<PAGE>
 
                    U.S. SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   Form 10-K

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

                   For the fiscal year ended January 3, 1999
                        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(g) of the Act:

                        Common Stock, $.00074 Par Value

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

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

     At March 15, 1999, the registrant had 11,809,146 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 $8,669,061.
The aggregate market value was determined based on the closing price of the
Common Stock on the NASDAQ Stock Market(SM) on March 15, 1999.

DOCUMENTS INCORPORATED BY REFERENCE
     Portions of the registrant's Proxy Statement for its Annual Meeting of
Shareholders in 1999 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"). Silver Diner Limited
Partnership ("SDLP"), of which the Company 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 and,
subsequently, liquidated SDLP into SDDI. The warrants were exercisable at any
time on or before the earlier of January 31, 1998 or 30 days following the first
public offering of Common Stock on or after June 30, 1997. 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 $7.50 and the average dining time is approximately 40
minutes.  For the last fiscal year the Silver Diner restaurants had sales
ranging from $2.0 million to $4.1 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 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 $5.99 AND UP -
Management believes the Silver Diner delivers outstanding value by providing
generous portions of fresh, high quality food at affordable prices. Appetizers
range from $3.99 to $6.99, 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" at $5.99 to $7.99.

                                       2
<PAGE>
 
RESTAURANTS.   The following sets forth certain information regarding the
Company's existing restaurants.


                                                                 APPROXIMATE  
                                               APPROXIMATE         NUMBER     
OPERATING LOCATIONS           DATE OPENED      SQUARE FEET        OF SEATS    
-------------------           -----------      -----------        --------    
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   

     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.  The Company is anticipating opening the first of its
latest generation of prototype restaurants in late 1999 and expects that the
Silver Diner restaurants opened in the next two years will continue to be
company-owned; however, 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 A DOZEN 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.  The Company is currently test marketing frozen 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 3, 1999, the Company had 775 employees, 12 of whom are
corporate personnel, 55 of whom are restaurant management personnel (including 8
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 65 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:

Name               Age   Served Since/(1)/   Position(s) Held
-------------------------------------------------------------------------------
Robert T. Giaimo    47        1987           Chairman of the Board,
                                             President and Chief Executive
                                             Officer 
Ype Hengst          48        1987           Director, Vice President, Executive
                                             Chef and Corporate Secretary
Patrick Meskell     45        1996           Senior Vice President, Human
                                             Resources
Craig Kendall       47        1998           Vice President, Finance
Timothy Cusick      33        1996           Area Director of Operations


/(1)/ Includes service with SDDI.

     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 captioned
Laura Reese v. Roger Richardson and Silver Diner Development, Inc.  The
plaintiff alleges that she was sexually assaulted by Roger Richardson, who was
the general manager of the Laurel Silver Diner restaurant.  Mr. Richardson was
terminated promptly following the occurrence of the event in November 1994.
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 Suggestion of Bankruptcy filed by Mr. Richardson, 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 Market/SM/ 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:

 
                    QUARTER                  HIGH           LOW
                    -------                  ----           ---

1997                First                    $4-7/8         $3-1/4
                    Second                   $3-19/32       $2-7/8
                    Third                    $3-1/8         $2
                    Fourth                   $2-5/16        $1
 
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
 
     DIVIDENDS. Since the Company's inception, no dividends have been paid on
the Common Stock.

     HOLDERS.  As of January 3, 1999, there were approximately 489 record
holders of the Common Stock.

                                       7
<PAGE>
 
ITEM 6.  SELECTED FINANCIAL DATA.

<TABLE>
<CAPTION>
                                                                               Fiscal Years Ended/(I)/
                                           -----------------------------------------------------------------------------------------
                                                January 3,       December 28,     December 29,       December 31,     January 1, 
                                                  1999              1997              1996              1995            1995
<S>                                        <C>                   <C>              <C>                <C>              <C> 
STATEMENT OF OPERATIONS DATA:
Net sales                                  $   28,561,422        $ 24,259,156      $ 16,550,468      $ 13,350,255     $ 10,896,682
 
Restaurant costs and expenses:
   Cost of sales                                7,920,808           6,929,221         4,526,286         3,655,254        3,036,995
   Labor                                        9,449,685           7,999,812         5,464,896         4,452,134        3,525,472
   Operating                                    5,211,704           4,037,198         2,536,609         2,015,668        1,642,039
   Occupancy                                    2,777,932           2,534,210         1,931,866         1,588,527        1,293,842
   Depreciation and amortization                1,648,134           1,499,125           882,843           715,426          382,082
                                           --------------        ------------      ------------      ------------     ------------
 
     Total restaurant costs and expenses       27,008,263          22,999,566        15,342,500        12,427,009        9,880,430
                                           --------------        ------------      ------------      ------------     ------------
 
     Restaurant operating income                1,553,159           1,259,590         1,207,968           923,246        1,016,252
 
General and administrative expenses             2,921,299           3,065,436         2,705,940         2,077,735        1,877,774
Depreciation and amortization                     267,171             263,484           183,928            97,351           61,042
Write off of abandoned site costs                  32,455             172,618                 -                 -           98,637
                                           --------------        ------------      ------------      ------------     ------------
 
   Operating loss                              (1,667,766)         (2,241,948)       (1,681,900)       (1,251,840)      (1,021,201)
                                           --------------        ------------      ------------      ------------     ------------
 
Interest expense                                   40,639              10,702           180,293           334,086          254,810
Investment income, net                           (151,967)           (294,231)         (432,721)          (83,021)           3,599
                                           --------------        ------------      ------------      ------------     ------------
 
   Net loss before minority interest and       
    cumulative effect of a change in
    accounting principle                       (1,556,438)         (1,958,419)       (1,429,472)       (1,502,905)      (1,279,610) 

Minority interest in net loss of SDLP                   -                   -                 -           180,175          332,977
                                           --------------        ------------      ------------      ------------     ------------
 
   Net loss before cumulative effect of a      
    change in accounting principle             (1,556,438)         (1,958,419)       (1,429,472)       (1,322,730)        (946,633) 

Cumulative effect of a change in                 
 accounting principle                            (326,868)                  -                 -                 -                - 
                                           --------------        ------------      ------------      ------------     ------------ 
 
   NET LOSS                                $   (1,883,306)       $ (1,958,419)     $ (1,429,472)     $ (1,322,730)    $   (946,633)
                                           ==============        ============      ============      ============     ============
 
Basic and diluted net loss per common      
 share before cumulative effect of a
 change in accounting principle            $        (0.13)       $      (0.17)     $      (0.15)     $      (0.26)    $      (0.19)
 
Cumulative effect of a change in                         
 accounting principle                               (0.03)                  -                 -                 -                - 
                                           --------------        ------------      ------------      ------------     ------------
 
Net loss per common share                  $        (0.16)       $      (0.17)     $      (0.15)     $      (0.26)    $      (0.19)
                                           ==============        ============      ============      ============     ============
 
Weighted average common shares 
 outstanding                                   11,591,822          11,609,400         9,545,681         5,013,319        4,982,414
                                           ==============        ============      ============      ============     ============
</TABLE>

                                       8
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                 As of/(I)/
                                      ---------------------------------------------------------------------------------------------
                                             January 3,       December 28,      December 29,      December 31,      January 1, 1995
                                                1999              1997              1996              1995          
<S>                                   <C>                     <C>               <C>               <C>               <C> 
BALANCE SHEET DATA:                                           
Working capital (deficiency)             $        625,043     $   1,332,141     $   6,669,761     $  (4,961,352)    $     (560,972)
Total assets                                   21,638,497        23,646,765        25,864,375        10,794,469          7,078,679
Current liabilities                             2,227,222         2,207,891         3,174,262         6,975,363          2,580,329
Long-term liabilities                           1,173,280         1,317,667           749,396         2,584,832          2,205,695
Stockholders' equity                           18,237,995        20,121,207        21,940,717         1,234,274          2,112,480
</TABLE>
                                                                                
/(I)/  Selected financial data as of and for the years ended January 3, 1999,
       December 28, 1997 and December 29, 1996 were obtained from the Company's
       audited financial statements. Selected financial data as of and for the
       years ended December 31, 1995 and January 1, 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 3, 1999. As of this date, the Company
          operates 11 diners, 10 in the Washington/Baltimore metropolitan area
          and one in Cherry Hill, New Jersey. Currently, there are no additional
          Silver Diners under construction. The Company is pursuing additional
          locations in the Philadelphia/Southern New Jersey market and
          throughout the Mid-Atlantic region for restaurant openings commencing
          in late 1999. Longer term, 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.

