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

                                    FORM 10-K
                                   (Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
    of 1934

                 For the fiscal year ended December 27, 1998 or

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934

                         Commission File Number: 0-29410

                        IL FORNAIO (AMERICA) CORPORATION
             (Exact name of registrant as specified in its charter)


           DELAWARE                                      94-2766571
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)


                         770 TAMALPAIS DRIVE, SUITE 400
                         CORTE MADERA, CALIFORNIA 94925
               (Address of principal executive offices) (Zip Code)

                                 (415) 945-0500
              (Registrant's telephone number, including area code)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
                                      None

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                     Common Stock, par value $.001 per share

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 the 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 voting stock held by non-affiliates of the
Registrant, based upon the closing price of the Registrant's Common Stock on
March 2, 1999, was $32,115,049.*

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

As of March 2, 1999 there were 5,658,821 shares outstanding of the Registrant's
Common Stock.

* Excludes 1,880,580 shares outstanding at March 2, 1999, of the Registrant's
Common Stock held by directors, executive officers and holders of more than 10%
of the Company's Common Stock. Exclusion of shares held by any person should not
be construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of the
Registrant, or that such person is controlled by or under common control with
the Registrant.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement for the Registrant's
Annual Meeting of Stockholders to be held on May 6, 1999 have been incorporated
by reference into Part III of this Annual Report on Form 10-K.

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ITEM 1. BUSINESS

CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995

     Certain statements set forth in or incorporated by reference in this Form
10-K as well as in the Company's Annual Report to Stockholders for the year
ended December 27, 1998 constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Act of 1995. These statements
include, without limitation, the timing of and plans for anticipated store
openings, the projected investment costs and sizes of future restaurants, the
adequacy if anticipated sources of cash, planned capital expenditures, the costs
of the Company's Year 2000 compliance efforts and the dates by which the Company
believes such efforts will be completed, the effect of interest rate increases,
and trends or expectations regarding the Company's operations. In addition,
words such as "believes," "anticipates," "expects," "intends," "estimates" and
similar expressions are intended to identify forward-looking statements, but are
not the exclusive means of identifying such statements. Such statements are
based on currently available operating, financial and competitive information
and are subject to various risks and uncertainties. Readers are cautioned that
the forward-looking statements reflect management's analysis only as of the date
hereof, and the Company assumes no obligation to update these statements. Actual
future results, events and trends may differ materially from those expressed in
or implied by such statements depending on a variety of factors, including, but
not limited to those set forth under "Risk Factors" and elsewhere in this Form
10-K. See "Business -- Risk Factors."

GENERAL

     Il Fornaio owns and operates 17 full-service, white tablecloth Italian
restaurants serving creatively prepared, premium quality Italian cuisine based
on authentic regional recipes. The Company's restaurants offer an extensive
menu, featuring house-made pasta, poultry and game roasted over a wood-fired
rotisserie, meat and fresh fish from a charcoal grill, pizza from a wood-burning
oven, soups, salads and desserts. Il Fornaio's menu is distinguished by fresh,
hand-made breads, pastries and other baked goods that are produced in the
Company's restaurants and five wholesale bakeries. Il Fornaio's wholesale
bakeries also sell baked goods to quality grocery stores, specialty retailers,
hotels and other fine restaurants. In addition, the Company operates a retail
market in each restaurant, which sells baked goods, prepared foods and a variety
of Il Fornaio-brand products, allowing guests to recreate the Il Fornaio
experience at home.

     The Company's objectives are to offer guests the most authentic Italian
dining experience available outside of Italy and to establish a brand identity
that provides a competitive advantage in every market in which the Company
operates. The Company's strategy to achieve these objectives includes the
following key elements: (i) serve premium quality, authentic regional Italian
cuisine created by native-born Italian chefs and complemented by hand-made Il
Fornaio baked goods; (ii) build brand awareness through its bakeries and retail
markets, which reinforce the Company's image as a provider of premium quality,
authentic Italian food and enable guests to recreate the Il Fornaio dining
experience at home; (iii) create a distinctive authentic Italian atmosphere with
restaurant designs unique to each location; (iv) consistently execute Il
Fornaio's high standards of food quality, service and cleanliness through its
employee-designed Five Star Service Program; and (v) foster a strong corporate
culture which attracts and retains highly qualified management, chefs and hourly
employees.

     Il Fornaio intends to develop restaurants in both existing and new
geographic markets and to locate restaurants at sites in affluent urban and
suburban areas. The flexibility of the Il Fornaio concept enables the Company to
develop successful restaurants in a variety of locations, including residential
neighborhoods, shopping centers, office buildings and hotels. Since its initial
public offering in September 1997, the Company has opened four restaurants,
located in Santa Monica, California; Denver, Colorado; Seattle, Washington; and
Walnut Creek, California. The Company currently intends to open four new
restaurants in 1999.

     The Company was incorporated in California in June 1980 and was
reincorporated in Delaware in September 1997 prior to its initial public
offering. The Company's executive office is located at 770 Tamalpais Drive,
Suite 400, Corte Madera, California 94925. The Company's telephone number is
(415) 945-0500.

     Il Fornaio and the Il Fornaio logo are registered marks of the Company, and
Festa Regionale and Passaporto are marks used and owned by the Company.



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RISK FACTORS

     In addition to the other information in this Annual Report on Form 10-K,
stockholders or prospective investors should carefully consider the following
risk factors:

UNCERTAINTIES ASSOCIATED WITH FUTURE GROWTH

     The Company has experienced growth in recent years, expanding from nine
restaurants at the end of 1993 to 17 restaurants at the end of 1998. In 1998,
the Company opened two new restaurants and currently expects to open four new
restaurants in 1999. The Company's ability to expand successfully will depend on
a number of factors, including the identification and availability of suitable
locations, the negotiation of favorable lease arrangements, timely development
and construction of any new shopping center, hotel or other site in which the
restaurant or bakery may be located, management of the costs of construction and
development of new restaurants and bakeries, securing required governmental
approvals and permits, recruitment of qualified operating personnel
(particularly managers and chefs), general economic conditions and other
factors, some of which are beyond the control of the Company. Moreover, the
opening of additional restaurants and bakeries in the future will depend, in
part, upon the Company's ability to generate sufficient funds from existing
operations or to obtain sufficient equity or debt financing on favorable terms
to support such expansion. There can be no assurance that the Company will be
successful in addressing these risks in each case, that the Company will be able
to open all of its planned new operations on a timely basis, if at all, or, if
opened, that those operations will be operated profitably. Delays in opening, or
failure to open, planned new restaurants could have a material adverse effect on
the Company's business, financial condition and results of operations.

     The Company's growth strategy may place a strain on the Company's
management, financial and other resources. To manage its growth effectively, the
Company must maintain its high level of quality and service at its existing and
future restaurants, continue to enhance its operational, financial and
management systems, and locate, hire, train and retain experienced and dedicated
operating personnel, particularly managers and chefs. There can be no assurance
that the Company will be able to effectively manage this expansion in any one or
more of these areas, and any failure to do so could have a material adverse
effect on the Company's business, financial condition and results of operations.

RISKS ASSOCIATED WITH SMALL OPERATIONS BASE

     Because of the relatively small number of restaurants operated by the
Company, adverse results experienced by any one location could have a material
adverse effect on the Company's business, financial condition and results of
operations. The results achieved to date by the Company's relatively small
number of restaurants may not be indicative of those restaurants' long-term
performance or the potential market acceptance of restaurants in other
geographic locations.

GEOGRAPHIC CONCENTRATION

     Thirteen of the Company's 17 restaurants are located in California. Because
of this geographic concentration, the Company is susceptible to local and
regional risks, such as increased government regulation, adverse economic
conditions, adverse weather conditions, earthquakes and other natural disasters,
any of which could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, in light of the
Company's current geographic concentration, adverse publicity relating to the
Company's restaurants could have a more pronounced adverse effect on the
Company's overall sales than might be the case if the Company's restaurants were
more broadly dispersed.

     The Company has opened only four restaurants located outside of California.
Over the next several years, the Company expects that some of its expansion will
involve opening restaurants in other states. Expansion into new geographic
regions involves a number of risks, in addition to those identified above,
including uncertainties related to local customs, demographics, legal
requirements, wages, costs and other economic conditions, the need to develop
relationships with local distributors and suppliers for fresh produce and other
ingredients, and potential difficulties related to management of operations
located in a number of broadly dispersed locations. There can be no assurance
that the Company will be successful in addressing these risks in each case, that
the Company will be able to open all of its planned new operations on a timely
basis, if at all, or, if opened, that those operations will be operated
profitably. Delays in opening, or failure to open, planned new restaurants could
have a material adverse effect on the Company's business, financial condition
and results of operations.

FLUCTUATIONS IN OPERATING RESULTS

     The Company's quarterly operating results may fluctuate significantly as a
result of a variety of factors, including general economic conditions, consumer
confidence in the economy, changes in consumer preferences, competitive factors,
weather

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conditions, the timing of new restaurant openings and related expenses, net
sales contributed by new restaurants, increases or decreases in comparable
restaurant revenues and fluctuations in inventory and general and administrative
expenses. For example, weather conditions have generally had the most
significant adverse impact in the first quarter of each year. In addition, in
the fourth quarter of 1998, the Company adopted a new accounting standard, which
requires the Company to expense as incurred all start-up and preopening costs
that may not otherwise be capitalized as long-lived assets. The adoption of this
new standard may lead to increased variability in operating results, depending
on the number and timing of restaurant openings. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations." Due
to the foregoing factors, results for any one quarter are not necessarily
indicative of results to be expected for any other quarter or for any year and,
from time to time in the future, the Company's results of operations may be
below the expectations of public market analysts and investors.

    A variety of factors also affect the Company's comparable restaurant sales
results, including general economic conditions, consumer confidence in the
economy, changes in consumer preferences, competitive factors, weather
conditions and the Company's ability to execute its business strategy. No
assurance can be given that comparable restaurant sales for any particular
future period will not decrease.

CHANGES IN FOOD AND LABOR COSTS

     The Company's profitability is dependent in part on its ability to
anticipate and react to changes in food and labor costs. Various factors beyond
the Company's control, including adverse weather conditions and governmental
regulation, may affect the Company's food costs. There can be no assurance that
the Company will be able to anticipate and react to changing food costs through
its purchasing practices and menu price adjustments in the future, and failure
to do so could have a material adverse effect on the Company's business,
financial condition and results of operations. During 1998, there was
significant volatility in the cost of certain bakery-related commodities,
principally butter and manufacturing cream, which adversely affected the
Company's costs of sales in 1998.

     A substantial number of the Company's employees are subject to various
minimum wage requirements. Many of the Company's employees work in restaurants
located in California and receive salaries equal to the California minimum wage.
The minimum wage in California was raised to $5.75 an hour effective March 1,
1998. In January 1999, the minimum wage in Oregon increased to $6.50 an hour
from $6.00 an hour and the minimum wage in Washington increased to $5.70 an hour
from $5.15 an hour. There can be no assurance that similar proposals will not
come before the voters in other jurisdictions in which the Company operates or
seeks to operate. Additional federal minimum wage increases have recently been
proposed. In the fourth quarter of 1996, the Company introduced its first menu
price increase in three years and implemented another price increase at the
start of the first quarter of 1998 due, in part, to increases in labor costs.
There can be no assurance that the Company will be able to pass additional
increases in labor costs through to its guests in the form of menu price
adjustments in the future and, accordingly, such minimum wage increases could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."

DEPENDENCE ON KEY PERSONNEL

     The success of the Company's business will continue to be highly dependent
on its key operating officers and employees, including Laurence B. Mindel, the
Company's Chairman of the Board, and Michael J. Hislop, the Company's President
and Chief Executive Officer. The Company currently maintains a $5.0 million term
life insurance policy covering Mr. Mindel and a $3.0 million term life insurance
policy covering Mr. Hislop. The Company's success in the future will be
dependent on its ability to attract, retain and motivate qualified management
and operating personnel, including restaurant managers and chefs. Failure by the
Company to attract and retain such key employees in the future could have a
material adverse effect on the Company's business, financial condition and
results of operations.

COMPETITION AND INDUSTRY CONDITIONS

     The restaurant and bakery industries are each intensely competitive with
respect to food quality, price-value relationships, ambiance, service and
location, and many restaurants and bakeries compete with the Company at each of
its locations. There are many well-established competitors with substantially
greater financial, marketing, personnel and other resources than the Company. In
addition, many of the Company's competitors are well established in the markets
where the Company's operations are, or in which they may be, located. While the
Company believes that its restaurants and bakeries are distinctive in design and
operating concept, other companies may develop restaurants and bakeries that
operate with similar concepts.

     The restaurant business is often affected by changes in consumer tastes,
national, regional or local economic conditions, demographic trends, consumer
confidence in the economy, discretionary spending priorities, weather
conditions, tourist travel, traffic 


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patterns, and the type, number and location of competing restaurants. Changes in
these factors could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Competition."

LONG-TERM, NON-CANCELABLE LEASES; TERMINATION PROVISIONS

     The Company's current leases have annual base rents ranging from $60,000 to
$352,000, are non-cancelable and typically have terms of 10 to 20 years. Leases
entered into by the Company in the future will also be long-term and
non-cancelable. If a decision is made to close any restaurant or bakery, the
Company may be committed to perform its obligations under the applicable lease,
which would include, among other things, payment of the base rent for the
balance of the lease term. In 1993 and 1995, the Company recorded provisions of
$2.3 million and $932,000, respectively, for liabilities associated with the
closure of facilities subject to non-cancelable, long-term leases. The Company
may incur liabilities of this nature in the future if a decision is made to
close one or more restaurants or bakeries, and such liabilities, if incurred,
could have a material adverse effect on the Company's business, financial
condition and results of operations.

     In addition, the Las Vegas restaurant lease contains provisions that allow
the hotel landlord to terminate the Company's lease without compensation if,
during any six-month period in which the hotel has achieved a specified
occupancy rate, the restaurant's monthly gross sales average less than a
specified minimum amount. To date, the Las Vegas restaurant's sales have been
more than triple the specified minimum amount, although there can be no
assurance that restaurant sales will continue to exceed the specified minimum.
In addition, the lease contains provisions allowing the landlord to relocate the
Company's restaurant to another site within the hotel possessing retail
characteristics similar to the site currently occupied by the Company. The
landlord may not use the site vacated for restaurant operations. Should the
Company elect not to relocate the restaurant, the lease may be terminated by the
Company and, in that event, the landlord is obligated to reimburse the Company
for the unamortized cost of its improvements to the site and any of the
Company's furniture, fixtures and equipment not removed by the Company. Such
termination or relocation could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Item 2.
Properties."

