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 March 31, 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)

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

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

                                 (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: 3,166,214 shares of common
stock, par value $.01 per share, were outstanding as of May 14, 1998.


<PAGE>



                           MONTEREY BAY BANCORP, INC.

                                     Index

PART I.  FINANCIAL INFORMATION                                              Page
         ---------------------                                              ----
         Item 1.  Condensed Consolidated Statements of Financial
                  Condition as of March 31, 1998 and December 31, 1997         1

                  Condensed Consolidated Statements of Operations for the
                  Three Months Ended March 31, 1998 and 1997                   2

                  Condensed Consolidated Statement of Stockholders' Equity
                  for the Three Months Ended March 31, 1998                    3

                  Condensed Consolidated Statements of Cash Flows for the
                  Three Months Ended March 31, 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  16

PART II. OTHER INFORMATION

         Item 1.  Legal Proceedings                                           17
         Item 2.  Changes in Securities                                       17
         Item 3.  Defaults Upon Senior Securities                             17
         Item 4.  Submission of Matters to a Vote of Security Holders         17
         Item 5.  Other Information                                           17
         Item 6.  Exhibits and Reports on Form 8-K                            17

SIGNATURES                                                                    18


<PAGE>


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

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1998 (UNAUDITED) AND DECEMBER 31, 1997 (Dollars in thousands)
--------------------------------------------------------------------------------
                                                      March 31,   December 31,
                                                        1998          1997
                                                      ---------   ------------
ASSETS
Cash and due from depository institutions              $  4,802     $  7,214
Overnight deposits                                        6,790        6,300
                                                       --------     --------
   Total cash and cash equivalents                       11,592       13,514
Certificates of deposit                                      99           99
Loans held for sale, at market                              656          514
Securities available for sale:
   Mortgage-backed securities (amortized cost of
     $65,867 at March 31, 1998 and
     $70,234 at December 31, 1997)                       66,260       70,465
   Investment securities (amortized cost of
     $32,264 at March 31, 1998 and
     $40,351 at December 31, 1997)                       32,248       40,355
Securities held to maturity:
   Mortgage-backed securities (market value of
     $131 at March 31, 1998 and
     $138 at December 31, 1997)                             134          142
   Investment securities (market value of $145 at
     December 31, 1997)                                       -          145
Loans receivable held for investment (net of
   allowance for loan losses at March 31, 1998, $1,830;
   and at December 31, 1997, $1,669)                    270,123      263,751
Federal Home Loan Bank stock, at cost                     3,432        3,383
Premises and equipment, net                               5,886        4,817
Accrued interest receivable                               2,740        2,339
Core deposit premiums and other intangibles, net          3,050        3,229
Real estate owned                                           200          321
Other assets                                              6,721        5,022
                                                       --------     --------
TOTAL ASSETS                                           $403,141     $408,096
                                                       ========     ========
LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
   Savings deposits                                    $326,729     $320,559
   Federal Home Loan Bank advances                       22,282       32,282
   Securities sold under agreements to repurchase         5,190        5,200
   Accounts payable and other liabilities                 1,856        2,122
                                                       --------     --------
     Total liabilities                                  356,057      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
     (3,166,214 shares outstanding at March 31, 1998;
     and 3,229,679 shares outstanding at
     December 31, 1997)                                      36           36
   Additional paid-in capital                            27,357       27,270
   Unearned shares held by employee stock ownership
     plan (194,062 at March 31, 1998; and 201,250
     at December 31, 1997)                               (1,552)      (1,610)
   Treasury stock, at cost (427,536 shares at
     March 31, 1998; and 364,071 shares at
     December 31, 1997)                                  (5,936)      (4,642)
   Retained earnings, substantially restricted           26,957       26,741
   Accumulated other comprehensive income - unrealized
     gain on securities                                     222          138
                                                       --------     --------
     Total stockholders' equity                          47,084       47,933
                                                       --------     --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY             $403,141     $408,096
                                                       ========     ========

See notes to condensed consolidated financial statements.

