November 26, 1997 was filed with the
               Securities and Exchange Commission on January 23, 1998 reporting
               information regarding the acquisition of 68 properties.

               A report on Form 8-K and 8-K/A dated January 21, 1998 was filed
               with the Securities and Exchange Commission on February 4, 1998
               and March 20, 1998, respectively, reporting information regarding
               the acquisition of 35 properties.

               A report on Form 8-K and 8-K/A dated June 24,1998 was filed with
               the Securities and Exchange Commission on July 7, 1998 and August
               21, 1998, respectively, reporting information regarding the
               acquisition of 58 properties.

               A report on Form 8-K and 8-K/A dated August 7, 1998 was filed
               with the Securities and Exchange Commission on August 21, 1998
               and October 6, 1998, respectively, reporting information
               regarding the acquisition of 74 properties.

(c)      Exhibits.

               The Exhibits filed as part of this Annual Report on Form 10-K are
               submitted as a separate section.


                                       23

<PAGE>   24



                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                               U.S. Restaurant Properties, Inc.


                                               By:  /s/ Robert J. Stetson 
                                                    ---------------------------
                                                        Robert J. Stetson
                                                    Chief Executive Officer and
                                                        President

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of U.S Restaurant
Properties, Inc. and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>

    SIGNATURES                                               TITLE                         DATE
<S>                                                 <C>                               <C> 
/s/ Robert J. Stetson                                Chief Executive Officer,           March 29, 1999
-------------------------                            President and Director
Robert J. Stetson                                    (Principal Executive Officer)
                                                     


/s/ Fred H. Margolin                                 Chairman of the Board of           March 29, 1999
-------------------------                            Directors, Secretary and
Fred H. Margolin                                     Director
                                                     


/s/ Michael D. Warren                                Director of Finance                March 29, 1999
-------------------------                            (Principal Accounting Officer)
Michael D. Warren                           


/s/ Gerald H. Graham                                 Director                           March 29, 1999
-------------------------
Gerald H. Graham


/s/ David K. Rolph                                   Director                           March 29, 1999
-------------------------
David K. Rolph


/s/ Darrel L.Rolph                                   Director                           March 29, 1999
-------------------------
Darrel L. Rolph


/s/ Eugene G.Taper                                   Director                           March 29, 1999
-------------------------
Eugene G. Taper
</TABLE>


                                       24

<PAGE>   25
















                       This page intentionally left blank



















<PAGE>   26






                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

<S>                                                                                                <C>
U.S. RESTAURANT PROPERTIES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
   Independent Auditors' Report......................................................................F - 2
   Consolidated Balance Sheets as of December 31, 1998 and 1997......................................F - 3
   Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996........F - 5
   Consolidated Statements of Other Comprehensive Operations for the years ended
     December 31, 1998, 1997 and 1996................................................................F - 6
   Consolidated Statement of Stockholders' Equity and Partners' Capital for the years
     ended December 31, 1998, 1997 and 1996..........................................................F - 7
   Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996........F - 8
   Notes to Consolidated Financial Statements........................................................F - 10

The following financial statement supplementary schedule of the Registrant and
its subsidiaries required to be included in Item 14(a)(2) is listed below:

   Schedule III - Real Estate and Accumulated Depreciation...........................................S - 1
</TABLE>

                                      F-1


<PAGE>   27



                          INDEPENDENT AUDITORS' REPORT



The Board of Directors and Shareholders
U.S. Restaurant Properties, Inc.


We have audited the accompanying consolidated balance sheets of U.S. Restaurant
Properties, Inc. and its subsidiaries (the Company) (formerly U.S. Restaurant
Properties Master L.P.) as of December 31, 1998 and 1997, and the related
consolidated statements of operations, comprehensive operations, stockholders'
equity and partners' capital and cash flows for each of the three years in the
period ended December 31, 1998. Our audit for the year ended December 31, 1998
also included the financial statement schedule listed in the Index at Item 14
(a) (2). These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of U.S. Restaurant Properties, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for contingent rents effective May 21, 1998 to
comply with the consensus reached by the Emerging Issues Task Force in Issue
98-9.

/s/ DELOITTE & TOUCHE LLP

DELOITTE & TOUCHE LLP


Dallas, Texas
March 19, 1999



                                      F-2
<PAGE>   28



                        U.S. RESTAURANT PROPERTIES, INC.
                           CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>

                                                                                      DECEMBER 31,
                                                                                ------------------------
                                                                                  1998            1997
                                                                                ---------      ---------
                                  ASSETS
<S>                                                                               <C>            <C>    
Property, net
       Land                                                                     $ 172,155      $ 109,515
       Building and leasehold improvements                                        342,686        211,200
       Machinery and equipment                                                      8,057          4,813
                                                                                ---------      ---------
                                                                                  522,898        325,528
       Less:  Accumulated depreciation                                            (27,938)       (13,438)
                                                                                ---------      ---------
                                                                                  494,960        312,090

Construction in progress                                                           30,713           --

Cash and cash equivalents                                                           1,857          1,104
Restricted cash                                                                       700           --
Rent and other receivables, net
       (includes $1,962 and $523 due from related parties in 1998 and 1997,
         respectively)                                                             10,817          4,791
Prepaid expenses and purchase deposits                                             10,091          1,967
Investments                                                                         3,057             23
Notes receivable
       (includes $2,300 and $5,406 due from related parties in 1998 and 1997,
         respectively)                                                              8,225          8,518
Mortgage loan receivable                                                           23,275          5,947
Net investment in direct financing leases                                           9,678         13,764
Intangibles and other assets, net                                                  10,796         10,945
                                                                                ---------      ---------
                              TOTAL ASSETS                                      $ 604,169      $ 359,149
                                                                                =========      =========
</TABLE>


                             continued on next page


                                      F-3

<PAGE>   29



                        U.S. RESTAURANT PROPERTIES, INC.
                     CONSOLIDATED BALANCE SHEETS (CONTINUED)
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>

                                                                                    DECEMBER 31,
                                                                            ------------------------
                                                                              1998           1997
                                                                            ---------      ---------
<S>                                                                         <C>            <C>      
                      LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities
       (includes $0 and $121 due to related parties in 1998 and 1997,       $  11,492      $   4,193
respectively)
Accrued dividends and distributions                                             8,456           --
Unearned contingent rent                                                        2,148           --
Deferred gain on sale of property                                                 556            642
Lines of credit                                                               136,000         89,196
Notes payable                                                                 205,050         40,000
Mortgage note payable                                                           1,062           --
Capitalized lease obligations                                                      63            170
                                                                            ---------      ---------
                              TOTAL LIABILITIES                               364,827        134,201

COMMITMENTS AND CONTINGENCIES (NOTES 8 AND 9)

MINORITY INTEREST IN OPERATING PARTNERSHIP                                     29,567         19,536

STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value per share;
    50,000 shares authorized,
    Series A - 3,680 shares issued and outstanding at December 31, 1998
    and 1997 (aggregate liquidation value of $92,000)                               4              4
Common stock, $.001 par value per share;
    100,000 shares authorized, shares issued and outstanding: 14,372
    at December 31, 1998; and 12,698 at December 31, 1997                          14             13
Additional paid in capital                                                    262,024        226,140
Excess stock, $.001 par value per share,
       15,000 shares authorized, no shares issued                                --             --
Accumulated other comprehensive loss                                             (797)          --
Distributions in excess of net income                                         (51,470)       (20,745)
                                                                            ---------      ---------
         TOTAL STOCKHOLDERS' EQUITY                                           209,775        205,412
                                                                            ---------      ---------
         TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                         $ 604,169      $ 359,149
                                                                            =========      =========
</TABLE>

See Notes to Consolidated Financial Statements.

                                      F-4

<PAGE>   30



                        U.S. RESTAURANT PROPERTIES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>

                                                                          YEAR ENDED DECEMBER 31,
                                                                  ------------------------------------
                                                                    1998          1997          1996
                                                                  --------      --------      --------
<S>                                                               <C>           <C>           <C>     
REVENUES
       Rental income                                              $ 54,501      $ 32,925      $ 16,346
       Interest income                                               2,855         1,091           194
       Amortization of unearned income on
         direct financing leases                                     1,174         1,568         1,978
                                                                  --------      --------      --------
                                    TOTAL REVENUES                  58,530        35,584        18,518
EXPENSES
       Rent                                                          3,158         2,488         2,080
       Depreciation and amortization                                15,753         9,415         3,978
       General and administrative                                    4,793         3,590         2,299
       Interest expense                                             16,689        10,011         2,720
       REIT conversion costs                                          --             920          --
       Termination of management contract                           12,047        19,220          --
       Equity in net loss of affiliates                                317          --            --
       Non-cash charge for impairment of long-lived assets             127          --            --
                                                                  --------      --------      --------
                                    TOTAL EXPENSES                  52,884        45,644        11,077
                                                                  --------      --------      --------
Income (loss) before gain on sale of property and minority
     interest in operating partnership and extraordinary item        5,646       (10,060)        7,441
Gain on sale of property                                               403           869            32
                                                                  --------      --------      --------
Income (loss) before minority interest in operating
     partnership and extraordinary item                              6,049        (9,191)        7,473
Minority interest in operating partnership                              58          (202)         --
                                                                  --------      --------      --------

Income (loss) before extraordinary item                              6,107        (9,393)        7,473
Loss on early extinguishment of debt                                  (190)         --            --
                                                                  --------      --------      --------
NET INCOME (LOSS)                                                    5,917        (9,393)        7,473

Dividends on Preferred Stock/General Partner interest               (7,102)         (868)         (148)
                                                                  --------      --------      --------

Net income (loss) allocable to
       Common stockholders/unit holders                           $ (1,185)     $(10,261)     $  7,325
                                                                  ========      ========      ========

Net income (loss) per share/unit
       Basic                                                      $  (0.09)     $  (0.88)     $   0.82
       Diluted                                                    $  (0.09)     $  (0.88)     $   0.80

Weighted average shares/units outstanding
       Basic                                                        13,325        11,693         8,984
       Diluted                                                      13,325        11,693         9,190
</TABLE>

See Note 2 for Pro Forma Effect of Change in Accounting Principle

See Notes to Consolidated Financial Statements.

