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 June 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.)

36 BRENNAN STREET, WATSONVILLE, CALIFORNIA                                                         95076
--------------------------------------------------------------------------------------------------------
(Address of principal executive offices)                                                      (Zip Code)
</TABLE>

                                 (408) 722-3885
--------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)

                                 Not Applicable
--------------------------------------------------------------------------------
              (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: 3,923,102 shares of common
stock, par value $.01 per share, were outstanding as of August 7, 1998.

<PAGE>




                            MONTEREY BAY BANCORP, INC.
                                      INDEX

PART I. FINANCIAL INFORMATION                                            PAGE
        ---------------------                                            ----

     Item 1. Condensed Consolidated Statements of Financial Condition as of
             June 30, 1998 and December 31, 1997.........................  1

             Condensed Consolidated Statements of Operations for the
             Three and Six Months Ended June 30, 1998 and 1997...........  2

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

             Condensed Consolidated Statements of Cash Flows for the
             Six Months Ended June 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.. 19

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

     Item 1. Legal Proceedings........................................... 20

     Item 2. Changes in Securities....................................... 20

     Item 3. Defaults Upon Senior Securities............................. 20

     Item 4. Submission of Matters to a Vote of Security Holders......... 20

     Item 5. Other Information........................................... 20

     Item 6. Exhibits and Reports on Form 8-K............................ 21

SIGNATURES............................................................... 22



<PAGE>



ITEM 1.  FINANCIAL STATEMENTS.
-----------------------------

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

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

                                                      JUNE 30,     DECEMBER 31,
                                                        1998          1997
                                                     ----------    ------------
ASSETS
Cash and due from depository institutions             $  5,968      $  7,214
Overnight deposits                                       9,255         6,300
                                                      --------      --------
      Total cash and cash equivalents                   15,223        13,514

Certificates of deposit                                      -            99
Loans held for sale, at market                           1,095           514
Securities available for sale:
   Mortgage-backed securities (amortized cost of
      $106,920 at June 30, 1998 and $70,234 at
      December 31, 1997)                               108,132        70,465
   Investment securities (amortized cost of
      $43,262 at June 30, 1998
      and $40,351 at December 31, 1997)                 43,271        40,355
Securities held to maturity:
   Mortgage-backed securities (market value of
      $117 at June 30, 1998
      and $138 at December 31, 1997)                       119           142
   Investment securities (market value of $145 at
      December 31, 1997)                                     -           145
Loans receivable held for investment (net of
   allowance for loan losses at June 30, 1998,
   $2,693; and at December 31, 1997, $1,669)           246,211       263,751
Federal Home Loan Bank stock, at cost                    3,482         3,383
Premises and equipment, net                              5,971         4,817
Accrued interest receivable                              2,773         2,339
Core deposit premiums and other intangibles, net         3,979         3,229
Real estate owned                                          193           321
Other assets                                             5,744         5,022
                                                      --------      --------

TOTAL ASSETS                                          $436,193      $408,096
                                                      ========      ========

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
   Savings deposits                                   $364,954      $320,559
   Federal Home Loan Bank advances                      16,182        32,282
   Securities sold under agreements to repurchase        5,110         5,200
   Accounts payable and other liabilities                2,994         2,122
                                                      --------      --------
      Total liabilities                                389,240       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 3,593,750 shares issued
      (3,138,563 shares outstanding at June 30, 1998; and
      3,229,679 shares outstanding at December 31, 1997)    36            36
   Additional paid-in capital                           27,458        27,270
   Unearned shares held by employee stock ownership plan
      (186,875 at June 30, 1998; and 201,250 at
      December 31, 1997)                                (1,495)       (1,610)
   Treasury stock, at cost (455,187 shares at
      June 30, 1998; and 364,071 shares
      at December 31, 1997)                             (6,709)       (4,642)
   Retained earnings, substantially restricted          26,944        26,741
   Accumulated other comprehensive income - unrealized
      gain on securities                                   719           138
                                                      --------      --------

      Total stockholders' equity                        46,953        47,933
                                                      --------      --------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY            $436,193      $408,096
                                                      ========      ========

See notes to condensed consolidated financial statements.


