<TABLE>
<CAPTION>

                                                     UNITED STATES
                                          SECURITIES AND EXCHANGE COMMISSION
                                                 WASHINGTON, DC 20549

                                                       FORM 10-Q

(Mark One)
<S>      <C>    
[ X ]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                                     For the quarterly period ended March 31, 1999

                                                          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)

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


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

                                                (831) 768-4800
-------------------------------------------------------------------------------------------------------------
                            (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:  3,535,387 shares of common stock, par value $.01 per share, were outstanding as of
May 12, 1999.
</TABLE>



<PAGE>


<TABLE>
<CAPTION>
                                              MONTEREY BAY BANCORP, INC.

                                                         Index
<S>                                                                                                                 <C> 
PART I.          FINANCIAL INFORMATION                                                                              Page

                 Item 1.    Condensed Consolidated Statements of Financial Condition as of
                            March 31, 1999 and December 31, 1998..................................................    1

                            Condensed Consolidated Statements of Operations for the
                            Three Months Ended March 31, 1999 and 1998............................................    2

                            Condensed Consolidated Statement of Stockholders' Equity for the
                            Three Months Ended March 31, 1999.....................................................    3

                            Condensed Consolidated Statements of Cash Flows for the
                            Three Months Ended March 31, 1999.....................................................    4

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

                 Item 2.
                            Management's Discussion and Analysis of Financial Condition
                            and Results of Operations.............................................................    7

                 Item 3.    Quantitative and Qualitative Disclosure of Market Risk................................   17

PART II.         OTHER INFORMATION

                 Item 1.    Legal Proceedings.....................................................................   18

                 Item 2.    Changes in Securities.................................................................   18

                 Item 3.    Defaults Upon Senior Securities.......................................................   18

                 Item 4.    Submission of Matters to a Vote of Security Holders...................................   18

                 Item 5.    Other Information.....................................................................   18

                 Item 6.    Exhibits and Reports on Form 8-K......................................................   18

SIGNATURES........................................................................................................   19
</TABLE>



<PAGE>


Item 1.  Financial Statements.

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998 (Dollars in thousands)
-----------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                March 31,         December 31,
                                                                                  1999                1998
                                                                              --------------      -------------
<S>                                                                           <C>                 <C>
ASSETS

Cash and due from depository institutions                                     $    7,106          $    11,626
Overnight deposits                                                                 2,625                5,325
                                                                              ----------          -----------
      Total cash and cash equivalents                                              9,731               16,951

Loans held for sale, at market                                                       437                2,177

Securities available for sale:
   Mortgage-backed securities (amortized cost of $89,080 at March  31, 1999
      and $97,158 at December 31, 1998)                                           89,556               98,006

   Corporate trust preferreds (amortized cost, of $15,079 at March  31, 1999
      and $18,658 at December 31, 1998                                            15,571               19,154

   Investment securities (amortized cost of $252 at December 31, 1998)                 -                  256

Securities held to maturity:

   Mortgage-backed securities (market value of $86 at March 31, 1999
      and $96 at December 31, 1998)                                                   87                   97

Loans receivable held for investment (net of allowance for loan losses
   at March 31, 1999, $2,887; and at December 31, 1998, $2,780)                  317,713              298,775

Federal Home Loan Bank stock, at cost                                              3,089                3,039
Premises and equipment, net                                                        6,234                6,316
Accrued interest receivable                                                        2,596                2,537
Core deposit premiums and other intangibles, net                                   3,456                3,630
Other assets                                                                       2,575                3,881
                                                                              ----------          -----------
TOTAL ASSETS                                                                  $  451,045          $   454,819
                                                                              ==========          ===========
LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
   Savings deposits                                                           $  368,699          $   370,677
   Federal Home Loan Bank advances                                                33,582               35,182
   Securities sold under agreements to repurchase                                  4,170                4,490
   Accounts payable and other liabilities                                          1,970                2,581
                                                                              ----------          -----------
      Total liabilities                                                          408,421              412,930
                                                                              ----------          -----------
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 (3,528,886 shares outstanding at March 31, 1999;
      and 3,505,355 shares outstanding at December 31, 1998)                          45                   45

   Additional paid-in capital                                                     27,650               27,586
   Unearned shares held by employee stock ownership plan (206,639 at
      March 31, 1999; and 215,623 at December 31, 1998)                          (1,322)              (1,380)

   Treasury stock, at cost (963,200 shares at March 31, 1999;
      and 986,731 shares at December 31, 1998)                                  (12,689)             (12,920)

   Retained earnings, substantially restricted                                    28,370               27,764
   Accumulated other comprehensive income - unrealized gain on securities            570                  794
                                                                              ----------          -----------
      Total stockholders' equity                                                  42,624               41,889
                                                                              ----------          -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                    $  451,045          $   454,819
                                                                              ==========          ===========

<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>



                                                      1
<PAGE>


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
(Dollars in thousands, except per share amounts)
----------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                         Three Months Ended
                                                                                             March 31,
                                                                                      --------------------------
                                                                                          1999        1998
<S>                                                                                    <C>         <C>
INTEREST INCOME:
   Loans receivable                                                                    $  6,296    $  5,416
   Mortgage-backed securities                                                             1,528       1,149
   Other investment securities                                                              401         760
                                                                                       --------    --------