                                      F-5

<PAGE>   31




                        U.S. RESTAURANT PROPERTIES, INC.
            CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>

                                                               YEAR ENDED DECEMBER 31,
                                                         ---------------------------------
                                                          1998         1997         1996
                                                         -------      -------      -------
<S>                                                      <C>          <C>          <C>    
NET INCOME (LOSS)                                        $ 5,917      $(9,393)     $ 7,473
       Other comprehensive loss - unrealized loss on
         investments                                        (797)        --           --
                                                         -------      -------      -------
COMPREHENSIVE INCOME (LOSS)                              $ 5,120      $(9,393)     $ 7,473
                                                         =======      =======      =======
</TABLE>


See Notes to Consolidated Financial Statements



                                      F-6

<PAGE>   32



                        U.S. RESTAURANT PROPERTIES, INC.
      CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
                FOR YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                                                                   
                                                                                                                                   
                                                                             PREFERRED STOCK          COMMON STOCK       ADDITIONAL
                                                    GENERAL    LIMITED    ---------------------   ---------------------   PAID IN  
                                           UNITS   PARTNERS    PARTNERS   SHARES      PAR VALUE   SHARES      PAR VALUE   CAPITAL  
                                          -------  ---------  ---------   -------     ---------   -------      --------   -------- 
<S>                                       <C>      <C>        <C>         <C>        <C>          <C>         <C>        <C>       
Balance January 1, 1996                     6,989  $   1,241  $  58,071        --     $      --       --      $     --   $      -- 

Net income                                               148      7,325                                                            
Units issued for property                     577         --      7,912                                                            
Proceeds from units issued in public        2,700         --     40,203                                                            
offering
Proceeds from exercised unit options           75         --        775                                                            
Distributions                                           (226)   (11,166)                                                           
                                          -------  ---------  ---------   -------     ---------   -------      --------   -------- 
Balance December 31, 1996                  10,341      1,163    103,120        --            --       --            --          -- 

Net income for the period January 1
  Through October 15, 1997                               135      6,678                                                            
Units issued for property                     681         --     13,796                                                            
Proceeds from units issued
  In private placements                     1,435         --     25,000                                                            
Proceeds from exercised
  unit options                                 75         --        775                                                            
Distributions                                           (240)   (11,776)                                                           
                                          -------  ---------  ---------   -------     ---------   -------      --------   -------- 
Balance before REIT conversion             12,532      1,058    137,593        --            --       --            --          -- 

Conversion to REIT                        (12,532)    (1,058)  (137,593)                           12,658            13    138,109 
Sale of preferred stock                                                     3,680             4                             87,618 
Proceeds from exercised stock options                                                                  40                      413 
Net loss for the period October 16
  Through December 31, 1997                                                                                                        
Distributions                                                                                                                      
                                          -------  ---------  ---------   -------     ---------   -------      --------   -------- 
Balance December 31, 1997                      --         --         --     3,680             4    12,698            13    226,140 

Proceeds from exercised stock options                                                                 300                    3,099 
Proceeds from sale of common stock                                                                  1,359             1     32,406 
Stock issued for "equity ownership
  interest in another entity"                                                                          24                      621 
Stock issued for property                                                                              25                      600 
Common stock repurchased and retired                                                                  (34)                    (842)
Other comprehensive loss                                                                                                           
Net income                                                                                                                         
Distributions on preferred stock                                                                                                   
Distributions on common stock                                                                                                      
Common and preferred stock distributions
  declared                                                                                                                         
                                          -------  ---------  ---------   -------     ---------   -------      --------   -------- 
                                               --  $      --  $      --     3,680     $       4    14,372      $     14   $262,024 
                                          =======  =========  =========   =======     =========   =======      ========   ======== 


<CAPTION>


                                                            
                                                           ACCUMULATED
                                            DISTRIBUTIONS      OTHER
                                            IN EXCESS OF   COMPREHENSIVE
                                             NET INCOME        LOSS            TOTAL
                                            -----------   ------------     -----------
<S>                                         <C>           <C>              <C>        
Balance January 1, 1996                     $        --   $         --     $    59,312

Net income                                                                       7,473
Units issued for property                                                        7,912
Proceeds from units issued in public                                            40,203
offering
Proceeds from exercised unit options                                               775
Distributions                                                                  (11,392)
                                            -----------   ------------     -----------
Balance December 31, 1996                            --             --         104,283

Net income for the period January 1
  Through October 15, 1997                                                       6,813
Units issued for property                                                       13,796
Proceeds from units issued
  In private placements                                                         25,000
Proceeds from exercised
  unit options                                                                     775
Distributions                                                                  (12,016)
                                            -----------   ------------     -----------
Balance before REIT conversion                       --             --         138,651

Conversion to REIT                                                                (529)
Sale of preferred stock                                                         87,622
Proceeds from exercised stock options                                              413
Net loss for the period October 16
  Through December 31, 1997                     (16,206)                       (16,206)
Distributions                                    (4,539)                        (4,539)
                                            -----------   ------------     -----------
Balance December 31, 1997                       (20,745)            --         205,412

Proceeds from exercised stock options                                            3,099
Proceeds from sale of common stock                                              32,407
Stock issued for "equity ownership
  interest in another entity"                                                      621
Stock issued for property                                                          600
Common stock repurchased and retired                                              (842)
Other comprehensive loss                                          (797)           (797)
Net income                                        5,917                          5,917
Distributions on preferred stock                 (7,675)                        (7,675)
Distributions on common stock                   (21,011)                       (21,011)
Common and preferred stock distributions
  declared                                       (7,956)                        (7,956)
                                            -----------   ------------     -----------
                                            $   (51,470)  $       (797)    $   209,775
                                            ===========   ============     ===========
</TABLE>


See Notes to Consolidated Financial Statements


                                      F-7


<PAGE>   33


                        U.S. RESTAURANT PROPERTIES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                          YEAR ENDED DECEMBER 31,
                                                                ---------------------------------------
                                                                   1998           1997           1996
                                                                ---------      ---------      ---------
<S>                                                             <C>            <C>            <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:

   Net income (loss)                                            $   5,917      $  (9,393)     $   7,473
   Adjustments to reconcile net income (loss) to
     net cash from operating activities:
     Depreciation and amortization                                 15,753          9,415          3,978
     Amortization of deferred financing costs                         666            385            162
     Loss on impairment of long-lived assets                          127           --             --
     Non-cash interest income                                        (136)          --             --
     Equity in loss of affiliates                                     317           --             --
     Minority interest in operating partnership                       (58)           202           --
     Gain on sale of property                                        (403)          (869)           (32)
     Loss on early extinquishment of debt                             190           --             --
     Termination of management contract                            12,047         19,220           --
     Distributions received on investments                            470           --             --
     Increase in restricted cash                                     (700)          --             --
     Increase in rent and other receivables, net                   (5,463)        (2,365)        (1,702)
     Increase in prepaid expenses                                     708         (1,043)           (88)
     Reduction in net investment in direct financing leases         2,172          2,286          2,041
     Increase in accounts payable and accrued liabilities           7,247          1,496          2,020
     Increase in unearned contingent rent                           2,148           --             --
                                                                ---------      ---------      ---------
                                                                   35,085         28,727          6,379
                                                                ---------      ---------      ---------
        Cash provided by operating activities                      41,002         19,334         13,852

CASH FLOWS FROM INVESTING ACTIVITIES:

     Proceeds from sale of property and equipment                   6,679          4,107            122
     Purchase of property                                        (202,967)      (166,123)       (95,918)
     Purchase of machinery and equipment                           (3,467)        (1,569)        (3,032)
     Purchase deposits (paid) used                                 (8,308)           387            884
     Purchase of investments                                       (3,393)           (23)          --
     Increase in mortgage loan receivable                         (18,450)        (6,000)          --
     Reduction of mortgage loan receivable principal                  653             53           --
     Increase in notes receivable                                 (18,227)        (5,072)        (4,933)
     Reduction of notes receivable principal                          992            200          1,899
                                                                ---------      ---------      ---------
        Cash used in investing activities                        (246,488)      (174,040)      (100,978)
</TABLE>


                             continued on next page


                                      F-8


<PAGE>   34



                        U.S. RESTAURANT PROPERTIES, INC.
                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                YEAR ENDED DECEMBER 31,
                                                                      ---------------------------------------
                                                                         1998           1997           1996
                                                                      ---------       --------      ---------
<S>                                                                   <C>            <C>            <C>    
CASH FLOWS FROM FINANCING ACTIVITIES:

     Proceeds from line of credit                                       306,786        133,530        104,805
     Payments on line of credit                                        (259,995)      (113,820)       (46,250)
     Distributions to minority interest                                  (1,813)          (415)          --
     Cash distributions to stockholders/partners                        (21,011)       (16,555)       (11,392)
     Payment of Preferred Stock dividends                                (7,675)          --             --
     Proceeds from sale of common stock/units                            35,506         26,188         40,978
     Proceeds from sale of preferred stock                                 --           87,622           --
     Proceeds from notes payable                                        158,500         40,000           --
     Financing costs and other intangibles                               (3,110)          (952)          (440)
     Payments on capitalized lease obligations                             (107)          (169)          (201)
     Repurchase and retirement of stock                                    (842)          --             --
                                                                      ---------       --------      ---------
        Cash flows provided by financing activities                     206,239        155,429         87,500
                                                                      ---------       --------      ---------

Increase in cash and cash equivalents                                       753            723            374
Cash and cash equivalents at beginning of year                            1,104            381              7
                                                                      ---------       --------      ---------
Cash and cash equivalents at end of year                              $   1,857       $  1,104      $     381
                                                                      =========       ========      =========

SUPPLEMENTAL DISCLOSURE:
     Interest paid during the year                                    $  15,115       $  9,073      $   2,431
                                                                      =========       ========      =========
NON-CASH INVESTING ACTIVITIES:
     Fair value of stock issued for ownership interest in another     $     621       $   --        $    --
entity
     Fair value of stock options received                                   469           --             --
     Fair value of stock and units issued for property                      955         13,796          7,912
     Deferred gain on sale of property                                       85             52            590
     Notes received on sale of property                                     675          1,661            743
     Reduction in note receivable for property acquired                  11,822          2,061           --
     Reduction in accounts receivable for property acquired                 219            227           --
     Sale of property for account receivable                                589           --             --
     Sale of property on capital lease                                     --               23           --
     Sale of property on direct financing lease                            --             --              225
     Mortgage note assumed                                                1,075           --             --
     Property acquired in exchange for note payable                       6,550           --             --
     Unrealized loss on investments                                         797           --             --
     Purchase of net assets of U.S. Restaurant Properties
         Development, L.P. (See Note 12)                                  6,381           --             --
NON-CASH FINANCING ACTIVITIES:
     Common stock dividends declared                                  $   6,180       $   --        $    --
     Preferred stock dividends declared                                   1,776           --             --
     Distributions to minority interest declared                            500           --             --

</TABLE>
See Notes to Consolidated Financial Statements.


                                      F-9


<PAGE>   35



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

U.S. Restaurant Properties, Inc. (the "Company") is a Maryland corporation
formed to continue the restaurant property management, acquisition and
development operations, related business objectives and strategies of U.S.
Restaurant Properties Master, L.P. (collectively, with its subsidiaries,
"USRP"). The Company became a self-administered real estate investment trust
("REIT") on October 15, 1997 as defined under the Internal Revenue Code of 1986,
as amended. This conversion was effected through the merger (the "Merger") of
USRP Acquisition, L.P. a partnership subsidiary of U.S. Restaurant Properties,
Inc., with and into U.S. Restaurant Properties Master L.P. As a result of the
Merger, all holders of common units (Units) of beneficial interest in USRP
became stockholders of the Company on a one unit for one share of Common Stock
basis. Accordingly, information contained in the consolidated financial
statements relating to the equity ownership of USRP following October 15, 1997
is presented as ownership of shares of Common Stock of the Company.

The Company is authorized to issue up to 100,000,000 shares of Common Stock, par
value $.001 per share (the "Common Stock"), 50,000,000 shares of Preferred
Stock, par value $.001 per share (the "Preferred Stock") and 15,000,000 shares
of Excess Stock, par value $.001 per share (the "Excess Stock"). Pursuant to the
Company's Articles of Incorporation (the "Articles"), any purported transfer of
shares of Common Stock or Preferred Stock that would result in a person owning
shares of Common Stock or Preferred Stock in excess of certain limits set out in
the Articles will result in the shares subject to such purported transfer being
automatically exchanged for an equal number of shares of Excess Stock. On
October 30, 1997 the REIT effected a three-for-two stock split. All of the
historical units and per unit information has been restated to reflect the
conversion to Common Stock and this stock split.

