SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

(Mark One)

[X]   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934

                For the quarterly period ended DECEMBER 27, 1998

                                       or

[ ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934

For the transition period from ___________________ to ___________________

Commission File Number:        0-20143

                          WATERMARC FOOD MANAGEMENT CO.
             (Exact name of registrant as specified in its charter)


         TEXAS                                               74-2605598
(State or other jurisdiction of                             (IRS  Employer
 incorporation or organization)                            Identification No.)

      11111 WILCREST GREEN, SUITE 350  HOUSTON, TEXAS                77042
(Address of principal executive offices)                           (Zip Code)

                                 (713) 783-0500
                         (Registrant's telephone number)

                                       N/A
              (Former name, former address and former fiscal year,
                          if changed since last report)


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  [ ]

As of December 27, 1998, the registrant had 24,563,564 shares of its common
stock and 329,540 shares of its preferred stock outstanding, respectively.
<PAGE>
                 WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
                (DEBTOR-IN-POSSESSION EFFECTIVE JANUARY 12, 1999)
                CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
                                                      DECEMBER 27, 1998     JUNE 29, 1998
                                                      ------------------    -------------
<S>                                                   <C>                   <C>          
               ASSETS
Current assets:
     Cash and cash equivalents ....................   $           87,687    $      90,775
     Accounts receivable, trade ...................               76,396          204,106
     Accounts receivable from affiliates ..........              292,525          115,244
     Inventories ..................................              221,655          316,334
     Prepaid expenses and other current assets ....              331,174           38,872
                                                      ------------------    -------------
          Total current assets ....................            1,009,437          765,331

Property and equipment, net .......................            5,726,267        6,213,441
Notes and other receivables from affiliate ........            1,398,583        1,398,583
Intangible assets, net ............................            3,558,511        4,041,433
Other assets ......................................              243,531          264,382
                                                      ------------------    -------------
                                                      $       11,936,329    $  12,683,170
                                                      ==================    =============
               LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable, trade ......................   $        5,828,919    $   4,969,793
     Accrued liabilities ..........................            3,215,924        2,605,392
     Current portion of long-term debt ............            4,123,878        2,919,648
                                                      ------------------    -------------
          Total current liabilities ...............           13,168,721       10,494,833

Long-term debt, less current portion ..............            5,693,077        7,230,348
Deferred rent .....................................              602,411          602,411

Commitments and contingencies

Stockholders' equity:
     Preferred stock ..............................              329,540          329,540
     Common stock .................................            1,189,155        1,189,155
     Additional paid-in capital ...................           30,114,040       30,114,052
     Accumulated deficit ..........................          (39,160,615)     (37,277,169)
                                                      ------------------    -------------
          Total stockholders' equity ..............           (7,527,880)      (5,644,422)
                                                      ------------------    -------------
                                                      $       11,936,329    $  12,683,170
                                                      ==================    =============
</TABLE>
See notes to condensed consolidated financial statements (unaudited).

                                       2
<PAGE>
                 WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
                (DEBTOR-IN-POSSESSION EFFECTIVE JANUARY 12, 1999)
           CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
                                                                 13 WEEKS ENDED
                                                       DECEMBER 27, 1998    DECEMBER 28, 1997
                                                       -----------------    -----------------
<S>                                                    <C>                  <C>              
Revenues ...........................................   $       7,958,807    $       9,450,564
                                                       -----------------    -----------------
Costs and expenses:
     Costs of revenues .............................           2,355,957            2,884,301
     Other restaurant operations ...................           4,990,357            5,709,677
     Selling, marketing and distribution ...........             217,548              230,182
     General and administrative ....................             872,669              482,337
     Depreciation and amortization .................             167,218              459,804
                                                       -----------------    -----------------
          Total costs and expenses .................           8,603,749            9,766,301
                                                       -----------------    -----------------
Income (loss) from operations ......................            (644,942)            (315,737)

Non-operating income (expense):
     Interest income ...............................              30,037               30,037
     Interest expense ..............................            (471,413)            (152,835)
     Other, net ....................................             117,375               10,994
                                                       -----------------    -----------------
          Total non-operating income (expense) .....            (324,001)            (111,804)
                                                       -----------------    -----------------
Income (loss) before income taxes ..................            (968,943)            (427,541)

Income tax provision (benefit) .....................                --                   --
                                                       -----------------    -----------------
Net income (loss) ..................................            (968,943)            (427,541)

Preferred stock dividends ..........................                --                   --
                                                       -----------------    -----------------
Net income (loss) less preferred stock dividends ...   $        (968,943)   $        (427,541)
                                                       =================    =================

Loss per common share - basic and fully diluted ....   $           (0.04)   $          (0.03)
                                                       =================    =================
Weighted average common and common equivalent shares          24,563,564           14,233,560
                                                       =================    =================
</TABLE>
See notes to condensed consolidated financial statements (unaudited).