      Total interest income                                                               8,225       7,325
                                                                                       --------    --------

INTEREST EXPENSE:
   Savings deposits                                                                       3,914       3,864
   FHLB advances and other borrowings                                                       537         513
                                                                                       --------    --------

      Total interest expense                                                              4,451       4,377
                                                                                       --------    --------

NET INTEREST INCOME BEFORE PROVISION
   FOR LOAN LOSSES                                                                        3,774       2,948

PROVISION FOR LOAN LOSSES                                                                   220         109
                                                                                       --------    --------
NET INTEREST INCOME AFTER PROVISION
   FOR LOAN LOSSES                                                                        3,554       2,839
                                                                                       --------    --------
NONINTEREST INCOME:
   Gain (loss) on sale of investment securities                                             217         (17)
   Gain  on sale of real estate owned                                                         9           9
   Commissions from sales of noninsured products                                            132         123
   Customer service charges                                                                 233         171
   Income from loan servicing                                                                17          46
   Other income                                                                              76          68
                                                                                       --------    --------

      Total noninterest income                                                              684         400
                                                                                       --------    --------
GENERAL AND ADMINISTRATIVE EXPENSE:
   Compensation and employee benefits                                                     1,360       1,172
   Occupancy and equipment                                                                  285         276
   Deposit insurance premiums                                                                42          22
   Data processing fees                                                                     243         183
   Legal and accounting expenses                                                            106          96
   Stationery, telephone and office expenses                                                141         107
   Advertising and promotion                                                                 57          60
   Amortization of core deposit premiums                                                    174         179
   Other expenses                                                                           414         345
                                                                                       --------    --------

      Total general and administrative expense                                            2,822       2,440
                                                                                       --------    --------

INCOME BEFORE INCOME TAX EXPENSE                                                          1,416         799

INCOME TAX EXPENSE                                                                          612         360
                                                                                       --------    --------

NET INCOME                                                                             $    804    $    439
                                                                                       ========    ========

BASIC EARNINGS PER SHARE                                                               $    .24    $    .12
                                                                                       ========    ========
DILUTED EARNINGS PER SHARE                                                             $    .24    $    .11
                                                                                       ========    ========
CASH DIVIDENDS PER SHARE                                                               $    .07    $    .06
                                                                                       ========    ========


<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>

                                                      2
<PAGE>



MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 (Dollar amounts in thousands)
-----------------------------------------------------------------------------------------------------------------------
<CAPTION>


                                                                                                          Accumulated
                                                           Additional                                         Other
                                       Common Stock          Paid in    Acquired   Treasury   Retained    Comprehensive
                                   Shares(1)      Amount     Capital    by ESOP    Stock(2)   Earnings  Income, net of tax  Total
                                   ---------      ------   ----------   --------   --------   --------  ------------------ --------
<S>                               <C>              <C>       <C>        <C>        <C>         <C>             <C>         <C>
Balance at
   December 31, 1998              3,505,355        $ 45      $27,586    $ (1,380)  $(12,920)   $27,764         $ 794       $41,889

Options exercised
   using treasury stock              23,531                                             231         47                         278

Dividends paid                                                                                    (246)                       (246)

Earned ESOP shares                                                64          58                                               122

   Net income                                                                                      804                         804

Change in unrealized gains
   on securities available for
   sale, net of taxes                                                                                            (97)          (97)

Reclassification adjustment
   for gains on securities
   available for sale included
   in income, net of taxes                                                                                      (127)         (127)

                                  -------------------------------------------------------------------------------------------------
Balance at
   March 31, 1999                 3,528,886        $ 45      $27,650    $ (1,322)  $(12,689)   $28,369         $ 570       $42,623
                                  =================================================================================================

<FN>
(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 March
      31, 1998 and December 31, 1997 were 152,734 and 143,750, respectively.

(2)   The Company held 963,200 shares of repurchased  Company common stock as of
      March 31, 1999 and 986,731 as of December 31, 1998.

See notes to condensed consolidated financial statements.
</FN>
</TABLE>



                                                      3
<PAGE>


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (Unaudited) (Dollars in thousands)
-----------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                       Three Months Ended
                                                                                           March 31,
                                                                                 -------------------------------
OPERATING ACTIVITIES:                                                                1999              1998
                                                                                 -------------     -------------
<S>                                                                              <C>               <C>
   Net income                                                                    $      804        $     439
   Adjustments to reconcile net income to net cash provided by
      operating activities:
   Depreciation and amortization of premises and equipment                              119              115
   Amortization of core deposit premiums                                                174              179
   Amortization of purchase premiums, net of discounts                                   86              243
   Loan origination fees deferred, net                                                   36               51
   Amortization of deferred loan fees                                                   (33)             (93)
   Provision for loan losses                                                            220              109
   Compensation expense related to ESOP shares released                                 122              145
   (Gain) loss on sale of investment securities                                        (217)              17
   Gain on sale of real estate owned                                                    (10)              (9)
   Losses on sale of fixed assets                                                         -                7
   Charge-offs on loans receivable, net of recoveries                                  (113)               2
   Originations of loans held for sale                                               (2,455)          (2,913)
   Proceeds from sales of loans originated for sale                                   4,195            2,771
   Change in income taxes payable and deferred income taxes                             136              250
   Change in other assets                                                             1,178           (1,817)
   Change in interest receivable                                                        (59)            (400)
   Change in accounts payable and other liabilities                                    (454)            (327)
                                                                                 ----------        ---------

