UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-Q

(Mark One)

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

               For the quarterly period ended September 30, 1998

                                       or

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

For the transition
period from                              to
                         ----------------    ----------------


                         Commission File Number 0-24842

                           MONTEREY BAY BANCORP, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

<TABLE>
<S><C>
DELAWARE                                                                               77-0381362
--------------------------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
</TABLE>

567 AUTO CENTER DRIVE, WATSONVILLE, CALIFORNIA                            95076
--------------------------------------------------------------------------------
(Address of principal executive offices)                              (Zip Code)

                                 (831) 768-4800
--------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)

                36 BRENNAN STREET, WATSONVILLE, CALIFORNIA 95076
--------------------------------------------------------------------------------
   (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    .
                                              ___     ___


                     APPLICABLE ONLY TO CORPORATE ISSUERS:

     Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 3,741,415 shares of common
stock, par value $.01 per share, were outstanding as of NOVEMBER 6, 1998.


<PAGE>



                               MONTEREY BAY BANCORP, INC.

                                         Index

<TABLE>
<CAPTION>
PART I.  FINANCIAL INFORMATION                                                    Page
         ---------------------                                                    ----
<S>      <C>                                                                      <C>
         Item 1. Condensed Consolidated Statements of Financial Condition as of
                 September 30, 1998 and December 31, 1997........................   1

                 Condensed Consolidated Statements of Operations for the
                 Nine Months Ended September 30, 1998 and 1997...................   2

                 Condensed Consolidated Statement of Stockholders' Equity for the
                 Nine Months Ended September 30, 1998............................   3

                 Condensed Consolidated Statements of Cash Flows for the
                 Nine Months Ended September 30, 1998 and 1997...................   4

                 Notes to Condensed Consolidated Financial Statements............   6

         Item 2. Management's Discussion and Analysis of Financial Condition
                 and Results of Operations.......................................   8

         Item 3. Quantitative and Qualitative Disclosures About Market Risk......  21


PART II. OTHER INFORMATION
         -----------------

         Item 1. Legal Proceedings...............................................  22

         Item 2. Changes in Securities...........................................  22

         Item 3. Defaults Upon Senior Securities.................................  22

         Item 4. Submission of Matters to a Vote of Security Holders.............  22

         Item 5. Other Information...............................................  22

         Item 6. Exhibits and Reports on Form 8-K................................  22


SIGNATURES.......................................................................  23
</TABLE>


<PAGE>


Item 1.  Financial Statements.
-----------------------------

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997 (Dollars in thousands)
--------------------------------------------------------------------------------

                                                      September     December
                                                         30,           31,
                                                        1998          1997
                                                      ---------     --------
ASSETS

Cash and due from depository institutions             $  7,473      $  7,214
Overnight deposits                                      25,525         6,300
                                                      --------      --------
      Total cash and cash equivalents                   32,998        13,514

Certificates of deposit                                      -            99
Loans held for sale, at market                             819           514
Securities available for sale:
   Mortgage-backed securities (amortized cost
     of $119,171 at September 30, 1998
     and $70,234 at December 31, 1997)                 120,985        70,465
   Investment securities (amortized cost
     of $37,452 at September 30, 1998
     and $40,351 at December 31, 1997)                  37,438        40,355
Securities held to maturity:
   Mortgage-backed securities (market value
     of $107 at September 30, 1998
     and $138 at December 31, 1997)                        108           142
   Investment securities (market value of
     of $145 at December 31, 1997)                           -           145
Loans receivable held for investment (net of
  allowance for loan losses at
  September 30, 1998, $2,770;
  and at December 31, 1997, $1,669)                    246,290       263,751
Federal Home Loan Bank stock, at cost                    3,533         3,383
Premises and equipment, net                              6,239         4,817
Accrued interest receivable                              3,226         2,339
Core deposit premiums and other intangibles, net         3,805         3,229
Real estate owned                                          217           321
Other assets                                             4,525         5,022
                                                      --------      --------

TOTAL ASSETS                                          $460,183      $408,096
                                                      ========      ========

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
  Savings deposits                                    $371,166      $320,559
  Federal Home Loan Bank advances                       36,182        32,282
  Securities sold under agreements to repurchase         4,850         5,200
  Accounts payable and other liabilities                 3,344         2,122
                                                      --------      --------

      Total liabilities                                415,542       360,163
                                                      --------      --------


COMMITMENTS AND CONTINGENCIES                                -             -

STOCKHOLDERS' EQUITY:
  Preferred stock, $.01 par value, 2,000,000
    shares authorized and unissued                           -             -
  Common stock, $.01 par value, 9,000,000 shares
    authorized and 4,378,289 shares issued
    (3,741,415 shares outstanding at
    September 30, 1998; and 3,229,679 shares
    outstanding at December 31, 1997)                       36            36
  Additional paid-in capital                            27,537        27,270
  Unearned shares held by employee stock
    ownership plan (233,593 at
    September 30, 1998; and 251,562 at
    December 31, 1997)                                  (1,438)       (1,610)
  Treasury stock, at cost (636,874 shares at
    September 30, 1998; and 364,071
    shares at December 31, 1997)                        (9,741)       (4,642)
  Retained earnings, substantially restricted           27,161        26,741
  Accumulated other comprehensive income -
    unrealized gain on securities                        1,086           138
                                                      --------      --------

      Total stockholders' equity                        44,641        47,933
                                                      --------      --------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY            $460,183      $408,096
                                                      ========      ========

See notes to condensed consolidated financial statements.


                                       1


<PAGE>


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
(Dollars in thousands, except per share amounts)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                 Three Months           Nine Months
                                                    Ended                 Ended
                                                 September 30,         September 30,
                                               ----------------     ------------------
                                                 1998     1997       1998      1997
<S>                                             <C>      <C>        <C>       <C>
INTEREST INCOME:
  Loans receivable                              $5,127   $5,087     $15,487   $14,507
  Mortgage-backed securities                     1,793    1,376       4,767     5,251
  Other investment securities                      829      823       2,365     2,590
                                                ------   ------     -------   -------

     Total interest income                       7,749    7,286      22,619    22,348
                                                ------   ------     -------   -------

INTEREST EXPENSE:
  Savings deposits                               4,324    3,895      12,391    11,617
  FHLB advances and other borrowings               297      664       1,196     2,258
                                                ------   ------     -------   -------

     Total interest expense                      4,621    4,559      13,587    13,875
                                                ------   ------     -------   -------

NET INTEREST INCOME BEFORE PROVISION
  FOR LOAN LOSSES                                3,128    2,727       9,032     8,473

PROVISION FOR LOAN LOSSES                           77       90         682       315
                                                ------   ------     -------   -------

NET INTEREST INCOME AFTER PROVISION
  FOR LOAN LOSSES                                3,051    2,637       8,350     8,158
                                                ------   ------     -------   -------

