SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

[ X ]   Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
        Act of 1934 for the fiscal year ended December 27, 1998 or

[   ]   Transition report pursuant to Section 13 or 15(d) of the 
        Securities Exchange Act of 1934

                         Commission file number 0-22534-LA

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

                             MONTEREY PASTA COMPANY
             (Exact name of registrant as specified in its charter)


           DELAWARE                                      77-0227341
   (State of incorporation)                 (IRS employer identification number)

                              1528 MOFFETT STREET
                           SALINAS, CALIFORNIA 93905
                                 (831) 753-6262
    (Address, including zip code, and telephone number, including area code,
                  of Registrant's principal executive offices)

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

        Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001
                                   par value

    Indicate by check mark whether 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, and (2) has been subject to such filing requirements
for the past 90 days.  Yes [X]  No [ ]

    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.

    The approximate aggregate market value of the voting stock held by
non-affiliates of the issuer as of March 16, 1999 was $23,005,407. The number of
shares outstanding of the issuer's common stock as of March 16, 1999, was
12,843,648.

================================================================================
<PAGE>
                                     PART I

 ITEM 1.       BUSINESS

Introduction

        Monterey Pasta Company ("the Company") was incorporated in June 
1989 as a producer and distributor of refrigerated gourmet pasta and 
sauces to restaurants and grocery stores in the Monterey, California 
area.  The Company has since expanded its operations to provide its 
products to grocery and club stores throughout the United States.  The 
Company's overall strategic plan is to enhance the value of the Monterey 
Pasta Company brand name by distributing its gourmet pasta products 
through multiple channels of distribution.

         The Company produces and markets premium quality refrigerated 
gourmet pasta and pasta sauces, emphasizing superior flavors and 
innovative products.  It seeks to build brand recognition and customer 
loyalty by employing a marketing program that focuses on developing 
multiple points of sale for the Company's products.  The Company markets 
and sells its products primarily through grocery and club stores.

The Company currently offers 57 varieties of contemporary gourmet 
pasta and sauce products that are produced using the Company's 
proprietary recipes, including refrigerated cut pasta, ravioli, 
tortellini, tortelloni and pasta sauces.   Examples of the Company's 
pasta and pasta sauces include: Roasted Garlic Chicken Ravioli, Lobster 
Ravioli, Fire Roasted Vegetable Ravioli, Five Cheese Tortelloni, Roasted 
Garlic Artichoke Sauce, Pesto Sauce and Fresh Herb Alfredo sauces.  In 
1998 the Company introduced two new product lines: Restaurant Style 
(large) pastas and sauces, with nine pastas and three sauces; and 
Gourmet Meat Sauces with three sauces.

        The Company sells its pasta and sauces through leading grocery 
store chains including Albertson's, Safeway, Lucky Stores, Jewel, Giant 
Foods, Kroger and QFC; and warehouse club stores such as Costco 
Wholesale and Sam's Club (a division of Wal-Mart).  As of December 27, 
1998, approximately 3,460 grocery and club stores offered Monterey 
Pasta's products.

In 1998 the Company added a web site www.montereypasta.com to 
further support its brand by providing both consumer and investor 
information, and opened an on-line store offering Monterey Pasta 
products to the rapidly growing number of Internet shoppers.  Shoppers 
can now order pastas and sauces for delivery within two days.  In the 
future the Company plans to offer other non-food items as well as other 
food items for Internet purchase through its on-line store.

        The success of the Company's efforts will depend on three key 
factors: (1) whether grocery and club store chains will continue to 
increase the number of their stores offering the Company's products, (2) 
whether the Company can continue to increase the number of grocery and 
club store chains offering its products, and 3) continued introduction 
of new products that meet consumer acceptance.  Grocery and club store 
chains continually re-evaluate the products carried in their stores, and 
no assurances can be given that the chains currently offering the 
Company's products will continue to do so in the future.

        This Form 10-K contains forward-looking statements within the 
meaning of Section 27A of the Securities Act of 1933, and Section 21E of 
the Securities Exchange Act of 1934, that involve substantial risks to 
the Company, including statements about the Company's recent operating 
losses, the possible need for additional capital, the ability to attract 
and retain qualified management, the need to add points of distribution 
and the need to develop new products.  In connection therewith, please 
see the cautionary statements contained herein in "Business Risks" 
which identify important factors that could cause actual results to 
differ materially from those in the forward-looking statements.

Industry Overview

        The Company believes that the U.S. retail market for refrigerated 
pasta is large and highly fragmented.  Although refrigerated pasta 
products are not new, fresh pasta and pasta sauce were essentially 
created as a national specialty food category in 1986 when Nestle Fresh 
Foods Co., a division of Nestle S.A. ("Nestle"), introduced its 
Contadina? brand of fresh pasta.  In 1990, Kraft General Foods, Inc., a 
division of Philip Morris ("Kraft"), unveiled its DiGiorno? brand of 
fresh pasta nationally.

The Company believes that the growth in the fresh pasta category 
has been aided by several factors including heavy advertising and 
promotion by Nestle and Kraft, the changing consumer preference for 
freshly prepared healthy foods, and increasing consumer demand for 
convenient, quick meal solutions.  The Company is further encouraged by 
industry research reports, which show that spending on gourmet, 
specialty foods by consumers in the Company's target market appears to 
be growing.

        No assurance can be given that the refrigerated pasta and sauce 
industry will expand further.  Nor can there be any assurance that 
current trends in healthy eating, perception of fresh pasta and pasta 
sauce as a healthy eating alternative, consumer demand for meal 
solutions, or consumer spending levels in the specialty food category 
will continue in the future.  Additionally, as the Company expands into 
different geographic regions, it may encounter different consumer 
perceptions, attitudes and behavior.  This may adversely impact the 
Company's marketing and expansion strategy and cause it to incur greater 
expenses in the promotion of its products.

Strategy

        Monterey Pasta's objective is to become the leading national 
supplier of refrigerated gourmet pasta and pasta sauces through 
distribution of its products to grocery and club stores.  The key 
elements of the Company's strategy include the following:       

- Create brand awareness by communicating to the consumer that 
Monterey Pasta Company provides a healthful and nutritious line 
of products and promote repeat business by reinforcing positive 
experiences with the Company's products.

- Introduce new products on a timely basis to maintain customer 
interest and to respond to changing consumer tastes.  In order 
to maximize its margins, the Company will focus its efforts on 
those new products that can be manufactured and distributed out 
of its Salinas, California facility and will supplement its 
existing line of cut pasta, ravioli, tortelloni, tortellini, 
and sauces.

- Use the Company's Internet presence to create awareness of, and 
make available, Monterey Pasta products in areas in which they 
are not currently available, and to support Company's existing 
retail and club store accounts.

- Reduce operating costs through continual evaluation of 
administrative and production staffing and procedures.  The 
Company will consider additional capital improvements at its 
manufacturing facility in order to increase production 
efficiencies and capacities, and to reduce the Company's cost 
of goods.

- Expand market share through same-store revenue growth, addition 
of new grocery and club store chains, geographic 
diversification, and product line expansion, including creation 
of additional meal occasions using Monterey Pasta products.

- Consider the acquisition of other compatible companies to 
expand retail distribution, or the range of product offerings, 
or to accomplish other synergies where the acquisition will 
create long-term stockholder value.

        The Company will continue to direct its advertising and 
promotional activities to specific programs customized to suit its 
retail grocery and club store accounts.  These will include in-store 
demonstrations, coupons, scan backs, cross-couponing and other related 
activities. There can be no assurance that the Company will be able to 
increase its net revenues from grocery and club stores.  Because the 
Company will continue to make expenditures associated with the expansion 
of its business, the Company's results of operations may be affected.

        The success of the Company's acquisition strategy is dependent 
upon its ability to generate cash from current operations, attract new 
capital, find suitable acquisition candidates, and successfully 
integrate new businesses and operations.  There is no assurance that 
acquisitions can be financed from current cash flow, and, if not, that 
outside sources of capital will be available to supplement internally-
generated funds.  There is no assurance that management can successfully 
select suitable acquisition candidates and that these new businesses can 
be successfully integrated to create long term stockholder value.

Products

    The Company produces and markets the following gourmet refrigerated cut
pasta, ravioli, tortelloni, tortellini and pasta sauces under the Monterey Pasta
Company product name:

<TABLE>
<CAPTION>

                                                            Year
                                                         Introduced
                                                         -----------
<S>                                                      <C>
Cut Pasta:
-------------------------------------------------------
  Egg Fettuccine.......................................        1989
  Egg Linguine.........................................        1989
  Garlic Basil Fettuccine..............................        1989
  Sweet Red Pepper Fettuccine..........................        1989
  Angel Hair...........................................        1989

Ravioli:
-------------------------------------------------------
  Garlic Basil/Cheese..................................        1989
  Spinach and Cheese...................................        1989
  Gorgonzola Roasted Walnut............................        1989
  Smoked Monterey Jack/Cilantro........................        1992
  Smoked Salmon........................................        1992
  Snow Crab............................................        1993
  Vermont Cheddar/Roasted Garlic.......................        1994
  Chicken Tarragon.....................................        1996
  Low Fat Cheese.......................................        1996
  Roasted Garlic Chicken...............................        1996
  Lobster..............................................        1997
  Fire Roasted Vegetable...............................        1997
  Restaurant Style Artichoke and Cheese................        1998
  Restaurant Style Chicken Piccata.....................        1998
  Restaurant Style Gorgonzola Cheese...................        1998
  Restaurant Style Snow Crab...........................        1998
  Restaurant Style Roasted Garlic......................        1998
  Restaurant Style Herb and Cheese.....................        1998
  Restaurant Style Spinach Ricotta.....................        1998
  Restaurant Style Shrimp Scampi.......................        1998

Tortelloni:
-------------------------------------------------------
  Spinach Mushroom.....................................        1994
  Sundried Tomato and Asiago Cheese....................        1994
  Five Cheese..........................................        1996
  Restaurant Style Pesto Sausage.......................        1998
  Restaurant Style Rainbow Five Cheese.................        1998

Tortellini:
-------------------------------------------------------
  Garlic Basil Cheese..................................        1996

Sauces:
-------------------------------------------------------
  Sweet Tomato Basil...................................        1989
  Pesto................................................        1989
  Sundried Tomato Cream................................        1991
  Fresh Herb Alfredo...................................        1993
  Roasted Garlic Artichoke.............................        1995
  Thick and Chunky Tomato Basil........................        1996
  Restaurant Style Roasted Garlic and Parmesan.........        1998
  Restaurant Style Basil Cream Sauce with Artichokes...        1998
  Restaurant Style Pesto Sauce with Garlic and Basil...        1998

Gourmet Meat Sauces:
-------------------------------------------------------
  Sun Dried Tomato Sausage.............................        1998
  Italian Sausage .....................................        1998
  Homestyle Pasta Sauce with 100% Ground Beef..........        1998

</TABLE>
------------------

        The Company is committed to diversifying its product offerings 
with innovative new pasta products and product lines.  The Company's 
product development team and product development consultants focus on 
creating new pasta products that innovatively blend complementary 
tastes, food textures and ingredients while strictly adhering to the 
Company's emphasis on freshness, healthfulness and quality.  As new 
products are introduced, selected items will be discontinued to help 
ensure that the product line is focused on consumer demand, to maximize 
the Company's return on its shelf space in grocery and club stores, and 
to respond to changing trends and consumer preferences.