 
               RESTAURANTS                              1996    1997    1998
               -----------                              ----    ----    ----
               In operation, beginning of year            6       7      11
               Newly opened                               1       4       0
                                                        ----    ----    ----
               In operation, end of year                  7      11      11
                                                        ====    ====    ====
               Under construction, end of year            3       0       0
                                                        ====    ====    ====

                                       9
<PAGE>
 
     On March 27, 1996, FTAC Transition Corporation, a wholly owned subsidiary
of FTAC, merged with and into Silver Diner Development, Inc., a Virginia
Corporation, with SDDI surviving as a wholly owned subsidiary of FTAC. In
connection with the Merger, FTAC changed its name to Silver Diner Development,
Inc., then subsequently to Silver Diner, Inc. Pursuant to the merger agreement,
each outstanding share of SDDI common stock converted into 33.339 shares of the
common stock of FTAC. Upon consummation of the Merger, the stockholders of SDDI
became the owners in the aggregate of approximately 57% of the outstanding
common stock of FTAC and the directors and officers of SDDI became directors and
officers of FTAC.

     For accounting and financial reporting purposes, the Merger was treated as
a recapitalization of SDDI and as an issuance of SDDI common shares for monetary
assets and liabilities.  The Company has reflected in its consolidated financial
statements the assets, liabilities and equity of SDDI and its subsidiary Silver
Diner Limited Partnership at their historical book values.  Accordingly, the
consolidated results of operations and financial position of the Company for
periods and dates prior to the Merger are the consolidated historical results of
operations and financial position of SDDI and SDLP for such periods and dates.

     All historical shares of common stock and per share amounts for periods
prior to the Merger have been retroactively adjusted to reflect the FTAC shares
issued to the SDDI shareholders at the time of the Merger.

     In connection with the Merger, on April 2, 1996, notes payable to related
parties totaling $1,236,811 were repaid by the offset of amounts due from
affiliates of $355,023 and the net outstanding balance was paid in full by the
Company.  On April 1, 1996, the Company terminated its capital lease obligation
with a related party by purchasing the leased equipment at the remaining lease
obligation balance of approximately $148,000.  In addition, the Company repaid
certain bank notes of SDDI in the approximate amount of $904,000 on April 4,
1996.

     On June 13, 1996, the Company completed its purchase of the minority
interest in SDLP from the original investors for $2,472,000 in cash and 84,000
warrants to purchase common stock exercisable at $8.00 per share until the
earlier of 30 days following a public offering or January 31, 1998.  The offer
was accepted by 100% of the limited partners.  Because SDLP's financial
statements are included in the consolidated financial statements of the Company,
acquisition of the minority interest will not result in any change in the
Company's future reported net sales, restaurant costs and expenses or restaurant
operating income.  The acquisition has been accounted for under the purchase
method and the entire cost of the transaction, totaling $2.8 million, has been
recorded as goodwill and is being amortized on a straight-line basis over 15
years.

     On July 11, 1996, the Company completed a $8,250,000 private placement of
common stock through the sale of 1.5 million shares at $5.50 per share.  Of the
$7.6 million net proceeds of the sale, $2.5 million was used to replace the
funds used for the acquisition of the minority interests in SDLP, approximately
$400,000 was used to repay the bank debt of SDLP and the remainder was available
to fund expansion.  On August 7, 1996, the Company registered the shares with
the Securities and Exchange Commission pursuant to a Form S-3 Registration
Statement filed under the Securities and Exchange Act of 1933, as amended.

     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
1998, 1997 and 1996 were comprised of 53, 52 and 52 weeks, respectively and
ended on January 3, 1999, December 28, 1997 and December 29, 1996, 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 3,       December 28,    December 29,
                                                          1999              1997            1996
                                                        ----------       ------------    ------------ 
<S>                                                     <C>              <C>             <C>
Net sales                                                100.0%             100.0%           100.0%
                                                                                             
Restaurant costs and expenses:                                                               
 Cost of sales                                            27.7%              28.6%            27.4%
 Labor                                                    33.1%              33.0%            33.0%
 Operating                                                18.3%              16.6%            15.3%
                                                        ----------       ------------    ----------- 
                                                                                             
   Restaurant operating margin                            20.9%              21.8%            24.3%
                                                                                             
 Occupancy                                                 9.7%              10.4%            11.7%
 Depreciation and amortization                             5.8%               6.2%             5.3%
                                                        ----------       ------------    ----------- 
                                                                                             
   Restaurant operating income                             5.4%               5.2%             7.3%
                                                                                             
General and administrative expenses                       10.2%              12.6%            16.3%
Depreciation and amortization                              0.9%               1.1%             1.1%
Write off of abandoned site costs                          0.1%               0.7%             0.0%
                                                        ----------       ------------    -----------  
                                                                                             
   Operating loss                                         (5.8%)             (9.2%)          (10.1%)
                                                                                             
Interest expense                                           0.0%               0.0%             1.1%
Investment income, net                                    (0.5%)             (1.1%)           (2.6%)
                                                        ----------       ------------    ----------- 
                                                                                             
 Net loss before cumulative effect of a change in         
  accounting principle                                    (5.3%)             (8.1%)           (8.6%)  
                                                                                             
 Cumulative effect of a change in accounting              
  principle                                               (1.2%)                -                -    
                                                        ----------       ------------    ----------- 
                                                                                             
 Net loss                                                 (6.5%)             (8.1%)           (8.6%)
                                                        ==========       ============    =========== 
</TABLE>

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.

                                       11
<PAGE>
 
     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 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.

                                       12
<PAGE>
 
     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.

YEAR ENDED DECEMBER 28, 1997 COMPARED TO THE YEAR ENDED DECEMBER 29, 1996.

     Net sales for the fiscal year ended December 28, 1997 ("Fiscal 1997")
increased $7.7 million to $24,259,156 compared to $16,550,468 for the fiscal
year ended December 29, 1996  ("Fiscal 1996").  Silver Diner restaurants opened
during Fiscal 1996 and Fiscal 1997 in Arlington, Merrifield, Springfield, and
Reston, Virginia and Cherry Hill, New Jersey added $8.4 million 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) decreased 2.1%.
Same store customer counts were down 4.3% for Fiscal 1997, but price increases
in mid-June 1997 helped raise average sales per customer and offset a portion of
that decline.  Average net sales for the seven restaurants open throughout
Fiscal 1997 was $2.6 million compared to $2.7 million for the six restaurants
open throughout 1996.

     Cost of sales, primarily food and beverage cost, was 28.6% of net sales for
Fiscal 1997, an increase of 1.2% from 27.4% in Fiscal 1996. The increase was
primarily the result of the Company's adoption of a new menu in 1997.
Additionally, cost of sales was unfavorably impacted by stores opened in late
1996 and throughout 1997, which incurred anticipated higher cost of goods as
well as labor and operating expenses in their initial months of operation.