                                       3
<PAGE>
                 WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
                (DEBTOR-IN-POSSESSION EFFECTIVE JANUARY 12, 1999)
           CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
                                                                  26 WEEKS ENDED
                                                       DECEMBER 27, 1998    DECEMBER 28, 1997
                                                       -----------------    -----------------
<S>                                                    <C>                  <C>              
Revenues ...........................................   $      17,079,684    $      20,318,635
                                                       -----------------    -----------------
Costs and expenses:
     Costs of revenues .............................           5,238,799            6,333,833
     Other restaurant operations ...................          10,668,530           12,747,992
     Selling, marketing and distribution ...........             455,140              434,834
     General and administrative ....................           1,519,197            1,079,332
     Depreciation and amortization .................             648,649            1,021,588
                                                       -----------------    -----------------
          Total costs and expenses .................          18,530,315           21,617,579
                                                       -----------------    -----------------
Income (loss) from operations ......................          (1,450,631)          (1,298,944)

Non-operating income (expense):
     Interest income ...............................              60,074               60,112
     Interest expense ..............................            (628,083)            (334,882)
     Other, net ....................................             135,194              629,836
                                                       -----------------    -----------------
          Total non-operating income (expense) .....            (432,815)             355,066
                                                       -----------------    -----------------
Income (loss) before income taxes ..................          (1,883,446)            (943,878)

Income tax provision (benefit) .....................                --                   --
                                                       -----------------    -----------------
Net income (loss) ..................................          (1,883,446)            (943,878)

Preferred stock dividends ..........................                  12                   47
                                                       -----------------    -----------------
Net income (loss) less preferred stock dividends ...   $      (1,883,458)   $        (943,925)
                                                       =================    =================
Loss per common share - basic and fully diluted ....   $           (0.08)   $           (0.07)
                                                       =================    =================
Weighted average common and common equivalent shares          24,554,988           14,248,395
                                                       =================    =================
</TABLE>
See notes to condensed consolidated financial statements (unaudited).

                                       4
<PAGE>
                 WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
                (DEBTOR-IN-POSSESSION EFFECTIVE JANUARY 12, 1999)
           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
                                                                       26 WEEKS ENDED
                                                            DECEMBER 27, 1998    DECEMBER 28, 1997
                                                            -----------------    -----------------
<S>                                                         <C>                  <C>               
Operating activities:
     Net income (loss) for the period ...................   $      (1,883,446)   $        (943,878)
     Adjustments to reconcile net income (loss) to
                   net cash used in operating activities:
          Depreciation and amortization .................             648,649            1,021,588
     Changes in assets and liabilities:
          Accounts receivable, trade ....................             127,710              358,834
          Accounts receivable from affiliates ...........            (177,281)              69,439
          Inventories ...................................              94,679              109,057
          Prepaid expenses and other current assets .....            (292,302)            (335,811)
          Accounts payable and accrued liabilities ......           1,469,658             (512,531)
          Other assets ..................................              20,851             (341,962)
                                                            -----------------    -----------------
     Net cash provided by (used in) operating activities                8,518             (575,264)

Investing activities:
     Purchase of property and equipment .................            (294,627)            (365,287)
     Proceeds from sale of assets .......................             116,074              470,663
     Collection of bad debt .............................                --                453,864
     Investment in note receivable ......................                --               (279,148)
     Repayment of notes receivable ......................                --                  5,653
                                                            -----------------    -----------------
     Net cash provided by (used in) investing activities             (178,553)             285,745
                                                            -----------------    -----------------
Financing activities:
     Net proceeds from borrowings .......................             500,000            2,255,047
     Cash dividends on preferred stock ..................                 (12)                 (46)
     Payments on borrowings .............................            (333,041)          (2,166,251)
                                                            -----------------    -----------------
     Net cash provided by (used in) financing activities              166,947               88,750
                                                            -----------------    -----------------
Net decrease in cash and cash equivalents ...............              (3,088)            (200,769)

Cash and cash equivalents, beginning of period ..........              90,775              263,542
                                                            -----------------    -----------------
Cash and cash equivalents, end of period ................   $          87,687    $          62,773
                                                            =================    =================
</TABLE>
See notes to condensed consolidated financial statements (unaudited).

                                       5
<PAGE>
                 WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
                (DEBTOR-IN-POSSESSION EFFECTIVE JANUARY 12, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. PETITION FOR REORGANIZATION UNDER CHAPTER 11:

   On January 12, 1999, Watermarc Food Management Co. (the "Company") and its
   subsidiaries, The Original Pasta Co. ("Pasta Co.") and Marco's Mexican
   Restaurants, Inc. ("Marco's") filed voluntary petitions for reorganization
   under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy
   Court for the Southern District of Texas, Houston Division. The Company is
   currently operating its business as a debtor-in-possession, subject to the
   jurisdiction of the Bankruptcy Court under Case No. 99-30427-H1-11, Caption
   In re: Watermarc Food Management Co.

   As a debtor-in-possession, the Company is authorized to operate its business,
   but may not engage in transactions outside of the normal course of business
   without approval, after notice and hearing, of the Bankruptcy Court. An
   unsecured creditors' committee was formed by the U.S. Trustee on January 15,
   1999, which has the right to review and object to business transactions
   outside the ordinary course and participate, as do certain other parties with
   claims against the Company's bankruptcy estate, in any plan of
   reorganization. The Company has submitted its plan of reorganization to the
   Bankruptcy Court.

   As of the petition date, actions to collect pre-petition indebtedness are
   stayed and other contractual obligations may not be enforced against the
   Company. In addition, the Company may reject executory contracts and lease
   obligations, and parties affected by these rejections may file claims with
   the Bankruptcy Court in accordance with the reorganization process.