        The Company's refrigerated cut pasta, ravioli, tortelloni, 
tortellini and pasta sauces are packaged in clear lightweight containers 
which reveal the fresh appearance of its products.  Monterey Pasta 
presents its products with a colorful logo, distinctive packaging 
styles, ingredient information and cooking instructions to communicate 
the gourmet, fresh and healthful qualities of its pasta and pasta 
sauces.  Its new Restaurant Style and Gourmet Meat Sauce product lines 
feature new packaging designed to maximize shelf impact and generate 
increased consumer interest in the products.

        The goal of the Company is to introduce new products on a timely 
and regular basis to maintain customer interest and to respond to 
changing consumer tastes.  There can be no assurance that the Company's 
efforts to achieve such a goal will result in successful new products or 
product lines or that new products can be developed and introduced on a 
timely and regular basis.  If the Company's new products are not 
successful, the Company's grocery and club store sales may be adversely 
affected as customers seek new products.

        Production

        The Company produces its refrigerated pasta products in a Monterey 
County, California facility which, in 1995, was expanded to 37,666 
square feet from its initial configuration of 10,000 square feet.  It is 
strategically located in one of the largest produce-growing regions in 
the United States and is near several major vendors and food service 
distributors.  The expanded facility is certified by the United States 
Department of Agriculture (USDA) and utilizes state of the art thermal 
processing, chilling and packaging processes.  As part of an addition to 
the existing lease, the Company added 6,014 square feet during 1998 (See 
"Properties" on page 9).  The space will materially improve the 
efficiency, flexibility, and capacity of the existing layout.

        The current facility is staffed by approximately 165 employees, 
including plant management, a purchasing agent, quality control, 
accounting personnel, sales staff, drivers, and production line workers.  
Refrigerated pasta is manufactured at the facility using high quality 
ingredients such as Extra Fancy Durham wheat, whole eggs or egg whites, 
fresh herbs and IQF (Individually Quick Frozen) herbs and spices, and 
local cheeses and milk products.  The ingredients are mixed in 
accordance with the Company's proprietary recipes.  After filling with 
fresh and unusual fillings such as snow crab, lobster, and Vermont 
cheddar cheese, the ravioli and tortellini products receive a prescribed 
thermal process (pasteurization) to insure product safety and to 
preserve flavor, quality and shelf life.  The product is then chilled 
immediately and packaged in controlled atmosphere trays.  Pasta sauces 
are mixed and processed in individual batches in accordance with the 
Company's proprietary processes and recipes and then directly packed and 
sealed in plastic containers.  After preparation, processing, chilling 
and packaging, all pasta and sauces are kept in cold storage to preserve 
quality and shelf life. 

        The Company continuously reviews a variety of capital projects for 
the production department and in the past two years has spent $1.5 
million on capital improvements. With the addition of a third tortelloni 
line in the summer of 1998, the Company maintains adequate production 
capacity to accommodate the forecasted growth of its current product 
line over the next two to three years.  The Company currently has plans 
to increase its refrigeration space by over 100 percent because of 
capacity and efficiency needs by leasing space at a nearby facility.  A 
new pack line will also be added during 1999 to provide for expansion 
capability and improve packaging efficiency. The future addition of 
assets will be evaluated for increased efficiency, flexibility and need.

 Distribution

        The Company's success depends upon an effective system of 
distribution for its products.   In Northern California the Company 
maintains three direct store delivery ("DSD") routes to deliver its 
products to approximately 140 stores.  The Company also delivers product 
direct to warehouses for Safeway, its largest Northern California 
customer. To distribute its products to other customers and parts of the 
country (over 90% of its business), the Company uses common carriers.  
The dependence on other companies for delivery of its products poses a 
risk to the Company.  While this method of delivery has been reliable 
and available at acceptable rates thus far, there can be no assurance 
that the Company will continue to be able to negotiate acceptable 
freight rates in the future and that delivery will not be disrupted for 
reasons including, but not limited to, adverse weather, natural 
disasters or labor disputes in the trucking industry.

Grocery Chain and Club Store Sales

    Monterey Pasta sells its refrigerated pasta and pasta sauces to chain
grocery and club stores.

<TABLE>
<CAPTION>

                                Number of Stores Carrying
                                 Monterey Pasta Products
                            --------------------------------
                               1996       1997       1998

<S>                         <C>
Retail Grocery Stores...        3,400      2,600      2,950
Club Stores.............          200        500        510
                            ---------- ---------- ----------
  Total.................        3,600      3,100      3,460
                            ========== ========== ==========

</TABLE>
------------------

        For the years 1996, 1997 and 1998, Costco accounted for 41%, 50% 
and 46% of total net revenues, while Sam's Club stores accounted for 12% 
of 1997 net revenues and 33% of 1998 net revenues.  The Company 
currently sells its products to six separate Costco regions which make 
purchasing decisions independently of one another.  These regions re-
evaluate, on a regular basis, the products carried in their stores.  
There can be no assurance that these Costco regions will continue to 
offer Monterey Pasta products in the future or continue to allocate 
Monterey Pasta the same amount of shelf space.  The Company currently 
has a one-year agreement, which expires 12/31/99, to supply its products 
to approximately 330 Sam's Club Stores which feature expanded delis.  
Purchasing decisions are made at the company headquarters with input 
from the store level.  While the Company is in the third year of its 
relationship with Sam's, there can be no assurance that Sam's Club 
Stores will continue to carry its products.  The loss of either of these 
major customers could materially adversely affect the Company's business 
operations.

        In 1998, the average grocery store carried 10 individual Monterey 
Pasta products, or Stock Keeping Units  ("SKUs"), and the average club 
store carried 11 SKUs.
operations.

 Marketing 

        The Company's marketing strategy is to create brand awareness by 
communicating to the consumer that Monterey Pasta Company provides a 
gourmet quality nutritious line of products and to promote repeat 
business by reinforcing positive experiences with the Company's 
products.  The Company's approach includes the introduction of new 
products on a timely basis to maintain customer interest and to respond 
to changing consumer tastes.  Additionally, the Company will continue to 
expand its sales into those geographic regions that will best support 
the purchase of the Company's upscale, premium grade products.

 Competition

        The Company's business is subject to significant competition.  The 
fresh pasta and pasta sauce industry is highly competitive and is 
dominated by a two very large multinational companies, Nestle, with its 
Contadina? brand, and Kraft, with its DiGiorno? brand.   There are also 
a number of smaller regional competitors, such as Mallards (recently 
acquired by Tyson), Romance, and Trios, (now owned by ConAgra).  
Multinational competitors have significantly more brand name 
recognition, marketing personnel, and cash resources than the Company.  
Moreover, competition for shelf space in grocery stores is intense and 
poses great difficulty for smaller food companies. 

        To date, the Company has benefited from the marketing efforts of 
Nestle and Kraft.  These companies have committed significant financial 
resources towards advertisement, promotion and development of the fresh 
pasta and pasta sauce industry, which have contributed to the rapid 
expansion of this market and to the increased consumer attention to the 
refrigerated pasta and sauce category.  No assurance, however, can be 
given that these large companies will continue to expend such resources 
in the future or that the Company will continue to enjoy such benefits. 
In the future, the Company may be required to incur significantly 
greater expenses for promotion, advertisement and marketing, which could 
adversely affect profitability.  There can be no assurance that the 
Company will be able to commit funds to promotion, advertisement and 
marketing while operating profitably.

        Competitive factors in the refrigerated pasta and sauce industry 
include brand awareness, product quality and taste, healthfulness, price 
and availability of grocery and club store shelf space. The Company's 
suggested retail prices are slightly higher than its competitors' prices 
to emphasize the premium quality of its product line.  The Company 
believes the excellent quality, taste and healthfulness of its products 
are superior to that of its competitors, although its brand name 
recognition and access to grocery shelf space is significantly less than 
many of its competitors.  The Company also believes that the quality of 
its products and the variety of its product line, which focuses on 
contemporary California cuisine, provide a competitive advantage over 
many companies who market traditional Italian-style pasta and sauce 
products.

 Management

        Information relating to directors and executive officers of the 
Company is set forth in Part III of this report.

 Management Information Systems

        The Company purchased a new integrated management information 
system in 1996 with the objective to implement an electronic link 
between the Company's retail sales operations, production facilities and 
the corporate offices.  The Expandable MRP system ("Expandable") is 
central to the Company's efforts to automate, centralize and streamline 
many of the Company's key functions including accounting and finance, 
human resources, and production and inventory control.           During the 
fall of 1998 the Company successfully installed a new version of 
Expandable to ensure compliance with year 2000 needs.