In connection with the conversion to a REIT, the management contract between
USRP and QSV Properties Inc. ("QSV"), the former General Partner of USRP, was
terminated. The contract termination and QSV's partnership interests in USRP
were converted to 126,582 shares of Common Stock of the Company and 1,148,418
units of U.S. Restaurant Properties Operating, L.P. ("OP"). An additional
825,000 shares of Common Stock of the Company or its equivalent in OP units may
be issued to QSV if certain earnings targets are met by the year 2000 (See Note
11). QSV's principal stockholders are Mr. Robert J. Stetson and Mr. Fred H.
Margolin, both executive officers of the Company.

The business and operations of the Company are conducted primarily through the
OP. The Company owns 92.59 % of and controls the OP. Each OP unit can only be
converted to one share of Common Stock and participates in any cash
distributions made by the OP in an amount equivalent to a share of common stock
of the Company. With each exchange of outstanding OP units for Common Stock, the
Company's percentage ownership interest in the OP, directly or indirectly, will
increase. The units do not have voting rights with respect to the Company and
are not traded on an open market.

The Company has 14,372,027 and 12,698,113 shares of Common Stock outstanding as
of December 31, 1998 and 1997, respectively.

                                      F-10

<PAGE>   36



2. ACCOUNTING POLICIES

CONSOLIDATION

The consolidated financial statements reflect the accounts of the Company, the
OP and their 60 wholly-owned and majority owned subsidiaries after elimination
of all material intercompany transactions.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include short-term, highly liquid investments with
maturities at the date of purchase of three months or less.

RESTRICTED CASH

Restricted cash consists of a security deposit from a tenant that is not
available for operating purposes.

RENT RECOGNITION

Rent revenues and expenses under operating leases are recognized on a
straight-line basis. Contingent rent is recognized as revenue after the related
lease sales targets are achieved.

In May 1998, the Financial Accounting Standards Board's Emerging Issues Task
Force issued EITF 98-9, "Accounting for Contingent Rent in Interim Financial
Periods," (EITF 98-9), which provides guidance on recognition of rental income
during interim periods for leases which provide for contingent rents (commonly
referred to as "percentage rents"). In accordance with the initial consensus
reached in EITF 98-9, the Company revised its method of accounting for
contingent rent on a prospective basis effective May 21, 1998. Using the
historical basis of accounting, net income before extraordinary item, net income
and basic and diluted net income per share amounts would have been $8,255,000,
$8,065,000, $0.07 and $0.07, respectively, for the twelve month period ended
December 31, 1998.

The pro forma information below was prepared based on management's estimate for
the effects of EITF 98-9 since it is impracticable to calculate the actual
amount on a retroactive basis precisely. Management of the Company believes that
the estimate is not materially different from what actual results would have
been under EITF 98-9. Following is the pro forma information for the twelve
months ended December 31, 1998, 1997 and 1996 as if the EITF 98-9 were in effect
as of January 1, 1996:

<TABLE>
<CAPTION>
                                                                                    TWELVE MONTHS ENDED
                                                                                         DECEMBER 31,
                                                                         ------------------------------------------
(In thousands, except per share amounts)                                    1998            1997           1996
                                                                         ----------      ----------      ----------
<S>                                                                      <C>             <C>             <C>       
Income (loss) before extraordinary item as reported                      $    6,107      $   (9,393)     $    7,473
Add: Adjustment for change in accounting policy on recognition of
     contingent lease rent                                                    1,981              39            (994)
                                                                         ----------      ----------      ----------
Income (loss) before extraordinary item as adjusted                      $    8,088      $   (9,354)     $    6,479
                                                                         ==========      ==========      ==========
Net income (loss) as adjusted                                            $    7,898      $   (9,354)     $    6,479
                                                                         ==========      ==========      ==========
Net income (loss) available to common stockholders as adjusted           $      796      $  (10,222)     $    6,351
                                                                         ==========      ==========      ==========
Income (loss) per share - Basic:
  Before extraordinary item, less dividends on Preferred
     Stock/General Partner's interest as reported                        $    (0.07)     $    (0.88)     $     0.82
  Adjustment for effect of change in accounting policy                         0.15            --             (0.11)
                                                                         ----------      ----------      ----------
Income (loss) before extraordinary item, less dividends on Preferred
  Stock/General Partner's interest as adjusted                           $     0.08      $    (0.88)     $     0.71
                                                                         ==========      ==========      ==========
</TABLE>

                                      F-11

<PAGE>   37

<TABLE>

<S>                                                                      <C>             <C>             <C>       
  Net income (loss) available to common stockholders as reported         $    (0.09)     $    (0.88)     $     0.82
  Adjustment for effect of change in accounting policy                         0.15            --             (0.11)
                                                                         ----------      ----------      ----------
  Net income (loss) available to common stockholders as adjusted         $     0.06      $    (0.88)     $     0.71
                                                                         ==========      ==========      ==========

Income (loss) per share - Diluted:
  Before extraordinary item, less dividends on Preferred
     Stock/General Partner's interest as reported                        $    (0.07)     $    (0.88)     $     0.80
  Adjustment for effect of change in accounting policy                         0.15            --             (0.11)
                                                                         ----------      ----------      ----------
  Income (loss) before extraordinary item, less dividends on
     Preferred Stock/General Partner's interest as adjusted              $     0.08      $    (0.88)     $     0.69
                                                                         ==========      ==========      ==========

  Net income (loss) available to common stockholders as reported         $    (0.09)     $    (0.88)     $     0.80
  Adjustment for effect of change in accounting policy                         0.15            --             (0.11)
                                                                         ----------      ----------      ----------
  Net income (loss) available to common stockholders as adjusted         $     0.06      $    (0.88)     $     0.69
                                                                         ==========      ==========      ==========
</TABLE>

DEPRECIATION AND AMORTIZATION

Depreciation is computed using the straight-line method over estimated useful
lives of 6 to 20 years for financial reporting purposes. Deferred financing
costs are amortized using the straight-line method over the life of the loans (1
to 6 years).

USE OF ESTIMATES

The preparation of consolidated financial statements, in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect reported amounts of certain assets, liabilities,
revenues and expenses as of and for the reporting periods. Actual results may
differ from such estimates.

CONSTRUCTION IN PROGRESS

The Company's construction in progress consist of land and improvements for the
development of restaurant, service station and other service retail properties.
The Company currently accumulates costs to develop new retail properties as
construction in progress. These developed properties are transferred from
construction in progress to land, building and improvements once complete and
accounted for under the Company's current property depreciation policies. In
addition, the Company capitalizes interest during the period of time required to
get the retail properties ready for their intended use. During 1998, the Company
capitalized $493,000 and no interest was capitalized in 1997 or 1996.

LONG-LIVED ASSETS

Long-lived assets include real estate, direct financing leases, and intangibles
which are evaluated on an individual asset basis. The Company's management
routinely reviews its investments for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.

An intangible asset was recorded for the excess of cost over the net investment
in direct financing leases in 1986. This intangible asset is being amortized on
a straight-line basis over 40 years. The Company's management routinely reviews
the carrying amount of intangibles based on projected cash flows. Based on the
Company's policy for evaluating impairment of intangibles, no valuation
allowance was recorded for the years ended December 31, 1998, 1997 or 1996.

                                      F-12

<PAGE>   38



ACCOUNTING POLICIES (CONTINUED)

CONCENTRATION OF RISK

The Company continues to decrease their concentration of risk by diversifying
the number of restaurant concepts operating on their properties, with no one
concept except Burger King (24%) accounting for more than 10% of the Company's
total properties. The properties are further diversified by the number of
tenants, with no tenant operating more than 10% of the Company's total
properties. Geographically, the company has properties located in 48 states,
with no state except Texas (32%) accounting for more than 8% of the Company's
properties.

INCOME TAXES

Prior to October 15, 1997 no federal or, in most cases, state income taxes are
reflected in the consolidated financial statements because USRP was not a
taxable entity. The partners reported their allocable shares of taxable income
or loss in their individual income tax returns. The Company elected to be taxed
as a REIT for Federal income tax purposes effective October 15, 1997 as provided
under the Internal Revenue Code of 1986, as amended. As a result, the Company
generally will not be subject to Federal income taxation if it distributes 95%
of its REIT taxable income to its stockholders and satisfies certain other
requirements. The Company believes it qualified as a REIT for the taxable period
ended December 31, 1998 and anticipates that its method of operations will
enable it to continue to satisfy the requirements for such qualification.

INVESTMENTS

The Company records its investments in debt and equity securities at their fair
value, except for debt securities that the Company intends to hold to maturity
or equity securities that are accounted for under the equity or cost method. The
Company has classified all debt securities as available for sale. The difference
between cost and fair market value of these securities is recorded as a
component of other comprehensive income.

The equity method is used to account for investments in equity securities in
which the Company has significant influence but does not have controlling
interest, including those investments in which the Company's ownership may be
less than 20%. Investments in equity securities in which the Company has a minor
interest and does not exercise significant influence are accounted for using the
cost method.

EARNINGS PER SHARE OF COMMON STOCK

Basic earnings per share are computed based upon the weighted average number of
common shares outstanding. Diluted earnings per share reflects the dilutive
effect of stock options and stock on which the price is guaranteed ("Guaranteed
Stock") when appropriate. Such options and Guaranteed Stock were antidilutive in
1998 and 1997. In addition, convertible preferred stock and OP units were
antidilutive in 1998 and 1997 (See Note 6 and 11).

                                      F-13

<PAGE>   39



ACCOUNTING POLICIES (CONTINUED)

EARNINGS PER SHARE OF COMMON STOCK (CONTINUED)

A reconciliation of net income (loss) per share and the weighted average shares
outstanding for calculating basic and diluted net income (loss) per share is as
follows:

<TABLE>
<CAPTION>

                                                                    YEAR ENDED DECEMBER 31,
                                                            ------------------------------------
     (In thousands, except per share amounts)                 1998          1997         1996
                                                            --------      --------      --------
<S>                                                         <C>           <C>           <C>     
Net income (loss) before extraordinary item                 $  6,107      $ (9,393)     $  7,473
       Loss on extinguishment of debt                           (190)         --            --
                                                            --------      --------      --------
Net income (loss)                                           $  5,917      $ (9,393)     $  7,473
Dividends/distributions on preferred stock/General
       partner interest                                       (7,102)         (868)         (148)
                                                            --------      --------      --------
Net income (loss) applicable to share/unitholders           $ (1,185)     $(10,261)     $  7,325
                                                            ========      ========      ========

Net income (loss) per share/unit - Basic
       Before extraordinary item less preferred stock/
         general partner interest                           $  (0.08)     $  (0.88)     $   0.82
       Extraordinary loss on extinguishment of debt            (0.01)         --            --
                                                            --------      --------      --------
Net income (loss) allocable to common stockholders          $  (0.09)     $  (0.88)     $   0.82
                                                            ========      ========      ========

Net income (loss) per share/unit - Diluted
       Before extraordinary item
         less preferred stock/ general partner interest     $  (0.08)     $  (0.88)     $   0.80
       Extraordinary loss on extinguishment of debt            (0.01)         --            --
                                                            --------      --------      --------
Net income (loss) allocable to common stockholders          $  (0.09)     $  (0.88)     $   0.80
                                                            ========      ========      ========

Basic
    Weighted average shares/units outstanding                 13,325        11,693         8,984

Diluted
    Weighted average shares outstanding - Basic               13,325        11,693         8,984
    Dilutive effect of outstanding options                      --            --             198
    Dilutive effect of Guaranteed Stock                         --            --               8
                                                            --------      --------      --------
    Weighted average shares/units outstanding-Dilutive        13,325        11,693         9,190
                                                            ========      ========      ========
</TABLE>

EQUITY-BASED COMPENSATION

Statement of Financial Accounting Standards ("SFAS") No 123 establishes a method
of accounting whereby recognized option pricing models are used to estimate the
fair value of equity based compensation, including options. This Statement also
applies to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. Those transactions must be
accounted for based on the fair value of the consideration received or the fair
value of the equity instruments issued, whichever is more reliably measurable.