     Labor, which consists of restaurant management and hourly employee wages
and bonuses, payroll taxes, workers' compensation insurance, group health
insurance and other benefits, was unchanged at 33.0% of net sales for Fiscal
1997 compared to Fiscal 1996.  Increases in hourly employee wages as a result of
increased minimum wage and higher labor expenses in new stores was offset by
lower workers' compensation costs in all stores and lower health and vacation
benefit costs in the Company's new stores where most hourly employees have not
worked for the Company long enough to qualify for these benefits.

                                       13
<PAGE>
 
     Operating expenses, which consist of all restaurant operating costs other
than cost of sales, labor, occupancy, and depreciation, including supplies,
utilities, repairs and maintenance and advertising, increased to 16.6% of net
sales for Fiscal 1997, compared to 15.3% for Fiscal 1996.  Higher marketing
costs primarily related to the Company's summer radio advertising campaign and
coupon mailings to prospective customers accounted for 0.9% of the increase in
operating expenses.  The remainder of the increase as a percentage of sales was
caused by higher administrative expenses driven by lower comparable store sales,
combined with slightly above average operating expenses in new stores.

     Restaurant operating margin, which consists of net sales minus cost of
sales, labor and operating expenses exclusive of occupancy, decreased to 21.8%
of net sales for Fiscal 1997 from 24.3% for Fiscal 1996. Management believes
restaurant operating margin is the most consistent measure of store level
operating results because it focuses on unit level performance. Restaurant
operating margin was unfavorably impacted by the five stores opened between
December 1996 and November 1997, which incurred anticipated higher cost of
sales, labor and operating expenses in their initial months of operation. As
these stores mature, management expects their restaurant operating margin to be
similar to the Company's comparable stores. The table below illustrates the
components of restaurant operating margin as a percentage of sales (New stores
include all stores that are not comparable stores as defined above):

<TABLE>
<CAPTION>
                                              NEW           COMPARABLE         TOTAL
                                              ---           ----------         -----
                                             STORES           STORES          COMPANY
                                             ------           ------          -------
       <S>                              <C>               <C>               <C>
       Sales                                  100%              100%             100%
 
       Cost of sales                         29.1%             28.1%            28.6%
       Labor                                 34.2%             32.0%            33.0%
       Operating Expenses                    16.8%             16.4%            16.6%
                                        ---------------   ---------------   ---------------        

       Restaurant Operating Margin           19.9%             23.5%            21.8%
                                        ===============   ===============   ===============    
</TABLE>

     Additionally, the decrease in restaurant operating margin was driven by an
approximately 0.7% increase in food cost related to the Company's new menu
platform and a 0.9% increase in marketing expenses.

     Occupancy, which is composed primarily of rent, property taxes and property
insurance, increased  $602,344 for Fiscal 1997 compared to Fiscal 1996, due
primarily to the opening of new restaurants during 1996 and 1997. As a
percentage of sales, occupancy expenses decreased from 11.7% in Fiscal 1996 to
10.4% in Fiscal 1997 due to lower rent expense in the new stores.  Also, the
Company owns the property for the Reston store that opened in June 1997.

     Restaurant depreciation and amortization increased $616,282 from $882,843
for fiscal 1996 to $1,499,125 for Fiscal 1997, primarily due to new restaurant
openings.  Fiscal 1997 and Fiscal 1996 include approximately $461,000 and
$240,000, respectively, of preopening amortization.  Preopening costs are
amortized on a straight-line basis over twelve months from the date of each new
restaurant opening.

     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 $3,065,436 for
Fiscal 1997; an increase of $359,496 compared to Fiscal 1996. As a percentage of
net sales, general and administrative expenses decreased to 12.6% in Fiscal 1997
from 16.3% in Fiscal 1996.  Increased corporate salary costs and higher
restaurant management and recruitment costs accounted for approximately $140,000
of the increase.  Also, higher professional fees during the first two quarters
of 1997 related to preparation of the Company's first annual report, 10-K and
annual proxy statement plus costs of implementing various compensation and
benefit plans added approximately $160,000.  In addition, 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

                                       14
<PAGE>
 
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. As such, the Company recorded
$123,000 of expense for these insurance policies for the year ended December 28,
1997. 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 and infrastructure necessary to support the Company's intermediate and 
long-term growth plans. As revenues increase in 1998, general and administrative
expenses are expected to decrease in absolute dollars and as a percentage of net
sales.

     The increase in depreciation and amortization of approximately $80,000 for
Fiscal 1997 is a result of additional goodwill amortization related to the
acquisition of the SDLP minority interest in June 1996.  Total goodwill
amortization related to this transaction in Fiscal 1996 was approximately
$100,000 and in Fiscal 1997 was approximately $184,000.

     Write off of abandoned site costs increased from zero in Fiscal 1996 to
$172,618 in Fiscal 1997.  These costs relate to deferred site costs including
legal, design and development costs for potential restaurant sites that the
Company is no longer pursuing due to unanticipated non-fulfillment of landlord
contingencies and sites that did not meet the Company's unit economic criteria.

     The decrease in interest expense from $180,293 in 1996 to $10,702 in 1997
is nearly entirely the result of the consummation of the Merger with FTAC in
March 1996 at which time the majority of the outstanding debt of the Company was
either repaid or converted to equity.  The bank debt of SDLP was subsequently
repaid in late July 1996 following acquisition of the SDLP minority interest.
Interest expense and amortization of deferred loan costs were eliminated for the
remainder of Fiscal 1996 due to the repayment of debt. The interest expense
incurred in Fiscal 1997 relates to debt incurred by the Company in the purchase
of a piece of property adjacent to the Potomac Mills Silver Diner from a related
party.  Interest income decreased significantly in Fiscal 1997 due to use of the
proceeds of the Merger and private placement proceeds to fund operating losses
and construct new Silver Diners.

     Net loss for Fiscal 1997 was $1,958,419, or $0.17 per share, compared to
the net loss of $1,429,472, or $0.15 per share, for Fiscal 1996.  Average shares
outstanding increased from 9,545,681 for Fiscal 1996 to 11,609,400 for Fiscal
1997.  The increase in shares resulted from the Merger and the private placement
in Fiscal 1996.  Management expects that the Company will continue incurring
quarterly losses until sufficient revenue is generated from new units to absorb
start-up expenses and the increased overhead put 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 3, 1999, the
Company has a net operating loss carryforward of approximately $6 million for
income tax purposes that expires in 2008 through 2013, which may be used to
reduce future income tax expense and tax liabilities.

NEW ACCOUNTING PRONOUNCEMENTS.

     In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," and in February 1998, FASB issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits -- an
amendment of FASB Statements No. 87, 88, and 106."  SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements.  SFAS No. 131 establishes standards for the way public
business enterprises report information about operating segments and the related
disclosures about products and services, geographic areas and major customers.
SFAS No. 132 revises employers' disclosures about pension and other
postretirement benefit plans. These standards are effective for financial
statements issued for fiscal years beginning after December 15, 1997.  Adoption
of SFAS Nos. 130, 131 and 132 did not have a material impact on the Company's
financial statement presentation or disclosures.

                                       15
<PAGE>
 
     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.

     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,
1999.  The Company has not yet determined the impact of adopting SFAS No. 133 on
its financial statement presentations or disclosures.

LIQUIDITY AND CAPITAL RESOURCES

     At January 3, 1999, cash and cash equivalents were $1.6 million, short-term
investments were $.7 million, working capital was $.6 million, the Company had
no long-term debt and stockholders' equity was $18.2 million. Short-term
investments decreased $.5 million during Fiscal 1998, due primarily to cash used
to finance the Fiscal 1998 purchases of property and equipment, including
construction payables associated with the Cherry Hill diner which opened in late
November 1997 and the purchase of computer systems.