GOVERNMENTAL REGULATION

     The Company's operations are subject to regulation by federal agencies and
to licensing and regulation by state and local health, environmental, land use,
labor relations, sanitation, building, zoning, safety, fire and other
departments relating to the development and operation of restaurants and retail
establishments. The Company's activities are also subject to the federal
Americans With Disabilities Act and related regulations, which prohibit
discrimination on the basis of disability in public accommodations and
employment. The Company is also subject to state "dram-shop" laws and
regulations, which generally provide that a person injured by an intoxicated
person may seek to recover damages from an establishment that wrongfully served
alcoholic beverages to such person. Changes in any or all of these laws or
regulations, such as government-imposed increases in minimum wages, paid leaves
of absence or mandated health benefits, or increased tax reporting and tax
payment requirements for employees who receive gratuities, could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company is required to comply with the alcohol
licensing requirements of the states and municipalities where its restaurants
are or may be located. Delays or failures in obtaining or maintaining the
required construction and operating licenses, permits or approvals could delay
or prevent the opening of new restaurants or could materially and adversely
affect the operation of existing restaurants. In addition, there can be no
assurance that the Company will be able to obtain necessary licenses, permits or
other approvals on a cost-effective and timely basis in order to construct and
develop restaurants and bakeries in the future. See "Business -- Governmental
Regulation."

UNINSURED LOSSES

     The Company has comprehensive insurance, including general liability, fire,
extended coverage and employee practices liability coverage. However, there are
certain types of losses that may be uninsurable or that the Company believes are
not economically insurable, such as earthquakes and other natural disasters. In
view of the location of many of the Company's existing and planned restaurants
in California, the Company's operations are particularly susceptible to damage
and disruption caused by earthquakes. In the event of an earthquake or other
natural disaster affecting the Company's geographic area of operations, the
Company could suffer a loss of the capital invested in, as well as anticipated
earnings from, the damaged or destroyed properties. In addition, the Company
does not currently maintain any insurance coverage for the effects of adverse
publicity, and such litigation or adverse publicity could have a material
adverse effect on the Company's business, financial condition and results of
operations.



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RISKS RELATED TO THE YEAR 2000

     The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. The Company's
computer equipment and software and devices with embedded technology that are
time-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities. The failure to correct a material Year 2000 problem could result in
an interruption in, or failure of, certain normal business operations. If Year
2000 issues are not properly identified, or if assessment, remediation and
testing are not effected timely with respect to Year 2000 problems that are
identified, the Year 2000 problem could materially adversely impact the
Company's results of operations and adversely affect the Company's relationships
with customers, vendors or others. Additionally, there can be no assurance that
the Year 2000 problems of other entities will not have a material adverse effect
on the Company's systems or results of operations. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000 Compliance."

CONTROL BY EXISTING STOCKHOLDERS AND MANAGEMENT

     At March 2, 1999, the Company's directors, officers and their affiliates
will beneficially own approximately 26.4% of the outstanding Common Stock
(assuming exercise of vested stock options). As a result of such Common Stock
ownership, the Company's directors, officers and their affiliates, if they voted
together, would be able to exercise significant influence over the election of
members of the Company's Board of Directors and other corporate actions
requiring stockholder approval. See "Item 12. Security Ownership of Certain
Beneficial Owners and Management."

ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE

     The market price of the shares of Common Stock may be subject to
significant fluctuations in response to the Company's operating results and
other factors, including general economic and market conditions. In addition,
the stock market in recent years has experienced and continues to experience
extreme price and volume fluctuations, which have affected the market price of
the stock of many companies and which have often been unrelated or
disproportionate to the operating performance of these companies. These
fluctuations, as well as a shortfall in sales or earnings compared to securities
analysts' expectations, changes in analysts' recommendations or projections or
general economic and market conditions, may adversely affect the market price of
the Common Stock. On March 16, 1999, the Company issued the press release filed
with this 10-K as Exhibit 99.1. In the past, securities class action litigation
has often been instituted following periods of volatility in the market price
for a company's securities. Such litigation could result in substantial costs
and a diversion of management attention and resources, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.

POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS

     The Company's Amended and Restated Certificate of Incorporation (the
"Restated Certificate") authorizes the Board of Directors to issue up to five
million shares of Preferred Stock and to determine the powers, preferences,
privileges, rights, including voting rights, qualifications, limitations and
restrictions of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The Restated Certificate and By-laws, among
other things, provide for a classified Board of Directors, require that
stockholder actions occur at duly called meetings of the stockholders, limit who
may call special meetings of stockholders, do not permit cumulative voting in
the election of directors and require advance notice of stockholder proposals
and director nominations. These and other provisions could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company, discourage a hostile bid or delay,
prevent or deter a merger, acquisition or tender offer, in which the Company's
stockholders could receive a premium for their shares, or a proxy contest for
control of the Company or other change in the Company's management.

IL FORNAIO CONCEPT AND STRATEGY

     Offer Premium Quality, Authentic Regional Italian Cuisine. Il Fornaio seeks
to differentiate its restaurants from other restaurants in the Italian food
segment by offering creatively prepared, premium quality Italian cuisine based
on authentic regional recipes. The core menu served at both lunch and dinner
features a variety of dishes, including house-made pasta, poultry and game
roasted over a wood-fired rotisserie, meat and fresh fish from a charcoal grill,
pizza from a wood-burning oven, soups, salads and desserts. Native-born Italian
chefs develop all of the core menu items, which vary depending on the seasonal
availability of raw ingredients. The Company's chefs also develop special menus
each month based on the local cuisine and culinary style of one of Italy's 20
geographic regions as part of the Company's Festa Regionale marketing program.
Hand-made, preservative-free baked goods, based on centuries-old regional
Italian recipes, are provided by Il Fornaio's bakeries for use in a variety of
menu items. Fresh breads and rolls are served 



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with each meal, providing an authentic and high quality complement to the menus.
Il Fornaio's restaurants have received numerous awards and commendations.

     Build Brand Awareness. The Company believes that its restaurants, bakeries
and retail markets work together to reinforce its image as a provider of premium
quality, authentic Italian food, enhance Il Fornaio's brand image and reputation
and attract guests over a wide variety of occasions for dining out or dining in.
The Company's bakeries supply the same fresh, award-winning breads and other
baked goods served at the Company's restaurants to quality grocery stores,
specialty retailers, hotels and other fine restaurants as well as to retail
markets within Il Fornaio restaurants. The restaurants' retail markets offer
prepared foods and Il Fornaio brand items, including fresh baked goods,
oakwood-roasted coffee, pasta, risotto, extra virgin olive oil and balsamic
vinegar imported from Modena, Italy, enabling guests to recreate the Il Fornaio
dining experience at home. The retail markets also offer an Il Fornaio-brand
Chianti Classico from a Tuscan vineyard that was originally planted in the 11th
century and is designated for Il Fornaio's exclusive use. The Company has
implemented a number of marketing initiatives designed to build brand awareness,
including monthly mailings of its Festa Regionale menus, food and wine tastings,
baking classes, Italian culture seminars and the Passaporto program, which
rewards frequent guests with complimentary menu items and commemorative plates.

     Create a Distinctive Authentic Italian Atmosphere. The Company seeks to
create a distinctive authentic Italian atmosphere with restaurant designs that
are unique to each location. The restaurants' sophisticated, yet informal and
friendly atmosphere is intended to be suitable for a variety of meal occasions.
Exhibition kitchens with wood-fired rotisseries, charcoal grills and
wood-burning pizza ovens are in full display of the guests and create appealing
cooking aromas that reinforce the guests' perceptions of quality, freshness and
authenticity. Retail markets located at the entrance to each restaurant are
designed to provide an inviting initial impression as well as to enhance the
perception of an authentic Italian dining experience through the prominent
display of Il Fornaio's Italian food. Design elements, which may include
terracotta or European slate floors, marble bars, mahogany trim, outdoor
piazzas, hand-painted ceilings and fine art, are selected to evoke the charm and
elegance of a memorable dining experience in Italy. Il Fornaio's Sacramento
restaurant received the grand prize for best new restaurant design worldwide,
one of five grand prizes in hospitality design awarded in 1994 by a national
hospitality design magazine.

     Focus on Five Star Service. The Company believes that its emphasis on
service through the implementation of its Five Star Service Program has been an
important factor in its success. The Company's Five Star Service Program,
designed by the Company's employees, defines Il Fornaio's high standards for
food quality, service and cleanliness. The Company has invested significant
resources in the training of its service personnel and staffs each restaurant
with an experienced management team to ensure attentive guest service and
consistent food quality. Through employee and guest questionnaires, the Company
receives valuable feedback and implements measures designed to reinforce its
commitment to outstanding service and guest satisfaction. Results of the Five
Star Service Program are considered in the evaluation and advancement of
restaurant management.

     Foster a Strong Corporate Culture. The Company believes that qualified
employees are critical to its success. The Company believes that, by providing
extensive training, attractive compensation and significant opportunities for
employee feedback and advancement, it fosters a strong corporate culture that
helps attract and retain highly qualified employees. In 1995, the Company
instituted a Partnership Program, which provides equity participation to chefs
and restaurant general managers. The Company also provides medical, dental and
other benefits to hourly employees and believes that the availability of these
benefits contributes to an employee turnover rate that is below the industry
average.

     Provide an Attractive Price-Value Relationship. The Company believes that
its restaurants provide guests with excellent value by offering high quality
authentic Italian food, a distinctive atmosphere and superior service, all for
an average check per guest in 1998 of $21.87 (including alcohol). As a result,
the Company's restaurants attract a broad variety of guests who desire a more
authentic Italian experience than may be available from other restaurants in the
Italian food segment, without a substantially higher cost.

UNIT ECONOMICS

     For 1998, the Company's 13 restaurants that were opened prior to 1997
(which excludes data from restaurants in their first year of operation) had
average revenues of approximately $5.1 million, average operating income of
approximately $826,000, or 16.2% of restaurant sales, and average operating
income before depreciation and amortization of approximately $1,044,000, or
20.4% of restaurant sales. The Company's restaurants range in size from 5,000
square feet to 13,200 square feet. Since 1991, the Company's total investment
per restaurant, net of landlord contributions, has averaged approximately $2.0
million, with additional average pre-opening costs per restaurant of
approximately $200,000. The Company expects that its planned future restaurants
will generally range in size from 7,000 to 10,000 square feet and that its total
investment and pre-opening costs per restaurant will be approximately $2.0
million and $250,000, respectively, based upon adjustments for inflation and the
geographic locations of future restaurants.



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LOCATIONS

     Il Fornaio owns and operates 17 full-service, white tablecloth Italian
restaurants and five bakeries. Four of these bakeries are located adjacent to
certain of the Company's restaurants and provide fresh breads, pastries and
other baked goods to the restaurants, as well as to a variety of quality grocery
stores, specialty retailers, hotels and other fine restaurants. All Il Fornaio
restaurants and wholesale accounts in the San Francisco Bay Area are supplied by
the Company's 12,000-square foot bakery located in Burlingame, California.
Restaurants that cannot be supplied by one of the Company's bakeries are
designed with an in-house bakery. All of the restaurants feature a retail
market, which sells baked goods, prepared foods and a variety of Il
Fornaio-brand products, allowing guests to recreate the Il Fornaio experience at
home.

     The following table provides information about the Company's current and
planned operations.

CURRENT OPERATIONS

<TABLE>
<CAPTION>
                                        YEAR      SIZE       NUMBER OF
               LOCATION                OPENED   (SQ. FT.)     SEATS(1)
------------------------------------   ------   ---------    ---------
<S>                                     <C>      <C>           <C>
Restaurants
  Corte Madera, CA..................    1987     5,600         104
  San Francisco, CA.................    1988     7,800         148
  Del Mar, CA.......................    1989     5,700         110
  Palo Alto, CA.....................    1989     7,300         136
  Irvine, CA........................    1991     9,600         220
  Beverly Hills, CA.................    1992     5,000          76
  San Jose, CA......................    1992     8,000         171
  Pasadena, CA......................    1993     8,000         152
  Sacramento, CA....................    1993     7,900         158
  Burlingame, CA....................    1995     9,200         185
  Carmel, CA........................    1995     7,500         120
  Portland, OR......................    1996     7,300         170
  Las Vegas, NV.....................    1997    10,900         218
  Santa Monica, CA..................    1997     7,500         150
  Denver, CO........................    1997     9,200         175
  Seattle, WA.......................    1998    13,200         269
  Walnut Creek, CA..................    1998     8,700         210
Bakeries
  Beverly Hills, CA.................    1983     1,500          --
  Irvine, CA........................    1991     3,400          --
  Pasadena, CA......................    1993     3,400          --
  Sacramento, CA....................    1993     2,500          --
  Burlingame, CA....................    1997    12,000          --
</TABLE>


PLANNED RESTAURANTS (2)

<TABLE>
<CAPTION>
                                                     SCHEDULED      SIZE
                  LOCATION                            OPENING     (SQ. FT.)
------------------------------------------------  -------------  ----------
<S>                                               <C>            <C>
Las Vegas, NV (The Venetian) ...................       1999       14,000
Atlanta, GA ....................................       1999        8,500
Coronado Island, CA ............................       1999        9,100
Manhattan Beach, CA ............................       1999        8,000
</TABLE>
----------
(1)  Excludes patio seating.
(2)  Leases have been signed for each of these planned restaurant locations.



                                       8
<PAGE>   9

EXPANSION STRATEGY AND SITE SELECTION

     The Company intends to continue to expand its operations by addressing both
existing and new geographic markets. The Company currently plans to open four
new restaurants in 1999 as indicated in the table above.

     The Company believes that the location of each restaurant is critical to
its long-term success and devotes significant effort to finding appropriate
sites. The Company's site selection strategy is to locate restaurants in
affluent urban and suburban areas, often located near or on main traffic routes.
The Company takes into account a variety of local factors, including demand and
consumer preferences, competition, availability of suitable locations and
personnel, local demographics and household income levels, as well as specific
site characteristics, such as visibility, accessibility and traffic volume.
Senior management selects each restaurant site. The flexibility of the Il
Fornaio concept enables the Company to develop successful restaurants in a
variety of locations, including residential neighborhoods, shopping centers,
office buildings and hotels.

     The Company's success in implementing its expansion plans will depend, in
each case, on the Company's ability to effectively address a number of risks.
There can be no assurance that the Company will be able to open all of its new
operations on a timely basis, if at all, or, if opened, that those operations
will be operated profitably. See "Business -- Risk Factors."

MENU

     The Company's restaurants feature creatively prepared, premium quality
Italian food based on authentic regional recipes. All recipes are created by
native-born Italian chefs. As guests are seated, Il Fornaio breads and rolls are
placed on the table and served with Il Fornaio olive oil. Guests may then select
from a menu featuring a variety of dishes, including house-made pasta, poultry
and game roasted over a wood-fired rotisserie, meat and fresh fish from a
charcoal grill, pizza from a wood-burning oven, soups, salads and desserts. The
core menu includes several flavorful low-salt and low-fat selections oriented
toward health- or diet-conscious guests. The restaurants also offer Italian
appetizers, creative desserts prepared on site, full liquor service and an
award-winning, extensive wine list emphasizing Italian and California varietals.
The wine list includes an Il Fornaio-brand Chianti Classico from a Tuscan
vineyard that was originally planted in the 11th century and is designated for
Il Fornaio's exclusive use. The core menu is virtually identical at most of Il
Fornaio's restaurants. A daily insert, which varies by restaurant, lists
specials developed by chefs at each restaurant, featuring creative dishes
inspired by seasonal availability of fresh local produce, fish, meats and game.
Il Fornaio's restaurants have received numerous awards and commendations.