The Company has elected, as provided by SFAS 123, not to recognize compensation
expense for employee equity based compensation as calculated under SFAS 123, but
will recognize any related expense in accordance with the provisions of APB
Opinion No. 25. Disclosure of amounts required by SFAS 123 are included in Note
6.

                                      F-14


<PAGE>   40



ACCOUNTING POLICIES (CONTINUED)

COMPREHENSIVE INCOME

In June, 1997, Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," was issued, effective for fiscal years beginning after
December 15, 1997. Other comprehensive income items are revenues, expenses,
gains and losses that under generally accepted accounting principles are
excluded from current period net income and reflected as a component of equity.
The Company has included a Statement of Comprehensive Operations herein.

MINORITY INTEREST

Minority interest is recorded for the 1,148,418 OP units not owned by the
Company that were issued in conjunction with the conversion to a REIT and the
termination of the management contract (See Note 1). The units are recorded at
carryover basis for the 1% General Partner interest of QSV in the OP and the
fair value of the units ($19.00 based on the market value of a share of Common
Stock) for the additional units issued for the termination of the management
contract (See Note 10). In addition, minority interest is recorded for the
14,254 OP units issued in 1998 in conjunction with certain property
acquisitions. These units were recorded at the fair value of the units on the
date of the transaction based on the market value of a share of Common Stock.

SEGMENT REPORTING

In June, 1997, Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information," was issued, effective
for fiscal years beginning after December 15, 1997. This Statement requires that
public business enterprises report financial and descriptive information about
their reportable operating segments. The Company operates solely in the real
estate industry with retail properties (restaurant and gas stations) under lease
on a triple net basis. The Company's real estate assets are operated with the
same long-term objectives and therefore are viewed as a single operating
segment. The Company has no operations outside of the United States, its country
of domicile, information related to geographical operations is not presented.

ENVIRONMENTAL REMEDIATION COSTS

The Company accrues for losses associated with environmental remediation
obligations when such losses are probable and reasonably estimable. Accruals for
estimated losses from environmental remediation obligations generally are
recognized no later than completion of the remediation feasibility study. Such
accruals are adjusted as further information develops or circumstances change.
Recoveries of environmental remediation costs from other parties are recorded as
assets when their receipt is deemed probable. Under the Company's standard lease
agreement the tenant is responsible for environmental remediation and is
required to maintain standard environmental insurance as part of their lease
agreement. The Company's management is not aware of any environmental
remediation obligations which would materially affect the operations, financial
position or cash flows of the Company as of December 31, 1998.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the current year
presentation.

                                      F-15

<PAGE>   41



NEW ACCOUNTING PRONOUNCEMENTS

In 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued. This statement establishes new accounting and reporting
standards for derivative financial instruments and must be adopted no later than
2000. The Company is currently evaluating the effect of this statement and does
not expect it to have a material effect on its results of operations, financial
position or cash flows.

3. PROPERTY

ACQUISITIONS

During 1998, the Company completed the purchase of 286 restaurants and gas
station/convenience store properties for an aggregate price of $214,909,000
included the value of 24,768 shares of Common Stock ($600,000) and the value of
14,254 OP Units ($355,000) issued as part of the aggregate purchase price. In
addition, the aggregate purchase price included $17,757,000 representing
property that was under construction at the time of acquisition. The 14,254 OP
Units issued in seven of these transactions have guaranteed values (See Note 6).

During 1997, the Company completed the purchase of 277 restaurant properties for
an aggregate purchase price of $182,396,000 including the value of 680,696
shares of Common Stock ($13,796,000) issued as part of the aggregate purchase
price. The 680,696 shares of Common Stock issued in two of these transactions
have guaranteed values (See Note 6).

During 1996, the Company completed the purchase of 184 restaurant properties for
an aggregate purchase price of $105,336,000 including the value of 577,254
shares of Common Stock ($7,912,000) issued as part of the aggregate purchase
price. The 577,254 shares of Common Stock issued in four of these transactions
have guaranteed values (See Note 6).

DISPOSITIONS

During 1998, the Company sold or disposed of 12 restaurant properties for cash
of $6,679,000, net of closing costs resulting in a gain of $403,000. In
addition, one restaurant property was sold for cash of $73,000, net of closing
costs and a note receivable of $675,000. In accordance with Statement of
Financial Accounting Standards No. 66, "Accounting for Real Estate Sales", the
Company recorded a deferred gain on the sale resulting in a deferred gain of
$85,000. The note earns interest at 8.50% with payments of principal and
interest due monthly through July 2012.

During 1997, the Company sold five restaurant properties for cash of $3,960,000,
net of closing costs resulting in a gain of $801,000. In addition, three
restaurant properties were sold for cash of $147,000, net of closing costs and
notes receivable of $1,661,000. One note of $972,000 earns interest at 9.25%
with interest only payments due monthly through June 1, 2000, when it matures
and one note of $689,000 earns interest at 9.75% with interest only payments due
monthly through September 1, 2001, when it matures. Each note receivable
requires all unpaid principal balances to be paid on the dates indicated herein.
The Company recorded a deferred gain of $52,000 for the year ended December 31,
1997 as a result of the non-cash property sales.

During 1996, the Company sold one restaurant property for $815,000. The Company
received cash of $72,000 and a note from the buyer of $743,000. This note earned
interest at 9.25% with interest only payments due monthly through November 1,
1998 when it matured. This note was paid in full during 1998 and the recorded
deferred gain of $171,000 was recognized.

                                      F-16

<PAGE>   42



PROPERTY CHARACTERISTICS

As of December 31, 1998 and 1997, there were 843 and 587 Company restaurant
sites respectively, in operation, and there were 22 and four closed sites,
respectively. The Company continues to seek suitable tenants for the
non-operating sites. Based on the Company's policy for reviewing impairment of
long-lived assets, a charge of $127,000 was recorded for the year ended December
31, 1998 and no valuation allowance was recorded for the years ended December
31, 1997 or 1996.

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

4. OTHER BALANCE SHEET INFORMATION

<TABLE>
<CAPTION>

                                                      DECEMBER 31,
                                                ----------------------
    (in thousands)                                1998          1997
                                                --------      --------
<S>                                             <C>           <C>     
RENT AND OTHER RECEIVABLES, NET
Accounts receivable and other                   $  7,320      $  2,913
Deferred rent receivable                           4,564         2,048
Less allowance for doubtful accounts              (1,067)         (170)
                                                --------      --------
                                                $ 10,817      $  4,791
                                                ========      ========

INTANGIBLES AND OTHER ASSETS, NET
Intangibles                                     $ 26,894      $ 26,607
Less accumulated amortization                    (16,098)      (15,662)
                                                --------      --------
                                                $ 10,796      $ 10,945
                                                ========      ========

ACCOUNTS PAYABLE AND OTHER ACCRUED PAYABLES
Accounts payable and accrued payables           $  6,313      $  2,781
Accrued interest expense                           3,005           938
Unearned income                                    2,174           474
                                                --------      --------
                                                $ 11,492      $  4,193
                                                ========      ========
</TABLE>

NOTES AND MORTGAGE LOANS RECEIVABLES

During 1998 and 1997, the Company acquired mortgage loans receivable secured by
first mortgages of $18,450,000 and $6,000,000, respectively. As of December 31,
1998, the maturity of all notes receivable and mortgage loan receivable for the
next five years is as follows (in thousands):

<TABLE>
<CAPTION>

                                               NOTES     MORTGAGE LOANS
                                             RECEIVABLE    RECEIVABLE
                                             ----------  --------------
<S>                                           <C>           <C>     
           1999 .........................     $  2,101      $    760
           2000 .........................        1,891           964
           2001 .........................          979         1,089
           2002 .........................          259         1,229
           2003 .........................          270         1,389
           Later ........................        2,728        18,501
                                              --------      --------
                                              $  8,228      $ 23,932
           Less: commitment fees ........           (3)         (657)
                                              --------      --------
                                              $  8,225      $ 23,275
                                              ========      ========
</TABLE>

                                      F-17

<PAGE>   43

Purchase deposits of $8,829,000 and $521,000 at December 31, 1998 and 1997,
respectively, including $20,000 and $285,000 of non-refundable deposits,
respectively, are included in prepaid expenses and purchase deposits in the
accompanying balance sheet. These amounts will be included in the allocation of
the purchase price of the respective properties once acquired or reduced once
the deposit is returned. Non-refundable deposits are expensed once it becomes
unlikely that the property will be acquired.

5. INVESTMENTS

As of December 31, the Company's investment in debt and equity securities
consist of the following:

<TABLE>
<CAPTION>

  (In thousands)
                                 1998           1997
                              ----------     ----------
<S>                           <C>            <C>     
Debt securities               $    1,704     $     --
Equity method investments            439           --
Cost method investments              914             23
                              ----------     ----------

Total Investments             $    3,057     $       23
                              ==========     ==========
</TABLE>

As of December 31, 1998 and 1997, the Company's cost method investments
consisted of restricted stock options and equity investments as a limited
partner in real estate partnerships with ownership percentages of generally less
than one percent. The Company's investment in real estate partnerships is so
minor that the Company has virtually no influence over the partnerships
operating and financial polices, and, accordingly is accounting for these
investments under the cost method. The Company's equity investments consisted
primarily of the following:
<TABLE>
<CAPTION>

                                               PERCENTAGE OF OWNERSHIP
                                                     DECEMBER 31,
                                                 1998          1997
                                               --------      --------
<S>                                           <C>            <C>
Equity investments
     U.S. Restaurant Lending GP, Inc. (a)           95%            0%
     U.S. Restaurant Lending LP, Inc. (a)           95%            0%
     The Anz Company, LLC (b)                       15%            0%
</TABLE>

(a)  The Company owns 5% of the voting stock and 100% of the nonvoting stock of
     U.S Restaurant Lending GP, Inc. (the "General Partner") and U.S. Restaurant
     Lending LP, Inc. (the "Limited Partner"). The Company is entitled to
     receive dividends and distributions equally with the voting stockholders.
     For the year ended December 31, 1998 the Company recorded 95% of the loss
     of the General Partner and Limited Partner in 1998 (See Note 10).

(b)  The Company issued 23,725 shares of Common Stock for a 15% ownership of The
     Anz Company, LLC ("Anz") on March 11, 1998. The Company's stock is
     guaranteed to have a market value of $26.18 two years from the issue date
     (See Note 6). The Company has significant influence but does not have a
     controlling interest in Anz. During the period March 12, 1998 through
     December 31, 1998 the Company recorded 15% of the income of Anz.

A summary of financial information as reported by Anz, Limited Partner and
General Partner as of, and for the year ended December 31 were as follows (In
thousands):

<TABLE>
<CAPTION>

                                               1998
                                              -----
<S>                                          <C>  
Total assets                                 $ 693
Notes payable                                  640
Total liabilities                              932
Total equity (deficit)                        (239)
Net income (loss)(1)                           287
</TABLE>

(1)  Net income shown is for period of ownership only.