   As part of its "first day orders," the Bankruptcy Court approved the
   Company's payment of pre-petition employee wages, salaries, and reimbursable
   employee expenses, and the continued payment of these items. The Bankruptcy
   Court also approved the interim use of cash collateral for the purpose of
   meeting payroll, ongoing operational expenses and other ordinary course of
   business costs and expenses. In addition, the Bankruptcy Court approved the
   Company's request to honor outstanding pre-petition gift certificates sold to
   customers in the ordinary course of business. The Company believes that its
   ability to honor these gift certificates may help to preserve its customer
   base and goodwill in a highly competitive market.

   As permitted under the Bankruptcy Code, the Company has elected to reject
   certain real estate leases. The Company has filed motions to reject eight
   real property leases in connection with the closing of six of its Marco's
   restaurants and two of its Pasta Co. restaurants. The Company has not yet
   completed its review of all of its pre-petition executory contracts and
   leases for assumption or rejection. The Company will continue to analyze, and
   may assume or reject, additional leases and other executory contracts. The
   Company cannot presently determine or reasonably estimate the aggregate
   liability resulting from rejection of executory contracts and unexpired
   leases for which claims have been, or may be, filed.

   Although the Company continues to negotiate with the creditors' committee in
   an attempt to maximize value for all of the Company's creditors and the
   holders of the Company's capital stock, there can be no assurance that the
   Company will be successful in its negotiations or that holders of the
   Company's capital stock will receive or retain any property under a plan of
   reorganization or otherwise. The Chapter 11 filings, the uncertainty
   regarding the eventual outcome of the reorganization of the Company and the
   effect of other unknown adverse factors could threaten the Company's
   existence as a going concern.

                                       6
<PAGE>
2. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:

   ORGANIZATION

   As of December 27, 1998, the Company, owned and operated 36 restaurants,
   primarily in the Houston Metropolitan area, under the names "Marco's Mexican
   Restaurants"; "The Original Pasta Co."; and Billy Blues Barbecue Bar & Grill
   ("Billy Blues").

   PRINCIPLES OF CONSOLIDATION

   The consolidated financial statements include the accounts of the Company and
   its wholly-owned subsidiaries. All significant intercompany accounts and
   transactions have been eliminated.

   BASIS OF PRESENTATION

   The accompanying unaudited financial information includes the results of
   operations of the Company for the thirteen week and twenty-six week periods
   ended December 27, 1998 and December 28, 1997. In the opinion of management,
   the information reflects all adjustments (consisting only of normal recurring
   adjustments) which are necessary for a fair presentation of the results of
   operations for such periods but should not be considered as indicative of
   results for a full year.

   The June 28, 1998 condensed consolidated balance sheet data was derived from
   the audited financial statements, but does not include all disclosures
   required by generally accepted accounting principles. Accordingly, the
   condensed consolidated financial statements should be read in conjunction
   with the audited consolidated financial statements.

   The accompanying consolidated interim financial statements have been prepared
   on a going concern basis, which contemplates continuity of operations,
   realization of assets and liquidation of liabilities in the ordinary course
   of business. As a result of the Company's Chapter 11 filings, however, such
   matters are subject to significant uncertainty. Continuing on a going concern
   basis is dependent upon, among other things, approval of the Company's plan
   of reorganization, the success of future business operations, and the
   generation of sufficient cash from operations and potential financing sources
   to meet the Company's obligations. The accompanying consolidated interim
   financial statements do not reflect (a) the realizable value of assets on a
   liquidation basis or their availability to satisfy liabilities, (b) aggregate
   pre-petition liability amounts that may be allowed for claims or
   contingencies, or their status or priority, (c) the effect of any changes to
   the Company's capital structure or in the Company's reorganization, or (d)
   adjustments to the carrying value of assets or liability amounts that may be
   necessary as the result of actions by the Bankruptcy Court.

   For a further discussion of the Company's liquidity and capital resources,
   see pages 13 through 14 hereof.

   IMPACT OF NEW ACCOUNTING STANDARDS

   In May 1997, the Financial Accounting Standards Board (FASB) issued Statement
   of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share", which
   changes the manner in which earnings per share (EPS) amounts are calculated
   and presented. Basic earnings per common share is calculated by dividing net
   income by the weighted average number of common shares outstanding during the
   period presented. Fully diluted earnings per common share is calculated by
   dividing net income by the weighted average number of common shares and
   common share equivalents. Stock options are regarding as common stock
   equivalents and are computed using the treasury stock method. Stock options
   will have a dilutive effect under the treasury stock method when the average
   market price of the common stock during the period exceeds the exercise price
   of the options.

   In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
   About Capital Structure", which establishes standards for disclosing
   information about the Company's capital structure. This statement does not
   change any previous disclosures but consolidates them in this statement for
   ease of retrieval and greater visibility.

                                       7
<PAGE>
   In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
   which established standards for reporting and displaying comprehensive income
   and its components in the financial statements. SFAS No. 130 is effective for
   fiscal years beginning after December 15, 1997. The adoption of this
   statement requires incremental financial statement disclosure, and thus will
   have no effect on the Company's financial position or results of operations.

   MANAGEMENT'S ESTIMATES

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

3. DEBTOR-IN-POSSESSION FINANCING:

   The Company is exploring opportunities to obtain debtor-in-possession
   financing during the pendency of the bankruptcy and long-term financing to
   support the Company's business plan after it emerges from Chapter 11,
   however, there can be no assurance that the Company will be able to obtain
   such financing on satisfactory terms, if at all.