         Net cash  provided by operating activities                                   3,729           (1,231)
                                                                                 ----------        ---------

INVESTING ACTIVITIES:

   Loans originated for the portfolio, net                                          (40,196)         (19,688)
   Purchases of loans receivable                                                       (258)          (5,471)
   Principal payments on loans receivable                                            21,376           18,583
   Proceeds from sales of corporate securities available for sale                     3,807                -
   Principal paydowns on mortgage-backed securities                                   8,023            4,266
   Purchases of investment securities available for sale                                  -           (5,000)
   Proceeds from sales of investment securities available for sale                      251            4,971
   Proceeds from maturities of investment securities                                      -            8,245
   Purchases of FHLB stock                                                              (50)             (50)
   Purchases of premises and equipment, net                                             (36)          (1,191)
                                                                                 ----------        ---------

         Net cash (used in) provided by investing activities                         (7,083)           4,665
                                                                                 ----------        ---------
</TABLE>

                                                 -continued-


                                                      4
<PAGE>




MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (Unaudited) (Dollars in thousands)
-----------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                       Three Months Ended
                                                                                           March 31,
                                                                                 -------------------------------
                                                                                     1999              1998
                                                                                 -------------     -------------
<S>                                                                              <C>               <C>
FINANCING ACTIVITIES:

   Net increase (decrease) in savings deposits                                   $   (1,978)       $   6,170
   Proceeds on (repayments) of Federal Home Loan Bank advances, net                  (1,600)         (10,000)
   Repayments of reverse repurchase agreements, net                                    (320)             (10)
   Purchases of treasury stock, net of reissuance for exercise of options               278           (1,290)
   Cash dividends paid to stockholders                                                 (246)            (226)
                                                                                 ----------        ---------

      Net cash provided by (used in) financing activities                            (3,866)          (5,356)
                                                                                 ----------        ---------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                            (7,220)          (1,922)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                     16,951           13,514
                                                                                 ----------        ---------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                       $    9,731        $  11,592
                                                                                 ==========        =========


CASH PAID DURING THE PERIOD FOR:

   Interest on savings deposits and advances                                     $    4,465        $   4,566

   Income taxes                                                                         411              101

NONCASH INVESTING ACTIVITIES:

   Real estate acquired in settlement of loans                                          280                -


<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>


                                                      5
<PAGE>





                           MONTEREY BAY BANCORP, INC.
              NOTES TO Condensed CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 1999

         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, 1998. 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 solely of
normal recurring  accruals)  necessary for a fair  presentation of the Company's
consolidated  financial  condition at March 31, 1999, and December 31, 1998, the
results of its  operations  for the three  months ended March 31, 1999 and 1998,
and its cash  flows for the three  months  ended  March 31,  1999 and 1998.  All
significant  inter-company  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.

Note 1.

Recently issued Accounting Pronouncements

         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".  The  Company  adopted  this
statement on January 1, 1999. It allows  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".  The adoption of this statement was
not material to the financial results of the Company.


                                       6
<PAGE>




Note 2.

Comprehensive Income

         The  following  tables  disclose  comprehensive  income for the quarter
ended March 31, 1999 and 1998 (dollars in thousands).

                                      Three Months Ended
                                          March 31,
                                     --------------------
                                         1999     1998

Comprehensive income:
   Net income                           $ 804    $ 439

Change in unrealized gains on
   securities available for sale,
   net of taxes                           (97)      71

Reclassification adjustment for gains
   on securities available for sale
   included in income, net of taxes      (127)      13
                                        -----    -----

Total comprehensive income              $ 580    $ 523
                                        =====    =====


Note 3.

Use of Estimates in the Preparation of Financial Statements

         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.

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 4,492,086 shares of
its common stock at an issuance  price of $6.40 per share,  adjusted for splits,
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,   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 March 31, 1999,  the Bank had eight full service  offices and
one real administrative office.


                                       7
<PAGE>

         In  December  1996,  the  Company  assumed  $102.1  million  of savings
deposits  from  Fremont  Investment  and Loan in  exchange  for cash and certain
assets.  On December 22, 1997, as part of its growth strategy,  the Bank entered
into an agreement with Commercial  Pacific Bank ("CPB") to assume  approximately
$29.0 million in deposits and to acquire certain  related assets.  The agreement
also calls for the  Company to make a $5.0  million  loan to the parent  holding
company of CPB. Consummation of these transactions was completed April 1998.