                                       1

<PAGE>


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
(Dollars in thousands, except per share amounts)
--------------------------------------------------------------------------------
                                                        Three Months Ended
                                                             March 31,
                                                        ------------------
                                                         1998         1997
INTEREST INCOME:
   Loans receivable                                     $5,416       $4,681
   Mortgage-backed securities                            1,149        2,084
   Other investment securities                             760          871
                                                        ------       ------
         Total interest income                           7,325        7,636
                                                        ------       ------
INTEREST EXPENSE:
   Savings deposits                                      3,864        3,862
   FHLB advances and other borrowings                      513          830
                                                        ------       ------
         Total interest expense                          4,377        4,692
                                                        ------       ------
NET INTEREST INCOME BEFORE PROVISION
   FOR LOAN LOSSES                                       2,948        2,944
PROVISION FOR LOAN LOSSES                                  109          123
                                                        ------       ------
NET INTEREST INCOME AFTER PROVISION
   FOR LOAN LOSSES                                       2,839        2,821
                                                        ------       ------
NONINTEREST INCOME:
   Loss on sale of investment securities                   (17)           -
   Gain on sale of real estate owned                         9            -
   Commissions from sales of noninsured products           123           87
   Customer service charges                                171          126
   Income from loan servicing                               46           59
   Other income                                             68           39
                                                        ------       ------
         Total noninterest income                          400          311
                                                        ------       ------
GENERAL AND ADMINISTRATIVE EXPENSE:
   Compensation and employee benefits                    1,172        1,060
   Occupancy and equipment                                 276          259
   Deposit insurance premiums                               22           50
   Data processing fees                                    183          168
   Legal and accounting expenses                            96          108
   Stationery, telephone and office expenses               107          130
   Advertising and promotion                                60           66
   Amortization of core deposit premiums                   179          207
   Other expenses                                          345          289
                                                        ------       ------
         Total general and administrative expense        2,440        2,337
                                                        ------       ------
INCOME BEFORE INCOME TAX EXPENSE                           799          795

INCOME TAX EXPENSE                                         360          324
                                                        ------       ------
NET INCOME                                              $  439       $  471
                                                        ======       ======
BASIC EARNINGS PER SHARE                                $  .15       $  .15
                                                        ======       ======
DILUTED EARNINGS PER SHARE                              $  .14       $  .15
                                                        ======       ======
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)
THREE MONTHS ENDED MARCH 31, 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         (70,000)                                      (1,374)                               (1,374)

Options exercised
  using treasury stock     6,535                                           80           3                        83

Dividends paid                                                                       (226)                     (226)

Earned ESOP shares                                 87          58                                               145

Comprehensive income:
  Net earnings                                                                        439                       439        $439
  Change in unrealized
    gains on securities
    available for sale                                                                             71            71          71
  Reclassification
    adjustment for losses
    included in income                                                                             13            13          13
                       --------------------------------------------------------------------------------------------   -------------
Balance at
  March 31, 1998       3,166,214     $36      $27,357      (1,552)    $(5,936)    $26,957        $222       $47,084        $523
                       ============================================================================================================
</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 March
    31, 1998 and December 31, 1997 were 93,438 and 86,250, respectively.
(2) The Company held 427,536 shares of repurchased Company common stock as of
    March 31, 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
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (Unaudited) (Dollars in thousands)
--------------------------------------------------------------------------------
                                                          Three Months Ended
                                                               March 31,
                                                          ------------------
                                                            1998      1997
                                                          --------  --------
OPERATING ACTIVITIES:

  Net income                                              $    439   $   471
  Adjustments to reconcile net income to
    net cash provided by operating activities:
    Depreciation and amortization of premises
      and equipment                                            115       105
    Amortization of core deposit premiums                      179       207
    Amortization of purchase premiums, net of discounts        243        84
    Loan origination fees deferred, net                         51        49
    Amortization of deferred loan fees                         (93)      (47)
    Provision for loan losses                                  109       123
    Compensation expense related to ESOP shares released       145        93
    Loss on sale of investment securities                       17         -
    Gain on sale of real estate owned                           (9)        -
    Losses on sale of fixed assets                               7         -
    Charge-offs on loans receivable, net of recoveries           2         -
    Originations of loans held for sale                     (2,913)     (294)
    Proceeds from sales of loans originated for sale         2,771       424
    Change in income taxes payable and deferred
      income taxes                                             250       352
    Change in other assets                                  (1,817)      268
    Change in interest receivable                             (400)     (527)
    Change in accounts payable and other liabilities          (327)      (24)
                                                           -------    ------
      Net cash (used in) provided by operating activities   (1,231)    1,284
                                                           -------    ------
INVESTING ACTIVITIES:

