<PAGE>

                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC  20549

                                   FORM 10-K

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

                   For the fiscal year ended January 2, 2000
                        Commission file number 0-24982

                              Silver Diner, Inc.
          (Exact name of the registrant as specified in its charter)

                                    Delaware
         (State or other jurisdiction of incorporation or organization)

                                   04-3234411
                      (I.R.S. employer identification no.)

                             11806 Rockville Pike
                           Rockville, Maryland 20852
                                 301-770-0333
(Address and telephone number of the registrant's principal executive offices)

          Securities registered pursuant to Section 12(b) of the Act:

     Title of each class          Name of each exchange on which registered
     -------------------          -----------------------------------------
            None                                      None

          Securities registered pursuant to Section 12(b) of the Act:

                         Common Stock, $.0074 Par Value

     Indicated 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 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]

     At March 15, 2000, the registrant had 11,792,034 shares of common stock
(the "Common  Stock") outstanding, and the aggregate market value of the Common
Stock held by non-affiliates of the registrant was approximately $6,729,847.
The aggregate market value was determined based on the closing price of the
Common Stock on the NASDAQ Stock Market(SM) on March 15, 2000.

DOCUMENTS INCORPORATED BY REFERENCE
     Portions of the registrant's Proxy Statement for its Annual Meeting of
Shareholders in 2000 are incorporated by reference into Part III.
<PAGE>

PART I

Item 1. Business.

General

     Silver Diner, Inc. (the "Company" or "Silver Diner") was incorporated in
Delaware in April 1994 under the name Food Trends Acquisition Corporation
("FTAC"). In March 1996, a subsidiary of the Company merged with Silver Diner
Development, Inc., a Virginia corporation ("SDDI"), which was formed in and
operated Silver Diner restaurants since 1987.  Silver Diner Limited Partnership
("SDLP"), of which SDDI was the general partner, operated the first three Silver
Diner restaurants.  In June 1996, the Company acquired all of the limited
partner interests in SDLP for a purchase price of $2.472 million and 84,000
warrants to purchase shares of the Common Stock at $8.00 per share.  Unless the
context otherwise requires, references to the Company or Silver Diner also
include FTAC, SDDI and their wholly owned subsidiaries.

     The Company's executive offices are located at 11806 Rockville Pike,
Rockville, Maryland 20852 and its telephone number is (301) 770-0333. The
Company's Common Stock trades on The Nasdaq Stock Market(SM) under the symbol
"SLVR."

Business

     The Company currently operates 11 Silver Diner restaurants, 10 in the
Washington/Baltimore Metropolitan Area and one in Cherry Hill, New Jersey,
serving breakfast, lunch, dinner and late night meals.  The Company targets the
growing number of customers tired of traditional fast food whose need for a
quick, high-quality, reasonably priced meal is not being adequately served by
existing family or casual theme restaurants; the Company capitalizes on the
timeless diner theme to uniquely address this need.  By attracting a broad range
of customer segments, and maintaining extended operating hours, a diverse menu
and convenient locations, the Company is able to compete effectively in the fast
food, family and casual dining segments of the restaurant industry, contributing
to the significant sales volumes of its units. The Company also offers Silver
Diner To Go, which features a range of carry out/delivery options targeting the
growing "home meal replacement" market, as well as specialty coffee drinks and
expanded bakery selections.

     The restaurants typically are open for business from 7:00 a.m. to midnight
on weekdays and from 7:00 a.m. to 3:00 a.m. on weekends.  The Silver Diner menu
strategy is to serve generous portions of made-from-scratch cooking at prices
competitive with traditional family dining restaurants.  The average check per
customer is approximately $7.75 and the average dining time is approximately 40
minutes.  For the last fiscal year the Silver Diner restaurants had sales
ranging from $2.1 million to $4.3 million with average unit sales of $2.6
million on an average of 222 seats.  Management attributes the significant sales
volumes of its units to its ability to attract a broad range of customer
segments, extended operating hours, diverse menu and convenient locations.
Management believes it has established a strong company mission and culture by
emphasizing a sense of ownership and entrepreneurship in its employees and by
providing frequent training, recognition and development of its management.

     Diners have been indigenous to the United States for more than 100 years.
Since opening the first Silver Diner restaurant in 1989, the Company has
capitalized on the diner restaurant theme to uniquely address the customers'
need of where to go for quick, high quality meals at reasonable prices.  Key
elements that differentiate Silver Diner restaurants from other restaurants
include:

     .  Broad and diverse  menu  combining "traditional  diner" items with
contemporary regional specialties - The menu includes a broad range of made-
from-scratch meal choices featuring traditional home-style diner fare and all-
day breakfast, as well as more contemporary "heart healthy" selections and
regional specialty items. Each Silver Diner restaurant bakes all of its pies and
cakes on the premises and features a carryout section offering its full menu.

                                       1
<PAGE>

     .  Classic, readily recognizable diner exterior, in combination with a
comfortable diner interior decor and atmosphere - The visually striking exterior
of the Silver Diner restaurants is both familiar and distinctive, combining
polished stainless steel, glass block and neon lighting traditional to old-style
diners with more contemporary tile, accent colors and a 25-foot clock tower.
Similarly, the Silver Diner restaurants' interior combines traditional diner
motifs such as a counter area with seating, booths and tabletop old style juke
boxes with a contemporary open kitchen and ambient dining room lighting.  The
result of these contrasting elements produces a high energy, fun, nostalgic
atmosphere which is also comfortable.

     .  Extended operating  hours with four meal  periods - Silver  Diner's
breadth of entree selection, its beer and wine service and night time ambiance
allow it to generate close to 50%  of its business at dinner and late night, the
most profitable meal periods. Additionally, the Silver Diner's extended hours
and diverse menu affords it two extra meal periods - breakfast and late night.
Together, these four meal periods provide the Silver Diner the opportunity to
generate significantly greater customer counts per facility than traditional
two- or three-meal period full-service restaurants.

     .  Rapid meal service resulting in a table turnover rate significantly
above industry averages for full service restaurants - Silver Diner's menu, food
preparation techniques and kitchen engineering account for its rapid meal
service. The Silver Diner's physical plant and kitchen layout allow it to serve
the majority of meals in approximately 10 minutes, providing quick turnover and
further improving productivity.  The Silver Diner employs a food preparation and
storage process which incorporates a type of "sous vide" production technique
enabling it to efficiently make a wide range of scratch-cooking recipes with
reduced labor hours, kitchen preparation and raw ingredient storage area. As a
result, Silver Diner restaurants are able to achieve high quality, consistency
and excellent productivity despite the broad menu.

     .  Generous portions and moderate prices with entrees from $6.99 and up -
Management believes the Silver Diner delivers outstanding value by providing
generous portions of fresh, high quality food at affordable prices. Appetizers
from $4.99, entrees range from $5.99 to $12.99, and full meals are available at
moderate prices including a 10% senior citizen discount and "blue plate
specials."

                                       2
<PAGE>

Restaurants.   The following sets forth certain information regarding the
Company's existing restaurants.

<TABLE>
<CAPTION>

                                                            Approximate
                                              Approximate     Number
Operating Locations           Date Opened     Square Feet    of Seats
-------------------          --------------   -----------   -----------
<S>                          <C>              <C>           <C>
Rockville, Maryland          February 1989          5,500           256
Laurel, Maryland             September 1990         4,680           153
Potomac Mills, Virginia       October 1991          4,675           164
Towson, Maryland             September 1992         5,250           194
Fair Oaks, Virginia            April 1995           5,675           240
Tysons Corner, Virginia      December 1995          5,675           240
Clarendon, Virginia          December 1996          5,675           240
Merrifield, Virginia         February 1997          5,675           240
Springfield, Virginia          April 1997           5,675           240
Reston, Virginia               June 1997            5,675           240
Cherry Hill, New Jersey      November 1997          5,675           240
</TABLE>

     The Company leases its corporate offices at 11806 Rockville Pike,
Rockville, Maryland, which is the location of the original Silver Diner
restaurant, as well as the majority of its operating units. The Company owns the
Reston, Virginia location.

     Management believes the greater Washington/Baltimore area can support
twelve to fifteen Silver Diner restaurants and it will continue to penetrate
this market area while avoiding market overlap in order to take advantage of
increased name recognition and economies of scale in advertising, management and
overhead.  Management believes that there are numerous other major metropolitan
areas throughout the United States that can support a similar concentration of
Silver Diner restaurants and intends to pursue expansion in these markets in a
manner similar to Washington/Baltimore.  The Company opened its first restaurant
in a new geographical market, specifically the Philadelphia-Southern New Jersey
area in November 1997.  At January 2, 2000, the Company had entered into lease
agreements for two new restaurants, Virginia Beach, Virginia and Lakeforest Mall
in Gaithersburg, MD, which are expected to open in the second and third quarters
of 2000, respectively.  The Company has been pursuing locations in a new
geographical market, specifically in the Mid-Atlantic area from North Carolina
to Southern New Jersey. To that end, management is presently involved in active
negotiations with prospective landlords at several locations for additional
Silver Diner sites.  Expansion into any markets outside of the Mid-Atlantic
region may include area joint-ventures or franchises.  There is no assurance
that the Company's expansion plans will be realized or that future Silver Diner
restaurants will be favorably received.

     Marketing.  Management focuses on providing its customers with superior
food quality, service and perceived value in a distinctive atmosphere and has
relied primarily on its eye-catching appearance, customer satisfaction and word
of mouth to obtain repeat customers as well as to attract new clientele. Since
1998, the Company has focused its marketing efforts on direct marketing, which
allows the Company to target customers and create a relationship in the
neighborhoods surrounding each restaurant.  The Company's penetration in its
core Washington Metro market has generated economies of scale and shown
significant results as measured by increased comparable store sales.

                                       3
<PAGE>

     Menu.   The Silver Diner menu includes a broad range of dining alternatives
featuring traditional diner fare, including soups, sandwiches, hamburgers, "blue
plate specials" as well as more contemporary "heart healthy" items, salads,
grilled chicken, seafood, pasta and regional specialties.  Silver Diner's full
breakfast menu, including omelets, pancakes and waffles, is available throughout
the day and night.  The menu includes numerous entrees that rotate on a seasonal
basis, as well as signature homemade pies and cakes baked on premises. High-
quality ingredients are used for all menu items, including Silver Diner's own
unique gravies, sauces and dressings.  Silver Diner's recipes are prepared for
the way management believes people eat today with an emphasis on fresh
ingredients, low salt and cholesterol-free oil.  In addition, Silver Diner's
"heart healthy" menu features several low-fat popular items formulated to exceed
USDA "heart healthy" dietary guidelines.  Silver Diner restaurants also serve
beer and wine in all locations except Cherry Hill, New Jersey, and non-alcoholic
specialty beverages.

     Purchasing.  The Company purchases items on a centralized basis and
negotiates directly with suppliers for food and beverage products to ensure
consistent quality and freshness of products as well as to obtain competitive
prices.  Food and supplies are shipped directly to the Silver Diner restaurants.
All shipments are inspected for quality and freshness by a kitchen manager or
supervisor upon receipt. The Company does not maintain a central product
warehouse or commissary.  The Company's food and supplies are available from a
wide number of suppliers.  Therefore, Silver Diner is not dependent on any
particular source of supplies.

     Customer Satisfaction/Quality Control.  The Company has a variety of
programs to measure its customer satisfaction, including comment cards, a
mystery shopper program, exit interviews, and frequent visits by supervisory
management.  Through the use of these techniques, senior management receives
valuable feedback from customers and through prompt action, demonstrates a
continued interest in meeting customer needs and desires.  In addition, Silver
Diner staff perform a variety of quality checks and are authorized to not serve
any products which do not meet Silver Diner's quality standards.

Competition

     The restaurant industry is intensely competitive with respect to price,
service, location and food quality. With respect to quality and cost of food,
size of food portions, decor and quality service, Silver Diner restaurants
compete with fast food and family style restaurants with ready to cook food and
take-out.  Silver Diner restaurants are located in areas of high concentration
of such restaurants.  There are many well-established food service competitors
with substantially greater financial and other resources than the Company and
with substantially longer operating histories. These competitors will also
compete with the Company in obtaining premium locations for restaurants (e.g.,
shopping malls and strip shopping centers) and in attracting and retaining
employees.  In addition, one or more national food service chains or other
companies could introduce a multi-unit chain of food service establishments that
use one or more food service concepts which resemble one or more of the food
service concepts used by the Company.

     The restaurant business is also affected by changes in consumer tastes and
eating patterns of the general public; national, regional or local economic
conditions; demographic trends; traffic patterns; as well as the type, number
and location of competitors.  In addition, factors such as inflation, increased
food, labor and benefit costs and a lack of experienced management and hourly
employees may adversely affect the restaurant industry in general and the
Company in particular.

     The Company believes that its distinctive diner concept, attractive price-
value relationship and quality of food and service enable it to differentiate
itself from its competitors. While the Company believes that its restaurants are
distinctive in design and operating concept, it is aware of restaurants that
operate with similar concepts.  The Company believes that its ability to compete
effectively will continue to depend upon its ability to offer high-quality,
moderately priced food in a full-service distinctive dining environment.

                                       4
<PAGE>

Employees

     As of January 2, 2000, the Company had 803 employees, 13 of whom are
corporate personnel, 68 of whom are restaurant management personnel (including 4
managers-in-training), and the remainder of whom are hourly restaurant
personnel. None of the Company's employees are covered by a collective
bargaining agreement.  The Company considers its employee relations to be good.

     The management staff of a typical Silver Diner restaurant consists of one
Operating Partner (general manager) and four assistant managers, including a
kitchen manager and a service manager.  Each Silver Diner restaurant also
employs approximately 75 associates on a part-time and full-time basis.

     Restaurant Personnel.  The Company has established a strong company mission
focusing on culture and values and emphasizing a sense of ownership and
entrepreneurship that empowers its people to achieve professional and personal
excellence.  Management believes that its people are its most valuable asset and
has a variety of programs to provide training, recognition and development of
its management and associates to their full potential. Non-management employees'
performance is tracked daily through productivity measurements that are
established as an integral part of a system of frequent incentive awards.

     Restaurant Operating Partner Program.  To attract and retain talented
management, the Company's compensation program is very competitive.  Management
believes that a key component for long-term success is for each restaurant to be
led by a general manager who lives in the community and has a long-term
commitment to that restaurant's success.  Accordingly, management has
established a Restaurant Operating Partner Program.  Under the Program, the
Operating Partner receives an annual salary and a periodic, profit based, cash
bonus award which equals a percentage of the restaurant's operating income.  In
addition, each general manager is required to purchase 8,000 shares of Common
Stock at market value and can potentially receive an annual award up to $10,000
of Common Stock, dependent upon achievement of performance criteria as
established and evaluated by the Board.  This Program is the successor to the
Restaurant Owner Operator Plan and contains similar plan elements.  Also, all
assistant managers received an annual grant of 500 Common Stock options with a
market exercise price at the grant date.  The stock awards under these plans are
awarded at the discretion of the Company's Board of Directors.

     Selection, Training and Supervision.  Management has developed specific
profiles and protocols used to interview and select its management and associate
staff.  Management personnel are required to participate in an 8- to 12-week
training program emphasizing the Company's operating procedures as well as
management development programs. Each associate also participates in a
standardized training program ranging from two to five days (depending on
position) which utilizes testing results to ensure all associates achieve a
specified standard of performance.

Government Regulations

     The Company is subject to numerous federal, state and local laws affecting
health, sanitation and safety standards as well as to state and local licensing
regulation of the sale of alcoholic beverages.  The Company has appropriate
licenses from regulatory authorities allowing it to sell beer and wine (except
in Cherry Hill, New Jersey where the Company does not sell beer or wine), and
has food service licenses from local health authorities.  The Company's licenses
to sell alcoholic beverages must be renewed annually and may be suspended or
revoked at any time for cause, including violation by the Company or its
employees of any law or regulation pertaining to alcoholic beverage control,
such as those regulating the minimum age of patrons or employees, advertising,
wholesale purchasing and inventory control. The Company's failure to obtain or
retain liquor or food service licenses would have a material adverse effect on
its operation.  To reduce this risk, each restaurant is operated with procedures
in accordance with complete compliance with applicable code and regulations.
There can be no assurance, however, that such approvals and licenses for new
restaurants will be obtained and, if obtained, will be renewed or not revoked.

                                       5
<PAGE>

     The Company is subject in certain states to "dram-shop" statutes, which
generally provide a person injured by an intoxicated person the right to recover
damages from an establishment that wrongfully served alcoholic beverages to the
intoxicated person.  The Company carries liquor liability coverage as part of
its existing comprehensive general liability insurance.  The Company has never
been named as a defendant in a lawsuit involving "dram-shop" statutes.

     The development and construction of additional restaurants will be subject
to compliance with applicable zoning, land use and environmental regulations.
The Company's operations are also subject to federal and state minimum wage laws
governing such matters as working conditions, overtime and tip credits and other
employee matters.

     Management believes it is in compliance with all current applicable
regulations relating to restaurant accommodations for the disabled including the
Federal Americans With Disabilities Act of 1992.

Trademarks

     Management believes that its trademarks and servicemarks are valuable to
the marketing of its restaurants and that it has substantial rights in such
trademarks and servicemarks for the Silver Diner name, based upon the Company's
actual usage and constructive usage derived from its U.S. trademark. The Company
intends to aggressively protect its marks from infringement and competing
claims.  However, there can be no assurance that the Company's marks, even as,
and if, registered do not or will not violate the proprietary rights of others,
that the marks will be upheld if challenged, or that the Company will not be
prevented from using the marks, any of which could have a material adverse
effect on the Company. Management's policy is to pursue registration of its
marks whenever possible and to oppose vigorously any infringements of its marks,
the success of which cannot be assured.

Executive Officers of the Company

     The name, age, period of service and position held of each of the executive
officers of the Company are as follows:

<TABLE>
<CAPTION>

Name                                         Age     Served Since/(1)/    Position(s) Held
-------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>     <C>                  <C>
Robert T. Giaimo                             48           1987            Chairman of the Board,
                                                                          President and Chief Executive Officer
Ype Hengst                                   49           1987            Director, Vice President, Executive Chef and
                                                                          Corporate Secretary
Patrick Meskell                              47           1996            Senior Vice President, Human Resources
Craig Kendall                                48           1998            Vice President, Finance
Timothy Cusick/(2)/                          34           1996            Area Director of Operations
</TABLE>

/(1)/ Includes service with SDDI.
/(2)/ Mr. Cusick has given notice he will be leaving the Company in May 2000.
      Mr. Jon Abbott will join the Company in April 2000 and will replace Mr.
      Cusick after his employment terminates.

     All of the officers have had the principal occupation indicated under
"Position(s) Held" for the previous five years except as follows: Mr. Meskell
was an independent consultant to financial institutions, specializing in the
areas of risk management systems design and implementation from 1988 to 1992 and
Director of Organizational Development & Management & Operations Training for
the Student Loan Marketing Association from 1992 to 1995; and Mr. Kendall who
joined the Silver Diner management team in November of 1998.  Previously, from
1988 to 1998, Mr. Kendall was corporate controller for Team Washington, Inc.,
one of the largest Domino Pizza franchises, which operates in the Washington,
D.C. metropolitan, area with annual sales exceeding $40 million.  Mr. Cusick was
a general manager for the Company from 1994 to 1996.

                                       6
<PAGE>

Item 2. Property.

     Information concerning the registrant's property is set forth under
"Restaurants" in Item 1 of Part I.

Item 3. Legal Proceedings.

     On May 20, 1996, the Company was named as a defendant in a proceeding
instituted in the Circuit Court for Prince George's County, Maryland.  The
plaintiff alleges that sexual assault by the general manager of a Silver Diner
restaurant.  The general manager was terminated promptly following the
occurrence of the event in November 1994.  The plaintiff sought recovery of
$500,000 for each count.  It was not clear if the counts were in the alternative
or cumulative.  The Company's insurance carrier was defending the claim with
reservation of rights.  The Company is insured up to $1,000,000 with respect to
the above mentioned claims.  In September 1998 the court granted summary
judgement in favor of the Company as to all claims brought against them in this
case. No final judgement can be entered at this time due to a Bankruptcy filing
by the former general manager, the co-defendant in the case, prior to the
decision of the court to grant summary judgement on behalf of the Company.

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

     Not Applicable.