     In addition, for two weeks of every month, the restaurants feature the
Festa Regionale, innovative menus developed, on a rotating basis, by one of Il
Fornaio's Chef-Partners, based on authentic recipes of one of Italy's 20
geographic regions. Each menu is intended to capture both the unique flavors and
culinary style that characterize that region's local cuisine and includes menu
items based on produce, cheese, meat, poultry and seafood indigenous to the
region. Selected wines of the region are also offered to complement menu items.
The most popular menu items developed as part of Festa Regionale are frequently
added to the core menu.

     Il Fornaio's bakeries supply the restaurants with over 30 varieties of
breads and rolls, based on centuries-old, regional Italian recipes. Breads
include ciabatta (a long, flat loaf with a porous interior and crunchy crust),
panmarino (a dome-shaped loaf infused with rosemary and sprinkled with coarse
sea salt), filone (a classic Italian white bread with a light crust and soft
interior), pagnotta (a round, rustic loaf with a soft interior), pane all'uva (a
rich, moist bread filled with golden raisins), pane alle olive (a soft-textured
bread studded with green olives) and foccacia (a flat bread brushed with olive
oil and finished with a variety of fresh toppings). Pastries include cornetti
(croissants) and cannelle (cinnamon twists). The Company's authentic Italian
artisan breads have received numerous awards and commendations.

     The Company's average check per guest in 1998 at its restaurants, including
alcoholic beverages, was $21.87. Nine of the restaurants also offer breakfast
service which, during 1998, accounted for approximately 3% of restaurant
revenues. During the same period, wine sales represented approximately 18% of
restaurant revenues, while other alcoholic beverages accounted for approximately
7% of restaurant revenues.

     Take-out prepared food and retail brand items accounted for approximately
7% of restaurant revenues in 1998. The restaurants' retail markets enable guests
to recreate the Il Fornaio dining experience at home by offering prepared foods,
including assorted cold pasta and risotto salads, Il Fornaio breads, green
salads, whole roasted chickens, stuffed artichokes, individual pizzette and
assorted Italian sandwiches, as well as Il Fornaio-brand retail items, including
oakwood-roasted coffee, pasta, risotto, extra virgin olive oil, balsamic vinegar
imported from Modena, Italy, and Chianti Classico.

     In November of 1998, the Company opened Il Fornaio Risotteria, a full
service restaurant in Pacific Place, an entertainment and shopping center in
downtown Seattle. Risotteria features authentic Italian foods simply presented
at lower price points than a typical Il 



                                       9
<PAGE>   10

Fornaio restaurant. The casual setting is designed for quicker, more informal
service, with all menu items priced below $10. While the Company has no current
plans to expand the Risotteria concept to other markets, it is possible that the
Company may build other Risotterias in the future in appropriate locations.

DECOR AND ATMOSPHERE

     The Company seeks to create a distinctive, authentic Italian atmosphere
with restaurant designs that are unique to each location. The restaurants'
sophisticated, yet informal and friendly atmosphere is intended to be suitable
for a variety of meal occasions. Exhibition kitchens with wood-fired
rotisseries, charcoal grills and wood-burning pizza ovens in full display of the
guests create appealing cooking aromas that reinforce the guests' perceptions of
quality, freshness and authenticity. Retail markets located at the entrance to
each restaurant are designed to provide an inviting initial impression as well
as to enhance the perception of an authentic Italian dining experience through
the prominent display of Il Fornaio's Italian food. Design elements, which may
include terracotta or European slate floors, marble bars, mahogany trim,
hand-painted ceilings and fine art, are selected to evoke the charm and elegance
of a memorable dining experience in Italy. The tables are a mix of booths and
free-standing tables with chairs. White tablecloths and Italian flatware dress
the tables. Service is intended to be professional and friendly but not
intrusive. In addition to table service, food is available at an indoor or
outdoor liquor/coffee bar, as well as at counter seats overlooking the large
pizza oven and open kitchen. The restaurants range in size from approximately
5,000 to 13,200 square feet with indoor seating ranging from 76 to 269 guests.
Outdoor piazzas provide additional seating during warmer weather. Il Fornaio's
Sacramento restaurant received the grand prize for best new restaurant design
worldwide, one of five grand prizes in hospitality design awarded in 1994 by a
national hospitality design magazine.

OPERATIONS

     The Company seeks to create a fine dining experience through the careful
selection, training and supervision of personnel. The staff of a typical
restaurant consists of a Managing Partner, two or three managers, a
Chef-Partner, two or three sous chefs and approximately 65 to 125 hourly
employees, many of whom work part-time. The Managing Partner of each restaurant
is responsible for the day-to-day operation of that restaurant, including
hiring, training and development of personnel, as well as operating results. The
Chef-Partner is responsible for product quality, food costs and kitchen labor
costs. The Company requires its Managing Partners and Chef-Partners to have
significant experience in the full-service restaurant industry.

     Comprehensive management manuals exist to ensure consistency in all facets
of restaurant operations, including food, service, safety and accounting.
Working in concert with Managing Partners and Chef-Partners, the Company's
senior management defines operations and performance objectives for each
restaurant and monitors implementation. The Company maintains quality and
consistency in its restaurants through its Five Star Service Program, which
establishes standards relating to food and beverage preparation, maintenance of
facilities and conduct of personnel. A restaurant survey firm regularly visits
the Company's restaurants and reports to senior management on the effectiveness
of the Five Star Service Program. In addition to the Five Star Service Program,
the Company's senior management regularly visit each restaurant and bakery to
ensure adherence to the Company's concept, strategy and standards of quality in
all aspects of restaurant operations. Senior management also meets once a
quarter with Managing Partners and Chef-Partners to discuss operational,
marketing and financial issues and to review the Five Star Service Program.

     The Company has implemented a comprehensive compensation and benefits
package in order to attract and retain highly qualified personnel. The Company
has a Partnership Program, which provides equity participation for Managing
Partners and Chef-Partners in the form of stock options, to encourage commitment
to the long-term success of the restaurants and the Company. The Company
believes that this equity participation differentiates the compensation package
from that of many of its competitors. The Company's bonus program is designed to
reward the restaurant management team for achievement of superior operating
results, and all members of management at the restaurant level are eligible to
participate. The bonus may provide a large percentage of management's total
compensation.

     The Company has a comprehensive four-to-six week training program, which
all operating management personnel are required to complete. The program
emphasizes the Company's operating strategy, philosophy, procedures and
standards. The training encompasses all aspects of both restaurant and kitchen
management. As part of the training program, a series of written tests is
administered to evaluate the trainee's progress. The trainee must achieve a
certain score to progress to the next section of the program. This training
program is administered by the Company's Director of Training in conjunction
with the Vice President of Operations and Executive Chef. The Managing Partners
and Chef-Partners are responsible for selecting and training employees for each
restaurant. The training period for new hourly employees lasts approximately one
to two weeks and utilizes training manuals and seminars developed by the
Company's training department. To foster a strong corporate culture and
encourage employee commitment and enthusiasm, management regularly solicits
employee suggestions concerning Company operations through extensive employee
feedback surveys.



                                       10
<PAGE>   11

     The Company currently has five bakeries, four of which range in size from
1,500 to 3,400 square feet and are located adjacent to certain of the Company's
restaurants. The Company's original heritage was based on bakeries and bakery
products remain an integral part of the Il Fornaio restaurant concept. In
addition to the Company's own restaurants, bakery products are sold to quality
grocery stores, specialty retailers, hotels and other fine restaurants. The
Company's bakeries accounted for approximately 9% of gross revenues during 1998.

     In March 1997, the Company commenced operation of a free-standing
12,000-square foot bakery, located in Burlingame, California. This facility
provides freshly baked goods to all Il Fornaio restaurants and wholesale
customers throughout the San Francisco Bay Area. This bakery is designed to
provide efficiencies in production (both labor and ingredients) and
distribution. This facility permits the Company to employ improved processes,
which enhance quality and consistency, while maintaining the Il Fornaio
commitment to preservative-free, hand-made authentic Italian breads. The
Company's total investment to construct this bakery, including leasehold
improvements, machinery and equipment, was approximately $800,000.

     The Company's bakeries produce over 30 varieties of breads and rolls based
on regional Italian recipes, as well as a wide assortment of Italian cookies,
cakes and pastries. Recipes are standardized to ensure consistency. The
Company's bread doughs, based on centuries-old recipes, are mixed and then
fermented for up to 20 hours to increase flavor. Each loaf is hand-formed,
proofed and baked in European deck ovens that eject steam around the bread at
timed intervals. The Company believes that these processes contribute to a
characteristically irregular-shaped and crusty bread. Bakers create a wide
variety of breads by varying proportions of ingredients, length and number of
risings, temperature of the oven and size and shape of the loaves. Some recipes
include fresh aromatic herbs and spices, such as rosemary or fennel, or other
ingredients, such as parmesan cheese, raisins, nuts and sesame seeds. To
maintain the high quality of its bakery products, the Company maintains strict
criteria for ingredients.

     The management staff of a typical bakery consists of a production manager,
an assistant production manager and a business manager. A bakery employs 10 to
45 hourly employees, depending on the bakery's size. The production manager
carries responsibility for day-to-day results of the bakery. Each production
manager is required to have significant bread baking experience in addition to
other general baking and management skills. Both the production manager and the
assistant production manager are also trained in the Company's systems, recipes
and procedures. The business manager is responsible for all accounting,
including the preparation of sales reports, which are electronically transmitted
to the corporate office on a daily basis. The business manager is also
responsible for customer service and distribution.

     The Company maintains a fleet of vehicles for distribution of its products
to wholesale customers and Company locations. A majority of the products are
packed and delivered in the early morning to ensure timely delivery, and a
second delivery is normally scheduled for Company locations to provide
fresh-baked products for late afternoon and evening sale and consumption.

MARKETING

     The Company believes that providing an authentic Italian dining experience
by offering quality food and bakery products, distinctive decor, Five Star
Service and an attractive price-value relationship is the most effective
approach to attracting new and repeat guests. Accordingly, Il Fornaio has relied
primarily on reputation, local reviews and awards, and word-of-mouth to promote
its restaurants and bakeries in each community in which it operates. The Company
has also implemented a program of marketing and public relations activities
designed to create awareness of the Il Fornaio name, encourage guests to
associate that name with authentic, premium quality Italian food and increase
the frequency of return visits to Il Fornaio.

     To encourage repeat patronage, the Company has developed the Festa
Regionale program. As part of this program, innovative menus are developed
monthly by Chef-Partners, on a rotating basis, based on authentic recipes from
one of Italy's 20 geographic regions. Menu items are accompanied by selected
wines from the region and a regional bread is provided by the Company's
bakeries. Mailers describing each month's Festa Regionale offerings are sent
monthly to over 120,000 households identified by the Company through customer
mailing lists or geographic proximity to an Il Fornaio restaurant. The
Passaporto program also encourages frequent dining at the Company's restaurants
by rewarding those who participate in each month of the six-month program with a
commemorative plate. In addition, guests receive a complimentary item such as an
appetizer or a dessert from the regional menu.

     The Company has developed a program that focuses marketing efforts on each
restaurant's immediate neighborhood. Under this program, each restaurant is
responsible for the execution of an annual Neighborhood Marketing Plan, which
includes initiatives to build awareness, sales and frequency from the immediate
trade area, typically defined as a one-mile radius around that location. These
initiatives include both on-site and off-site activities, such as large party,
special event and meeting planning, bread and baked goods classes, Italian
culture seminars, food and wine tastings, anniversary parties, community group
fund-raisers as well as programs designed to encourage concierges from local
hotels and office buildings to recommend Il Fornaio to their clients. Restaurant



                                       11
<PAGE>   12

management, in conjunction with the Director of Neighborhood Marketing, develops
a calendar of events based on quarterly and annual sales objectives. Each
location is provided with a comprehensive Neighborhood Marketing Resource Guide
and Neighborhood Marketing Calendar designed to assist management and staff with
event planning, sales building strategies and guest communication guidance.
These programs and initiatives are specifically tailored to the food service
needs of the current and potential guests that are employed or reside in the
immediate trade areas. Other public relations activities include special events,
such as chef demonstrations at local stores, charitable donations and
participation in community activities, such as fundraisers for schools,
hospitals and other non-profit organizations.

MANAGEMENT INFORMATION SYSTEMS

     The Company has developed an integrated management information system that
is utilized in all of its restaurants and bakeries. This system currently
includes a computerized point-of-sale system in its restaurant operations and a
proprietary accounts receivable system in its bakeries. The restaurant
point-of-sale system facilitates the movement of guest food and beverage orders
between the guest areas and kitchen and bar, controls cash, handles credit card
authorizations and provides management with revenue data. The integrated system
electronically transmits sales and guest counts to Company headquarters on a
daily basis. The Company has a computerized time management system at each of
its locations. The system calculates the time worked by each employee, allows
management to gather data and schedule labor hours and produces payroll reports.
Additionally, the Company has developed a proprietary back-office system for
processing daily and weekly paperwork (sales, accounts payable, labor and
inventory). This system generates a weekly operating statement, which compares
both weekly and month-to-date results versus budget.

     The Company's accounting system includes a scalable, relational database.
The Company's automated restaurant and bakery point-of-sale, time management and
unit accounting system provides data for posting directly to the Company's
centralized system. The centralized database provides flexibility in generating
various management reports against predetermined operating budgets. Such
reporting includes (i) weekly reports of revenues, cost of revenues and selected
controllable operating budgets, (ii) detailed monthly performance of revenues
and expenses and (iii) monthly reports of administrative expense performance.
The system allows management to review the mix of menu items in order to better
match guest preferences and improve profitability. Detailed monthly profit and
loss statements are compiled at the corporate office and reviewed with unit
management every month by senior management.

PURCHASING

     The Company seeks to obtain ingredients of high quality at competitive
prices from reliable sources. To ensure freshness and quality, maintain low
inventory levels and facilitate the unique preparation of menu items, the
Company purchases most of its ingredients in an unprocessed state. In order to
maximize operating efficiencies and to provide the freshest ingredients for its
food products, the management team of each restaurant and bakery determines the
daily quantities of food items needed and orders accordingly. The Company's
purchasing department seeks to obtain the lowest possible prices available to
the Company by negotiating bulk purchasing contracts for a number of the
ingredients utilized by the restaurants and bakeries. Ingredients and supplies
are shipped directly to the restaurant or bakery, as the Company does not
maintain a central food product warehouse or commissary.

COMPETITION

     The restaurant and bakery business is intensely competitive with respect to
food quality, price-value relationships, ambiance, service and location, and
many existing restaurants and bakeries compete with the Company at each of its
locations. There are many well-established competitors with substantially
greater financial, marketing, personnel and other resources than the Company. In
addition, many of the Company's competitors are well established in the markets
where the Company's operations are, or in which they may be, located. While the
Company believes that its restaurants and bakeries are distinctive in design and
operating concept, other companies may develop restaurants and bakeries that
operate with similar concepts.

     The restaurant business is often affected by changes in consumer tastes,
national, regional or local economic conditions, demographic trends, consumer
confidence in the economy, discretionary spending priorities, weather
conditions, tourist travel, traffic patterns, and the type, number and location
of competing restaurants. Changes in these factors could have a material adverse
effect on the Company's business, financial condition and results of operations.