   Loans originated for the portfolio, net                 (19,688)   (6,824)
   Purchases of loans receivable                            (5,471)        -
   Principal payments on loans receivable                   18,583     5,493
   Principal paydowns on mortgage-backed securities          4,266     3,731
   Purchases of investment securities available for sale    (5,000)        -
   Proceeds from sales of investment securities available
     for sale                                                4,971         -
   Proceeds from maturities of investment securities         8,245     2,000
   Purchases of FHLB stock                                     (50)      (62)
   Purchases of premises and equipment, net                 (1,191)     (164)
                                                           -------   -------
     Net cash provided by investing activities               4,665     4,174
                                                           -------   -------

                                  -continued-


                                       4


<PAGE>


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (Unaudited) (Dollars in thousands)
--------------------------------------------------------------------------------
                                                          Three Months Ended
                                                               March 31,
                                                          ------------------
                                                            1998      1997
                                                          --------  --------
FINANCING ACTIVITIES:

  Net increase (decrease) in savings deposits             $  6,170  $   (857)
  Repayments of Federal Home Loan Bank advances, net       (10,000)   (2,400)
  Repayments of reverse repurchase agreements, net             (10)        -
  Cash dividends paid to stockholders                         (226)     (164)
  Purchases of treasury stock, net                          (1,290)       19
                                                          --------  --------
    Net cash used in financing activities                   (5,356)   (3,402)
                                                          --------  --------
NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                               (1,922)    2,056

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD            13,514     4,978
                                                          --------  --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                $ 11,592  $  7,034
                                                          ========  ========
CASH PAID DURING THE PERIOD FOR:

   Interest on savings deposits and advances              $  4,566  $  4,685

   Income taxes                                                101         -


See notes to condensed consolidated financial statements.

                                       5


<PAGE>


                           MONTEREY BAY BANCORP, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 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 March 31, 1998 and December 31, 1997, the
results of its operations for the three months ended March 31, 1998 and 1997,
and its cash flows for the three months ended March 31, 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 March 31, 1998, the Bank had seven full
service offices and one real estate loan office.

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

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

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997

Overview
--------

         The Company reported net income of $439,000, or $0.15 per basic share,
for the three months ended March 31, 1998, compared to $471,000, or $0.15 per
basic share, reported for the same period last year. Diluted earnings per share
were $0.14 for the first quarter of 1998, compared to $0.15 a year ago. The
reduction in net income was the result of decreased interest income, higher
general and administrative expenses, and an increase in the Company's effective
tax rate, partially offset by a decrease in interest expense and higher
noninterest income, for the quarter ended March 31, 1998 compared to the similar
period in 1997.

                                       8


<PAGE>

         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 $29
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.

         Net interest income before provision for loan losses was $2.9 million
for the three months ended March 31, 1998, unchanged from the amount recorded
for the three months ended March 31, 1997. For the quarter ended March 31, 1998,
the average outstanding balance of interest-earning assets, as well as
interest-bearing liabilities, declined compared to the similar period a year
ago. The Company's net interest margin increased to 3.03% for the quarter ended
March 31, 1998, from 2.90% for the quarter ended March 31, 1997.