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

     Market Information.  Since March 27, 1996, the Common Stock has been listed
on The NASDAQ Stock MarketSM under the symbol SLVR.  Before that date, the
Common Stock was quoted on the OTC Bulletin Board under the symbol FDTR.  The
following table sets forth the high and low closing prices for the Common Stock
for the periods indicated:

<TABLE>
<CAPTION>

                        Quarter     High      Low
                        -------   --------   ------
<S>                     <C>       <C>        <C>
1998                    First     $2-9/16   $1-1/8
                        Second    $1-15/32  $1
                        Third     $1-7/8    $7/8
                        Fourth    $1-1/16   $5/8

1999                    First     $1-15/32  $3/4
                        Second    $1-1/8    $3/4
                        Third     $1-1/32   $25/32
                        Fourth    $1-7/32   $25/32
</TABLE>

     Dividends. Since the Company's inception, no dividends have been paid on
the Common Stock.

     Holders.  As of January 2, 2000, there were approximately 518 record
holders of the Common Stock.

                                       7
<PAGE>

Item 6. Selected Financial Data.

<TABLE>
<CAPTION>
                                                                       Fiscal Years Ending/(i)/
                                         -------------------------------------------------------------------------------------
                                          January 2,      January 3,        December 28,       December 29,       December 31,
                                            2000            1999                1997               1996               1995
<S>                                       <C>             <C>               <C>                <C>                <C>
Statement of Operations Data:
Net sales                                $29,157,366     $28,561,422        $24,259,156        $16,550,468        $13,350,255

Restaurant costs and expenses:
   Cost of sales                           7,609,271       7,920,808          6,929,221          4,526,286          3,655,254
   Labor                                   9,850,921       9,449,685          7,999,812          5,464,896          4,452,134
   Operating                               5,234,014       5,211,704          4,037,198          2,536,609          2,015,668
   Occupancy                               2,866,935       2,777,932          2,534,210          1,931,866          1,588,527
   Depreciation and amortization           1,172,397       1,648,134          1,499,125            882,843            715,426
                                         -----------     -----------        -----------        -----------        -----------
     Total restaurant costs and
      expenses                            26,733,538      27,008,263         22,999,566         15,342,500         12,427,009
                                         -----------     -----------        -----------        -----------        -----------

     Restaurant operating income           2,423,828       1,553,159          1,259,590          1,207,968            923,246

General and administrative expenses        3,133,073       2,921,299          3,065,436          2,705,940          2,077,735
Depreciation and amortization                339,725         267,171            263,484            183,928             97,351
Write off of abandoned site costs                  -          32,455            172,618                  -                  -
                                         -----------     -----------        -----------        -----------        -----------

   Operating loss                         (1,048,970)     (1,667,766)        (2,241,948)        (1,681,900)        (1,251,840)
                                         -----------     -----------        -----------        -----------        -----------

Interest expense                              23,826          40,639             10,702            180,293            334,086
Investment income, net                      (100,917)       (151,967)          (294,231)          (432,721)           (83,021)
                                         -----------     -----------        -----------        -----------        -----------

   Net loss before minority interest
    and cumulative effect of a
    change in accounting principle          (971,879)     (1,556,438)        (1,958,419)        (1,429,472)        (1,502,905)

Minority interest in net loss of SDLP              -               -                  -                  -            180,175
                                         -----------     -----------        -----------        -----------        -----------

   Net loss before cumulative effect
    of a change in accounting
    principle                               (971,879)     (1,556,438)        (1,958,419)        (1,429,472)        (1,322,730)

Cumulative effect of a change in
 accounting principle                              -        (326,868)                 -                  -                  -
                                         -----------     -----------        -----------        -----------        -----------

   NET LOSS                              $  (971,879)    $(1,883,306)       $(1,958,419)       $(1,429,472)       $(1,322,730)
                                         ===========     ===========        ===========        ===========        ===========

Basic and diluted net loss per
 common share before cumulative
 effect of a change in accounting
 principle                               $     (0.08)    $     (0.13)       $     (0.17)       $     (0.15)       $     (0.26)

Cumulative effect of a change in
 accounting principle                              -           (0.03)                 -                  -                  -
                                         -----------     -----------        -----------        -----------        -----------

Net loss per common share                $     (0.08)    $     (0.16)       $     (0.17)       $     (0.15)       $     (0.26)
                                         ===========     ===========        ===========        ===========        ===========

Weighted average common shares
 outstanding                              11,586,512      11,591,822         11,609,400          9,545,681          5,013,319
                                         ===========     ===========        ===========        ===========        ===========
</TABLE>

                                       8
<PAGE>

<TABLE>
<CAPTION>
                                                                               As of/(i)/
                                         -------------------------------------------------------------------------------------
                                          January 2,      January 3,        December 28,       December 29,       December 31,
                                            2000            1999                1997               1996               1995
                                          ----------      ----------        ------------       ------------       ------------
<S>                                       <C>             <C>               <C>                <C>                <C>
Balance Sheet Data:
Working capital
 (deficiency)                             $   460,049     $   625,043       $ 1,332,141       $ 6,669,761         $(4,961,352)
Total assets                               20,594,533      21,638,497        23,646,765        25,864,375          10,794,469
Current liabilities                         2,024,801       2,227,222         2,207,891         3,174,262           6,975,363
Long-term liabilities                       1,295,338       1,173,280         1,317,667           749,396           2,584,832
Stockholders' equity                       17,274,394      18,237,995        20,121,207        21,940,717           1,234,274
</TABLE>

/(i)/ Selected financial data as of and for the year ended January 2, 2000 was
obtained from the Company's audited financial statements. Selected financial
data as of and for the years ended January 3, 1999, December 28, 1997, December
29, 1996 and December 31, 1995 were obtained from the Company's financial
statements audited by another accounting firm whose opinion was unqualified.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
        of Operations.

Forward Looking Disclosure

      Certain information included herein contains statements that are forward-
looking, such as statements relating to plans for future expansion and other
business development activities as well as operating costs, capital spending,
financial sources and the effects of competition.  Such forward-looking
information is subject to changes and variations which are not reasonably
predictable and which could significantly affect future results.  Accordingly,
such results may differ from those expressed in any forward-looking statements
made by or on behalf of the Company.  These changes and variations which could
significantly affect future results include, but are not limited to, those
relating to development and construction activities, including delays in opening
new diners, acceptance of the Silver Diner concept, increased competition in the
restaurant industry, weather conditions, the quality of the Company's restaurant
operations, the adequacy of operating and management controls, dependence on
discretionary consumer spending, dependence on existing management, inflation
and general economic conditions, and changes in federal or state laws or
regulations.

General

     The following discussion includes comments and data relating to the
Company's financial condition and results of operations for the three-year
period ended January 2, 2000.  As of this date, the Company operates 11 diners,
10 in the Washington/Baltimore metropolitan area and one in Cherry Hill, New
Jersey. As of March 15, 2000, there are two additional Silver Diners under
construction, one in the Washington/Baltimore metropolitan area and one in the
Southern Virginia region. The Company is pursuing additional locations
throughout the Mid-Atlantic region for restaurant openings. The Company plans to
expand the Silver Diner chain nationwide through additional openings of Company-
owned restaurants and possibly through the development of franchise or joint
venture relationships. The following table reflects the growth in number of
restaurants over the three-year period.

<TABLE>
<CAPTION>

          Restaurants                                  1997            1998            1999
          -----------                                --------        --------        --------
          <S>                                        <C>             <C>             <C>
          In operation, beginning of year                7              11              11
          Newly opened                                   4               0               0
                                                     --------        --------        --------
          In operation, end of year                     11              11              11
                                                     --------        --------        --------
</TABLE>

                                       9
<PAGE>

     The Company was incorporated in Delaware in April 1994 under the name FTAC.
In March 1996, a subsidiary of the Company merged with SDDI, a Virginia
corporation, which was formed in and operated Silver Diner restaurants since
1987.  SDLP, of which SDDI was the general partner, operated the first three
Silver Diner restaurants.  In June 1996, the Company acquired all of the limited
partner interests in SDLP for a purchase price of $2.472 million and 84,000
warrants to purchase shares of the Common Stock at $8.00 per share.  Unless the
context otherwise requires, references to the Company or Silver Diner also
include FTAC, SDDI and their wholly owned subsidiaries.

     The Company currently operates 11 Silver Diner restaurants, 10 in the
Washington/Baltimore Metropolitan Area and one in Cherry Hill, New Jersey,
serving breakfast, lunch, dinner and late night meals.  The Company targets the
growing number of customers tired of traditional fast food whose need for a
quick, high-quality, reasonably priced meal is not being adequately served by
existing family or casual theme restaurants; the Company capitalizes on the
timeless diner theme to uniquely address this need.  By attracting a broad range
of customer segments, and maintaining extended operating hours, a diverse menu
and convenient locations, the Company is able to compete effectively in the fast
food, family and casual dining segments of the restaurant industry, contributing
to the significant sales volumes of its units. The Company also offers Silver
Diner To Go, which features a range of carry out/delivery options targeting the
growing "home meal replacement" market, and expanded bakery selections.

     Effective January 1, 1994, the Company adopted a 52 or 53-week fiscal year
that ends on the Sunday nearest December 31. Fiscal quarters consist of
accounting periods of 16, 12, 12 and 12 or 13 weeks, respectively. Fiscal years
1999, 1998 and 1997 were comprised of 52, 53 and 52 weeks, respectively and
ended on January 2, 2000, January 3, 1999 and December 28, 1997, respectively.

                                       10
<PAGE>

Results Of Operations

     The following table sets forth the percentage relationship to net sales of
items included in the consolidated statements of operations for the periods
indicated:

<TABLE>
<CAPTION>
                                                                                      Fiscal Years Ended
                                                                ---------------------------------------------------------------
                                                                January 2,                January 3,               December 28,
                                                                  2000                      1999                       1997
                                                                ----------                ----------               ------------
<S>                                                             <C>                       <C>                       <C>
Net sales                                                        100.0%                    100.0%                    100.0%

Restaurant costs and expenses:
 Cost of sales                                                    26.1%                     27.7%                     28.6%
 Labor                                                            33.8%                     33.1%                     33.0%
 Operating                                                        18.0%                     18.3%                     16.6%
                                                                 -----                     -----                     -----
   Restaurant operating margin                                    22.1%                     20.9%                     21.8%

 Occupancy                                                         9.8%                      9.7%                     10.4%
 Depreciation and amortization                                     4.0%                      5.8%                      6.2%
                                                                 -----                     -----                     -----
   Restaurant operating income                                     8.3%                      5.4%                      5.2%

General and administrative expenses                               10.7%                     10.2%                     12.6%
Depreciation and amortization                                      1.2%                      0.9%                      1.1%
Write off of abandoned site costs                                    -                       0.1%                      0.7%
                                                                 -----                     -----                     -----
   Operating loss                                                 (3.6%)                    (5.8%)                    (9.2%)

Interest expense                                                   0.1%                      0.0%                      0.0%
Investment income, net                                            (0.3%)                    (0.5%)                    (1.1%)
                                                                 -----                     -----                     -----

 Loss before cumulative effect of a change in
  accounting principle                                            (3.4%)                    (5.3%)                    (8.1%)

 Cumulative effect of a change in accounting
  principle                                                          -                      (1.2%)                       -
                                                                 -----                     -----                     -----
 Net loss                                                         (3.4%)                    (6.5%)                    (8.1%)
                                                                 =====                     =====                     =====
</TABLE>

Year Ended January 2, 2000 Compared to the Year Ended January 3, 1999

     Net sales for the fiscal year ended January 2, 2000 ("Fiscal 1999") of
$29,157,366 increased approximately $600,000 compared to the fiscal year ended
January 3, 1999 ("Fiscal 1998"). Fiscal 1998 included 53 weeks, adding
approximately $591,000 to net sales. On a 52-week comparative basis, total sales
increased approximately $1.2 million or 4.2%.

     Comparable Company sales (sales for Silver Diner restaurants open
throughout both periods being compared, excluding the initial six months of
operations during which sales are typically higher than normal) increased 5.8%
(3.9% inclusive of the Fiscal 1998 53rd week sales). Same store customer counts
were up 2.8%, while average guest check increased 2.2%. The Company believes the
increase in same store sales was generated through continued focus and
improvement in operational excellence as measured by exit interviews with
customers, which have continued to improve throughout Fiscal 1999.

                                       11
<PAGE>

     Average unit sales increased $102,818 or 4.2% from $2,547,852 in Fiscal
1998 to $2,650,670 in Fiscal 1999; primarily as a result of the increased
customer traffic and increased average check driven by a carefully focused
marketing campaign and supported by operational execution.

     Cost of sales, consisting primarily of food and beverage costs, decreased
from 27.7% of net sales in Fiscal 1998 to 26.1% of net sales in Fiscal 1999 due
primarily to continued management focus on cost control, purchasing agreements,
refinement of food preparation and delivery systems and less extensive seasonal
menu changes.

     Labor, which consists of restaurant management and hourly employee wages
and bonuses, payroll taxes, workers' compensation insurance, group health
insurance and other benefits increased 0.7% to 33.8% of net sales for Fiscal
1999, resulting primarily from a highly competitive labor market causing upward
pressure on average wage rates and continued cost escalation of health benefits.

     Operating expenses, which consists of all restaurant operating costs other
than cost of sales, labor, occupancy and depreciation, including supplies,
utilities, repairs and maintenance and advertising decreased .3% to 18.0% of net
sales for Fiscal 1999, compared to 18.3% for Fiscal 1998. Reduced supply and
maintenance costs accounted for savings of 0.9% and was offset by an increase of
0.6% in advertising and promotional costs.

     Occupancy, which is composed primarily of rent, property taxes and property
insurance, increased $89,003 for Fiscal 1999 compared to Fiscal 1998. As a
percentage of net sales occupancy expenses increased 0.1% in Fiscal 1999 to 9.8%
compared to 9.7% in Fiscal 1998. Additionally, the Company owns the Reston,
Virginia site and consequently does not absorb any rent expense on this
location.

     Restaurant depreciation and amortization decreased $475,737 to $1,172,397
for Fiscal 1999. The decrease was primarily the result of depreciation
associated with an evaluation of unit operational processes, menu engineering,
and a comprehensive unit equipment assessment resulting in the Company writing
off equipment in the fourth quarter of 1998.

     General and administrative expenses include the cost of corporate
administrative personnel and functions, multi-unit management and restaurant
management recruitment and initial training. Such expenses were $3,133,073 for
Fiscal 1999, an increase of  $211,774, or 7.2%, compared to Fiscal 1998.  As a
percentage of net sales, general and administrative expenses increased to 10.7%
for Fiscal 1999 from 10.2% for Fiscal 1998.  The increase was principally
related to higher legal and accounting fees during the first sixteen weeks of
Fiscal 1999, coupled with the continued cost escalation of recruiting and
training restaurant management talent. The Company's administrative overhead as
a percentage of net sales remains above the industry average primarily due to
the cost of the corporate management team required to support the Company's
intermediate and long-term growth plans.

     The Company earned $100,917 in investment income for Fiscal 1999, compared
to investment income of $151,967 for Fiscal 1998. The decrease is primarily a
result of reduced levels of cash available for investment. Interest expense was
$23,826 for Fiscal 1999 and $40,639 for Fiscal 1998.

     Net loss for Fiscal 1999 was $971,879 or $0.08 per share, compared to a
loss of $1,883,306 or $0.16 per share in Fiscal 1998. Weighted average shares
outstanding remained essentially unchanged at 11,586,512 in 1999 versus
11,591,822 in 1998. Management expects that the Company will continue to incur
quarterly losses until such time as revenue generation from increased market
penetration is sufficient to absorb new unit start-up costs and the increased
general and administrative infrastructure costs currently in place to support
the Company's growth plans.

                                       12
<PAGE>

Year Ended January 3, 1999 Compared to the Year Ended December 28, 1997

     Net sales for the fiscal year ended January 3, 1999 ("Fiscal 1998") of
$28,561,422 increased $4.3 million compared to the fiscal year ended December
28, 1997. Silver Diners opened during Fiscal 1997 in Northern Virginia and
Cherry Hill, New Jersey contributed significantly to the incremental sales.
Additionally, Fiscal 1998 included 53 weeks, adding approximately $591,000 to
net sales.

     Comparable Company sales (sales for Silver Diner restaurants open
throughout both periods being compared, excluding the initial six months of
operations during which sales are typically higher than normal) increased 3.6%
(1.5% exclusive of the 53rd week sales). Same store customer counts were up
1.4%, while average guest check increased 2.0%. The Company believes the
increase in same store sales was generated through continued focus and
improvement in operational excellence as measured by exit interviews with
customers, which have improved by approximately 50% from year-end 1997 to year-
end 1998.  The vehicle to achieve this was the development, implementation and
continued focus on the Company's 110% guarantee program. The 110% guarantee
initiative provides for a 10% discount on the customer's current meal and a
coupon for a free entree if not completely satisfied with the dining experience.
Additionally, a direct mail campaign increased customer traffic.

     Average unit sales, measured on an effective restaurants open basis,
decreased 3.9% from $2,651,274 in fiscal 1997 to $2,547,852 in Fiscal 1998;
primarily as the result of the "honeymoon sales period" of four new unit
openings throughout Fiscal 1997 and increased penetration of the Northern
Virginia market reducing the trade area of existing diners.

     Cost of Sales, consisting primarily of food and beverage costs, decreased
from 28.6% of net sales in Fiscal 1997 to 27.7% of net sales in Fiscal 1998 due
primarily to operational improvements, purchasing efficiencies on high cost,
high turnover items and a significant menu re-engineering, that included recipe
reformulation as well as basic menu redesign and layout. The maturation of new
units also contributed favorably to improved cost of sales performance.

     Labor, which consists of restaurant management and hourly employee wages
and bonuses, payroll taxes, workers' compensation insurance, group health
insurance and other benefits increased 0.1% to 33.1% of net sales for Fiscal
1998, resulting from a decrease in average unit volume.  An analysis of this
dollar cost element indicates an overall per unit dollar expenditure decrease in
effective unit direct labor of 3.6%, driven by a 5.6% decrease in hourly wages,
a 26.2% reduction in training labor and partially offset by modest increases in
unit management compensation and escalating benefit costs.

     Operating expenses, which consists of all restaurant operating costs other
than cost of sales, labor, occupancy and depreciation, including supplies,
utilities repairs and maintenance and advertising increased 1.6% to 18.3% of net
sales for Fiscal 1998, compared to 16.6% for Fiscal 1997. All but .2% of the
increase was attributable to the higher marketing costs associated with the 110%
guarantee program and the related direct mail campaign. Fiscal 1998 expenditures
for these initiatives totaled $410,000. The remainder of the margin variance
resulted from increased supply and maintenance costs reflecting management's
commitment under the 110% guarantee to ensure a quality dining experience to its
customers.

     Occupancy, which is composed primarily of rent, property taxes and property
insurance, increased $243,722 for Fiscal 1998 compared to Fiscal 1997,
principally due to a full year of expense recognition on units opened in Fiscal
1997. As a percentage of net sales occupancy expenses decreased 0.7% in Fiscal
1998 to 9.7% compared to 10.4% in Fiscal 1997. Additionally, the Company owns
the Reston, Virginia site and consequently does not absorb any rent expense on
this location.

     Restaurant depreciation and amortization increased $149,009 to $1,648,134
for Fiscal 1998. The increase was the result of depreciation associated with the
new unit openings throughout Fiscal 1997 totaling $112,000, plus $372,734 in
depreciation and amortization incurred in connection with an evaluation of unit
operational processes, menu engineering, and a comprehensive unit equipment
assessment resulting in the Company writing off equipment in the fourth quarter
of 1998. This increase in restaurant depreciation and amortization was offset by
a $326,886 reduction for the expensing of all preopening costs capitalized as of
December 28, 1997 and recording of a

                                       13
<PAGE>

cumulative effect of a change in accounting principle in the first quarter of
1998. During the First Quarter of 1998, the company elected early adoption of
SOP No. 98-5, "Reporting on the Costs of Start-Up Activities." SOP No. 98-5
requires that costs associated with start-up activities, such as opening a new
restaurant, be expensed as incurred. Prior to the First Quarter 1998, the
Company had capitalized all preopening expenses and amortized these costs over a
12-month period.