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 MONTHS ENDED MARCH 31, 1999 AND 1998

Overview

         The Company  reported net income of $804,000,  or $.24 per basic share,
for the quarter  ended March 31, 1999,  compared to net income of  $439,000,  or
$.12 per basic share, for the same period last year.  Diluted earnings per share
were $.24 for the first  quarter  of 1999,  compared  to $.11 a year ago.  First
quarter 1999  earnings  were 83% higher than  earnings for the similar  period a
year ago primarily due to substantial increases in net interest income resulting
from  higher  levels of loans  receivable  and  decreases  in the cost of funds.
Return on average equity was 7.89% and return on average assets was .72% for the
quarter  ended March 31, 1999  compared to 2.79% and .32%,  respectively  a year
ago.

         Net interest  income  before  provision  for loan losses and  recurring
noninterest  income rose $826,000 in 1999,  from the comparable  period in 1998.
The  increase  in net  interest  income  was  primarily  due to  growth in loans
receivable  and  decreases  in the  cost of  funds.  Increases  in  general  and
administrative expense for the quarter ended March 31, 1999 compared to the same
period in 1998 was primarily  attributable to higher  compensation  and employee
benefits,  as new  employees  were  hired in mid 1998 to support  the  Company's
deposit  growth and the expansion of its branch  locations and new product lines
and services. Deposits have grown by approximately $42.0 million since March 31,
1998 with all of the net 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



                                       8
<PAGE>

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  commercial  bank by  increasing  its  commercial  real  estate,
construction, multi-family and business lending activities. As well, the Company
is focusing its deposit gathering efforts on small businesses  in-market,  which
will  complement the business  lending  function.  Separately,  the Company will
continue to pursue growth in lower cost transaction  deposit accounts (checking,
passbook, and money market accounts).

Interest Income

         Interest  income for the quarter  ended March 31,  1999,  increased  by
12.3% to $8.2  million,  compared to $7.3 million for the first quarter of 1998.
The reason for the increase in interest  income for the three months ended March
31,  1999,  compared to the same period in 1998,  was  primarily  due to a $44.3
million increase in the average balance of loans receivable, and a $25.1 million
increase  in the  average  balance  of  mortgage-backed  securities,  which  was
partially offset by a $22.4 million decrease in the average balance of corporate
securities.

         The weighted average yield on interest earning assets was 7.57% for the
three months ended March 31, 1999 compared to 7.52% for the same period in 1998.
The average yield on loans  receivable was virtually  unchanged at 8.05% for the
three months ended March 31, 1999,  compared to 8.07% for the three months ended
March 31, 1998. The weighted  average yield on interest earning assets increased
compared  to the same  period in 1998 due to loans  receivable  for the  quarter
ended March 31, 1999  representing a larger percentage of total interest earning
assets.   Average  loans  receivable  for  the  quarter  ended  March  31,  1999
represented  71.9% of total interest  earning  assets  compared to 68.9% for the
same period in 1998. The Company is continuing to pursue its long-term strategic
goal to increase the net interest margin by replacing lower-yielding  securities
with higher-yielding loans.

         Interest expense was $4.5 million for the quarter ended March 31, 1999,
compared  to $4.4  million  for the  similar  period a year  ago.  The  $100,000
increase in interest expense was due to the higher average  outstanding  balance
of deposits of $47.3  million,  which was almost  entirely  offset by a 67 basis
point  decline  in the  weighted  average  cost of funds  year  over  year.  The
principal reason for the drop in the cost of funds is the decline in the cost of
deposits,  which is the largest  category of interest bearing  liabilities.  The
weighted  average cost of deposits  dropped to 4.20% for the quarter ended March
31,  1999  compared  to 4.86% for the same  period in 1998.  The  decline in the
weighted  average  cost of deposits is due to the success the Company has had in
achieving  its  strategic  goals of  changing  the mix of  deposits  to increase
transaction accounts (checking,  passbook, and money market accounts) as well as
a decline in rates paid on time  deposits.  At March 31,  1998,  the company had
$69.9 million in transaction accounts or 21.4% of total deposits with a weighted
average  cost of 2.46%.  At March 31, 1999  transaction  accounts  total  $127.4
million or 34.6% of total deposits with a weighted average cost of 2.90%.


                                       9
<PAGE>




         The changes in net interest income for the three months ended March 3l,
1999  compared  with  the  corresponding  periods  in 1998 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 March 31,
                                            1999 Compared with 1998
                                               Increase (Decrease)
                                      ------------------------------------
                                       Volume         Rate           Net
                                      -------       -------        -------
Interest income:
   Loans                              $ 894          $ (14)         $ 880
   Mortgage-backed securities           418            (40)           378
   Investment securities               (360)             2           (358)
                                      -----          -----          -----

                                        952            (52)           900
                                      -----          -----          -----
Interest expense:
   On customer deposits                 290           (240)            50
   On borrowings                         82            (58)            24
                                      -----          -----          -----
                                        372           (298)            74
                                      -----          -----          -----

Change in net interest income         $ 580          $ 246          $ 826
                                      =====          =====          =====

<TABLE>
         Average  assets and  liabilities  together with average  interest rates
earned  and  paid  for the  three  months  ended  March  31,  1999  and 1998 are
summarized as follows (dollars in millions):
<CAPTION>
                                                            Three Months Ended March 31,
                                              -------------------------------------------------------
                                                         1999                         1998
                                              -------------------------    --------------------------
                                                                           