                                       12
<PAGE>   13

EMPLOYEES

     At February 5, 1999, the Company employed approximately 2,306 persons, 45
of whom were executive office personnel, 181 of whom were unit management
personnel and the remainder of whom were hourly restaurant or bakery personnel.
None of the Company's employees is covered by a collective bargaining agreement.
The Company considers its employee relations to be good.

TRADEMARKS

     The Company has registered and applied for registration with the United
States Patent and Trademark Office for a number of trademarks and service marks
used in connection with its business. The Italian corporation which owned the
rights to the Il Fornaio marks in the United States has assigned to the Company
all of its United States rights and related goodwill. The Company regards its
trademarks and related rights as having substantial value and as being an
important factor in the marketing of its Il Fornaio restaurants and brand items.

GOVERNMENTAL REGULATION

     The Company's restaurants are subject to regulation by federal agencies and
to licensing and regulation by state and local health, sanitation, building,
zoning, safety, fire and other departments relating to the development and
operation of restaurants and retail establishments. These regulations include
matters relating to environmental, building construction, zoning requirements
and the preparation and sale of food and alcoholic beverages. The Company's
facilities are licensed and subject to regulation under state and local fire,
health and safety codes, and the operation of its trucks is subject to
Department of Transportation regulations. Delays or failures in obtaining or
maintaining the required construction and operating licenses, permits and
approvals could delay or prevent the opening of new restaurants or could
materially and adversely affect the operation of existing restaurants.

     The development and construction of additional restaurants and bakeries
will be subject to compliance with applicable zoning, land use, environmental
and licensing regulations. There can be no assurance that the Company will be
able to obtain necessary licenses or other approvals on a cost-effective and
timely basis in order to construct and develop restaurants and bakeries in the
future. Various federal and state labor laws govern the Company's operations and
its relationship with its employees, including minimum wage, overtime, working
conditions, fringe benefit and citizenship requirements.

     During 1998, approximately 25% of restaurant revenues was attributable to
the sale of alcoholic beverages, primarily wine. The Company is required to
comply with the alcohol licensing requirements of the federal government, states
and municipalities where its restaurants are located. For each new location,
alcoholic beverage control regulations require applications to state authorities
and, in certain locations, county and municipal authorities for a license and
permit to sell alcoholic beverages. Typically, licenses must be renewed annually
and may be revoked or suspended for cause at any time. Alcoholic beverage
control regulations relate to numerous aspects of the daily operations of the
restaurants, including minimum age of guests and employees, hours of operation,
advertising, wholesale purchasing, inventory control and handling, storage and
dispensing of alcoholic beverages. Failure to comply with federal, state or
local regulations could cause the Company's licenses to be revoked or force it
to terminate the sale of alcoholic beverages at one or more of its restaurants.

     The Company is subject to state "dram-shop" laws and regulations, which
generally provide that a person injured by an intoxicated person may seek to
recover damages from an establishment that wrongfully served alcoholic beverages
to such person. While the Company carries liquor liability coverage as part of
its existing comprehensive general liability insurance, there can be no
assurance that it will not be subject to a judgment in excess of such insurance
coverage or that it will be able to obtain or continue to maintain such
insurance coverage at reasonable costs, or at all.

     The federal Americans With Disabilities Act prohibits discrimination on the
basis of disability in public accommodations and employment. The Company is
required to comply with the Act and regulations relating to accommodating the
needs of the disabled in connection with the construction of new facilities and
with significant renovations of existing facilities.

EXECUTIVE OFFICERS OF THE REGISTRANT

     Laurence B. Mindel, age 61, joined the Company as Chairman of the Board,
President and Chief Executive Officer in January 1987. Mr. Mindel currently
serves as Chairman of the Board, having resigned as President in 1995 and as
Chief Executive Officer in 1998. From 1964 to 1970, Mr. Mindel was President and
Chief Executive Officer of Caswell Coffee Company in San Francisco. In 1970, Mr.
Mindel co-founded Spectrum Foods, where he served as Chairman of the Board,
President and Chief Executive Officer. Under Mr. Mindel's direction, Spectrum
created 14 restaurants in Northern and Southern California, including Chianti,
MacArthur Park, Harry's Bar and American Grill, Prego and Guaymas. In 1984, Saga
Corporation acquired Spectrum Foods, and from that time 



                                       13
<PAGE>   14

until he joined the Company, Mr. Mindel served as President of the Saga
Restaurant Group, which included Stuart Anderson's Black Angus, Velvet Turtle,
Spoons, Hotel Food Services and the newly acquired Spectrum Foods restaurants.
In 1985, Mr. Mindel became the first person of non-Italian descent and the first
American to be awarded the Caterina di Medici medal. Awarded by the Italian
government, the medal recognizes persons who have excelled in preserving the
Italian heritage outside of Italy. In 1998, Mr. Mindel became one of a select
group of restaurant industry leaders to receive the International Foodservice
Manufacturers Association's Foodservice Operator of the Year and Gold Plate
Award.

     Michael J. Hislop, age 44, joined the Company as President and Chief
Operating Officer in July 1995 and was promoted to Chief Executive Officer and
President in 1998. From April 1991 to May 1995, Mr. Hislop served as Chairman
and Chief Executive Officer of Chevy's Mexican Restaurants which, under his
direction, grew from 17 locations to 63 locations nationwide. From 1982 to 1991,
Mr. Hislop was employed by El Torito Mexican Restaurants, Inc., serving first as
Regional Operator, then as Executive Vice President of Operations and for the
last three years as Chief Operating Officer. From 1979 to 1982, Mr. Hislop was
employed by T.G.I. Fridays Restaurants, Inc. as a Regional Manager.

     Paul J. Kelley, age 43, joined the Company as Vice President, Finance,
Chief Financial Officer and Secretary in April 1991. From 1988 to 1991, he
served as Vice President of Finance of Bon Appetit Management, a contract food
service operator. From 1977 to 1988, he served a variety of positions for Saga
Corporation, most recently as Vice President and Controller of Velvet Turtle and
Spoons.

     Michael J. Beatrice, age 45, joined the Company as Vice President,
Operations, in April 1996 and was promoted to Chief Operating Officer in 1998.
From 1994 to 1996, Mr. Beatrice was Vice President, Operations, for an area
developer of Boston Chicken, a restaurant company. From 1991 to 1994, he owned
and operated an upscale, full-service Italian restaurant north of Boston. From
1983 to 1991, he served a variety of positions with El Torito Mexican
Restaurant, Inc., most recently as Regional Vice President.

ITEM 2. PROPERTIES

     All of the Company's operations are located in leased facilities. Current
restaurant and bakery leases have expiration dates ranging from 2000 to 2017,
with the majority of the leases providing for five-year options to renew for at
least one additional term. All of the Company's leases provide for a minimum
annual rent, and most leases require additional percentage rent based on sales
volume in excess of minimum levels at the particular location. Some of the
leases require the Company to pay the costs of insurance, taxes and a portion of
the lessor's operating costs. See Note 10 to Financial Statements for
information regarding aggregate minimum and percentage rentals paid by the
Company for recent periods and information regarding the Company's obligation to
pay minimum rentals in future periods. The Company's lease for its Las Vegas
restaurant contains certain termination and relocation provisions. See "Item 1.
Business -- Risk Factors -- Long-Term, Non-Cancelable Leases; Termination
Provisions."

     The Company does not anticipate any difficulties renewing existing leases
as they expire. However, there can be no assurance that the Company will be able
to renew any leases on favorable terms, if at all. Inability of the Company to
renew a particular lease or closure of a facility subject to a long-term,
non-cancelable lease could have a material adverse effect on the Company's
business, financial condition and results of operations.

     The Company's executive offices are located in approximately 8,110 square
feet of leased space in Corte Madera, California.

ITEM 3. LEGAL PROCEEDINGS

     The Company is a party to various legal proceedings arising in the ordinary
course of its business, but is not currently a party to any legal proceeding
which the Company believes will have a material adverse effect on the Company's
business, financial condition or results of operations.

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

     None.



                                       14
<PAGE>   15

                                     PART II

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

     (a)  The Company's Common Stock (Nasdaq symbol "ILFO") is traded on the
          Nasdaq National Market. The following table presents quarterly
          information on the price range of the Company's Common Stock,
          indicating the high and low sale prices reported by the Nasdaq
          National Market. These prices do not include retail markups, markdowns
          or commissions.

<TABLE>
<CAPTION>              
          FISCAL QUARTER ENDED:                           HIGH        LOW
          --------------------                           ------     ------
<S>                                                      <C>        <C>   
          September 28, 1997.........................    $15.63     $13.88
            (commencing September 19, 1997)
          December 28, 1997..........................    $17.00     $12.75
          March 29, 1998.............................    $15.88     $12.13
          June 28, 1998..............................    $14.94     $11.00
          September 27, 1998.........................    $13.75     $ 4.50
          December 27, 1998..........................    $ 8.25     $ 5.13
</TABLE>


     At March 2, 1999, there were 519 holders of record of the Company's Common
Stock. The Company has never paid any cash dividends on its Common Stock. The
Board of Directors intends to retain earnings to support operations and to
finance expansion and does not intend to pay cash dividends on the Common Stock
for the foreseeable future.

RECENT SALES OF UNREGISTERED SECURITIES

     Since December 28, 1997, the Registrant has sold and issued the following
unregistered securities:

     1.   During the period, the Company granted incentive stock options to key
          employees, officers and directors under its 1997 Equity Incentive Plan
          (the "Plan") covering an aggregate of 211,872 shares (net of
          cancellations) of the Company's Common Stock, at an average exercise
          price ranging from $11.00 to $13.50. During the period, the Company
          granted non-qualified stock options to officers under the Plan
          covering an aggregate of 43,366 shares (net of cancellations) of the
          Company's Common Stock, at an average exercise price ranging from
          $13.25 to $14.58. These options vest over a period of time following
          their respective dates of grant. The Company claimed exemption from
          registration under the Securities Act for option grants described
          above in that the Company believes such grants were not "sales" within
          the meaning of the Securities Act.


USE OF PROCEEDS

     (b)  The Company's Registration Statement on Form S-1 covering the sale of
          1,725,000 shares of Common Stock (No. 333-23605) (the "Registration
          Statement") was declared effective by the Commission on September 18,
          1997. The net proceeds to the Company of the offering (including the
          net proceeds from the sale of shares issued upon exercise of the
          underwriters' overallotment option on October 1, 1997) were $11.3
          million. From the effective date of the offering to December 27, 1998,
          the Company has used approximately $4.5 million to fund construction
          of new restaurants. None of such expenses were paid to affiliates,
          directors or officers of the Company, associates or officers or
          directors or persons or entities owning 10% or more of any class of
          equity securities of the Company. The remainder of the net proceeds
          were invested in short-term, investment-grade, interest-bearing
          securities.



                                       15
<PAGE>   16

ITEM 6. SELECTED FINANCIAL DATA

     The following selected financial data have been derived from the financial
statements of the Company. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's financial statements and notes
thereto.

<TABLE>
<CAPTION>
                                                                           FISCAL YEAR
                                                    1994         1995          1996         1997         1998
                                                  -------      -------       -------       -------      -------
                                                            (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                               <C>          <C>           <C>           <C>          <C>    
INCOME STATEMENT DATA:

Revenues:
  Restaurants                                     $39,485      $43,647       $50,599       $65,525      $75,523
  Wholesale bakeries                                4,951        5,181         6,016         6,284        7,615
  Retail bakeries                                   5,208        5,312         4,137           311           --
                                                  -------      -------       -------       -------      -------
     Total revenues                                49,644       54,140        60,752        72,120       83,138
                                                  -------      -------       -------       -------      -------
Costs and expenses:
  Costs of sales                                   11,300       12,772        14,792        16,993       19,594
  Operating expenses                               29,290       31,036        35,152        41,800       47,589
  Depreciation and amortization (1)                 2,948        3,173         3,434         3,517        4,258
  Preopening expenses (1)                             214          131           426           432          534
  General and administrative expenses               3,592        4,083         4,724         6,012        6,299
  Provision for store closures                         --          932            --          (470)          --
                                                  -------      -------       -------       -------      -------
    Total costs and expenses                       47,344       52,127        58,528        68,284       78,274
                                                  -------      -------       -------       -------      -------
Income from operations                              2,300        2,013         2,224         3,836        4,864
Interest (income) expense, net                         53          (59)         (127)         (398)        (811)
                                                  -------      -------       -------       -------      -------
Income before income taxes and change
    in accounting principle                         2,247        2,072         2,351         4,234        5,675
Provision (benefit) for income taxes                  332       (2,432)          898         1,651        2,224
                                                  -------      -------       -------       -------      -------
Income before change in accounting
    principle                                       1,915        4,504         1,453         2,583        3,451
Cumulative effect of change in accounting
    principle (net of taxes) (1)                       --           --            --            --          326
                                                  -------      -------       -------       -------      -------
Net income                                        $ 1,915      $ 4,504       $ 1,453       $ 2,583      $ 3,125
                                                  =======      =======       =======       =======      =======
Basic earnings per share before change in
    accounting principle                          $  0.43      $  1.01       $  0.32       $  0.53      $  0.59
Cumulative effect of change in accounting
    principle                                          --           --            --            --         0.06
                                                  -------      -------       -------       -------      -------
Basic earnings per share                          $  0.43      $  1.01       $  0.32       $  0.53      $  0.53
                                                  =======      =======       =======       =======      =======
Basic weighted average shares outstanding           4,437        4,452         4,485         4,908        5,846

Diluted earnings per share before change
    in accounting principle                      $   0.43      $  1.00       $  0.32       $  0.48      $  0.55
Cumulative effect of change in accounting 
    principle                                          --           --            --            --         0.05
                                                  -------      -------       -------       -------      -------
Diluted earnings per share                       $   0.43      $  1.00       $  0.32       $  0.48      $  0.50
                                                  =======      =======       =======       =======      =======
Diluted weighted average shares outstanding         4,477        4,499         4,570         5,433        6,298

BALANCE SHEET DATA (AT YEAR END):

Working capital (deficit)                        $   (496)     $   807       $   158       $11,094      $ 6,748
Total assets                                       30,164       34,194        34,855        52,091       57,354
Long-term debt (excluding current portion)            750          150            --            --           --
Stockholders' equity                               16,678       21,283        22,936        37,126       39,509
</TABLE>
----------
(1) Reflects adoption of SOP 98-5, "Reporting on the Costs of Start-up
Activities," in 1998. See Note 2 to Financial Statements.



                                       16
<PAGE>   17

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

OVERVIEW

     The Company's revenues consist of restaurant sales and wholesale bakery
sales and, prior to February 1997, free-standing retail bakery sales. Comparable
restaurant sales are calculated to include a new restaurant only after its first
full month following the eighteenth month of its operation. Comparable
restaurant revenues may fluctuate significantly as a result of a variety of
factors. See "Factors Affecting Operating Results" below.

     Cost of sales is composed primarily of the cost of food and beverages.
Operating expenses include payroll and fringe benefit costs, occupancy costs,
marketing costs and other store-level costs. The majority of these costs are
variable and are expected to increase with sales volume. Occupancy costs include
both a fixed and percentage portion of rent.