     General and administrative expenses include the cost of corporate
administrative personnel and functions, multi-unit management and restaurant
management recruitment and initial training. Such expenses were $2,921,299 for
Fiscal 1998, a decrease of $144,137, or 4.7%, compared to Fiscal 1997.  As a
percentage of net sales, general and administrative expenses decreased to 10.2%
for Fiscal 1998 from 12.6% for Fiscal 1997.  The decrease was a direct result of
management's efforts to reduce overhead and leverage increased sales to improve
overall margin performance. The Company's administrative overhead as a
percentage of net sales remains above the industry average primarily due to the
cost of the corporate management team required to support the Company's
intermediate and long-term growth plans.

     Write off of abandoned site costs decreased from $172,618 in Fiscal 1997 to
$32,455 in Fiscal 1998. The Fiscal 1998 write off related to a suburban Maryland
site, which was abandoned during the fourth quarter.

     The Company earned $151,967 in investment income for Fiscal 1998, compared
to investment income of $294,231 for Fiscal 1997. The decrease is a direct
result of cash being used to construct and open four Silver Diners since Fiscal
1996. Interest expense was $40,639 for Fiscal 1998 and $10,702 for Fiscal 1997.
The issuance of debt in the second quarter of 1997 and interest charges on non-
financing transactions caused interest expense to increase to $40,639 from
$10,702 in the prior year.

     Net loss for Fiscal 1998 was $1,883,306 or $0.16 per share, compared to a
loss of $1,958,419 or $0.17 per share in Fiscal 1997. Weighted average shares
outstanding remained substantially unchanged at 11,591,822 in 1998 versus
11,609,400 at December 28, 1997. Management expects that the Company will
continue to incur quarterly losses until such time as revenue generation from
increased market penetration is sufficient to absorb new unit start-up costs and
the increased general and administrative infrastructure costs currently in place
to support the Company's growth plans.

     Income Taxes.  No current or deferred income tax benefit has been provided
in the Company's consolidated financial statements due to the Company's history
of net operating losses for income tax purposes.  At January 2, 2000, the
Company has a net operating loss carryforward of approximately $6,663,000 for
income tax purposes that expires in 2008 through 2014, which may be used to
reduce future income tax expense and tax liabilities.

New Accounting Pronouncement

     In June, 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. This statement
is effective for all fiscal quarters of fiscal years beginning after June 15,
2000.  Adoption of SFAS No. 133 is not expected to have a material impact on the
Company's financial statement presentation or disclosures.

Liquidity and Capital Resources

     The Silver Diner's operations are subject to significant external
influences beyond its control. Any one, or any combination of such factors,
could materially impact the actual results of the Diner's operations. Those
factors include, but are not limited to: (I) changes in general economic
conditions,  (II) changes in consumer spending habits  (III) changes in the
availability and cost of raw materials,  (IV) changes in the availability of
capital resources,  (V) changes in the prevailing interest rates,  (VI) changes
in the competitive environment and  (VII) changes in the Federal or State laws
governing the business.

                                       14
<PAGE>

     At January 2, 2000, cash and cash equivalents were $1.12 million, short-
term investments were $810,000, working capital was $460,000, the Company had no
long-term debt and stockholders' equity was $17.27 million. Cash and cash
equivalents decreased $490,000 during Fiscal 1999, due primarily to cash used to
finance the purchases of property and equipment including the purchase of Point-
of-Sale computer systems.

     The Company's principal future capital requirement is expected to be the
development of restaurants. Currently, the typical building, equipment
(including smallwares) and site development cost of a new Silver Diner prototype
is expected to be approximately $1.3 to $1.5 million. However, due to above
average site costs and architectural and design costs, the five Silver Diner
locations opened since December 1995 have averaged approximately $1.8 million
for building, equipment and site costs.  The Company is currently in the process
of executing the new prototype design to decrease the cost of a Silver Diner
restaurant.  There is no assurance that the Company's prototype redesign plans
will produce significant savings in the prototype costs.  Land generally will be
leased. When land is purchased, management may pursue a sale-leaseback or debt
financing strategy following the restaurant's opening.

     At January 2, 2000, the Company had entered into lease agreements for two
new restaurants, Virginia Beach, Virginia, which is currently under
construction, and Lakeforest Mall in Gaithersburg, MD, which are expected to
open in the second and third quarters of 2000, respectively.  The Company has
been pursuing locations in a new geographical market, specifically in the Mid-
Atlantic area from North Carolina to Southern New Jersey. To that end,
management is presently involved in active negotiations with prospective
landlords at several locations for additional Silver Diner sites.

     Management believes that the Company's current capital resources and
expected 2000 cash flow will be adequate to construct up to two units. The
Company has entered into a loan agreement with its lead bank to extend a $3
million line of credit in October 1999 that is sufficient to fund at least two
additional diners. A replacement loan agreement is presently being negotiated.
Pending execution of the replacement loan agreement, it is unclear whether the
Company could advance any funds under the existing loan agreement.  Additional
financing will be required to finance growth in 2000 beyond the next two diners.
The Company may forced to limit unit growth, if it is unable to meet or exceed
certain financial and operating criteria defined in the formal loan documents.

Seasonality and Quarterly Results

     Although the Company's limited operating history, geographic concentration
and small number of existing Silver Diners make future trends difficult to
predict, Silver Diner restaurants have generally experienced higher average
weekly net sales in the second and third quarters. The timing of new Silver
Diner restaurant openings and extreme weather, especially during the winter
months, may also affect sales and quarterly results.  Accordingly, quarter-to-
quarter comparisons of the Company's results of operations may not be
meaningful, and results for any quarter are not necessarily indicative of the
results that may be achieved for a full fiscal year. The first fiscal quarter
includes 16 weeks of operations as compared to 12, 12 and 12 or 13 weeks for
each of the subsequent three-quarters, respectively. As a result, despite higher
average weekly sales, net sales from comparable Silver Diners can be expected to
be lower in the second quarter as compared to the first quarter of each year.

Year 2000 Issue and Compliance

     In connection with the Company's efforts to ensure that its information
technology systems and non-information technology systems were Year 2000
compliant, the Company incurred costs of approximately $17,000 during Fiscal
1999. Additionally, the Company was concurrently upgrading its point-of-sale
systems with a vendor that had been assessed as Year 2000 compliant. These
efforts and the related costs were necessary to ensure the Company did not
experience any significant system failures or other adverse effects on the
routine operation of the Diners. As a result the Company has not suffered any
system failures to date. Management continues to monitor its technology-based
systems for any undiscovered issues.

                                       15
<PAGE>

Impact of Inflation

     Management does not believe that inflation has materially affected the
Company's operating results. Substantial increases in costs and expenses,
particularly food, supplies, labor and operating expenses, could have a
significant impact on the Company's operating results to the extent that such
increases cannot be passed along to customers.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

     Not applicable.

                                       16
<PAGE>

Item 8.  Financial Statements

                                                               PAGE

INDEPENDENT AUDITORS' REPORT                                    18

CONSOLIDATED FINANCIAL STATEMENTS

     CONSOLIDATED BALANCE SHEETS AS OF
     JANUARY 2, 2000 AND JANUARY 3, 1999                        20

     CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
     FISCAL YEARS ENDED JANUARY 2, 2000, JANUARY 3, 1999
     AND DECEMBER 28, 1997                                      21

     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
     EQUITY FOR THE FISCAL YEARS ENDED JANUARY 2, 2000,
     JANUARY 3, 1999 AND DECEMBER 28, 1997                      22

     CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
     FISCAL YEARS ENDED JANUARY 2, 2000, JANUARY 3, 1999
     AND DECEMBER 28, 1997                                      23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                      25

                                       17
<PAGE>

                         INDEPENDENT AUDITORS' REPORT


To the Board of Directors
Silver Diner, Inc. and Subsidiary

We have audited the accompanying consolidated balance sheet of Silver Diner,
Inc. and Subsidiary (the "Company") as of January 2, 2000, and the related
consolidated statement of operations, changes in stockholders' equity, and cash
flows for year then ended.  The consolidated financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audit.  The consolidated
financial statements of Silver Diner, Inc. as of and for the years ended January
3, 1999 and December 28, 1997 were audited by other auditors whose reports,
dated March 8, 1999 and March 6, 1998, respectively, expressed an unqualified
opinion on those statements.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Silver Diner, Inc.
and Subsidiary as of January 2, 2000 and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.



/s/ Reznick Fedder & Silverman
______________________________
Bethesda, Maryland
March 2, 2000

                                       18
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Stockholders of Silver Diner, Inc.:

We have audited the accompanying consolidated balance sheet of Silver Diner,
Inc. and subsidiaries (the "Company") as of January 3, 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
years ended January 3, 1999 and December 28, 1997.  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 our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Silver Diner, Inc. and subsidiaries
as of January 3, 1999, and the results of their operations and their cash flows
for the years ended January 3, 1999 and December 28, 1997 in conformity with
generally accepted accounting principles.

As discussed in Note 2 to the financial statements, the Company changed its
method of accounting for preopening costs during the year ended January 3, 1999
to conform with the American Institute of Certified Public Accountants Statement
of Position No. 98-5.



/s/ Deloitte & Touche LLP
_________________________
Washington, DC
March 8, 1999

                                       19
<PAGE>

                        Silver Diner, Inc. and Subsidiary

                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                              ASSETS

                                                                                   January 2,                January 3,
                                                                                     2000                      1999
                                                                                ----------------------------------------
<S>                                                                             <C>                       <C>
Current assets:
 Cash and cash equivalents                                                      $   1,122,755             $   1,611,757
 Marketable securities available for sale                                             813,452                   746,597
 Inventory                                                                            134,698                   139,039
 Prepaid rent                                                                         158,447                   182,796
 Incentive rebates                                                                    108,928                    61,410
 Prepaid and other current assets                                                     146,570                   110,666
                                                                                -------------             -------------
  Total current assets                                                          $   2,484,850             $   2,852,265

Property, equipment and improvements, net                                          15,583,903                16,117,417

Due from related parties                                                              142,293                   126,516
Goodwill, net                                                                       2,114,587                 2,299,082
Deposits and other                                                                    268,900                   243,217
                                                                                -------------             -------------

   Total assets                                                                 $  20,594,533             $  21,638,497
                                                                                =============             =============

                         LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
 Accounts payable and accrued expenses                                          $   1,757,801             $   1,960,222
 Note payable                                                                         267,000                   267,000
                                                                                -------------             -------------
                                                                                    2,024,801                 2,227,222
Long-term liabilities:
 Deferred rent liability                                                            1,295,338                 1,173,280
                                                                                -------------             -------------
   Total liabilities                                                                3,320,139                 3,400,502
                                                                                -------------             -------------

Commitments and contingencies                                                               -                         -

Stockholders' equity:
 Preferred stock, $.001 par value, 1,000,000 shares authorized;
  none issued                                                                               -                         -
 Common stock, $.00074 par value, 20,000,000 shares authorized;
  at January 2, 2000, 11,592,691 shares issued and outstanding
  at January 3, 1999, 11,585,510 shares issued and outstanding                          8,563                     8,558
 Additional paid-in capital                                                        30,773,262                30,688,714
 Unearned compensation                                                               (227,489)                 (252,453)
 Treasury stock (165,802 shares of common stock at cost)                             (101,239)                        -
 Accumulated deficit                                                              (13,178,703)              (12,206,824)
                                                                                -------------             -------------
   Total stockholders' equity                                                      17,274,394                18,237,995
                                                                                -------------             -------------

   Total liabilities and stockholders' equity                                   $  20,594,533             $  21,638,497
                                                                                =============             =============
</TABLE>

   The accompanying notes are an integral part of these financial statements

                                       20

<PAGE>

                        Silver Diner, Inc. and Subsidiary

                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                                                Fiscal years ended
                                                         ------------------------------------------------------------------
                                                          January 2,                 January 3,                December 28,
                                                             2000                       1999                       1997
                                                         ------------              --------------            --------------
<S>                                                      <C>                       <C>                       <C>
Net sales                                                $ 29,157,366              $   28,561,422            $   24,259,156
                                                         ------------              --------------            --------------

 Cost of sales                                              7,609,271                   7,920,808                 6,929,221
 Labor                                                      9,850,921                   9,449,685                 7,999,812
 Operating                                                  5,234,014                   5,211,704                 4,037,198
 Occupancy                                                  2,866,935                   2,777,932                 2,534,210
 Depreciation and amortization                              1,172,397                   1,648,134                 1,499,125
                                                         ------------              --------------            --------------

   Total restaurant costs and expenses                     26,733,538                  27,008,263                22,999,566
                                                         ------------              --------------            --------------

   Restaurant operating income                              2,423,828                   1,553,159                 1,259,590

General and administrative expenses                         3,133,073                   2,921,299                 3,065,436
Depreciation and amortization                                 339,725                     267,171                   263,484
Write-off of abandoned site costs                                   -                      32,455                   172,618
                                                         ------------              --------------            --------------

   Operating loss                                          (1,048,970)                 (1,667,766)               (2,241,948)

Interest expense                                               23,826                      40,639                    10,702
Investment income, net                                       (100,917)                   (151,967)                 (294,231)
                                                         ------------              --------------            --------------

   Loss before cumulative effect of a change
    in accounting principle                                  (971,879)                 (1,556,438)               (1,958,419)

Cumulative effect of a change in accounting
principle                                                           -                    (326,868)                        -
                                                         ------------              --------------            --------------

   NET LOSS                                              $   (971,879)             $   (1,883,306)           $   (1,958,419)
                                                         ============              ==============            ==============
Basic and diluted net loss per common share
 Loss per common share before cumulative effect of
  a change in accounting principle                       $      (0.08)             $        (0.13)           $        (0.17)
 Cumulative effect of a change in accounting                        -                       (0.03)                        -
                                                         ------------              --------------            --------------

 Net loss per common share                               $      (0.08)             $        (0.16)           $        (0.17)
                                                         ============              ==============            ==============

Weighted average common shares outstanding               $ 11,586,512              $   11,591,822            $   11,609,400
                                                         ============              ==============            ==============
</TABLE>

   The accompanying notes are an integral part of these financial statements

                                       21

<PAGE>
                        Silver Diner, Inc. and Subsidiary

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Fiscal years ended January 2, 2000, Janaury 3, 1999 and December 28, 1997

<TABLE>
<CAPTION>
                                              Common Stock               Treasury Stock
                                              ------------               --------------          Additional         Unearned
                                         Shares           Amount       Shares         Cost     Paid-in Capital    Compensation
                                         ------           ------       ------         ----     ---------------    ------------
<S>                                      <C>              <C>         <C>           <C>        <C>                <C>
Balance at December 29, 1996                11,520,473    $8,526             -     $       -      $30,423,561     $  (126,271)
Issuance of common stock                       130,117        96             -             -          467,404        (315,000)
Issuance of stock awards                             -         -             -             -          920,000        (920,000)
Common stock purchased                         (83,606)      (62)            -             -         (186,938)         52,500
Stock options exercised                         35,419        26             -             -               15               -
Stock options issued                                 -         -             -             -           61,865               -
Repurchase of outstanding options                    -         -             -             -          (40,500)         20,250
Cancellation of outstanding options                  -         -             -             -          (40,470)         40,470
Amortization of unearned compensation                -         -             -             -                -          79,253
Net loss                                             -         -             -             -                -               -
                                           -----------    ------     ---------     ---------      -----------     -----------
Balance at December 28, 1997                11,602,403     8,586             -             -       31,604,937      (1,168,798)
                                           -----------    ------     ---------     ---------      -----------     -----------

Issuance of common stock                        17,392        13             -             -           24,987         (12,500)
Issuance of stock awards                             -         -             -             -          206,250        (206,250)
Common stock purchased                         (42,746)      (47)            -             -          (93,801)         43,753
Stock options exercised                          8,461         6             -             -               79               -
Cancellation of outstanding options                  -         -             -             -       (1,053,738)      1,026,757
Amortization of unearned compensation                -         -             -             -                -          64,585
Net loss                                             -         -             -             -                -               -
                                           -----------    ------     ---------     ---------      -----------     -----------
Balance at January 3, 1999                  11,585,510     8,558             -             -       30,688,714        (252,453)
                                           -----------    ------     ---------     ---------      -----------     -----------

Issuance of common stock                        15,050        11             -             -           10,878               -
Issuance of stock awards                             -                       -             -          158,243        (158,243)
Common stock purchased                          (7,869)       (6)            -             -           (9,994)              -
Purchase of treasury stock                           -         -     (165,802)      (101,239)               -               -
Stock options issued                                 -         -             -             -           37,789          (6,774)
Cancellation of outstanding options                  -         -             -             -         (112,368)         87,764
Amortization of unearned compensation                -         -             -             -                -         102,217
Net loss                                             -         -             -             -                -               -
                                           -----------    ------     ---------     ---------      -----------     -----------
Balance at January 2, 2000                  11,592,691    $8,563      (165,802)    $(101,239)     $30,773,262     $  (227,489)
                                           ===========    ======     =========     =========      ===========     ===========
<CAPTION>
                                             Accumulated
                                               Deficit             Total
                                               -------             -----
<S>                                          <C>               <C>
Balance at December 29, 1996                 $ (8,365,099)     $21,940,717
Issuance of common stock                                -          152,500
Issuance of stock awards                                -                -
Common stock purchased                                  -         (134,500)
Stock options exercised                                 -               41
Stock options issued                                    -           61,865
Repurchase of outstanding options                       -          (20,250)
Cancellation of outstanding options                     -                -
Amortization of unearned compensation                   -           79,253
Net loss                                       (1,958,419)      (1,958,419)
                                             ------------      -----------
Balance at December 28, 1997                  (10,323,518)      20,121,207
                                             ------------      -----------

Issuance of common stock                                -           12,500
Issuance of stock awards                                -                -
Common stock purchased                                  -          (50,095)
Stock options exercised                                 -               85
Cancellation of outstanding options                     -          (26,981)
Amortization of unearned compensation                   -           64,585
Net loss                                       (1,883,306)      (1,883,306)
                                             ------------      -----------
Balance at January 3, 1999                    (12,206,824)      18,237,995
                                             ------------      -----------

Issuance of common stock                                -           10,889
Issuance of stock awards                                -                -
Common stock purchased                                  -          (10,000)
Purchase of treasury stock                              -         (101,239)
Stock options issued                                    -           31,015
Cancellation of outstanding options                     -          (24,604)
Amortization of unearned compensation                   -          102,217
Net loss                                         (971,879)        (971,879)
                                             ------------      -----------
Balance at January 2, 2000                   $(13,178,703)     $17,274,394
                                             ============      ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements

                                       22

<PAGE>

                        Silver Diner, Inc. and Subsidiary

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                 Fiscal years ended
                                                         -----------------------------------------------------------------
                                                            January 2,               January 3,             December 28,
                                                               2000                     1999                    1997
                                                         --------------------  -----------------------  ------------------
<S>                                                         <C>                     <C>                     <C>
Cash flows from operating activities
Net loss                                                    $ (971,879)             $(1,883,306)            $(1,958,419)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
 Depreciation and amortization                               1,512,122                1,915,305               1,762,609
 Development and abandoned site costs                                -                   32,455                 172,618
 Compensation expense - stock options and
  deferred compensation                                        108,627                   37,604                 141,118
 Cumulative effect of change in accounting principle
  principles                                                         -                  326,868                       -
 Termination of note receivable                                      -                        -                 123,329
 Changes in operating assets and liabilities
  Inventory                                                      4,341                   57,404                 (48,462)
  Prepaid rent                                                  24,349                 (182,796)                      -
  Incentive rebates                                            (47,518)                  17,623                       -
  Prepaid and other current assets                             (35,904)                   7,509                   4,873
  Preopening expenses                                                -                        -                (660,325)
  Deposits and other                                           (25,683)                 (13,936)                100,585
  Accounts payable and accrued expenses                       (204,377)                (247,669)               (262,323)
  Deferred rent liability                                      122,058                  122,613                 301,271
  Due from related parties                                     (15,777)                (115,916)                      -
                                                            ----------              -----------             -----------

 Net cash provided by (used in) operating activities           470,359                   73,758                (323,126)
                                                            ----------              -----------             -----------

  Cash flows used in investing activities
  Purchases of property and equipment                         (792,156)                (497,407)             (6,421,329)
  Maturities of short-term investments                         750,000                2,900,000               4,030,907
  Purchase of short-term investments                          (816,855)              (2,424,514)             (4,171,974)
  Advances to affiliates                                             -                        -                 (67,372)
                                                            ----------              -----------             -----------

   Net cash used in investing activities                      (859,011)                 (21,921)             (6,629,768)
                                                            ----------              -----------             -----------
</TABLE>

   The accompanying notes are an integral part of these financial statements

                                       23

<PAGE>

                        Silver Diner, Inc. and Subsidiary

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                 Fiscal years ended
                                                         -----------------------------------------------------------------
                                                            January 2,               January 3,             December 28,
                                                               2000                     1999                    1997
                                                         --------------------  -----------------------  ------------------
<S>                                                         <C>                     <C>                     <C>
Cash flows from financing activities
 Proceeds from issuance of common stock                     $   10,889              $   12,500              $   152,500
 Proceeds from exercise of stock options                             -                      85                       41
 Purchase of common stock                                      (10,000)                (50,095)                (134,500)
 Purchase of treasury stock                                   (101,239)                      -                        -
 Proceeds from notes payable                                         -                       -                  267,000
 Repurchase of employee stock options                                -                       -                  (20,250)

Net cash provided by (used in) financing activities           (100,350)                (37,510)                 264,791
                                                            ----------              ----------              -----------

Net increase (decrease) in cash and cash equivalents          (489,002)                 14,327               (6,688,103)

Cash and cash equivalents, beginning of year                 1,611,757               1,597,430                8,285,533
                                                            ----------              ----------              -----------

Cash and cash equivalents, end of year                      $1,122,755              $1,611,757              $ 1,597,430
                                                            ==========              ==========              ===========
Supplemental disclosure of cash flow information:
 Interest paid                                              $   37,492              $   25,523              $    10,702
                                                            ==========              ==========              ===========
Noncash investing and financing activities:
 Construction payables included in accounts
 payable and accrued expenses                               $        -              $        -              $   350,604
                                                            ==========              ==========              ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements

                                       24
<PAGE>

                       Silver Diner, Inc. and Subsidiary

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                January 2, 2000

1. Organization

   Silver Diner, Inc. (the Company) and its subsidiary develop and operate the
   Silver Diner restaurant chain.  At January 2, 2000, the Company owned and
   operated ten diners in the Washington/Baltimore metropolitan area and one in
   Cherry Hill, New Jersey.