NONINTEREST INCOME:
  Gain  on sale of investment securities            31      170          14       172
  Gain (Loss) on sale of real estate owned           3       (6)         12        (6)
  Commissions from sales of noninsured products    126       58         415       240
  Customer service charges                         220      181         585       440
  Income from loan servicing                        58       56         182       174
  Other income                                      60       47         182       131
                                                ------   ------     -------   -------

     Total noninterest income                      498      506       1,390     1,151
                                                ------   ------     -------   -------

GENERAL AND ADMINISTRATIVE EXPENSE:
  Compensation and employee benefits             1,275    1,024       3,788     3,178
  Occupancy and equipment                          250      271         816       799
  Deposit insurance premiums                        36       60          99       173
  Data processing fees                             224      168         607       509
  Legal and accounting expenses                     64       86         482       317
  Stationery, telephone and office expenses        149      109         400       377
  Advertising and promotion                        116       50         279       186
  Amortization of core deposit premiums            174      211         521       627
  Other expenses                                   430      297       1,153       850
                                                ------   ------     -------   -------

     Total general and administrative expense    2,718    2,276       8,145     7,016
                                                ------   ------     -------   -------

INCOME (LOSS) BEFORE INCOME TAX EXPENSE            831      867       1,595     2,293

INCOME TAX EXPENSE                                 371      356         762       936
                                                ------   ------     -------   -------

NET INCOME                                      $  460   $  511     $   833   $ 1,357
                                                ======   ======     =======   =======

BASIC EARNINGS PER SHARE(1)                     $  .13   $  .14     $   .23   $   .36
                                                ======   ======     =======   =======
DILUTED EARNINGS PER SHARE(1)                   $  .12   $  .13     $   .21   $   .35
                                                ======   ======     =======   =======
CASH DIVIDENDS PER SHARE(1)                     $  .06   $  .05     $   .12   $   .09
                                                ======   ======     =======   =======
</TABLE>

(1) 1997 earnings per share and dividends per share, adjusted for 1998 5 for 4
    stock split.

See notes to condensed consolidated financial statements.


                                       2


<PAGE>


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 (Dollar amounts in thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>                                                                              Accumulated
                          Common Stock     Additional                                     Other
                        -----------------   Paid-In    Acquired  Treasury  Retained   Comprehensive           Comprehensive
                        Shares(1)  Amount   Capital     by ESOP  Stock(2)  Earnings      Income       Total       Income
                        ---------  ------  ----------  --------  --------  --------   -------------  -------  -------------
<S>                     <C>          <C>     <C>       <C>       <C>        <C>           <C>        <C>           <C>
Balance at
  December 31, 1997     3,229,679    $36     $27,270   $(1,610)  $(4,642)   $26,741       $  138     $47,933

Purchase of
  treasury stock         (302,495)                                (5,446)                             (5,446)

Options exercised
  using treasury stock     29,692                                    347         50                      397

Dividends paid                                                                 (463)                    (463)

Earned ESOP shares                               267       172                                           439

Shares created through
  5 for 4 stock split     784,539

Comprehensive income:
  Net income                                                                    833                      833       $  833
  Change in unrealized
    gains on securities
    available for sale                                                                       956         956          956
  Reclassification
    adjustment for gains
    on securities
    available for sale
    included in income                                                                        (8)         (8)          (8)

                        ------------------------------------------------------------------------------------  -----------

Balance at
  September 30, 1998    3,741,415    $36     $27,537   $(1,438)  $(9,741)   $27,161       $1,086     $44,641       $1,781
                        ====================================================================================  ===========
</TABLE>


(1) The number of shares of common stock includes 359,375 shares which are
    pledged as security for a loan to the Bank's ESOP. Shares earned at
    September 30, 1998 and December 31, 1997 were 107,812 and 86,250,
    respectively.

(2) The Company held 636,874 shares of repurchased Company common stock as of
    September 30, 1998 and 364,071 as of December 31, 1997.

See notes to condensed consolidated financial statements.


                                       3


<PAGE>


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (Unaudited) (Dollars in thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                           Nine Months Ended
                                                                             September 30,
                                                                          ---------------------
OPERATING ACTIVITIES:                                                       1998        1997
                                                                          ---------   ---------
<S>                                                                       <C>          <C>

  Net income                                                              $    833     $  1,357
  Adjustments to reconcile net income to net cash provided by
    operating activities:
    Depreciation and amortization of premises and equipment                    336          323
    Amortization of core deposit premiums                                      521          627
    Amortization of purchase premiums, net of discounts                        781          378
    Loan origination fees deferred, net                                        (90)         328
    Amortization of deferred loan fees                                        (193)        (156)
    Provision for loan losses                                                  682          310
    Compensation expense related to ESOP shares released                       440          281
    Unrealized loss on sale of investment securities, net of taxes             948            -
    Loss on sale of investment securities                                      (14)        (171)
    Gain on sale of real estate owned                                          (12)           -
    Losses on sale of fixed assets                                             (22)           3
    Charge-offs on loans receivable, net of recoveries                           3          (27)
    Originations of loans held for sale                                     (8,923)      (1,860)
    Proceeds from sales of loans originated for sale                         8,618        1,860
    Change in income taxes payable and deferred income taxes                   631         (116)
    Change in other assets                                                     645         (534)
    Change in interest receivable                                             (887)        (216)
    Change in accounts payable and other liabilities                           556          224
                                                                          --------     --------

      Net cash  provided by operating activities                             4,853        2,611
                                                                          --------     --------

INVESTING ACTIVITIES:

  Loans originated for the portfolio, net                                  (68,358)     (38,456)
  Purchases of loans receivable                                            (33,012)     (14,661)
  Mortgage-backed securities acquired in exchange for securitized loans     48,370            -
  Principal payments on loans receivable                                    69,650       23,157
  Purchases of mortgage-backed securities available for sale               (79,651)      (1,747)
  Proceeds from sales of mortgage-backed securities available for sale      12,564       33,716
  Principal paydowns on mortgage-backed securities                          17,910       11,625
  Purchases of corporate securities available for sale                     (11,200)           -
  Purchases of investment securities available for sale                    (15,998)           -
  Proceeds from sales of investment securities available for sale           21,960            -
  Proceeds from maturities of investment securities                          8,245        6,109
  Unrealized gain on securities                                             (1,611)           -
  Decreases in certificates of deposit                                          99          100
  Purchases of FHLB stock                                                     (150)       1,712
  Purchases of premises and equipment, net                                  (2,154)        (322)
  Proceeds from sale of fixed assets                                           418            -
                                                                          --------     --------

    Net cash (used in) provided by investing activities                    (32,918)      21,233
                                                                          --------     --------
</TABLE>

                                  -continued-


                                       4


<PAGE>


                    MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (Unaudited) (Dollars in thousands)
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                           Nine Months Ended
                                                                             September 30,
                                                                          ---------------------
                                                                            1998        1997
                                                                          ---------   ---------
<S>                                                                       <C>          <C>

FINANCING ACTIVITIES:

  Net increase  in savings deposits                                       $ 50,607     $ (1,226)
  Purchase premium on acquisition of core deposits                          (1,096)           -
  Purchase of investment company assets                                                     (87)
  Repayments of Federal Home Loan Bank advances, net                         3,900       (3,475)
  Repayments of reverse repurchase agreements, net                            (350)     (13,000)
  Purchases of treasury stock, net                                          (5,049)        (255)
  Cash dividends paid to stockholders                                         (463)        (357)
                                                                          --------     --------

     Net cash provided by (used in) financing activities                    47,549      (18,400)
                                                                          --------     --------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                   19,484        5,444

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                            13,514        4,978
                                                                          --------     --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                $ 32,998     $ 10,422
                                                                          ========     ========


CASH PAID DURING THE PERIOD FOR:

  Interest on savings deposits and advances                               $ 13,963     $ 14,040

  Income taxes                                                                 719        1,145

NONCASH INVESTING ACTIVITIES:

  Mortgage-backed securities acquired in exchange for securitized
    loans, net of deferred fees                                             47,703            -

  Real estate acquired in settlement of loans                                  194          610
</TABLE>


See notes to condensed consolidated financial statements.