                                               Average        Yield/        Average         Yield/
                                               Balance         Rate         Balance          Rate
                                              -----------   -----------    -----------     ----------
<S>                                             <C>             <C>         <C>               <C>
Interest earning assets:
   Loans                                        $ 313           8.05%       $ 268             8.07%
   Mortgage-backed securities                      94           6.50           69             6.66
   Investment securities                           28           5.74           53             5.86
                                                -----                       -----             
      Total interest earning assets               435           7.57          390             7.52

Noninterest earning assets                         18                          16
                                                -----                       -----
      Total assets                              $ 453                       $ 406            
                                                =====                       =====                    

Interest bearing liabilities:                                              
   Deposits                                     $ 370           4.20%       $ 323             4.86%
   Borrowings                                      39           5.42           34             6.12
                                                -----                       -----                    
      Total interest bearing liabilities          409           4.31          357             4.98

Noninterest bearing liabilities                     2                           2            
Stockholders' equity                               42                          47            
                                                -----                       -----                    
      Total liabilities and                                                
         stockholders' equity                   $ 453                       $ 406            
                                                =====                       =====                  
Net interest rate spread                                        3.26%                         2.54%  
Net interest margin                                             3.47%                         3.03%  
                                                                           
Ratio of interest bearing assets to                                        
   interest bearing liabilities                                  106%                          109%  
                                                                           
                                                                           
</TABLE>


                                       10
<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 three  months  ended March 31,  1999,  the  provision  for loan
losses was  $220,000,  compared to $109,000  for the same  quarter in 1998.  The
Company  increased its  provision for loan losses  largely due to an increase in
higher risk forms of lending.  At March 31, 1999,  the  Company's  allowance for
loan losses totaled $2.9 million or .90% of loans  receivable,  compared to $2.8
million or .92% of loans receivable at December 31, 1998. At March 31, 1999, the
Company  had real  estate  owned  totaling  $204,300,  consisting  of two one-to
four-family   residential  properties  acquired  through  foreclosure  in  1998.
Nonperforming  loans totaled  $204,363 or .06% of loans  receivable at March 31,
1999  compared to $752,000,  or .28% of loans  receivable  at March 31, 1998 and
$1.5 million, or .50% of loans receivable at December 31, 1998.

Noninterest Income

         Noninterest  income  increased by 71% to $684,000 for the first quarter
of 1999 compared to $400,000 a year ago, primarily due to a $234,000 increase in
gain on the sale of an investment securities.  Excluding the increase in gain on
investment sales,  noninterest income increased $50,000,  or 13%, primarily from
customer  service charges  stemming from a larger customer base and an increased
number of checking accounts.

         For the three  months ended March 31, 1999,  customer  service  charges
amounted to $233,000  compared to $171,000 for the  corresponding  period 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.

General and Administrative Expenses

         General and  administrative  expenses were $2.8 million,  for the first
quarter of 1999,  compared to $2.4 million for the similar  period in 1998.  The
increase in 1999 was primarily  attributable to higher compensation and employee
benefits,  as new  employees  were  hired in mid 1998 to support  the  Company's
deposit  growth and the expansion of its branch  locations and new product lines
and  services.  General and  administrative  expense as a percentage  of average
assets  increased  slightly  during the  quarter  ended  March 31, 1999 to 2.48%
compared  to  2.35%  for the  first  quarter  of  1998.  More  importantly,  the
efficiency  ratio,  which is general and  administrative  expense divided by net
interest  income  before  provision  for loan losses plus  noninterest  revenue,
declined  during the quarter ended March 31, 1999. The efficiency  ratio for the
quarter  ended March 31, 1999 was 63%  compared to 73% for the first  quarter of
1998. The  improvement in the efficiency  ration for the quarter ended March 31,
1999 was primarily due to  improvements  in net interest  income and to a lesser
extent efforts to contain growth in general and administrative expenses.


                                       11
<PAGE>


COMPARISON OF CHANGES IN FINANCIAL CONDITION

         Total  assets of the  Company  were $451.0  million at March 31,  1999,
compared to $454.8 million at December 31, 1998, a decrease of $3.8 million. The
slight  decrease in assets during the first quarter of 1999 was primarily due to
the sale of mortgage-backed  securities and corporate securities and prepayments
on  mortgage-backed  securities,  with  the  utilization  of a  majority  of the
proceeds to fund net loan growth and to pay down short-term borrowings.

         Mortgage-backed  securities and investment  securities  decreased $12.3
million, or 10.5%, during the three months ended March 31, 1999. These decreases
were offset by an increase of $18.9 million, or 6.3%, in loans receivable during
the same period.