     The Company's principal future capital requirement is expected to be the
development of restaurants. The Company is anticipating opening one to three
Company-owned restaurants in 1999; however, the location of these sites has not
been determined. 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 endeavoring to
decrease the cost of the Silver Diner prototype for the next 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 3, 1999, the Company did not have any restaurants under
construction.  The Company has been pursuing locations in a new geographical
market, specifically in the Mid-Atlantic area from Richmond to Southern New
Jersey. To that end, the Company opened a new store in Cherry Hill, New Jersey
in November 1997, and is aggressively pursuing several locations in that market
for new store openings beginning in late 1999.  Management is continuing to
negotiate to obtain other sites throughout the Mid-Atlantic region.

     Management believes that the Company's current capital resources and
expected 1999 cash flow will be adequate to construct up to two units in 1999.
Additional financing will be required to finance growth in 2000 beyond the next
two diners.  The Company has entered into a loan commitment with its lead bank
to extend a $3.0 million line of credit that, if obtained, would be sufficient
to fund at least two additional diners. Should the Company be unable to close on
the financing commitment, management may be forced to limit unit growth in 2000.

                                       16
<PAGE>
 
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

     The Year 2000 issue is the result of software programs being written using
two digits rather than four to define the applicable year, and some computers
(and other date-sensitive equipment including credit card processing machines)
may incorrectly recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in similar business activities both at the
restaurant and corporate level.

     The Company is continually evaluating its risk and the related costs of
updating its computer hardware and software to properly process Year 2000 and
later dates. Included in this process is the upgrade of its point of sale
systems mentioned above which has been assessed by the vendor as being Year 2000
compliant. The Company has identified the other areas which may be potentially
affected by the Year 2000 issue: credit card processing machines, and the Year
2000 compliance of those entities on which the Company relies for goods and
services, such as its suppliers and bank. The Company expects the cost related
to the Year 2000 issue to be between $10,000 and $50,000.

     In the event that the Company's systems fail as a result of the Year 2000
issue, management believes that the Company's restaurants will remain operating
on a manual basis.  The risks associated with this contingency plan involve the
decreased level of operational controls and the inability to process credit card
transactions.  The Company cannot currently estimate the potential cost of this
contingency plan, but does not anticipate a material impact on its business
activities.

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.

                                       17
<PAGE>
 
ITEM 8.  FINANCIAL STATEMENTS

SILVER DINER, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                  Page
<S>                                                                               <C>
 
Report of Independent Auditors                                                    19
 
Consolidated Financial Statements:
 
Consolidated Balance Sheets as of
January 3, 1999 and December 28, 1997.                                            20
 
Consolidated Statements of Operations for the
Fiscal Years Ended January 3, 1999, December 28, 1997 and December 29, 1996.      21
 
Consolidated Statements of Stockholders' Equity for the
Fiscal Years Ended January 3, 1999, December 28, 1997 and December 29, 1996.      22
 
Consolidated Statements of Cash Flows for the
Fiscal Years Ended January 3, 1999, December 28, 1997 and December 29, 1996.      23

Notes to Consolidated Financial Statements.                                       25
</TABLE> 

                                       18
<PAGE>
 
INDEPENDENT AUDITORS' REPORT

To the Stockholders of Silver Diner, Inc.:

We have audited the accompanying consolidated balance sheets of Silver Diner,
Inc. and subsidiaries (the "Company") as of January 3, 1999 and December 28,
1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for years ended January 3, 1999, December 28, 1997 and
December 29, 1996.  These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Silver Diner, Inc. and subsidiaries
as of January 3, 1999 and December 28, 1997, and the results of their operations
and their cash flows for the years ended January 3, 1999, December 28, 1997 and
December 29, 1996 in conformity with generally accepted accounting principles.

As discussed in Note 1 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 SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                            January 3,               December 28,
                                                                               1999                      1997
                                                                      ---------------------     --------------------
<S>                                                                   <C>                       <C>  
        ASSETS
 
Current assets:
 Cash and cash equivalents                                                $   1,611,757           $   1,597,430
 Marketable securities available for sale                                       746,597               1,222,083
 Inventory                                                                      139,039                 196,443
 Prepaid rent                                                                   182,796                       -
 Incentive rebates                                                               61,410                  79,033
 Prepaid and other current assets                                               110,666                 118,175
 Preopening costs, net                                                                -                 326,868
                                                                      ---------------------     --------------------
     Total current assets                                                     2,852,265               3,540,032
 
Property, equipment and improvements, net                                    16,117,417              17,384,019
 
Due from related parties                                                        126,516                  10,600
Goodwill, net                                                                 2,299,082               2,482,833
Deposits and other                                                              243,217                 229,281
                                                                      ---------------------     -------------------- 
 
     Total assets                                                         $  21,638,497           $  23,646,765
                                                                      =====================     ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
 Accounts payable and accrued expenses                                    $   1,960,222           $   2,207,891
 Note payable, current maturity                                                 267,000                       -
                                                                      ---------------------     -------------------- 
                                                                              2,227,222               2,207,891
Long term liabilities:
 Note payable                                                                         -                 267,000
 Deferred rent liability                                                      1,173,280               1,050,667
                                                                      ---------------------     -------------------- 
     Total liabilities                                                        3,400,502               3,525,558
 
Commitments and contingencies (Note 10)                                               -                       -
 
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 3, 1999, 11,585,510 shares issued and outstanding; at
   December 28, 1997, 11,602,403 shares issued and outstanding                    8,558                   8,586
  Additional paid-in capital                                                 30,688,714              31,604,937
  Unearned compensation                                                        (252,453)             (1,168,798)
  Accumulated deficit                                                       (12,206,824)            (10,323,518)
                                                                      ---------------------     ---------------------
     Total stockholders' equity                                              18,237,995              20,121,207
                                                                      ---------------------     ---------------------
 
     Total liabilities and stockholders' equity                           $  21,638,497           $  23,646,765
                                                                      =====================     =====================
</TABLE>


Accompanying notes are an integral part of these financial statements.

                                       20
<PAGE>
 
                      SILVER DINER, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                    Fiscal Years Ended
                                                       -------------------------------------------------------------------------
                                                              January 3,                December 28,             December 29,  
                                                                 1999                      1997                    1996     
                                                       ----------------------     ---------------------    ---------------------
<S>                                                    <C>                        <C>                      <C>    
Net sales                                                   $      28,561,422         $      24,259,156        $      16,550,468
                                                       ======================      ====================    =====================
Restaurant costs and expenses:
 Cost of sales                                                      7,920,808                 6,929,221                4,526,286
 Labor                                                              9,449,685                 7,999,812                5,464,896
 Operating                                                          5,211,704                 4,037,198                2,536,609
 Occupancy                                                          2,777,932                 2,534,210                1,931,866
 Depreciation and amortization                                      1,648,134                 1,499,125                  882,843
                                                       ----------------------     ---------------------    ---------------------
 
   Total restaurant costs and expenses                             27,008,263                22,999,566               15,342,500
                                                       ----------------------     ---------------------    ---------------------
 
   Restaurant operating income                                      1,553,159                 1,259,590                1,207,968
 
General and administrative expenses                                 2,921,299                 3,065,436                2,705,940
Depreciation and amortization                                         267,171                   263,484                  183,928
Write off of abandoned site costs                                      32,455                   172,618                        -
                                                       ----------------------     ---------------------    ---------------------
 
 Operating loss                                                    (1,667,766)               (2,241,948)              (1,681,900)
 
Interest expense                                                       40,639                    10,702                  180,293
Investment income, net                                               (151,967)                 (294,231)                (432,721)
                                                       ----------------------     ---------------------    ---------------------
 
 Net loss before cumulative effect of a change in                  (1,556,438)               (1,958,419)              (1,429,472)
  accounting principle
 
Cumulative effect of a change in accounting principle                (326,868)                        -                        -
                                                       ----------------------     ---------------------    ---------------------
 
 NET LOSS                                                   $      (1,883,306)        $      (1,958,419)       $      (1,429,472)
                                                       ======================     =====================    =====================
 
Basic and diluted net loss per common share
 Loss per common share before cumulative effect of a        $           (0.13)        $           (0.17)       $           (0.15)
  change in accounting principle
 Cumulative effect of a change in accounting principle                  (0.03)                        -                        -
                                                       ----------------------     ---------------------    ---------------------
 
 Net loss per common share                                  $           (0.16)        $           (0.17)       $           (0.15)
                                                       ======================     =====================    =====================
 
Weighted average common shares outstanding                         11,591,822                11,609,400                9,545,681
                                                       ======================     =====================    =====================
</TABLE>


Accompanying notes are an integral part of these financial statements.

