<PAGE>   1

                       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 March 30, 1997
                               -------------- 
                                      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 Identification No.)
incorporation or organization)



    11111 Wilcrest Green, Suite 350           Houston, Texas           77042
-------------------------------------------------------------------------------
(Address of principal executive offices)                             (Zip Code)


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


-------------------------------------------------------------------------------
              (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 March 30, 1997, the registrant had 13,670,847 shares of its common stock
and 329,540 shares of its preferred stock outstanding, respectively.
<PAGE>   2
                         WATERMARC FOOD MANAGEMENT CO.

                                     INDEX


<TABLE>
<CAPTION>
 PART I.      FINANCIAL INFORMATION                                    PAGE NO.
                                                                       --------
 <S>          <C>                                                        <C>

     ITEM 1.        FINANCIAL STATEMENTS

                    Condensed Consolidated Balance Sheets -               2
                    March 30, 1997 and June 30, 1996

                    Condensed Consolidated Statements of Operations -     3
                    Thirteen Weeks Ended
                    March 30, 1997 and March 31, 1996

                    Condensed Consolidated Statements of Operations -     4
                    Thirty-nine Weeks Ended
                    March 30, 1997 and March 31, 1996

                    Condensed Consolidated Statements of Cash Flow -      5
                    Thirty-nine Weeks Ended
                    March 30, 1997 and March 31, 1996

                    Notes to Consolidated Financial Statements            6


     ITEM 2.        MANAGEMENT'S DISCUSSION AND ANALYSIS                  9
                    OF FINANCIAL CONDITION AND RESULTS OF
                    OPERATIONS


 PART II.     OTHER INFORMATION                                          
     ITEM 6.        Exhibits and Reports on Form 8-K                     12
</TABLE>

                                       1
<PAGE>   3

                 WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)


<TABLE>
<CAPTION>
          ASSETS                                             MARCH 30, 1997   JUNE 30, 1996
                                                             --------------   -------------
<S>                                                           <C>             <C>
Current assets:
       Cash and cash equivalents                              $    56,806      $   463,166
       Accounts receivable, trade                                 522,590          397,744
       Accounts receivable from affiliates                        421,470          252,440
       Inventories                                                507,961          715,538
       Prepaid expenses and other current assets                  515,780          105,779
                                                              -----------      -----------
          Total current assets                                  2,024,607        1,934,667

Property and equipment, net                                     8,293,756        9,328,526
Notes and other receivable from affiliate                       2,217,784        2,217,784
Intangible assets, net                                         11,594,726       12,200,047
Other assets                                                      177,087          183,686
                                                              -----------      -----------
                                                              $24,307,960      $25,864,710
                                                              ===========      ===========

          LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
       Accounts payable, trade                                $ 4,667,015      $ 3,186,690
       Accrued liabilities                                      1,813,212        1,831,055
       Current portion of long-term debt and note payable 
         to stockholder                                         3,997,863        1,401,825
                                                              -----------      -----------
          Total current liabilities                            10,478,090        6,419,570

Long-term debt, less current portion                            3,485,840        5,698,692
Notes payable to stockholder                                    4,569,202        5,069,202
Deferred rent                                                     434,510          435,949

Commitments and contingencies

Stockholders' equity:
       Preferred stock                                            329,540          329,540
       Common stock                                               671,682          671,682
       Additional paid-in capital                              26,639,641       26,640,385
       Accumulated deficit                                    (22,150,545)     (19,400,310)
       Treasury stock                                            (150,000)               0
                                                              -----------      -----------
          Total stockholders' equity                            5,340,318        8,241,297
                                                              -----------      -----------


                                                              $24,307,960      $25,864,710
                                                              ===========      ===========
</TABLE>

See notes to condensed consolidated financial statements (unaudited).