         Loans  receivable  held for investment were $317.7 million at March 31,
1999,  compared to $298.8 million at December 31, 1998.  Residential real estate
loans  continue to  represent  the largest  category of  collateral  in the loan
portfolio.  At March 31, 1999, total one-to-four  family residential real estate
loans were  $176.3  million,  or 56.0% of loans  receivable,  compared to $183.9
million, or 61.0% of total loans, at December 31, 1998. The Company successfully
continued to focus its efforts on changing its mix of interest earning assets by
emphasizing   construction,   commercial  real  estate,   and  business  lending
activities,  resulting  in increased  loan yields.  Loans other than one to four
residential  loans comprise 44% or $141.4  million of loans  receivable at March
31, 1999 compared to 39% or $119.8 million at December 31, 1998 and 29% or $80.2
million at March 31, 1998.  During the quarter ended March 31, 1999, the Company
originated  $41.7  million  in loans of which 76% were  other  than  one-to-four
family  residential  loans. Loans originated and funded during the first quarter
were earning a weighted  average yield of 8.39%. The Company  originated  $19.7,
$26.4,  $22.3,  and $36.4 million,  respectively  of portfolio  loans during the
first, second, third, and fourth quarters of 1998,  respectively.  The growth in
portfolio  loan  fundings  was due to a low  interest  rate  environment,  which
promotes  loan  production,  additions to sales staff,  and the expansion of the
Company's  portfolio lending into construction,  commercial,  multi-family,  and
business lending.

         At March 31, 1999, the Company's permanent  commercial real estate loan
portfolio was $43.6 million,  or 13.7% of total loans receivable,  up from $37.9
million,  or 12.7% of total loans  receivable at December 31, 1998. At March 31,
1999, the Company $38.6 million or 12.2% of net  construction  loans compared to
$27.5  million,  or 9.2%,  at December  31,  1998.  Construction  loans are made
primarily to  residential  builders and to commercial  property  developers.  At
March 31, 1999, the Company had $37.0 million of multi-family residential loans,
or 11.7% of total loans receivable, up from $35.4 million, or 11.9%, at December
31, 1998.  The  remainder of the loans  receivable  was  comprised  primarily of
business loans totaling $22.2 million,  or 7.0%, of total loans  receivable,  at
March 31, 1999, compared to $19.0 million, or 6.4%, at December 31, 1998.

         During the three months ended March 31, 1999, the Company's liabilities
decreased by $4.5 million to $408.4 million, from $412.9 million at December 31,
1998. The decrease in liabilities was primarily attributable a slight decline in
deposits of $2.0 million and a $1.6 million  decline in advances  from the FHLB.
Total savings deposits  decreased during the three-month  period ended March 31,
1999 to $368.7  million,  or by 0.5% from $370.7  million at December  31, 1998.
Continued  emphasis  has been placed on growth of low-cost  transaction  deposit
accounts.  Transaction  deposit  accounts  are  made  up  of  passbook  savings,
checking, and money market accounts.  Transaction accounts increased from $113.6
million,  or 30.6%, of total deposits at December 31, 1998 to $127.4 million, or
34.6%, of total deposits at March 31, 1999.  Time deposits  declined from $257.1
million  at  December  31,  1998 to $241.3  million at March 31,  1999.  Average
transaction deposits at March 31, 1999, bore a weighted average interest rate of
2.90%.


                                       12
<PAGE>

         At March 31, 1999, shareholders' equity was $42.6 million,  compared to
$41.9  million at December  31,  1998.  Equity  increased by $0.7 million due to
first  quarter net income of $0.8  million,  partially  offset by the payment of
cash  dividends  totaling  $246,000,   or  $.07  per  share,  on  the  Company's
outstanding common stock. Tangible book value per share of Monterey Bay Bancorp,
Inc.  common stock was $11.80 at March 31, 1999,  compared to $11.60 at December
31, 1998.

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 deposit 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.

         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  1.92% at
December  31, 1998  indicating  that the Company is  vulnerable  to increases in
interest rates and  advantaged if interest  rates decline.  At December 31, 1997
the change in the market value of equity as a percentage of the present value of
assets if interest rate levels were to


                                       13
<PAGE>

increase by 2% was negative  3.11%.  While  progress in reducing  interest  rate
sensitivity has been made,  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 March 31, 1999, the Company had no nonaccrual loans past due 90 days
or more  compared to $1.5 million of  nonaccrual  loans at December 31, 1998. At
March 31, 1999, impaired loans totaled $1.7 million, compared to $3.8 million at
December 31, 1998.

         At March 31, 1999, the Company had real estate owned totaling $204,300,
consisting of two one-to-four  family  residential  properties  acquired through
foreclosure in 1998.

         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  decreased to $3.0 million,  or
0.66% of total assets, at March 31, 1999 from $5.4 million,  or 1.19% of assets,
at December 31, 1998. At March 31, 1999,  the Company had $3.0 million of assets
classified  as  substandard  and no  assets  classified  as  doubtful  or  loss.
Substandard  assets was comprised of loans with identified risk  characteristics
indicating the asset maybe  inadequately  protected by the current net worth and
paying  capacity  of the  obligor  or of the  collateral  pledged.  The  largest
substandard loan at March 31, 1999 was a one-to-four family residential mortgage
with an outstanding principal balance of $309,739.

         All of the Company's  mortgage loans are secured by real estate located
within the state of  California.  The majority of such loans 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.

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 March
31, 1999 and December 31, 1998,  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 March 31,  1999 and  December  31,  1998,  the Bank met the  definition  of a
well-capitalized institution.