 Government Regulation

        The Company is subject to the regulations of the U.S. Food and 
Drug Administration (FDA), the U.S. Department of Agriculture (USDA), 
and state and local regulations relating to cleanliness, maintenance of 
food production equipment, food storage, cooking and cooling 
temperatures and food handling, and is subject to unannounced on-site 
inspections of production facilities.  Regulations in new markets, new 
regulations in existing markets, and future changes in existing 
regulations may adversely impact the Company by raising the cost of 
production and delivery of pasta and sauces and/or by affecting the 
perceived healthfulness of the Company's products.  A failure to comply 
with one or more regulatory requirements could result in a variety of 
sanctions, including fines and the withdrawal of the Company's products 
from store shelves.  The Company is not aware of any currently existing 
facts or circumstances that would cause it to fail to comply with any of 
the regulations to which it is currently subject.

 Employees

        As of December 27, 1998, the Company employed a total of 165 
persons, including 27 administrative personnel, 6 sales personnel, 4 
drivers, and 128 production personnel.  None of the Company's employees 
are represented by a labor union and the Company believes its relations 
with its employees are good.

 Trademarks and Service Marks

        The Company has registered the "Monterey Pasta Company" name and 
"postage stamp" logo design with the United States Patent and 
Trademark Office.  There can be no assurance that competitors will not 
adopt similar names or logo designs outside the protection of the 
Company's trademark registration.

 ITEM 2.        PROPERTIES

        During February 1996, the Company leased 9,160 square feet of 
executive office and training space facilities in downtown San 
Francisco.  The Company vacated this space in January 1997 following a 
staff reduction and consolidation of all operations in the Company's 
factory in Monterey County.  The Company subleased the San Francisco 
property at a premium, as of April 1, 1997, to a large publishing 
interest for the remaining term of the lease.

        Effective February 6, 1998, the Company leased an additional 4,649 
sq. ft. in the same building it now occupies in Monterey County, 
California, bringing the total square footage leased to 42,315 pursuant 
to a lease which expires in 2004 with two ten year options for renewal.  
The additional space was used to increase the efficiency of the 
production and storage areas.  In June of 1998, the Company leased an 
additional 1,365 sq. ft. in the same building, pursuant to the same 
lease expiration.  The new area will be used for office space.  The 
total square footage now leased by the Company is 43,680, or 
approximately one acre of building space, and comprises the entire 
building.  Company management believes that the properties/facilities 
are suitable and adequate for the Company's needs.

        The Company currently leases two outside warehouse facilities in 
Salinas, California within a one-mile radius of its production facility.  
One, comprised of 4,800 square feet, is used to store excess coolers and 
display racks, packaging materials and company records, and is a month-
to-month lease.   The second, entered into with a public warehouse 
concern, is for refrigerated storage and varies in usage based on volume 
of finished product stored.  The annual term is for three years 
beginning March 1, 1999.  Cancellation is based on a 60 day notice 
provision in the event of a transfer of control involving the Company 
with no buyout clause, a 900,000 case annual minimum, and annual price 
reviews.

 ITEM 3.        LEGAL PROCEEDINGS
        There are no material pending legal proceedings, other than 
ordinary, routine litigation incidental to the Company's business, to 
which the Company is a party or to which any of its property is subject.  
(The Company's former subsidiary, Upscale Food Outlets ("UFO"), has 
been a defendant in several lawsuits alleging breach of payment in 
vendor related matters. As noted above, the Company sold UFO in 1996, 
and the new owner assumed all current and future liabilities associated 
with that business.  Although there can be no assurance given as the 
results of such legal proceedings, based upon information currently 
available, management does not believe these proceedings will have a 
material adverse effect on the financial position, cash flows, or 
results of operations of the Company.)

 ITEM 4.        SUBMISSION OF MATTERS TO A VOTE OF SECURITY 
HOLDERS

        No matters were submitted to vote during the fourth quarter of 
1998.

                                     PART II

 ITEM 5.        MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
                STOCKHOLDER MATTERS




Price Range of Common Stock

    The Company effected its initial public offering on December 7, 1993 at a
price to the public of $6.00 per share. Since that date, the Company's Common
Stock has traded on the NASDAQ National Market System under the symbol "PSTA."
The following table sets forth for the period indicated, the high and low sales
prices of shares of the Common Stock on the NASDAQ National Market System.

<TABLE>
<CAPTION>

                         High        Low
                       ---------  ---------
<S>                    <C>        <C>
Fiscal year 1997:
  First quarter......   $  2 7/8   $  1 5/8
  Second quarter.....      2 3/4      1 5/8
  Third quarter......      2 3/8     1 7/16
  Fourth quarter.....     2 3/16        3/4

Fiscal year 1998:
  First quarter......   $  1 3/4   $  1 1/8
  Second quarter.....      1 1/2     1 1/16
  Third quarter......     1 9/16     1 1/16
  Fourth quarter.....    1 13/16       1

</TABLE>
------------------

    As of March 1, 1999, there were 316 stockholders of record of the Common
Stock and approximately 4,000 investors with shares in street name.

 Dividend Policy

        The Company has not paid any cash dividends to Common 
stockholders.  The Company intends to retain future earnings in its 
business and does not anticipate paying cash dividends on the 
outstanding Common stock in the near future.

ITEM 6.       SELECTED FINANCIAL DATA

    The following table sets forth selected consolidated financial data for
the Company. These data should be read in conjunction with the consolidated 
financial statements and related notes included elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
                                                                      Years Ended
                                             ----------------------------------------------------------------
                                                 1994         1995         1996         1997         1998
                                             ------------ ------------ ------------ ------------ ------------
                                             (dollar amounts in thousands except per share data)
<S>                                          <C>          <C>          <C>          <C>          <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
--------------------------------------------
Net revenues from continuing operations......     $9,738      $18,716      $24,492      $23,447      $26,217
Income (loss) from continuing operations ....    ($1,261)     ($1,297)     ($8,453)        $474       $2,037
Income (loss) from discontinued operations...    ($1,772)    ($21,279)        $220          $37         --
Net income (loss) per common share...........     ($0.57)      ($3.50)      ($1.13)       $0.02        $0.16
Weighted average common and common     
  equivalent shares outstanding .............  5,303,811    6,440,198    8,276,608   10,458,451   12,979,055

CONSOLIDATED BALANCE SHEET DATA:
--------------------------------------------
Working capital (deficit)....................     $4,719         $597        ($377)      $2,444       $1,601
Total assets.................................    $22,117      $11,691      $10,789      $11,029      $10,835
Total debt and capital lease obligations.....       $127       $3,958       $1,635       $1,797       $2,277
Stockholders' equity.........................    $20,397       $2,405       $5,085       $7,360       $6,709

</TABLE>
------------------

 ITEM 7.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL               
                CONDITION AND RESULTS OF OPERATIONS     

        The following discussion should be read in conjunction with the 
financial statements and related notes and other information included in 
this report.  The financial results reported herein do not indicate the 
financial results that may be achieved by the Company in any future 
period.

 Background

        Monterey Pasta Company was incorporated in June 1989 as a producer 
and wholesaler of refrigerated gourmet pasta and sauces to restaurants 
and grocery stores in the Monterey, California area.  The Company has 
since expanded its operations to provide its products to grocery and 
club stores throughout the United States.  The Company's overall 
strategic plan is to enhance the value of the Monterey Pasta Company 
brand name by distributing its gourmet pasta products through multiple 
channels of distribution.

        The Company's distribution of pasta and pasta sauces to grocery 
and club stores increased from approximately 25 stores as of December 
1989, to approximately 4,300 by December 1995, declined to approximately 
3,100 as of December 28, 1997 and increased, once again, to 
approximately 3,460 stores by December 27, 1988.   During 1994, 1995 and 
1996, significant costs were incurred to promote the expansion that 
occurred, including product demonstration, advertising, warehousing, and 
distribution costs and the hiring of additional personnel.  In 1997, the 
focus was changed to developing a profitable distribution base.  Hence, 
the reduction in store totals, and the return to profitability.  During 
1998 the Company added profitable retail and club distribution and 
expects to continue that trend in 1999.

        The success of the Company's efforts to increase revenue will 
depend on three key factors: (1) whether grocery and club store chains 
will continue to increase the number of their stores offering the 
Company's products, (2) whether the Company can continue to increase the 
number of grocery and club store chains offering its products, and (3) 
continued introduction of new products that meet consumer acceptance.  
Grocery and club store chains continually re-evaluate the products 
carried in their stores, and no assurances can be given that the chains 
currently offering the Company's products will continue to do so in the 
future or that such chains will not reduce the number of stores carrying 
the Company's products.

        The Company believes that access to substantially greater capital 
resources, coupled with continued reduction of its administrative and 
production costs as a percent of sales revenue, will be key requirements 
in the Company's efforts to enhance its competitive position and 
increase its market penetration.  In order to support its expansion 
program, the Company has developed, and is continuing to develop new 
products for consumers and revised advertising and promotional 
activities for its retail grocery and club store accounts. There can be 
no assurance that the Company will be able to increase its net revenues 
from grocery and club stores.  Because the Company will continue to make 
expenditures associated with the expansion of its business, the 
Company's results of operations may be affected.

 Continuing Operations for 1996, 1997 and 1998

        Net revenues from continuing operations were $24,492,000, 
$23,447,000, and $26,217,000 for 1996, 1997 and 1998, respectively, 
reflecting an annual decrease in sales of 4% for 1997, when compared to 
1996, and a 12% increase for 1998 when compared to 1997. The decline in 
sales in 1997 reflected the elimination of unprofitable chains and 
Direct Store Delivery accounts. The 1998 increase resulted from an 
increased number of stores to approximately 3,460 individual grocery and 
club stores by year-end of 1998, compared to approximately 3,100 at year 
end 1997. 

        The 6% gross margin increase from 35% in 1996 to 41% in 1997 was 
due mainly to reduced sales discounts and allowances through better 
controls and elimination of unprofitable accounts.  Gross margin 
stabilized at 41% in 1998.    