                                       2
<PAGE>   4
                 WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
          CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)



<TABLE>
<CAPTION>
                                                              13 WEEKS ENDED
                                                      MARCH 30, 1997    MARCH 31, 1996
                                                      --------------    --------------
<S>                                                     <C>               <C>
Revenues                                                $11,427,721       $10,118,214
                                                        -----------       -----------

Costs and expenses:
     Costs of revenues                                    3,668,951         3,121,995
     Other restaurant operations                          7,548,932         5,710,491
     Selling, marketing and distribution                    516,590           208,970
     General and administrative                             770,228           518,662
     Depreciation and amortization                          648,949           636,044
                                                        -----------       -----------
          Total costs and expenses                       13,153,650        10,196,162
                                                        -----------       -----------

Income (loss) from operations                            (1,725,929)          (77,948)

Non-operating income (expense):
     Interest income                                         30,038            30,760
     Interest expense                                      (327,331)         (258,665)
     Other, net                                              28,293           208,963
                                                        -----------       -----------

          Total non-operating income (expense)             (269,000)          (18,942)
                                                        -----------       -----------

Income (loss) before income taxes                        (1,994,929)          (96,890)

Income taxes                                                     -                 -
                                                        -----------       -----------

Net income (loss)                                        (1,994,929)          (96,890)

Preferred stock dividends                                    74,732            74,732
                                                        -----------       -----------

Net income (loss) less preferred stock dividends        $(2,069,661)      $  (171,622)
                                                        ===========       ===========



Net income (loss) per common share                      $     (0.15)      $     (0.01)
                                                        ===========       ===========


Weighted average common and common equivalent
     shares outstanding                                  13,631,750        12,662,160
                                                        ===========       ===========
</TABLE>

See notes to condensed consolidated financial statements (unaudited).


                                       3
<PAGE>   5
                 WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
          CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
                                                             39 WEEKS ENDED
                                                     MARCH 30, 1997    MARCH 31, 1996
                                                     --------------    --------------
<S>                                                   <C>               <C>
Revenues                                              $33,374,792       $28,003,586
                                                      -----------       -----------
Costs and expenses:
     Costs of revenues                                 10,257,935         8,695,945
     Other restaurant operations                       19,884,104        14,868,223
     Selling, marketing and distribution                1,389,230         1,057,191
     General and administrative                         2,126,998         1,786,013
     Depreciation and amortization                      1,928,454         1,554,489
                                                      -----------       -----------

          Total costs and expenses                     35,586,721        27,961,861
                                                      -----------       -----------

Income (loss) from operations                          (2,211,929)           41,725

Non-operating income (expense):
     Interest income                                       87,494           126,724
     Interest expense                                    (945,240)         (578,039)
     Other, net                                           319,440           487,515
                                                      -----------       -----------

          Total non-operating income (expense)           (538,306)           36,200
                                                      -----------       -----------

Income (loss) before income taxes                      (2,750,235)           77,925

Income taxes                                                   -                 -
                                                      -----------       -----------

Net income (loss)                                      (2,750,235)           77,925

Preferred stock dividends                                 222,447           223,030
                                                      -----------       -----------

Net income (loss) less preferred stock dividends      $(2,972,682)      $  (145,105)
                                                      ===========       ===========

Net income (loss) per common share                    $     (0.22)      $     (0.01)
                                                      ===========       ===========

Weighted average common and common equivalent
     shares outstanding                                13,499,689        11,650,166
                                                      ===========       ===========

</TABLE>

See notes to condensed consolidated financial statements (unaudited).



                                       4
<PAGE>   6
                 WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)


<TABLE>
<CAPTION>
                                                              39 WEEKS ENDED
                                                       MARCH 30, 1997   MARCH 31, 1996
                                                       --------------   --------------
<S>                                                      <C>            <C>
Operating activities:
     Net income (loss) for the period                    $(2,750,235)   $     77,925
     Adjustments to reconcile net income (loss) to
           net cash used in operating activities:
        Depreciation and amortization                      1,928,454       1,554,489
    Changes in assets and liabilities:
        Accounts receivable, trade                          (124,846)       (259,206)
        Accounts receivable from affiliates                 (169,030)       (348,805)
        Inventories                                          207,577         (81,080)
        Prepaid expenses and other current assets           (410,005)       (236,927)
        Accounts payable and accrued liabilities           1,760,998        (448,243)
        Other assets                                           6,600         623,903
                                                         -----------    ------------
    Net cash provided by operating activities                449,513         882,056
                                                         -----------    ------------

Investing activities:
    Purchase of property and equipment                    (1,038,363)     (1,654,003)
    Repayment of notes receivable                                  0           6,500
    Proceeds from sale of equipment                          750,000               0
    Cost of acquisitions, net of cash acquired                     0        (231,745)