                                       21
<PAGE>
 
                       SILVER DINER, INC AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

  Fiscal Years Ended January 3, 1999, December 28, 1997 and December 29, 1996
                                        
<TABLE>
<CAPTION>
                                                   Common Stock        Additional      
                                                   ------------
                                                                         Paid-in        Unearned       Accumulated                
                                               Shares       Amount       Capital      Compensation       Deficit          Total     
                                           ------------------------   --------------  ------------    --------------   -----------  
<S>                                        <C>            <C>         <C>             <C>             <C>              <C> 
Balance at January 1, 1996                    150,947     $  15,095   $    8,351,243  $  (196,437)    $  (6,935,627)   $ 1,234,274 

Issuance of common stock in connection                                                                                            
 with Food Trends merger                    9,227,857        (8,155)      11,739,775            -                 -              
Debenture conversion                          625,000           463        2,654,140            -                 -      2,654,603 
Common stock offering                       1,500,000         1,111        7,555,427            -                 -      7,556,538 
Payments on stockholders' notes receivable          -             -           41,669            -                 -         41,669 
Stock options exercised                        16,669            12               38            -                 -             50 
Repurchase of outstanding options                   -             -          (60,691)      30,343                 -        (30,348)
Amortization of unearned compensation               -             -                -       39,823                 -         39,823 
Warrants issued                                     -             -          141,960            -                 -        141,960 
Net loss                                            -             -                -            -        (1,429,472)    (1,429,472)
                                           ----------    ----------   --------------  ------------    --------------   -----------
Balance at December 29, 1996               11,520,473         8,526       30,423,561     (126,271)       (8,365,099)    21,940,717 
                                                                                                                                
Issuance of common stock                      130,117            96          467,404     (315,000)                -        152,500 
Issuance of stock awards                            -             -          920,000     (920,000)                -              - 
Common stock purchased                        (83,606)          (62)        (186,938)      52,500                 -       (134,500)
Stock options exercised                        35,419            26               15            -                 -             41 
Stock options issued                                -             -           61,865            -                 -         61,865 
Repurchase of outstanding options                   -             -          (40,500)      20,250                 -        (20,250)
Cancellation of outstanding options                 -             -          (40,470)      40,470                 -              - 
Amortization of unearned compensation               -             -                -       79,253                 -         79,253 
Net loss                                            -             -                -            -        (1,958,419)    (1,958,419)
                                           ----------    ----------   --------------  ------------    --------------   -----------
Balance at December 28, 1997               11,602,403         8,586       31,604,937   (1,168,798)      (10,323,518)    20,121,207 
                                                                                                                                  
Issuance of common stock                       17,392            13           24,987      (12,500)                -         12,500 
Issuance of stock awards                            -             -          206,250     (206,250)                -              - 
Common stock purchased                        (42,746)          (47)         (93,801)      43,753                 -        (50,095)
Stock options exercised                         8,461             6               79            -                 -             85 
Cancellation of outstanding options                 -             -       (1,053,738)   1,026,757                 -        (26,981)
Amortization of unearned compensation               -             -                -       64,585                 -         64,585 
Net loss                                            -             -                -            -        (1,883,306)    (1,883,306)
                                           ----------    ----------   --------------  ------------    --------------   -----------
Balance at January 3, 1999                 11,585,510     $   8,558   $   30,688,714  $  (252,453)    $ (12,206,824)   $18,237,995 
                                           ==========    ==========   ==============  ============    ==============   ===========
</TABLE>


Accompanying notes are an integral part of these financial statements.

                                       22
<PAGE>
 
                      SILVER DINER, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                        
<TABLE>
<CAPTION>
                                                                                           Fiscal Years  Ended
                                                                 -----------------------------------------------------------------
                                                                      January 3,            December 28,           December 29,
                                                                         1999                  1997                   1996
                                                                 --------------------     ------------------     -----------------
<S>                                                              <C>                      <C>                    <C>  
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                            $     (1,883,306)     $      (1,958,419)     $      (1,429,472)
Adjustments to reconcile net loss to net cash provided by (used
 in) operating activities
  Depreciation and amortization                                            1,915,305              1,762,609              1,066,771
  Development and abandoned site costs                                        32,455                172,618                      -
  Compensation expense - stock options and deferred                                 
         compensation                                                         37,604                141,118                 81,489
  Termination of note receivable                                                   -                123,329                      -
  Changes in operating assets and liabilities
     Inventory                                                                57,404                (48,462)               (30,588)
     Prepaid rent                                                           (182,796)                     -                      -
     Incentive rebates                                                        17,623                      -                      -
     Prepaid expenses and other assets                                         7,509                  4,873                (73,972)
     Preopening expenses                                                     326,868               (660,325)              (128,287)
     Deposits and other                                                      (13,936)               100,585                (78,696)
     Accounts payable and accrued expenses                                  (247,669)              (262,323)              (284,195)
     Deferred rent liability                                                 122,613                301,271                174,575
     Advances to officer and employees                                      (115,916)                     -                      -
                                                                    ----------------      -----------------      -----------------
 
  Net cash provided by (used in) operating activities                         73,758               (323,126)              (702,375)
                                                                    ----------------      -----------------      -----------------
 
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchases of property and equipment                                         (497,407)            (6,421,329)            (5,729,378)
Maturities of short-term investments                                       2,900,000              4,030,907                      -
Purchase of short term investments                                        (2,424,514)            (4,171,974)            (1,081,015)
Advances to affiliates                                                             -                (67,372)               (55,957)
                                                                    ----------------      -----------------      -----------------
                                                                      
  Net cash used in investing activities                                      (21,921)            (6,629,768)            (6,866,350)
                                                                    ----------------      -----------------      -----------------
</TABLE>
                                                                               
                                  (continued)

Accompanying notes are an integral part of these financial statements.