2. Summary Of Significant Accounting Policies

   Basis of Presentation and Consolidation
   ---------------------------------------

   The consolidated financial statements include the accounts and operations of
   the Company and its subsidiary, Silver Diner Development, Inc. (SDDI).  All
   significant intercompany balances and transactions have been eliminated in
   consolidation.

   Fiscal Year
   -----------

   The Company operates on a 52- or 53-week fiscal year that ends on the Sunday
   nearest December 31. The fiscal quarters for the Company consist of
   accounting periods of 16, 12, 12, and 12 or 13 weeks, respectively. Fiscal
   years 1999, 1998 and 1997 were comprised of 52, 53 and 52 weeks,
   respectively, and ended on January 2, 2000, January 3, 1999 and December 28,
   1997, respectively.

   Cash and Cash Equivalents and Marketable Securities
   ---------------------------------------------------

   All short-term investments are classified as available-for-sale. Those
   investments that are part of the Company's cash management portfolio with an
   original maturity of three months or less when purchased are reported as cash
   equivalents. The balance of short-term investments are classified as
   marketable securities. At January 2, 2000, marketable securities consists of
   investment-grade commercial paper. Cash and cash equivalents and marketable
   securities are stated at cost plus accrued interest, which approximates fair
   value.

   Inventory
   ---------

   Inventory consists of food and supplies and is stated at the lower of cost
   (first-in, first-out) or market.

   Property, Equipment and Improvements
   ------------------------------------

   Property, equipment and improvements are recorded at cost. Buildings and
   leasehold improvements are depreciated over the shorter of the estimated
   useful lives of the assets or the respective anticipated lease period
   including renewal options, ranging from 20 to 35 years, with a provision for
   salvage value for the Rockville building.  Furniture and equipment are
   depreciated over the estimated useful lives of the related assets, ranging
   from two to ten years.  Depreciation is computed using the straight-line
   method.

   Deferred Lease Costs
   --------------------

   Deferred lease costs represent brokerage commissions, legal fees and zoning-
   related costs primarily related to leases on the land upon which the Company
   constructed its restaurants and are amortized on a straight-line basis over
   the life of the respective lease agreement.

                                       25
<PAGE>

                       Silver Diner, Inc. and Subsidiary

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                                January 2, 2000


2. Summary Of Significant Accounting Policies (Continued)

   Pre-opening Costs
   -----------------

   On April 3, 1998, the American Institute of Certified Public Accountants
   (AICPA) issued Statement of Position (SOP) No. 98-5, "Reporting on the Cost
   of Start-Up Activities." SOP No. 98-5 requires that costs associated with
   start-up activities, such as opening a new facility, be expensed as incurred.
   This SOP is effective for financial statements for fiscal years beginning
   after December 15, 1998; however, early application is encouraged.

   Prior to 1998, the Company capitalized preopening costs, including payroll,
   employee recruitment and advertising, incurred in the restaurant start-up and
   training period prior to the opening of each restaurant, and amortized these
   costs over 12 months from the date of opening. The Company elected early
   application of SOP 98-5 during the first quarter of 1998. As a result of the
   early application, all preopening costs capitalized as of December 28, 1997
   were expensed and recorded as a cumulative effect of a change in accounting
   principle in the first quarter of 1998. Had preopening costs been accounted
   for in accordance with SOP No. 98-5 during the year ended December 28, 1997,
   the Company's net loss and net loss per share would have been the pro forma
   amounts indicated below:

<TABLE>
            <S>                                    <C>
            Net loss:
               As reported                         $(1,958,419)
               Pro forma                           $(2,157,873)


              Net loss per common share:
               As reported                         $     (0.17)
               Pro forma                           $     (0.19)
</TABLE>

   Goodwill
   --------

   Cost in excess of fair value of net assets required related to the
   acquisition of the minority interest in SDLP (see note 3) is being amortized
   on a straight-line basis over 15 years.

   Deferred Rent
   -------------

   Deferred rent is recorded and amortized to the extent the total minimum
   rental payments allocated to the current period on a straight-line basis
   exceed or are less than the cash payments required.

   Income Taxes
   ------------

   The provision for income taxes is based on earnings reported in the financial
   statements. Deferred income taxes are provided for temporary differences
   between financial assets and liabilities and those reported for income tax
   purposes.

                                       26
<PAGE>

                       Silver Diner, Inc. and Subsidiary

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                                January 2, 2000

2. Summary of Significant Accounting Policies (Continued)

   Net Loss Per Common Share
   -------------------------

   Net loss per common share is computed based upon the weighted average number
   of common shares outstanding during the period. The Company implemented
   Statement of Financial Accounting Standards (SFAS) No. 128, which requires
   presentation of basic and diluted earnings per share amounts and a
   reconciliation of the respective calculations. The Company incurred a net
   loss for the years ended January 2, 2000, January 3, 1999 and December 28,
   1997; therefore, all potential common shares are antidilutive and not
   included in the calculation of diluted net loss per share.

   Evaluation of Long-Lived Assets
   -------------------------------

   The Company evaluates the potential impairment of long-lived assets,
   including goodwill, based upon projections of undiscounted cash flows
   whenever events or changes in circumstances indicate that the carrying amount
   of an asset may not be fully recoverable. During fiscal years 1999 and 1998,
   the Company wrote off $0 and $32,455, respectively, of deferred site costs
   including legal, design and development costs for potential restaurant sites
   that the Company is no longer pursuing or that the Company believes the
   probability of the site being procured is unlikely. During fiscal years 1999
   and 1998, in connection with an evaluation of unit operational processes,
   menu engineering, and a comprehensive unit equipment assessment, the Company
   wrote off equipment with a net book value of $41,400 and $372,734,
   respectively, which is included in depreciation and amortization within the
   Statement of Operations. Management believes no additional material
   impairment of these assets exists at January 2, 2000. The write-off resulted
   from the elimination of the operational usefulness for certain equipment and
   the identification of obsolete or no longer in service equipment.

   Stock-Based Compensation
   ------------------------

   Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
   Stock-Based Compensation," requires expanded disclosures of stock-based
   compensation arrangements with employees and encourages (but does not
   require) compensation cost to be measured based on fair value of the equity
   instrument awarded (see note 11). The Company has chosen to continue to
   account for employee stock-based compensation using the intrinsic value
   method prescribed in Accounting Principles Board Opinion No. 25, "Accounting
   for Stock Issued to Employees, and Related Interpretations." Accordingly,
   compensation costs for stock options is measured as the excess, if any, of
   the quoted market price of the Company's stock at the date of the grant over
   the amount the employee must pay to acquire the stock.

   Reclassification
   ----------------

   Certain prior year balances have been reclassified to conform to the 1999
   presentation.

   Use of Estimates
   ----------------

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

                                       27
<PAGE>

                       Silver Diner, Inc. and Subsidiary

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                                January 2, 2000


2. Summary of Significant Accounting Policies (Continued)

   Recent Accounting Pronouncement
   -------------------------------

   In June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
   Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
   reporting standards for derivative instruments. It requires that an entity
   recognize all derivatives as either assets or liabilities in the statement of
   financial position and measure those instruments at fair value. This
   statement is effective for all fiscal quarters of fiscal years beginning
   after June 15, 2000. Adoption of SFAS No. 133 is not expected to have a
   material impact on the Company's financial statement presentation or
   disclosures.

3. Acquisition of Minority Interest in Silver Diner Limited Partnership

   On June 13, 1996, the Company completed its purchase of all of the limited
   partnership interests in Silver Diner Limited Partnership (SDLP) from the
   original investors for $2,472,000 in cash and 84,000 warrants (New Warrants)
   to purchase common stock exercisable at $8.00 per share. The New Warrants
   were exercisable until the earlier of 30 days following a public offering of
   common stock or January 31, 1998. The offer was unanimously accepted by all
   of the limited partners. The acquisition was accounted for under the purchase
   method and the entire cost of the transaction, totaling $2.8 million, has
   been allocated to goodwill based on the Company's estimate that the fair
   value of the tangible assets acquired approximates book value. The goodwill
   is being amortized on a straight-line basis over 15 years and, as a result,
   amortization expense related to goodwill totaled $184,495, $183,751 and
   $184,977 in fiscal years 1999, 1998 and 1997, respectively.

4. Property, Equipment and Improvements

   The major components of property, equipment and improvements are as follows:

<TABLE>
<CAPTION>
                                                                 January 2,                    January 3,
                                                                   2000                           1999
                                                                 ----------                    ----------
       <S>                                                     <C>                            <C>
       Land                                                    $ 1,737,655                    $ 1,737,655
       Buildings and leasehold improvements                     12,709,589                     12,645,160
       Furniture, fixtures and equipment                         6,290,107                      5,918,067
       Deferred lease costs                                        760,074                        607,107
                                                               -----------                    -----------
       Less accumulated depreciation and amortization           (5,913,522)                    (4,790,572)
                                                               -----------                    -----------
                                                               $15,583,903                    $16,117,417
                                                               ===========                    ===========
</TABLE>

                                       28
<PAGE>

                       Silver Diner, Inc. and Subsidiary

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                                January 2, 2000

5. Accounts Payable and Accrued Expenses

   Accounts payable and accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                          January 2,                    January 3,
                                                             2000                          1999
                                                          ----------                    ----------
       <S>                                                <C>                            <C>
         Trade payables                                   $1,038,230                     1,381,805
         Payroll and related taxes                           584,485                       443,623
         Sales and use taxes                                 135,086                       134,794
                                                          ----------                     ---------
                                                          $1,757,801                     1,960,222
                                                          ==========                     =========
</TABLE>

6. Note Payable

   In June 1997, the Company entered into a note agreement in the amount of
   $267,000 with a bank to purchase a parcel of land from the Company's
   president (note 8). The principal balance of the note, originally due in June
   1999, was extended through June 2000. Interest is paid monthly at an annual
   rate of 9.25%. The note is collateralized by the land purchased. The Company
   incurred $23,826, $25,523 and $10,702 in interest expense related to the note
   for the years ended January 2, 2000, January 3, 1999 and December 28, 1997,
   respectively.

7. Notes Receivable

   During 1997, the Company issued notes receivable totaling $132,000 to an
   outside party which owns and maintains the jukeboxes in four Silver Diner
   units. The Company receives principal and interest payments on these notes on
   a monthly basis. The outstanding balance, classified as deposits and other,
   was $97,899 for 1999 and $113,729 for 1998. Interest is calculated at an
   annual rate of 9% and the principal payments are based on the amount of
   monthly cash flow generated by the jukeboxes. For the years ended January 2,
   2000 and January 3, 1999, the Company has received $15,830 and $9,300 in
   principal payments, respectively, and $11,587 and $11,000 in interest income,
   respectively.

8. Related Party Transactions

   Robert Giaimo Development, Inc.
   -------------------------------

   On June 17, 1997, the Company purchased from Robert Giaimo Development, Inc.,
   a corporation wholly-owned by the president of the Company, an undivided
   parcel of land representing a parking lot adjacent to the Silver Diner
   restaurant in Potomac Mills, Virginia. The total cost of the land was
   $408,000. The Company received a loan from a bank in the amount of $267,000
   to purchase the property (note 6). The note is fully collateralized by the
   land.

   Silver Diner Potomac Mills, Inc.
   --------------------------------

   The Company leases the diner at Potomac Mills pursuant to two lease
   agreements with Silver Diner Potomac Mills, Inc., a corporation wholly-owned
   by the president of the Company. The leases expire October 14, 2011 and
   include annual CPI adjustments to base rent and percentage rent based on
   gross receipts. The amount of property leased was reduced in 1997 by the land
   purchase described above. For the years ending January 2,

                                       29
<PAGE>

                       Silver Diner, Inc. and Subsidiary

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                                January 2, 2000

   2000, January 3, 1999 and December 28, 1997, occupancy costs include
   $360,000, $355,000, and $350,000, respectively, in rent and related pass-
   through costs associated with the leases.

   Construction, Real Estate Consulting Services and Real Estate Management
   ------------------------------------------------------------------------

   The Company has from time to time entered into contracts with a Director of
   the Company and certain affiliates of the Director to provide construction,
   real estate consulting and real estate management services to the Company.
   During the year ended January 2, 2000, the Company incurred costs totaling
   $74,036 for miscellaneous construction and renovation of existing diners,
   $23,547 for real estate consulting services and $180,496 for payment of rent
   and real estate taxes related to the Merrifield Silver Diner. At January 2,
   2000, $2,565 is payable to the Director and affiliates of the Director.

   Keyman Life Insurance
   ---------------------

   The Company is paying premiums for three life insurance policies owned,
   respectively, by two officers. In 1996, the Company recorded notes receivable
   from the two officers, which were payable in full upon demand, were
   collateralized by the life insurance policies and were equal to the amount of
   premiums paid by the Company on such life insurance policies. The notes
   receivable were non-interest bearing. During 1997, the Company terminated
   these note receivable agreements and recorded the full amount of premiums
   paid in 1996 and 1997, less the cash surrender value of the policies, as
   expense. In 1999 and 1998, the Company recorded the full amount of premiums
   paid in 1998 and 1999, respectively, less the cash surrender value of the
   policies, as expense. As such, the Company recorded $84,596, $92,000 and
   $123,000 of expense for these insurance policies for the years ended January
   2, 2000, January 3, 1999 and December 28, 1997, respectively.

   Due from Related Parties
   ------------------------

   In connection with entering into an employment continuity agreement during
   1998, the Company made a $100,000 loan to an officer of the Company. The
   note, bearing interest at a rate of 5.25%, is secured by the Company's common
   stock holding of the officer. The loan and accrued interest is to be repaid
   by the officer through the application of annual bonuses in the amount of
   $20,000, plus accrued interest, by the officer over a five-year period. As of
   January 2, 2000 and January 3, 1999, $80,000 and $100,000 of principal
   remained due from an officer of the Company.

9. Commitments and Contingencies

   Operating Leases
   ----------------

   The Company leases restaurant land and buildings under various noncancelable
   operating leases with terms expiring at various dates through 2017. Certain
   of these leases are with related parties (see note 8). These leases include
   minimum lease payments, reimbursable operating costs and real estate taxes.
   Also, certain of these leases contain renewal options for a maximum of 20
   years beyond the original term, have provisions for additional rent based on
   sales at the individual locations and annual increases based on the consumer
   price index. The leases provide for certain rent holidays and escalations in
   payments over the lease terms. The effect of the holidays and escalations
   have been reflected in rent expense on a straight-line basis over the initial
   lease terms. The excess of expense over cash payments has been reflected in
   the consolidated financial statements as deferred rent.

                                       30
<PAGE>

                       Silver Diner, Inc. and Subsidiary

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                                January 2, 2000


9.  Commitments and Contingencies (Continued)

    Operating Leases (continued)
    ----------------------------

    Future minimum annual lease payments as of January 2, 2000 are:

                     2000                         $ 2,370,000
                     2001                           2,567,000
                     2002                           2,630,000
                     2003                           2,699,000
                     2004                           2,737,000
                     Thereafter                   $21,717,000

    Rent expense under the leases for fiscal years 1999, 1998 and 1997 was
    approximately $2,328,000, $2,236,000 and $2,033,000, respectively.

    Legal Proceedings
    -----------------

    On May 20, 1996, the Company was named as a defendant in a proceeding
    instituted in the Circuit Court for Prince George's County, Maryland. The
    plaintiff alleges sexual assault by the general manager of a Silver Diner
    restaurant. The general manager was terminated promptly following the
    occurrence of the event in November 1994. The plaintiff sought recovery of
    $500,000 for each count. It was not clear if the counts were in the
    alternative or cumulative. The Company's insurance carrier was defending the
    claim with reservation of rights. The Company is insured up to $1,000,000
    with respect to the above mentioned claims. In September 1998, the court
    granted summary judgment in favor of the Company as to all claims brought
    against them in this case. No final judgment can be entered at this time due
    to a Bankruptcy filing by the codefendant in the case, prior to the decision
    of the court to grant summary judgment on behalf of the Company.

    Employment Continuity Agreements
    --------------------------------

    SDDI has entered into employment continuity agreements with certain
    executives. The agreements are for one to five years in length and provide
    for minimum salary levels, as adjusted for minimum percentage increases and
    include incentive bonuses based on specified management goals. The aggregate
    minimum commitment for future salaries, excluding bonuses, as of January 2,
    2000 is approximately $1,860,000.

10. Income Taxes

    At January 2, 2000, the Company has a net operating loss carryforward of
  approximately $6,663,000 for income tax purposes, that expires in 2008 through
  2014, which may be used to reduce future income tax expense and tax
  liabilities.  Deferred income taxes reflect the net tax effects of temporary
  differences between the carrying amounts of assets and liabilities for
  financial reporting purposes and the amounts reported for income tax purposes.

                                       31
<PAGE>

                       Silver Diner, Inc. and Subsidiary

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                                January 2, 2000


10. Income Taxes (Continued)

    Significant components of the Company's deferred tax assets and liabilities
    are as follows:

<TABLE>
<CAPTION>
                                                                  January 2,                 January 3,
                                                                     2000                       1999
                                                                  ----------                 ----------
         <S>                                                     <C>                        <C>
         Net operating loss carryforwards                        $ 2,657,259                $ 2,420,534
         Book over (under) tax depreciation/
            Amortization                                             (47,282)                   (83,841)
         Deferred rent                                               516,567                    466,653
                                                                 -----------                -----------
         Deferred tax assets                                     $ 3,126,544                  2,803,346
         Less: valuation allowance                                (3,126,544)                (2,803,346)
                                                                 -----------                -----------
         Net deferred tax asset                                  $         -                $         -
                                                                 ===========                ===========
</TABLE>

    As a result of the Company's history of cumulative losses, a valuation
    allowance equal to the calculated deferred tax benefit has been recorded at
    January 2, 2000 and January 3, 1999, respectively.

11. Stock Compensation Plans

    The Company has the following stock-based compensation plans:

    1996 Employee Stock Purchase Plan
    ---------------------------------

    The 1996 Employee Stock Purchase Plan was adopted in September 1996 by the
    Company's Board of Directors and approved by shareholders in June 1997, and
    continues in effect for a term of 10 years. The Company is authorized to
    issue 300,000 shares under the plan to employees who customarily work at
    least 20 hours per week and more than five months in a calendar year, and
    who have been continuously employed by the Company for six months. Under the
    terms of the plan, employees can choose each quarter to have up to 10
    percent of their base earnings (not to exceed $21,250 annually) withheld to
    purchase the Company's common stock. The purchase price of the stock is 85%
    of the lower of its beginning-of-quarter or end-of-quarter market price. The
    Company implemented the plan in August 1998. During fiscal 1999, 15,050
    shares were issued under the plan.