                                                         -----------    ------------
    Net cash provided by (used in) investing activities     (288,363)     (1,879,248)
                                                         -----------    ------------

Financing activities:
    Net proceeds from borrowings                             598,365         315,863
    Payments on notes payable to affiliates                        0        (150,000)
    Payments on other borrowings                          (1,015,179)     (1,133,716)
    Cash dividends on preferred stock                           (696)              0
    Purchase of treasury stock                              (150,000)              0
                                                         -----------    ------------
    Net cash provided by (used in) financing activities     (567,510)       (967,853)
                                                         -----------    ------------


Net (decrease) increase in cash and cash equivalents        (406,360)     (1,965,045)

Cash and cash equivalents, beginning of period               463,166       2,101,729
                                                         -----------    ------------
Cash and cash equivalents, end of period                 $    56,806    $    136,684
                                                         ===========    ============

</TABLE>




See notes to condensed consolidated financial statements (unaudited).



                                       5
<PAGE>   7
                 WATERMARC FOOD MANAGEMENT CO. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



1.   ORGANIZATION AND BASIS OF PRESENTATION:

     ORGANIZATION

     Watermarc Food Management Co. (The "Company"), owns and operates 43
     restaurants, primarily in the Houston Metropolitan area, under the names
     "Marco's Mexican Restaurants"; "The Original Pasta Co."; "Billy Blues";
     "Longhorn Cafe"; "Pete's Barbecue"; and "Hotspurs".  All but the Billy
     Blues restaurant are operated by wholly-owned subsidiaries of the Company.
     The Company also produces and markets two brands of barbecue sauces, "Billy
     Blues Barbecue Sauce" and "Chris' & Pitt's Bar-B-Que Sauce".  Both are
     marketed to supermarkets, other retail stores and food service outlets.

     BASIS OF PRESENTATION

     The accompanying unaudited financial information includes the results of
     operations of the Company for the thirteen week and thirty-nine week
     periods ended March 30, 1997 and March 31, 1996.  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 the periods presented but should not be
     considered as indicative of results for a full year.

     The June 30, 1996 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 financial statements have been prepared assuming the
     Company will be able to continue as a going concern.  The Company has a
     working capital deficit of approximately $8.5 million at March 30, 1997 and
     a net loss of $2,750,235 for the thirty-nine weeks ended March 30, 1997.
     The Company's continuation as a going concern in both the short-term and
     the long-term is dependent upon its ability to generate sufficient cash 
     flow to meet its obligations on a timely basis, to obtain additional 
     financing or capital and to refinance its debt. For a further discussion 
     of the Company's liquidity and capital resources, see pages 11 and 12 
     hereof.

     Management's plans include the following:

     o   Increasing revenues in existing restaurants by improving marketing
         programs and customer service and by remodeling certain Marco's
         Mexican Restaurants when and if funds become available.

     o   Franchising new restaurants.

     o   Reducing costs.

     o   Obtaining additional equity capital or debt financing.

     o   Refinancing debt, primarily $3 million in Subordinated Notes due in
         July of 1997.


     IMPACT OF NEW ACCOUNTING STANDARDS

     In October 1995, the Financial Accounting Standards Board ("FASB") issued
     Statement of Financial Accounting Standards ("SFAS") No. 123 "Accounting
     for Stock-Based Compensation" which establishes accounting and reporting
     standards for stock-based employee compensation plans.  Companies are
     encouraged to utilize the fair-value method to measure stock based
     compensation but may continue to utilize the accounting method prescribed
     by APB Opinion No. 25 and disclose the pro-forma effects of the SFAS No.
     123 method.  The Company has decided to continue to use the accounting
     method prescribed by APB Opinion No. 25 and to adopt the disclosure
     requirements of SFAS No. 123.

     In February 1997, the FASB issued SFAS No. 128 "Earnings Per Share" which
     changes the computation and presentation of Earnings Per Share. Companies
     will be required to present basic and diluted earnings per share on 
     the face of the Statement of Operations. The statement is effective 
     December 15, 1997. The Company does not expect any material impact on its
     earnings per share due to the implementation of SFAS No. 128.


                                       6

<PAGE>   8

     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.


2.   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.