     Preopening costs consist of direct costs related to hiring and training the
initial workforce and certain other direct costs related to opening new
restaurants. Prior to 1998, the Company capitalized preopening expenses for each
of its new units and amortized the costs over the 12-month period following the
opening of the unit. On April 3, 1998, the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants approved
Statement of Position 98-5 (SOP) entitled "Reporting on the Costs of Start-Up
Activities." SOP 98-5 requires entities to expense as incurred all start-up and
preopening costs that may not otherwise be capitalized as long-lived assets, and
is effective for fiscal years beginning after December 15, 1998. The Company
elected early adoption of SOP 98-5 in the fourth quarter of 1998. The Company's
adoption of SOP 98-5 resulted in a one-time, after-tax charge for fiscal 1998 in
the form of a cumulative effect of a change in accounting principle of $326,000
for the unamortized balance of preopening costs as of December 28, 1997.
Preopening costs in 1998 were expensed as incurred. The new expense-as-incurred
standard may lead to increased variability in the amount of preopening costs
recognized, depending on the number and timing of restaurant openings. As a
result, the Company's operating results may fluctuate to a greater extent than
under the previously applied principle.

     General and administrative expenses are composed of expenses associated
with all corporate and administrative functions that support existing operations
and provide an infrastructure to support future growth, including management and
staff salaries, employee benefits, travel, information systems and training and
market research. Certain expenses of recruiting and training unit management
personnel are also included as general and administrative expenses.



                                       17
<PAGE>   18

RESULTS OF OPERATIONS FOR FISCAL YEARS 1996, 1997 AND 1998

     The following table sets forth operating results as a percentage of total
revenues for the periods indicated.

<TABLE>
<CAPTION>
                                               PERCENTAGE OF TOTAL REVENUES            PERCENTAGE INCREASE
                                                       FISCAL YEAR                         (DECREASE)
                                             ------------------------------      -------------     -------------
                                             1996         1997         1998      1997 VS. 1996     1998 VS. 1997
                                             -----        -----        ----      -------------     -------------
<S>                                           <C>         <C>         <C>          <C>               <C>
INCOME STATEMENT DATA:

Revenues:
  Restaurants                                 83.3%       90.9%       90.8%           29.5%             15.3%
  Wholesale bakeries                           9.9%        8.7%        9.2%            4.5%             21.2%
  Retail bakeries                              6.8%        0.4%        0.0%          -92.5%           -100.0%
                                             -----       -----       -----
     Total revenues                          100.0%      100.0%      100.0%           18.7%             15.3%
                                             -----       -----       -----
Costs and expenses:
  Costs of sales                              24.3%       23.6%       23.6%           14.9%             15.3%
  Operating expenses                          57.9%       58.0%       57.2%           18.9%             13.8%
  Depreciation and amortization (1)            5.6%        4.9%        5.1%            2.4%             21.1%
  Preopening expenses (1)                      0.7%        0.6%        0.6%            1.4%             23.6%
  General and administrative expenses          7.8%        8.3%        7.6%           27.3%              4.8%
  Provision for store closures                 0.0%       -0.7%        0.0%          100.0%           -100.0%
                                             -----       -----       -----
    Total costs and expenses                  96.3%       94.7%       94.1%           16.7%             14.6%
                                             -----       -----       -----
Income from operations                         3.7%        5.3%        5.9%           72.5%             26.8%
Interest (income) expense, net                -0.2%       -0.6%       -1.0%          213.4%            103.8%
                                             -----       -----       -----
Income before income taxes and change
  in accounting principle                      3.9%        5.9%        6.9%           80.1%             34.0%
Provision for income taxes                     1.5%        2.3%        2.7%           83.9%             34.7%
                                             -----       -----       -----
Income before change in accounting
  principle                                    2.4%        3.6%        4.2%           77.8%             33.6%
Cumulative effect of change in 
  accounting principle (net of tax) (1)        0.0%        0.0%        0.4%            0.0%            100.0%
                                             -----       -----       -----
Net income                                     2.4%        3.6%        3.8%           77.8%             21.0%
                                             =====       =====       =====
</TABLE>
---------- 
(1)  Reflects adoption of SOP 98-5, "Reporting on the Costs of Start-up
     Activities," in 1998. See Note 2 to Financial Statements.

FISCAL 1998 COMPARED TO FISCAL 1997

REVENUES

     Total revenues increased by $11.0 million, or 15.3%, to $83.1 million in
1998 from $72.1 million in 1997. The increase was primarily attributable to (i)
the opening of four new restaurants, two of which opened in late 1997 and
another two in late 1998, and (ii) a 3.2% increase in comparable restaurant
sales and a 21.2% increase in comparable wholesale bakery sales. Comparable
restaurant sales are calculated to include a new restaurant only after the first
full month following the eighteenth month of its operation. The increase in
restaurant revenues also reflects the benefit of a moderate menu price increase
implemented in 1998. These factors more than offset the $311,000 decrease in
revenues in 1998 attributable to the disposition of the four remaining
free-standing retail bakeries in February 1997.

COST OF SALES

     Cost of sales as a percentage of revenues was 23.6% for both 1998 and 1997,
as the increase in dairy prices in 1998 was offset by improved purchasing
capabilities along with the menu price increase in 1998.

OPERATING EXPENSES

     Operating expenses include all restaurant and bakery operating and
occupancy costs, the major components of which are labor, rent, operating
supplies, repairs and maintenance, marketing and utilities. Operating expenses
as a percentage of revenues decreased to 57.2% in 1998 from 58.0% in 1997. This
decrease was the result of a decrease in total occupancy costs as a percentage
of revenues, 



                                       18
<PAGE>   19

partially offset by higher labor costs due to minimum wage
increases and the resulting upward pressure on the wage scale for other unit
staff positions. Operating expenses in 1997 also reflected expenses related to
the remodel of one restaurant in the second quarter of 1997.

DEPRECIATION AND AMORTIZATION

     Depreciation and amortization expenses as a percentage of revenues
increased slightly to 5.1% in 1998 from 4.9% in 1997, primarily reflecting
increased depreciation related to new unit construction costs, partially offset
by a declining depreciable asset base for older units.

PREOPENING EXPENSES

     Prior to 1998, preopening expenses for each of its new units were
capitalized and amortized over the 12-month period following the opening of the
unit. With the adoption of SOP 98-5, preopening costs in 1998 were expensed as
incurred. This change is discussed in more detail in the "Overview" above.
Preopening costs in both 1997 and 1998 related to the opening of two new
restaurants. Preopening expenses as a percentage of revenues were 0.6% for both
1998 and 1997, as the increase in preopening costs in 1998 was offset by
increased revenues.

GENERAL AND ADMINISTRATIVE EXPENSES

     General and administrative expenses as a percentage of revenues decreased
to 7.6% in 1998 from 8.3% in 1997, primarily due to lower management bonuses in
1998.

PROVISION FOR STORE CLOSURES

     As a result of the disposition of the Costa Mesa restaurant in June 1997,
the Company recorded a $470,000 pre-tax reversal in 1997 of the provision for
store closures originally recorded in 1993.

INTEREST (INCOME) EXPENSE

    Interest income increased to $844,000 in 1998 from $400,000 in 1997,
reflecting interest on higher average cash balances as a result of both cash
generated from operations and the proceeds of the Company's initial public
offering in September 1997. For 1998, interest income included interest on the
proceeds from the initial public offering for a full year, while interest income
for 1997 included interest on the proceeds from the initial public offering for
only part of the year.

INCOME TAX PROVISION

     The Company's effective tax rate increased slightly for fiscal 1998 to
39.2% from 39.0% for fiscal 1997, reflecting the planned use of various
deductible tax assets and other tax credits.

FISCAL 1997 COMPARED TO FISCAL 1996

REVENUES

     Total revenues increased by $11.4 million, or 18.7%, to $72.1 million in
1997 from $60.8 million in 1996. The increase primarily reflected sales of $11.5
million attributable to (i) the opening of four new restaurants, one of which
opened in April 1996, one in January 1997 and another two in late 1997, and (ii)
a 7.1% increase in comparable restaurant sales and a 4.8% increase in comparable
wholesale bakery sales. Comparable restaurant sales are calculated to include a
new restaurant only after the first full month following the eighteenth month of
its operation. These factors more than offset the $3.8 million decrease in
revenues attributable to the disposition of four retail bakeries in 1996 and the
remaining four in February 1997. The impact of menu price increases in the
restaurant sales in 1997 was approximately 3.5%.

COST OF SALES

     Cost of sales as a percentage of revenues decreased to 23.6% in 1997 from
24.3% in 1996, primarily as a result of a menu price increase in December 1996
as well as improved purchasing capabilities and stable food and beverage prices
during the 1997 period.



                                       19
<PAGE>   20

OPERATING EXPENSES

     Operating expenses include all restaurant and bakery operating and
occupancy costs, the major components of which are labor, rent, operating
supplies, repairs and maintenance, marketing and utilities. Operating expenses
as a percentage of revenues increased slightly to 58.0% in 1997 from 57.9% in
1996. The slight increase is attributuble to two increases in minimum wage
affecting 1997 results offset by declines in several other areas.

DEPRECIATION AND AMORTIZATION

     Depreciation and amortization expenses as a percentage of revenues
decreased to 4.9% in 1997 from 5.6% in 1996, primarily reflecting increased
revenues and a declining depreciable asset base for older units which offset
increases related to new unit construction costs.

PREOPENING EXPENSES

     Prior to 1998, preopening expenses for each new unit were capitalized and
amortized over the 12-month period following the opening of the unit. Preopening
expenses as a percentage of revenues decreased slightly to 0.6% in 1997 from
0.7% in 1996, primarily reflecting increased revenues.

GENERAL AND ADMINISTRATIVE EXPENSES

     General and administrative expenses as a percentage of revenues increased
to 8.3% in 1997 from 7.8% in 1996. This increase was largely due to expansion of
the management infrastructure, the accrual of higher performance-based
management bonuses as a result of an improvement in pre-tax income in 1997 and,
to a lesser extent, higher market research costs.

PROVISION FOR STORE CLOSURES

     As a result of the disposition of the Costa Mesa restaurant in June 1997,
the Company recorded a $470,000 pre-tax reversal in 1997 of the provision for
store closures originally recorded in 1993.

INTEREST (INCOME) EXPENSE

     Interest income increased to $400,000 in 1997 from $167,000 in 1996 as a
result of the Company's investments in cash generated from operations and from
higher average funds available for investment as the result of the proceeds of
the Company's initial public offering in September 1997.

INCOME TAX PROVISION

     The Company's effective tax rate increased slightly for fiscal 1997 to
39.0% from 38.2% for fiscal 1996, reflecting the planned use of various
deductible tax assets and other tax credits, including a lower amount of the
remaining federal net operating loss carryforward credits.

LIQUIDITY AND CAPITAL RESOURCES

     At December 27, 1998, the Company had $12.3 million in cash and cash
equivalents, including approximately $6.8 million in net proceeds from the
Company's initial public offering.

    For the periods presented, the Company has funded its capital expansion
primarily with cash flow generated from new and existing restaurant operations.
The cash flow from operations increased to $8.9 million for fiscal 1998 from
$8.2 million in fiscal 1997. At December 27, 1998, the Company's working capital
totaled $6.7 million compared to $11.1 million at December 28, 1997.

     Net cash used in financing activities was $742,000 for 1998 as compared to
cash provided of $11.5 million in 1997. In October 1998, the Board of Directors
authorized the repurchase of up to 500,000 shares of the Company's common stock.
Repurchases may be made in the open market at prevailing prices or in negotiated
off-market transactions. Through December 27, 1998, the Company had repurchased
approximately 362,400 shares of common stock in the open market for an aggregate
of approximately $2.0 million. In addition, the Company received $959,000 in
cash from the issuance of common stock under the Company's employee stock
purchase plan and $333,000 from the issuance of common stock upon exercise of
stock options. The cash provided in 1997 related primarily to 



                                       20
<PAGE>   21

the receipt of $11.3 million in net proceeds from the initial public offering. A
term loan held by a commercial bank was repaid in full in March 1997.

     The Company has a credit agreement, which provides for a $5.0 million
revolving line of credit and which expires on March 31, 2000. At December 27,
1998, there were no amounts outstanding under the credit line.

     Capital expenditures, net of construction allowances received, were $11.3
million for 1998 as compared to $7.6 million for 1997. In 1998, the Company
opened two new restaurants, located in Seattle and Walnut Creek, enhanced an
existing restaurant and began construction on two of the restaurants to open in
1999. The Company intends to open a total of four restaurants in 1999. The
Company also anticipates incurring additional expenditures to enhance certain of
its existing restaurants. Total capital expenditures in 1999, net of
construction allowances, are expected to be approximately $12.0 million. The
Company expects that its planned future restaurants will require, on average, a
total investment by the Company per restaurant, net of anticipated landlord
contributions, of approximately $2.0 million, with additional average
pre-opening costs per restaurant of approximately $250,000. The Company intends
to finance these capital expenditures through a combination of cash provided by
operations, cash and cash equivalents on hand, and landlord construction
contributions (when available).

     The Company's future capital requirements and the adequacy of its available
funds will depend on many factors, including the pace of expansion, the size of
restaurants developed and the nature of the arrangements negotiated with
landlords. Although no assurance can be given, the Company believes that
anticipated cash flow from operations, existing cash balances and borrowings
under the credit agreement will be sufficient to fund its capital requirements,
including planned expansion and ongoing maintenance and renovation of existing
restaurants, at least through 1999. In the event that additional capital is
required, the Company may seek to raise that capital through public or private
equity or debt financings. There can be no assurance that such capital will be
available on favorable terms, if at all.

YEAR 2000 COMPLIANCE

     The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. The Company's
computer equipment and software and devices with embedded technology that are
time-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities.

     The Company's Year 2000 preparations began in fiscal 1997. The preparations
include identification and assessment of all software, hardware, equipment and
non-information technology (IT) systems that could be affected by the Year 2000
issue and remedial action, where necessary, followed by further testing.
Analysis to identify internal Year 2000 deficiencies has been completed.

     Based upon its identification and assessment efforts to date, the Company
has identified one main software system, its bakery group software system, that
will require replacement. This system had already been identified as a system
that was to be replaced in the ordinary course of business. The Company expects
to replace the current bakery group software with a system that is Year 2000
compliant. To date, the Company has identified and assessed the replacement
software and plans to have the new software tested and in operation by mid-1999.
The Company currently estimates that the costs of that software will be
approximately $75,000. Furthermore, based on its assessment to date, the Company
believes that future costs associated with its Year 2000 compliance effort will
not be material. However, because both IT and non-IT systems may contain
embedded technology, this may complicate the Company's Year 2000 identification,
assessment, remediation and testing efforts. The Company intends to fund Year
2000 compliance costs through cash provided by operations.

     The Company also intends to contact critical suppliers of products and
services to determine the extent to which the Company may be vulnerable to such
suppliers' failures to resolve their own Year 2000 compliance issues. The
Company has obtained verbal assurances and is in the process of obtaining
written verification of Year 2000 compliance from the third parties that have
provided licensed software for such systems as accounting and point-of-sale and
payroll services.