                                       1


<PAGE>



MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

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

                                    THREE MONTHS ENDED    SIX MONTHS ENDED
                                         JUNE 30,             JUNE 30,
                                    ------------------    ----------------
                                       1998     1997        1998     1997
INTEREST INCOME:
   Loans receivable                   $4,944  $4,739      $10,360 $ 9,420
   Mortgage-backed securities          1,826   1,790        2,974   3,874
   Other investment securities           777     896        1,537   1,767
                                      ------  ------      ------- -------

         Total interest income         7,547   7,425       14,871  15,061
                                      ------  ------      ------- -------

INTEREST EXPENSE:
   Savings deposits                    4,204   3,860        8,068   7,722
   FHLB advances and other borrowings    387     764          899   1,594
                                      ------  ------      ------- -------

         Total interest expense        4,591   4,624        8,967   9,316
                                      ------  ------      ------- -------

NET INTEREST INCOME BEFORE PROVISION
   FOR LOAN LOSSES                     2,956   2,801        5,904   5,745

PROVISION FOR LOAN LOSSES                496     102          605     225
                                      ------  ------      ------- -------


NET INTEREST INCOME AFTER PROVISION
   FOR LOAN LOSSES                     2,460   2,699        5,299   5,520
                                      ------  ------      ------- -------

NONINTEREST INCOME:
   Gain (Loss) on sale of investment
      securities                           -       2          (17)      2
   Gain on sale of real estate owned       -       -            9       -
   Commissions from sales of
      noninsured products                166      94          289     182
   Customer service charges              195     133          366     259
   Income from loan servicing             78      60          124     119

   Other income                           53      44          121      83
                                      ------  ------      ------- -------

         Total noninterest income        492     333          892     645
                                      ------  ------      ------- -------

GENERAL AND ADMINISTRATIVE EXPENSE:
   Compensation and employee benefits  1,341   1,095        2,513   2,154
   Occupancy and equipment               291     269          567     527
   Deposit insurance premiums             40      63           62     113
   Data processing fees                  200     173          383     341
   Legal and accounting expenses         322     122          418     230
   Stationery, telephone and office
      expenses                           143     138          251     268
   Advertising and promotion             102      70          162     136
   Amortization of core deposit
      premiums                           168     209          346     416
   Other expenses                        379     262          725     553
                                      ------  ------      ------- -------

         Total general and
            administrative expense     2,986   2,401        5,427   4,738
                                      ------  ------      ------- -------

INCOME (LOSS) BEFORE INCOME TAX EXPENSE  (34)    631          764   1,427


INCOME TAX EXPENSE                        31     256          391     581
                                      ------  ------      ------- -------

NET INCOME (LOSS)                     $  (65) $  375      $   373 $   846
                                      ======  ======      ======= =======

BASIC EARNINGS (LOSS) PER SHARE       $(0.02) $  .12      $   .13 $   .27
                                      ======  ======      ======= =======

DILUTED EARNINGS (LOSS) PER SHARE     $(0.02) $  .12      $   .12 $   .27
                                      ======  ======      ======= =======

CASH DIVIDENDS PER SHARE              $    -  $    -      $   .07 $   .05
                                      ======  ======      ======= =======


See notes to condensed consolidated financial statements.


                                       2

<PAGE>



MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 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>
 Balance at
    December 31, 1997  3,229,679    $36   $27,270   $(1,610)  $(4,642)   $26,741       $138       $47,933
 Purchase of
    treasury stock      (113,745)                              (2,344)                             (2,344)
 Options exercised
    using treasury stock  22,629                                  277         56                      333
 Dividends paid                                                             (226)                    (226)
 Earned ESOP shares                           188       115                                           303

 Comprehensive income:
    Net earnings                                                             373                      373      $373
    Change in unrealized
       gains on securities
       available for sale                                                               568           568       568
    Reclassification
       adjustment for losses
       included in income                                                                13            13        13
                       ----------------------------------------------------------------------------------      ----
 Balance at
    June 30, 1998      3,138,563    $36   $27,458   $(1,495)  $(6,709)   $26,944       $719       $46,953      $954
                       ==================================================================================      ====
</TABLE>