        Selling, general and administrative expenses decreased to 
$8,311,000, down $413,000 or 5% in 1998 from $8,724,000 in 1997.   The 
1998 expense level reflects a two-year decline of $7,927,000 from the 
1996 level, or a 49% decrease.  Included in 1996's spending was over $8 
million specifically for sales and marketing, including incremental 
headcount and promotional expenses deemed necessary, at that time, to 
expand the business base. Additionally, selling costs were high as a 
result of the Company's efforts to obtain new customers and enter new 
geographic markets. The 1996 increases were also attributable to 
expansion of the Company's infrastructure, including increased 
administrative and management salaries, recruiting and training, and 
facilities costs.  This trend was reversed in 1997 as a result of 
redefined marketing focus, and facilities consolidation from San 
Francisco to Salinas, with reduced headcount and related overhead 
expenses implemented in late 1996 and early 1997.  Further decreases in 
administrative costs continued during 1998 with a $1.1 million reduction 
in professional fees, public reporting expense, insurance costs, and 
other administrative expenses, partially offset by increased expenses in 
the sales and marketing area related to new customers and stores.  
Management believes the current level of SG&A expenses is consistent 
with efficient operations, and additional expenses in future periods, 
mainly in the sales and marketing area, will be directly associated with 
increased levels of sales. 

        Depreciation and amortization expense increased to $999,000, or 4% 
of net revenues in 1998,  compared to $961,000 or 4% of net revenues in 
1997, and $919,000 or 4% in 1996.  These increases over the past two 
years relate primarily to capital expenditures in the Salinas, 
California production facility.  The Company anticipates further 
increases in depreciation and amortization in future periods as 
additional equipment is purchased and placed in service.

        Net interest expense of $250,000 was recognized in 1998 compared 
to net interest  expense of  $211,000 in 1997 and $431,000 in 1996 
(which included $173,000 for guaranteed discount on convertible debt).  
Cash raised by the March, 1997 private placement helped reduce interest 
expense in 1997.    The 1998 increase was the result of the funds 
borrowed to  repurchase common stock from Clearwater Fund IV LLC in 
March.

  Results of Discontinued Operations for 1996

        Net revenues from discontinued operations for 1996 were $1,796,000 
prior to the sale of former subsidiary Upscale Food Outlets, ("UFO").  
Operating losses from discontinued operations were $839,999 for 1996 
(prior to sale of UFO).  The 1996 losses from business disposition and 
phaseout were charged directly to the reserves established during 1995, 
as were other expenditures related to the restaurant and franchising 
operations.  During 1996, the reserves were also reduced by $220,000 to 
reflect adjustments of estimates to the actual Company expenditures.  
Remaining reserves of $388,000 at the end of 1996, less a recovery of 
$37,000, were utilized during 1997.  

 Liquidity and Capital Resources

        During the twelve months ended December 27, 1998, $3,057,000 of 
cash was provided by the Company's operations, compared to $1,026,000 
used in 1997.  The improvement in 1998 related to an increase in net 
cash income (net income plus depreciation and amortization) from 
continuing operations of $1,601,000 and an improvement in working 
capital accounts, specifically accounts receivable, prepaid expenses and 
accounts payable, partially offset by an increase in inventory.

        In December 1995, the Company obtained a $3,000,000 credit 
facility from a commercial lending institution.  The proceeds from such 
financing were used for sales and marketing expenses, working capital, 
and capital investment.  This facility was renegotiated with another 
bank in July 1997 to avail the Company of lower interest rates. It was 
increased to $4,000,000 in March, 1998 to allow for a stock repurchase 
of 2,365,066 shares of Common from Clearwater Fund IV LLC for a total 
purchase price of $2,690,000 or $1.1375 per share, resulting in a 15.6% 
reduction in shares outstanding.  In July 1998 the credit facility was 
renewed for another year with lower interest rates on the term note and 
the receivables and inventory line, as well as no loan fees (See Note 4 
to the financial statements).  

 A total of $2,741,000 in cash was used in 1998 in connection with 
the stock repurchase referred to above, including costs associated with 
the transaction.  In addition, $1,042,000 in cash was used to purchase 
property, equipment, and intangible assets in 1998, compared to $481,000 
in 1997.  The Company plans to make additional capital expenditures in 
1999 to expand production capability and improve packaging efficiency by 
adding a new pack line.  The Company expects the new line will cost 
approximately $310,000.  Additional projects are planned with a total 
expected outlay of approximately $700,000.  All capital expenditures are 
expected to be funded with cash flow from operations.

 In addition, in March of 1999 the Company purchased the operating assets and
inventory of Frescala Foods, Inc. ("Frescala") for a consideration of $1,345,000
in cash and 300,000 options with immediate vesting to purchase shares of 
the company's common stock (see Notes 4 and 17). The options have an 
approximate fair market value of $145,000, an exercise price of $2.33 
per share, and a three-year expiration.  Additionally, Frescala owners 
could receive an earn-out based upon Frescala sales above a 
predetermined level.  The earn-out will be calculated during the first 
year of combined operations.  Funding for the transaction will come from 
a new $750,000 two-year term note, use of existing accounts receivable 
and inventory line, and cash flow from operations.  

        Management believes that the Company's credit facility and cash 
generated from continuing operations will provide adequate funding to 
meet its needs for normal operations through 1999.

 Sales and Marketing

        The Company's sales and marketing strategy targets sustainable 
growth.  Its focus is on increasing sales through expansion of its club 
store and retail grocery business, increasing its distribution through 
the rapidly growing number of natural and organic food retailers, and 
the introduction of innovative new products designed to meet consumer 
needs.

        Expansion of the Company's club store business continued in 1998 
with the addition of Costco Wholesale's Northwest and Midwest Divisions 
with 44 total warehouses, and introduction of the Company's products 
into Costco's Los Angeles Division.  Distribution of the Company's 
products continues to grow with the national expansion of Sam's Club.  
Monterey Pasta's products are now found in over 380 Sam's Club 
locations.

        During 1998 the Company's retail grocery distribution increased 
significantly with the addition of over 300 stores in the Seattle and 
Portland divisions of Safeway, the addition of 40 stores in Kroger's 
Louisville division, and the introduction of the Company's products into 
the Chicago market in over 20 Jewel locations.

        Monterey Pasta's products are made with no preservatives or 
artificial ingredients.  Capitalizing on this strength, the Company 
continues to pursue increased distribution through natural and organic 
food retailers, whose growth has exceeded 20% in recent years.  The 
Company estimates there are 450 potential natural and organic retail 
grocery stores available, which are potential markets for its products.

        To fulfill its objective of introducing innovative new products, 
in 1998 the Company introduced its new line of Restaurant Style pastas 
and sauces, which feature the largest ravioli currently available to the 
fresh grocery consumer. Offerings in the line include Artichoke and 
Cheese Ravioli, Chicken Piccata Ravioli, Gorgonzola Cheese Ravioli, Snow 
Crab Ravioli, Roasted Garlic, Herb and Cheese Ravioli, Shrimp Scampi 
Ravioli, Spinach Ricotta Ravioli, Pesto Sausage Tortelloni, Rainbow Five 
Cheese Tortelloni, Roasted Garlic & Parmesan Sauce, Basil Cream Sauce 
with Artichokes and Pesto Sauce with Garlic and Basil.

        Also in 1998, the Company introduced a new line of Gourmet Meat 
Sauces, which are the first refrigerated, fresh meat sauces widely 
available in the marketplace.  Varieties in the line are Italian Sausage 
Sauce, Sun Dried Tomato Sausage Sauce, and Homestyle Pasta Sauce made 
with 100% Ground Beef.

 Cost Reductions

        The Company significantly reduced its total corporate and plant 
administrative headcount and costs on a going-forward basis as part of 
the plan adopted in the fourth quarter of 1996 in order to return to 
profitable operations and optimize financial performance.  In January 
1997, the Company relocated its corporate headquarters from San 
Francisco, California to its manufacturing facility in Salinas, 
California.  This move resulted in a substantial reduction of future 
corporate and overhead costs, beginning in the second quarter of 1997.

        Also in 1997, the Company significantly reduced the scope of its 
advertising and media campaigns.  The Company will continue with those 
promotional activities, such as in-store demonstrations, that it 
considers effective and consistent with its ongoing sales objectives.  
In this light, the Company's slotting fees from club stores and grocery 
chains for shelf space allocations, for example, declined significantly 
starting in the fourth quarter of 1996.  Total 1997 selling, general and 
administrative expenses declined to $8,723,000, a $7.5 million decrease 
compared to 1996.  In 1998 the Company increased its sales and marketing 
expenditures by $683,000 to $6,718,000, a level more consistent with 
sustained growth.  This increase was offset by an $821,000 decrease in 
professional fees and insurance expense, and overall SG&A expenses were 
reduced once again, by $412,000, to $8,311,000.  Management believes the 
current level of SG&A expenses is consistent with efficient operations, 
and additional expenses in future periods, mainly in the sales and 
marketing area, will be directly associated with increased levels of 
sales.

        In an effort to sustain its commitment to reduce cost of 
production, the Company will continue to invest in a variety of 
machinery and equipment and leasehold improvements in retooling its 
Salinas production facilities.  The Company has spent approximately $1.4 
million over the past two years in equipment and facilities 
improvements.

 Major Customers

        Two of the Company's retail customers, Costco and Sam's, accounted 
for 46% and 33%, respectively of the Company's sales for the twelve 
months ended December 27, 1998.  No other customer accounted for greater 
than 10% of net revenues for the period.

 Business Risks

        Certain characteristics and dynamics of  the Company's business 
and of financial markets generally create risks to the Company's long-
term success and to predictable quarterly results.  These risks include:

- Recent Operating Losses:  No Assurance of Continued Profitability.  
In the second quarter of 1994, the Company reported its first 
operating loss from continuing operations.   Subsequent to that 
quarter the Company incurred losses through the first quarter of 
1997, after which it regained profitability, which has continued for 
seven consecutive quarters.   At December 27, 1998, the Company had 
an accumulated deficit of $32,680,000.  There can be no assurance 
that the Company will maintain its recent profitability in the long 
term.  