4. STORE CLOSINGS:

   In connection with the bankruptcy filing, the Company has closed six Marco's
   restaurants (two in the second quarter of fiscal 1999) and two Pasta Co.
   restaurants (one in the second quarter of fiscal 1999 and one in the third
   quarter of fiscal 1999) which had declining sales and profits.

5. SALE OF CHRIS' & PITT'S FOOD PRODUCTS DIVISION:

   On December 4, 1998 the Company sold its Chris' & Pitt's Food Products
   Division to an unaffiliated third party for $300,000 and the assumption of
   $117,000 in liabilities owed by the Company to its 9% Convertible
   Subordinated Debenture holders.

6. CONTINGENCIES:

   The Company is involved in various lawsuits arising in the ordinary course of
   its business, but believes that the resolution of these matters will not have
   a material adverse impact on its financial position, results of operations or
   cash flows.

   In the fourth quarter of fiscal year ended June 28, 1998, the Company accrued
   a liability of $150,000 for a claim of monies owed on a guarantee by the
   Company of an open account of Pete's Hospitality Co., Inc., formerly a
   subsidiary of the Company, owed to a vendor for sale of goods. Pete's filed
   for bankruptcy and failed to pay the account. The vendor, Sysco Food Services
   of Seattle, filed suit on November 21, 1997 against the Company on the
   guarantee. The suit was filed in the Superior Court of the State of
   Washington for King County. The suit has been stayed by the Chapter 11
   filings.

   In the third quarter of fiscal 1999, suit was filed against the Company for
   default on a promissory note in the principal amount of $1,000,000 owed to an
   unaffiliated foreign investor, Fantasia Stiftung. The suit was filed on
   December 31, 1998 in the 11th Judicial District Court of Harris County,
   Texas. The suit has been stayed by the Chapter 11 filings.

                                       8
<PAGE>
   Except as stated above, in management's opinion, the Company is not a party
   to any litigation other than ordinary routine matters which are incidental to
   the Company's business, including personal injury claims and disputes with
   vendors and suppliers. The Company believes that no current legal
   proceedings, individually, will have a material adverse effect upon the
   Company or its business.

7. RELATED PARTY TRANSACTIONS:

   In the fourth quarter of fiscal 1997 the Company sold Pete's Hospitality Co.,
   Inc., ("Pete's") a wholly-owned subsidiary, pursuant to a Stock Purchase
   Agreement, to Angelo Pitillo, former President, Chief Operating Officer and
   director of the Company. Mr. Pitillo acquired all of the issued and
   outstanding shares of Pete's in exchange for a promissory note of Pete's
   payable to the Company in the principal amount of $300,000 (the "Pete's
   Note"). The Pete's Note accrues interest at the rate of 10% per annum over
   approximately five years. The Pete's Note is secured by the assets of Pete's.
   The Company recorded a loss of approximately $750,000 on the transaction. On
   December 18, 1997, Pete's Hospitality Co., Inc. filed for bankruptcy.
   Therefore, the Company wrote off the note receivable balance of $294,904 in
   fiscal 1998. The Company is a secured creditor of the bankrupt estate,
   however, there is no assurance that there will be sufficient assets in the
   estate to fully satisfy the claims of all creditors, including the Company's,
   in whole or in part.

   On May 1, 1998 the Board of Directors of the Company adopted a resolution
   approving the issuance to Mr. Bombaywala of warrants to purchase 10,000,000
   pre-reverse stock split shares of the Company's Common Stock at the
   pre-reverse stock split exercise price of $.14 per share, which was the
   market price of the stock on April 2, 1998 when the Board of Directors first
   considered a proposal to compensate Mr. Bombaywala for the bank loans, notes,
   accounts payable, taxes, contracts and leases that he had personally
   guaranteed on behalf of the Company in order for the Company to continue to
   do business.

   In approving the issuance of the warrants to Mr. Bombaywala, the Board
   considered, among other things, (i) its prior commitment to Mr. Bombaywala to
   compensate him for his personal guarantees of Company obligations and his
   loans and advances to the Company (collectively the "Guarantees"), (ii) the
   importance of the Guarantees to the Company's financial survival and the
   aggregate amount of such Guarantees, particularly in the past year, (iii) the
   personal risk of the Guarantees to Mr. Bombaywala and the pledge of his
   personal assets to partially collateralize certain of the Guarantees, (iv)
   the fact that the market price of the Company's Common Stock was equal to the
   exercise price of the warrants at the time of the request by Mr. Bombaywala,
   (v) the short- and long-term value to the Company of the commitment of Mr.
   Bombaywala to guarantee up to $5 million of future obligations of the Company
   if requested by the Company for additional financing or the renewal of
   existing leasehold or debt obligations of the Company, (vi) the waiver and/or
   accrual and nonpayment of all prior compensation payable to Mr. Bombaywala as
   an executive officer of the Company, (vii) the lock-up agreement with respect
   to the shares underlying the warrants, and (viii) the fact that the Company
   will pursue a fairness opinion with respect to the warrants and approval of
   the independent shareholders of the Company with respect to the issuance of
   the warrants.

   However, the Board decided to defer the issuance of the warrants to Mr.
   Bombaywala for an indefinite period of time. Due to the Chapter 11 filings,
   the Company does not expect to issue such warrants to Mr. Bombaywala.