3.   BUSINESS COMBINATIONS:

     Effective January 26, 1996, the Company acquired all of the outstanding
     common stock of The Original Pasta Co. (Pasta Co.).  The purchase price was
     $6,666,667, consisting of $3,750,000 of notes and the issuance of 1,666,667
     shares of the Company's common stock valued at $2,916,667.  The acquisition
     has been accounted for as a purchase and, accordingly, the assets and
     liabilities of Pasta Co. have been recorded at their fair value at the date
     of acquisition.  The excess of the purchase price over the fair value of
     the net assets acquired is reported as goodwill and is being amortized over
     15 years.

     The statement of operations includes the results of Pasta Co. from the date
     of acquisition.  The following table summarizes the unaudited pro forma
     results of operations of the Company as if the acquisition had occurred at
     the beginning of the period presented:

<TABLE>
<CAPTION>
                                         13 WEEKS ENDED          39 WEEKS ENDED
                                         MARCH 31, 1996          MARCH 31, 1996
                                         --------------          --------------
     <S>                                  <C>                  <C>
     Revenues                             $10,897,038             $33,772,816
     Net Income (loss)                       (216,995)               (761,584)
     Net loss per common share                   (.02)                   (.08)
</TABLE>

4.   ISSUANCE OF COMMON STOCK:

     In January of 1997, the Company issued 237,189 shares of common stock as
     payment of a dividend to Preferred Stockholders.

5.   RELATED PARTY TRANSACTIONS:

     In October 1996, the Company sold equipment associated with three of its
     restaurants to Ghulam Bombaywala, the majority shareholder, officer and a
     director of the Company, and subsequently leased the assets back from Mr.
     Bombaywala.  The Company believes that the selling price of $750,000 and
     the lease rate are comparable to those which could be attained from an
     unrelated third party.  There was no gain or loss to the Company on this
     transaction.



                                       7

<PAGE>   9
6.   SUBSEQUENT EVENTS:

     In April 1997, the Company agreed to sell equipment associated with three
     new restaurants to Mr. Bombaywala and lease the assets back.  The three
     restaurants are to be opened in the fourth quarter of fiscal 1997.  The
     Company believes that the selling price of $750,000 and the lease rate are
     comparable to those which could be attained from an unrelated third party.
     There was no gain or loss to the Company on this transaction.

     On September 14, 1995, The Original Pasta Co., executed Promissory Notes
     (the "Notes") in the principal amounts of $2,750,000 and $1,000,000 in
     favor of Mr. Bombaywala, in connection with the acquisition of The Original
     Pasta Co. by the Company.  On May 15, 1997 Mr. Bombaywala and the Company
     entered into a Conversion and Offset Agreement (attached hereto as
     Exhibit 99.1 and incorporated herein by reference) whereby the parties to
     the Notes agreed to convert the $3,750,000 of debt evidenced by the Notes
     to 7,500,000 Common Stock Rights (the "Rights").  Each of the Rights can be
     converted to one share of the Company's Common Stock at a later date
     assuming the Company has a sufficient number of shares authorized and
     freely issuable.  In exchange for the Rights, Mr. Bombaywala forgave the
     Notes.  The Company intends to proceed with an amendment to its Articles of
     Incorporation to increase its authorized Common Stock to a sufficient level
     to enable it to issue all of the shares.  However, there can be no
     assurance that such amendment will be adopted.

     The Company also agreed with Mr. Bombaywala to offset $819,202 in
     additional notes payable to, against notes receivable from, Mr. Bombaywala.

     The following table presents the capitalization of the Company as of March
     30, 1997 as reported and on a pro forma basis assuming the conversion and
     offset had occurred on that date (in thousands):

<TABLE>
<CAPTION>
                                        MARCH 30, 1997
                                    -------------------------
                                    AS REPORTED     PRO FORMA
                                    -----------     ---------
                                          (Unaudited)
     <S>                            <C>            <C>

     Long-Term Debt and Other
     Obligations, Including
     Current Portion:
      Long-term debt                  $  7,484      $  7,484
      Notes payable to stockholder       4,569             0
      Deferred Rent                        435           435
                                      --------      --------
                                      $ 12,488      $  7,919
                                      ========      ========


     Stockholders' Equity:
      Preferred stock                     $329          $329
      Common stock                         672           672
      Additional paid-in capital        26,640        30,390
      Accumulated deficit              (22,151)      (22,151)
                                      --------      --------
      Treasury stock                      (150)         (150)
                                      --------      --------
                                      $  5,340      $  9,090
                                      ========      ========
</TABLE>




                                       8
<PAGE>   10
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 third quarter of fiscal years 1997
  and 1996 are to the thirteen week periods ended March 30, 1997 and March
  31, 1996 respectively.  References to the first three quarters of fiscal
  year 1997 and 1996 are to the thirty-nine week periods ending on those same
  dates.