                                      F-18

<PAGE>   44

Investments in debt securities are recorded at fair value in accordance with
SFAS No. 115. The aggregate cost basis and net unrealized loss for these
investments were as follows (In thousands):

<TABLE>
<CAPTION>

                                        DECEMBER 31, 1998
                            -------------------------------------------
                               COST         UNREALIZED         FAIR
                               BASIS           LOSS            VALUE
                            -----------     -----------     -----------      
<S>                         <C>             <C>             <C>        
       Debt securities      $    2,501      $      (797)    $     1,704
</TABLE>


6. STOCK OPTIONS AND GUARANTEED STOCK PRICE

GUARANTEED STOCK

<TABLE>
<CAPTION>

           OP UNITS OR            YEAR        YEAR GUARANTEE         NUMBER OF        SHARE PRICE
           COMMON STOCK          ISSUED           EXPIRES           SHARES/UNITS       GUARANTEE
     ------------------          ------       --------------        ------------      -----------
<S>                            <C>           <C>                  <C>               <C>          
     OP units                     1998             2000                 2,545       $       30.00
     OP units                     1998             2000                   667       $       29.99
     OP units                     1998             2000                 4,215       $       28.00
     OP units                     1998             2000                 6,827       $       27.93
     Common Stock                 1998             2000                23,725       $       26.18
     Common Stock                 1997             1999               502,827       $       24.00
     Common Stock                 1996             1999                42,392       $       15.33
</TABLE>

During 1998, 14,254 OP units were used to purchase seven properties in seven
separate transactions. These properties were recorded at the guaranteed value of
the OP units or Common Stock discounted to reflect the present value on the date
the OP units were issued. OP units were valued based on the market value of the
Company's Common Stock since each OP unit is exchangeable on a one-to-one basis
(See Note 11). In addition, the Company issued 23,725 shares of Common Stock in
1998 for an equity ownership in The Anz Company LLC. The Company's OP units and
Common stock guarantees can cause more OP units or Common Stock to be issued to
affect the guarantee if the guarantee price is higher than the market value of
the stock according to the provisions of each guarantee agreement.

During 1997, 680,696 shares of Common Stock were used to purchase 29 properties
in two separate transactions. These properties were recorded at the guaranteed
value of the Common Stock discounted to reflect the present value on the date
the shares of Common Stock were issued. The guarantee on 177,869 shares of
Common stock issued in 1997 has terminated under provisions in the guarantee
agreement without issuance of additional shares.

During 1996, 577,254 shares of Common Stock were used to purchase 18 properties
in four separate transactions. As of December 31, 1998, the guarantee on 534,862
shares of Common Stock issued in 1996 have expired without issuance of
additional shares. The guarantee on 42,392 shares of Common Stock expired in
January 1999 without issuance of additional shares.

Based upon the expiration of prior Common Stock price guarantees without the
issuance of additional shares or payment of cash, the Company does not believe
that additional shares of stock will be issued or cash paid as a result of the
guaranteed stock prices outstanding. Accordingly, no accrual has been recorded
for the additional shares of stock or units that could be issued under the
guarantees.

                                      F-19

<PAGE>   45



FIXED STOCK OPTION PLAN

Under the fixed stock plan USRP limited partners on March 17, 1995 granted QSV
options to acquire up to 600,000 shares of Common Stock of the Company, subject
to certain adjustments under anti-dilution provisions. The exercise price of
each option is $10.33 which is the average closing price of the security on the
New York Stock Exchange for the five trading days immediately after the date of
grant. The options are non-transferable except by operation of law and vest and
became exercisable in March 1996. The term of the options expire in March 2005.
As of December 31, 1998, QSV has exercised 490,000 stock options at the option
price of $10.33 for a total purchase price of $5,061,700.

In accordance with SFAS 123, the fair value of each option is estimated on the
date of grant using the binomial option-pricing model with the following
weighted-average assumptions: dividend yield of 7.3 percent for all years;
expected volatility of 17.8 percent, risk free interest rate of 5.7 percent for
the options; and expected lives of 4 years for the plan options.

As of March 17, 1995, the 600,000 options which are described above had a fair
value as of the grant date of $724,000 representing a value per option of $1.21.

Under the fixed option plan, if these options were considered as compensation,
net income would have been $7,292,000 as of December 31, 1996 as compared to net
income of $7,473,000 reported. No compensation would have been recognized in
1998 and 1997. Basic net income per share would have been $0.81 and diluted
income per share would have been $0.80 as of December 31, 1996.

FLEXIBLE INCENTIVE PLAN

Under the Flexible Incentive Plan ("Incentive Plan") adopted in 1998, the
Company may grant stock options to purchase Common Stock of the Company.
Pursuant to this Incentive Plan stock options may be granted at any time and the
aggregate outstanding options that can be granted shall be at an amount equal to
or less than 4.9% of the Company's issued and outstanding shares of Common stock
at the date of grant. Stock options can be granted only at the fair market value
of the stock at the date of grant. As of December 31, 1998 the Company has
granted 622,000 stock options to key employees, non-employee directors and
consultants as defined in the Incentive Plan. These options have an exercise
price of $22.00 per share which was equal to the market price of a share of
Common Stock on the date of grant. Outstanding options in the amount of 311,000
become vested on December 18, 2000 and the remaining 311,000 options become
vested on December 18, 2001. The stock options expire no later than ten years
from the grant date or December 18, 2007. Options may be exercised through
either the payment of cash or the transfer of shares of the Company's Common
Stock owned by the optionee. As of December 31, 1998, 78,000 stock options were
granted to non-employees of the Company. The fair value of these non-employee
options are being expensed over the vesting period. For the year ended December
31, 1998 the total amount of expense incurred by the Company was approximately
$65,000. During 1998, no options were exercised, canceled or expired. Options
outstanding at December 31, 1998 had a weighted average remaining contractual
life of 8.95 years.

In accordance with SFAS 123, the fair value of each option is estimated on the
date of grant using the binominal option - pricing model with the following
weighted-average assumptions: dividend yield of 6.6 percent for all years;
expected volatility of 18.33 percent, risk free interest rate of 5.24 percent
for the options; and expected lives of 4.5 years for the 622,000 granted options
under the Incentive Plan.

The 622,000 outstanding options under the Incentive Plan had a fair market value
as of the grant date of approximately $1,630,000 representing a value per option
of $2.62. 

                                      F-20

<PAGE>   46

Under the Incentive Plan, if all options were considered as compensation, net
income would have been $5,510,000 for the year ended December 31, 1998 as
compared to net income of $5,917,000 reported. Basic and diluted net loss per
share would have been $(0.12) as of December 31, 1998.

7. LINES OF CREDIT AND NOTES PAYABLE

The Company's debt consisted of the following (In thousands):

<TABLE>
<CAPTION>

                                                               DECEMBER 31,
                                                           ---------------------
                                                             1998         1997
                                                           --------     --------
<S>                                                        <C>          <C>     
Revolving line of credit facilities                        $136,000     $ 89,196
                                                           ========     ========

Notes payable
      7 Year fixed rate 7.15 % senior unsecured notes      $111,000     $   --
      Fixed rate 8.22% senior unsecured notes                47,500         --
      Series A fixed rate 8.06% senior unsecured notes       27,500       27,500
      Series B fixed rate 8.30% senior unsecured notes       12,500       12,500
      Secured variable rate note payable                      6,550         --
                                                           --------     --------
         Total notes payable                               $205,050     $ 40,000
                                                           ========     ========
Mortgage note payable                                      $  1,062     $   --
                                                           ========     ========
</TABLE>

LINES OF CREDIT

On January 17, 1998, the OP entered into a credit agreement with a syndicate of
banks for an unsecured revolving credit line of $175 million. This credit
agreement replaced the Company's then existing line of credit. As of December
31, 1998, the Company has approximately $39 million available under the new
credit agreement. The Company may request advances under this credit agreement
to finance the acquisition of restaurant properties, to repair and update
restaurant properties and for working capital. The banks will also issue standby
letters of credit for the account of the Company under this line of credit. This
credit agreement expires on January 15, 2001 and provides that borrowings
thereunder bear interest at the then current LIBOR plus a margin spread of
either 1.05%, 1.20% or 1.35%, dependent on a leverage ratio formula. As of
December 31, 1998, the margin spread was 1.20% resulting in an effective rate of
6.52%. There is an unused line of credit fee of 0.25% per annum on the unused
portion of the credit agreement. The line of credit requires the Company to
maintain a minimum equity value of $200 million, total adjusted outstanding
indebtedness not to exceed 60% of capitalization value, secured indebtedness not
to exceed 15% of capitalization value, debt yield of not less than 16% and
maintain certain other financial covenants as defined in the line of credit
agreement.

On December 15, 1998 the Company entered into a short term secured borrowing
facility ("PAC Facility") for $20 million. This PAC Facility will be used to
acquire property. As of December 31, 1998, the Company had not borrowed on this
Facility.

On December 31, 1997, $62,996,000 had been drawn on the Company's previous line
of credit. On January 17, 1998, the outstanding balance on this secured credit
facility was repaid with funds from the new unsecured credit agreement and the
facility was terminated. In connection with the termination of the facility the
related unamortized deferred financing costs were written off and recorded as an
extraordinary loss of $190,000.

                                      F-21

<PAGE>   47

On August 15, 1997, a wholly-owned subsidiary of the Company entered into a
short term borrowing facility (the "Pacific Mutual Facility") for $30 million
which matured on May 20, 1998. This revolving credit facility was paid in full
during 1998.

NOTES PAYABLE

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

On May 12, 1998 the Company issued $111 million of 7 year fixed rate senior
unsecured notes payable in a private placement. The notes bear interest at the
rate of 7.15% per annum and are due May 1, 2005. The net proceeds of the notes
were used to repay a portion of the revolving credit agreement and for general
corporate purposes. In conjunction with the notes payable agreement the
underwriters and the Company entered into a rate lock agreement for the purpose
of setting the interest rate on these notes payable. The fee paid to lock in the
rate on these notes payable was approximately $424,000 and is being amortized
over the term of the notes as an adjustment to interest expense.

On November 13, 1998, the Company issued $47,500,000 in senior notes payable in
a private placement. The notes bear interest at the rate of 8.22% per annum and
are due August 1, 2003. The net proceeds were used to repay a portion of the
revolving credit agreement and for general corporate purposes. In conjunction
with the notes payable agreement, the underwriters and the Company entered into
a rate lock agreement for the purpose of setting the interest rate on these
notes payable. The fee paid to lock in the rate on these notes payable was
approximately $406,000 and is being amortized over the term of the notes as an
adjustment to interest expense.

On August 10, 1998, the Company assumed a mortgage note payable as part of an
office building acquisition. The mortgage bears interest at a rate of 8.00% per
annum with payments of principal and interest due monthly through June 2007. As
of December 31, 1998 the balance is $1,062,000.

On December 30, 1998 the Company financed part of a property acquisition with
the seller in the amount of $6,550,000. The note bears interest at the rate of
prime plus 1% per annum (8.75% as of December 31, 1998) and is due in two
installments of $3,275,000 plus accrued interest on June 15, 1999 and December
30, 1999. This note is secured by 18 properties.

The Company is in compliance with all covenants associated with its debt and
credit facilities as of December 31, 1998.