    1996 Stock Option Plan
    ----------------------

    The 1996 Stock Option Plan was adopted by the Company's Board of Directors
    in September 1996 and approved by the shareholders in June 1997, and
    continues in effect for 10 years. The plan provides for incentive stock
    options and nonqualified stock options. Options may be granted to any
    director, officer, key employee or outside consultant of the Company. Terms
    of the options are set by the Company's Board of Directors and range from
    seven to ten years, with the ability to accelerate vesting upon the Company
    achieving certain performance measurements, as predetermined by the Board.
    The Company has reserved 1,750,000 shares of common stock for issuance under
    the plan. A total of 600,400 and 1,143,500 options were granted under this
    plan during fiscal 1999 and 1998, respectively.

                                       32
<PAGE>

                       Silver Diner, Inc. and Subsidiary

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                                January 2, 2000


11. Stock Compensation Plans (Continued)

    Restaurant Operating Partner Program
    ------------------------------------

    The Restaurant Operating Partner Program, which was adopted by the Company's
    Board of Directors in December 1996 for implementation in fiscal year 1997,
    provides for the general manager (Operating Partner) and the store manager
    team (Store Managers) of each of the Company's restaurants to share in the
    profits of their restaurant and to participate as equity owners of the
    Company. To participate in the program, employees who became Operating
    Partners prior to January 4, 1999 were required to make an initial
    investment in discounted Company common stock, which may not be sold or
    otherwise transferred by the Operating Partner for a period of five years
    from the date of purchase. Should the Operating Partner's employment
    terminate for any reason other than death or disability, the Company has the
    right to repurchase the stock from the Operating Partner for the amount of
    his or her investment. Employees who become Operating Partners beginning
    January 4, 1999 and thereafter are required to purchase 8,000 shares of
    Company common stock at market value and can potentially receive an annual
    award up to $10,000 of Common Stock, dependent upon achievement of
    performance criteria as established and evaluated by the Board. The plan
    also provides for annual restricted common stock awards to Store Managers;
    however, the Company has determined that no further stock awards will be
    provided to Store Managers subsequent to January 3, 1999.

    For employees who became Operating Partners and Store Managers prior to
    January 4, 1999, stock awarded at the end of the first year generally vests
    after the fourth anniversary of the award date. For each year thereafter,
    stock awards generally vest after the third anniversary of the award date.
    For employees who became Operating Partners beginning January 4, 1999 and
    thereafter, stock awarded at the end of the first year vests after the fifth
    anniversary of the award date, stock awarded at the end of the second year
    vests after the fourth anniversary of the award date, and stock awarded in
    each subsequent year vests after the third anniversary of each award date.

    The stock awards under these plans are awarded at the discretion of the
    Company's Board of Directors. The Company has reserved 415,000 shares of
    common stock for issuance under the plan. During fiscal 1999 and 1998, -0-
    and 17,392 shares, respectively, were issued under the plan.

    Associate Ownership and Profit Sharing Plan
    -------------------------------------------

    The Associate Ownership and Profit Sharing Plan, which was adopted by the
    Company's Board of Directors in December 1999 for implementation in fiscal
    year 2000, provides for associates of each of the Company's restaurants to
    share in the profits of their restaurant and to participate as equity owners
    of the Company. All associates employed by the Company prior to January 1,
    2000 will be awarded 100 shares of common stock. The common stock is
    restricted for a one-year period, whereby on January 1, 2001, all associates
    still employed by the Company will have all such restrictions removed. The
    Company has reserved 100,000 shares of common stock for issuance under the
    plan.

                                       33
<PAGE>

                       Silver Diner, Inc. and Subsidiary

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                                January 2, 2000


11. Stock Compensation Plans (Continued)

    1996 Consultant Stock Option and Stock Purchase Plan
    ----------------------------------------------------

    The 1996 Consultant Stock Option and Stock Purchase Plan was adopted by the
    Company's Board of Directors in September 1996, and continues in effect for
    a term of 10 years. The plan provides for the Company's consultants to
    purchase (i) options to purchase shares of common stock in the Company or
    (ii) shares of common stock in the Company, and apply a portion of the fees
    otherwise payable to them by the Company to pay the purchase price for such
    options or common stock. Options under the plan are granted with an exercise
    price at the fair market value of the common stock on the first day of each
    calendar quarter, and are exercisable at any time in whole or in part for a
    period of three years from date of grant and vest immediately. The Company
    records the transactions at the fair value of the options granted to the
    consultant, using the Black-Scholes methodology. The Company has reserved
    100,000 shares of common stock for issuance under the plan. During fiscal
    1999 and 1998, no options were issued to consultants under this plan.

    1996 Non-Employee Director Stock Option Plan
    --------------------------------------------

    The 1996 Non-Employee Director Stock Option Plan was adopted by the
    Company's Board of Directors in September 1996 and approved by shareholders
    in June 1997, and continues in effect for 10 years. Under the plan, each
    non-employee director shall be granted an option to purchase 1,000 shares of
    the Company's common stock at fair market value on the first day of each
    calendar quarter. Options granted under the plan are exercisable at any time
    in whole or in part for a period of three years from date of grant, and vest
    immediately. The Company has reserved 150,000 share of common stock for
    issuance under the plan. A total of 27,000 and 35,000 options were granted
    under this plan during fiscal 1999 and 1998, respectively.

    Second Amended and Restated 1991 Stock Option Plan
    --------------------------------------------------

    The Second Amended and Restated 1991 Stock Option Plan for directors,
    officers, key employees and consultants provides for incentive and non-
    qualified stock options. The options generally expire 10 years from the date
    of grant and are exercisable over the period stated in each option. The
    Board of Directors determines the option price (not to be less than fair
    market value for incentive options) at the date of grant. Options under the
    plan are exercisable in full if the Company executes a merger agreement or
    consolidates with another company, if more than 50% of the Company's voting
    stock is acquired by another person or group in an other than capital stock
    transaction, or if Robert T. Giaimo ceases to by President of the Company.
    The plan expires in 2001. At January 2, 2000, no options were available for
    future grant under the plan.

    Second Amended and Restated Earned Ownership Plan
    -------------------------------------------------

    The Second Amended and Restated Earned Ownership Plan for key employees
    provides for non-qualified stock options. The options generally expire 10
    years from the date of grant, have an option price of $0.0003 and vest 20%
    at date of grant and 20% on each of the next four anniversaries following
    the grant date. Options under the plan are exercisable in full if the
    Company executes a merger agreement or consolidates with another company, if
    more than 50% of the Company's voting stock is acquired by another person or
    group in an other than capital stock transaction, or if Robert T. Giaimo
    ceases to be President of the Company. The plan has no fixed expiration
    date. At January 2, 2000, no options were available for future grant under
    the plan.

                                       34
<PAGE>

                       Silver Diner, Inc. and Subsidiary

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                                January 2, 2000


11. Stock Compensation Plans (Continued)

    The Company applies APB Opinion No. 25 and related Interpretations in
    accounting for its plans. The compensation cost that has been charged
    against income under the Company's plans was $108,627, $37,604 and $141,118
    for the years ended January 2, 2000, January 3, 1999 and December 28, 1997,
    respectively. Had compensation cost been determined in accordance with FASB
    Statement No. 123, the Company's net loss and net loss per share would have
    been the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                     Fiscal years ended
                                         -------------------------------------------------------------------------
                                         January 2, 2000              January 3, 1999            December 28, 1997
                                         ---------------              ---------------            -----------------
<S>                                      <C>                          <C>                        <C>
         Net loss:
         As reported                      $  (971,879)                  $(1,883,306)                 $(1,958,419)
         Pro forma                        $(1,164,133)                  $(1,995,021)                 $(2,030,469)

         Net loss per common share:
         As reported                      $     (0.08)                  $     (0.16)                 $     (0.17)
         Pro forma                        $     (0.10)                  $     (0.17)                 $     (0.17)
</TABLE>

    Options granted during the year ended January 2, 2000 were issued pursuant
    to the 1996 Non-Employee Director Stock Option Plan and the 1996 Stock
    Option Plan. The fair value of each option grant under these plans is
    estimated on the date of grant using the Black-Scholes option-pricing model
    with the following weighted-average assumptions: dividend yield of 0.0% and
    expected volatility of 46.48%. In addition, in estimating the fair value of
    the options granted under the 1996 Non-Employee Director Stock Option Plan
    and the 1996 Stock Option Plan, the following weighted average assumptions
    were used: risk free interest rate of approximately 6% and an expected life
    ranging from 3 to 10 years.

    Options granted during the year ended January 3, 1999 were issued pursuant
    to the 1996 Non-Employee Director Stock Option Plan and the 1996 Stock
    Option Plan. The fair value of each option grant under these plans is
    estimated on the date of grant using the Black-Scholes option-pricing model
    with the following weighted-average assumption: dividend yield of 0.0% and
    expected volatility of 50%. In addition, in estimating the fair value of the
    options granted under the 1996 Non-Employee Director Stock Option Plan and
    the 1996 Stock Option Plan, the following weighted average assumptions were
    used: risk free interest rate of 5.5% and an expected life of 6 years.

    Options granted during the year ended December 28, 1997 were issued pursuant
    to the 1996 Non-Employee Director Stock Option Plan, the 1996 Consultant
    Stock Option and Stock Purchase Plan and the 1996 Stock Option Plan. The
    fair value of each option grant under these plans is estimated on the date
    of grant using the Black-Scholes option-pricing model with the following
    weighted-average assumptions: dividend yield of 0.0% and expected volatility
    of 49%. In addition, in estimating the fair value of the options granted
    under the 1996 Non-Employee Director Stock Option Plan and the 1996
    Consultant Stock Option and Stock Purchase Plan, the following weighted
    average assumptions were used: risk-free interest rate of 5.7% and an
    expected life of two years. The fair value of options granted under the
    Incentive Stock Option Plan was estimated assuming a risk-free interest rate
    of 6.2% and an expected life of seven years.

                                       35
<PAGE>

                       Silver Diner, Inc. and Subsidiary

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                                January 2, 2000


11. Stock Compensation Plans (Continued)

    A summary of the status of the Company's stock option plans as of January 2,
    2000, January 3, 1999 and December 28, 1997 and changes during the years
    ended on these dates is:

<TABLE>
<CAPTION>
                                        1999                                   1998                                1997
                            ----------------------------            --------------------------           --------------------------
                                               Weighted-                             Weighted-                            Weighted-
                                               Average                               Average                              Average
                                               Exercise                              Exercise                             Exercise
                            Shares              Price               Shares            Price              Shares            Price
                            ------             ---------            ------           ---------           ------           ---------
<S>                        <C>                <C>                 <C>                <C>                <C>               <C>
Options outstanding,
 Beginning of year         1,691,291             $1.51              583,327           $2.55              689,220          $2.52
Granted                      627,400              1.02            1,178,500            1.09               89,387           3.54
Exercised                          -                 -               (8,461)           0.00              (35,421)          0.00
Forfeited                   (204,020)             1.63              (62,075)           3.45             (149,858)          3.78
Repurchased                        -                 -                    -               -              (10,001)          0.00
                           ---------             -----            ---------           -----             --------          -----
Options outstanding,
 end of year               2,114,671             $1.35            1,691,291           $1.51              583,327          $2.55
                           =========                              =========                              =======

Options exercisable at
 year end                    950,607                                687,954                              396,809

Weighted-average fair
 value of options granted
 during the year                                 $0.67                                $0.41                               $1.41
</TABLE>


    The following table summarizes information about stock options outstanding
    at January 2, 2000.


<TABLE>
<CAPTION>
                                              Options Outstanding                                     Options Exercisable
                           ---------------------------------------------------------           ---------------------------------
                                                     Weighted              Weighted-                                   Weighted-
                              Number                 Average               Average              Number                 Average
          Range of         Outstanding               Remaining             Exercise            Exercisable             Exercise
       Exercise Prices     at 1/2/2000            Contractual Life          Price              at 1/2/2000              Price
       ---------------     -----------            ----------------         ---------           -----------             ---------
<S>                        <C>                     <C>                      <C>                 <C>                     <C>
    Less than $0.01          192,873                4.1 years               $0.00                192,873                $0.00
    $0.63 to $1.25         1,649,900                7.3 years                1.04                547,425                 1.14
    $1.38 to $3.60            54,704                2.1 years                2.85                 49,704                 2.99
    $4.05                    217,194                5.9 years                4.05                160,605                 4.05
                           ---------                                                             -------

    $0.0003 to $4.05       2,114,671                6.8 years               $1.30                950,607                $1.50
                           =========                                                             =======
</TABLE>

                                       36
<PAGE>

                       Silver Diner, Inc. and Subsidiary

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                                January 2, 2000


12. Net Loss Per Common Share

    SFAS 128, "Earnings per Share," requires the disclosure of a reconciliation
    between the numerators and the denominators of the basic and diluted per-
    share computations for income from continuing operations. For the years
    ended January 2, 2000, January 3, 1999 and December 28, 1997, the Company
    incurred a net loss; therefore, all potential common shares are antidilutive
    and are not included in the calculation of the diluted net loss per common
    share. At January 2, 2000, January 3, 1999 and December 28, 1997, there were
    options to purchase 2,114,671, 1,691,291 and 583,327 shares, respectively,
    at the weighted average price of $1.35, $1.51 and $2.55, respectively. These
    options are antidilutive and thus not included in the computation of diluted
    net loss per share for the years ended January 2, 2000, January 3, 1999 and
    December 28, 1997. In addition, at January 2, 2000 and January 3, 1999 there
    were 80,713 and 25,919, respectively, restricted shares of common stock
    outstanding. These shares, which were issued during fiscal 1999 and 1998
    pursuant to the Restaurant Operating Partner Program, are antidilutive and
    are not included in the computation of net loss per share for the years
    ended January 2, 2000 and January 3, 1999.

13. Employee Benefit Plan

    The Company sponsors a plan to provide retirement benefits under the
    provision of Section 401(k) of the Internal Revenue Code (the 401(k) Plan)
    for all employees who have completed one year of service. Company
    contributions may range from 0% to 100% of employee contributions, up to a
    maximum 6% of eligible employee compensation, as defined. Employees may
    elect to contribute up to 20% of their eligible compensation on a pretax
    basis. Benefits under the 401(k) Plan are limited to the assets of the
    401(k) Plan. During the years ended January 2, 2000, January 3, 1999 and
    December 28, 1997, respectively, the Company made no contributions to the
    401(k) Plan.

14. Subsequent Events

    On January 9, 2000, the Company, acting as an agent for the landlord of the
    Virginia Beach Silver Diner, entered into a construction contract with an
    affiliate of a Director of the Company. The contract is a fixed fee contract
    in the amount of $800,000. Pursuant to the lease agreement, the landlord is
    liable for all payments and terms under the construction agreement.

    On February 29, 2000, the Company entered into a construction contract with
    an affiliate of a Director of the Company for construction of the Lakeforest
    Silver Diner. The contract is a fixed fee contract in the amount of
    $735,200. The affiliate will act as the general contractor and will be paid
    a fee for coordinating and supervising the development of the facility.

                                       37
<PAGE>

Item 9. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure.

Previous Independent Accountant.   Following Registrant's merger with and into
Silver Diner Development, Inc. (SDDI), Registrant retained Deloitte & Touche LLP
(Deloitte & Touche) to audit its financial statements for the years ended
December 29, 1996, December 28, 1997 and January 3, 1999.  Deloitte & Touche
submitted a fee proposal to audit Registrant's financial statements for the year
ended January 2, 2000.  Based thereon, the Registrant's Board of Directors and
Audit Committee, in an attempt to reduce substantially Registrant's audit costs,
talked to a number of accounting firms and on September 29, 1999, the Registrant
notified Deloitte & Touche of its dismissal as Registrant's independent auditors
and reported the dismissal in a Current Report on Form 8-K dated September 29,
1999.

     Deloitte & Touche has not issued any reports on the current year financial
statements.  Deloitte & Touche's report on the financial statements of Silver
Diner, Inc. and Subsidiary for the years ended December 29, 1996, December 28,
1997 and January 3, 1999 contained no adverse opinion or disclaimer of opinion
and was not qualified as to uncertainty, audit scope or accounting principles.
During the fiscal years ended December 29, 1996, December 28, 1997 and January
3, 1999 and through the date of termination on September 29, 1999, the
Registrant has had no disagreements with Deloitte & Touche on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which, had they not been resolved, would have caused
Deloitte & Touche to make reference to the subject matter of the disagreement in
connection with its report.

New Independent Accountant.  On September 29, 1999, the Registrant engaged
Reznick Fedder & Silverman P.C. to audit the financial statements of the
Registrant for the year ending January 2, 2000 and reported such engagement in a
Current Report on Form 8-K dated September 29, 1999.

PART III

Item 10. Directors and Executive Officers of the Company.

     The Directors, Executive Officers and key employees of the Company are as
follows:

<TABLE>
<CAPTION>
     NAME                                   AGE             DIRECTOR SINCE                   POSITION
<S>                                         <C>             <C>               <C>
Robert T. Giaimo                            48                   1996         Chairman of the Board, President, Chief
                                                                              Executive Officer, and Treasurer
Catherine Britton                           46                   1996         Director
Michael Collier                             45                   1999         Director
Ype Von Hengst                              49                   1996         Director, Vice President, Executive Chef,
                                                                              and Secretary
Edward H. Kaplan                            61                   1996         Director
Louis P. Neeb                               61                   1996         Director
Charles M. Steiner                          58                   1996         Director
</TABLE>


     ROBERT T. GIAIMO has been the Company's Chairman of the Board, President,
Chief Executive Officer and Treasurer since March 1996. In 1987 Mr. Giaimo
developed and popularized the Silver Diner concept with Ype Von Hengst after
conducting a one year national tour of diner-style restaurants. Mr. Giaimo has
been the Co-Founder, Director, President, Chief Executive Officer and Treasurer
of Silver Diner Development, Inc. since its inception in 1987. Mr. Giaimo was
president, chief executive officer and director of Monolith Enterprises, Inc.
("Monolith") from 1971 to January 1987. From 1972 through 1976, Mr. Giaimo co-
founded and operated, through Monolith, Blimpies Restaurant in Georgetown. In
1977, Mr. Giaimo co-founded and operated, through Monolith, The American Cafe
restaurant, an innovative, award-winning restaurant chain which was one of the
first restaurants to promote "American cuisine" and helped popularize the
croissant sandwich. In 1985, Mr. Giaimo sold The American Cafe to W.R. Grace &
Co. Mr. Giaimo graduated from the Business School of Georgetown University in

                                       38
<PAGE>

1974 and Harvard University's Smaller Company Management Program in 1982. He is
a member of the Young President's Organization and serves as a Director and Co-
chairman of Development. In 1993, Mr. Giaimo received an "Entrepreneur of the
Year" award from Inc. Magazine in conjunction with Ernst & Young and Merrill
Lynch. Mr. Giaimo is married to Catherine Britton.

     CATHERINE BRITTON has been a Director since March 1996 and was a director
of Silver Diner Development, Inc. from July 1995 until March 1996. She assisted
with marketing and design of Silver Diner restaurants and has been involved with
menu development and concept evolution since Silver Diner Development, Inc.'s
inception. She also participated extensively in the development of Silver Diner
restaurants. Ms. Britton graduated from Georgetown University in 1975, receiving
a Bachelor of Arts degree in Philosophy. Ms. Britton earned a Masters Degree in
Special Education from George Washington University in 1978. Ms. Britton is
married to Robert T. Giaimo.

     MICHAEL COLLIER has been a Director since March 1999, when he was elected
to fill the vacancy left by Clinton A. Clark's resignation. Mr. Collier is the
President of Uniwest Group, Inc. and Uniwest Construction, Inc., companies which
handle business in the area of real estate development and general contracting
and which serve as the developer and general contractor for the Company's
diners. He is also President of Atlantic Environmental Services, Incorporated, a
full-service environmental company.