                                       5


<PAGE>


                           MONTEREY BAY BANCORP, INC.
              NOTES TO Condensed CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998

        The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X for
interim financial information. Accordingly, the adequacy of the disclosure
contained herein has been determined with the presumption that the users of
these interim financial statements have read or have access to the Annual Report
on Form 10-K of Monterey Bay Bancorp, Inc. (the "Company") for the year ended
December 31, 1997. Only material changes in financial condition and results of
operations are discussed in the remainder of Part I of this Quarterly Report.

        In the opinion of the management of the Company and its subsidiary,
Monterey Bay Bank (the "Bank"), the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the Company's
consolidated financial condition at September 30, 1998 and December 31, 1997,
the results of its operations for the nine months ended September 30, 1998 and
1997, and its cash flows for the nine months ended September 30, 1998 and 1997.
All significant intercompany balances and transactions have been eliminated in
consolidation. Results of operations for any interim period are not necessarily
indicative of the operating results that may be expected for any other interim
period or for the entire year.

        In June, 1998 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for
Derivative Instruments and Hedging Activities". The statement establishes
accounting and reporting standards for derivative instruments and hedging
activities. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company is in the process of determining the
impact of SFAS No. 133 on the Company's financial statements, which is not
expected to be material.

        In October, 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise". It is effective for the fiscal
quarter beginning after December 15, 1998. It will allow companies that hold
mortgage loans for sale to classify mortgage-backed securities retained in a
securitization of such loans as either held-to-maturity, available for sale, or
trading based on management's intentions. This guidance is consistent with the
treatment established for investments covered by SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities".

        Effective January 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which requires that an enterprise report, by major
components and as a single total, the change in its net assets during the period
from nonowner sources; and No. 131, "Disclosures about Segments of an Enterprise
and Related Information," which establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas, and major customers. Adoption of these
statements does not impact the Company's consolidated financial position,
results of operations or cash flows, and any effect is limited to the form and
content of its disclosures. Both statements are effective for fiscal years
beginning after December 15, 1997.

        In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the dates of



                                       6


<PAGE>


the balance sheets and revenues and expenses for the periods covered. Actual
results could differ significantly from those estimates and assumptions.


                                       7

<PAGE>


Item 2.  Management's Discussion and Analysis of Results of Operations and
Financial Condition

        Monterey Bay Bancorp, Inc. (the "Company") is a savings and loan holding
company incorporated in 1994 under the laws of the State of Delaware. The
Company was organized as the holding company for Monterey Bay Bank ("the Bank")
in connection with the Bank's conversion from the mutual to stock form of
ownership. On February 14, 1995, the Company issued and sold 3,593,750 shares of
its common stock at an issuance price of $8.00 per share to complete the
conversion. Net proceeds to the Company were $27.1 million, including shares
purchased by the employee stock ownership plan, after deduction of conversion
expenses and underwriting fees of $1.6 million. The Company used $13.5 million
of the net proceeds to acquire all of the stock of the Bank. The Bank owns a
subsidiary, Portola Investment Corporation ("Portola"), which sells insurance
and brokerage services.

        The Company's primary business is providing conveniently located deposit
facilities to attract checking, money market, savings and certificate of deposit
accounts, and investing such deposits and other available funds in mortgage
loans secured by one-to-four family residences and, to a lesser extent,
construction, commercial real estate, and business loans. The Bank's deposit
gathering and lending markets are primarily concentrated in the communities
surrounding its full service offices located in Santa Cruz, Monterey, and Santa
Clara counties, in California. At September 30, 1998, the Bank had eight full
service offices and one real estate loan office.

Safe Harbor Statement for Forward-Looking Statements
----------------------------------------------------

        This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements, which are based on certain assumptions and describe future plans,
strategies, and expectations of the Company, are generally identifiable by use
of the words "believe," "expect," "intend," "anticipate," "estimate," "project"
or similar expressions. The Company's ability to predict results or the actual
effect of future plans or strategies is inherently uncertain. Factors which
could have a material adverse affect on the operations and future prospects of
the Company include, but are not limited to, changes in: interest rates, general
economic conditions, legislative/regulatory changes, monetary and fiscal
policies of the U.S. Government, including policies of the U.S. Treasury and the
Board of Governors of the Federal Reserve System, the quality or composition of
the loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles, policies and guidelines. These risks and uncertainties
should be considered in evaluating forward-looking statements and undue reliance
should not be placed on such statements.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30,
1998 AND 1997

Overview
--------

      Monterey Bay Bancorp, Inc. reported net income of $460,000, or $.13 per
basic share, for the quarter ended September 30, 1998, compared to net income of
$511,000, or $.14 per basic share, for the third quarter of 1997. Diluted
earnings per share were $.12 for the third quarter of 1998, compared to $.13 a
year ago. Net income for the first nine months of 1998 was $833,000, or $.23 per
basic share, a decline from net income of $1,357,000, or $.35 per basic share,
recorded for the first nine months of 1997. Diluted earnings per share for the
nine month period ended September 30, 1998 were $.21 compared to $.34 for the
same period in 1997.


                                       8


<PAGE>


      While net interest income before provision for loan losses and recurring
noninterest income rose in 1998 from comparable periods in 1997, these
improvements were offset by increases in general and administrative expense.
Increases in general and administrative expense for the quarter and the nine
months ended September 30, 1998 primarily reflects increases in staffing in the
Company's wholly owned subsidiary, Monterey Bay Bank (the "Bank"), to support
the deposit growth and the expansion of its branch locations and new product
lines and services. Deposits have grown by approximately $50.6 million since
December 31, 1997 with 60% or $30.3 million of this growth occurring in low cost
checking, money market and passbook accounts. During the second quarter of 1998,
the Bank opened its eighth full service branch location.

      The most significant component of the Company's revenue is net interest
income, which represents the difference between interest income, primarily from
loans, mortgage-backed securities, and the investment portfolio, and interest
expense, primarily on deposits and borrowings. The Company's net interest income
and net interest margin, which is defined as net interest income divided by
average interest-earning assets, are affected by its asset growth and quality,
its asset and liability composition, and the general interest rate environment.