  Effective January 26, 1996, the Company acquired The Original Pasta Co.
  which operated a chain of ten restaurants (the "Pasta Co. Restaurants").
  The acquisition was accounted for as a purchase, and no revenues or
  expenses are reported for past periods.  Cost percentages for the acquired
  restaurants are similar to those of the Company's existing restaurant
  operations.


RESULTS OF OPERATIONS

THIRTEEN WEEKS ENDED MARCH 31, 1996 COMPARED TO THE
  THIRTEEN WEEKS ENDED MARCH 30, 1997.

  REVENUES.  Revenues increased $1,309,507 or 11.5% to $11,427,721 for the
  third quarter of fiscal 1997 as compared to $10,118,214 for the third
  quarter of fiscal 1996.  Revenues attributable to the Pasta Co. Restaurants
  were $3,617,670 in the third quarter of fiscal 1997 as compared to
  $1,888,397 in the third quarter of fiscal 1996.  The increase of $1,729,273
  is attributable to the fact that revenues from Pasta Co. Restaurants were
  only included for two months of the third quarter of fiscal 1996 along with
  the fact that five additional restaurants were opened by the third quarter
  of fiscal 1997.  Remaining revenues decreased by $419,766.  This decrease
  is due to the sale of a Longhorn Cafe restaurant during fiscal 1996, and a
  decline in comparable restaurant revenues.  The Company believes the decline
  in comparable revenues was related to competitive conditions and a general
  softness in restaurant sales in the Company's Houston, Texas market.

  To counteract the decline in comparable revenues, management has taken
  action to increase sales, including stepped-up marketing and promotional
  activities and restaurant remodeling. There can be no assurance that such
  actions will result in the desired sales increases.

  COSTS AND EXPENSES.  Total cost of revenues increased to 32.1% of revenues
  in 1997 as compared to 30.9% of revenues in 1996.  The increase is due to
  higher raw product costs experienced in 1997.

  Restaurant operations include all other unit-level operating expenses,
  comprised principally of labor, supplies, rent, utilities, repairs and
  maintenance, and other direct expenses.  As a percentage of restaurant
  revenues, these costs increased from 56.4% of revenues in fiscal 1996 to
  66.1% of revenues in fiscal 1997 primarily due to the decline in comparable
  sales, since a number of these expenses are fixed or indirectly variable.
  Labor expense also increased due to an increase in the federal minimum wage
  rate in October 1996.

  Selling, marketing and distribution expenses increased from 2.1% of
  revenues to 4.5% of revenues due to stepped-up marketing and promotional
  activities.

  General and administrative expenses increased by $251,566 primarily due to
  the acquisition of the Pasta Co. Restaurants.



                                       9

<PAGE>   11




  Depreciation and amortization increased by $12,905 primarily due to the
  acquisition of the Pasta Co. Restaurants, offset by reductions due to
  assets becoming fully depreciated or amortized.

  NON-OPERATING INCOME (EXPENSE).  Interest expense increased by $68,666 due
  to interest accrued on notes payable associated with the acquisition of the
  Pasta Co. Restaurants, partially offset by reductions in other interest
  bearing debt.

  NET INCOME (LOSS).  As a result of the changes in the relationship between
  revenues and costs and expenses discussed above, the Company reported a net
  loss of $1,994,929 for the third quarter of fiscal 1997 compared to a net
  loss of $96,890 for the third quarter of fiscal 1996. The fiscal 1997 loss is
  generally due to increasing costs along with declining 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.


THIRTY-NINE WEEKS ENDED MARCH 31, 1996 COMPARED TO THE
  THIRTY-NINE WEEKS ENDED MARCH 30, 1997.