     YPE VON HENGST has been a Director, Vice President, Executive Chef and
Secretary since March 1996 and co-founder, director, vice president of culinary
operations, and executive chef of Silver Diner Development, Inc. since 1987. Mr.
Hengst was a director of operations of "Dominiques" restaurant in Washington,
D.C. from May through September 1987. From 1984 to 1987, Mr. Hengst was
corporate executive chef and director for Food Service for The American Cafe and
was responsible for the central kitchen and bake shop, menu changes, and food
preparation for all seven American Cafe restaurants. From 1981 to 1984, Mr.
Hengst was corporate executive chef for Restaurant Associates in New York, New
York, where he supervised over fifteen diverse full-service restaurants. From
1976 to 1981, Mr. Hengst held executive chef positions in Charlotte, North
Carolina, Cleveland, Ohio, Houston, Texas, and New York, New York. Prior to
1976, Mr. Hengst worked as a chef in Europe.

     EDWARD H. KAPLAN has been a Director since March 1996 and was a director of
Silver Diner Development, Inc. from 1987 until March 1996. He is a real estate
developer and investor and has served since 1983 as a Director of Palmer
National Bank, Washington, D.C. and subsequently, its successor, George Mason
Bankshares until April 2, 1998, when George Mason merged into United Bankshares
and now serves on the board of directors of United Bankshares of Virginia. Mr.
Kaplan received his B.A. from the University of Pennsylvania, Wharton School in
1961. Mr. Kaplan served as President of the United Jewish Appeal Federation of
Greater Washington from 1989 to 1991, President of the United Jewish Endowment
Fund from 1992 to 1997, and currently is a member of the Maryland Public
Television Commission and the Maryland Public Television board of directors.

     LOUIS P. NEEB has been a Director since March 1996 and was a director of
Silver Diner Development, Inc. from 1994 until March 1996. Mr. Neeb is currently
the president of Neeb Enterprises, Inc., a corporation which provides management
consulting services and oversees the operation of an affiliated restaurant
company, and chairman of the board and chief executive officer of Mexican
Restaurants, Inc., formerly Casa Ole Restaurants, Inc. He was the president and
chief executive officer of The Spaghetti Warehouse, Inc. from July 1991 until
January 1994 and of Geest Food USA from 1989 until 1991. From 1982 until 1987,
he served as president and chief executive officer of Creative Food N Fun, a
subsidiary of W.R. Grace & Co. From 1985 until 1987, be served as president and
chief executive officer of a W.R. Grace & Co. affiliate, Taco Villa, Inc. Mr.
Neeb was employed by The Pillsbury Company from 1973 until 1982. From 1980 to
1982, he served as an executive vice president of The Pillsbury Company and as
chairman and chief executive officer of its affiliate, Burger King Corporation.
In 1973, he was director of operations at Steak & Ale Restaurants, Inc. another
affiliate of The Pillsbury Company. His leadership role with Steak & Ale
Restaurants, Inc. continued until 1980, after serving as vice president of
operations and eventually president and chief operating officer. Currently, Mr.
Neeb serves as a director of CEC Entertainment and Franchise Finance Corporation
of America, Inc., both publicly traded companies. Mr. Neeb received a BBA in
marketing from Notre Dame University in 1961 and an MBA from George Washington
University in 1969.

     CHARLES M. STEINER has been a Director since March 1996. Mr. Steiner was a
director of Silver Diner Development, Inc. from 1987 until March 1996. He is the
chief executive officer of Branch Group, Inc., an electric distributor. In 1975,
Mr. Steiner founded IMARK, an electric cooperative, and in 1991 founded EDIC, a
distribution

                                       39
<PAGE>

insurance company. He is a former director and officer of the National
Association of Electric Distributors (NAED). He received a B.B.A. in Accounting
from the University of Pittsburgh in 1963.

     There is no family relationship between any of the Company's directors or
officers except that Catherine Britton is the wife of Robert T. Giaimo. There
are no arrangements between any director of the Company and any other person
pursuant to which he was selected as a director.

NON-DIRECTOR EXECUTIVE OFFICERS

     TIMOTHY CUSICK has been Area Director of Operations since July 1996 and has
been a member of the executive management since April 1998. Mr. Cusick joined
the Company in October 1992 and served as a restaurant manager and owner
operator until 1996. Mr. Cusick has over eight years of restaurant management
experience.

     JON ABBOTT will join the Company in April 2000 and will assume the duties
and responsibilities of Vice President of Operations following Mr. Cusick's
departure in May 2000.  Mr. Abbott has twenty years of operating experience in
casual dining restaurant concepts, most recently with Damons International,
Inc., where he served as Director of Operations from 1997 to 2000.  Prior
thereto, Mr. Abbott served as Regional Manager for Cooker Restaurant Corporation
from 1985 to 1997.

     PATRICK MESKELL has been Senior Vice President, Human Resources since
January 1996. Mr. Meskell was an independent consultant to institutions,
specializing in the areas of risk management system design and implementation
from 1988 to 1992 and Director of Organizational Development & Management &
Operations Training for the Student Loan Marketing Association from 1992 to
1995.

     CRAIG KENDALL has been Vice President, Finance since November 1998. From
1988 to 1998, Mr. Kendall was a senior financial officer for Team Washington,
Inc., one of the nation's largest Domino Pizza franchises, which operates in the
Washington, D.C. metropolitan area.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     To the Company's knowledge, based solely upon a review of reports and other
information furnished to it by its directors, officers, greater than 10%
beneficial owners of the Company, and other persons subject to the reporting
requirements (collectively, the "Reporting Persons"), all reports required to be
filed by such Reporting Persons under Section 16(a) of the Securities Exchange
Act of 1934, as amended, were duly filed during the year ended January 2, 2000.

                                       40
<PAGE>

Item 11. Executive Compensation

     The following table sets forth summary information concerning compensation
paid by the Company with respect to fiscal years 1999, 1998 and 1997 to Robert
T. Giaimo, the Company's Chairman of the Board, President, Chief Executive
Officer and Treasurer, and to each of the Company's executive officers whose
aggregate annual cash compensation exceeded $100,000 for fiscal year 1999.

                          SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                ANNUAL COMPENSATION                   LONG-TERM COMPENSATION AWARDS
                                                                                                          SECURITIES
                                                                                      RESTRICTED          UNDERLYING
                                                                     OTHER ANNUAL        STOCK             OPTIONS/
NAME AND PRINCIPAL POSITION       YEAR   SALARY($)   BONUS($)       COMPENSATION($)   AWARD(S) ($)         SARS (#)
<S>                               <C>    <C>         <C>        <C>               <C>            <C>
Robert T. Giaimo                  1999    258,315          0             18,000             0                    0
Chairman of the Board,            1998    269,544          0             18,000             0              550,000 (1),(2)
President, Chief Executive        1997    250,000     50,000             18,000             0                    0
Officer and Treasurer
Ype Von Hengst                    1999    145,173          0             26,000             0              150,000 (4)
 Director, Vice President,        1998    129,144          0              6,000             0              205,000 (5),(6)
  Executive                       1997    105,000     12,500              6,000             0                      (2)
 Chef and Secretary                                                                                              0
Patrick Meskell                   1999    101,769      5,000              6,000             0              200,000 (8)
 Senior Vice President, Human     1998    103,579      5,000              6,000             0              155,000 (9),(6),
 Resources                        1997     93,690     17,500              6,000             0                    0 (2)

Timothy Cusick                    1999    101,769          0              6,000             0                    0
 Area Director of                 1998    103,737          0              6,000             0              155,000 (9),(6),
 Operations                       1997     94,792     12,500              6,000             0                    0 (2)

Craig Kendall                     1999    120,192          0              6,000             0              100,000 (10)
 Vice President,                  1998     17,875     10,000                  0             0               55,000 (11),(6)
 Finance                          1997          0          0                  0             0                    0
</TABLE>

                                       41
<PAGE>

                            LONG-TERM COMPENSATION
<TABLE>
<CAPTION>
                                                    PAYOUTS

                                                     LTIP
 NAME AND PRINCIPAL POSITION                      PAYOUTS ($)                        ALL OTHER COMPENSATION ($)
<S>                                              <C>                                 <C>
Robert T. Giaimo                                       0                                      57,061 (3)
 Chairman of the Board,                                0                                      56,358 (3)
 President, Chief Executive                            0                                      49,037 (3)
 Officer and Treasurer
Ype Von Hengst                                         0                                      27,535 (7)
 Director, Vice President,                             0                                      27,535 (7)
 Executive Chef and Secretary                          0                                      25,573 (7)
Patrick Meskell                                        0                                           0
 Senior Vice President,                                0                                           0
 Human Resources                                       0                                           0
Timothy Cusick                                         0                                           0
 Area Director of                                      0                                           0
 Operations                                            0                                           0
Craig Kendall                                          0                                           0
 Vice President                                        0                                           0
 Finance                                               0                                           0
</TABLE>

----------------------------
(1)  Includes an option to purchase up to 400,000 Shares at $1.238 per Share
     through December 14, 2003, which vests, or has vested, except as provided
     in Note 2 below, as follows: (a) 120,000 on December 29, 1998, (b) 80,000
     on December 29, 1999, (c) 80,000 on December 29, 2000, and (d) 120,000 on
     December 29, 2001.  Also included is an option to purchase up to 150,000
     Shares at $0.625 per Share through December 14, 2008, which was to vest
     100% on September 15, 2008, except that 100% of the option could vest
     earlier under certain circumstances.  Mr. Giaimo elected to cancel the
     foregoing option for 150,000 Shares during 1999.

(2)  An additional 18% of the option may vest earlier each time the market price
     of the Shares is initially greater than $5.00 per Share, $7.50 per Share
     and $10 per Share, with the option vesting 100% when the market price is
     greater than $12.00 per Share.

(3)  Includes the annual premiums the Company paid on a $3,000,000 split dollar
     life insurance policy on the life of Mr. Giaimo. The 1996 amount includes
     $12,000 in term life insurance premiums for Mr. Giaimo paid by SDDI.

(4)  Includes an option to purchase up to 150,000 Shares at $1.00 per Share
     through December 7, 2009, which vests or has vested 30,000 Shares annually
     commencing on January 1, 2000.

(5)  Includes an option to purchase up to 55,000 Shares at $0.625 per Share
     through December 14, 2008, which vests 100% at December 31, 2005, except as
     provided in Note 6 below. Also includes an option to purchase up to 150,000
     Shares at $1.125 per Share through December 28, 2007, which vests or has
     vested, except as provided in Note 2 above, as follows: (a) 45,000 Shares
     on December 29, 1998, (b) 30,000 on December 29,1999, (c) 30,000 on
     December 29, 2000, and (d) 45,000 on December 29, 2001.

(6)  The Compensation Committee of the Board amended the performance criteria to
     provide that the option would vest to the extent of 20,000 Shares on
     December 31, 1999 if the Company's actual net income for 1999 exceeded the
     Company's budgeted net income by up to $100,000.  However, the performance
     criteria for fiscal year 1999 were not achieved, and no Shares vested for
     such period.  The Compensation Committee also provided that the option may
     vest earlier in fiscal year 2000, as follows: (a) 25,000 Shares

                                       42
<PAGE>

     may vest immediately if the Company's actual net income for 2000 exceeds
     the Company's budgeted net income by at least $300,000; (b) 20,000 Shares
     may vest immediately if the Company's actual net income for 2000 exceeds
     budgeted net income by $200,000 or more but less than $300,000; (c)15,000
     Shares may vest immediately if the Company's actual net income for 2000
     exceeds budgeted net income by $100,000 or more but less than $200,000; and
     (d) 10,000 Shares may vest immediately if the Company's actual net income
     for 2000 exceeds budgeted net income by less than $100,000. The Board has
     the ability to set other performance criteria for accelerating the vesting
     of the option in future years.

(7)  Includes the annual premiums the Company paid on a $1,500,000 split dollar
     life insurance policy on the life of Mr. Von Hengst.

(8)  Includes an option to purchase up to 200,000 Shares at $1.00 per Share
     through December 7, 2009, which vests or has vested 40,000 Shares annually
     commencing on January 1, 2000.

(9)  Includes an option to purchase up to 55,000 Shares at $0.625 per Share
     through December 14, 2008, which vests 100% at December 31, 2005, except as
     provided in Note 6 above. Also includes an option to purchase up to 100,000
     Shares at $1.125 per Share through December 28, 2007, which vests, except
     as provided in Note 2 above, as follows: (a) 30,000 Shares on December 29,
     1998, (b) 20,000 on December 29,1999, (c) 20,000 on December 29, 2000, and
     (d) 30,000 on December 29, 2001.

(10) Includes an option to purchase up to 100,000 Shares at $1.125 per Share
     through March 17, 2009, which vests or has vested, 20,000 Shares annually
     commencing on March 18, 2000.

(11) Includes an option to purchase up to 55,000 Shares at $0.625 per Share
     through December 14, 2008, which vests 100% at December 31, 2005, except as
     provided in Note 6 above.

STOCK OPTIONS

     Options for 450,000 Shares were granted to executive officers during the
year ended January 2, 2000, and Mr. Giaimo elected to surrender an option for
150,000 Shares during 1999.  The following table provides information as to
grants of stock options made during the fiscal year ended January 2, 2000, and
held by the following executive officers. No stock appreciation rights with
respect to the Shares were outstanding at such date.


                    OPTIONS/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                SECURITIES
                                UNDERLYING          % OF TOTAL OPTIONS/SARS GRANTED TO
                           OPTIONS/SARS GRANTED       EMPLOYEES IN FISCAL YEAR ENDED      EXERCISE OR BASE PRICE
     NAME                           (#)                        01/02/00 (1)                       ($/SH)
<S>                        <C>                      <C>                                    <C>
Robert T. Giaimo                        0                           --                                --
Timothy Cusick                          0                           --                                --
Craig Kendall                     100,000                         22.2                            $1.125
Patrick Meskell                   200,000                         44.4                            $1.000
Ype Von Hengst                    150,000                         33.3                            $1.000
</TABLE>

                                       43
<PAGE>

<TABLE>
<CAPTION>
                                                            MARKET PRICE ON                                       GRANT DATE
     NAME                           DATE OF GRANT            DATE OF GRANT           EXPIRATION DATE            PRESENT VALUE $
<S>                                 <C>                     <C>                      <C>                        <C>
Robert T. Giaimo                         --                        --                      --                          --
Timothy Cusick                           --                        --                      --                          --
Craig Kendall                         03/18/99                   $1.125                 03/17/09                       --
Patrick Meskell                       12/08/99                   $1.000                 12/07/09                       --
Ype Von Hengst                        12/08/99                   $1.000                 12/07/09                       --
</TABLE>

---------
  (1)  As of January 2, 2000 options for 1,592,900 Shares under the Stock Option
       Plan were outstanding.

     The following table provides information as to the number and value of
options during the year ended January 2, 2000 held by the following executive
officers. No stock appreciation rights with respect to the Shares were
outstanding at such date.


              AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                   AND FISCAL YEAR END OPTION/SAR VALUES (1)

<TABLE>
<CAPTION>
                                                          NUMBER OF SECURITIES                VALUE OF UNEXERCISED
                                                         UNDERLYING UNEXERCISED            IN-THE-MONEY OPTIONS/SARS
                                                     OPTIONS/SARS AT FISCAL YEAR END         AT FISCAL YEAR END (2)
                         SHARES
                        ACQUIRED        VALUE        EXERCISABLE    UNEXERCISABLE       EXERCISABLE    UNEXERCISABLE
     NAME              ON EXERCISE   REALIZED ($)        (#)              (#)               ($)              ($)
<S>                    <C>           <C>             <C>            <C>                 <C>            <C>
Robert T. Giaimo           0             0             280,000           120,000                0                0
Ype Von Hengst             0             0             105,000           250,000                0           18,920
Patrick Meskell            0             0             163,862           291,254           24,221           18,920
Timothy Cusick             0             0              71,124           111,417            4,072           18,920
Craig Kendall              0             0              20,000           135,000                0           18,920
</TABLE>

---------

(1)  Information pertains to options as there were no stock appreciation rights
     issued or outstanding during the period concerned for the named
     individuals.

(2)  Represents the difference between the fair market value of the Shares
     subject to the options, based on the closing price of $0.969 for the Shares
     on December 31, 1999 (the final trading day of the year ended January 2,
     2000), and the exercise prices of the options.

BENEFIT PLANS

     The Company provides insurance benefits to its officers and other
employees, including health, dental, and life insurance, subject to certain
deductibles and co-payments by employees.

                                       44
<PAGE>

EMPLOYMENT AGREEMENTS

FOUNDER'S EMPLOYMENT AGREEMENT. The Company and Robert T. Giaimo entered into a
Founder's Employment Agreement on August 28, 1995, effective as of March 27,
1996, and amended on November 9, 1998. The base compensation under the Founder's
Employment Agreement is $240,000 per annum, increased annually at a minimum
amount equal to the increase in the Consumer Price Index for the Washington,
D.C., Maryland, and Virginia metropolitan area (the "Base Compensation").
Benefits under the agreement include four weeks paid vacation, health and dental
insurance, life and disability insurance, director and officer liability
insurance and a $3,000,000 "split-dollar" life insurance agreement. Perquisites
include an up to $500 per month car allowance, an education fee of $1,000 per
month, and free shift meals.

     The Founder's Employment Agreement had an initial term of five years and,
starting on its first anniversary, was renewable for five years from each
anniversary. If at any such anniversary the Board does not renew, the agreement
will expire five years from such anniversary (the five-year period beginning on
such anniversary is referred to as the "Expiration Term"). The Founder's
Employment Agreement was renewed on December 15, 1999 and, as renewed, expires
in March 2005. The Board will consider renewal of the Founder's Employment
Agreement at its December 2000 Board meeting.

     During the Expiration Term, Mr. Giaimo may, upon at least sixty days prior
written notice, terminate the Founder's Employment Agreement immediately and
such termination shall be an "Involuntary Resignation." If an Involuntary
Resignation occurs, Mr. Giaimo shall be entitled to a severance amount equal to:
(i) his base compensation, including all bonuses, for the immediately preceding
fiscal year (the "Annual Amount"), (ii) divided by 365, and (iii) multiplied by
the number of days remaining in the Expiration Term, provided that the severance
amount paid to Mr. Giaimo due to an Involuntary Resignation shall not exceed
three times the Annual Amount.

     Mr. Giaimo may also terminate the agreement by reason of a material breach
by the Company (as specified in the Founder's Employment Agreement). If Mr.
Giaimo terminates the Founder's Employment Agreement within the first five years
of the agreement for a material breach by the Company, he shall be entitled to
receive the Annual Amount multiplied by ten. If the material breach occurs after
the first five years of the agreement, the Annual Amount shall be multiplied by
five. Additionally, if a termination for a material breach occurs prior to the
earlier of (i) the end of the first five years of the agreement, or (ii) the
completion of an underwritten public offering of the Company's Shares from which
it realizes $15,000,000, then the Company shall be obligated, at the employee's
option, to purchase all of Mr. Giaimo's Shares at fair market value.

     The Company may terminate the agreement upon the death or disability of Mr.
Giaimo or for cause. If terminated for death, the Mr. Giaimo's estate shall be
entitled to receive all accrued compensation plus a severance amount equal to
one year's Base Compensation (as adjusted to the date of death). The decedent's
family will also be provided health insurance for one year from date of death.
If terminated for disability, Mr. Giaimo shall be entitled to receive all
accrued compensation plus a severance amount equal to his then current Base
Compensation for a period of five years, but reduced dollar for dollar by all
amounts received by the employee under disability insurance. If terminated for
cause, Mr. Giaimo shall be entitled to receive all accrued compensation.

EXECUTIVE EMPLOYMENT AGREEMENT. The Company and Ype Von Hengst entered into an
Employment Agreement effective as of November 9, 1998. The base salary under the
Employment Agreement is $125,000 per annum through December 31, 1998, $150,000
per annum from January 1, 1999 through December 31, 1999, and increased annually
at a minimum amount equal to the increase in the Consumer Price Index for the
Washington, D.C., Maryland, and Virginia metropolitan area beginning January 1,
2000 (the "Base Salary"). Benefits under the agreement include health and dental
insurance, life and disability insurance, and participation in stock options,
bonus plans and other benefit plans customarily made available to executive
employees of the Company.

                                       45
<PAGE>

     In consideration of Mr. Von Hengst entering into the agreement, the Company
extended a $100,000 non-recourse loan (the "Loan") to Mr. Von Hengst, subject to
his execution of a promissory note and secured by his 182,881 Shares in the
Company (the "Collateral"). Beginning December 31, 1999, Mr. Von Hengst is also
entitled to an annual bonus of an amount equal to $20,000 plus accrued and
unpaid interest on the Loan (the "Bonus"). The Bonus is not paid directly to Mr.
Von Hengst, but is applied to repay the outstanding principal and interest under
the Loan. The term of the Employment Agreement is from November 9, 1998 to
December 31, 2003.