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

         For the quarter ended March 31, 1998, total interest income declined by
4.1% to $7.3 million, from $7.6 million in the first quarter of 1997. Interest
income on mortgage-backed securities decreased by 44.9% to $1.1 million for the
quarter ended March 31, 1998, from $2.1 million for the quarter ended March 31,
1997. This decline was primarily due to a decrease in the average outstanding
balance of mortgage-backed securities in the first quarter of 1998, compared to
the similar period a year ago, as a result of high prepayments and sales of
mortgage-backed securities during the previous year. The Company experienced
unusually high prepayments on its mortgage-backed securities and loans during
the first quarter of 1998, primarily as the result of consumer refinancing in
the current lower market interest rate environment. The decrease in interest
income on mortgage-backed securities was partially offset by an increase of
15.7% in interest income on loans receivable, to $5.4 million for the first
quarter of 1998, from $4.7 million a year ago, primarily due to growth in the
Company's mortgage loan portfolio. During 1997, the Company sold long-

                                       9


<PAGE>

duration mortgage-backed securities and reinvested the proceeds into
higher-yielding in-market loans as part of its long-term strategic goal to
increase the net interest margin through the origination and retention of
variable-rate consumer, business, construction and commercial real estate loans
which generally have higher yields than residential permanent loans.

         The weighted average yield on interest earning assets was 7.52% for the
three months ended March 31, 1998, unchanged from the previous year. The yield
earned on loans receivable increased to 8.07% for the three months ended March
31, 1998, compared to 7.93% for the same period a year ago, primarily due to the
origination of higher yielding construction and commercial real estate loans.
The yield earned on mortgage-backed securities decreased to 6.66% for the first
quarter of 1998, compared to 7.26% for the same period a year ago, due to
unusually high prepayments and a corresponding increase in premium amortization
during the period.

         Interest expense declined to $4.4 million for the quarter ended March
31, 1998, compared to $4.7 million for the quarter ended March 31, 1997. The
decrease in interest expense was primarily due to a reduction in the average
outstanding balance of borrowings. In addition, the Company's weighted average
cost of interest-bearing liabilities decreased to 4.98% for the three months
ended March 31, 1998, from 5.07% for the three months ended March 31, 1997, due
to a decrease in the weighted average cost of deposit liabilities. The weighted
average cost of deposits was 4.86% for the three months ended March 31, 1998,
compared to 4.92% for the corresponding period a year ago.

         The changes in net interest income for the three months ended March 31,
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 March 31,
                                                   1998 Compared with 1997
                                                     Increase (Decrease)
                                                 ----------------------------
                                                 Volume      Rate        Net
                                                 ------      ----        ---
Interest income:
   Loans                                          $ 644      $  91      $ 735
   Mortgage-backed securities                      (831)      (104)      (935)
   Investment securities                            (79)       (32)      (111)
                                                  -----      -----      -----
                                                   (266)       (45)      (311)
                                                  -----      -----      -----
Interest expense:
   On customer deposits                              (4)         6          2
   On borrowings                                   (346)        29       (317)
                                                  -----      -----      -----
                                                   (350)        35       (315)
                                                  -----      -----      -----
Change in net interest income                     $  84      $ (80)     $   4
                                                  =====      =====      =====

                                       10


<PAGE>


         Average assets and liabilities together with average interest rates
earned and paid for the three months ended March 31, 1998 and 1997 are
summarized as follows (dollars in millions):

                                               Three Months Ended March 31,
                                             --------------------------------
                                                  1998              1997
                                             ---------------  ---------------
                                             Average  Yield/  Average  Yield/
                                             Balance   Rate   Balance   Rate
                                             -------  ------  -------  ------
Interest earning assets:
  Loans                                        $268    8.07%    $236    7.93%
  Mortgage-backed securities                     69    6.66      115    7.26
  Investment securities                          53    5.86       55    6.30
                                               ----             ----
    Total interest earning assets               390    7.52      406    7.52
Noninterest earning assets                       16               17
                                               ----             ----
    Total assets                               $406             $423
                                               ====             ====
Interest bearing liabilities:
  Deposits                                     $323    4.86%    $318    4.92%
  Borrowings                                     34    6.12       58    5.89
                                               ----             ----
    Total interest bearing liabilities          357    4.98      376    5.07
Noninterest bearing liabilities                   2                2
Stockholders' equity                             47               45
                                               ----             ----
    Total liabilities and stockholders'
      equity                                   $406             $423
                                               ====             ====
Net interest rate spread                               2.54%            2.46%
Net interest margin                                    3.03%            2.90%
Ratio of interest bearing assets to
  interest bearing liabilities                          109%             108%


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 ended March 31, 1998, the provision for loan losses was
$109,000, compared to $123,000 for the similar quarter a year ago. The provision
resulted in a total allowance for loan losses of $1,830,000, or .67% of loans
receivable, at March 31, 1998, compared to an allowance for loan losses of
$1,434,000, or .61% of loans receivable, at March 31, 1997. Nonperforming loans
totaled $752,000, or .28% of loans receivable, at March 31, 1998, compared to
$1.2 million, or .50% of loans receivable, a year earlier.