(1) The number of shares of common stock includes 287,500 shares which are
    pledged as security for a loan to the Bank's ESOP. Shares earned at June 30,
    1998 and December 31, 1997 were 100,625 and 86,250, respectively.
(2) The Company held 455,187 shares of repurchased Company common stock as of
    June 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
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (Unaudited) (Dollars in thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                       SIX MONTHS ENDED
                                                                            JUNE 30,
                                                                      -------------------
                                                                        1998       1997
                                                                      --------   --------
<S><C>
OPERATING ACTIVITIES:
   Net income                                                       $    373   $    846
   Adjustments to reconcile net income to net cash provided by
      operating activities:
      Depreciation and amortization of premises and equipment            227        212
      Amortization of core deposit premiums                              346        416
      Amortization of purchase premiums, net of discounts                543        238
      Loan origination fees deferred, net                                (86)       182
      Amortization of deferred loan fees                                (147)       (88)
      Provision for loan losses                                          605        225
      Compensation expense related to ESOP shares released               304        185
      Unrealized loss on sale of investment securities, net of taxes     581          -
      Loss on sale of investment securities                               17         (2)
      Gain on sale of real estate owned                                   (9)         -
      Losses on sale of fixed assets                                       8          -
      Charge-offs on loans receivable, net of recoveries                   3        (10)
      Originations of loans held for sale                             (5,888)      (897)
      Proceeds from sales of loans originated for sale                 5,307        791
      Change in income taxes payable and deferred income taxes             3       (110)
      Change in other assets                                            (182)      (115)
      Change in interest receivable                                     (434)        65
      Change in accounts payable and other liabilities                   466        667
                                                                    --------   --------
         Net cash provided by operating activities                     2,037      2,605
                                                                    --------   --------

INVESTING ACTIVITIES:
   Loans originated for the portfolio, net                           (46,101)   (19,760)
   Mortgage-backed securities acquired in exchange for
      securitized loans                                               48,370          -
   Purchases of loans receivable                                     (32,099)   (14,661)
   Principal payments on loans receivable                             46,708     13,871
   Principal paydowns on mortgage-backed securities                   10,785      7,916
   Unrealized gain on securities                                        (987)         -
   Purchases of investment securities available for sale             (63,701)         -
   Proceeds from sales of investment securities available for sale     4,971     24,722
   Proceeds from maturities of investment securities                   8,245      3,109
   Decreases in certificates of deposit                                   99          -
   Purchases of FHLB stock                                               (99)     1,763
   Purchases of premises and equipment, net                           (1,390)      (241)
                                                                    --------   --------
      Net cash (used in) provided by investing activities            (25,199)    16,719
                                                                    --------   --------
</TABLE>


                                  -continued-


                                       4

<PAGE>




MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

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

<TABLE>
<CAPTION>
                                                                   SIX MONTHS ENDED
                                                                       JUNE 30,
                                                                 ---------------------
                                                                   1998        1997
                                                                 ---------   ---------
<S><C>
FINANCING ACTIVITIES:
   Net increase  in savings deposits                              $ 14,745    $    377
   Assumption of savings deposits, net of core deposit premiums     28,554           -
   Purchase of investment company assets                                           (86)
   Repayments of Federal Home Loan Bank advances, net              (16,100)    (15,025)
   Repayments of reverse repurchase agreements, net                    (90)          -
   Cash dividends paid to stockholders                                (226)       (162)
   Purchases of treasury stock, net                                 (2,012)        (22)
                                                                  --------    --------

      Net cash provided by (used in) financing activities           24,871     (14,918)
                                                                  --------    --------

NET INCREASE IN CASH AND CASH EQUIVALENTS                            1,709       4,405

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                    13,514       4,978
                                                                  --------    --------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                        $ 15,223    $  9,383
                                                                  ========    ========
CASH PAID DURING THE PERIOD FOR:
   Interest on savings deposits and advances                      $  9,217    $  9,245
   Income taxes                                                        719         740

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                           -         395
</TABLE>



See notes to condensed consolidated financial statements.


                                       5

<PAGE>



                           MONTEREY BAY BANCORP, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 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 June 30, 1998 and December 31, 1997, the
results of its operations for the six months ended June 30, 1998 and 1997, and
its cash flows for the six months ended June 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.

