The 33-year-old actress attended dinner with Foster and his daughters Sara, 36, and Erin, 35, Wednesday at Craig's restaurant in Los Angeles, according to Us Weekly.
Sources said McPhee and Foster "spaced out" their arrivals at the restaurant because "they didn't want to draw attention to themselves." E! News reported, however, that the pair left the establishment together.
"It was a really nice dinner," an insider said. "Everyone was joking around and giving him a hard time about his age, but David was loving it."
"[Katharine was] by his side the entire time," the source added. "David and her were affectionate. He had his arm around her at times and they looked happy."
Us Weekly reported in October that McPhee and Foster started seeing each other in the spring. The pair were spotted together in Malibu in May, and attended the Grammy Museum Gala together in September.
"David Foster and Katharine are hooking up and casually dating on the down low," a source said. "They are just having fun right now, but they have such a good chemistry and really connect organically on so many levels."
"There is potential for things to escalate in the future," the insider added. "Erin and Sara are particularly fond of Katharine and think she is just the most wonderful person. They are totally team McFoster!"
McPhee split from Nick Cokas in 2013 after five years of marriage, and finalized her divorce in February 2016. Foster finalized his divorce from Yolanda Hadid in October after splitting from the Real Housewives of Beverly Hills alum in December 2015.