- Dependence on Major Customers-Need to Diversify Distribution.  During 
1998, two customers accounted for 46%, and 33%, respectively, of the 
Company's total revenues.  Loss of either of these customers, Costco 
or Sam's Club Stores, would have a material adverse effect on the 
Company.  The Company is seeking to diversify its distribution 
channels by adding additional grocery and club store chains as 
customers.  Failure to diversify its customer base could have a 
material adverse effect on the Company's future growth and 
profitability.

- Liquidity:  Need for Additional Capital.   Management believes that 
its operations and existing bank lines of credit will provide 
adequate liquidity to meet the Company's planned capital and 
operating requirements for normal operations through 1999.  If the 
Company's operations do not provide cash sufficient to fund its 
operations, and the Company seeks outside financing, there can be no 
assurance that the Company will be able to obtain such financing when 
needed, on acceptable terms, or at all.  In addition, any future 
equity financing or convertible debt financing would cause the 
Company's stockholders to incur dilution in net tangible book value 
per share of Common Stock.

- Hiring and Retention of Key Personnel:  Management Transition. The 
success of the Company depends on its ability to operate under new 
management that was retained in mid-1997, and to motivate and retain 
key employees and officers.  There can be no assurance that the 
Company's new management team will be able to perform effectively, or 
that significant management turnover will not continue in the future.  
The Company has key man insurance policies in place in the face 
amount of $500,000 for its Chief Executive Officer, R. Lance Hewitt, 
and its Chief Financial Officer, Stephen L. Brinkman.

- Impact of Inflation. The Company believes that inflation has not had 
a material impact on its operations to date.  Substantial increases 
in labor, employee benefits, freight, energy, ingredients and 
packaging, rents and other operating expenses could adversely affect 
the operations of the Company's business in future periods.  The 
Company cannot predict whether such increases will occur in the 
future.

- Volatility of Stock Price.  The market price of the Company's common 
stock has fluctuated substantially since the initial public offering 
of the Company's common stock in December 1993.  Such volatility may, 
in part, be attributable to the Company's operating results or to 
changes in the direction of the Company's expansion efforts.  In 
addition,  changes in general conditions in the economy, the 
financial markets or the food industry, natural disasters or other 
developments affecting the Company or its competitors could cause the 
market price of the Company's common stock to fluctuate 
substantially.  In addition, in recent years,  the stock market has 
experienced extreme price and volume fluctuations.  This volatility 
has had a significant effect on the market prices of securities 
issued by many companies, including the Company, for reasons 
sometimes unrelated to the operating performance of these companies.  
Any shortfall in the Company's net sales or earnings from levels 
expected by securities analysts or the market could have an immediate 
and significant adverse effect on the trading  price of the Company's 
common stock in any given period.  Additionally, the Company may not 
learn of such shortfalls until late in the fiscal quarter, which 
could result in an even more immediate and significant adverse effect 
on the trading price of the Company's common stock.

- Risks Inherent in Food Production.  The Company faces all of the 
risks inherent in the production and distribution of refrigerated 
food products, including contamination, adulteration and spoilage, 
and the associated risks of product liability litigation and declines 
in the price of its stock may be associated with even an isolated 
event.  The Company has a modern production facility, employs what it 
believes is state-of-the-art thermal processing, temperature-
controlled storage, HAACP programs intended to insure food safety, 
and has obtained USDA approval for its production plant.  However, 
there can be no assurance that the Company's procedures will be 
adequate to prevent the occurrence of such events.

- Seasonality and Quarterly Results.  The Company's grocery and club 
store accounts are expected to experience seasonal fluctuations to 
some extent.  The Company's business in general may also be affected 
by a variety of other factors, including but not limited to general 
economic trends, competition, marketing programs, and special or 
unusual events.

- Dependence on Common Carriers. The Company continues to be dependent 
on common carriers to distribute its products.  Any disruption in its 
distribution system or increase in the costs thereof could have a 
material adverse impact on the Company's business.

- Marketing and Sales Risks.  The future success of the Company's 
efforts will depend on a number of factors, including whether grocery 
and club store chains will continue to expand the number of their 
individual stores offering the Company's products and whether 
allowances and other incentives will expand retail distribution.  
Expansion into new markets increases the risk of significant product 
returns resulting from the Company's supply of  slower selling items 
to its customers.  In addition, grocery and club store chains 
continually re-evaluate the products carried in their stores and no 
assurances can be given that the chains currently offering the 
Company's products will continue to do so in the future.  Should 
these channels choose to reduce or eliminate products, the Company 
could experience a significant reduction in its product sales.  As 
indicated previously,  the Company remains dependent on the use of 
slotting allowances and other incentives to expand retail 
distribution.  In order to reduce risk, the Company has significantly 
reduced expansion into new markets requiring such major expenditures.  

- Year 2000.  Many computer systems were written using two digits 
rather than four to define the applicable year.  As a result, those 
computer programs have time sensitive software that recognizes a date 
using "00" as the year 1900 rather than the year 2000.  This could 
cause a system failure or miscalculations causing disruptions of 
operations, including, among other things, a temporary inability to 
process transactions, send invoices, or engage in similar normal 
business activities.

The Company utilizes software vendors for its major computer program 
applications.   The Company has a task force in place to address 
"Year 2000" issues and installation of a year 2000 compliant 
version of the Company's financial, inventory, and production 
software was completed in November, 1998.  The Company has also 
completed an assessment of its internal personal computer network, 
which is expected to be year 2000 compliant by the end of March 1999.  
Updating telephones, facsimile machines and labeling equipment for 
year 2000 is scheduled to be complete by mid-1999.    

In addition, the Company has been in contact with its suppliers and 
other third parties to determine the extent, which they may be 
vulnerable to year 2000 issues.  As this assessment continues, 
matters may come to the Company's attention, which could give rise to 
the need for remedial measures, which have not yet been identified.  
The Company cannot currently predict the potential effect of third 
parties "year 2000" issues on its business.  It is expected that 
assessment, remediation and contingency planning activities will be 
on-going throughout 1999, with the goal of appropriately resolving 
all material internal systems and third party issues.  The Company 
intends to utilize both internal and external resources to reprogram, 
replace and test the systems for the year 2000 modifications.

The Company does not believe that the cost of becoming year 2000 
compliant will be in excess of $70,000.  To date the Company has 
incurred minor expenses, primarily for assessment of the year 2000 
issue, development of a modification plan, and for the installation 
of a year 2000 compliant version of its financial, inventory, and 
production software.    

The cost of the project and the dates on which the Company believes 
it will complete the year 2000 modifications are based on 
management's best estimates.  However, there can be no guarantee that 
these estimates will be achieved.  Failure to be year 2000 compliant 
in a timely fashion could have a material adverse effect on the 
Company's operations and financial condition.

Recently Issued Accounting Standards

         In February 1998, the Financial Accounting Standards Board issued 
Statement of Financial Accounting Standards (SFAS) No. 132, Employers' 
Disclosures about Postretirement Benefits.  SFAS No. 132 standardizes the 
disclosure requirements for pensions and other postretirement benefits to 
the extent practicable, requires additional information on changes in the 
benefit obligations and fair values of plan assets that will facilitate 
financial analysis, and eliminates certain disclosures that are no longer 
as useful as they were when previous related accounting standards were 
issued. 

         SFAS 132 is effective for financial statements for years 
beginning after December 15, 1997 and requires comparative information 
for earlier years  to be restated unless the information is not readily 
available, in which case the notes to the financial statements should 
include all available information and a description of the information 
not available.  Management has not yet determined whether the Company's 
current financial statement disclosures will need to be modified based 
upon current operations.  Results of operations and financial position 
will be unaffected by implementation of this standard.   

        In June 1998, the Financial Accounting Standards Board issued SFAS 
133, Accounting for Derivative Instruments and Hedging Activities.  SFAS 
133 requires companies to recognize all derivative contracts as either 
assets or liabilities in the balance sheet and to measure them at fair 
value.  If certain conditions are met, a derivative may be specifically 
designated as a hedge, the objective of which is to match the timing of 
gain or loss recognition on the hedging derivative with the recognition 
of (i) the changes in the fair value of the hedged asset or liability 
that are attributable to  the hedged risk or (ii) the earnings' effect 
of the hedged forecast transaction.  For a derivative not designated as 
a hedging instrument, the gain or loss is recognized in income in the 
period of change.  SFAS 133 is effective for all fiscal quarters 
beginning after June 15, 1999.  Historically the Company has not entered 
into derivative contracts either to hedge existing risks or for 
speculative purposes.  Accordingly, the Company does not expect adoption 
of this new standard to affect its financial statements.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The financial statements and supplementary data of the Company 
required by this item are set forth at the pages indicated at Item 
14(a).

ITEM 9.        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON                
               ACCOUNTING AND FINANCIAL DISCLOSURE

        None

                                     PART III

ITEM 10.       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    As of March 16, 1999, the directors, executive officers, and other
significant employees of the Company are as follows:

<TABLE>
<CAPTION>
Directors and Executive Officers:

             Name               Age  
------------------------------ ----- ------------------------------------------
<S>                            <C>   <C>
Charles B. Bonner...........     57  Director
Thomas E. Kees..............     48  Director
R. Lance Hewitt.............     59  Chief Executive Officer, President and
                                     Director
Floyd R. Hill...............     55  Director
Van Tunstall................     52  Director
James Wong..................     52  Director
Stephen L. Brinkman.........     51  Chief Financial Officer and Corporate
                                     Secretary
<CAPTION>
Other Significant Employees:

             Name               Age                   Position
------------------------------ ----- ------------------------------------------
Lynn Port...................     54  Plant Controller
Roy G. Scotton..............     39  Director-Logistics and Human
                                     Resources
Peter F. Klein..............     39  Plant Manager
Ron Hendershott.............     48  Director-Quality Assurance and Tech.
                                     Svcs.
Don Anspaugh................     33  Sales Manager-Mid Central Region
Clifford Farmer.............     43  Natural Foods/DSD Sales Manager
Lisa Player.................     39  Sales Manager-East
Joseph Stirlacci............     39  Sales Manager-West
</TABLE>

        Normally each director is elected for a period of one year and 
serves until his or her successor is duly elected by the stockholders.  
Directors may be elected by the Board to fill a vacancy between annual 
stockholder meeting elections.  