        Effective December 1997, the Company adopted SFAS No. 128, "EARNINGS PER
SHARE," which superseded APB No. 15, "EARNINGS PER SHARE." SFAS 128 establishes
standards for computing and presenting earnings per share and applies to
entities with publicly held common stock or potential common stock (i.e.
securities such as options, warrants, convertible securities, or contingent
stock agreements). The statement replaces the presentation of primary earnings
per share with a presentation of basic earnings per share and requires dual
presentation of basic and diluted earnings per share on the face of the income
statement. SFAS 128 is effective for financial statements issued for periods
ending after December 15, 1997 and requires restatement of all presented
prior-period earnings per share data.

        In February 1997, the FASB issued SFAS No. 129, "DISCLOSURE OF
INFORMATION ABOUT CAPITAL STRUCTURE." This statement establishes standards for
disclosing information about an entity's capital structure. It supersedes
specific disclosure requirements of APB SFAS No. 47, "DISCLOSURE OF LONG-TERM
OBLIGATIONS," and consolidates them in this statement for ease of retrieval and
for greater visibility to nonpublic entities. SFAS 129 is effective for
financial statements issued for periods ending after December 15, 1997. It
contains no changes in disclosure requirements for entities that were previously
subject to the requirements of Opinions No. 10 and No. 15 and SFAS No. 47, and
therefore is not expected to have a significant impact on the consolidated
financial condition or results of operations of the Company.

        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


                                       6


<PAGE>


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 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 June 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 SIX AND THREE MONTH PERIODS ENDED JUNE 30, 1998
AND 1997

Overview
--------

        The Company reported a net loss of $65,000, or $.02 per basic share, for
the quarter ended June 30, 1998, compared to net income of $375,000, or $.12
basic per share, for the second quarter of 1997. Diluted loss per share was $.02
for the second quarter of 1998, compared to $.12 a year ago. Net income for the
first six months of 1998 was $373,000, or $.13 per basic share, a decline from
net income of $846,000, or $.27 per basic share, recorded for the first six
months of 1997. Diluted earnings per share for the six month period ended June
30, 1998 was $.12 compared to $.27 for the same period in 1997.


                                       8


<PAGE>


      While net interest income before provision for loan losses and noninterest
income rose in 1998 from comparable periods in 1997, these improvements were
more than offset by increases in provision for loan losses and general and
administrative expense. The increase in the provision for loan losses was
attributable to potential losses on loans secured by properties damaged by
unusually severe winter weather conditions in its market area and to a
significantly lesser extent due to additional loss provisions related to
increased higher risk business lending. Increases in general and administrative
expense for the quarter and the six months ended June 30, 1998 reflected two
non-reoccurring expenses as well as higher compensation and employee benefits.
The Company's wholly owned subsidiary, Monterey Bay Bank (the "Bank"), hired
staff to support the deposit growth and the expansion of its branch locations
and new product lines and services. During the second quarter of 1998, the Bank
opened its eighth full service branch location as well as closed on the purchase
and assumption of approximately $32.0 million in loans and $28.6 million in
deposits. These assumed deposits were added to an existing branch location,
thereby increasing deposits to approximately $42 million in that branch.

        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, and business lending activities. As part of its growth strategy,
on April 17, 1998, the Company completed the assumption of approximately $28.6
million of deposit liabilities from a Santa Cruz-based federal savings bank, in
exchange for an approximately equal amount of loan assets. In May of 1998, the
Company opened a new full service bank branch in Felton, California, in a leased
facility formerly occupied by Coast Federal Savings. 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, in general and administrative expenses. Such costs are
expected to continue as the Company further expands its branch locations,
product lines, and services. 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 June 30, 1998, increased by 1.6% to
$7.5 million, compared to $7.4 million for the second quarter of 1997. For the
six months ended June 30, 1998, total interest income was $14.9 million, a
decrease of 1.3% or $190,000 from the amount recorded for the first six months
of 1997. The primary reason for the

                                       9


<PAGE>


slight increase in interest income for the three months ended June 30, 1998
compared to the same period in 1997 is due to a $10.0 million increase in
interest earning assets during the three months ended June 30, 1998. Most of the
$10.0 million increase came in the form of higher yielding loans receivable and
mortgage-backed securities. The primary reason for the slight decline in
interest income for the six months ended June 30, 1998 compared to the same
period in 1997 is a decline in both rate and volume, in the mortgage-backed and
investment security portfolios. These declines resulted from an increase in
prepayments on higher yielding mortgage-backed securities and early call of
investment securities, both relating to the current low interest rate
environment.