                                       21
<PAGE>   22

     As part of its Year 2000 readiness efforts, the Company intends to develop
contingency plans to identify activities which will need to be performed in the
event of system failures. The contingency plans are expected to be completed by
July 31, 1999. Based on its assessment to date, the Company presently believes
that the Year 2000 issue will not pose significant operational problems for the
Company. However, the failure to correct a material Year 2000 problem could
result in an interruption in, or failure of, certain normal business operations.
If Year 2000 issues are not properly identified, or if assessment, remediation
and testing are not effected timely with respect to Year 2000 problems that are
identified, the Year 2000 problem could materially adversely impact the
Company's results of operations and adversely affect the Company's relationships
with customers, vendors or others. Additionally, there can be no assurance that
the Year 2000 problems of other entities will not have a material adverse effect
on the Company's systems or results of operations.

FACTORS AFFECTING OPERATING RESULTS AND QUARTERLY RESULTS

     This Management's Discussion and Analysis contains forward-looking
statements that involve risks and uncertainties. Such forward-looking statements
may be deemed to include the timing of and plans for anticipated restaurant
openings, the projected investment and costs required for future restaurants,
the adequacy of anticipated sources of cash to fund the Company's future capital
requirements through 1999, and the costs of the Company's Year 2000 compliance
efforts and dates by which the Company believes it will complete such efforts.
Words such as "believes," "anticipates," "expects," "intends" and similar
expressions are intended to identify forward-looking statements, but are not the
exclusive means of identifying such statements. Readers are cautioned that the
forward-looking statements reflect management's analysis only as of the date
hereof, and the Company assumes no obligation to update these statements. Actual
events or results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to the risks and uncertainties discussed herein, as well as
other risks set forth under the caption "Risk Factors" in the Company's Annual
Report on Form 10-K for the fiscal year ended December 27, 1998.

     The Company's business is subject to a number of challenges and risks
including, among other things, the risks associated with the Company's pursuit
of a more aggressive growth strategy, risks related to the Company's relatively
small operations base and the geographic concentration of the Company's
restaurants, uncertainties associated with possible changes in food and labor
costs, potentially adverse weather conditions, and the impact of potential
governmental regulation, risks related to the Company's dependence on its key
personnel, uncertainties related to the intensely competitive nature of the
restaurant business, as well as potential liabilities associated with long-term
leases. The Company's plans for new restaurant locations and timing of openings
depend upon, among other things, timely project development and restaurant
construction, obtaining appropriate regulatory approvals, management of costs
and recruitment of qualified operating personnel.

     The Company's quarterly operating results may fluctuate significantly as a
result of a variety of factors, including general economic conditions, consumer
confidence in the economy, changes in consumer preferences, competitive factors,
weather conditions, the timing of new restaurant openings and related expenses,
net sales contributed by new restaurants, the Company's ability to execute its
business strategy, fluctuations in inventory and general and administrative
expenses, and increases or decreases in comparable restaurant revenues. Due to
the foregoing factors, results for any one quarter are not necessarily
indicative of results to be expected for any other quarter or for any year and,
from time to time in the future, the Company's results of operations may be
below the expectations of public market analysts and investors. Comparable
restaurant sales may also vary from period to period as a result of similar
factors.

INFLATION

     The primary inflationary factors affecting the Company's operations are
food and labor costs. During 1998, there was significant volatility in the cost
of certain bakery-related commodities, principally butter and manufacturing
cream. Many of the Company's restaurant personnel are paid at rates based on the
applicable minimum wage, and increases in the minimum wage directly affect the
Company's labor costs. In addition, increases in the minimum wage have resulted
in indirect pressure on other wage levels. To date, inflation (except for the
impact of minimum wage increases) has not had a material impact on the Company's
operations. The minimum wage increased under federal legislation to $5.15 an
hour in September 1997 and increased in California to $5.75 an hour in March
1998. In January 1999, the minimum wage increased to $6.50 an hour in Oregon and
to $5.70 an hour in Washington. Additional increases to the minimum wage have
been proposed.



                                       22
<PAGE>   23

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

     In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants approved Statement of Position 98-5
(SOP 98-5) entitled "Reporting on the Costs of Start-Up Activities." The SOP
requires entities to expense as incurred all start-up and preopening costs that
may not otherwise be capitalized as long-lived assets. The SOP is effective for
fiscal years beginning after December 15, 1998. The Company elected early
adoption of SOP 98-5 in the fourth quarter of 1998. The Company's adoption of
SOP 98-5 resulted in a one-time, after-tax charge for fiscal 1998 in the form of
a cumulative effect of a change in accounting principle of $326,000 for the
unamortized balance of preopening costs as of December 28, 1997. Preopening
costs in 1998 were expensed as incurred. The new expense-as-incurred standard
may lead to increased variability in the amount of preopening costs recognized,
depending on the number and timing of restaurant openings. As a result, the
Company's operating results may fluctuate to a greater extent than under the
previously applied principle.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company's cash and cash equivalents are subject to interest rate risk.
The Company invests primarily on a short-term basis. The financial instrument
holdings at year-end were analyzed to determine their sensitivity to interest
rate changes. The fair values of these instruments were determined by net
present values. In our sensitivity analysis, the same change in interest rate
was used for all maturities. All other factors were held constant. If interest
rates increased by 10%, the expected effect on net income related to the
Company's financial instruments would be immaterial.



                                       23
<PAGE>   24

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                        IL FORNAIO (AMERICA) CORPORATION
                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                      Page
<S>                                                                                                   <C>
Independent Auditors' Report........................................................................   25

Balance Sheets as of December 28, 1997 and December 27, 1998........................................   26

Statements of Income for the years ended December 29, 1996, December 28, 1997,
and December 27, 1998...............................................................................   27

Statements of Changes in Stockholders' Equity for the years ended December 29, 1996,
December 28, 1997, and December 27, 1998............................................................   28

Statements of Cash Flows for the years ended December 29, 1996, December 28, 1997,
and December 27, 1998...............................................................................   29

Notes to Financial Statements.......................................................................   30
</TABLE>



                                       24
<PAGE>   25

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Il Fornaio (America) Corporation:

     We have audited the accompanying balance sheets of Il Fornaio (America)
Corporation (the "Company") as of December 27, 1998 and December 28, 1997, and
the related statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 27, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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 that our audits provide a reasonable basis for our opinion.

     In our opinion, such financial statements present fairly, in all material
respects, the financial position of Il Fornaio (America) Corporation at December
27, 1998 and December 28, 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 27, 1998 in
conformity with generally accepted accounting principles.

     /s/ DELOITTE & TOUCHE LLP
-------------------------------------
         DELOITTE & TOUCHE LLP

San Francisco, California
February 5, 1999



                                       25
<PAGE>   26

                        IL FORNAIO (AMERICA) CORPORATION

                                 BALANCE SHEETS
                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                                         DECEMBER 28,     DECEMBER 27,
                                                             1997             1998
                                                         ------------     ------------
<S>                                                      <C>              <C>
                         ASSETS
Current assets:
  Cash and cash equivalents............................     $15,271         $12,296
  Restricted cash......................................         518             378
  Accounts receivable, net.............................       1,291           1,495
  Note receivable......................................         121              19
  Inventories..........................................       1,720           1,871
  Prepaid expenses and other assets....................       1,420             920
  Deferred tax assets, net.............................         125             245
                                                            -------         -------
          Total current assets.........................      20,466          17,224
                                                            -------         -------
Property and equipment, net............................      29,255          38,620
Deferred tax assets, net...............................       1,879           1,023
Other assets...........................................         491             487
                                                            -------         -------
          Total assets.................................     $52,091         $57,354
                                                            =======         =======

         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable.....................................     $ 3,085         $ 3,910
  Accrued expenses.....................................       6,287           6,566
                                                            -------         -------
          Total current liabilities....................       9,372          10,476
                                                            -------         -------

Reserve for store closures.............................         374             244
Deferred lease incentives..............................       5,219           7,125
Commitments (Note 10)
Stockholders' equity:
  Preferred stock, $.001 par value; 5,000,000 shares
     authorized; no shares issued......................          --              --
  Common stock, $.001 par value; 20,000,000 shares
     authorized; 5,818,513 shares issued and 
     outstanding at December 28, 1997, and 6,020,961
     shares issued and 5,658,561 shares outstanding at
     December 27, 1998.................................           6               6
  Additional paid-in-capital...........................      36,466          37,758
  Retained earnings....................................         654           3,779
                                                            -------         -------
                                                             37,126          41,543
  Treasury stock, 362,400 shares, at cost..............          --          (2,034)
                                                            -------         -------
     Total stockholders' equity........................      37,126          39,509
                                                            -------         -------
          Total liabilities and stockholders' equity...     $52,091         $57,354
                                                            =======         =======
</TABLE>


    The accompanying notes are an integral part of these financial statements



                                       26
<PAGE>   27

                        IL FORNAIO (AMERICA) CORPORATION

                              STATEMENTS OF INCOME
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                         YEAR ENDED
                                        -------------------------------------------
                                        DECEMBER 29,    DECEMBER 28,   DECEMBER 27,
                                            1996            1997           1998
                                        ------------    ------------   ------------
<S>                                     <C>             <C>            <C>    
Revenues:
  Restaurants...........................   $50,599        $65,525        $75,523
  Wholesale bakeries....................     6,016          6,284          7,615
  Retail bakeries.......................     4,137            311             --
                                           -------        -------        -------
          Total revenues................    60,752         72,120         83,138
                                           -------        -------        -------
Costs and expenses:
  Cost of sales.........................    14,792         16,993         19,594
  Operating expenses....................    35,152         41,800         47,589
  Depreciation and amortization.........     3,434          3,517          4,258
  Preopening expenses...................       426            432            534
  General and administrative expenses...     4,724          6,012          6,299
  Provision for store closures..........        --           (470)            --
                                           -------        -------        -------
          Total costs and expenses......    58,528         68,284         78,274
                                           -------        -------        -------
Income from operations..................     2,224          3,836          4,864
Other (income) expenses:
  Interest income.......................      (167)          (400)          (844)
  Interest expense......................        40              2             33
                                           -------        -------        -------
    Total other (income) expenses, net..      (127)          (398)          (811)
                                           -------        -------        -------
Income before income taxes and change
  in accounting principle...............     2,351          4,234          5,675
Provision for income taxes..............       898          1,651          2,224
                                           -------        -------        -------
Income before change in accounting
  principle.............................     1,453          2,583          3,451
Cumulative effect of change in
  accounting principle (net of taxes)...        --             --            326
                                           -------        -------        -------
Net income..............................   $ 1,453        $ 2,583        $ 3,125
                                           =======        =======        =======
BASIC EARNINGS PER SHARE
Basic earnings per share before change
  in accounting principle...............   $  0.32        $  0.53        $  0.59
Cumulative effect of change in
  accounting principle..................        --             --           0.06
                                           -------        -------        -------
Basic earnings per share................   $  0.32        $  0.53        $  0.53
                                           =======        =======        =======
Basic weighted average shares
  outstanding...........................     4,485          4,908          5,846
                                           =======        =======        =======
DILUTED EARNINGS PER SHARE
Diluted earnings per share before
  change in accounting principle........   $  0.32        $  0.48        $  0.55
Cumulative effect of change in
  accounting principle..................        --             --           0.05
                                           -------        -------        -------
Diluted earnings per share..............   $  0.32        $  0.48        $  0.50
                                           =======        =======        =======
Diluted weighted average shares
  outstanding...........................     4,570          5,433          6,298
                                           =======        =======        =======
</TABLE>


  The accompanying notes are an integral part of these financial statements



                                       27
<PAGE>   28

                        IL FORNAIO (AMERICA) CORPORATION

                       STATEMENTS OF STOCKHOLDERS' EQUITY
                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                                  RETAINED
                                                                                    ADDITIONAL    EARNINGS
                                                                                     PAID-IN    (ACCUMULATED  TREASURY
                                       PREFERRED STOCK            COMMON STOCK       CAPITAL      DEFICIT)      STOCK       TOTAL
                                    ----------------------   --------------------   ----------   -----------  --------     --------
                                      SHARES       AMOUNT      SHARES      AMOUNT
                                    ---------     --------   ---------     ------
<S>                                 <C>           <C>        <C>          <C>      <C>          <C>          <C>          <C>
BALANCE, DECEMBER 31, 1995........  2,316,296     $ 16,936   1,532,359    $ 7,729    $            $(3,382)    $            $21,283
Issuance of common stock..........                              30,210        136                                              136
Conversion of preferred to        
  common..........................     (8,100)         (51)     10,222         51                                               --
Exercise of common stock options..                              38,975         64                                               64
Net income........................                                                                  1,453                    1,453
                                    ---------     --------   ---------    -------    --------     -------     --------     -------
BALANCE, DECEMBER 29, 1996........  2,308,196       16,885   1,611,766      7,980                  (1,929)                  22,936
Par value adjustment..............                           1,269,775     (7,978)      7,978                                   --
Issuance of common stock, net of
  offering expenses...............                                              1      11,544                               11,545
Warrants converted to common......                              10,362         --          18                                   18
Conversion of preferred to
  common.......................... (2,308,196)     (16,885)  2,912,906          3      16,882                                   --
Exercise of common stock options..                              13,704         --          44                                   44
Net income........................                                                                  2,583                    2,583
                                    ---------     --------   ---------    -------    --------     -------     --------     -------
BALANCE, DECEMBER 28, 1997........          0            0   5,818,513          6      36,466         654                   37,126
Issuance of common stock under
  the 1997 Purchase Plan..........                             119,836         --         959                                  959
Exercise of common stock options..                              82,612         --         333                                  333
Repurchase of treasury stock......                            (362,400)                                         (2,034)     (2,034)
Net income........................                                                                  3,125                    3,125
                                    ---------     --------   ---------    -------    --------     -------     --------     -------
BALANCE, DECEMBER 27, 1998........          0     $      0   5,658,561    $     6    $ 37,758     $ 3,779     $ (2,034)    $39,509
                                    =========     ========   =========    =======    ========     =======     ========     =======
</TABLE>