        The principal occupations of each director and executive officer 
of the Company, for at least the past five years, are as follows:

        Charles B. Bonner, Director.  Mr. Bonner served as a Director of 
the Company from 1993 through January 1995, and was reappointed as a 
Director effective September, 1995.  Mr. Bonner is President of Pacific 
Resources, Inc., a mergers and acquisitions advisory firm, a position he 
has held since September 1989.  Mr. Bonner also serves as a director for 
the following entities: Organic Food Products, Everything Metal 
Imaginable, Inc., and Daystar Funds, L.P.

        R. Lance Hewitt, President, Chief Executive Officer and Director.  
Mr. Hewitt joined the Company in June, 1997 as President and Director.  
He was named Chief Executive Officer in August, 1997.  Mr. Hewitt was 
most recently President of Carriage House Fruit Company from 1995 to 
1997.  He was Chief Operating Officer of Ingro Mexican Foods from 1988 
to 1995.  Hewitt also served as Vice President of Marketing and Sales 
for the Lawry's Foods division of Thomas J. Lipton, Inc., a subsidiary 
of Unilever, and spent fifteen years with McCormick Schilling, Inc. in 
various executive capacities.

        Floyd R. Hill, Director.  Mr. Hill co-founded the Company in 1989, 
served as its Secretary/Treasurer and Chief Executive Officer until 
1993, and served as a Director of the Company from 1989 until 1994.  Mr. 
Hill became a Director again in January, 1995.  He also served as the 
Senior Vice President of Production from August 1993 until November 
1995.  From 1969 until 1991, Mr. Hill was employed by Eli Lilly & Co. in 
various marketing and product development positions.  Mr. Hill joined 
Organic Food Products in November 1995 as Chief Operating Officer, and 
was promoted the Chief Executive Officer in December, 1995, a position 
he held until April, 1998.  He is currently serving as an independent 
consultant to Organic Food Products and is the owner and operator of a 
motel in Tombstone, Arizona. 

        Thomas E. Kees, Director.  Mr. Kees has served as President, 
Chief Executive Officer, and Chairman of Legacy Brands, Inc. since 
September 1, 1995.  Legacy is a licensing and marketing company for 
highly recognized food products such as Mrs. Field's frozen desserts, 
Gumby food and beverage items and Mattel's Extreme Dinosaurs.  From 1994 
to 1995 he was the Senior Vice President of Retail Development at A.C. 
Nielsen where he founded and chaired the Nielsen Retail Advisory Board.  
Mr. Kees served as Executive Vice President of Raley's Supermarkets and 
Drug Centers, a regional sales operator of 85 Stores in Northern 
California and Nevada, from 1992 to 1994.           

        Van Tunstall, Director.  Mr. Tunstall was elected to the Board of 
Directors in February 1997.  He has been an independent consultant with 
a variety of companies since 1997.  Mr. Tunstall was a senior executive 
with  Gilroy Foods, Inc., an international  manufacturer of various food 
product ingredients, from 1977 to 1995.  He served as President and 
Chairman of the Board from 1991 through 1995.   Previously, Mr. Tunstall 
held various positions with McCormick & Company, Inc. 

        James Wong, Director.  Mr. Wong was elected to the Board of 
Directors in March 1997.  He serves as Chairman and Chief Executive 
Officer of Directions International, a U.S.  based management consulting 
firm which he founded in 1988.  He has worked on five continents 
facilitating strategic alliances with suppliers and joint venture 
partners to improve global market share and profitability.    Mr. Wong 
serves as a director on a variety of  boards for both profit and not-
for-profit, privately held organizations.

        Stephen L. Brinkman, Chief Financial Officer and Corporate 
Secretary.  Mr. Brinkman joined the Company in August, 1997 after a 17 
year career with Gilroy Foods, Inc., where he was Controller from 1984 
through 1988 and Vice President, Finance and Administration from 1989 
through 1996.   Previously, he was Controller for a large California-
based farming company, and worked for Security Pacific Bank in 
agricultural banking.

        The principal occupations of certain other significant employees 
of the Company, for at least the past five years, are as follows:

        Lynn Port, Plant Controller.  Mr. Port came to the Company in 
January 1998.  He has over 24 years experience as a controller in 
agribusiness, retail, government and health care concerns, most recently 
with Country Home Care from 1995 through 1997.  From 1989 to 1995 Mr. 
Port was Director of Finance for the Monterey County Housing Authority.  
Prior to 1989 Mr. Port served for four years as Controller for Gilroy 
Canning, Inc., a large tomato processing company.

         Roy G. Scotton, Director-Logistics and Human Resources.  Mr. 
Scotton joined the Company in June 1996 as Production Manager and was 
subsequently promoted to Plant Manager.  Mr. Scotton served at Nestle 
Food Company from 1987 to 1996, most recently as Organizational 
Development Manager.  In March 1998, Mr. Scotton was reassigned to the 
responsibilities formerly held by Mr. Klein, with the exception of plant 
maintenance.

        Peter F. Klein, Plant Manager.  Mr. Klein became Production 
Manager at the Company in November 1994, responsible for production and 
plant maintenance.  In 1996 he was promoted to Plant Superintendent 
responsible for warehouse functions and plant maintenance.   He has over 
15 years of experience in overseeing warehouse operations, shipping and 
receiving, and maintenance services.  In March of 1998 Mr. Klein assumed 
responsibility for plant operations as well as plant maintenance and 
production planning, relinquishing his warehouse functions to Mr. 
Scotton.     

        Ron Hendershott, Director of Quality Assurance and Technical 
Services.  Mr. Hendershott joined the Company in May 1995 as Quality 
Control Manager.  He was promoted to his current position in March 1998. 
Mr. Hendershott has over 25 years of managerial experience in Quality 
Control/Quality Assurance,  technical services, and regulatory affairs.  
Prior to joining Monterey Pasta he was with La Victoria Foods as 
Director of Quality Control from 1993 through 1995 after spending two 
years with Weight Watchers as Manager of Technical Support Services.   
He also served American Home Foods for seven years as Regulatory Affairs 
Manager.

        Don Anspaugh,  Sales Manager-Mid Central Region.  Mr. Anspaugh 
joined the Company in March, 1998 to replace Jody Cook, who assumed new 
responsibilities as a Manufacturer's Agent in a consulting role and has 
since left the Company.  Mr. Anspaugh has nearly ten years of sales 
experience, most recently with Willett America, where he served as 
Inside Sales Manager from 1995 through 1997.  He was DSD Manager with 
the Company from 1994 to 1995.  Mr. Anspaugh also was an Area Sales 
Manager with Labeljet Company, a division of  Willett America, and was a 
District Sales Representative with Coca-Cola.

        Joseph Stirlacci, Sales Manager-West.  Mr. Stirlacci has served as 
Western Zone Manager since December, 1995.  His primary responsibility 
is to manage, maintain and secure club store accounts.  Mr. Stirlacci 
has been in the food and beverage industry since 1981, serving seven 
years with Young's Market managing wholesale liquor and wine from 1988 
to 1995, after six years as the account executive for four large grocery 
chains.

         Lisa Player, Sales Manager-East.  Ms. Player joined the Company 
in the capacity of Eastern Zone Sales Manager and Sam's Club Stores 
Account Manager in March, 1998 after spending a year as Corporate Sales 
Account Executive with FTP Travel Management Group, a large regional 
corporate travel management company.  Prior to that she was employed for 
over five years by Trio's Pasta Products of Chelsea, Massachusetts, a 
competitor of the Company, ultimately as National Account Sales Manager.  
During her tenure with Trio's, Ms. Player was responsible for the Sam's 
Club account (which, after her tenure with Trio's, was acquired by the 
Company in September, 1997).  

         Clifford M. (Rick) Farmer.  Mr. Farmer joined Monterey Pasta 
Company in April 1991 and was responsible for developing the Company's 
Direct Store Delivery operation.   After the successful startup of the 
DSD system, he was promoted in 1992 to Plant Operations/Distribution 
Manager.  Her moved back to the DSD operation in June 1993 in the 
capacity of Northern California Division Manager and was ultimately 
promoted to Western Regional Operations Manager.  He has been 
responsible for the Company's DSD operations since 1993 and recently 
added natural food and specialty stores to his responsibilities.  Mr. 
Farmer has over 15 years of food sales and distribution experience 
including as four-year stint as Executive Vice President of Golden Yolk 
Egg Company in San Francisco.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

        Section 16(a) of the Securities Exchange Act of 1934, as amended, 
requires the Company's directors and executive officers, and persons who 
own more than 10% of a registered class of the Company's equity 
securities, to file with the SEC initial reports of ownership and reports 
of changes in ownership of Common Stock and other equity securities of 
the Company.  Officers, directors and greater than 10% beneficial owners 
are required by SEC regulations to furnish the Company with copies of all 
reports they file under Section 16(a).  To the Company's knowledge, based 
solely on its review of the copies of such reports furnished to the 
Company and written representations that no other reports were required, 
all Section 16(a) filing requirements applicable to its officers, 
directors and greater than 10% beneficial owners were complied with 
during the fiscal year ended December 27, 1998, with three exceptions:  
Mr. Tom Kees' Form 4 report for August 1998 was filed one day late, the 
Form 5 for 1997 for Mr. Ken Steel, a former CEO and Director was filed 
late, and Mr. Dan Gallery's Form 4 for May 1998 was returned for 
corrections and subsequently refiled after the original due date.