      The weighted average yield on interest earning assets decreased slightly
to 7.39% and 7.45%, respectively, for the quarter and six months ended June 30,
1998, compared to 7.44% and 7.48%, respectively, for the similar periods in
1997. The average yield on loans receivable increased to 8.07% for both the
three and six months ended June 30, 1998, compared to 7.93%, for both the three
and six months ended June 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 6.56% and 6.60%, respectively, for the three and six months ended June 30,
1998 from 7.03% and 7.15%, respectively for the three and six months ended June
30, 1997.

      Interest expense was $4.6 million and $9.0 million, respectively for the
quarter and six months ended June 30,1998, compared to $4.6 million and $9.3
million, respectively for the similar periods a year ago. The $300,000 decrease
in interest expense during the six months ended June 30, 1998 from 1997 was due
to a slight decline in average interest bearing liabilities dropping from $372
million for the period ended June 30, 1998 to $368 million for the same period
in 1997. Another contributing factor was the decline in the weighted average
rate of interest bearing liabilities dropping from 5.04% for the six month
period ended June 30, 1997 to 4.92% for same period in 1998. These changes are
due to a continued success in reducing higher cost borrowing and replacing them
with lower cost deposit accounts. This trend continued in the quarter ended June
30, 1998 with an 11.7% increase in average deposits, increasing from $318
million for the three months ended June 30, 1997 to $338 million for the similar
period in 1998.


                                       10

<PAGE>



        The changes in net interest income for the three and six months ended
June 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 JUNE 30,
                                            1998 COMPARED WITH 1997
                                              INCREASE (DECREASE)
                                         -----------------------------
                                         VOLUME      RATE          NET
       Interest income:
           Loans                         $ 120      $  85        $ 205
           Mortgage-backed securities      166       (131)          35
           Investment securities          (102)       (17)        (119)
                                         -----      -----        -----
                                           184        (63)         121
                                         -----      -----        -----
       Interest expense:
           On customer deposits            336          7          343
           On borrowings                  (398)        21         (377)
                                         -----      -----        -----
                                           (62)        28          (34)
                                         -----      -----        -----

       Change in net interest income     $ 246      $ (91)       $ 155
                                         =====      =====        =====

                                           SIX MONTHS ENDED JUNE 30,
                                            1998 COMPARED WITH 1997
                                              INCREASE (DECREASE)
                                         -----------------------------
                                         VOLUME      RATE          NET

       Interest income:
           Loans                         $ 764      $ 175        $ 939
           Mortgage-backed securities     (649)      (251)        (900)
           Investment securities          (169)       (61)        (230)
                                         -----      -----        -----
                                           (54)      (137)        (191)
                                         -----      -----        -----
       Interest expense:
           On customer deposits            506       (161)         345
           On borrowings                  (742)        47         (695)
                                         -----      -----        -----
                                          (236)      (114)        (350)
                                         -----      -----        -----

       Change in net interest income     $ 182      $ (23)       $ 159
                                         =====      =====        =====


                                       11


<PAGE>



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

<TABLE>
<CAPTION>
                                                   THREE MONTHS ENDED JUNE 30,
                                               -----------------------------------
                                                      1998              1997
                                               -----------------  ----------------
                                               AVERAGE    YIELD/  AVERAGE   YIELD/
                                               BALANCE     RATE   BALANCE    RATE
                                               -------    ------  -------   ------
<S><C>
   Interest earning assets:
    Loans                                        $245      8.07%    $239     7.93%
    Mortgage-backed securities                    111      6.56      102     7.03
    Investment securities                          52      5.93       58     6.12
                                                 ----               ----
       Total interest earning assets              408      7.39      399     7.44
   Noninterest earning assets                      19                 18
                                                 ----               ----
    Total assets                                 $427               $417
                                                 ====               ====

   Interest bearing liabilities:
    Deposits                                     $354      4.76%    $317     4.88%
    Borrowings                                     25      6.22       52     5.90
                                                 ----               ----
       Total interest bearing liabilities         379      4.86      369     5.02
   Noninterest bearing
   liabilities                                      3                  3
   Stockholders' equity                            45                 45
                                                 ----               ----
    Total liabilities and stockholders' equity   $427               $417
                                                 ====               ====