      Service charges, mortgage loan servicing fees, and commissions from the
sale of insurance products and investments through Portola also have significant
effects on the Company's results of operations. General and administrative
expenses consist primarily of employee compensation, occupancy expenses, federal
deposit insurance premiums, data processing fees and other operating expenses.
The Company's results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, government policies, and actions of regulatory agencies.

      Recently, the Company has focused its efforts on becoming more like a
community-based retail bank by increasing its commercial real estate,
construction, multi-family and business lending activities. As well the bank is
focusing its deposit gathering efforts on small businesses in market, which will
complement the business lending function. The Company intends to continue to
pursue a growth strategy by focusing on internal growth as well as external
acquisition opportunities.

      Implementation of the Company's strategic decision to transition from a
traditional saving institution to a community banking orientation resulted in an
increase, during 1997 and the first nine months of 1998, in general and
administrative expenses. The planned benefits of this transition, increased net
interest margin and fee income, are expected to lag behind the increase in
expenditures.

Interest Income
---------------

      Interest income for the quarter ended September 30, 1998, increased by
6.4% to $7.7 million, compared to $7.3 million for the third quarter of 1997.
For the nine months ended September 30, 1998, total interest income was $22.6
million, an increase of 1.2% or $271,000 from the amount recorded for the first
nine months of 1997. The primary reasons for the slight increase in interest
income for the nine months ended September 30, 1998 compared to the same period
in 1997 is due to a $6.0 million increase in average interest earning assets.
Most of the $6.0 million increase came in the form of higher yielding loans
receivable.

      The weighted average yield on interest earning assets increased slightly
to 7.46% from 7.43% for the quarter ended September 30, 1998 compared to the
quarter ended September 30, 1997. The weighted average yield on interest earning
assets was 7.46% for both the nine ended September 30, 1998 and 1997. The
average yield on loans receivable continued to increased to 8.18% and 8.11%,
respectively for the three and nine months ended September 30, 1998, compared to
7.84% and 7.90%,


                                       9


<PAGE>


respectively for the three and nine months ended September 30, 1997. Improvement
in the yield on loans receivable was offset by a decline in the yield on the
mortgage-backed and investment securities portfolio. The average yield of
mortgage-backed securities declined to 6.55% and 6.58%, respectively, for the
three and nine months ended September 30, 1998 from 6.85% and 7.07%,
respectively for the three and nine months ended September 30, 1997.

      Interest expense was $4.6 million and $13.6 million, respectively for the
quarter and nine months ended September 30, 1998, compared to $4.6 million and
$13.9 million, respectively for the similar periods a year ago. The $300,000
decrease in interest expense during the nine months ended September 30, 1998
from 1997 was due to the decline in the weighted average rate of interest
bearing liabilities dropping from 5.03% for the nine month period ended
September 30, 1997 to 4.85% for the same period in 1998. These changes are due
to a continued success in reducing higher cost borrowing and replacing them with
lower cost transaction deposit accounts. Transaction deposit accounts at
September 30, 1998 represent 26.1% of total deposits, up from 20.9% at December
31, 1997. Increasing low cost transaction accounts is an ongoing objective of
the Bank. Average deposits increased 9.8%, growing from $317 million for the
nine months ended September 30, 1997 to $348 million for the similar period in
1998.


                                       10


<PAGE>


        The changes in net interest income for the three AND nine months ended
September 30, 1998 compared with the corresponding periods in 1997 are analyzed
in the following table. The table shows the changes by major component, setting
forth changes attributable to changes in volume, changes attributable to changes
in interest rates and the net effect of both (in thousands):



                                     Three Months Ended September 30,
                                         1998 Compared with 1997
                                           Increase (Decrease)
                                     --------------------------------
                                       Volume      Rate         Net
                                       ------      ----         ---
      Interest income:
           Loans                      $  (174)     $ 214      $    40
           Mortgage-backed securities     498        (82)         416
           Investment securities           37        (31)           6
                                      -------      -----      -------
                                          361        101          462
                                      -------      -----      -------
      Interest expense:
           On customer deposits           444        (16)         428
           On borrowings                 (373)         6         (367)
                                      -------      -----      -------
                                           71        (10)          61
                                      -------      -----      -------

      Change in net interest income   $   290      $ 111      $   401
                                      =======      =====      =======


                                      Nine Months Ended September 30,
                                         1998 Compared with 1997
                                           Increase (Decrease)
                                     --------------------------------
                                       Volume      Rate         Net
                                       ------      ----         ---
      Interest income:
           Loans                      $   586      $ 393      $   979
           Mortgage-backed securities    (127)      (356)        (483)
           Investment securities         (167)       (58)        (225)
                                      -------      -----      -------
                                          292        (21)         271
                                      -------      -----      -------
      Interest expense:
           On customer deposits           780         (6)         774
           On borrowings               (1,113)        51       (1,062)
                                      -------      -----      -------
                                         (333)        45         (288)
                                      -------      -----      -------

      Change in net interest income   $   625      $ (66)     $   559
                                      =======      =====      =======


                                       11


<PAGE>

        Average assets and liabilities together with average interest rates
earned and paid for the three and nine months ended September 30, 1998 and 1997
are summarized as follows (dollars in millions):

<TABLE>
<CAPTION>
                                                       Three Months Ended September 30,
                                                     -----------------------------------
                                                           1998                1997
                                                     --------------      ---------------
                                                     Average Yield/      Average  Yield/
                                                     Balance  Rate       Balance   Rate
                                                     ------- ------      -------  ------
   <S>                                                 <C>    <C>          <C>     <C>
   Interest earning assets:
     Loans                                             $251   8.18%        $259    7.84%
     Mortgage-backed securities                         109   6.55           80    6.85
     Investment securities                               55   5.99           53    6.25
                                                       ----                ----
       Total interest earning assets                    415   7.46          392    7.43
   Noninterest earning assets                            20                  18
                                                       ----                ----
     Total assets                                      $435                $410
                                                       ====                ====

   Interest bearing liabilities:
     Deposits                                          $368   4.66%        $317    4.88%
     Borrowings                                          19   6.15           44    5.95
                                                       ----                ----
       Total interest bearing liabilities               387   4.74          361    5.01
   Noninterest bearing liabilities                        3                   3
   Stockholders' equity                                  45                  46
                                                       ----                ----
     Total liabilities and stockholders' equity        $435                $410
                                                       ====                ====

   Net interest rate spread                                   2.72%                2.42%
   Net interest margin                                        3.01%                2.78%
   Ratio of interest bearing assets to
     interest bearing liabilities                              107%                 109%
</TABLE>