     Under the Employment Agreement, Mr. Von Hengst agrees, except as required
by the performance of his duties, not to disclose or use any Confidential
Information of the Company or its affiliates, which is defined as all
information disclosed to him or known by him as a consequence of or through his
employment with the Company where such information is not generally known in the
trade or industry and where such information refers or relates in any manner to
the business activities of the Company. During the term of the Employment
Agreement and for a period of twelve consecutive months after the termination of
the Employment Agreement, Mr. Von Hengst agrees, except as required by the
performance of his duties, not to induce, attempt to induce, counsel, advise,
solicit or encourage any person to leave the employ of the Company or, with
respect to any person who had left the employ of the Company within the previous
six months, not to engage in any of the above activities in connection with such
former employee's acceptance of employment with any person or entity other than
the Company. For a period of twelve consecutive months after the termination of
the Employment Agreement for any reason other than a termination without cause,
Mr. Von Hengst agrees not to (i) engage in the "diner business" anywhere in the
United States; (ii) engage in competition with the Company within a 10 mile
radius of any Company owned or franchised facility or planned facility; or (iii)
directly or indirectly, either individually or in any other capacity, work for,
consult with or otherwise assist Movenpick, its parent corporation, affiliates
and subsidiaries, in the development of "diners."

     Mr. Von Hengst may terminate his Employment Agreement at any time upon
sixty days written notice ("Voluntary Resignation"). Upon receipt of such
notice, the Company may elect to relieve Mr. Von Hengst of any or all of his
duties or terminate him immediately. The Company may terminate the agreement for
cause (as that term is defined in the Employment Agreement), upon the death or
disability of Mr. Von Hengst, or without cause. If the agreement is terminated
by Voluntary Resignation or for cause, (i) the Company's obligation to pay the
Base Salary, Bonus and medical benefits shall cease immediately on the date of
termination; and (ii) the principal balance under the Loan shall be
extinguished, and all right, title and interest in the Collateral shall vest
immediately with the Company. If the agreement is terminated for death (i) the
Company's obligation to pay the Base Salary, Bonus and medical benefits shall
cease immediately on the date of termination; and (ii) the principal balance
under the Loan shall be extinguished, and all right, title and interest in the
Collateral shall vest with Mr. Von Hengst (or his estate or heirs). If
terminated for disability, defined as the inability to perform the essential
function of the job, with or without accommodation, for at least 180 consecutive
days, (i) Mr. Von Hengst's right to the Base Salary and Bonus shall cease on the
date of termination, (ii) the Company shall make the medical benefits available
to Mr. Von Hengst for a period of eighteen months following termination, the
costs of which shall be paid by the Company for the first twelve months of such
period; and (iii) the principal balance under the Loan shall be extinguished,
and all right, title and interest in the Collateral shall vest with Mr. Von
Hengst (or his estate or heirs). If terminated without cause, (i) Mr. Von Hengst
shall be entitled to the Base Salary, Bonus, and medical benefits for a one year
period commencing with the date of termination; and (ii) the principal balance
under the Loan shall be extinguished, and all right, title and interest in the
Collateral shall vest with Mr. Von Hengst (or his estate or heirs).

     OFFICER EMPLOYMENT AGREEMENTS. The Company entered into letter agreements
on March 4, 1999, with Craig Kendall, Timothy Cusick, and Patrick Meskell. Mr.
Meskell's letter agreement on March 4, 1999, supersedes his letter agreement
with the Company dated December 4, 1995. The agreements provide for Mr.
Kendall's employment as Vice President, Finance with a base salary of $125,000
per annum, Mr. Cusick's employment as Area Director of Operations with a base
salary of $104,000 per annum, and Mr. Meskell's employment as Senior Vice
President, Human Resources with a base salary of $104,000, with future
adjustments to each employee's base salary to be determined by the Board. In
addition, each employee is entitled to (i) participate in bonus and stock option
plans made available to executive employees of the Company; (ii) receive a $500
per month car allowance, (iii) receive life insurance coverage in the amount of
$500,000; (iv) participate in group health and dental plans generally offered to
employees of the Company; (v) receive long term disability insurance coverage in
amount of approximately 60% of the employee's base salary per month, subject to
a 90 day initial waiting period;

                                       46
<PAGE>

(vi) receive three weeks paid vacation that does not accrue or carry over from
one year to the next; and (vii) receive sick leave and other benefits, in
accordance with the Company's policies for its executives. Each employee agrees
to enter into confidentiality and non-competition agreements with the Company.

     Each of the agreements are terminable at any time by either party thereto.
However, if the Company terminates the agreement, the Company will pay the
employee all base salary earned but unpaid on the date of resignation plus three
months base salary. If the employee resigns after providing at least three
months prior notice, the Company will pay the employee all base salary earned
but unpaid on the date of resignation plus three months base salary payable
after resignation on the same schedule as the salary that was paid before
resignation. If the employee resigns without providing at least three months
prior notice, (i) all stock options and all stock purchase rights granted under
the Stock Option Plan to the employee (a) subsequent to March 1, 1999, (b) on
December 15, 1997, and (c) to Mr. Cusick and Mr. Meskell on December 29, 1997
will be terminated on the date of resignation; and (ii) the employee will sell
and the Company will purchase all Shares of the Company acquired by the employee
pursuant to stock options or stock purchase rights within six months prior to
the date of resignation at a purchase price equal to the price paid for the
Shares.

NON-EMPLOYEE DIRECTOR COMPENSATION

     During the year ended January 2, 2000, each of the Company's non-employee
directors, other than Michael Collier, who became a director in March 1999 to
fill the vacancy left by Clinton A. Clark, received an option to purchase 1,000
Shares on April 1, 1999 under the 1996 Non-Employee Director Stock Option Plan
as in effect prior to its amendment in June 1999.  Such options may be exercised
at a price equal to 100% of the fair market value on the date of grant, are
exercisable at any time in whole or in part for a period of three years from the
date of grant, and vest immediately.  On June 18, 1999, upon the amendment of
the plan pursuant to the approval given by the stockholders at the annual
stockholder meeting held on such date, all of the non-employee directors,
including Mr. Collier, received an option to purchase 4,000 Shares. Such options
may be exercised at a price equal to 100% of the fair market value on the date
of grant, vest and become exercisable in whole or in part one year after the
date of grant for a period of ten years from such date.  Other than the option
grants and the reimbursement of certain expenses, non-employee directors
received no other compensation for service as directors for the year ended
January 2, 2000.

                                       47
<PAGE>

Item 12. Security Ownership of Certain Beneficial Owners and Management.

     As of January 2, 2000, the Company had 11,592,691 Shares issued and
outstanding. The following table sets forth, to the Company's knowledge as of
January 2, 2000, the beneficial ownership of Shares by each person or entity
beneficially owning more than 5% of the Shares, each director, each nominee, and
certain executive officers, individually, and all directors and executive
officers as a group.

<TABLE>
<CAPTION>
                                                                                  AMOUNT AND NATURE OF
NAME AND ADDRESS (1) OF BENEFICIAL OWNER                                         BENEFICIAL OWNERSHIP (2)       PERCENT(3)
<S>                                                                              <C>                            <C>
Catherine Britton                                                                     2,485,112 (4),(5)            21.4
Michael Collier                                                                          79,928 (6)                *
Robert T. Giaimo                                                                      1,480,006 (7)                12.5
Ype Von Hengst                                                                          308,498 (8)                 2.6
Edward H. Kaplan                                                                      1,008,000 (9),(5)             8.7
Craig Kendall                                                                            42,222 (10)                *
Patrick Meskell                                                                         211,332 (11)                1.8
Louis P. Neeb                                                                            35,906 (12),(5)            *
Charles M. Steiner                                                                      628,729 (13),(5)            5.4
Timothy Cusick                                                                           82,936 (14)                *
All directors and executive officers as a group (12 persons)                          5,988,480 (16)               48.6
</TABLE>

"*" means less than 1%
________________________

(1)  The address for each beneficial owner listed above is Silver Diner, Inc.,
     11806 Rockville Pike, Rockville, Maryland 20852.

(2)  Unless otherwise stated in Notes 4 through 14 below, all references to
     options are to options exercisable currently and within 60 days of January
     2, 2000.

(3)  Each percentage of beneficial ownership is calculated using a different
     denominator, consisting of the total number of Shares outstanding
     (11,592,691) increased by the number of options owned by the beneficial
     owner that are exercisable within 60 days. The denominator used to
     calculate the percentage of beneficial ownership of all directors and
     executive officers as a group is the sum of the total number of Shares
     outstanding (11,592,691) and all outstanding options held by directors and
     executive officers that are exercisable within 60 days.

(4)  Includes: (a) 2,456,109 directly owned Shares; (b) options to purchase
     9,000 Shares granted under the 1996 Non-Employee Director Stock Option
     Plan, exercisable at the prices set forth in Note 5 below; and (c) 20,003
     Shares assigned to Ms. Britton by Robert T. Giaimo which are subject to an
     option held by Mr. Clinton A. Clark at an exercise price of $3.60 per Share
     through April 5, 2004.   Of the 2,476,112 Shares directly owned by Ms.
     Britton, 1,000 are subject to the terms of a voting agreement described in
     clause (c) of Note 7.  Does not include 1,480,006 Shares beneficially owned
     by Mr. Giaimo, Ms. Britton's spouse. Ms. Britton disclaims beneficial
     ownership of the Shares beneficially owned by Mr. Giaimo.

(5)  Each non-employee director other than Mr. Collier (five persons, excluding
     Mr. Collier) holds options for 9,000 Shares granted under the 1996 Non-
     Employee Director Stock Option Plan, exercisable at the following prices:
     (a) 1,000 at $3.4375 per Share; (b) 1,000 at $3.125 per Share; (c) 1,000 at
     $2.125 per Share; (d) 1,000 at $1.25 per Share; (e) 1,000 at $1.25 per
     Share; (f) 1,000 at $1.125 per Share; (g) 1,000 at $0.969 per Share; (h)
     1,000 at $0.8125 per Share; and (i) 1,000 at $0.938 per Share.

                                       48
<PAGE>

(6)  Includes: (a) 52,857 directly owned Shares; (b) options to purchase 26,071
     Shares granted under the 1991 Stock Option Plan at an exercise price of
     $.003 per Share; and (c) options to purchase 1,000 Shares granted under the
     Non-Employee Director Stock Option Plan at an exercise price of $0.938 per
     Share. Of the 52,857 Shares directly owned by Mr. Collier, 31,672 are
     subject to the terms of a voting agreement described in clause (d) of Note
     7.

(7)  Includes: (a) 421,565 directly owned Shares; (b) options to purchase
     280,000  Shares granted under the Stock Option Plan at an exercise price of
     $1.238 per Share; (c) 223,436 Shares owned of record by five persons, two
     of whom were principals of the Company prior to March 27, 1996, and three
     of whom are transferees of Shares owned by two other principals of the
     Company prior to March 27, 1996, which are subject to a voting agreement;
     and (d) 555,005 Shares owned of record by stockholders of the Company that
     are subject to voting agreements. The voting rights described in clause (c)
     above were granted to Mr. Giaimo pursuant to the FTAC Voting and Lockup
     Agreement, as amended by an Addendum thereto, which provides that Mr.
     Giaimo has an irrevocable right to vote the Shares with respect to all
     matters in which stockholder approval is required under the Delaware
     General Corporation Law. The right survives until the earlier of (i) five
     years after March 27, 1996; (ii) the death of the stockholder; or (iii) the
     sale by Mr. Giaimo of 50% or more of his Shares. Notwithstanding the
     foregoing, up to a total of 50% of such Shares may be transferred free of
     the voting restrictions during the period commencing 48 months after March
     27, 1996 and ending 60 months after such time. In addition, a security
     interest in the Shares may be granted at any time after 36 months after
     March 27, 1996 and in the event of a default with respect to such secured
     debt the Shares may be sold free and clear of such right. The voting rights
     described in clause (d) above were granted to Mr. Giaimo pursuant to the
     voting agreements that grant to Mr. Giaimo an irrevocable right to vote
     with respect to all matters in which stockholder approval is required under
     the Delaware General Corporation Law, including, without limitation, voting
     such stockholders' Shares in favor of nominees to the Board and for or
     against any and all matters that may come before the Company's stockholders
     for a vote. The appointment survives until the earliest of five years after
     March 27, 1996, the public offering of Shares by the Company from which the
     Company realizes $15 million or more, or the death of the stockholder. The
     1,480,006 Shares beneficially owned by Mr. Giaimo do not include any Shares
     beneficially owned by Catherine Britton, Mr. Giaimo's spouse. Mr. Giaimo
     disclaims beneficial ownership of Shares beneficially owned by Catherine
     Britton. The 1,480,006 Shares beneficially owned by Mr. Giaimo also do not
     include Shares issuable upon the exercise of certain outstanding stock
     option agreements issued to employees of the Company ("Options") that will
     be subject to the terms of voting agreements between the holders of such
     Options and Mr. Giaimo ("Voting Agreements"). Pursuant to the Voting
     Agreements, Mr. Giaimo would have the sole power to vote the Shares issued
     upon the exercise of such Options until the earliest to occur of: (i) March
     27, 2001; (ii) an underwritten public offering by the Company from which it
     realizes at least $15 million; or (iii) if applicable, termination of the
     optionee's employment with the Company as a result of death or incapacity.
     An aggregate of approximately 279,864 Shares issuable upon exercise of
     Options would be subject to the Voting Agreements. Of such Options,
     approximately 243,027 are currently exercisable through March 2, 2000
     (including approximately 128,344 with an exercise price of less than $.01
     per Share and approximately 114,683 with an exercise price between $2.25
     and $4.05 per Share) and approximately 36,837 are not exercisable within
     such period (including 36,837 with an exercise price of between $2.25 and
     $4.05 per Share). Mr. Giaimo would have sole power to vote the
     approximately 243,027 Shares underlying the currently exercisable Options,
     if such Options were exercised.

(8)  Includes: (a) 203,498 directly owned Shares; (b) options to purchase 75,000
     Shares granted under the Stock Option Plan at an exercise price of $1.125
     per Share; and (c) options to purchase 30,000 Shares under the Stock Option
     Plan at an exercise price of $1.00 per Share. Of the 203,498 Shares
     directly owned by Mr. Von Hengst, 395 are subject to the terms of a voting
     agreement described in clause (c) of Note 7 and 182,881 are subject to the
     terms of a voting agreement described in clause (d) of Note 7.

(9)  Includes: (a) 994,000 directly owned Shares; (b) options to purchase 9,000
     Shares granted under the 1996 Non-Employee Director Stock Option Plan,
     exercisable at the prices set forth in Note 5 above; and (c) options to
     purchase 5,000 Shares granted under the 1991 Stock Option Plan at an
     exercise price of $4.05 per Share. Of the 994,000 Shares directly owned by
     Mr. Kaplan, 158,241 are subject to the terms of a voting agreement
     described in clause (c) of Note 7.

                                       49
<PAGE>

(10) Includes: (a) 22,222 directly owned Shares; and (b) options to purchase
     20,000 Shares granted under the Stock Option Plan at an exercise price of
     $1.125 per Share.

(11) Includes: (a) 47,570 directly owned Shares; (b) options to purchase 25,004
     Shares granted under the Earned Ownership Plan at an exercise price of
     $.0003 per Share; (c) options to purchase 48,758 Shares granted under the
     1991 Stock Option Plan at an exercise price of $4.05 per Share; (d) options
     to purchase 50,000 Shares granted under the Stock Option Plan at an
     exercise price of $1.125 per Share; and (e) options to purchase 40,000
     Shares granted under the Stock Option Plan at an exercise price of $1.125
     per Share.

(12) Includes: (a) 14,334 Shares held of record by Neeb Enterprises, Inc., a
     corporation wholly-owned by Mr. Neeb and of which Mr. Neeb is President and
     a Director; (b) options to purchase 12,572 Shares granted under the 1991
     Stock Option Plan at the exercise price of $.003 per Share; and (c) options
     to purchase 9,000 Shares granted under the 1996 Non-Employee Director Stock
     Option Plan, exercisable at the prices set forth in Note 5 above.  Of the
     14,334 Shares directly owned by Neeb Enterprises, Inc., 1,000 are subject
     to the terms of a voting agreement described in clause (c) of Note 7.

(13) Includes: (a) 564,729 Shares held of record by the Steiner Family
     Partnership (Mr. Steiner owns a 25% interest in and is the managing partner
     of The Steiner Family Partnership and, therefore, may be deemed to
     beneficially own all Shares held of record by such partnership (except to
     the extent of his 25% ownership interest in The Steiner Family Partnership,
     Mr. Steiner disclaims beneficial ownership of such Shares)); (b) 50,000
     Shares held by the Branch Group, Inc. 401(k) Profit Sharing Plan (Mr.
     Steiner is sole trustee of the Branch Group, Inc. 401(k) Profit Sharing
     Plan and one of a number of beneficiaries thereof, holding an approximate
     7% interest in the plan); (c) options to purchase 5,000 Shares under the
     1991 Stock Option Plan at the exercise price of $4.05 per Share; and (d)
     options to purchase 9,000 Shares under the 1996 Non-Employee Director Stock
     Option Plan, exercisable at the prices set forth in Note 5 above.

(14) Includes: (a) 11,812 directly owned Shares; (b) options to purchase 16,920
     Shares granted under the 1991 Stock Option Plan at an exercise price of
     $4.05 per Share; (c) options to purchase 4,204 Shares granted under the
     Earned Ownership Plan at an exercise price of $.0003 per Share; and (d)
     options to purchase 50,000 Shares granted under the Stock Option Plan at an
     exercise price of $1.125 per Share.

(15) The total Shares beneficially owned by all directors and executive officers
     as a group was calculated by taking the sum of all Shares beneficially-
     owned by each director and executive officer, as reflected in the table,
     and reducing that number to avoid double counting of those Shares which are
     subject to a proxy given to Mr. Giaimo, as follows: (a) 1,000 Shares held
     by Ms. Britton; (b) 31,672 Shares held by Mr. Collier; (c) 183,276 Shares
     held by Mr. Von Hengst; and (d) 158,241 Shares held by Mr. Kaplan.

Item 13. Certain Relationships and Related Transactions.

     SILVER DINER POTOMAC MILLS, INC. Pursuant to lease agreements dated October
14, 1991 and May 27, 1992, the Company leases the Silver Diner restaurant in
Potomac Mills, Virginia (the "Potomac Mills Restaurant") from Silver Diner
Potomac Mills, Inc. ("SDPMI"), a corporation wholly owned by Robert T. Giaimo,
the Chairman and President of the Company. The leases require the payment of an
annual base rent, with annual adjustments based on the Consumer Price Index, and
the payment of percentage rent based on gross receipts. The leases expire in
late 2011. For the years ending January 3, 1999, December 28, 1997, and December
29, 1996, occupancy costs were $355,000, $350,000 and $389,000, respectively, in
rent and related pass through costs associated with the leases.

     ROBERT GIAIMO DEVELOPMENT, INC. On June 17, 1997, the Company purchased
from Robert Giaimo Development, Inc. ("RGDI"), a corporation wholly owned by
Robert T. Giaimo, the Chairman and President of the Company, an undivided 70%
interest in the parcel of land used as a parking lot for the Potomac Mills
Restaurant. The total purchase price of the land was $408,000, of which $267,000
was borrowed from a bank, secured by the land, bearing interest of 9.25%
annually, and due to mature in June 1999.

                                       50
<PAGE>

     The Company assumed a management agreement entered into between RGDI with
SDPMI (the "Management Agreement"), which provides that the Company is the
exclusive manager of the Potomac Mills Restaurant, is entitled to receive all of
the net profits (as defined in the Management Agreement) from the Potomac Mills
Restaurant, and is responsible for paying all operating costs and expenses of
the restaurant, including rent. The Management Agreement is unlimited in
duration and can only be terminated by mutual agreement of the Company and
SDPMI, or following notice that the Company failed to meet its management
obligations and responsibilities. RGDI has granted the Company an option to
purchase the Potomac Mills Restaurant for an amount equal the fair market value,
on the date of purchase, as determined by an appraisal.

     LOAN TO YPE VON HENGST. In connection with his entering into an employment
agreement with the Company on November 9, 1998, Ype Von Hengst, a Director and
officer of the Company, received a $100,000 loan from the Company, secured by
his 182,881 Shares in the Company and bearing interest at 5.25% annually. The
loan and accrued interest is to be repaid annually by applying an annual bonus
received by Mr. Von Hengst beginning December 31, 1999.