   Net interest rate spread                                2.54%             2.42%
   Net interest margin                                     2.89%             2.81%
   Ratio of interest bearing assets to
      interest bearing liabilities                          108%              108%

<CAPTION>
                                                     SIX MONTHS ENDED JUNE 30,
                                               -----------------------------------
                                                      1998              1997
                                               -----------------  ----------------
                                               AVERAGE    YIELD/  AVERAGE   YIELD/
                                               BALANCE     RATE   BALANCE    RATE
                                               -------    ------  -------   ------
<S><C>
   Interest earning assets:
    Loans                                        $257      8.07%    $237     7.93%
    Mortgage-backed securities                     90      6.60      108     7.15
    Investment securities                          52      5.88       58     6.23
                                                 ----               ----
       Total interest earning assets              399      7.45      403     7.48
   Noninterest earning assets                      17                 17
                                                 ----               ----
    Total assets                                 $416               $420
                                                 ====               ====

   Interest bearing liabilities:
    Deposits                                     $338      4.81%     $318    4.90%
    Borrowings                                     29      6.15        54    5.87
                                                 ----                ----
       Total interest bearing liabilities         367      4.92       372    5.04
   Noninterest bearing liabilities                  3                   3
   Stockholders' equity                            46                  45
                                                 ----                ----
    Total liabilities and stockholders' equity   $416                $420
                                                 ====                ====

   Net interest rate spread                                2.53%             2.44%
   Net interest margin                                     2.96%             2.85%
   Ratio of interest bearing assets to
      interest bearing liabilities                          109%              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 six months ended June 30, 1998, the provision for
loan losses was $496,000 and $605,000, respectively. The Company recorded a
provision for loan losses of $102,000 for the quarter ended June 30, 1997 and
$225,000 for the six months ended June 30, 1997. The Company increased its
provision for loan losses largely due to an increase in higher risk forms of
lending and approximately $300,000 in specific reserve additions related to two
residential properties damaged during severe winter weather. At June 30, 1998,
the Company's allowance for loan losses totaled $2.7 million or 1.08% of loans
receivable, compared to $1.7 million or .63% of loans receivable at December 31,
1997.

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

      Noninterest income increased by 48% to $492,000 for the second quarter of
1998, compared to $333,000 a year ago. Noninterest income for the first six
months of 1998 increased to $892,000 or 38% from $645,000 for the same period in
1997. During both the second quarter of 1998 and the first six 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 $166,000 and $289,000,
respectively, from the sale of insurance and investment products for the three
and six months ended June 30, 1998, compared to $94,000 and $182,000,
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 six months ended June 30, 1998, customer service charges
amounted to $195,000 and $366,000, respectively, compared to $94,000 and
$182,000 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
$27,000 and $58,000 in service charges for the three and six months ended June
30, 1998.

        Loan servicing income was $78,000 and $124,000, respectively, for the
three and six months ended June 30, 1998, compared to $60,000 and $119,000 for
the same periods in 1997. The outstanding principal balance of mortgage loans
serviced for others was $88.8 million at June 30, 1998, compared to $57.9
million at June 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 FHLMC or FNMA mortgage-backed securities. These
conversions provide increased liquidity because the mortgage-backed


                                       13

<PAGE>


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 $3.0 million and $5.4 million,
respectively, for the quarter and six months ended June 30, 1998, compared to
$2.4 million and $4.7 million, respectively, for the similar periods in 1997.
General and administrative expenses were $585,000 and $689,000 higher,
respectively, for the three month period and six month period ended June 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 approximately $210,000 in charges, including associated related
legal costs, resulting from the settlement of two outstanding legal matters,
higher compensation and employee benefits, as new employees were hired to
support the Company's deposit growth and the expansion of its branch locations
and new product lines and services.

                                       14

<PAGE>



COMPARISON OF CHANGES IN FINANCIAL CONDITION

        Total assets of the Company were $436.2 million at June 30, 1998,
compared to $408.1 million at December 31, 1997, an increase of $28.1 million,
or 6.9%.