PRINCIPAL DEBT MATURITIES

Lines of credit and notes payable principal debt maturities for the next five
years at December 31, 1998 are as follows (in thousands):

<TABLE>

<S>                                                <C>     
                     1999 ....................     $  6,574
                     2000 ....................       12,528
                     2001 ....................      136,031
                     2002 ....................       27,533
                     2003 ....................       47,536
                     Later ...................      111,910
                                                   --------
                     Total ...................     $342,112
                                                   ========
</TABLE>



                                      F-22


<PAGE>   48



8. INVESTMENTS AND COMMITMENTS AS LESSOR

The Company leases land and buildings to a variety of national and regional fast
food chain and casual dining restaurants. The building portion of these leases
on 98 of these properties, which are leased by BKC franchisees, is accounted for
as direct financing leases while the land portion is accounted for as an
operating lease. These leases generally provide for a term of 20 years from the
opening of the related restaurant, and do not contain renewal options. The
Company, however, has agreed to renew a franchise lease if BKC or any of the
other franchise chains renews or extends the lessee's franchise agreement.

As of December 31, 1998, the remaining lease terms of all leases ranged from one
to 25 years and include various renewal options. The leases provide for minimum
rents and contingent rents based on a percentage of each restaurant's sales, and
require the franchisee to pay executory costs.

<TABLE>
<CAPTION>

                                                                  DIRECT       OPERATING
                                                             FINANCING LEASES   LEASES
                                                             ---------------- ----------
<S>                                                           <C>             <C>      
MINIMUM FUTURE LEASE RECEIPTS FOR YEARS ENDING DECEMBER 31 
  ARE AS FOLLOWS (IN THOUSANDS):
1999                                                          $   2,875       $  59,922
2000                                                              1,950          59,543
2001                                                              1,267          58,381
2002                                                                760          57,482
2003                                                                269          55,550
Later                                                               208         624,473
                                                              ---------       ---------
                                 TOTAL                        $   7,329       $ 915,351
                                                              =========       =========
</TABLE>

<TABLE>
<CAPTION>

                                                                      DECEMBER 31,
                                                              ------------------------
                                                                  1998         1997
                                                              ---------      ---------
<S>                                                           <C>            <C>      
NET INVESTMENT IN DIRECT FINANCING LEASES (IN THOUSANDS):
Minimum future lease receipts                                 $   7,329      $  10,810
Estimated unguaranteed residual values                            5,051          6,920
Unearned amount representing interest                            (2,702)        (3,966)
                                                              ---------      ---------
                                 TOTAL                        $   9,678      $  13,764
                                                              =========      =========
</TABLE>

<TABLE>
<CAPTION>
                                          YEAR ENDED DECEMBER 31,
                                     -------------------------------
                                      1998         1997        1996
                                     -------     -------     -------
<S>                                  <C>         <C>         <C>    
RENTAL INCOME (IN THOUSANDS):
     Minimum rental income           $49,750     $27,570     $11,022
     Contingent rental income          4,751       5,355       5,324
                                     -------     -------     -------
                        TOTAL        $54,501     $32,925     $16,346
                                     =======     =======     =======
</TABLE>

If Burger King properties are not adequately maintained during the term of the
tenant leases of which there are 208, such properties may have to be rebuilt
before the leases can be renewed, either by the Company as it considers
necessary or pursuant to Burger King's successor policy. The successor policy,
which is subject to change from time to time at Burger King's discretion, is
intended to encourage the reconstruction, expansion, or other improvement of
older Burger King restaurants and generally affects properties that are more
than ten years old or are the subject of a franchise agreement that will expire
within five years.


                                      F-23

<PAGE>   49

Under the current OP agreement, Burger King can require that a restaurant
property be rebuilt. If the tenant does not elect to undertake the rebuilding,
the Company would be required to make the required improvement itself. However,
as a condition to requiring the Company to rebuild, Burger King would be
required to pay the Company its percentage share ("Burger King's Percentage
Share") of the rebuilding costs. Such percentage share would be equal to (i) the
average franchise royalty fee percentage rate payable to Burger King with
respect to such restaurant, divided by (ii) the aggregate of such average
franchise royalty fee percentage rate and the average percentage rate payable to
the Partnership with respect to such restaurant property. The Company believes
that Burger King's Percentage Share of the rebuilding costs would typically be
29% for a restaurant property.

Management believes it is unlikely that any material amount of rebuilding of
Burger King restaurant properties will be required in the next several years, if
ever.

To encourage the early renewal of existing leases/subleases, the Company
recently established an "early renewal program" whereby the Company has offered
to certain tenants the right to renew existing leases/subleases for up to an
additional 20 years in consideration for remodeling financing. The purpose of
this program is to extend the term of existing leases/subleases prior to the end
of the lease term and enhance the value of the underlying property to the
Company. As of December 31, 1998, the Company has extended the lease term on 69
leases/subleases as a result of remodel grants and lease riders. One lease in
1997 and two leases in 1996, respectively were renewed with loans. During 1998
and 1997, the Company paid remodeling costs of $488,000 and $888,000
respectively in conjunction with this Program.

9. COMMITMENTS

The land at 92 restaurant properties and the land and buildings at 38 restaurant
properties are leased by the Company from third party lessors. The building
portions of the leases are generally capital leases while the land portions are
operating leases. These leases provide for an original term of 20 years and most
are renewable at the Company's option. As of December 31, 1998, the remaining
lease terms (excluding renewal option terms) expire from one to 12 years. If all
renewal options are taken into account, the terms expire from one to 33 years.
Rents payable may escalate during the original lease and renewal terms. For
eight properties, the leases provide for contingent rent based on each
restaurant's sales.

<TABLE>
<CAPTION>

                                                                         CAPITAL         OPERATING
                                                                         LEASES           LEASES
                                                                      -------------    ---------------
                                                                      (IN THOUSANDS)   (IN THOUSANDS)
<C>                                                                   <C>              <C>         
MINIMUM FUTURE LEASE OBLIGATIONS FOR YEARS ENDING DECEMBER 31 
  ARE AS FOLLOWS:
1999                                                                  $       60       $      3,113
2000                                                                           4              2,889
2001                                                                           1              2,477
2002                                                                        --                2,145
2003                                                                        --                1,629
Later                                                                       --                4,077
                                                                      ----------       ------------
Total minimum obligations (a)                                                 65       $     16,330
                                                                                       ============
Amount representing interest                                                  (2)     
                                                                      ----------
Present value of minimum obligations                                  $       63  
                                                                      ==========
</TABLE>

(a)  Minimum lease obligations have not been reduced by minimum sublease
     rentals.


                                      F-24

<PAGE>   50

<TABLE>
<CAPTION>

                                                 YEARS ENDED DECEMBER 31,
                                  -------------------------------------------------
                                      1998               1997             1996
                                  -------------     -------------     -------------
                                  (IN THOUSANDS)    (IN THOUSANDS)   (IN THOUSANDS)
<S>                               <C>               <C>               <C>          
RENTAL EXPENSE
Minimum rental expense            $       3,057     $       2,434     $       1,992
Contingent rental expense                   101                54                88
                                  -------------     -------------     -------------
                        TOTAL     $       3,158     $       2,488     $       2,080
                                  =============     =============     =============
</TABLE>

On October 15, 1997, the Company entered into four-year employment agreements
with its two executive officers for which the aggregate compensation of the two
executive officers is $500,000 per year. Under such agreements, the Company is
liable for the compensation benefits for three years of the agreements if an
executive officer were to be terminated without cause, as defined. As of
December 31, 1998, the remaining unearned compensation under the employment
agreements was $896,000.

The Company has entered into commitments for development of certain restaurant,
gas station/convenience store properties. As of December 31, 1998, the Company
had commitments totaling approximately $13,000,000 representing construction
contract costs not yet incurred.

The Company is subject to various legal proceedings in the ordinary course of
business. The resolution of these matters cannot be predicted with any
certainty, management believes the final outcome of such matters will not have a
material effect on the financial position, results of operations or cash flows
of the Company.

10. RELATED PARTY TRANSACTIONS

Prior to October 15, 1997, the Managing General Partner of USRP was responsible
for managing the business and affairs of USRP. USRP paid the Managing General
Partner a non-accountable annual allowance (adjusted annually to reflect
increases in the Consumer Price Index and additions to the property portfolio),
plus reimbursement of out-of-pocket costs incurred to other parties for services
rendered to USRP. The allowance for the period ended October 15, 1997 and the
year ended December 31, 1996 was $1,826,000 and $1,175,000 respectively. The
Company's accounts payable balance includes $121,000 for this allowance as of
December 31, 1997. The Managing General Partner paid no out-of-pocket costs to
other parties on behalf of USRP during 1997 and 1996.

USRP compensated the Managing General Partner for its efforts and increased
internal expenses with respect to additional properties acquired. USRP paid the
Managing General Partner, with respect to each additional property purchased:
(i) a one-time acquisition fee equal to one percent of the purchase price for
such property and (ii) an annual fee equal to one percent of the purchase price
for such property, adjusted for increases in the Consumer Price Index. For 1997
and 1996, the one-time acquisition fee equaled $1,401,000 and $1,043,000,
respectively, which was capitalized, and the increase in the non-accountable
annual fee equaled $498,000 and $495,000 respectively. In addition, if the Rate
of Return (as defined) on the Partnership's equity on all additional properties
exceeded 12 percent per annum for any fiscal year, the Managing General Partner
was paid an additional fee equal to 25 percent of the cash flow received with
respect to such additional properties in excess of the cash flow representing a
12 percent Rate of Return thereon. For 1996, this additional fee equaled $93,000
and there was no fee paid in 1997. These fees were discontinued with the
termination of the management contract between QSV and USRP on October 15, 1997
(See Note 11).

                                      F-25

<PAGE>   51

The Managing General Partner of Arkansas Restaurants #10 L.P.(Ark #10) is owned
by an officer of the Company who receives no compensation for this role. The
Managing General Partner owns 90% of the outstanding equity interest in Ark #10.
As of December 31, 1998 and 1997, notes receivable of $454,000 and $261,000 were
due from Ark #10, respectively. The notes receivable are due on September 1,
1999 ($394,000) and November 2, 1999 ($60,000) and have an interest rate of 9.0%
per annum. At December 31, 1998 and 1997, tenant and other receivables from Ark
#10 were $678,000 and $158,000, respectively. During 1997, the Company paid
remodeling costs of $53,000 on behalf of Ark #10 for three restaurants operated
by Ark #10 under the Company's early-renewal program for Burger King restaurant
properties (See Note 8). In addition, Ark #10 has an agreement to reimburse the
Company for overhead incurred on its behalf, which amounted $52,000 in 1998.

The Managing General Partner of Southeast Fast Food Partners, L.P.(SFF) is owned
by another officer of the Company. The Managing General Partner owns
approximately 9.8% of the outstanding equity interest of SFF. As of December 31,
1998 and 1997, notes receivable of $1,070,000 were due from SFF. The notes
receivable are due on July 1, 1999 and have an interest rate of 9.0% per annum.
As of December 31, 1998 and 1997, notes receivable of $136,000 are due from the
owners of SFF one of which is an officer of the Company. These notes receivable
are due on July 1, 1999 and have an interest rate of 9.0% per annum. At December
31, 1998 and 1997, tenant and other receivables from SFF were $979,000 and
$362,000, respectively.

The Company is currently in negotiations with Ark #10 and SFF to modify their
current lease and note agreements with the Company.

During 1996, the Company agreed to make available to U.S. Restaurant Properties
Development Company, LP (Development Co.) a revolving line of credit in the
principal amount of $5,000,000, to be used solely for paying for the acquisition
and development of restaurant properties, which were to be purchased by the
Company upon completion of development. The line of credit was secured by the
development properties and had an annual interest rate of 9.0%. At December 31,
1997, the outstanding balance was $3,920,000.