  REVENUES.  Revenues increased $5,371,206 or 16.1% to $33,374,792 for the first
  three quarters of fiscal 1997 as compared to $28,003,586 for the first three
  quarters of fiscal 1996.  Revenues attributable to the Pasta Co. Restaurants
  were $10,042,662 compared to $1,888,397 included in fiscal 1996.  Remaining
  revenues decreased by $2,783,059.  Approximately $390,000 of this decline is
  due to revenues associated with a fair held in the State of Washington.  The
  Company participated in the fair in fiscal 1996, but not in fiscal 1997.  The
  remainder of the decrease is due to the sale of a Longhorn Cafe restaurant
  during fiscal 1996, severe weather in the Company's Seattle, Washington market
  and a decline in comparable restaurant revenues.  The Company believes the
  decline in comparable revenues was related to competitive conditions and a
  general softness in restaurant sales in the Company's Houston, Texas market.

  COSTS AND EXPENSES.  Total cost of revenues decreased to 30.7% of revenues
  in 1997 as compared to 31.1% of revenues in 1996.  The decline is due to
  operational efficiencies introduced by management, partially offset by
  higher raw product costs.

  Restaurant operations include all other unit-level operating expenses,
  comprised principally of labor, supplies, rent, utilities, repairs and
  maintenance, and other direct expenses.  As a percentage of restaurant
  revenues, these costs increased from 53.1% of revenues in fiscal 1996 to
  59.6% of revenues in fiscal 1997 primarily due to the decline in comparable
  sales, since a number of these expenses are fixed or indirectly variable.
  Labor expense also increased due to an increase in the federal minimum wage
  rate in October 1996.

  Selling, marketing and distribution expenses increased from 3.8% of
  revenues to 4.2% of revenues due to stepped-up marketing and promotional
  activities.

  General and administrative expenses increased by $340,985 primarily due to
  the acquisition of the Pasta Co. Restaurants.

  Depreciation and amortization increased by $373,965 primarily due to the
  acquisition of the Pasta Co. Restaurants, partially offset by reductions
  due to assets becoming fully depreciated or amortized.

  NON-OPERATING INCOME (EXPENSE).  Interest expense increased by $367,201 due
  to interest accrued on notes payable associated with the acquisition of the
  Pasta Co. Restaurants, partially offset by reductions in other interest
  bearing debt.

  NET INCOME (LOSS).  As a result of the changes in the relationship between
  revenues and costs and expenses discussed above, the Company reported a net
  loss of $2,750,235 for the first three quarters of fiscal 1997 compared to
  net income of $77,925 for the first three quarters of fiscal 1996.





                                       10

<PAGE>   12
LIQUIDITY AND CAPITAL RESOURCES


  OPERATING ACTIVITIES.  The Company continues to experience substantial
  losses from operations and, as of March 30, 1997, has an accumulated
  deficit of $22,150,545.

  The Company anticipates an additional loss in the fourth quarter of fiscal
  1997. There can be no assurance that the Company will be profitable in the 
  future or that its losses will decline.

  These losses raise doubt about the Company's ability to continue as a going
  concern.  The financial statements do not reflect any adjustments that
  might result from the outcome of this uncertainty.  The Company's
  continuation as a going concern is dependent upon its ability to generate
  sufficient cash flow to meet its obligations on a timely basis, to obtain
  additional financing or capital, and ultimately to attain profitable
  operations.

  If substantial losses continue, the value of certain of the Company's
  long-lived assets may become impaired.  If so, the Company would be required
  to write-down the book value of these assets to their fair value.  The
  Company may also consider disposing of certain under-performing assets. 

  During the thirty-nine weeks ended March 30, 1997, net cash provided by
  operating activities was $449,513 which resulted from an increase in
  accounts payable and accrued liabilities offset by a net loss less non-cash
  expenses.  Investing activities used $288,363 in cash due to purchases of
  property and equipment partially offset by the sale of fixed assets.
  Financing activities utilized $567,510 in cash due to payments on borrowings 
  and the purchase of treasury stock partially offset by new borrowings.

  For the thirty-nine weeks ended March 31, 1996, net cash provided by
  operating activities was $882,056 due primarily to a net profit plus
  non-cash expenses.  Investing activities utilized $1,879,248 primarily due
  to the purchase of property and equipment.  Financing activities used $967,853
  in cash due primarily to payments on borrowings.