<TABLE>
<CAPTION>
                                                        Nine Months Ended September 30,
                                                     -----------------------------------
                                                          1998                 1997
                                                     --------------      ---------------
                                                     Average Yield/      Average  Yield/
                                                     Balance  Rate       Balance   Rate
                                                     ------- ------      -------  ------
   <S>                                                 <C>    <C>          <C>     <C>
   Interest earning assets:
     Loans                                             $255   8.11%        $245    7.90%
     Mortgage-backed securities                          97   6.58           99    7.07
     Investment securities                               53   5.51           55    6.23
                                                       ----                ----
       Total interest earning assets                    405   7.46          399    7.46
   Noninterest earning assets                            18                  18
                                                       ----                ----
     Total assets                                      $423                $417
                                                       ====                ====

   Interest bearing liabilities:
     Deposits                                          $348   4.76%        $317    4.89%
     Borrowings                                          26   6.15           52    5.89
                                                       ----                ----
       Total interest bearing liabilities               374   4.85          369    5.03
   Noninterest bearing liabilities                        3                   3
   Stockholders' equity                                  46                  45
                                                       ----                ----
     Total liabilities and stockholders' equity        $423                $417
                                                       ====                ====

   Net interest rate spread                                   2.61%                2.43%
   Net interest margin                                        2.98%                2.83%
   Ratio of interest bearing assets to
     interest bearing liabilities                              108%                 108%
</TABLE>

                                       12


<PAGE>


Provision for Loan Losses
-------------------------

      The allowance for loan losses is maintained at a level considered
appropriate by management and is based on an ongoing assessment of the risks
inherent in the loan portfolio. The allowance is increased by the provision for
estimated loan losses, which is charged against operations, and is decreased by
the amount of net loans charged off during the period. In evaluating the
adequacy of the allowance for loan losses, management incorporates such factors
as collateral value, portfolio composition and concentration, and trends in
local and national economic conditions and the related impact on the financial
strength of the Company's borrowers. (See "-Asset Quality.")

      For the quarter and nine months ended September 30, 1998, the provision
for loan losses was $77,000 and $682,000, respectively. The Company recorded a
provision for loan losses of $90,000 for the quarter ended September 30, 1997
and $315,000 for the nine months ended September 30, 1997. The Company increased
its provision for loan losses largely due to an increase in higher risk forms of
lending. At September 30, 1998, the Company's allowance for loan losses totaled
$2.8 million or 1.13% of loans receivable, compared to $1.7 million or .63% of
loans receivable at December 31, 1997.

Noninterest Income
------------------

      Noninterest income decreased to $498,000 for the third quarter of 1998,
compared to $506,000 a year ago. Noninterest income for the first nine months of
1998 increased to $1,390,000 or 21% from $1,151,000 for the same period in 1997.
Included in the third quarter of 1997 was a non-recurring gain of $170,000
resulting from the sale of investment securities. Adjusting noninterest income
for the gains on the sale of investments for the third quarter in 1998 and 1997
would result in a $139,000 improvement or 39% year over year. During both the
third quarter of 1998 and the first nine months of 1998 increases in noninterest
income were primarily due to an increase in commission income from the sale of
insurance, mutual funds, and annuity products, and higher revenues from customer
service charges stemming from a larger customer base and an increased number of
checking accounts.

      The Company recorded commission income of $126,000 and $415,000,
respectively, from the sale of insurance and investment products for the three
and nine months ended September 30, 1998, compared to $58,000 and $240,000,
respectively, for the comparable periods in 1997. The increase in commission
income reflects new management coupled with additional staff members for the
subsidiary through which these products are sold since the same period in 1997.

      For the three and nine months ended September 30, 1998, customer service
charges amounted to $220,000 and $585,000, respectively, compared to $181,000
and $440,000 for the corresponding periods a year earlier. The increase in
customer service fee income reflects continuing growth in the number of customer
checking accounts resulting primarily from the continued consolidation of
financial institutions in the Company's market. Additionally, during the 1998
periods, the Company began surcharging for foreign ATM usage, which contributed
approximately $36,000 and $94,000 in service charges for the three and nine
months ended September 30, 1998 compared to $31,000 and 46,000 for the
corresponding periods a year earlier.

        Loan servicing income was $58,000 and $182,000, respectively, for the
three and nine months ended September 30, 1998, compared to $56,000 and $174,000
for the same periods in 1997. The outstanding principal balance of mortgage
loans serviced for others was $83.2 million at September 30, 1998, compared to
$52.1 million at September 30, 1997. The increase in loans serviced for others
is primarily due to the securitization of approximately $48.4 million of the
Company's fixed rate residential loans receivable, completed April, 1998. From
time to time, depending upon its asset and liability strategy, the Company
converts a portion of its mortgages into


                                       13


<PAGE>


FHLMC or FNMA mortgage-backed securities. These conversions provide increased
liquidity because the mortgage-backed securities are typically more readily
marketable than the underlying loans and because they can be used as collateral
for borrowings.

General and Administrative Expenses
-----------------------------------

      General and administrative expenses were $2.7 million and $8.1 million,
respectively, for the quarter and nine months ended September 30, 1998, compared
to $2.3 million and $7.0 million, respectively, for the similar periods in 1997.
General and administrative expenses were $442,000 and $1.1 million higher,
respectively, for the three-month period and nine-month period ended September
30, 1998 than for the comparable periods in 1997. The majority of the increase
for both periods occurred in the second quarter of 1998 and was primarily
attributable to the Bank's deposit growth and the expansion of its branch
locations and new product lines and services resulting in higher compensation
and employee benefits, data processing expenses, and advertising expense.
Additionally, the Company incurred during the nine-month period ended September
30, 1998 non-reoccurring expenses of approximately $210,000 in charges,
including associated related legal costs, resulting from the settlement of two
outstanding legal matters.


                                       14


<PAGE>


COMPARISON OF CHANGES IN FINANCIAL CONDITION

        Total assets of the Company were $460.2 million at September 30, 1998,
compared to $408.1 million at December 31, 1997, an increase of $52.1 million,
or 12.8%.

      Mortgage-backed securities and investment securities increased by $47.6
million, or 43.0%, during the nine months ended September 30, 1998. These
increases were partially offset by a decrease of $17.5 million, or 6.7%, in
loans receivable during the same period. During the nine months ended September
30, 1998, the Company completed the securitization of approximately $48.4
million in fixed rate loans secured by residential property, thereby increasing
mortgage-backed securities by an equal amount. This growth in mortgage-backed
securities was partially offset by principal prepayments received on
mortgage-backed securities.

      Loans receivable held for investment were $246.3 million at September 30,
1998, compared to $263.8 million at December 31, 1997. The decrease in loan
receivable is primarily due to the $48.4 million in fixed rate loans securitized
and the $69.7 million in principal payments received during the nine-month
period ended September 30, 1998. This decrease was partially offset by the
origination of approximately $68.4 million in loans for the portfolio and the
purchase of approximately $33.0 million in loans from Commercial Pacific Bank.
Residential real estate loans continue to represent the largest category of
collateral in the loan portfolio. At September 30, 1998, total one-to-four
family residential real estate loans were $147.3 million, or 60.0% of loans
receivable, compared to $195.5 million, or 68.0% of total loans, at December 31,
1997. The Company originated $19.7 million, $26.4 and $22.3 million,
respectively of portfolio loans during the first, second and third quarters of
1998, respectively. This is improved from $6.8 million, $13.0, and $18.7
million, respectively for the first, second and third quarters in 1997. The
growth in portfolio loan fundings was due to a low interest rate environment,
which promotes loan production and the expansion of our portfolio lending into
construction, commercial, multi-family, and business lending.