                                       23
<PAGE>
 
                      SILVER DINER, INC. AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
                                        
<TABLE>
<CAPTION>
                                                                                        Fiscal Years  Ended
                                                                  ---------------------------------------------------------------
                                                                       January 3,            December 28,           December 29,
                                                                          1999                 1997                     1996
                                                                  --------------------    ------------------       --------------
<S>                                                               <C>                     <C>                      <C> 
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from merger                                                            -                     -            11,916,868
Net proceeds from sale of stock                                                12,500               152,500             7,556,538
Exercise of options                                                                85                    41                    50
Acquisition of outstanding interest in Silver Diner Limited                                                
  Partnership                                                                       -                     -            (2,625,453)
Purchase of common stock                                                      (50,095)             (134,500)                    -
Proceeds from notes payable                                                         -               267,000                     -
Payments of principal - notes payable                                               -                     -            (1,666,325)
Payments of principal - notes payable - related party                               -                     -              (881,788)
Repurchase of employee stock options                                                -               (20,250)              (30,348)
                                                                  --------------------    ------------------       --------------
 
Net cash (used in) provided by financing activities                           (37,510)              264,791            14,269,542
                                                                  --------------------    ------------------       --------------
 
Net increase (decrease) in cash and cash equivalents                           14,327            (6,688,103)            6,700,817
Cash and cash equivalents at beginning of the year                          1,597,430             8,285,533             1,584,716
                                                                  --------------------    ------------------       --------------
 
Cash and cash equivalents at end of the year                         $      1,611,757      $      1,597,430         $   8,285,533
                                                                  ====================    ==================       ==============
                                                                                                                    
Supplemental disclosure of cash flow information:                                                                   
     Interest paid                                                   $         25,523      $         10,702         $     137,300
                                                                  ====================    ==================       ==============
Noncash investing and financing activities:                                                                         
     Construction payables included in accounts payable                                                             
       and accrued expenses                                          $              -      $        350,604         $   1,054,652
                                                                  ====================    ==================       ============== 
                                                                                                                    
     Repayment of  notes payable - related party by offset                                                          
       of amounts due from affiliates                                $              -      $              -         $     355,023
                                                                  ====================    ==================       ============== 
                                                                                                                    
     Conversion of senior subordinated convertible promissory                                                       
       notes to 625,000 shares of common stock                       $              -      $              -         $   2,500,000
                                                                   ===================     =================       ==============
                                                                                                                    
     Issuance of 84,000 warrants in conjunction with SDLP                                                           
       purchase                                                      $              -      $              -         $     141,960
                                                                  ====================    ==================       ==============
</TABLE>

                                  (concluded)

Accompanying notes are an integral part of these financial statements.

                                       24
<PAGE>
 
SILVER DINER, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JANUARY 3, 1999


1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Silver Diner, Inc., (the Company) and its subsidiaries develop and operate
     the Silver Diner restaurant chain. At January 3, 1999, the Company owned
     and operated ten diners in the Washington/Baltimore metropolitan area and
     one in Cherry Hill, New Jersey.

     Basis of Presentation

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

     During 1996, the Company acquired the minority interest in SDLP (see Note
     3), liquidated SDLP into SDDI and began presenting results on a
     consolidated basis. Because SDLP's financial statements were previously
     combined with the Company's, the change to a consolidated basis did not
     have a material impact on the Company's financial statements.

     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 1998, 1997 and 1996 were comprised of 53, 52 and 52 weeks,
     respectively and ended on January 3, 1999, December 28, 1997 and December
     29, 1996, 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 a
     remaining maturity of three months or less when purchased are reported as
     cash equivalents. The balance of the short-term investments are classified
     as marketable securities. At January 3, 1999, 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 valued at the lower of cost
     (first-in, first-out) or market.

     Property, Equipment and Improvements

     Property, equipment and improvements are stated 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 2 to 10 years. Depreciation is computed using the straight-line
     method.

     Change in Accounting Principle

     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.

                                       25
<PAGE>
 
     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 twelve 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 in prior fiscal
     years, the Company's net loss and net loss per share would have been the
     proforma amounts indicated below:

<TABLE> 
<CAPTION> 
                                                      Fiscal Years Ended
                                          ------------------------------------------------
                                              December 28,                December 29,
                                                  1997                        1996
                                          --------------------       ---------------------
<S>                                       <C>                        <C>             
Net loss:
    As reported                              $    (1,958,419)           $    (1,429,472)   
    Pro forma                                $    (2,157,873)           $    (1,556,885)   
                                                                                           
Net loss per common share:                                                                 
    As reported                              $         (0.17)           $         (0.15)   
    Pro forma                                $         (0.19)           $         (0.16)    
</TABLE>

  Goodwill

  Cost in excess of fair value of net assets acquired 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.  Taxable losses reported by SDLP passed through to, and were
  reportable by, its partners.

  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 3, 1999, December 28, 1997 and December 29, 1996;
  therefore, all potential common shares are anitdilutive 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 1998 and 1997, the Company wrote off $32,455 and
  $172,618, 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 the fourth quarter of 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 $372,734, which is included in depreciation and
  amortization within the Fiscal Year 1998 Statement of Operations.  Management
  believes no additional material impairment of these assets exists at January
  3, 1999.  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.

                                       26
<PAGE>
 
    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 12). 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 1998
    presentation.

    Use of Estimates

    Management of the Company has made a number of estimates and assumptions
    relating to the reporting of assets and liabilities and the disclosure of
    contingent assets and liabilities to prepare these financial statements in
    conformity with generally accepted accounting principles. Actual results
    could differ from those estimates.

    New Accounting Pronouncements

    In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
    No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures
    about Segments of an Enterprise and Related Information," and in February
    1998, FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and
    Other Postretirement Benefits -- an amendment of FASB Statements No. 87, 88,
    and 106." SFAS No. 130 establishes standards for reporting and display of
    comprehensive income and its components (revenues, expenses, gains and
    losses) in a full set of general-purpose financial statements. SFAS No. 131
    establishes standards for the way public business enterprises report
    information about operating segments and the related disclosures about
    products and services, geographic areas and major customers. SFAS No. 132
    revises employers' disclosures about pension and other postretirement
    benefit plans. These standards are effective for financial statements issued
    for fiscal years beginning after December 15, 1997. Adoption of SFAS Nos.
    130, 131 and 132 did not have a material impact on the Company's financial
    statement presentation or disclosures.

    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, 1999. The Company has not yet determined the impact of
    adopting SFAS No. 133 on its financial statement presentations or
    disclosures.

2.  MERGER

    On March 27, 1996, FTAC Transition Corporation, a wholly owned subsidiary of
    Food Trends Acquisition Corporation (FTAC) merged (the Merger) with and into
    SDDI with SDDI surviving as a wholly owned subsidiary of FTAC. In connection
    with the Merger, FTAC changed its name to Silver Diner Development, Inc.,
    and in June 1996, to Silver Diner, Inc. Pursuant to the Merger agreement,
    each outstanding share of SDDI common stock converted into 33.339 shares of
    the common stock of FTAC. Upon consummation of the Merger, the stockholders
    of SDDI became the owners in the aggregate of approximately 57% of the
    outstanding common stock of FTAC and the directors and officers of SDDI
    became directors and officers of FTAC. Prior to the Merger, FTAC had no
    operating activities.

                                       27
<PAGE>
 
    For accounting and financial reporting purposes, the Merger was treated as a
    recapitalization of SDDI and as an issuance of SDDI common shares for
    monetary assets and liabilities. The transaction was in essence a reverse
    acquisition with SDDI retaining the majority voting interest in the merged
    entity. The reverse acquisition is a business combination accounted for by
    the purchase method in which the continuing entity is not assumed to be the
    acquirer. The substance of the reverse acquisition is that of an initial
    public offering and the acquisition costs incurred by the Company have
    therefore been treated as a reduction in paid-in capital. The Company has
    reflected in its consolidated financial statements the assets, liabilities
    and equity of SDDI at their historical book values. Accordingly, the
    consolidated results of operations and financial position of the Company for
    periods and dates prior to the Merger are the consolidated historical
    results of operations and financial position of SDDI for such periods and
    dates. All historical shares of common stock and per share amounts for
    periods prior to the Merger have been retroactively adjusted to reflect the
    FTAC shares issued to the SDDI shareholders at the time of the Merger.

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 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 $183,751, $184,977 and $99,603 in fiscal years
    1998, 1997 and 1996, respectively.