  As of March 30, 1997, the Company had negative working capital of
  $8,453,483, as compared to negative working capital of $4,484,903 at June
  30, 1996.  The increase is due primarily to $3 million in Subordinated
  Notes being classified as a current liability as of March 30, 1997 and due
  to an increase in accounts payable.


  CAPITAL REQUIREMENTS.  The Company renegotiated the payment terms of its $3
  million 12% Subordinated Notes which were due on March 31, 1996.  All
  principal and remaining interest is now due on July 31, 1997.  It is unlikely
  that payment terms can be re-negotiated or extended again and the Company will
  therefore be required to pay these notes when due.  There is no assurance that
  funds will be available to make timely payment.  The Notes are collateralized
  by the stock of Marco's Mexican Restaurants, Inc. and a default could result
  in foreclosure. Revenues from Marco's Mexican Restaurants currently constitute
  approximately 48% of the Company's total revenues.  The loss of or a
  substantial reduction in such revenues would have a material adverse impact on
  the Company and its ability to continue as a going concern. The Company is
  currently seeking additional financing to provide funds for timely payment.
  However, there is no assurance that such funds will be obtained on a timely
  basis or at all.

  The material capital commitments of the Company over the coming year are
  related to:

  o    Reduction of the Company's working capital deficit, including
       payments on notes, accounts payable and accrued liabilities.
  
  o    Refinancing the Subordinated Notes.








                                       11
<PAGE>   13


  By the end of fiscal 1997, the Company expects to have opened five additional
  Pasta Co. Restaurants, two of which have already been opened and the other
  three are under construction.  The Pasta Co. Restaurants require an initial
  capital investment of approximately $400,000 each, or a total investment of
  approximately $2 million to open the five restaurants.  The Company has
  financed these expenditures through cash flow from operations and  from
  additional outside financing.  There is no assurance that such funds will
  be available for further expansion, especially considering the Company's
  current cash flow and its upcoming debt service requirements.

  Cash generated from operations will not be sufficient to meet these
  commitments.  Without additional debt or equity financing in the
  short-term, the Company may not be able to repay the $3 million in 12%
  Subordinated Notes due July 31, 1997 or reduce its current working capital
  deficit.  There is no assurance that such debt or equity financing will
  become available.

  The inability of the Company to obtain such financing and achieve improved
  operating results could result in the curtailment by the Company of its
  expansion activities and restructuring and/or downsizing of the Company's
  operations, including the sale of material assets of the Company.

FORWARD LOOKING INFORMATION

  The statements contained in this report on Form 10-Q which are not
  historical facts, including, but not limited to, statements found under the
  caption "Management's Discussion and Analysis of Financial Condition and
  Results of Operations", are based on current expectations that involve a
  number of risks and uncertainties.  The Company cannot provide any
  assurance that these expectations will actually be met.  The factors that
  could cause actual results to differ materially from those described in the
  forward-looking statements include, but are not limited to, the following:
  changes in general economic and financial conditions within the markets
  that the Company serves; changes in the political and/or regulatory
  environments in which the Company operates; changes in consumer demand for
  the Company's products and services; competitive factors; and other risk
  factors described from time to time in the Company's Securities and
  Exchange Commission filings.  The actual results of the future events
  described in such forward-looking statements in this Form 10-Q could differ
  materially from those contemplated by such forward-looking statements.

  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.

PART II - OTHER INFORMATION

ITEM 6. Exhibits and Reports on Form 8-K.

  (a) Exhibits 11.1 and 99.1 required by Item 601 of Regulation S-K are filed
      as part of this report.

 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:  May 19, 1997             By: /s/ Thomas J. Buckley
      -------------------           ------------------------------------------
                                     Thomas J. Buckley
                                     Chief Financial Officer
                                     (Duly Authorized Signatory and
                                     Principal Financial & Accounting Officer)





                                       12
<PAGE>   14
                         WATERMARC FOOD MANAGEMENT CO.



                               INDEX TO EXHIBITS


<TABLE>
<CAPTION>
          EXHIBIT
          NUMBER  DESCRIPTION
          ------  -----------
          <S>     <C>

          11.1.   Watermarc Food Management Co. and Subsidiaries -
                  Computation of Earnings (Loss) Per Common and Common
                  Equivalent Shares

          27      Financial Data Schedule

          99.1    Conversion and Exchange Agreement
</TABLE>