   In December 1994, in connection with the offering of the Company's $3 million
   12% Subordinated Notes, Sanders Morris Mundy, Inc. ("SMM") received
   approximately $250,000 as a placement fee. Also in connection with the
   offering, the Company entered into an eighteen month advisory agreement with
   SMM calling for payments of $10,000 per month and issued warrants to purchase
   150,000 shares of common stock at an exercise price of $2.50 per share which
   currently expire on August 31, 2002. Michael S. Chadwick, a former director
   of the Company, is Senior Vice President and a Managing Director of Corporate
   Finance of SMM. Mr. Chadwick was assigned 45,000 of the warrants by SMM. In
   July 1998, the payment terms of the 12% Subordinated Notes were extended and
   the exercise price of the warrants was reduced to $.09 per share. In
   consideration for the extension of the note term, an additional 1,150,000
   warrants exercisable at $.25 per share and expiring August 31, 2003 unless
   the note is paid at its maturity date, were issued to the noteholders. In
   December 1997, the advisory agreement was 

                                        9
<PAGE>
   extended to July 1998, after which it expired. The amount owing under the
   advisory agreement $ (75,000), due on December 31, 1999 pursuant to a
   non-interest bearing note, was not paid prior to the Chapter 11 filing.

   On October 15, 1998 the Company executed a promissory note in the principal
   amount of $520,000 in favor of the Bombaywala Family Trust (the "Trust"). A
   loan in that amount was made by the Trust to the Company, the proceeds of
   which were used to pay operating expenses and other obligations of the
   Company. The loan is unsecured and bears interest at the rate of 10% per
   annum.

8. SUBSEQUENT EVENTS:

   On January 12, 1999, the Company and its subsidiaries, The Original Pasta Co.
   and Marco's Mexican Restaurants, Inc., filed voluntary petitions for
   reorganization under Chapter 11 of the United States Bankruptcy Code in the
   U.S. Bankruptcy Court for the Southern District of Texas, Houston Division.
   The Company is currently operating its business as a debtor-in-possession,
   subject to the jurisdiction of the Bankruptcy Court. (See Note 1).

   On December 18, 1998 Philip M. Mount resigned as a director of the Company.
   On January 21, 1999 Michael S. Chadwick resigned as a director of the
   Company.

                       (This space intentionally left blank.)

                                       10
<PAGE>
9. DETERMINATION OF EARNINGS PER INCREMENTAL SHARE:

   The following tables present the reconciliation of the numerators and
   denominators in calculating diluted earnings per share ("EPS") from
   continuing operations in accordance with Statement of Financial Accounting
   Standards No. 128.

                                                     INCREASE IN    EARNINGS PER
   QUARTER ENDED 12/27/98             INCREASE IN     NUMBER OF      INCREMENTAL
                                        INCOME         SHARES           SHARE
                                      -----------    -----------    ------------
   Options .......................           --        1,475,910    $       0.00


                    Computation of Diluted Earnings per Share

                          INCOME AVAILABLE
                          FROM CONTINUING       COMMON        PER
                             OPERATIONS         SHARES       SHARE
                          ----------------    -----------   ------
                          $     (1,883,446)    24,554,988   $(0.08)
Common Stock Options ..               --        1,475,910     --
                          ----------------    -----------   ------
                          $     (1,883,446)    26,030,898   $(0.07) Antidilutive


                                                       INCREASE IN  EARNINGS PER
   QUARTER ENDED 12/28/97               INCREASE IN      NUMBER OF  INCREMENTAL
                                          INCOME         SHARES        SHARE
                                        ------------   -----------  ------------
Options .............................           --       3,880,108         --
Dividends on convertible
     preferred stock ................   $     74,147       411,925         --   
Interest on 9% convertible
     subordinated debenture .........   $      2,633        43,400         --
                                        ------------   -----------  ------------
                                        $     76,780     4,335,433  $       0.02
                                        ============   ===========  ============

                    Computation of Diluted Earnings per Share
<TABLE>
<CAPTION>
                                    INCOME AVAILABLE
                                    FROM CONTINUING         COMMON          PER
                                       OPERATIONS           SHARES         SHARE
                                    ----------------    --------------    -------
<S>                                 <C>                     <C>           <C>     
                                    $       (943,925)       14,248,395    $ (0.07)
   Common Stock Options .........               --           3,880,108       --
                                    ----------------    --------------    -------
                                    $       (943,925)       18,128,503    $ (0.05) Antidilutive
   Dividend on convertible
        preferred stock .........             74,147           411,925       --

   Interest on 9% convertible
        subordinated debenture ..              2,633            43,400       --
                                    ----------------    --------------    -------
                                    $       (867,115)       18,583,828    $ (0.05) Antidilutive
                                    ================    ==============    =======
</TABLE>
                                       11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

INTRODUCTION

   The Company utilizes a 52-53 week fiscal year which ends on the Sunday
   closest to June 30. References to the second quarter of fiscal years 1999 and
   1998 are to the thirteen week periods ended December 27, 1998 and December
   28, 1997, respectively.


RESULTS OF OPERATIONS

THIRTEEN WEEKS ENDED DECEMBER 28, 1997 COMPARED TO THE
   THIRTEEN WEEKS ENDED DECEMBER 27, 1998.

   REVENUES. Revenues decreased $1,491,757 or 15.8% to $7,958,807 for the second
   quarter of fiscal 1999 as compared to $9,450,564 for the second quarter of
   fiscal 1998.