      Loan receivable other than one-to-four residential real estate loans
totaled $98.0 million at September 30, 1998 compared to $67.4 million at
December 31, 1997, or a 45% increase. At September 30, 1998, the Company's
commercial real estate loan portfolio was $30.2 million, or 12.3% of the loan
portfolio, up from $20.9 million, or 7.7% of the loan portfolio at December 31,
1997. At September 30, 1998, the Company had $53.6 million of construction
loans, of which $22.1 million, or 41.2%, had not yet been disbursed. Net
construction loans totaled $31.6 million or 12.9% of loans receivable at
September 30, 1998. Net construction loans totaled $13.8 million or 5.2% at
December 31, 1997. Construction loans are made primarily to residential builders
and to commercial property developers. At September 30, 1998, the Company had
$27.8 million of multi-family residential loans, or 11.3% of the loan portfolio,
up from $26.0 million, or 10.5% at December 31, 1997. The remainder of the loans
receivable was comprised of primarily business loans totaling $8.4 million or
3.4% of total loans receivable at September 30, 1998 compared to $11.2 million
or 4.3% at December 31, 1997.

      During the nine months ended September 30, 1998, the Company's liabilities
increased by $55.3 million to $415.5 million, from $360.2 million at December
31, 1997. The increase in liabilities was attributable to growth in deposits of
$50.6 million and a $3.9 million increase in advances from the FHLB. Growth in
deposits during the nine-month period ended September 30, 1998 was due to the
assumption of approximately $28.6 million in deposits from Commercial Pacific
Bank and in market deposit growth of $22.0 million. Total savings deposits
increased during the nine-month period ended September 30, 1998 to $371.1
million, or by 15.8% from $320.6 million at December 31, 1997. Continued
emphasis has been placed on growth of low cost transaction deposit


                                       15


<PAGE>


accounts. Transaction accounts are made up of passbook savings, checking, and
money market accounts. Transaction accounts grew from $66.9 million, or 20.9% of
total deposits at December 31, 1997 to $97.0 million, or 26.1% of total deposits
at September 30, 1998, a 45% improvement. Average transaction deposits at
September 30, 1998 bore a weighted average interest rate of 2.63%.

      At September 30, 1998, shareholders' equity was $44.6 million, compared to
$47.9 million at December 31, 1997. Equity was reduced during the first nine
months as a result of stock repurchases by the Company totaling $5.1 million,
and by the payment of cash dividends totaling $463,000, or $.12 per share, on
the Company's outstanding common stock. Offsetting these reductions were
increases in equity resulting from the first nine months net income, an increase
in earned ESOP shares, and a net increase in unrealized gains on securities
available for sale. Tangible book value per share of Monterey Bay Bancorp, Inc.
common stock was $11.47 at September 30, 1998, compared to $14.76 at December
31, 1997. The decline in tangible book value per share from December 31, 1997 is
principally due to stock repurchases.

Interest Rate Sensitivity and Market Risk Analysis
--------------------------------------------------

      Market risk is the risk of losses resulting from adverse changes in market
pricing and rates. The Company's market risk is primarily interest rate risk
associated with its lending, deposit and borrowing functions. Interest rate risk
arises when interest rates on assets change in a different time period or in a
different proportion from that of liabilities. Management actively monitors its
interest rate sensitivity position with the primary objective of prudently
structuring the balance sheet so that movements of interest rates on assets and
liabilities are highly correlated and produce reasonable net interest margin
even in periods of volatile interest rates. Interest rate risk is considered by
management to be the Company's most significant market risk in terms of
potential for material impact upon the Company's financial position and results
of operations. In the normal course of business, the Company is not exposed to
other types of market risk such as risk associated with commodity prices or
foreign currencies.

      Management seeks to manage its asset and liability portfolios to help
reduce any adverse impact on its net interest income caused by fluctuating
interest rates. A key objective of asset/liability management is to manage
interest rate risk associated with changing asset and liability cash flows and
market interest rate movements. Interest rate risk occurs when interest rate
sensitive assets and liabilities do not reprice simultaneously and in equal
volumes. The Company's asset/liability committee provides oversight to the
interest rate risk management process and recommends policy guidelines regarding
exposure to interest rates for approval by the Board of Directors. Adherence to
these policies is monitored on an ongoing basis, and decisions related to the
management of interest rate exposure due to changes in balance sheet structure
and/or market interest rates are made when appropriate and agreed to by this
committee.

      The Company manages interest rate risk principally through emphasizing the
origination of adjustable rate loans and short or intermediate term fixed rate
loans and the matching of these assets with short and intermediate term
certificates of deposits and adjustable rate borrowings. The Company's
monitoring activities related to managing interest rate risk include both
interest rate sensitivity "gap" analysis and the use of a simulation model.
While gap analysis provides a picture of the interest rate risk embedded in the
balance sheet, it provides only a static view of interest rate sensitivity at a
specific point in time and does not measure the potential volatility in
forecasted results relating to changes in market interest rates over time.
Accordingly, the Company combines the use of gap analysis with use of a
simulation model which provides a dynamic assessment of interest rate
sensitivity. The simulation model is designed to enable the Company to generate
a forecast of net interest income and market value of equity given various
interest rate forecasts and alternative


                                       16


<PAGE>


strategies. The model is also designed to measure the anticipated impact that
prepayment risk, basis risk, customer maturity preferences, volumes of new
business and changes in the relationship between long- and short-term interest
rates have on the performance of the Company.

      Interest rate sensitivity estimated by management, as measured by the
change in the market value of equity as a percentage of the present value of
assets if interest rate levels were to increase by 2%, was negative 3.11% at
December 31, 1997 and 2.87% at June 30, 1998, indicating that the Company is
vulnerable to increases in interest rates. Management continues to pursue
strategies to reduce the impact of changes in interest rates on its market value
of equity, primarily by shortening asset maturities and lengthening maturities
of interest-bearing liabilities, when possible, and by originating and retaining
variable-rate consumer, business, construction and commercial real estate loans
which generally have higher yields than permanent residential loans.

Asset Quality
-------------

      At September 30, 1998, the Company had $1.5 million of nonaccrual loans
past due 90 days or more, compared to $1.6 million of nonaccrual loans at
December 31, 1997. The Company's nonaccrual loans are secured by one-to-four
family and multi-family residences located in Northern California. At September
30, 1998, impaired loans totaled $4.1 million, compared to $1.8 million at
December 31, 1997. Impaired loans at September 30, 1998 consisted of loans
collateralized by one-to-four family residences, including four loans that met
the definition of a troubled debt restructuring. The increase in impaired loans
is directly attributable to the purchase of approximately $33.0 million in loans
from Commercial Pacific Bank, a portion of which was not performing pursuant to
the loan contract. Management does not expect any material losses in the
collection of these loans.