In April 1998, the line of credit to Development Co. was increased to
$15,000,000 with interest only payments due on November 1, 1998, and on each
anniversary thereof throughout the term of the note with all outstanding
principal and accrued but unpaid interest due on October 31, 2001, when it
matured. The assets of Development Co. were acquired during 1998 in settlement
of the outstanding note and the revolving line of credit was terminated.

As of April 29, 1998, two affiliates of the Company, U.S. Restaurant Lending GP,
Inc. (the "General Partner") and U.S. Restaurant Lending LP, Inc. (the "Limited
Partner") (See Note 5) entered into joint venture and limited partnership
agreements with MLQ Investors, L.P., an affiliate of Goldman, Sachs & Co., to
form two limited partnerships. The two limited partnerships engage in lending
activities to owners and operators of quick service franchises and gas
station/convenience store outlets. The Company has indirect ownership interests
(through the General Partner and Limited Partner interests it owns) of 71.25%
and 47.5%, respectively, in these two partnerships. As of December 31, 1998, the
Company had other receivables from the two lending partnerships of $306,000 and
a note receivable of $640,000 from the General Partner and Limited Partner.
Officers of the Company own 95% of the voting stock of the General Partner and
the Limited Partner.

                                      F-26

<PAGE>   52



As of March 11, 1998, the Company issued 23,725 shares of common stock for a 15%
ownership interest in The Anz Company, LLC (ANZ). During 1998, ANZ provided
services for the Company. These services represented approximately 9% of ANZ's
total revenues.

In 1998, eleven restaurant properties were acquired from Apple South, Inc., a
Georgia corporation. The operations on these properties were purchased by an
entity which is owned by a director of the Company. The Company has entered into
a lease agreement with this director's entity that purchased the operations on
these 11 properties. In 1997, two sale/leaseback transactions were completed by
the Company with Carlos O'Kelly's, Inc. Carlos O'Kelly's, Inc. is owned by a
director of the Company. As of December 31, 1998 no balances were outstanding
from this related party.

11. STOCKHOLDERS' EQUITY, MINORITY INTEREST AND PARTNERS' CAPITAL

COMMON STOCK

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

MINORITY INTEREST

In connection with the conversion to a REIT, the management contract between QSV
and USRP was terminated. The contract termination and QSV's partnership
interests in USRP were converted to 126,582 shares of Common Stock of the
Company and 1,148,418 units of the OP. The OP units represent a minority
interest in the OP of the REIT. Each OP unit participates in any income (loss)
of the OP based on the percent ownership in the OP and receives a cash dividend
in an amount equivalent to a share of Common Stock. Each OP unit may be
exchanged by the holder thereof for one share of Common Stock of the Company.
With each exchange of outstanding OP units for Common Stock, the Company's
percentage ownership interest in the OP, directly or indirectly, will increase.
An additional 825,000 shares of Common Stock of the Company or its equivalent in
OP units may be issued to QSV if certain earnings targets are met by the year
2000. These earnings targets are based upon what QSV would have received under
their prior management contract. As of December 31, 1998, the Company has
accrued approximately $12,047,000 (based on the market value of a share of the
Company's Common Stock at December 31, 1998) representing 495,509 OP units based
on earnings targets that have been met. The 495,509 OP units have not been
issued and will not participate in any income (loss) or receive any
distributions from the OP until such units are issued. In addition to the OP
units and Common Stock issued in 1997 relating to the termination of the
management contract, the Company also issued 14,254 OP units for the purchase of
property during the twelve months ended December 31, 1998. The OP units
outstanding of 1,162,672 represent the minority interest.

                                      F-27

<PAGE>   53



Minority interest in the OP consists of the following at December 31, 1998 and
1997 (in thousands):

<TABLE>

<S>                                                    <C>               
       Termination of management contract and
            issuance of original 1,148,418 OP units
            on October 15, 1997                         $        19,749
       Distributions paid                                          (415)
       Income allocated to minority interest                        202
                                                        ---------------
       Balance December 31, 1997                        $        19,536

       Market value of contingent shares earned                  12,047
       OP units issued for property                                 355
       Distributions paid                                        (1,813)
       Distributions declared                                      (500)
       Loss allocated to minority interest                          (58)
                                                        ---------------
       Balance at December 31, 1998                     $        29,567
                                                        ===============
</TABLE>

SHELF REGISTRATION

On August 22, 1997, the Company filed a shelf registration statement to register
shares of Common or Preferred Stock for sale in the amount of $150,000,000. The
amount of securities available for sale under this shelf registration statement
at December 31, 1998 is $25,025,000.

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

PREFERRED STOCK

On November 12, 1997, the Company sold 3,680,000 shares of Series A Cumulative
Convertible Preferred Stock ("Series A") with a liquidation preference of $25.00
per share under the August 22, 1997 shelf registration statement. Shares of
Series A are convertible, in whole or in part, at the option of the holder at
any time, unless previously redeemed, into shares of Common Stock at a
conversion price of $26.64 per share of Common Stock (equivalent to a conversion
rate of .9384 shares of Common Stock). Distributions on Series A are cumulative
and are equal to the greater of (i) $1.93 per annum or (ii) the cash
distribution paid or payable on the number of shares of Common Stock into which
a share of Series A is convertible. As of December 31, 1998, 62 Series A shares
have been converted into Common Stock. Holders of Preferred Stock are entitled
to receive dividends in preference to any dividends to Common Stockholders or OP
unit holders.

DISTRIBUTIONS TO COMMON AND PREFERRED STOCKHOLDERS

For the year ended December 31, 1998, the Company paid distributions of
$22,824,000 to its Common Stockholders and the minority interests (or $1.5725
per share of Common Stock), of which 36% represented a return of capital and 64%
represented ordinary taxable dividend income. As of December 31, 1998,
$8,456,000 dividends have been declared to be paid on Preferred and Common Stock
outstanding to stockholders and minority interests OP unitholders of record on
March 1, 1999.

                                      F-28

<PAGE>   54



DISTRIBUTIONS AND ALLOCATIONS AS UNITHOLDERS

Under the amended USRP partnership agreement, cash flow from operations and net
proceeds from capital transactions of USRP each year were distributed 98.02% to
the unitholders and 1.98% to the general partners for the period January 1, 1996
through October 15, 1997 (date of REIT conversion).

All operating income and loss of USRP for each year generally was allocated
among the partners in the same aggregate ratio as cash flow was distributed for
that year. Gain and loss from a capital transaction was generally allocated
among the partners in the same aggregate ratio as proceeds of the capital
transactions were distributed except to the extent necessary to reflect capital
account adjustments. For the period ended October 15, 1997 and for the year
ended December 31, 1996, distributions to USRP unitholders amounted to
$12,016,000 and $11,392,000, respectively.

12. SUPPLEMENTAL CASH FLOW INFORMATION

During the year ended December 31, 1998 the Company had the following additional
non-cash investing activities related to the purchase of net assets of U.S.
Restaurant Properties Development, L.P.:

<TABLE>
<CAPTION>

                                                                  1998
                                                              -------------
                                                              (in thousands)
<S>                                                           <C>          
      Rent and other receivables                              $         193
      Prepaid and other assets                                          524
      Property                                                        5,716
      Accounts payable                                                  (52)
                                                              -------------
      Non-cash note receivable                                $       6,381
                                                              =============
</TABLE>

13. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS

The following disclosure of estimated fair value was determined by the Company
using available market information and appropriate valuation methodologies.
However, considerable judgment is necessary to interpret market data and develop
the related estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that could be realized upon
disposition of the financial instruments. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.

Cash and cash equivalents, receivables (including deferred rent receivable) and
accounts payable (including deferred rent payable) are carried at amounts that
approximate their fair value based on their short term, highly liquid nature.
The line of credit is carried at an amount that approximates fair value because
it represents short term variable rate debt.

The fair value of notes and mortgage loan receivables totaling $31,500,000 and
$14,665,000 as of December 31, 1998 and 1997, respectively, have a fair value of
$34,211,000 and $12,973,000, respectively, based upon interest rates for notes
with similar terms and remaining maturities.

The fair value of cost method investments totaling $914,000 as of December 31,
1998 have a fair value of $849,000 based on publicly traded share prices for
publicly traded investments and prices recently paid by the Company and/or
published market values if available for private investments.

                                      F-29

<PAGE>   55

The fair value of notes and mortgage loan payables totaling $206,112,000 and
$40,000,000 as of December 31, 1998 and 1997, respectively, have a fair value of
$214,988,000 and $41,250,000, respectively based upon interest rates for notes
with similar terms and remaining maturities.

The fair value estimates presented herein are based on information available to
management as of December 31, 1998 and 1997. Although management is not aware of
any factors that would significantly affect the estimated fair value amounts,
such amounts have not been comprehensively revalued for purposes of these
consolidated financial statements since that date, and current estimates of fair
value may differ significantly from the amounts presented herein.

14. EMPLOYEE BENEFIT PLAN

Effective October 15, 1997, the U.S. Restaurant Properties, Inc. 401(k) plan
(the "Plan") was established as a savings plan for the Company's employees. The
Plan is a voluntary defined contribution plan. Employees are eligible to
participate in the Plan on the earlier of January 1, April 1, July 1 and October
1 immediately following the later of the (i) six months after their first day of
employment with the Company or (ii) the date an employee attains the age of 21,
as defined. Each participant may make contributions to the Plan by means of a
pre-tax salary deferral in an amount up to 15% of the participant's annual
compensation (not to exceed $10,000 per annum for 1998). The Company will match
up to 25% of participating annual employee contributions. The Company's matching
contributions are made in Company stock, which is purchased by the Plan on the
open market, and are subject to specified years-of-service for vesting of the
Company's portion of contributions to the Plan. Employer contributions of
approximately $25,000 and $7,000 have been paid or accrued for the year ended
December 31, 1998 and December 31, 1997, respectively.

15. PRO FORMA (UNAUDITED)

The following pro forma information was prepared by adjusting the actual
consolidated results of the Company for the years ended December 31, 1998 and
1997 for the effects of:

a.   the purchase of 286 restaurant and gas stations and convenience properties
     on various dates during 1998 for an aggregate purchase price of
     $214,909,000 including the value of 24,768 shares of Common Stock and
     14,254 OP Units issued to sellers; and the sale of 12 restaurant properties
     for $8,174,000 and other related financing transactions including the sale
     of 1,359,063 shares of Common Stock for $32,407,000 and the repurchase and
     retirement of 33,700 shares of Common Stock for $842,000; and.

b.   the purchase of 277 restaurant properties on various dates during 1997 for
     an aggregate purchase price of $182,396,000 including the value of 680,696
     shares of Common Stock issued to sellers; the loan of $6,000,000 on a
     secured mortgage; and the sale of eight restaurant properties for
     $5,822,000; the Preferred Stock dividends required and the reduction of
     interest expense as a result of the Preferred Stock offering proceeds used
     to reduce the total debt outstanding by $87,622,000; the three-for-two
     stock split on October 30, 1997; and other related financing transactions,
     including the sale of 1,434,831 shares of Common Stock for $25,000,000.


                                      F-30

<PAGE>   56

These pro forma results are not necessarily indicative of what the actual
results of operations of the Company would have been assuming all of the
restaurant properties were acquired as of January 1, 1997 and they do not
include gains on property dispositions and they do not purport to represent the
results of operations for future periods.