   To counteract the decline in comparable revenues, management is currently
   taking action in an attempt to increase sales, including an intense
   concentration on increasing customer satisfaction. However, there can be no
   assurance that such actions will result in the desired sales increases.
   Management continues to implement cost reduction strategies in order to
   attempt to decrease the impact of the sales decline on the Company's bottom
   line.

   COSTS AND EXPENSES. Total cost of revenues decreased to 29.6% of revenues in
   1999 as compared to 30.5% of revenues in 1998. The decline is due to
   operational efficiencies and cost controls on food and labor introduced by
   management.

   Other operations include all other operating expenses, comprised principally
   of labor and benefits, operating supplies, rent, utilities, repairs and
   maintenance and other costs. As a percentage of revenues, these costs
   increased from 60.4% of revenues in fiscal 1998 to 62.7% of revenues in
   fiscal 1999 primarily due to the increase in minimum wage.

   Selling, marketing and distribution expenses increased by $12,634.

   General and administrative expenses increased by $390,332 primarily due to
   increased legal cost.

   Depreciation and amortization decreased by $292,586 primarily due to closing
   of non-performing restaurants, the write down of The Original Pasta Co.
   goodwill and the sale of the Chris' & Pitt's Food Products Division.

   NON-OPERATING INCOME (EXPENSE).  Interest expense increased by $318,578.

   NET INCOME (LOSS). As a result of the changes in the relationship between
   revenues and costs and expenses discussed above, the Company showed net loss
   of $968,943 for the second quarter of fiscal 1999 compared to net loss of
   $427,541 for the second quarter of fiscal 1998. The fiscal 1999 loss is
   generally due to decline in comparable revenues. If such trends continue, the
   Company will incur substantial losses in the future which would have a
   material impact upon its cash flow.


TWENTY-SIX WEEKS ENDED DECEMBER 28, 1997 COMPARED TO THE
   TWENTY-SIX WEEKS ENDED DECEMBER 27, 1998.

   REVENUES. Revenues decreased $3,238,951 or 15.9% to $17,079,684 for the first
   half of fiscal 1999 as compared to $20,318,635 for the first half of fiscal
   1998.

                                       12
<PAGE>
   COSTS AND EXPENSES. Total cost of revenues decreased to 30.7% of revenues in
   1999 as compared to 31.2% of revenues in 1998. The decline is due to
   operational efficiencies and cost controls on food and labor introduced by
   management.

   Other operations include all other operating expenses, comprised principally
   of labor and benefits, operating supplies, rent, utilities, repairs and
   maintenance and other costs. As a percentage of revenues, these costs
   decreased from 62.7% of revenues in fiscal 1998 to 62.5% of revenues in
   fiscal 1999 primarily due to continued cost reduction strategies.

   Selling, marketing and distribution expenses increased by $20,306.

   General and administrative expenses increased by $439,865 due to increased
   legal cost.

   Depreciation and amortization decreased by $372,939 primarily due to closing
   of non-performing restaurants.

   NON-OPERATING INCOME (EXPENSE).  Interest expense increased by $293,201.

   NET INCOME (LOSS). As a result of the changes in the relationship between
   revenues and costs and expenses discussed above, the Company showed net loss
   of $1,883,446 for the first half of fiscal 1999 compared to net loss of
   $943,878 for the first half of fiscal 1998. The fiscal 1999 loss is generally
   due to decline in comparable revenues. If such trends continue, the Company
   will incur substantial losses in the future which would have a material
   impact upon its cash flow.


LIQUIDITY AND CAPITAL RESOURCES

   OPERATING ACTIVITIES. The Company continues to experience losses from
   operations and, as of December 27, 1998, has an accumulated deficit of
   $39,160,615.

   During the twenty-six weeks ended December 27, 1998, net cash flow provided
   by operating activities equaled $8,518 which resulted from increases in
   accrued liabilities and accounts payable. Investing activities used $178,553
   in cash for purchases of fixed assets. Financing activities provided $166,947
   in cash for payments on borrowings.

   During the twenty-six weeks ended December 28, 1997, net cash flow used in
   operating activities equaled $575,264 which resulted from decreases in
   accrued liabilities and accounts payable. Investing activities provided
   $285,745 in cash due to the sale of fixed assets and collection of bad debt.
   Financing activities provided $88,750 in cash from borrowings.

   As of December 27, 1998, the Company had negative working capital of $12.2
   million, as compared to negative working capital of approximately $9.7
   million at June 28, 1998. The increase is due primarily to an increase in
   accounts payable and accrued expenses.

   EXPECTED SOURCES AND USES OF CASH.

   The Company's liquidity position for the remainder of fiscal 1999 will be
   impacted primarily by the success of initiatives undertaken to improve store
   level cash flows. The Company believes that sales have been negatively
   impacted as a result of the publicity concerning the bankruptcy filings. The
   Company's uses of capital for the remainder of fiscal 1999 include working
   capital for store operations and costs associated with the reorganization. In
   addition to cash flow generated by store operations, the Company is seeking
   debtor-in-possession financing to fund its cash requirements. In addition,
   the Company is exploring opportunities to obtain long-term financing to
   support its business plan after it emerges from Chapter 11. However, there
   can be no assurance that the Company will be able to obtain either
   debtor-in-possession financing or long-term financing on satisfactory terms,
   if at all.