      Mortgage-backed securities and investment securities increased by $40.6
million, or 36.7%, during the six months ended June 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 six months ended June 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 $246.2 million at June 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
$46.7 million in principal payments received during the six month period ended
June 30, 1998. This decrease was partially offset by the origination of
approximately $46.1 million in loans for the portfolio and the purchase of
approximately $32.0 million in loans from Commercial Pacific Bank. Residential
real estate loans continue to represent the largest category in the loan
portfolio. At June 30, 1998, total one-to-four family and multi-family
residential real estate loans were $181.4 million, or 74.0% of loans receivable,
compared to $228.0 million, or 86.0% of total loans, at December 31, 1997. The
Company originated $26.4 million and $19.7 million, respectively of portfolio
loans during the first quarter and second quarter of 1998. This is improved from
$13.0 million and $6.8 million, respectively for the first quarter and second
quarter 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, multifamily, and business
lending. At June 30, 1998, the Company's commercial real estate loan portfolio
was $28.3 million, or 11.5% of the loan portfolio, up from $20.9 million, or
7.7% of the loan portfolio at December 31, 1997. At June 30, 1998, the Company
had $45.4 million of construction loans, of which $17.4 million, or 38.0%, had
not yet been disbursed. Net construction loans totaled $28.0 million or 11.4% of
loans receivable at June 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. The remainder of the
loans receivable was comprised of primarily business loans totaling $7.5 million
or 3.1% of total loans receivable at June 30, 1998.

      During the six months ended June 30, 1998, the Company's liabilities
increased by $29.0 million to $389.2 million, from $360.2 million at December
31, 1997. The increase in liabilities was attributable to growth in deposits of
$44.4 million, which was partially offset by a $16.1 million decrease in
advances from the FHLB. Growth in deposits during the six month period ended
June 30, 1998 was due to the assumption of approximately $28.6 million in
deposits from Commercial Pacific Bank and in market deposit growth of $14.7
million. Total savings deposits increased during the six month period ended June
30, 1998 to $365.0 million, or by 13.8% from $320.6 million at December 31,
1997. Continued emphasis has been placed on growth of low cost transaction
deposit accounts. Transaction deposit accounts are other than time deposits.
Transaction accounts grew from $66.9 million, or 18.3% of total deposits at
December 31, 1997 to $90.7 million, or 24.8% of total deposits at June 30, 1998.
Average transaction deposits at June 30, 1998 bore a weighted average interest
rate of 2.53%. The decrease in FHLB advances of $16.1 million is directly
attributable to the increase in deposits.

                                       15

<PAGE>



        At June 30, 1998, shareholders' equity was $47.0 million, compared to
$47.9 million at December 31, 1997. Equity was reduced during the first six
months as a result of stock repurchases by the Company totaling $2.1 million,
and by the payment of cash dividends totaling $226,000, or $.07 per share, on
the Company's outstanding common stock. Offsetting these reductions were
increases in equity resulting from the first six 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 $14.56 at June 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 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.

                                       16

<PAGE>



      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 2.99% at March 31, 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 June 30, 1998, the Company had $1.4 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 June 30, 1998,
impaired loans totaled $3.0 million, compared to $1.8 million at December 31,
1997. Impaired loans at June 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 $32.0 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 June 30, 1998, the Company had real estate owned totaling $193,000,
consisting of two one- to four-family residential properties acquired through
foreclosure in 1997.

      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 $6.2 million, or
1.42% of total assets, at June 30, 1998 from $2.5 million, or .61% of assets, at
December 31, 1997. At June 30, 1998, the Company had $6.2 million of assets
classified as substandard and no assets classified as doubtful or loss.
Substandard assets included $1.5 million of loans past due 90 days or more and
$4.5 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 June 30,
1998 was a one-to-four family residential mortgage with an outstanding principal
balance of $385,880.