      At September 30, 1998, the Company had real estate owned totaling
$217,000, consisting of two one-to-four family residential properties acquired
through foreclosure.

      To measure the quality of assets, the Company has established internal
asset classification guidelines as part of its credit monitoring system for
identifying and reporting problem assets and determining provisions for
anticipated loan losses. The Company classifies assets it considers of
questionable quality using the classification categories of substandard,
doubtful, and loss. The Company's classified assets consist of foreclosed
residential properties, nonperforming assets, and assets that are performing in
accordance with their contractual terms but are adversely classified because
they exhibit one or more well-defined weaknesses. Management monitors the
Company's assets regularly, classifies any problem assets, and provides specific
or general valuation allowances when necessary and appropriate.

        Total classified assets of the Company increased to $7.0 million, or
1.51% of total assets, at September 30, 1998 from $2.5 million, or .61% of
assets, at December 31, 1997. At September 30, 1998, the Company had $7.0
million of assets classified as substandard and no assets classified as doubtful
or loss. Substandard assets included $1.2 million of loans past due 90 days or
more and $5.5 million of loans with identified risk characteristics indicating
the asset is inadequately protected by the current net worth and paying capacity
of the obligor or of the collateral pledged. The largest substandard loan at
September 30, 1998 was a one-to-four family residential mortgage with an
outstanding principal balance of $384,988.

        All of the Company's loans are secured by real estate located within the
state of California. The majority are secured by real estate in Santa Cruz,
Monterey, Santa Clara, and San Benito


                                       17


<PAGE>



counties; therefore, the Company's credit risk is primarily related to the
economic conditions of this region.

Capital and Regulatory Standards
--------------------------------

        In connection with the insurance of its deposits by the Federal Deposit
Insurance Corporation ("FDIC") and general regulatory oversight by the Office of
Thrift Supervision ("OTS"), the Bank is required to maintain minimum levels of
regulatory capital, including tangible, core and risk-based capital. At
September 30, 1998 and December 31, 1997, the Bank was in compliance with all
regulatory capital requirements. OTS prompt corrective action (PCA) regulations
include five capital tiers ranging from well capitalized to critically
undercapitalized. At September 30, 1998 and December 31, 1997, the Bank met the
definition of a well-capitalized institution.

        The following table sets forth the amounts and ratios regarding actual
and minimum tangible, core and risk-based capital requirements, together with
the amounts and ratios required in order to meet the definition of a "well
capitalized" institution.

<TABLE>
<CAPTION>
                                       Minimum            Well
                                       Capital        Capitalized
                                     Requirements     Requirements       Actual
                                     -------------    -------------   --------------

                                     Amount  Ratio    Amount  Ratio   Amount   Ratio
                                     ------  -----    ------  -----   ------   -----
    <S>                             <C>      <C>     <C>     <C>     <C>      <C>
    As of September 30, 1998:
      Total capital
        (to risk-weighted assets)   $19,843  8.00%   $24,804 10.00%  $32,771  13.21%
      Tier 1 capital
        (to risk-weighted assets)       N/A    N/A    14,740  6.00%   30,397  12.37%
      Core (tier 1) capital
        (to adjusted assets)         17,636  4.00%    22,045  5.00%   30,397   6.89%
      Tangible capital
        (to tangible assets)          6,613  1.50%       N/A    N/A   30,397   6.89%



<CAPTION>
                                       Minimum            Well
                                       Capital        Capitalized
                                     Requirements     Requirements       Actual
                                     -------------    -------------   --------------

                                     Amount  Ratio    Amount  Ratio   Amount   Ratio
                                     ------  -----    ------  -----   ------   -----
    <S>                             <C>      <C>     <C>     <C>     <C>      <C>
    As of December 31, 1997:
      Total capital
        (to risk-weighted assets)   $17,898  8.00%   $22,372 10.00%  $38,570  17.24%
      Tier 1 capital
        (to risk-weighted assets)       N/A    N/A    13,323  6.00%   36,901  16.62%
      Core (tier 1) capital
        (to adjusted assets)         11,777  3.00%    19,629  5.00%   36,901   9.40%
      Tangible capital
        (to tangible assets)          5,888  1.50%       N/A    N/A   36,859   9.39%
</TABLE>

        The OTS has incorporated an interest rate risk component into its
regulatory capital rule, under which savings associations with "above normal"
interest rate risk exposure would be subject to a deduction from total
risk-based capital. In August 1994, the OTS issued a final regulation adding the
interest rate risk component to its risk-based capital standard. Implementation
of the final regulation has been delayed. The delay provides an opportunity to
assess any further guidance from other federal banking agencies regarding their
planned implementation of a capital deduction.

        The regulation requires a savings institution to maintain capital in an
amount equal to one-half the difference between the institution's measured
interest rate risk and 2% of the market value of the institution's assets.
Interest rate risk is to be measured on the market value of its assets, based on
a

                                       18

<PAGE>


hypothetical 200 basis point change in interest rates. The credit risk component
of the risk-based capital standard will remain unchanged at 8% of risk-weighted
assets. Institutions with measured interest rate risk less than or equal to 2%
will not be required to maintain additional capital. If the Bank had been
subject to adding an interest rate risk component to its risk-based capital
standard at September 30, 1998, the Bank would have continued to substantially
exceed minimum risk based capital requirements.

Liquidity
---------

      The Company's primary sources of funds are customer deposits, principal
and interest payments on loans and mortgage-backed securities, FHLB advances and
other borrowings and, to a lesser extent, proceeds from sales of securities and
loans. While maturities and scheduled amortization of loans are predictable
sources of funds, deposit flows and mortgage prepayments are greatly influenced
by general interest rates, economic conditions, and competition.

      The Company maintains the required minimum levels of liquid assets as
defined by OTS regulations. This requirement, which may be varied at the
direction of the OTS depending upon economic conditions and deposit flows, is
based upon a percentage of deposits and short-term borrowings. The required
ratio is currently 4%. At September 30, 1998, the Company's liquidity ratio was
10.31%, compared to 8.08% at December 31, 1997. The Company's strategy generally
is to maintain its liquidity ratio at or near the required minimum in order to
maximize its yield on alternative investments.

Year 2000
---------

      Many existing computer programs use only two digits to identify a year in
the date field with the assumption that the first two digits are always 19.
Systems that calculate, compare or sort using the incorrect date may cause
erroneous results, ranging from system malfunctions to incorrect or incomplete
processing. If not remedied, potential risks include business disruption or
temporary shutdown and financial loss. Pursuant to its information technology
strategy, the Company principally utilizes third-party computer service
providers and third-party software for its information technology needs. As a
result, the Year 2000 compliance of the Company's information technology assets
("IT assets"), such as computer hardware, software and systems, is primarily
dependent upon the Year 2000 compliance efforts and results of its third-party
vendors. The Year 2000 compliance of the Company's non-IT assets, which include
automated teller machines (ATMs), copiers, fax machines, coin/currency counters,
microfilmers, HVAC systems and emergency communications radios, is also
primarily dependent upon the Year 2000 compliance efforts and results of third
parties.