   As a debtor-in-possession under Chapter 11, actions to collect pre-petition
   indebtedness are stayed and other contractual obligations may not be enforced
   against the Company. With the approval of the 

                                       13
<PAGE>
   Bankruptcy Court, certain of these obligations may be paid prior to approval
   of the plan of reorganization. To date, the Company has received approval to
   pay pre-petition wages, salaries and reimbursable expenses to employees who
   have agreed to remain employees of the Company throughout the pendency of the
   bankruptcy.

   As permitted under the Bankruptcy Code, the Company has elected to reject
   certain real estate leases. The Company has not completed its review of all
   of its pre-petition executory contracts and leases for assumption or
   rejection. The ultimate amount of, and settlement terms for, such liabilities
   are subject to an approved plan of reorganization and, accordingly, the
   timing and form of settlement are not presently determinable. While under
   bankruptcy protection, the Company does not expect to pay the principal or
   interest obligations of its subordinated debt.

   As part of the reorganization, the Company expects to reduce its current debt
   by exchanging its outstanding subordinated debt for equity. The ultimate
   amount of, and settlement terms for, such liabilities are subject to an
   approved plan of reorganization and, accordingly, are not presently
   determinable.

   MARKETING OF THE COMPANY'S RESTAURANTS.

   The Company has requested permission from the Bankruptcy Court to establish
   procedures for marketing and possibly selling some or all of its restaurants
   in an effort to determine whether sufficient interest exists in the
   marketplace for the sale of the restaurants. This effort is supported by the
   creditors' committee.

YEAR 2000 ISSUES

   The Year 2000 issue is the result of computer programs written to identify
   the applicable year with two digits rather than four. As written, these
   programs may identify the year "00" as 1900 rather than 2000, which could
   result in system miscalculations or failures leading to potentially
   substantial business disruption.

   The Company is working to resolve the potential impact of the year 2000 on
   the ability of the Company's computerized information systems to accurately
   process information that may be date-sensitive. Any of the Company's programs
   that recognize a date using "00" as the year 1900 rather than the year 2000
   could result in errors or systems failures. The Company utilizes a number of
   computer programs in its operations. The Company has retained a consultant to
   assess the potential impact of the year 2000 on its own operations. In
   addition, the Company is also evaluating the year 2000 readiness of those
   third parties, including vendors and suppliers, with whom the Company does
   business, and the potential impact on the Company if these third parties are
   unable to address this issue in a timely manner. The Company has not
   completed its assessment, but currently believes that the costs of addressing
   this issue will not have a material adverse impact on the Company's financial
   position. However, if the Company and third parties upon which it relies are
   unable to address this issue in a timely manner, it could result in a
   material financial risk to the Company. There can be no assurance that all of
   the Company's information technology systems and material third party vendors
   will be year 2000 compliant, or that the Company will successfully develop
   and implement satisfactory contingency plans on a timely basis. The
   occurrence of any such event could have a material adverse effect on the
   financial condition or results of operations of the Company. The Company is
   evaluating its estimated costs for the year 2000 conversion.

FORWARD-LOOKING INFORMATION.

   Information contained in this report on Form 10-Q which are not historical
   facts, contains forward-looking statements and information relating to the
   Company that are based on the beliefs of the Company's management, as well as
   assumptions made by, and information currently available to the Company's
   management. When used in this Form 10-Q, words such as "anticipate,"
   "believe," "estimate," "expect," "intend," "may," "probably" and similar
   expressions, as they relate to the Company, its operations and management,
   identify forward-looking statements. Such statements reflect the current
   views of the Company 

                                       14
<PAGE>
   with respect to future events, and are subject to certain risks,
   uncertainties, and assumptions relating to the operations and results of
   operations of the Company.

   On January 12, 1999, the Company and its subsidiaries, The Original Pasta Co.
   and Marco's Mexican Restaurants, Inc., filed voluntary petitions for
   protection under Chapter 11 of the United States Bankruptcy Code and are
   operating as debtors-in-possession. All forward-looking statements relating
   to the Company's efforts to negotiate the exchange of outstanding debt for
   equity, reduce debt levels, market its restaurants, and other aspects of any
   plan of reorganization submitted in connection with its Chapter 11
   proceedings are dependent upon, among other things, further improvements in
   Marco's and Pasta Co. store-level operating performance and Bankruptcy Court
   approval of the Company's plan of reorganization.

   In general, the results, performance or achievements of the Company and its
   stores are dependent upon a number of factors including, without limitation,
   the following: store performance (including sales and profit margins);
   competition; shift in consumer demand; success of operating initiatives;
   operating costs; advertising and promotional efforts; brand awareness;
   adverse publicity; acceptance of new product offerings (e.g., menu items and
   pricing structures); changes in business strategy; availability and cost of
   capital; food, labor and employee benefit costs; changes in government
   regulations; general economic conditions; and other factors referenced in
   this Form 10-Q and from time to time, in the Company's periodic earnings
   releases and reports filed with the Securities and Exchange Commission. These
   cautionary statements by the Company should not be construed as exhaustive or
   as any admission regarding the adequacy of disclosures made by the Company.
   Should one or more of these risks or uncertainties materialize, or should
   underlying assumptions prove incorrect, actual results or outcomes may vary
   materially from those described herein as anticipated, believed, estimated,
   expected, or intended, or the like.