4.  PROPERTY, EQUIPMENT AND IMPROVEMENTS

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

<TABLE>
<CAPTION>
                                                            January 3, 1999           December 28, 1997 
                                                         ------------------         ------------------
    <S>                                                  <C>                        <C>             
    Land                                                        $ 1,737,655                $ 1,647,655
    Buildings and leasehold improvements                         12,645,160                 12,605,754
    Furniture, fixtures and equipment                             5,918,067                  6,465,211
    Deferred lease costs                                            607,107                    572,549
    Construction in progress                                              -                    101,916
                                                         ------------------         ------------------
                                                                 20,907,989                 21,393,085
    Less accumulated depreciation and amortization               (4,790,572)                (4,009,066)
                                                         ------------------         ------------------
                                                                $16,117,417                $17,384,019
                                                         ==================         ================== 
</TABLE>

    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.

5.  ACCOUNTS PAYABLE AND ACCRUED EXPENSES

    Accounts payable and accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                             January 3,                December 28,  
                                                                1999                       1997      
                                                         ------------------        ------------------
    <S>                                                  <C>                       <C>               
    Trade payables                                               $1,381,805                $1,442,913
    Payroll and related taxes                                       443,623                   622,013
    Sales and use taxes                                             134,794                   142,965
                                                         ------------------        ------------------
                                                                 $1,960,222                $2,207,891
                                                         ==================        ================== 
</TABLE>

                                       28
<PAGE>
 
6.   LONG-TERM OBLIGATIONS

     In June, 1997 the Company was issued a $267,000 note payable to a bank to
     purchase a parcel of land from the Company's president (see Note 9). The
     principal of the note is due in June, 1999, and interest is paid monthly at
     an annual rate of 9.25%. The note is collateralized by the land purchased.
     The Company incurred $25,523 and $10,702 in interest expense related to the
     note for the years ended 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 $113,729 for 1998 and $123,035 for 1997. 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 3, 1999 and December 28, 1997, the Company has received $9,300 and
     $9,000 in principal payments, respectively and $11,000 and $6,000 in
     interest income, respectively.

8.   PRIVATE PLACEMENT

     On July 11, 1996, the Company completed a $8,250,000 private placement of
     common stock through the sale of 1.5 million shares at $5.50 per share.
     Approximately $2.5 million of the approximately $7.6 million net proceeds
     of the sale were used to replace the funds used for the acquisition of the
     minority interests in SDLP, and the remainder was available to fund
     expansion. In connection with the sale, the Company registered the shares
     with the Securities and Exchange Commission.

9.   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. The note, bearing interest of 9.25% annually, is
     fully collateralized by the land and is due in June, 1999.

     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 3, 1999,
     December 28, 1997 and December 29, 1996, occupancy costs include $355,000,
     $350,000 and $389,000, respectively, in rent and related pass through costs
     associated with the leases.

     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 1998, the Company recorded the full amount of
     premiums paid in 1998, less the cash surrender value of the policies, as
     expense. As such, the Company recorded $92,000 and $123,000 of expense for
     these insurance policies for the years ended January 3, 1999 and December
     28, 1997, respectively.

                                       29
<PAGE>
 
     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, to the officer over a five year
     period.

10.  COMMITMENTS AND CONTINGENCIES
  
     Operating Leases
     ----------------
     The Company leases restaurant land and buildings under various
     noncancellable operating leases with terms expiring at various dates
     through 2017. Certain of these leases are with related parties (see Note
     9). 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.

     Future minimum annual lease payments as of January 3, 1999 are:


                    1999                                   2,121,000
                    2000                                   2,204,000
                    2001                                   2,248,000
                    2002                                   2,290,000
                    2003                                   2,319,000
                    Thereafter                            18,390,000


     Rent expense under the leases for fiscal 1998, 1997 and 1996 was
     approximately $2,236,000, $2,033,000, and $1,622,000, 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,
     captioned Laura Reese v. Roger Richardson and Silver Diner Development,
     Inc. The plaintiff alleges that she was sexually assaulted by Roger
     Richardson, who was the general manager of the Laurel Silver Diner
     restaurant. Mr. Richardson was terminated promptly following the occurrence
     of the event in November 1994. 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
     Suggestion of Bankruptcy filed by Mr. Richardson, the co-defendant in the
     case, prior to the decision of the court to grant summary judgement 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 3, 1999 is approximately $1.2 million.

11.  INCOME TAXES

     At January 3, 1999, the Company has a net operating loss carryforward of
     approximately $6 million for income tax purposes, that expires in 2008
     through 2013, 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.

                                       30
<PAGE>
 
     Significant components of the Company's deferred tax assets and liabilities
     are as follows:

<TABLE>
<CAPTION>
                                                            January 3, 1999          December 28, 1997 
                                                           ------------------       -------------------
     <S>                                                   <C>                       <C>               
     Net operating loss carryforwards                             $ 2,420,534               $ 2,219,298
     Book over (under) tax depreciation/amortization                  (83,841)                  238,197
     Deferred rent                                                    466,653                   422,475
                                                           ------------------       -------------------
     Deferred tax assets                                            2,803,346                 2,879,970
          Less: valuation allowance                                (2,803,346)               (2,879,970)
                                                           ------------------       -------------------
     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 3, 1999 and December 28, 1997, respectively.

12.  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 of 1998.

     1996 Stock Option Plan

     The 1996 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. 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 1,200,000 shares of common stock for issuance
     under the plan. A total of 1,143,500 options were granted under this plan
     during Fiscal 1998.

     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 

                                       31
<PAGE>
 
     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
     1998, 17,391 shares were issued under the plan.

     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-Sholes methodology. The
     Company has reserved 100,000 shares of common stock for issuance under the
     plan. During Fiscal 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 shares of common
     stock for issuance under the plan. A total of 35,000 options were granted
     under this plan during Fiscal 1998.

     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. Excluding
     the effect of the Merger (see Note 2), 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 expires in 2001. At January 3, 1999, 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. Excluding the effect of the Merger (see Note 2), 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
     3, 1999, no options were available for future grant under the plan.

                                       32
<PAGE>
 
     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 approximately $10,000,
     $141,118 and $39,823 for the years ended January 3, 1999, December 28, 1997
     and December 29, 1996, 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 3,                December 28,               December 29,      
                                                     1999                       1997                       1996          
                                           ----------------------     ----------------------     ----------------------  
           <S>                             <C>                        <C>                        <C>                     
           Net loss:                                                                                                     
               As reported                        $ (1,883,306)              $ (1,958,419)              $ (1,429,472)    
               Pro forma                          $ (1,995,021)              $ (2,030,469)              $ (1,469,539)    
                                                                                                                         
           Net loss per common share:                                                                                    
               As reported                        $      (0.16)              $      (0.17)              $      (0.15)    
               Pro forma                          $      (0.17)              $      (0.17)              $      (0.15)    
</TABLE>

     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 assumptions: 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 2 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.

     All options granted during the year ended December 29, 1996 were issued
     pursuant to the 1996 Non-Employee Director Stock Option Plan. The fair
     value of each option grant under this plan 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%, expected volatility
     of 27%, risk free interest rate of 6.2% and an expected life of two years.