<TABLE>
<CAPTION>

(In thousands)                                            YEAR ENDED DECEMBER 31,
                                                          ----------------------
                                                            1998          1997
                                                          --------      --------
<S>                                                       <C>           <C>     
TOTAL REVENUES                                            $ 72,629      $ 70,772
                                                          ========      ========
NET INCOME (LOSS)                                         $  6,709      $ (2,450)

Dividends on Preferred Stock/General Partner interest       (7,102)       (7,102)
                                                          --------      --------

Net income (loss) allocable to
       Common shareholders/unit holders                   $   (393)     $ (9,552)
                                                          ========      ========

Net income (loss) per share/unit
       Basic                                              $  (0.03)     $  (0.68)
       Diluted                                            $  (0.03)     $  (0.68)
Weighted average shares/units outstanding
       Basic                                                14,297        14,005
       Diluted                                              14,297        14,005
</TABLE>






                                      F-31


<PAGE>   57



16. SUMMARY BY QUARTER (UNAUDITED)

<TABLE>
<CAPTION>

                                                              QUARTER                              
                                         ------------------------------------------------------       TOTAL
                                            FIRST       SECOND        THIRD            FOURTH         YEAR
                                         ----------   ----------   -----------     -------------   -----------
<S>                                      <C>          <C>          <C>             <C>             <C>        
1998
Revenues                                 $    13,221  $    14,195  $    14,506     $    16,608     $    58,530

Net income (loss)                              4,404        4,862         (653)(a)      (2,696)(a)       5,917(a)

Income (loss) allocable to
     Common stockholders                       2,628        3,086       (2,429)         (4,470)         (1,185)

Earnings (loss) per common share (c)

Basic net income (loss) per share        $      0.20  $      0.24  $     (0.18)    $     (0.31)    $     (0.09)
Diluted net income (loss) per share      $      0.20  $      0.23  $     (0.18)    $     (0.31)    $     (0.09)

1997
Revenues                                 $     6,265  $     8,556  $     9,775     $    10,988     $    35,584

Net income (loss)                              1,952        2,147        2,532         (16,024)(b)      (9,393)(b)

Income (loss ) allocable to
     Common stockholders                       1,913        2,105        2,482         (16,761)        (10,261)

Earnings (loss) per common share (c)

Basic net income (loss) per share        $      0.18  $      0.18  $      0.20     $     (1.30)    $     (0.88)
Diluted net income (loss) per share      $      0.18  $      0.18  $      0.20     $     (1.30)    $     (0.88)
</TABLE>



(a)  Includes $4,991, $7,056, and $12,047 in the third and fourth quarter and
     year, respectively, relating to the contingent shares of Common Stock or OP
     units the Company will have to issue in 2001 based upon transactions to
     date for the termination of the management contract with QSV.

(b)  Includes $19,220 relating to the termination of the management contract
     with QSV.

(c)  Due to the significant variances between quarters in net income and
     weighted average shares outstanding, the combined quarterly income (loss)
     per share does not equal the reported income (loss) per share for 1997 or
     1998.







                                      F-32






<PAGE>   58




                        U.S. RESTAURANT PROPERTIES, INC.
              SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
                             AS OF DECEMBER 31, 1998
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>

                                                                       INITIAL COST TO COMPANY AND                     
                                                                    GROSS AMOUNT AT DECEMBER 31, 1998                  
                                                     -------------------------------------------------------------     
                                        NO. OF
           STORE TYPE                 PROPERTIES         LAND         BUILDINGS         EQUIPMENT          TOTAL       
------------------------             --------------  -----------   ------------     ---------------    -----------     

<S>                                 <C>             <C>           <C>              <C>                <C>              
APPLEBEE'S                                       12  $     1,939   $      9,962     $            --    $    11,901     
ARBY'S                                           87       11,591         41,283                  --         52,874     
BRUEGGER'S BAGEL                                 17        2,422          9,478                  --         11,900     
BURGER KING                                     208       35,465         61,261                 242         96,968     
CHEVRON                                           2          352          1,046                  --          1,398     
CHILI'S                                           8        4,101          7,769                  --         11,870     
CITGO                                             9        2,319          4,982                  --          7,301     
CONOCO                                           27        6,958         22,076                  --         29,034     
DAIRY QUEEN                                      41        2,908          8,628                 875         12,411     
DENNY'S                                           6          853          2,440                 109          3,402     
EL CHICO                                         22        8,500         19,685                  --         28,185     
EMBERS                                            8          904          2,248                 447          3,599     
FINA                                             53        5,070         15,518                  --         20,588     
GRANDY'S                                         30       12,758             --                  --         12,758     
HARDEE'S                                         27        2,990         17,247               2,099         22,336     
KETTLE                                           19          688          1,663                  --          2,351     
KFC                                               5        1,979          4,529                  --          6,508     
MOBIL                                             4        2,389          3,046                  66          5,501     
PHILLIP 66                                       10        1,775          1,758               1,667          5,200     
PIZZA HUT                                        20        1,943          6,215                  --          8,158     
POPEYE'S                                         20        3,369          8,707                  --         12,076     
SCHLOTZSKY'S                                     28        8,310         14,734                  --         23,044     
TACO BELL                                         5          560          1,034                  --          1,594     
WENDY'S                                           8        1,360          2,949                  54          4,363     
OTHER BRANDS                                    172       50,652         74,428               2,498        127,578
                                     --------------  -----------   ------------     ---------------    -----------     

                                                848  $   172,155   $    342,686     $         8,057    $   522,898     
                                     ==============  ===========   ============     ===============    ===========     



<CAPTION>

                                                   ACCUMULATED DEPRECIATION
                                                     AT DECEMBER 31, 1998
                                      ------------------------------------------------
                                    
           STORE TYPE                    BUILDINGS         EQUIPMENT           TOTAL
------------------------              -------------    ----------------    -----------

<S>                                  <C>              <C>                 <C>        
APPLEBEE'S                            $         191    $             --    $       191
ARBY'S                                        3,182                  --          3,182
BRUEGGER'S BAGEL                                818                  --            818
BURGER KING                                   8,313                  80          8,393
CHEVRON                                          49                  --             49
CHILI'S                                         970                  --            970
CITGO                                            70                  --             70
CONOCO                                           46                  --             46
DAIRY QUEEN                                   1,352                 333          1,685
DENNY'S                                          25                  --             25
EL CHICO                                        957                  --            957
EMBERS                                          150                  85            235
FINA                                             32                  --             32
GRANDY'S                                         --                  --             --
HARDEE'S                                      2,623                 657          3,280
KETTLE                                          112                  --            112
KFC                                             238                  --            238
MOBIL                                            39                   8             47
PHILLIP 66                                       43                  70            113
PIZZA HUT                                       631                  --            631
POPEYE'S                                        444                  --            444
SCHLOTZSKY'S                                    935                  --            935
TACO BELL                                        73                  --             73
WENDY'S                                         188                   8            196
OTHER BRANDS                                  4,816                 400          5,216
                                      -------------    ----------------    -----------        

                                      $      26,297    $          1,641    $    27,938
                                      =============    ================    ===========
</TABLE>


                                      S-1

<PAGE>   59


(1)  Substantially all property is restaurant property.

(2)  Substantially all property is unsecured except for 18 gas station
     properties which are secured by a $6,550,000 note payable and one office
     building that is secured by a $1,062,000 mortgage note payable.

(3)  Depreciation is computed over the estimated useful life of 15 to 20 years
     for the restaurant buildings and improvements and 7 years for the
     restaurant equipment.

(4)  Burger King restaurant properties include the land values of 98 restaurant
     properties in which the building and improvements are accounted for as
     direct financing leases.

(5)  Transactions in real estate and equipment and accumulated depreciation
     during 1998 and 1997 are summarized below.

(6)  The 848 properties include the 865 (854 core business properties, 10
     billboard properties and one office building) less 17 properties currently
     under development.

<TABLE>
<CAPTION>

                                                                    COST         DEPRECIATION
                                                                  ---------      ------------
<S>                                                               <C>            <C>
Balance, December 31, 1996                                        $ 145,112      $      5,453
                                     Acquisitions                   183,686              --
                                     Cost of real estate sold        (3,270)             (245)
                                     Depreciation expense              --               8,230
                                                                  ---------      ------------

Balance, December 31, 1997                                          325,528            13,438

                                     Acquisitions                   204,944              --
                                     Cost of real estate sold        (7,447)             (325)
                                     Depreciation expense              --              14,825
                                     Asset impairment                  (127)             --
                                                                  ---------      ------------

Balance, December 31, 1998                                        $ 522,898      $     27,938
                                                                  =========      ============
</TABLE>




                                      S-2


<PAGE>   60



                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>

Exhibit
Number
-------
<S>  <C>
2.1  Agreement and Plan of Merger dated October 14, 1997 by and among U.S.
     Restaurant Properties Master L.P., U.S. Restaurant Properties, Inc., USRP
     Acquisition, L.P., USRP Managing, Inc., and QSV Properties, Inc.(1)

10.1 Withdrawal Agreement dated October 15, 1997 by and among U.S. Restaurant
     Properties, Inc., U.S. Restaurant Properties Master L.P., U.S. Restaurant
     Properties Operating L.P. and QSV Properties, Inc.(2)

10.2 Fourth Amended and Restated Agreement of Limited Partnership of U.S.
     Restaurant Properties Operating L.P.(3)

10.3 Amendment to Revolving Credit Agreement dated January 9, 1998 among U.S.
     Restaurant Properties Operating L.P., the institutions from time to time
     party thereto as Lenders and as Co-agents and Union Bank of Switzerland

10.4 Employment Agreement dated October 15, 1997 by and between U.S. Restaurant
     Properties, Inc. and Robert J. Stetson(4)

10.5 Employment Agreement dated October 15, 1997 by and between U.S. Restaurant
     Properties, Inc. and Fred H. Margolin(5)

10.6 Note Purchase Agreement dated May 1, 1998 for $111,000,000, 7.15% Senior
     Notes due May 1, 2005 between U.S. Restaurant Properties Operating L.P.,
     U.S. Restaurant Properties, Inc. and the purchasers

10.7 Note Purchase Agreement dated October 15, 1998 for $47,500,000, 8.22%
     Senior Notes due August 1, 2003 between U.S. Restaurant Properties
     Operating L.P., U.S. Restaurant Properties, Inc. and the purchasers

12.1 Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends

21.1 U.S. Restaurant Properties, Inc. List of Subsidiaries as of December 31,
     1998

23.1 Independent Auditors' Consent letter dated March 29, 1999 from Deloitte &
     Touche LLP

27.1 Financial Data Schedule
</TABLE>



(1)  Previously filed as Exhibit 2.5 to the registrant's Form 10-K for the
     fiscal year ended December 31, 1997 and incorporated herein by reference.

(2)  Previously filed as Exhibit 10.1 to the registrant's Form 10-K for the
     fiscal year ended December 31, 1997 and incorporated herein by reference.

(3)  Previously filed as Exhibit 10.2 to the registrant's Form 10-K for the
     fiscal year ended December 31, 1997 and incorporated herein by reference.

(4)  Previously filed as Exhibit 10.4 to the registrant's Form 10-K for the
     fiscal year ended December 31, 1997 and incorporated herein by reference.

(5)  Previously filed as Exhibit 10.5 to the registrant's Form 10-K for the
     fiscal year ended December 31, 1997 and incorporated herein by reference.


                                      E-1