     MICHAEL COLLIER AND UNIWEST GROUP, INC. AND AFFILIATES  The Company has
from time to time entered into contracts with Michael Collier, a Director, and
with Uniwest Group, Inc., a construction corporation and certain of its
affiliates, a company of which Michael Collier is the President and a
stockholder, as follows: the Company paid Michael Collier approximately $23,600
for real estate consulting services provided to the Company during fiscal year
1999; the Company paid Uniwest Management Inc., a company which manages the real
estate operations, approximately $180,500, as rent on the Merrifield lease; and
the Company paid Uniwest Construction, Inc. approximately $74,000 for
miscellaneous construction and renovation to the existing diners.

     In 1995, the Company entered into a ground lease with 2909 Gallows LC,
landlord, covering the Merrifield facility.  The landlord is a partnership in
which Michael Collier owns a significant limited partnership interest.  The
lease provides for minimum annual rent of $110,000 in 1998 with fixed
escalations in rent payments over the lease term through 2012.

     Uniwest Construction, Inc. acted as the general contractor for the
construction of the diner on the Merrifield property.  Michael Collier was not a
director of the Company when the lease and construction contract were entered
into.

     In January 2000, as an agent for Interface Properties, Inc., the landlord,
the Company entered into a construction contract with Uniwest Construction, Inc.
for the construction of the Virginia Beach, VA Silver Diner.  The contract is a
fixed fee contract in the amount of $800,000.  Uniwest Construction, Inc. acts
as the general contractor and is paid a fee for coordinating and supervising the
development of the facility.  All work and materials will be provided by
subcontractors whose prices are subject to bid.  Pursuant to the lease
agreement, the landlord is liable for all payments and terms under the
construction contract agreement.

     In February 2000, the Company entered into a construction contract with
Uniwest Construction, Inc. for the construction of the Lakeforest Mall Silver
Diner.  The contract is a fixed fee contract in the amount of $735,200.  Uniwest
Construction, Inc. acts as the general contractor and is paid a fee for
coordinating and supervising the development of the facility.  All work and
materials will be provided by subcontractors whose prices are subject to bid.

                                       51
<PAGE>

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a) Lists of Documents Filed as Part of this Report

1. Financial Statements

<TABLE>
<CAPTION>
                                                                                  Page
<S>                                                                               <C>
Report of Independent Auditors................................................     18

Consolidated Financial Statements:

Consolidated Balance Sheets as of
January 2, 2000 and January 3, 1999...........................................     20

Consolidated Statements of Operations for the
Fiscal Years Ended January 2, 2000, January 3, 1999 and December 28, 1997.....     21

Consolidated Statements of Stockholders' Equity for the
Fiscal Years Ended January 2, 2000, January 3, 1999 and December 28, 1997.....     22

Consolidated Statements of Cash Flows for the
Fiscal Years Ended January 2, 2000, January 3, 1999, and December 28, 1997....     23

Notes to Consolidated Financial Statements....................................     25
</TABLE>

2. Schedules

All Schedules are omitted because the required information is inapplicable or it
is presented in the Consolidated Financial Statements or the notes thereto.

3. Exhibits

Exhibit
 Number   Description of Document
-------   -----------------------

3.        Articles of incorporation and bylaws

3.1.1.    Registrant's Certificate of Incorporation as amended by Certificates
          of Amendment incorporated by reference to Exhibit 3.01 of the
          registrant's Form 8-K dated March 27, 1996.

3.2.      Registrant's Bylaws incorporated by reference to Exhibit 3.3 of the
          registrant's Form S-4 (File No. 33-98844).

9.0       Form of Voting and Lockup Agreement with respect to Stock Option
          Agreements incorporated by reference to Exhibit 9.01 of the
          registrant's Form 8-K dated March 27, 1996.

9.1       Form of SDDI Voting and Lockup Agreement among SDDI, Robert T. Giaimo
          and certain shareholders of SDDI, together with Schedule of executed
          Voting and Lockup Agreements incorporated by reference to Exhibit 9.04
          of the registrant's Form 8-K dated March 27, 1996.

9.2       FTAC Voting and Lockup Agreement dated as of September 15, 1995 by and
          among the registrant and George A. Naddaff, Douglas M. Suliman, Jr.,
          Ralph J. Guarino and Charles A. Cocotas incorporated by reference to
          Exhibit 9.05 of the registrant's Form 8-K dated March 27, 1996.

                                       52
<PAGE>

9.3       Assumption of SDDI Voting and Lockup Agreement, SDDI Affiliate Lockup
          Agreement and Stockholder Lockup Agreement dated March 27, 1996,
          pursuant to Section 5.14(c) of merger agreement by and among FTAC,
          FTAC Transition Corporation and SDDI, incorporated by reference to
          Exhibit 9.06 of the registrant's Form 8-K dated March 27, 1996.

10.       Material Contracts

          Material Contracts - Real Property

          Rockville, Maryland

10.1      Lease Agreement between Federal Realty Investment Trust (Landlord) and
          SDLP (Tenant) dated July 13, 1988 as amended by Lease Modification
          dated August 17, 1988, Second Lease Modification dated February 3,
          1989, Third Amendment to Lease dated January 20, 1993, and Fourth
          Lease Modification Agreement dated October 17, 1994 incorporated by
          reference to Exhibit 10.01 of the registrant's Form 8-K dated March
          27, 1996. Laurel, Maryland.

10.2      Lease between CG Beltsville Limited Partnership (Landlord) and SDLP
          (Tenant) dated January 26, 1990, as amended by Letter Agreement dated
          October 28, 1995 incorporated by reference to Exhibit 10.02 of the
          registrant's Form 8-K dated March 27, 1996.

          Dale City, Virginia (Potomac Mills)

10.3      Lease between RGDI (Landlord) and SDPMI (Tenant), dated June 10, 1991,
          as amended by First Amendment to Lease, dated October 14, 1991, as
          amended by Second Amendment to Lease dated October 30, 1995
          incorporated by reference to Exhibit 10.03 of the registrant's Form
          8-K dated March 27, 1996.

          Parking Lot (parcel 11-B-1A), Dale City, Virginia (located adjacent to
          Silver Diner Restaurant at Potomac Mills)

10.4      Lease between Robert Giaimo Development, Inc. ("RGDI") (Landlord) and
          SDPMI (Tenant) dated May 27, 1992, as amended by Amendment to Lease
          dated October 30, 1995 incorporated by reference to Exhibit 10.04 of
          the registrant's Form 8-K dated March 27, 1996.

          Towson, Maryland

10.5      Lease Agreement between Towson Town Center Associates (Landlord) and
          the registrant (Tenant) effective January 30, 1992 incorporated by
          reference to Exhibit 10.05 of the registrant's Form 8-K dated March
          27, 1996.

          Fair Lakes, Virginia (Fair Oaks)

10.6      Ground Lease Agreement between F.L. Promenade L.P. (Landlord) and the
          registrant (Tenant) dated July 12, 1994, as amended by First Amendment
          to Ground Lease Agreement dated February 15, 1995, and Second
          Amendment to Ground Lease Agreement dated April 4, 1995 incorporated
          by reference to Exhibit 10.06 of the registrant's Form 8-K dated March
          27, 1996.

          Tysons Corner, Virginia

                                       53
<PAGE>

10.7      Ground Lease between Lehndorff Tysons Joint Venture (Landlord) and the
          registrant (Tenant) dated December 29, 1994), as amended by First
          Amendment to Lease dated May 14, 1995 incorporated by reference to
          Exhibit 10.07 of the registrant's Form 8-K dated March 27, 1996.

          Springfield, Virginia

10.8      Springfield Mall Lease between Franconia Associates (Landlord) and the
          registrant (Tenant) effective May 1, 1996 incorporated by reference to
          Exhibit 10.08 of the registrant's Form 8-K dated March 27, 1996.

          Merrifield, Virginia

10.9      Agreement of Lease dated September 14, 1995 by and between 2909
          Gallows LC (Landlord) and the registrant (Tenant) incorporated by
          reference to Exhibit 10.09 of the registrant's Form 8-K dated March
          27, 1996.

          Reston, Virginia

10.10     Purchase and Sale Agreement dated December 29, 1995 by and between
          Reston Land Corporation (Seller) and the registrant (Buyer)
          incorporated by reference to Exhibit 10.10 of the registrant's Form
          8-K dated March 27, 1996.

          Clarendon, Virginia

10.11     Lease dated February 12, 1996 between Wilson Limited Partnership
          (Landlord) and the registrant (Tenant) incorporated by reference to
          Exhibit 10.11 of the registrant's Form 8-K dated March 27, 1996.

          Kendall, Florida

10.12     Purchase Agreement dated October 4, 1996 by and between Documentation
          Corp. And Bersin Development Corp. (Sellers) and the registrant
          (Buyer). Exhibit 10.12 to the Company's Annual Report on Form 10-K for
          the fiscal year ended December 29, 1996, is incorporated herein by
          reference.

          Cherry Hill, New Jersey

10.13     Lease Agreement dated September 30, 1996 by and between Cherry Hill
          Associates L.P. (Landlord) and the registrant (Tenant). Exhibit 10.13
          to the Company's Annual Report on Form 10-K for the fiscal year ended
          December 29, 1996 is incorporated herein by reference.

          Gaithersburg, Maryland

10.13.1   Composite of Lease dated November 2, 1999 by and between Lake
          ForestAssociates LLC (Landlord) and Silver Diner Development, Inc.
          (Tenant)* Virginia Beach, Virginia

10.13.2   Form of Lease dated August 11, 1999 between Interface Properties, Inc
          (Landlord) and Silver Diner Development, Inc. (Tenant)*

          Material Contracts - Stock Plans

                                       54
<PAGE>

10.14     SDDI Second Amended and Restated 1991 Stock Option Plan, together with
          forms of incentive stock option agreement and non- qualified stock
          option agreement incorporated by reference to Exhibit 10.14 of the
          registrant's Form 8-K dated March 27, 1996.

10.15     SDDI Second Amended and Restated Earned Ownership Plan, together with
          form of non-qualified stock option agreement incorporated by reference
          to Exhibit 10.15 of the registrant's Form 8-K dated March 27, 1996.

10.16     Silver Diner, Inc. 1996 Non-employee Director Stock Option Plan
          together with form of stock option agreement incorporated by reference
          to Exhibit 4(a) of the registrant's Form S-8 filed December 20, 1996.

10.17     Silver Diner, Inc. 1996 Consultant Stock Option and Stock Purchase
          Plan together with form of stock option agreement, form of stock
          purchase agreement, form of election to purchase common stock and form
          of election to purchase options, incorporated by reference to Exhibit
          4(b) of the registrant's Form S-8 filed December 20, 1996.

10.18     Certificate and Agreement of Participation, Silver Diner, Inc.
          Restaurant Operating Partner Program and Addenda incorporated by
          reference to Exhibit 4 of the registrant's Form S-8 filed February 14,
          1997.

10.19     Silver Diner, Inc. Stock Option Plan together with form of Stock
          Option Agreement. Exhibit 10.19 to the Company's Annual Report on Form
          10-K for the fiscal year ended December 29, 1996, is incorporated
          herein by reference.

10.20     Silver Diner, Inc. Employee Stock Purchase Plan together with form of
          Subscription Agreement and Notice of Withdrawal. Exhibit 10.20 to the
          Company's Annual Report on Form 10-K for the fiscal year ended
          December 29, 1996, is incorporat ed herein by reference.

10.20.1   Form of Certificate and Agreement of Participation-Restaurant
          Operating Partner Program, as approved by the Board on December 15,
          1998, incorporated by reference to Exhibit 10.31 to the
          Company's Annual Report on Form 10-K for the fiscal year ended January
          3, 1999.

10.20.2   Form of Addendum to a Certain Certificate and Agreement of
          Participation in the Silver Diner, Inc. Restaurant Operating Partner
          Program (Version for 1997 Certificates issued after January 1, 1997),
          as approved by the Board on December 15, 1998, incorporated by
          reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K
          for the fiscal year ended January 3, 1999.

10.20.3   Form of Addendum to a Certain Certificate and Agreement of
          Participation in the Silver Diner, Inc. Restaurant Operating Partner
          Program (Version for 1997 Certificates issued on January 1, 1997), as
          approved by the Board on December 15, 1998, incorporated by reference
          to Exhibit 10.33 to the Company's Annual Report on Form 10-K for the
          fiscal year ended January 3, 1999.

10.20.4   Silver Diner, Inc. Stock Option Plan (as amended March 4, 1998),
          incorporated by reference to Exhibit 10.34 to the Company's Annual
          Report on Form 10-K for the fiscal year ended January 3, 1999.

10.20.5   Form of Stock Option Plan Agreement between Silver Diner, Inc. and
          certain Executive Officers, Date of Grant: December 15, 1998, together
          with Performance Criteria for each of: Craig Kendall; Patrick Meskell;
          Timothy Cusick; and Ype Von Hengst, incorporated by reference to
          Exhibit 10.36 to the Company's Annual Report on Form 10-K for the
          fiscal year ended January 3, 1999.

                                       55
<PAGE>

10.20.6   Stock Option Plan Agreement between Silver Diner, Inc. and Robert T.
          Giaimo for grant of 400,000 Shares on December 15, 1998, incorporated
          by reference to Exhibit 10.37 to the Company's Annual Report on Form
          10-K for the fiscal year ended January 3, 1999.

10.20.7   Form of Restated Stock Option Plan Agreement between Silver Diner,
          Inc. and Certain Executive Officers Granting Shares on December 29,
          1997, incorporated by reference to Exhibit 10.38 to the Company's
          Annual Report on Form 10-K for the fiscal year ended January 3, 1999.

10.20.8   1996 Non-Employee Director Stock Option Plan, as amended March 4,
          1998, incorporated by reference to Exhibit 10.41 to the
          Company'sAnnual Report on Form 10-K for the fiscal year ended January
          3, 1999.

10.20.9   1996 Employee Stock Purchase Plan, as amended.*

10.20.10  1996 Non-Employee Director Stock Option Plan (as amended March 4, 1998
          and March 18, 1999)*.

10.20.11  Form of Performance Criteria (for January 2, 1999-December 31, 1999),
          as amended by the Compensation Committee on December 8, 1999, for
          options granted December 15,1998 to each of: Craig Kendall; Patrick
          Meskell; Timothy Cusick; and Ype Von Hengst*

10.20.12  Form of Performance Criteria (for January 1, 2000-December 31, 2000),
          as adopted by the Compensation Committee on December 8, 1999, for
          options granted December 15,1998 to each of: Craig Kendall; Patrick
          Meskell; Timothy Cusick; and Ype Von Hengst*

          Material Contracts - Agreements with Executive Officers/Director

10.22     Letter Agreement dated December 4, 1996 between the registrant and
          Patrick Meskell regarding terms of employment, as amended by Letter
          Agreement dated March 26, 1996 incorporated by reference to Exhibit
          10.19 of the registrant's Form 8-K dated March 27, 1996.

10.22.1   Letter Agreement dated March 4, 1999 between the Company and Patrick
          Meskell.*

10.23     Founder's Employment Agreement dated August 28, 1995 by and between
          the registrant and Robert T. Giaimo incorporated by reference to
          Exhibit 10.20 of the registrant's Form 8-K dated March 27, 1996.

10.24     Assumption of Founder's Employment Agreement dated March 27, 1996
          pursuant to Section 5.14(b) of merger agreement by and among FTAC,
          FTAC Transition Corporation and SDDI, incorporated by reference to
          Exhibit 10.21 of the registrant's Form 8-K dated March 27, 1996.

10.25     Indemnity Agreement dated August 29, 1995 by and between Robert T.
          Giaimo, as indemnitee, and the registrant incorporated by reference to
          Exhibit 10.22 of the registrant's Form 8-K dated March 27, 1996.

10.25.1   Letter Agreement dated March 4, 1999 between the Company and Craig
          Kendall.*

10.25.2   Letter Agreement dated March 4, 1999 between the Company and Timothy
          Cusick.*

10.25.3   Employment Agreement dated November 9, 1998, between Silver Diner,
          Inc. and Ype Von Hengst, including Promissory Note in principal amount
          of $100,000, incorporated by reference to Exhibit 10.39 of the
          Company's Annual Report on Form 10-K for thefiscal year ended January
          3, 1999.

                                       56
<PAGE>

10.25.4   Letter Agreement dated November 9, 1998 between Robert T. Giaimo and
          Silver Diner, Inc. Re: Founder's Employment Agreement, incorporated by
          reference to Exhibit 10.40 of the Company's Annual Report on Form 10-K
          for the fiscal year ended January 3, 1999.

          Material Contracts - Miscellaneous

10.26     Option to Purchase dated January 26, 1990 between CG Beltsville
          Limited Partnership (Optionor), and SDLP (Optionee) regarding land
          parcel on which the Silver Diner Restaurant in Laurel, Maryland, is
          located incorporated by reference to Exhibit 10.36 of the registrant's
          Form 8-K dated March 27, 1996.

10.27     Amendment No. 1 to the Stock Escrow Agreement dated as of March 26,
          1996 among the Registrant, George A. Naddaff, Douglas M. Suliman, Jr.,
          Ralph J. Guarino, Charles A. Cocotas and Continental Stock Transfer &
          Trust Company, together with letter dated March 27, 1996 from the
          Registrant to Continental Stock Transfer & Trust Company incorporated
          by reference to Exhibit 10.37 of the registrant's Form 8-K dated March
          27, 1996.

10.28     Affiliate Warrant Exchange and Custodial Agreement dated September 15,
          1996, by and among George A. Naddaff, Douglas M. Suliman, Jr. and
          Charles A. Cocotas, as Warrant Holders, SDDI and Douglas M. Suliman,
          Jr., as Custodian incorporated by reference to Exhibit 10.38 of the
          registrant's Form 8-K dated March 27, 1996.

10.29     Escrow Agreement dated as of February 1, 1996 by and between GKN
          Securities Corp., certain affiliates thereof, the SDDI and Arent Fox,
          as Escrow Agent incorporated by reference to Exhibit 10.39 of the
          registrant's Form 8-K dated March 27, 1996.

10.30     Option Agreement dated March 27, 1996 by and between RGDI and SDDI
          granting option to SDDI for the purchase of Potomac Mills real estate
          parcels incorporated by reference to Exhibit 10.34 of the registrant's
          Form 8-K dated March 27, 1996.

10.31     Agreement dated February 29, 2000 between Silver Diner Development,
          Inc. (Owner) and Uniwest Construction, Inc. (Contractor) for Silver
          Diner at Lakeforest Mall (Project)*

10.32     Letter Agreement dated January 7, 2000 between Uniwest and Silver
          Diner Development, Inc. regarding Silver Diner at Columbus Square
          East, Virginia Beach, Virginia, together with Agreement dated December
          1, 1999 between the parties*

21.       Subsidiaries of the Registrant. (a) Silver Diner Development, Inc., a
          Virginia corporation

22.       Accountants Consent

23.1      Consent of Reznick Fedder & Silverman P.C.*

(b) Reports on Form 8-K

          Current Report on Form 8-K dated September 29, 1999 regarding the
          change in the Company's certifying accountant.

*   Filed herewith. All other exhibits have been previously filed as indicated.

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<PAGE>

SIGNATURES

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

                                              Silver Diner, Inc.

                                              By:/s/ Robert T. Giaimo
                                              _______________________
                                              Robert T. Giaimo
                                              President and Chief Executive
                                              Officer
                                              April 3, 2000


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.

Signatures                   Title                       Date
/s/ Robert T. Giaimo         President, Chief Executive  April 3, 2000
________________________     Officer and Director
Robert T. Giaimo


/s/ Craig Kendall            Vice President, Finance     April 3, 2000
________________________
Craig Kendall


/s/ Catherine Britton        Director                    April 3, 2000
________________________
Catherine Britton


/s/ Ype Hengst               Director                    April 3, 2000
________________________
Ype Hengst


/s/ Edward H. Kaplan         Director                    April 3, 2000
________________________
Edward H. Kaplan


/s/ Michael Collier          Director                    April 3, 2000
________________________
Michael Collier


/s/ Louis P. Neeb            Director                    April 3, 2000
________________________
Louis P. Neeb


/s/ Charles Steiner          Director                    April 3, 2000
________________________
Charles Steiner

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