   The Company does not undertake, and specifically disclaims any obligation, to
   publicly release the results of any revisions which may be made to any
   forward-looking statements to reflect events or circumstances after the date
   of such statements or to reflect the occurrence of anticipated or
   unanticipated events.

                                       15
<PAGE>
PART  II - OTHER INFORMATION

   ITEM 1.  Legal Proceedings.

   The information set forth under Notes 1 and 6 of the Company's Notes to
   Consolidated Financial Statements contained in Part I of this Form 10-Q is
   incorporated herein by reference thereto.

   ITEM 2.  Changes in Securities.

   On December 19, 1998 the shareholders of the Company approved a reverse stock
   split of the Company's outstanding Common Stock on a one for ten basis and
   the reduction of the par value from $.05 to $.01 per share. However, the
   Board of Directors reserved the right, in its sole discretion, to delay or
   waive entirely the implementation and effectiveness of the reverse stock
   split. The Board has decided to defer implementation of the reverse stock
   split for an indefinite period of time. While under bankruptcy protection the
   Company does not expect to implement the reverse stock split.

   Due to the financial condition of the Company, the Board of Directors did not
   declare a dividend on its 9% Cumulative Preferred Stock for the semi-annual
   period ended December 31, 1998. The amount of the arrearage is $148,293.
   While under bankruptcy protection, the Company does not expect to pay
   dividends on its preferred stock. Although the Company is exploring
   opportunities to preserve some value for existing shareholders, there can be
   no assurance that the existing holders of the Company's Common Stock or
   Preferred Stock will receive or retain any property under a plan of
   reorganization or otherwise.

   ITEM 3.  Defaults Upon Senior Securities.

   The information set forth under Item 2 in this Part II of this Form 10-Q with
   respect to the Company's Preferred Stock dividends is incorporated herein by
   reference thereto.

   ITEM 4.  Submission of Matters to a Vote of Security Holders.

   On December 18, 1998 the Annual Meeting of the shareholders of the Company
   was held. The matters which were voted upon at the meeting were as follows:

   PROPOSAL NO. 1: To amend the Company's Restated Articles of Incorporation to
   (a) effect a reverse stock split on a one for ten basis of the outstanding
   Common Stock of the Company and (b) to reduce the par value of the Company's
   Common Stock from $.05 to $.01 per share.

                                 NUMBER OF VOTES                     
                  FOR         AGAINST     ABSTAIN     BROKER NON-VOTE
               ----------   ----------   ----------   ---------------
               22,432,577      419,281       61,059         -0-


   PROPOSAL NO. 2:  Election of Directors.

                                      NUMBER OF VOTES
                       FOR         AGAINST      ABSTAIN    BROKER NON-VOTE
                    ----------   ----------   ----------   ---------------
Ghulam Bombaywala   22,705,676        8,725      198,516         -0-
Sarosh Collector    22,706,151        8,250      198,516         -0-
Philip Mount        22,706,151        8,250      198,516         -0-
Michael Chadwick    22,706,151        8,250      198,516         -0-
Darrin Straughan    22,706,151        8,250      198,516         -0-

                                       16
<PAGE>
   PROPOSAL NO. 3: Approval of the selection by the Board of Directors of the
   Company of Mann Frankfort Stein & Lipp, P.C. as independent public
   accountants for the current fiscal year.

                                 NUMBER OF VOTES                       
                  FOR        AGAINST       ABSTAIN    BROKER NON-VOTE
               ----------   ----------   ----------   ---------------
               22,842,468       46,404       24,045         -0-
          
   ITEM 6.  Exhibits and Reports on Form 8-K.

   (a)Exhibits: See Exhibit Index appearing elsewhere herein, which is
      incorporated herein by reference.

   (b)REPORTS ON FORM 8-K. The Company filed a report on Form 8-K on January 15,
      1999, reporting under Item 3 "Bankruptcy or Receivership", that on January
      12, 1999 the Company and its subsidiaries, The Original Pasta Co. and
      Marco's Mexican Restaurants, Inc. had filed for protection under Chapter
      11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for
      the Southern District of Texas, Houston Division.

  SIGNATURES

      Pursuant to the requirements of the Securities Exchange Act of 1934, the
  registrant has duly caused this report to be signed on its behalf by the
  undersigned thereunto duly authorized.

  WATERMARC FOOD MANAGEMENT CO.


  Date: 2/16/99                 By:/s/ GHULAM BOMBAYWALA
                                   Ghulam Bombaywala, Chairman of the Board,
                                   Chief Executive Officer and Director  (Duly
                                   Authorized Signatory and Principal Executive
                                   Officer and acting as Principal Financial and
                                   Accounting Officer) (1)

   (1) The principal financial and accounting officer resigned in July 1997 and
      has not been replaced as of the date of this filing. Mr. Bombaywala is
      signing as these capacities.

                                       17
<PAGE>
                                 EXHIBIT INDEX

      EXHIBIT
      NUMBER                     DESCRIPTION OF EXHIBIT
      ------                     ----------------------
       10.50        Assets Sale and Purchase Agreement dated December 4, 1998
                    between the Company and Lone Star Laser Technologies for the
                    sale of the Company's Chris' & Pitt's Food Products Division

       10.51        $520,000 promissory note from the Company to The Bombaywala
                    Family Trust dated October 15, 1998

       27.1         Financial Data Schedule

       99.5         Form 8-K dated January 12, 1999 and filed January 15, 1999