                                       14
<PAGE>



<TABLE>
         The following  table sets forth the Bank's  capital  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.
<CAPTION>
                                       Minimum Capital         Well Capitalized
                                         Requirements            Requirements               Actual
                                     ---------------------   ---------------------   ---------------------
                                     Amount       Ratio       Amount      Ratio       Amount      Ratio
                                     --------    ---------   ---------   ---------   ---------   ---------
<S>                                   <C>         <C>        <C>         <C>         <C>         <C>
      As of March 31, 1999:
         Total capital
            (to risk-weighted assets) $22,290     8.00%      $27,862     10.00%      $32,937     11.82%
         Tier 1 capital
            (to risk-weighted assets)   N/A        N/A        16,556      6.00%       30,240     10.96%
         Tier 1 capital
            (to adjusted assets)       17,382     4.00%       21,728      5.00%       30,240      6.96%
         Tangible capital
            (to tangible assets)        6,518     1.50%        N/A         N/A        30,240      6.96%

      As of December 31, 1998:
         Total capital
            (to risk-weighted assets) $21,980     8.00%      $27,475     10.00%      $31,882     11.60%
         Tier 1 capital
            (to risk-weighted assets)   N/A        N/A        16,334      6.00%       29,319     10.77%
         Tier 1 capital
            (to adjusted assets)       17,522     4.00%       21,902      5.00%       29,319      6.69%
         Tangible capital
            (to tangible assets)        6,571     1.50%        N/A         N/A        29,319      6.69%
</TABLE>


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 is required by OTS regulations to maintain an average daily
balance of liquid assets in each calendar  quarter of not less than 4% of either
the amount of its liquidity base at the end of the preceding calendar quarter or
the average daily balance of its  liquidity  base during the preceding  calendar
quarter.  In  addition  to this  minimum  requirement,  the Bank is  required to
maintain  sufficient  liquidity  to ensure  its safe and sound  operations.  The
minimum liquidity requirement may be changed by the OTS to any amount within the
range of 4% to 10%,  depending upon economic  conditions and the savings deposit
flows of savings institutions.  Monetary penalties may be imposed for failure to
meet these liquidity  requirements.  The Bank's average  liquidity ratio for the
quarter  ended  March 31,  1999 was 7.3%,  which  exceeded  the  then-applicable
requirements.  The Bank has never been subject to monetary penalties for failure
to meet its  liquidity  requirements.  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

         The "Year 2000 issue"  relates to the fact that many computer  programs
use only two digits to represent a year, such as "98" to represent "1998," which
means that in the Year 2000 such programs could  incorrectly treat the Year 2000
as the year 1900. This issue has grown in importance as the use of


                                       15
<PAGE>

computers and microchips have become more pervasive  throughout the economy, and
interdependencies between systems have multiplied.  The issue must be recognized
as a business problem, rather than simply a computer problem, because of the way
its  effects  could  ripple  through  the  economy.  The Year 2000  issue  could
materially and adversely affect the Company either directly or indirectly.  This
could happen if any of its  critical  computer  systems or equipment  containing
embedded logic fail, if the local infrastructure  (electric power, phone system,
or water system) fails, if its significant vendors are adversely impacted, or if
its borrowers or depositors are adversely  impacted by their internal systems or
those of their  customers  or  suppliers.  Failure of the  Company  to  complete
testing and renovation of its critical  systems on a timely basis,  could have a
material  adverse  effect on the  Company's  financial  condition and results of
operations,  as could Year 2000  problems  faced by others with whom the Company
does business.

         Federal  banking  regulators  have  responsibility  for supervision and
examination of banks to determine whether each institution has an effective plan
for identifying,  renovating,  testing and implementing  solutions for Year 2000
processing  and  coordinating   Year  2000  processing   capabilities  with  its
customers, vendors and payment system partners. Bank examiners are also required
to assess the soundness of a bank's  internal  controls and to identify  whether
further  corrective  action may be necessary to assure an  appropriate  level of
attention to Year 2000 processing capabilities.

         The Company has a written  plan to mitigate the risks  associated  with
the impact of the Year 2000. The plan directs the Company's Year 2000 activities
under the framework of the Federal Financial  Institutions  Examination  Council
(FFIEC) five-step program.  The FFIEC's five-step program includes the following
phases: awareness, assessment,  renovation,  validation, and implementation. The
awareness  phase,  which the  Company  has  completed,  discusses  the Year 2000
problem and gains executive level support for the necessary resources to prepare
the Company for Year 2000 compliance.  The assessment  phase,  which the Company
has also completed,  assesses the size and complexity of the problem and details
the magnitude of the effort necessary to address the Year 2000 issues.  Although
the awareness and assessment phases are completed,  the Company will continue to
evaluate  any new  issues as they  arise.  In the  renovation  phase,  which the
Company  has  substantially  completed,  the  required  incremental  changes  to
hardware and software  components are tested. In the validation stage, which the
Company has also substantially  completed,  the hardware and software components
are tested.

         The  Company  is  utilizing  both  internal  and  external  sources  to
identify,  correct or reprogram,  and test its systems for Year 2000 compliance.
The Company has identified fifteen  applications  which management  believes are
material to the Company's  operations.  Based on  information  received from its
vendors and testing  results,  the Company  believes  approximately  90% of such
applications  are Year 2000  compliant as of March 31, 1999.  The testing of the
critical system  applications for core banking product provided by the Company's
primary vendor was completed,  and results verified during November and December
1998.