     The accompanying notes are an integral part of these financial statements



                                       28
<PAGE>   29

                        IL FORNAIO (AMERICA) CORPORATION

                            STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                            YEAR ENDED
                                           -----------------------------------------------
                                           DECEMBER 29,     DECEMBER 28,      DECEMBER 27,
                                               1996             1997              1998
                                           ------------     ------------      ------------
<S>                                        <C>              <C>               <C>
Cash flows from operating activities:
  Net income..........................        $ 1,453           $ 2,583          $ 3,125
  Adjustments  to reconcile net income
    to net cash provided by operating
    activities:
    Depreciation and amortization.....          3,434             3,517            4,258
    Amortization of preopening
      expenses........................            426               432               --
    Amortization of deferred lease
      incentives......................           (403)             (558)            (447)
    Change in accounting principle....             --                --              326
    Provision for store closures......             --                28             (130)
    Gain on sale of property and
      equipment.......................            (72)             (300)              --
    Retirement of fixed assets........            253               567               --
    Deferred income taxes.............            232               502              736
  Changes in:
    Restricted cash...................            (23)             (180)             140
    Accounts receivable...............           (153)              (20)            (204)
    Note receivable...................             --              (204)              --
    Inventories.......................            178              (369)            (151)
    Prepaid expenses and other assets.           (408)           (1,095)             174
    Other assets......................             19               (46)               4
    Accounts payable..................            185               793              825
    Accrued expenses..................           (174)            2,583              279
                                              -------           -------          -------
       Net cash provided by operating
         activities...................          4,947             8,233            8,935
                                              -------           -------          -------
Cash flows from investing activities:
  Construction allowances received....             --               350            2,353
  Capital expenditures................         (5,847)           (7,942)         (13,623)
  Proceeds from sale of property and
    equipment.........................            626             1,081               --
  Collection of note receivable.......             --               391              102
                                              -------           -------          -------
       Net cash used in investing 
         activities...................         (5,221)           (6,120)         (11,168)
                                              -------           -------          -------
Cash flows from financing activities:
  Payments on debt....................           (600)             (150)              --
  Net proceeds from the issuance of
    common stock......................            136            11,545              959
  Exercise of stock options...........             64                44              333
  Warrants converted to common stock..                               18               --
  Repurchase of common stock..........             --                --           (2,034)
                                              -------           -------          -------
       Net cash provided by (used in)
         financing activities.........           (400)           11,457             (742)
                                              -------           -------          -------
Increase (decrease) in cash and
  equivalents.........................           (674)           13,570           (2,975)
Cash and equivalents, beginning of
  year................................          2,375             1,701           15,271
                                              -------           -------          -------
Cash and equivalents, end of year.....        $ 1,701           $15,271          $12,296
                                              =======           =======          =======
Interest paid.........................        $    45           $     3          $    28
                                              =======           =======          =======
Income taxes paid.....................        $   614           $ 1,730          $   685
                                              =======           =======          =======
Noncash investing and financing
  activities:
  Issuance of note receivable for
    retail bakery and restaurant
    assets............................        $   308           $   704          $    --
</TABLE>


 The accompanying notes are an integral part of these financial statements



                                       29
<PAGE>   30

                        IL FORNAIO (AMERICA) CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

1.   ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

     Organization and nature of operations -- Il Fornaio (America) Corporation
(the "Company") is engaged in restaurant operations and the production and sale
of Italian bakery products for the wholesale and retail market. At December 27,
1998, the Company owned and operated 17 Italian white tablecloth restaurants and
five wholesale bakeries in California; Portland, Oregon; Las Vegas, Nevada;
Denver, Colorado; and Seattle, Washington.

     Fiscal year -- The Company operates on a 52/53-week fiscal year ending on
the last Sunday in December. The fiscal years ended December 29, 1996, December
28, 1997 and December 27, 1998 each contained 52 weeks of operations.

     Cash and equivalents -- Cash equivalents consist primarily of investments
with maturities of three months or less. Cash equivalents are carried at cost
which approximates market value.

     Restricted cash represents cash restricted for the Company's voluntary
disability insurance plan and contributions to the employee stock purchase plan.

     Fair value of financial instruments -- The carrying amounts of cash and
cash equivalents, accounts receivable, notes receivable, accounts payable,
accrued liabilities and revolving credit borrowings are reasonable estimates of
the fair values of these financial instruments.

     Accounts receivable consist primarily of amounts due from wholesale
customers, which are net of allowances for doubtful accounts of $104,000 and
$217,000 as of December 28, 1997 and December 27, 1998, respectively.

     Inventories, consisting primarily of wine, liquor, grocery products and
operating supplies, are stated at the lower of first-in, first-out method (FIFO)
cost or market.

     Property and equipment are stated at cost and include interest on funds
borrowed to finance construction. Depreciation and amortization are computed
using the straight-line method over the following estimated useful lives:
leasehold improvements -- lesser of lease term or life of improvements;
furniture, fixtures and equipment -- 3 to 10 years. Leasehold improvements
reimbursed by the landlord through construction allowances are capitalized as
leasehold improvements with the construction allowances recorded as deferred
lease incentives. Such leasehold improvements and related deferred lease
incentives are amortized on a straight-line basis over the lease term.

     Deferred rent -- Certain leases contain fixed escalations of the minimum
annual lease payment during the original term of the lease. For these leases,
the Company recognizes rental expense on a straight-line basis and records the
difference between rent expense and the amount currently payable under the lease
as deferred rent. Deferred rent is included with deferred lease incentives.

     Preopening expenses are expensed as incurred. See further discussion in
Note 2.

     Advertising costs are expensed as incurred.

     Accounting estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of expenses during the
reporting period. Actual amounts could differ from those estimates.

     Income taxes are accounted for using the liability method, under which
deferred taxes are provided for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities.

     Reserve for store closures includes management's best estimates of the net
costs to be incurred on the sale or disposal of a reserved store. The accrual
consists of future payments on leases and other estimated costs directly
associated with the decision to close the stores.



                                       30
<PAGE>   31

     Stock-based compensation -- The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."

     Revenue recognition -- Revenue from restaurant sales is recognized when
food and beverage products are sold. Revenue from bakery sales is recognized
when the bakery products are shipped.

     Earnings per share -- Basic EPS is computed as net income divided by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares issuable
through stock options, warrants and other convertible securities.

     Segments -- In June 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosure
About Segments of an Enterprise and Related Information," which changes the way
public companies report information about operating segments. This statement,
which is based on the management approach to segment reporting, establishes
requirements to report selected segment information quarterly and to report
entity-wide disclosures about products and services and major customers. The
Company manages on the basis of one business segment with multiple products.

     Reclassifications -- Certain fiscal 1996 and 1997 amounts have been
reclassified to conform with fiscal 1998 presentations.

2.   PREOPENING EXPENSES

     Pre-opening costs consist of location setup, employee training and
promotion associated with the opening of new locations. Prior to 1998,
preopening costs were capitalized and then amortized over 12 months beginning in
the month the location commenced operations.

     In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants approved Statement of Position (SOP)
98-5 entitled "Reporting on the Costs of Start-Up Activities." The SOP requires
entities to expense as incurred all start-up and preopening costs that may not
otherwise be capitalized as long-lived assets. The SOP is effective for fiscal
years beginning after December 15, 1998.

     The Company elected early adoption of SOP 98-5 in the fourth quarter of
1998. The Company's adoption of SOP 98-5 resulted in a one-time, after-tax
charge for fiscal 1998 in the form of a cumulative effect of a change in
accounting principle of $326,000 (net of income taxes of $209,000) for the
unamortized balance of preopening costs as of December 28, 1997. Preopening
costs in 1998 were expensed as incurred. The new expense-as-incurred standard
may lead to increased variability in the amount of preopening costs recognized,
depending on the number and timing of restaurant openings.

3.   NOTE RECEIVABLE

     On February 14, 1997, the Company sold the net assets of its four remaining
free-standing retail bakeries for $815,000 including a promissory note in the
principal amount of $204,000. The note bears interest at 8.25% and is payable in
24 equal monthly installments starting March 15, 1997. The note is
collateralized by the assets of the retail bakeries. The sale price approximates
the carrying value of the assets sold.

4.   PROPERTY AND EQUIPMENT

     Property and equipment consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                       1997          1998
                                                     --------      --------
<S>                                                  <C>           <C>     
     Leasehold improvements.....................     $ 26,009      $ 32,687
     Machinery and equipment....................       13,758        15,186
     Furniture and fixtures.....................        4,700         6,722
     Construction in progress...................          941         3,063
                                                     --------      --------
               Total............................       45,408        57,658
     Less -- accumulated depreciation and
     amortization...............................      (16,153)      (19,038)
                                                     --------      --------
     Property and equipment -- net..............     $ 29,255      $ 38,620
                                                     ========      ========
</TABLE>



                                       31
<PAGE>   32

5.   ACCRUED EXPENSES

     Accrued expenses consisted of the following (in thousands):

<TABLE>
<CAPTION>
     Accrued expenses:                          1997     1998
                                              -------  -------
 <S>                                          <C>      <C>
     Accrued payroll and related benefits..   $ 3,443  $ 1,807
     Gift certificates.....................       528      779
     Accrued rent..........................       486      660
     Accrued taxes.........................     1,127    1,997
     Accrued construction costs............        --      678
     Other.................................       703      645
                                              -------  -------
     Total accrued expenses................   $ 6,287  $ 6,566
                                              =======  =======
</TABLE>

6.   LINE OF CREDIT

     The Company has a $5,000,000 revolving line of credit with a letter of
credit sub-facility which expires on March 31, 2000 and bears interest at the
bank's reference rate. There were no amounts outstanding under the credit line
at December 27, 1998. The credit agreement requires compliance with certain
financial covenants.

7.   PROVISION FOR STORE CLOSURES

     As a result of the disposition of the Costa Mesa restaurant in June 1997,
the Company recorded a $470,000 pre-tax reversal of the provision for store
closures originally recorded in 1993.

8.   STOCKHOLDERS' EQUITY

     Preferred Stock

     On September 24, 1997, each outstanding share of Series B, C, E and F
preferred stock was converted into 1.262 shares of common stock upon the
completion of the Company's initial public offering.

     Common Stock

     The Company issued and sold an aggregate of 1.0 million shares of common
stock pursuant to an initial public offering at $11.00 per share, which closed
on September 24, 1997. The net proceeds to the Company, after payment of
underwriting fees and offering expenses were approximately $9.0 million. On
October 1, 1997, the Company issued and sold an aggregate of 225,000 shares of
Common Stock at $11.00 per share pursuant to the exercise by the underwriters of
their over-allotment option under the Underwriting Agreement. The net proceeds
to the Company were approximately $2.3 million.

     In October 1998, the Board of Directors authorized the repurchase of up to
500,000 shares of the Company's common stock. Repurchases may be made in the
open market at prevailing prices or in negotiated off-market transactions.
Through December 27, 1998, the Company had repurchased approximately 362,400
shares of common stock in the open market for an aggregate of approximately $2.0
million.

     Stock Plans

     The Company maintains several stock option plans under which the Company
may grant incentive stock options and nonqualified stock options to employees
and non-employee directors. Stock options have been granted at prices at or
above the fair market value on the date of the grant. Options vest and expire
according to terms established at the grant date.

     In March 1997, the Board of Directors adopted and, in April 1997, the
stockholders approved, an Equity Incentive Plan (the "1997 Incentive Plan"), a
Non-Employee Directors' Stock Option Plan (the "1997 Directors Plan") and an
Employee Stock Purchase Plan (the "1997 Purchase Plan," and collectively, the
"1997 Plans"). The 1997 Incentive Plan amends and restates the 1992 Stock Option
Plan and 1995 Stock Option Plan.



                                       32
<PAGE>   33

     Employee Stock Purchase Plan

     During fiscal 1997, the Company implemented the 1997 Purchase Plan. The
Company's 1997 Purchase Plan provides that eligible employees may contribute up
to 15% of their base earnings toward bi-annual purchase of the Company's common
stock with a value up to $25,000. The employee's purchase price is 85% of the
lesser of the fair market value of the stock on the date of commencement of the
offering or the date of purchase. No compensation expense is recorded in
connection with the plan. The total number of shares issuable under the plan is
300,000. On April 30, 1998, the first purchase date under the plan, an aggregate
of 60,199 shares were issued under the plan at $9.35 per share, and on October
30, 1998, an aggregate of 59,267 shares were issued under the plan at $6.70 per
share.

     The following table reflects the activity under the Company's stock option
plans:

<TABLE>
<CAPTION>
                                     NUMBER OF        WEIGHTED
                                      OPTIONS       AVERAGE PRICE
                                     ---------      -------------
<S>                                  <C>            <C>
     Balance, December 31, 1995..     708,734            $4.20
     Granted.....................     163,265             5.05
     Exercised...................     (38,975)            1.64
     Cancelled...................      (3,200)            4.81
                                     --------
     Balance, December 29, 1996..     829,824             4.49
     Granted.....................     169,555             6.15
     Exercised...................     (13,704)            3.19
     Cancelled...................      (5,890)            5.12
                                     --------
     Balance, December 28, 1997..     979,785             4.79
     Granted.....................     256,738            13.33
     Exercised...................     (82,612)            4.19
     Cancelled...................     (11,750)            7.80
                                    ---------
     Balance, December 27, 1998..   1,142,161             6.72
                                    =========
</TABLE>


     The weighted average fair values per share of options granted during 1997
and 1998 were $2.33 and $7.76, respectively.

     Additional information regarding options outstanding as of December 27,
1998 was as follows:

<TABLE>
<CAPTION>
                                           OPTIONS OUTSTANDING
                             ---------------------------------------------------
                                               WEIGHTED AVG.                                  OPTIONS EXERCISABLE
                                                 REMAINING                             -------------------------------
         RANGE OF               NUMBER          CONTRACTUAL        WEIGHTED AVG.         NUMBER          WEIGHTED AVG.
      EXERCISE PRICES        OUTSTANDING        LIFE (YRS)        EXERCISE PRICE       EXERCISABLE      EXERCISE PRICE
      ---------------        -----------       -------------      --------------       -----------      --------------
<S>                          <C>               <C>                <C>                  <C>              <C>
        $ 2.38- 4.40             62,742              1.8                $ 3.67            56,928            $ 3.61
          4.50- 4.50            505,235              0.7                  4.50           395,524              4.50
          4.95- 6.00            298,046              3.2                  5.47           100,718              5.31
          6.60-14.58            276,138              8.1                 12.81             4,600              7.08
                              ---------                                                  -------
          2.38-14.58          1,142,161              3.2                  6.72           557,770              4.58
                              =========                                                  =======
</TABLE>


     At December 29, 1996 and December 28, 1997, options to purchase 310,875 and
451,136 shares of common stock, respectively, were exercisable under the plans.

     At December 27, 1998, the numbers of shares available for future grants
under the various plans were as follows:

<TABLE>
<CAPTION>
                                                  SHARES
                                                 AVAILABLE
                                                    FOR
                                                   GRANT
                                                 ---------
<S>                                              <C>
              1997 Directors Plan..............    79,000
              1997 Incentive Plan..............   207,332
              1997 Purchase  Plan..............   180,534
</TABLE>



                                       33
<PAGE>   34

     Additional Stock Plan Information

     As discussed in Note 1, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and its related interpretations. No compensation expense has been
recognized in the financial statements for employee stock arrangements.

     SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123),
requires the disclosure of pro forma net income and earnings per share had the
Company adopted the fair value method as of the beginning of fiscal 1995. In
accordance with SFAS 123, the fair value of stock-based awards to employees is
calculated through the use of option pricing models, even though such models
were developed to estimate the fair value of freely tradeable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's calculations
were made using the Black-Scholes option pricing model with the following
weighted average assumptions: expected life, 7.30 years for 1997 and 4 years for
1998, stock volatility, .47% and .62% in 1997 and 1998, risk free interest
rates, 5.48% in 1997 and 4.57% in 1998; and no dividends during the expected
term. The Company's calculations are based on a multiple option valuation
approach and forfeitures are recognized as they occur. Under SFAS 123, the 1997
Purchase Plan would be compensatory due to the look-back feature, and $289,000
of compensation would have been recognized in 1998. If the computed fair values
of the 1997 and 1998 awards had been amortized to expense over the vesting
period of the awards, pro forma net income would have been as follows:

<TABLE>
<CAPTION>
                                             1997     1998
                                            ------   ------
<S>                                         <C>      <C>
            Net income (in thousands):
               As reported..............    $2,583   $3,125
               Pro forma................     2,301    2,190
            Basic earnings per share:
               As reported..............    $ 0.53   $ 0.53
               Pro forma................      0.47     0.37
            Diluted earnings per share:
               As reported..............    $ 0.48   $ 0.50
               Pro forma................      0.42     0.35
</TABLE>



     However, the impact of outstanding unvested stock options granted prior to
1995 has been excluded from the pro forma calculation; accordingly, the 1996 and
subsequent pro forma adjustments are not indicative of future period pro forma
adjustments, when the calculation will apply to all applicable stock options.