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

         Noninterest income increased by 28.6% to $400,000 for the quarter ended
March 31, 1998, compared to $311,000 for the quarter ended March 31, 1997. The
Company recorded commission income from the sales of noninsured products of
$123,000 for the three months ended March 31, 1998, compared to $87,000 for the
similar period a year ago. The increase in commission income reflects the
Company's implementation of a strategic plan to increase sales of insurance and
investment products, which included the purchase of the assets of an investment
firm during 1997.

                                       11


<PAGE>


For the three months ended March 31, 1998, customer service charges amounted to
$171,000, compared to $126,000 for the three months ended March 31, 1997. The
increase in customer service charge revenue reflects a larger customer base and
continuing growth in the number of customer checking accounts, resulting
primarily from an active marketing campaign to increase the Company's
outstanding balances of transaction-related customer deposit accounts.

         Loan servicing income was $46,000 and $59,000, respectively, for the
three months ended March 31, 1998 and 1997. The outstanding principal balance of
mortgage loans serviced for others was $46.6 million at March 31, 1998, compared
to $60.1 million at March 31, 1997. 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 securities are typically more readily
marketable than the underlying loans and because they can be used as collateral
for borrowings. At March 31, 1998, the Company had entered into an agreement
with FNMA to convert approximately $48.0 million of its fixed rate residential
loans into mortgage-backed securities.

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

         General and administrative expenses were $2.4 million for the first
quarter of 1998, compared to $2.3 million for the similar period in 1997. The
increase in 1998 was primarily attributable to higher compensation and employee
benefits, as new employees were hired to support the Company's expansion into
the new branch locations, and to support the Company's new product lines and
services.

COMPARISON OF CHANGES IN FINANCIAL CONDITION

         Total assets of the Company were $403.1 million at March 31, 1998,
compared to $408.1 million at December 31, 1997, a decline of $5.0 million, or
1.2%.

         Mortgage-backed securities and investment securities decreased by $12.5
million, or 11.2%, during the three months ended March 31, 1998. These decreases
were partially offset by an increase of $6.4 million, or 2.4%, in loans
receivable during the same period. During the three months ended March 31, 1998,
the Company sold $5.0 million of investment securities and utilized the
proceeds, along with principal payments received on mortgage-backed securities
and loans receivable, to fund the growth of the Company's mortgage loan
portfolio and to pay down short-term FHLB advances.

         Loans receivable held for investment were $270.1 million at March 31,
1998, compared to $263.8 million at December 31, 1997. Residential real estate
loans continue to represent the largest category in the loan portfolio. At March
31, 1998, total one- to four-family and multifamily residential real estate
loans were $223.1 million, or 82% of loans receivable, compared to $228.0
million, or 86% of total loans, at December 31, 1997. The Company originated
$15.1 million and $7.6 million, respectively, of portfolio loans during the
three months ended March 31, 1998 and 1997, of which 42% and 50%, respectively,
were collateralized by one- to four-family residential real estate. The Company
engages in nonresidential real estate lending which includes commercial mortgage
loans and construction loans secured by deeds of trust. At March 31, 1998, the
Company's commercial real estate loan portfolio was $20.9 million, or 7.7% of
the loan portfolio. Construction loans are made primarily to residential
builders and to commercial property developers. At March 31, 1998, the Company
had $45.2 million of construction loans, of which $21.4 million, or 47%, had not
yet been disbursed. Net construction loans totaled $23.8 million at March 31,
1998.