         The core banking  product  includes  software  solutions  for checking,
savings,  time  certificates  of  deposit,  general  ledger,  accounts  payable,
automated clearing house, individual retirement accounts,  commercial,  mortgage
and installment loans, proof of deposit and ancillary supporting products.

         The  Company has  identified  two  vendors  that the  Company  does not
believe  are fully  Year 2000  compliant  as of March  31,  1999.  Each of those
vendors  have  advised the Company  that it has  completed  the  evaluation  and
renovation   stages  of  Year  2000   compliance   and  is  scheduled  to  begin
implementation  and validation  beginning in January 1999, and all are scheduled
to complete final validation by June 30, 1999.


                                       16
<PAGE>

         The  Company  is also  making  efforts  to ensure  that its  customers,
particularly its significant customers,  are aware of the Year 2000 problem. The
Company has sent Year 2000  correspondence to the Bank's significant deposit and
loan  customers.  A customer of the bank is deemed  significant  if the customer
possesses any of the following characteristics:

         o     Total indebtedness to the bank of $750,000 or more.
         o     Credit risk rating of five (substandard) or higher.
         o     The customers business is dependent on the use of high technology
               and/or the electronic exchange of information.
         o     The customer's  business is dependent on third party providers of
               data processing services or products.
         o     An average ledger deposit  balance greater than $100,000 and more
               than 12 transactions during the month.

         The  Company  has amended  its credit  authorization  documentation  to
include consideration  regarding the Year 2000 problem. The Company assesses its
significant  customer's  Year 2000 readiness and assigns an assessment of "low",
"medium",  or "high" risks. Risk evaluation of the Bank's significant  customers
was  substantially  completed by December 31, 1998. Any depositor  determined to
have a high risk is scheduled  for an evaluation by the Bank every 90 days until
the customer can be assigned a low risk assessment.

         Because of the range of possible  issues and large  number of variables
involved, it is impossible to quantify the total potential cost of the Year 2000
problems,  or to determine  the Company's  worst-case  scenario in the event the
Company's  Year 2000  remediation  efforts or the  efforts of those with whom it
does  business  are not  successful.  In  order  to deal  with  the  uncertainty
associated  with the Year 2000 problem,  the Company has developed a contingency
plan to address the possibility  that efforts to mitigate the Year 2000 risk are
not successful either in whole or part. These plans include manual processing of
information for critical  information  technology  systems and increased cash on
hand. The contingency plans, including employee training, will be tested by June
3, 1999.

         As of March 31, 1999, the Company had incurred  approximately  $220,000
in Year 2000 costs,  which have been  expensed as  incurred.  Year  2000-related
costs have been funded from the continuing  operations of the Company and, as of
March 31, 1999, have constituted  approximately 2% of the Company's  information
systems  expenses  for 1999.  The Company  estimates  that  additional  costs to
complete Year 2000  compliance  will be  approximately  $100,000.  This estimate
includes the cost of purchasing  hardware and licenses for software  programming
tools,  the cost of the time of internal staff and the cost of consultants.  The
estimate  does not include the time that  internal  staff is devoting to testing
programming  changes.  Testing is not  expected to add  significant  incremental
costs.  Certain information system projects at the Company have been deferred as
a result of the Company's Year 2000 compliance efforts. However, these deferrals
are not expected to have a material effect on the Company's business.

Item 3.  Quantitative and Qualitative Disclosure of 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."



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<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.

         On April 29, 1999, the Company entered into an agreement with Josiah T.
         Austin,  the beneficial owner of 339,205 shares, or approximately  9.7%
         of the Company's  outstanding common stock.  Pursuant to the agreement,
         Mr.  Austin has been  appointed  a director  of the  Company for a term
         expiring at the  Company's  2000  annual  meeting and has agreed to not
         participate  in  a  solicitation   of  proxies  in  opposition  to  any
         recommendation  of the  Board  of  Directors  during  the  term  of the
         agreement and to vote all shares of Company  common stock  beneficially
         owned by him for the Board's  nominees at the 1999 annual  meting.  The
         Company has agreed to retain an  investment-banking  firm to advise the
         Company concerning various means of enhancing shareholder value.

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

         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  Annual  Report  on Form 10-K for the year
         ended December 31, 1998.

         Exhibit  10(i) -  Settlement  Agreement  dated April 29,  1999  between
         Monterey Bay Bancorp, Inc. and Josiah T. Austin.

         Exhibit  10(ii) -  Monterey  Bay  Bancorp,  Inc.  Stock  Award Plan for
         Outside Directors.

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

         Exhibit 27.0 - Financial Data Schedule (filed herewith).


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<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:        May 12, 1999                 By /s/ Marshall G. Delk
          ------------------------        --------------------------------------
                                          Marshall G. Delk
                                          President, Chief Operating Officer
                                            and Chief Financial Officer
                                         
                                         
Date:        May 12, 1999                 By /s/ Philip Safran
          ------------------------        --------------------------------------
                                          Philip Safran
                                          Vice President
                                            and Controller
                                         
                                         
                                         

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