ITEM 11. EXECUTIVE COMPENSATION

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                          Long Term Compensation
                                                                         -----------------------
                                                                                          All
                                          Annual Compensation            Securities      Other
                             ------------------------------------------- Underlying     Compen-
Name and Principal Position   Year   Salary $      Bonus $   Other $      Options#      sation
---------------------------- ------- ------------ --------- ------------ ------------- ---------
<S>                          <C>     <C>          <C>       <C>          <C>           <C>
R. Lance Hewitt............    1998  $175,000 (1)  $61,250    $9,000 (1)      --   (1)    $ --
  President and Chief          1997   $94,231 (1)    $ --     $4,500 (1)   100,000 (1)    $ --
  Executive Officer            1996        N/A          N/A       N/A          N/A           N/A


Stephen L. Brinkman            1998  $115,293 (2)  $23,540     $ --  (2)      --   (2)    $ --
  Chief Financial Officer      1997     $ --         $ --      $ --         60,000 (2)    $ --
                               1996        N/A          N/A       N/A          N/A           N/A

</TABLE>
----------------

(1)     Mr. Hewitt was appointed President in June of 1997 and Chief 
Executive Officer in August 1997.   He was eligible for a 35% bonus upon 
completing his first full year of employment, which was paid in June 
1998.  For every year thereafter he is eligible for a bonus of up to a 
maximum of 35% of his salary annually for achieving agreed-upon income 
targets, as approved by the Board of Directors, and an additional 25% of 
his salary for achieving certain specific objectives for each fiscal 
period.  He was also eligible to vest and vested 50,000 options because 
he was still employed on the first anniversary of his May 26, 1997 
employment agreement, and is eligible to vest 50,000 options if still 
employed on the second anniversary of the agreement.  Mr. Hewitt may 
also receive, at the discretion of the Board of Directors, an additional 
200,000 options during the first two years of employment split as 
follows: 120,000 for achieving agreed-upon business goals in the first 
year and 80,000 for achieving business goals in the second year. The 
cycle for measurement of Mr. Hewitt's eligibility for bonus and those 
options tied to performance was converted to a fiscal year basis during 
the fourth quarter of 1998 by resolution of the board of Directors at 
its October 22, 1998 meeting.  As of December 27, 1998 the Board of 
Directors had not authorized additional options.  Mr. Hewitt also 
receives an auto allowance of $750 per month.

(2)     Mr. Brinkman was appointed Chief Financial Officer in September 
1997.  He was eligible for and received a 20% bonus based upon 
performance upon completion of his first full year of employment.  For 
every year thereafter he is eligible for a bonus of up to 20% based upon 
the achievement of performance criteria agreed upon with the Chief 
Executive Officer.  Mr. Brinkman was granted 60,000 options in 1997.  He 
vested 10,000 options upon his initial employment date, 10,000 options 
on his first anniversary and 10,000 options for achieving certain 
performance criteria in his first full year of employment.  In addition, 
he is eligible to vest 10,000 options on his second anniversary of 
employment, 10,000 options for achieving certain performance criteria in 
his second full year of employment, 5,000 options on his third 
anniversary of employment and 5,000 options for achieving certain 
performance criteria in his third full year of employment.  The cycle 
for measurement of Mr. Brinkman's eligibility for bonus and those 
options tied to performance was converted to a fiscal year basis during 
the fourth quarter of 1998 at the direction of the Chief Executive 
Officer.    

        Option Grants in Last fiscal Year   

        There were no option grants to executive officers during 1998.  In 
addition, there were no options exercised during 1998 by any holder.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
  VALUES

<TABLE>
<CAPTION>

                                           Number of Securities         Value of Unexercised
                                           Underlying Unexercised       In-the-Money Options
                                          Options at December 27, 199   at December 27, 1998
                                         --------------------------- --------------------------
Name                                      Exercisable  Unexercisable  Exercisable  Unexercisable
--------------------                     ------------- ------------- ------------- ------------
<S>                                      <C>           <C>           <C>           <C>
R. Lance Hewitt................                50,000        50,000          --            --
Stephen L. Brinkman............                30,000        30,000          --            --
</TABLE>

Employment Contracts

        Mr. Hewitt and Mr. Brinkman have employment agreements, the terms 
of which were outlined under "Executive Compensation."

ITEM 12.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND             
                MANAGEMENT

        The table on the following page sets forth as of March 3, 1999  
(except as noted in the footnotes to the table), certain information 
with respect to the beneficial ownership of the Company's Common Stock 
by  (i) all persons known by the Company to be the beneficial owners of 
more than 5% of the outstanding Common Stock of the Company,  (ii) each 
director and director-nominee of the Company,  (iii) the Chief Executive 
Officer as of  March 15, 1999, and  (iv) all executive officers and 
directors of the Company for fiscal year 1998 through March 15, 1999,  
as a group.

<TABLE>
<CAPTION>
                                                   Amount and
                                                   Nature of    Percent
                                                   Beneficial      of
Name and Address of Beneficial Owner(1)           Ownership(2)  Class (2)
-----------------------------------------------   ------------  --------
<S>                                               <C>           <C>
Clearwater Fund IV, Ltd. .......................    1,483,934     10.35
  611 Druid Road East, Suite 200
  Clearwater, Florida 34616
Gruber and McBaine Capital Management (3).......    1,416,200      9.88
  50 Osgood Place, Penthouse
  San Francisco, CA 94133
Van Tunstall (4)................................       77,300      0.54
Floyd R. Hill (5)...............................      159,000      1.11
James Wong (6)..................................       15,000      0.11
R. Lance Hewitt (7).............................       65,000      0.45
Charles B. Bonner (8)...........................      124,727      0.87
Thomas E. Kees.... .............................        8,000      0.06
Stephen L. Brinkman (9)........................        48,000      0.33
All Officers and Directors as a group
 (7 persons)....................................      497,027      3.47
</TABLE>
----------------
(1)    Unless otherwise noted, the address of each named person is:  
Care of Monterey Pasta Company,  1528 Moffett Street, Salinas, CA  
93905.

(2)    Includes shares of Monterey Pasta Company Common Stock underlying 
the options and convertible securities outstanding held by the 
beneficial owners with respect to whom the calculation is made, but does 
not include shares of Common Stock that may not be acquired until more 
than 60 days after March 3, 1999.

(3) John D. Gruber and J. Patterson McBaine are the only directors of, 
and hold all executive offices of, Gruber and McBaine Capital 
Management ("GMCM"), an investment advisor.  GMCM, together with 
Messrs. Gruber, McBaine, and Thomas O. Lloyd-Butler, are the general 
partners of Lagunitas Partners, L.P. ("Lag"), a California 
investment limited partnership.  As of 3/01/99 GMCM had shared 
voting and investment power over 1,078,800 shares; Mr. Gruber has 
sole voting and investment power over 166,200 shares and shared 
voting and investment power over 1,078,800 shares; Mr. McBaine has 
sole voting and investment power over 171,200 shares and shared 
voting and investment power over 1,078,800 shares; Lag has sole 
voting and investment power over 216,700 shares; and Mr. Butler has 
shared voting and investment power over 1,078,800 shares.   

(4)    Includes 15,000  exercisable options granted under the 1993 Stock 
Option Plan. 

(5)    Includes  59,000 exercisable options granted under the 1993 Stock 
Option Plan.

(6)    Includes 15,000 exercisable options granted under the 1993 Stock 
Option Plan.

(7)    Includes 50,000  exercisable options granted under the 1993 Stock 
Option Plan.

(8)    Includes 71,000  exercisable options granted under the 1993 Stock 
Option Plan. 

(9)    Includes 30,000  exercisable options granted under the 1993 Stock 
Option Plan.


ITEM 13.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                On April 30, 1997, Mr. Kenneth Steel, former Chief Executive 
Officer, Director, and stockholder was granted rights to purchase 
550,000 shares of Common Stock with a full recourse promissory note for 
the full amount at a per share price of $1.875 per share, subject to 
time served and performance restrictions.  The note was converted to a 
two-year non-interest bearing non-recourse status on December 31, 1997, 
and was renewed for $562,500, the balance after the forfeiture of 
250,000 shares due to performance restrictions. The shares have now been 
classified as options and the $51,000 calculated as the fair market 
value in the Black-Scholes model was recorded as an expense during the 
first quarter of 1998.

                                     PART IV

ITEM 14.        EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON  
                FORM 8-K 

(a)(1)  Consolidated Financial Statements of Monterey Pasta Company:

        Report of Independent Certified Public Accountants

        Consolidated Balance Sheets: Year-End 1997 and 1998

        Consolidated Statements of Operations: Years Ended 1996, 1997 and 1998

        Consolidated Statements of Stockholders' Equity: Years Ended 1996, 
        1997 and 1998

        Consolidated Statements of Cash Flows:  Years Ended 1996, 1997 and 1998

        Summary of Significant Accounting Policies

        Notes to Consolidated Financial Statements

        Schedule II - Valuation and Qualifying Accounts                         


        All other schedules have been omitted since the required 
        information is contained in the Consolidated Financial Statements
        or because such schedules are not required.


(a)(2)  Exhibits:  See Index to Exhibits on page 52.  The Exhibits 
listed in the accompanying Index of Exhibits are filed or incorporated 
by reference as part of this report.  Exhibit Nos. 10.1, 10.2, 10.18, 
10.19, 10.20, 10.21, 10.22, 10.44, 10.45, 10.46, 10.48, and 10.49 are 
management contracts or compensatory plans or arrangements.

(b)     Reports on Form 8-K filed in the fourth quarter of 1998:

        None

<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



To the Stockholders and Board of Directors of
Monterey Pasta Company


We have audited the accompanying consolidated balance sheets of Monterey 
Pasta Company and subsidiary as of December 28, 1997 and December 27, 
1998 and the related consolidated statements of operations, 
stockholders' equity and cash flows for each of the three years in the 
period ended December 27, 1998. We have also audited the Schedule listed 
in the accompanying index at Item 14(a).  These financial statements and 
the Schedule are the responsibility of Monterey Pasta Company's 
management.  Our responsibility is to express an opinion on these 
financial statements and the Schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing 
standards.  These standards require that we plan and perform the audits 
to obtain reasonable assurance about whether the financial statements 
and Schedule are free of material misstatement.  An audit includes 
examining, on a test basis, evidence supporting the amounts and 
disclosures in the financial statements and Schedule.  An audit also 
includes assessing the accounting principles used and significant 
estimates made by management, as well as evaluating the overall 
financial statement presentation of the financial statements and 
Schedule.  We believe that our audits provide a reasonable basis for our 
opinion.