State of Readiness

      In June 1997, the Company developed a plan to address Year 2000 issues and
appointed a Year 2000 Task Force comprised of representatives from all divisions
of the Company. The Year 2000 Task Force has developed and is currently
implementing a comprehensive initiative to make its IT assets and non-IT assets
Year 2000 compliant. A Year 2000 compliance review and test of the computer
hardware and software used by the Company was conducted in the spring of 1998.
As a result, the Company determined to replace approximately 5% of its existing
personal computers and purchased network and application software upgrades and
related licensing rights.

      The Company's non-IT assets have also been assessed for Year 2000
compliance. Manufacturers, installers, and/or servicers of each have been
contacted for certification of Year 2000 readiness. Of the Company's non-IT
assets, no hardware was determined to be in need of replacement.


                                       19


<PAGE>


      The Company's task force has adopted a formal five-step process
(Awareness, Assessment, Renovation, Validation and Implementation) for making
sure that all of its equipment, computer hardware, software and internal
embedded time clocks are Year 2000 compatible. This process follows the strict
guidelines and recommendations of The Federal Financial Institutions Examination
Council. Additionally the bank must pass periodic examination on its Year 2000
compliance progress from its regulators, The Office of Thrift Supervision.

1. Awareness-Educational initiative on Year 2000 issues and concerns. This phase
has been completed.

2. Assessment-Inventory of IT assets and non-IT assets as well as identification
of third party vendors and service providers with which the Company has material
relationships. This phase has been completed.

3. Renovation-Review of vendor and service providers responses to the Company's
Year 2000 inquiries and development of a follow-up plan and timeline. This phase
has been 90% completed.

4. Validation-The Year 2000 Task Force is currently in this phase. This phase
consists of testing of IT assets and non-IT assets as well as testing of
third-party vendors and service providers for Year 2000 issues. The testing of
IT assets and non-IT assets should be completed by December 31, 1998. The
testing of third-party vendors and service providers has begun and will continue
through June 30, 1999. Testing of all mission-critical systems is scheduled to
be completed by February 28, 1999.

5. Implementation-This phase has begun, and will continue until all
non-compliant hardware or software is replaced. The Company's Year 2000
initiative provides for its Year 2000 readiness to be completed by mid-1999
consistent with OTS guidelines. As the Company progresses through the validation
phase, the Company expects to determine necessary remedial actions and
subsequently provide for their implementation, with respect to any third-party
vendors or service providers who are ultimately determined to not be Year 2000
compliant.

Costs to Address the Year 2000 Issue

      The total cost of carrying out the Company's plan to address the Year 2000
issue is currently estimated to be approximately $74,000, including, and is
comprised primarily of, costs for equipment and software that will be acquired
and depreciated over its useful life in accordance with Company policy. Any
consulting costs have been and will continue to be expensed as incurred. These
currently contemplated Year 2000 compliance costs are expected to be funded
primarily through operating cash flow and are not expected to have a material
adverse effect on the Company's business, financial condition or results of
operations. To date, the costs incurred related to Year 2000, excluding
estimates of personnel costs, are approximately $25,000.

Risks Presented by the Year 2000 Issue

      Because the Company is substantially dependent upon the proper functioning
of its computer systems and the computer systems and services of third parties,
a failure of those computer systems and services to be Year 2000 compliant could
have a material adverse effect on the Company's business, financial condition or
results of operations. The Company relies heavily on third-party vendors and
service providers for its information technology needs. The Company's primary
third-party computer service provider is a computer service bureau that provides
data processing for virtually all of the Company's savings and checking
accounts, real estate lending and real estate loan servicing, general


                                       20


<PAGE>


ledger, fixed assets and accounts payable. This third-party's data processing
services are mission-critical services for the Company and a failure of this
provider's services to be Year 2000 compliant could cause substantial disruption
of the Company's business and could have a material adverse financial impact on
the Company. Live 2000 testing of this third-party data processing service
bureau was performed in August, 1998. This test did not reveal any substantial
problems in the Deposit, Loan, Operations, or General Ledger applications.


      If other third party vendors, with which the Company has material
relationships are not compliant the following problems could result: (i),
important services upon which the Company depends, such as telecommunications
and electrical power, could be interrupted, (ii) in the case of third-party
service providers, the Company could receive inaccurate or outdated information,
which could impair the Company's ability to perform critical data functions,
such as the processing of deposit accounts, loan servicing and internal
accounting, and (iii) in the case of governmental agencies, such as the FHLB,
and correspondent banks, such agencies and financial institutions could fail to
provide funds to the Company, which could materially impair the Company's
liquidity and affect the Company's ability to fund loans and deposit
withdrawals. In addition, whether or not the Company is Year 2000 compliant, the
Company may experience an outflow of deposits if customers are concerned about
the integrity of financial institutions' records regarding customers' accounts.

Contingency Plans

      The Company has expanded its Business Resumption Contingency Plan manual
to include a Year 2000 Contingency plan. This plan is modeled after the FFIEC
guidelines for Year 2000 Contingency Planning. This plan includes alternative
products and vendors for all mission critical products and services. The plan
includes a risk analysis of large depositors and business and commercial loan
clients. The plan also includes the team task force structure for incident
resolution.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

        For the above-captioned information, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Interest Rate
Sensitivity and Market Risk Analysis."


                                       21


<PAGE>



                           PART II. OTHER INFORMATION

Item 1. Legal Proceedings.
        ------------------

           The Company is involved as plaintiff or defendant in various legal
actions incident to its business, none of which is believed by management to be
material to the financial condition of the Company.

Item 2. Changes in Securities.
        ----------------------

           None.

Item 3. Defaults Upon Senior Securities.
        --------------------------------

           None.

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

           None.

Item 5. Other Information.
        ------------------

           None.

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

        (a) Exhibit 3(i) - Certificate of Incorporation of Monterey Bay Bancorp,
            Inc., incorporated by reference to the Company's Quarterly Report on
            Form 10-Q for the quarter ended March 31, 1995.

            Exhibit 3(ii) - Bylaws of Monterey Bay Bancorp, Inc., incorporated
            by reference to the Company's Quarterly Report on Form 10-Q for the
            quarter ended March 31, 1995.

            Exhibit 11.0 - Computation of per share earnings (filed herewith).

            Exhibit 27.0 - Financial data schedule.

        (b) Reports on Form 8-K:

            None.


                                       22


<PAGE>



                                   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.


                                       MONTEREY BAY BANCORP, INC.

Date     November 10, 1998                By /s/ Marshall G. Delk
      _______________________                ____________________
                                             Marshall G. Delk, President,
                                             Chief Operating Officer
                                             and Director


Date     November 10, 1998                By /s/ Philip Safran
      _______________________                _________________
                                             Philip Safran, Vice President
                                             and Controller



                                       23