                                       33
<PAGE>
 
  A summary of the status of the Company's stock option plans as of January 3,
  1999, December 28, 1997 and December 29, 1996 and changes during the years
  ended on these dates is:
 
<TABLE>
<CAPTION>
                                       1998                         1997                          1996
                             ---------------------------   -------------------------    -------------------------
                                               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              583,327        $  2.55       689,220        $   2.52       784,959       $   2.50
Granted                       1,178,500        $  1.09        89,387        $   3.54        18,000       $   5.83
Exercised                        (8,461)       $  0.00       (35,421)       $   0.00       (16,669)      $   0.00
Forfeited                       (62,075)       $  3.45      (149,858)       $   3.78       (82,081)      $   4.05
Repurchased                           -        $     -       (10,001)       $   0.00       (14,989)      $   0.00
                             ----------                    ---------                     ---------       
Options outstanding,                                                                                         
 End of year                  1,691,291        $  1.51       583,327        $   2.55       689,220       $   2.52 
                             ==========                    =========                     =========
 
Options exercisable at
 Year end                       687,954                      396,809                       313,260
 
Weighted-average fair
 Value of options
 Granted during the                            $  0.41                      $   1.41                     $   1.21
 Year
</TABLE>

The following table summarizes information about stock options outstanding at
January 3, 1999:
 
<TABLE>
<CAPTION>
                                            Options                                              Options
                                          Outstanding                                          Exercisable
                       -----------------------------------------------------         ---------------------------------
      Range               Number        Weighted-Avg.          Weighted-Avg.           Number            Weighted-Avg.
       of               Outstanding       Remaining              Exercise            Exercisable           Exercise
 Exercise Prices        at 1/03/99    Contractual Life             Price             at 1/03/99              Price
<S>                    <C>            <C>                      <C>                   <C>                 <C>
Less than $0.01             192,865          5.4 years           $     0.00              177,175           $     0.00
$0.63 to $1.25            1,178,500          5.9 years           $     1.09              270,000           $     1.27
$2.13 to $3.82               79,054          1.5 years           $     3.30               79,054           $     3.30
$4.05 to $6.50              240,872          3.5 years           $     4.21              161,725           $     4.28
                       ------------                                                  -----------         

$0.0003 to $6.50          1,691,291          2.3 years           $     1.51              687,954           $     1.88
                       ============                                                  ===========
</TABLE>

13. 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
3, 1999, December 28, 1997 and December 29, 1996, 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
3, 1999, December 28, 1997 and December 29, 1996, there were options to purchase
1,691,291, 583,327, and 689,220 shares, respectively at the weighted average
price of $1.51, $2.55, and $2.52, respectively. These options are antidilutive
and, thus, not included in the computation of diluted net loss per share for the
years ended January 3, 1999, December 28, 1997 and December 29, 1996. In
addition, at January 3, 1999 and December 28, 1997, there were 25,919 and 8,528,
respectively, restricted shares of common stock outstanding. These shares, which
were issued during 1997 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 3, 1999 and December 28, 1997.

                                       34
<PAGE>
 
14. 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 3,
1999, December 28, 1997 and December 29, 1996, respectively, the Company made no
contributions to the 401(k) Plan.

                                       35
<PAGE>
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         None

PART III

         ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.

         The information under "Election of Directors" in the Proxy Statement
for the Annual Meeting of Shareholders in 1998 is incorporated herein by
reference. Information concerning executive officers is set forth under
"Executive Officers of the Registrant" in Part I.

         ITEM 11.  EXECUTIVE COMPENSATION.

         The information under "Executive Compensation" in the Proxy Statement
for the Annual Meeting of Shareholders in 1998 is incorporated herein by
reference.

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

         The information under "Ownership of Common Stock by Directors and
Executive Officers" and "Election of Directors" in the Proxy Statement for the
Annual Meeting of Shareholders in 1999 is incorporated herein by reference.

         ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The information under "Election of Directors" and "Executive
Compensation" in the Proxy Statement for the Annual Meeting of Shareholders in
1999 is incorporated herein by reference.

                                       36
<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................................................    19
 
Consolidated Financial Statements:
 
Consolidated Balance Sheets as of
January 3, 1999 and December 28, 1997.........................................    20
 
Consolidated Statements of Operations for the
Fiscal Years Ended January 3, 1999, December 28, 1997 and December 29, 1996...    21
 
Consolidated Statements of Stockholders' Equity for the
Fiscal Years Ended January 3, 1999, December 28, 1997 and December 29, 1996...    22
 
Consolidated Statements of Cash Flows for the
Fiscal Years Ended January 3, 1999, December 28, 1997 and December 29, 1996...    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        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          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.

                                       37
<PAGE>
 
     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.

     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.

     9.4        GKN Voting and Lockup Agreement dated as of September 15, 1995
                by and among the registrant, Robert T. Giaimo, GKN Securities
                Corp., and certain additional signatories thereto incorporated
                by reference to Exhibit 9.07 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)

                                       38
<PAGE>
 
     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

     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

                                       39
<PAGE>
 
     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.

                Material Contracts - Stock Plans

     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.

                                       40
<PAGE>
 
     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 incorporated herein by
                reference.

                Material Contracts - Agreements with Executive
                Officers/Directors

     10.21      Letter Agreement dated December 31, 1995 between the registrant
                and Daniel Brannan regarding terms of employment, as amended by
                Letter Agreement dated March 26, 1996 incorporated by reference
                to Exhibit 10.18 of the registrant's Form 8-K dated March 27,
                1996.

     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.

     10.23      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.

                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.

                                       41
<PAGE>
 
     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      Form of Certificate and Agreement of Participation-Restaurant
                Operating Partner Program, as approved by the Board on December
                15, 1998*
                
     10.32      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*
 
     10.33      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*
                
     10.34      Silver Diner, Inc. Stock Option Plan (as amended March 4, 1998)*
 
     10.35      Stock Option Plan Agreement between Silver Diner, Inc. and
                Robert T. Giaimo for grant of 150,000 Shares on December 15,
                1998*
 
     10.36      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*
 
     10.37      Stock Option Plan Agreement between Silver Diner, Inc. and
                Robert T. Giaimo for grant of 400,000 Shares on December 15,
                1998*

     10.38      Form of Restated Stock Option Plan Agreement between Silver
                Diner, Inc. and Certain Executive Officers Granting Shares on
                December 29, 1997*

     10.39      Employment Agreement dated November 9, 1998, between Silver
                Diner, Inc. and Ype Von Hengst, including Promissory Note in
                principal amount of $100,000*
 
     10.40      Letter Agreement dated November 9, 1998 between Robert T. Giaimo
                and Silver Diner, Inc. Re: Founder's Employment Agreement*

                                       42
<PAGE>
 
     10.41      1996 Non-Employee Director Stock Option Plan, as amended March
                4, 1998 and incorporated by reference to registrant's Form S-8
                dated July 21, 1998*

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

     23         Accountants Consents
 
     23.1       Consent of Deloitte & Touche LLP.*
 
     27         Financial Data Schedule
   
          (b) Reports on Form 8-K

              There were no Reports on Form 8-K filed during the last fiscal
              quarter of the period covered by this report.

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

                                       43
<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:  Robert T. Giaimo
                                              ---------------------
                                              Robert T. Giaimo
                                              President and Chief Executive
                                              Officer
                                              April 5, 1999


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 5, 1999
--------------------      
                              Officer and Director
Robert T. Giaimo                       
                      
/s/ Craig Kendall             Vice President, Finance           April 5, 1999
-----------------     
Craig Kendall         
                      
/s/ Catherine Britton         Director                          April 5, 1999
--------------------- 
Catherine Britton     
                      
/s/ Ype Hengst                Director                          April 5, 1999
--------------        
Ype Hengst            
                      
/s/ Edward H. Kaplan          Director                          April 5, 1999
--------------------  
Edward H. Kaplan      
                      
/s/ George A. Naddaff         Director                          April 5, 1999
--------------------- 
George A. Naddaff     
                      
/s/ Louis P. Neeb             Director                          April 5, 1999
-----------------     
Louis P. Neeb         
                      
/s/ Charles Steiner           Director                          April 5, 1999
-------------------   
Charles Steiner       
                      
/s/ Douglas M. Suliman        Director                          April 5, 1999
----------------------
Douglas M. Suliman

                                       44