     The following is a summary of the calculation of the number of shares used
in calculating basic and diluted EPS:

<TABLE>
<CAPTION>
                                                 1996               1997               1998
                                               ---------          ---------         ---------
<S>                                            <C>                <C>               <C>
      Shares used to compute basic EPS         4,485,006          4,907,875         5,846,215

      Add: effect of dilutive securities          84,642            525,316           451,295
                                               ---------          ---------         ---------
      Shares used to compute diluted EPS       4,569,648          5,433,191         6,297,510
                                               =========          =========         =========
</TABLE>



                                       34
<PAGE>   35

9.   INCOME TAXES

     The Company provides a deferred tax expense or benefit equal to the change
in the deferred tax liability during the year. Deferred income taxes reflect the
net tax effects of (a) temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes, and (b) tax credit carryforwards. Significant components of
the Company's net deferred tax balances as of December 28, 1997 and December 27,
1998 were as follows (in thousands):

<TABLE>
<CAPTION>
                                                1997     1998
                                              -------  -------
<S>                                           <C>      <C>
           Deferred tax assets:
             Compensation related.........    $   289  $    61
             Reserves for store closures..        188      136
             Deferred rent liability......        147      142
             Tax credit carryforwards.....      1,557    1,327
             Other........................         47      146
                                              -------  -------
               Total deferred tax assets..      2,228    1,812
                                              -------  -------
           Deferred tax liabilities:                   
             Fixed assets.................         --     (544)
             Pre-opening expenses.........       (224)      --
                                              -------  -------
               Total deferred tax
                 liabilities..............       (224)    (544)
                                              -------  -------
           Net deferred tax assets........    $ 2,004  $ 1,268
                                              =======  =======
</TABLE>

     The Company provided no valuation allowance against deferred tax assets
recorded as of December 28, 1997 and December 27, 1998, as the Company believes
it is "more-likely-than-not" that all deferred assets will be fully realized in
future periods.

     As of December 27, 1998, the Company has unused investment and general
business tax credits of approximately $443,000 and alternative minimum tax
credits of approximately $884,000. The investment tax credits will begin to
expire in 2003 and the minimum tax credits have an indefinite carryforward
period.

     The provision for income taxes consists of the following (in thousands):

<TABLE>
<CAPTION>
                                       1996     1997      1998
                                      -----    -----     ------
<S>                                   <C>      <C>       <C>
        Current provision:
          Federal.................    $ 461    $  826    $1,147
          State...................      205       323       340
                                      -----    ------    ------
             Total current........      666     1,149     1,487
        Deferred taxes, net.......      232       502       737
                                      -----    ------    ------
        Income tax expense .......    $ 898    $1,651    $2,224
                                      =====    ======    ======
</TABLE>


     The cumulative effect of the change in accounting principle is presented
net of related tax benefits. Therefore, 1998 income tax expense excludes tax
benefits of $209,000 related to the cumulative effect of change in accounting
principle.

     The reconciliation between the Company's effective tax rate on earnings
before income taxes and the statutory federal income tax rate of 34% was as
follows (in thousands):

<TABLE>
<CAPTION>
                                                   1996     1997      1998
                                                  -----    ------    ------
<S>                                               <C>      <C>       <C>   
     Federal income tax at 34% statutory rate.... $ 801    $1,440    $1,930
     State income tax............................   141       243       298
     FICA tip credit and other business credits..   (71)     (159)     (119)
     Other accrual...............................    --        85        82
     Permanent items and other...................    27        42        33
                                                  -----    ------    ------
     Total....................................... $ 898    $1,651    $2,224
                                                  =====    ======    ======
</TABLE>



                                       35
<PAGE>   36

10.  COMMITMENTS

     The Company leases all restaurant, retail bakery, production bakery and
office space under operating leases which extend through year 2017. Certain
leases require increased rental payments, generally related to changes in the
Consumer Price Index and increases in property taxes and certain leases also
provide for additional rent based on a percentage of sales. Total rent expense
for all operating leases was as follows (in thousands):

<TABLE>
<CAPTION>
                                        1996      1997       1998
                                       ------    ------     ------
<S>                                    <C>       <C>        <C>   
           Minimum rentals.........    $2,076    $2,339     $2,914
           Contingent rentals......       772     1,347      1,178
                                       ------    ------     ------
           Total rental expense....    $2,848    $3,686     $4,092
                                       ======    ======     ====== 
</TABLE>


     At December 27 1998, future minimum lease payments under long-term
operating leases were as follows (in thousands):

<TABLE>
<CAPTION>
                      YEAR
                ENDING DECEMBER
            ----------------------
<S>                                   <C>    
            1999..................    $ 3,705
            2000..................      4,057
            2001..................      4,012
            2002..................      3,851
            2003..................      3,655
            Thereafter............     21,197
                                      -------
            Total.................    $40,477
                                      =======
</TABLE>

11.  QUARTERLY FINANCIAL DATA (UNAUDITED):

     Summarized unaudited quarterly financial data (in thousands, except per
share data) for fiscal years 1997 and 1998 are as follows:

<TABLE>
<CAPTION>
                                             FIRST       SECOND      THIRD      FOURTH
                                            -------     -------     ------     -------
<S>                                         <C>         <C>         <C>        <C>
       1997 quarter:                                                    
         Total revenues.................    $17,682     $17,895     $17,995    $18,548
         Income from operations.........        852       1,259         937        788
         Net income.....................        527         778         583        695
         Basic net income per share.....    $  0.12     $  0.17     $  0.12    $  0.12
         Diluted net income per share...    $  0.11     $  0.16     $  0.11    $  0.11

       1998 quarter:                                                    
         Total revenues.................    $19,696     $20,499     $20,095    $22,848
         Income from operations.........      1,298       1,591       1,041        934
         Income before change in
           accounting principle.........        949       1,093         741        668
         Cumulative effect of change in
           accounting principle (net of 
           taxes).......................        326          --          --         --
         Net income.....................        623       1,093         741        668
         Basic net income per share
           before change in accounting
           principle....................   $   0.16    $  0.19      $  0.12    $  0.12
         Cumulative effect of change in
           accounting principle.........       0.06         --           --         --
         Basic net income per share.....   $   0.10    $  0.19      $  0.12    $  0.12
         Diluted net income per share
           before change in accounting
           principle....................   $   0.15    $  0.17      $  0.12    $  0.11
         Cumulative effect of change in
           accounting principle.........       0.05         --           --         --
         Diluted net income per share...   $   0.10    $  0.17      $  0.12    $  0.11
</TABLE>



                                       36
<PAGE>   37

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

     None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Identification of Directors

     The information required by this Item concerning the Company's directors is
incorporated by reference from the sections captioned "Proposal 1: Election of
Directors" contained in the Company's definitive Proxy Statement related to the
Annual Meeting of Stockholders to be held May 6, 1999, to be filed by the
Company with the Securities and Exchange Commission (the "Proxy Statement").

Identification of Executive Officers

     The information required by this Item concerning the Company's executive
officers is set forth in Part I of this Report.

Compliance with Section 16(a) of the Exchange Act

     The information required by this Item is incorporated by reference from the
section captioned "Compliance with Section 16(a) of the Securities Exchange Act
of 1934" contained in the Proxy Statement.


ITEM 11. EXECUTIVE COMPENSATION

     The information required by this Item is incorporated by reference to the
section captioned "Executive Compensation" in the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this Item is incorporated by reference to the
section captioned "Security Ownership of Certain Beneficial Owners and
Management" contained in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this Item is incorporated by reference from the
sections captioned "Certain Transactions" and "Executive Compensation" contained
in the Proxy Statement.

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

(a)  1.

      o  Index to Financial Statements

      o  Independent Auditors' Report

      o  Balance Sheets at December 28, 1997 and December 27, 1998

      o  Statements of Income for the years ended December 29, 1996, December
         28, 1997 and December 27, 1998 

      o  Statements of Stockholders' Equity for the years ended December 29, 
         1996, December 28, 1997 and December 27, 1998 

      o  Statements of Cash Flows for the years ended December 29, 1996,
         December 28, 1997 and December 27, 1998 

      o  Notes to Financial Statements

     2.   All schedules are omitted because they are not required, are not
          applicable or the information is included in the financial statements
          or notes thereto.



                                       37
<PAGE>   38

     3.   Exhibits

<TABLE>
<CAPTION>
Exhibit
Number    Description
-------   -----------
<S>       <C>
3.1       Amended and Restated Certificate of Incorporation. (1)
3.2       By-laws, as amended.
3.3       Reference is made to Exhibits 3.1 and 3.2.
4.2       Speciman stock certificate. (4)
10.1*     Form of Indemnity Agreement between the Company and each executive
          officer and director. (3)
10.2*     Summary of Bonus Plan for 1998.
10.3*     1997 Equity Incentive Plan and forms of related agreements.
10.4*     1997 Employee Stock Purchase Plan and form of offering related
          thereto. (4)
10.5*     1997 Non-Employee Stock Purchase Plan and form of offering related
          thereto. (5)
10.6      Form of Series F Preferred Stock Purchase Agreement with Schedule of
          additional Preferred Stock Purchase Agreements attached. (3)
10.7      Form of Warrant to purchase shares of Series F Preferred Stock of the
          Registrant. (3)
10.8      Revised License Agreement, dated December 11, 1986 and Stock Purchase
          Agreement dated March 6, 1987, between the Company and Vegetti
          S.r.1.(3)
10.9      Assignment of Trademark Registrations Nunc Pro Tunc executed by
          Vegetti S.r.1.(3)
10.10+    Lease Agreement, dated December 22, 1988, and Amendment, dated October
          4, 1989, between the Company and Cowper Square Partners, for the Palo
          Alto restaurant. (3)
10.11+    Lease Agreement, dated November 21, 1991, between the Company and
          Hotel Sainte Claire Partners, L.P., for Hotel Sainte Claire, San Jose.
          (3)
10.12+    Lease Agreement dated April 15, 1996, between the Company and New
          York-New York Hotel, LLC, for the Las Vegas Restaurant. (3)
10.13     Food Service Operations Agreement dated November 21, 1991, between the
          Company and Mobedshahi Hotel Group, Inc. (3)
10.14     Loan Agreement dated October 30, 1996, between the Company, Bank of
          America National Trust and Savings Association. (3)
10.15*    Employment Agreement dated April 1995, between the Company and Michael
          J. Hislop. (3)
10.16*    1991 Incentive Stock Option Plan and form of related agreement. (1)
10.17*    1992 Non-Employee Directors' Stock Option Plan and form of related
          agreement.(1)
10.18*    1988 Stock Option Plan and form of related agreement. (1)
10.19     Underwriting Agreement dated September 18, 1997 between the Company
          and the Representatives of the Underwriters. (2)
10.20     Revolving Line of Credit Note and Loan Agreement between the Company
          and Wells Fargo Bank, N.A., dated March 31, 1998. (6)
23.1      Consent of Deloitte & Touche LLP.
24.1      Power of Attorney, Reference is made to the signature page.
27.1      Financial Data Schedule.
99.1      Press Release dated March 16, 1999.
</TABLE>
---------- 

(1)       Filed as an exhibit to the Registrant's Form S-8 (File No. 
          333-46421), and incorporated herein by reference.
(2)       Filed as an exhibit to the Registrant's Quarterly Report of Form 10-Q
          for the quarter ended September 28, 1997 (0-29410), and incorporated 
          herein by reference.
(3)       Filed as an exhibit to the Registrant's Registration Statement on Form
          S-1 (File No. 333-23605), on March 19, 1997, and incorporated herein
          by reference.
(4)       Filed as an exhibit to Amendment No. 1 to the Form S-1 Registration
          Statement (File No. 333-23605), on July 1, 1997, and incorporated
          herein by reference.
(5)       Filed as an exhibit to Amendment No. 2 to the Form S-1 Registration
          Statement (File No. 333-23605), on August 22, 1997, and incorporated 
          herein by reference.
(6)       Filed as an exhibit to the Registrant's Quarterly Report of Form 10-Q
          for the quarter ended March 29, 1998 (0-29410), and incorporated 
          herein by reference.
 *        Indicates management contracts or compensatory plans or arrangements
          filed pursuant to Item 601(b)(10) of Regulation S-K.
 +        Certain confidential information has been deleted from this exhibit
          pursuant to a confidential treatment request order that was granted.



                                       38
<PAGE>   39

(b)  Reports on Form 8-K

     There were no Reports on Form 8-K filed for the quarter ended December 27,
1998.



                                   SIGNATURES

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

    Date: March 25, 1999                Il Fornaio (America) Corporation

                                        By: /s/ LAURENCE B. MINDEL
                                            ------------------------------------
                                            Laurence B. Mindel
                                            Chairman of the Board


                                        By: /s/ MICHAEL J. HISLOP
                                            ------------------------------------
                                                 Michael J. Hislop
                                        President and Chief Executive Officer
                                            (Principal Executive Officer)

POWER OF ATTORNEY

     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Laurence B. Mindel and Paul J. Kelley and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution, for him, and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this report, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities Exchange Commission, granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform each and every act
and thing requisite and necessary to be done therewith, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, and any of them, or his substitutes,
may lawfully do or cause to be done by virtue hereof.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
           SIGNATURE                           TITLE                             DATE
           ---------                           -----                             ----
<S>                                 <C>                                     <C>
    /s/ LAURENCE B. MINDEL          Chairman of the Board                   March 25, 1999
--------------------------------
        Laurence B. Mindel



     /s/ MICHAEL J. HISLOP          President and Chief Executive Officer   March 25, 1999
--------------------------------    (Principal Executive Officer)
       Michael J. Hislop



      /s/ PAUL J. KELLEY            Vice President, Finance and             March 25, 1999
--------------------------------    Chief Financial Officer
        Paul J. Kelley              (Principal Financial and Accounting
                                    Officer)                           
</TABLE>



                                       39
<PAGE>   40

<TABLE>
<S>                                 <C>                                     <C> 
    /s/ DEAN A. CORTOPASSI          Director                                March 25, 1999
--------------------------------
      Dean A. Cortopassi



     /s/ W. SCOTT HEDRICK           Director                                March 25, 1999
--------------------------------
       W. Scott Hedrick



     /s/ F. WARREN HELLMAN          Director                                March 25, 1999
--------------------------------
       F. Warren Hellman



     /s/ W. HOWARD LESTER           Director                                March 25, 1999
--------------------------------
       W. Howard Lester



     /s/ LAWRENCE F. LEVY           Director                                March 25, 1999
--------------------------------
       Lawrence F. Levy
</TABLE>



                                       40