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

                                       17

<PAGE>

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 June 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 June 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 CAPITAL  WELL CAPITALIZED
                                                REQUIREMENTS      REQUIREMENTS        ACTUAL
                                               ---------------  ---------------- ---------------
                                               AMOUNT  RATIO    AMOUNT   RATIO   AMOUNT    RATIO
                                               ------  -------  -------  ------  -------  ------
<S><C>
        AS OF JUNE 30, 1998:
           Total capital
              (to risk-weighted assets)       $18,611  8.00%   $23,264  10.00%   $35,469  15.25%
           Tier 1 capital
              (to risk-weighted assets)           N/A   N/A     13,822   6.00%    33,201  14.41%
           Core (tier 1) capital
              (to adjusted assets)             16,890  4.00%    20,914   5.00%    33,201   7.94%
           Tangible capital
              (to tangible assets)              6,274  1.50%       N/A    N/A     33,201   7.94%


<CAPTION>
                                               MINIMUM CAPITAL  WELL CAPITALIZED
                                                REQUIREMENTS      REQUIREMENTS        ACTUAL
                                               ---------------  ---------------- ---------------
                                               AMOUNT  RATIO    AMOUNT   RATIO   AMOUNT    RATIO
                                               ------  -------  -------  ------  -------  ------
<S><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 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 June 30, 1998, the Bank would have continued to substantially exceed
minimum risk based capital requirements.

                                       18


<PAGE>


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 June 30, 1998, the Company's liquidity ratio was
7.80%, 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
---------

        In 1997, the Company initiated a program to ensure its computer systems
and applications are compliant for the year 2000. Many existing computer
programs and application software products in the marketplace were originally
designed to recognize calendar years by their last two digits. As a result, the
year 1999 (i.e. `99') may be the maximum date value these systems will be able
to process accurately. Computer programs that can only distinguish the final two
digits of the year entered are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest, or delinquency based on the wrong date
or are expected to be unable to compute payment, interest, or delinquency.

        The Company has conducted a review and evaluation of its computer
systems to identify systems and applications which could be adversely impacted
by year 2000 issues, and is working with providers and software vendors to
evaluate and manage the risks and costs associated with this problem. The
majority of the material data processing of the Bank is provided by a third
party service bureau. The service bureau has advised the Company that it expects
to resolve potential problems before the year 2000. However, if the service
bureau is unable to resolve these problems in a timely manner, the Company could
experience significant data processing delays, mistakes, or failures.

        The Company has established a target date of December 31, 1998 to
complete all identification, evaluation, and testing of system changes to
achieve year 2000 compliance. Testing and conversion of existing and replacement
system applications are expected to cost less than $50,000 over the next two
years. The Company presently believes that with the planned modifications to
existing systems and conversion to new systems, the year 2000 compliance issue
will be resolved on a timely basis and will not pose significant operational
problems for the Company.

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."


                                       19

<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.
        ----------------------------------------------------

           The Company held its Annual Meeting of Shareholders on May 21, 1998.
At the Annual Meeting, the Shareholders elected directors P. W. Bachan, Edward
K. Banks, Nicholas C. Biase, and Louis Resetar, Jr. to three year terms.  The
following directors continued in office (their remaining terms follow their
names): Eugene R. Friend  (two years), Donald K. Henrichsen (two years),
McKenzie Moss (two years), Stephen G. Hoffmann (one year), Steven Franich (one
year), Gary L. Manfre (one year), Marshall G. Delk (one year).  The shareholders
also ratified the appointment of Deloitte & Touche, LLP as independent auditors
of the Company for the year ending December 31, 1998.

                  The vote on each matter was as follows.

           1.  For Directors
                                                                    BROKER
                                             FOR       WITHHELD    NON-VOTES
                  P. W. Bachan            1,888,875    322,997         -
                  Edward K. Banks         1,888,675    323,197         -
                  Nicholas C. Biase       2,192,838     19,034         -
                  Louis Resetar, Jr.      1,870,421    341,451         -

           2.  Ratification of the appointment of Deloitte & Touche, LLP as the
               independent auditors for the Company

                                                                    BROKER
                                             FOR       WITHHELD    NON-VOTES
                                          1,894,667    315,589       1,616

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

           None.



                                       20


<PAGE>


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.


                                       21



<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 August 10, 1998                            By /s/ Marshall G. Delk
                                                   ____________________
                                                   Marshall G. Delk, President,
                                                   Chief Operating Officer
                                                      and Director

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


                                       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 August 10, 1998                            By ________________
                                                   Marshall G. Delk, President,
                                                   Chief Operating Officer
                                                      and Director

Date August 10, 1998                            By ________________
                                                   Philip Safran,
                                                   Vice President
                                                      And Controller

                                       23