                                       12


<PAGE>


         During the three months ended March 31, 1998, the Company's liabilities
decreased by $4.1 million to $356.1 million, from $360.2 million at December 31,
1997. The decrease in liabilities was attributable to a decrease of $10.0
million, or 26.7%, in borrowings, from $37.5 million at December 31, 1997 to
$27.5 million at March 31, 1998. The Company utilized a portion of the cash
proceeds from reductions in the investment securities portfolio to pay down
short-term FHLB advances during the first quarter of 1998, as part of its asset
and liability management objectives. Savings deposits were $326.7 million at
March 31, 1998, compared to $320.6 million at December 31, 1997. The $6.2
million, or 1.9%, increase in deposits was due to growth of $3.4 million in
low-cost transaction accounts (consisting of checking, statement savings, and
money market accounts) and net increases of $2.8 million in certificate of
deposit accounts.

         At March 31, 1998, shareholders' equity was $47.1 million, compared to
$47.9 million at December 31, 1997. Equity was reduced during the first quarter
as a result of stock repurchases by the Company totaling $1.4 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 first quarter 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
$14.84 at March 31, 1998, compared to $14.76 at December 31, 1997.

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

                                       13


<PAGE>

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 3.11% at
December 31, 1997 and approximately unchanged from that level 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 March 31, 1998, the Company had $648,000 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 March 31, 1998,
impaired loans totaled $1.1 million, compared to $1.8 million at December 31,
1997. Impaired loans at March 31, 1998 consisted of loans collateralized by one-
to four-family residences, including four loans which met the definition of a
troubled debt restructuring. Management does not expect any material losses in
the collection of these loans.

         At March 31, 1998, the Company had $200,000 of real estate owned
consisting of two residential properties acquired through foreclosure during
1997. During the first quarter of 1998, the Company sold a property acquired
through foreclosure and recorded a net gain of $9,000 on the sale of real estate
owned.

         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 declined to $2.1 million, or
0.51% of total assets, at March 31, 1998 from $2.5 million, or .61% of assets,
at December 31, 1997. At March 31, 1998, the Company had $2.1 million of assets
classified as substandard and no assets classified as doubtful or loss.
Substandard assets included $648,000 of loans past due 90 days or more and $1.4
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 March 31,
1998 was a one- to four-family residential mortgage with an outstanding
principal balance of $298,000.

                                       14


<PAGE>


         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.

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, 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 March 31, 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 March 31, 1998:
   Total capital
      (to risk-weighted assets)     $18,302     8.00%     $22,877    10.00%    $39,282    17.17%
   Tier 1 capital
      (to risk-weighted assets)        N/A       N/A       13,726     6.00%     37,452    16.37%
   Core (tier 1) capital
      (to adjusted assets)           11,665     3.00%      19,441     5.00%     37,452     9.63%
   Tangible capital
      (to tangible assets)            5,832     1.50%        N/A       N/A      37,452     9.63%

<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

                                       15


<PAGE>

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
March 31, 1998, the Bank would have continued to substantially exceed minimum
risk based capital requirements.

Liquidity
---------

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

         The Company maintains the required minimum levels of liquid assets as
defined by OTS regulations. This requirement, which may be varied at the
direction of the OTS depending upon economic conditions and deposit flows, is
based upon a percentage of deposits and short-term borrowings. The required
ratio is currently 4%. At March 31, 1998, the Company's liquidity ratio was
7.63%, 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 $25,000 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."

                                       16


<PAGE>


                          PART II.  OTHER INFORMATION

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

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

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

                  None.

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

                  None.

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

                  None.

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

                  None.

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

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

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

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

                  Exhibit 27.0 - Financial data schedule.

         (b)      Reports on Form 8-K:

                  None.

                                       17

<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 13, 1998                  By  /s/ Marshall G. Delk
     ____________________                  _______________________________
                                           Marshall G. Delk, President,
                                           Chief Operating Officer
                                             and Director

Date     May 13, 1998                  By  /s/ Deborah R. Chandler
     ____________________                  _______________________________
                                           Deborah R. Chandler,
                                           Senior Vice President
                                             Chief Financial Officer
                                             and Treasurer

                                       18