In our opinion, such consolidated financial statements present fairly, 
in all material respects, the consolidated financial position of  
Monterey Pasta Company and subsidiary at December 28, 1997 and December 
27, 1998, and the results of their operations and their cash flows for 
each of the three years in the period ended December 27, 1998, in 
conformity with generally accepted accounting principles.

Also, in our opinion, the Schedule presents fairly in all material 
respects, the information set forth therein.



/s/ BDO Seidman LLP
-------------------

BDO Seidman, LLP
San Francisco, California
January 29, 1999, except for Notes 4 and 17, which are as of March 12, 1999

<PAGE>


                             MONTEREY PASTA COMPANY
                          CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                      December 28,  December 27,
                                                          1997          1998
                                                      ------------  ------------
<S>                                                   <C>           <C>
                     ASSETS (Note 4)
Current assets:
  Cash and cash equivalents (Note 1).................    $410,228       $61,645
  Accounts receivable, less allowances of $332,877
    and $312,408 (Notes 1, 8, and 12)................   2,440,745     2,062,565
  Inventories (Note 2)...............................   1,218,546     1,813,653
  Prepaid expense and other (Note 11)................   1,519,801     1,291,251
                                                      ------------  ------------
    Total current assets.............................   5,589,320     5,229,114

Property and equipment, net (Notes 3, 4 and 8).......   5,057,846     5,261,723
Intangible and other assets, net.....................     101,582       174,302
Deposits and other...................................     280,245       170,141
                                                      ------------  ------------
    Total assets..................................... $11,028,993   $10,835,280
                                                      ============  ============

             LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable...................................     954,728     1,330,649
  Accrued payroll and related benefits...............     192,787       225,438
  Accrued liabilities (Note 14)......................     724,345       292,982
  Current portion of notes, loans, and capitalized
    leases payable (Notes 1, 3 and 4)................   1,273,216     1,779,227
                                                      ------------  ------------
    Total current liabilities........................   3,145,076     3,628,296

Notes, loans, and capitalized leases payable,
  less current portion (Notes 1, 3 and 4)............     523,701       497,761
                                                      ------------  ------------
    Total liabilities................................   3,668,777     4,126,057
                                                      ------------  ------------
Commitments and contingencies 
  (Notes 5, 10, 12, 14, 15, and 17)

Stockholders' equity (Notes 6, 7 and 16):
  Series A and B Convertible Preferred Stock, no
    par value, 1,000,000 shares authorized, none
    issued and outstanding...........................         --            --
  Common stock, $.001 par value, 70,000,000 shares
    authorized, 15,206,259 and 12,842,613
    issued and outstanding...........................  42,640,107    39,389,656
  Shareholder note receivable........................    (562,500)          --
  Accumulated deficit................................ (34,717,391)  (32,680,433)
                                                      ------------  ------------
    Total stockholders' equity.......................   7,360,216     6,709,223
                                                      ------------  ------------
    Total liabilities and stockholders' equity....... $11,028,993   $10,835,280
                                                      ============  ============
</TABLE>
        See accompanying summary of significant accounting policies and
                  notes to consolidated financial statements.
<PAGE>

                             MONTEREY PASTA COMPANY
                     CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE> 
<CAPTION> 
                                                       Years Ended
                                          --------------------------------------
                                              1996         1997         1998
                                          ------------ ------------ ------------
<S>                                       <C>          <C>          <C>
Net revenues (Note 12)................... $24,492,403  $23,446,780  $26,217,297
Cost of sales............................  15,851,120   13,761,013   15,579,059
                                          ------------ ------------ ------------
Gross profit.............................   8,641,283    9,685,767   10,638,238

Selling, general and administrative
  (Notes 5, 11 and 14)...................  16,237,609    8,723,887    8,310,908
                                          ------------ ------------ ------------
Operating income (loss)..................  (7,596,326)     961,880    2,327,330

Loss on disposition or impairment of
  assets (Note 3)........................    (571,544)    (259,480)     (26,387)
Other income, net (Notes 5 and 8)........     145,808        4,135       16,843
Interest expense, net (Note 4)...........    (430,968)    (211,438)    (249,693)
                                          ------------ ------------ ------------
Income (loss) from continuing operations
  before provision for income taxes......  (8,453,030)     495,097    2,068,093

Provision for income taxes (Note 9)......        --         20,691       31,135
                                          ------------ ------------ ------------
Income (loss) from continuing operations.  (8,453,030)     474,406    2,036,958

Discontinued operations (Note 15)........     219,998       36,882         --
                                          ---------------------------------------
Net income (loss)........................ ($8,233,032)    $511,288   $2,036,958
                                          ============ ============ ============

Net income (loss) per common share (Note 6):

Net income (loss) from continuing
  operations............................. ($8,453,030)    $474,406   $2,036,958
Dividends to preferred and certain
  common stockholders ...................  (1,108,343)    (317,647)        --
                                          ------------ ------------ ------------
Net income (loss) from continuing
  operations attributable to common
  stockholders........................... ($9,561,373)    $156,759   $2,036,958
                                          ============ ============ ============

Basic and diluted income (loss) per share:
  Continuing operations..................      ($1.16)       $0.02        $0.16
  Discontinued operations................       $0.03        $0.00        $0.00
                                          ---------------------------------------
Net income (loss) per common share.......      ($1.13)       $0.02        $0.16
                                          ============ ============ ============
Weighted average common and common
  equivalent shares outstanding..........   8,276,608   10,458,451   12,979,055
                                          ============ ============ ============
</TABLE>
        See accompanying summary of significant accounting policies and
                  notes to consolidated financial statements.
<PAGE>


                             MONTEREY PASTA COMPANY

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                    FOR THE YEARS ENDED 1996, 1997, AND 1998
<TABLE>
<CAPTION>
                                          Preferred Stock           Common Stock         Shareholder                      Total
                                        --------------------  -------------------------      Note       Accumulated   Shareholders'
SEE NOTES 6 AND 7                       Shares     Amount       Shares        Amount      Receivable      Deficit        Equity
--------------------------------------- -------  -----------  -----------  ------------  ------------  -------------  -------------
<S>                                     <C>      <C>          <C>          <C>           <C>           <C>            <C>
Balance, end of 1995...................    --        $ --      6,819,112   $27,974,170       $  --     ($25,569,667)    $2,404,503
Conversion of 7% note payable plus
  accrued interest, less costs of
  $264,951, at an average net price
  per share of $4.78 (including
  $705,907 discount recorded in 1995)..    --          --        933,711     3,755,505          --             --        3,755,505
Issuance of common stock in payment of
  penalties related to conversion of
  7 % note, at an average net price
  per share of $5.06...................    --          --         39,506       200,000          --             --          200,000
Issuance of common stock in private
  placement, net of offering costs of
  $222,147, at an average net price
  per share of $4.13....................   --          --        916,000     3,785,353          --             --        3,785,353
Issuance of common stock in payment
  of lease settlement to a related
  party, at an average net price
  per share of $6.58....................   --          --          5,323        35,000          --             --           35,000
Issuance of Series A and B convertible
  preferred stock, net of offering
  costs of $146,938 plus deemed
  dividend, at an average net value
  per share of $1,195.08................ 3,500    4,182,790         --           --             --         (875,000)     3,307,790
Deemed dividend of $50 per share on
  preferred stock.......................   --          --           --           --             --         (175,000)      (175,000)
Issuance of common stock under
  Employee Stock Purchase Plan, at an
  average price per share of $4.58......   --          --          1,000         4,583          --             --            4,583
Net loss for the year...................   --          --           --           --             --       (8,233,032)    (8,233,032)
                                        -------  -----------  -----------  ------------  ------------  -------------  -------------
Balance, end of 1996.................... 3,500    4,182,790    8,714,652    35,754,611          --      (34,852,699)     5,084,702
Conversion of Series B-1 Shares to
  Common Stock..........................  (500)    (593,542)     345,490       582,372          --             --          (11,170)
Issuance of common stock in private
  placement, net of offering costs of
  $145,407, at an average net price
  per share of $1.259...................   --          --      1,600,000     1,960,448          --             --        1,960,448
Conversion of A-1 shares to common
  stock.................................(3,000)  (3,589,248)   4,108,108     3,523,343          --             --          (65,905)
Options granted in lieu of fees.........   --          --           --          27,095          --                          27,095
Issuance of common stock under
  Employee Stock Purchase Plan, at an
  average price per share of $2.05......   --          --          1,225         2,513          --             --            2,513
Issuance of 550,000 shares of common
  stock at $1.875 in exchange for
  promissory note.......................   --          --        550,000     1,031,250    (1,031,250)          --             --
Steel share forfeitures.................   --          --       (250,000)     (468,750)      468,750           --             --
Deemed dividends paid in shares.........   --          --        136,784       227,225          --         (227,225)          --
Deemed and actual dividends paid in
  cash..................................   --          --           --           --             --         (148,755)      (148,755)
Net income for the year.................   --          --           --           --             --          511,288        511,288
                                        -------  -----------  -----------  ------------  ------------  -------------  -------------
Balance, end of 1997....................   --          --     15,206,259    42,640,107      (562,500)   (34,717,391)     7,360,216
Issuance of common stock under
  Employee Stock Purchase Plan, at an
  average price per share of $1.14......   --          --          1,420         1,612          --             --            1,612
Reversal of share subscription..........   --          --           --        (562,500)      562,500           --             --
Reclassification of above share 
  subscription as an option.............   --          --           --          51,000          --             --           51,000
Repurchase and retirement of  
  Clearwater Fund IV, Ltd. Common 
  shares at an average total price 
  price per share of $1.16..............   --          --     (2,365,066)   (2,740,563)         --             --       (2,740,563)
Net income for the year.................   --          --           --           --             --        2,036,958      2,036,958
                                        -------  -----------  -----------  ------------  ------------  -------------  -------------
Balance, end of 1998....................   --        $ --     12,842,613   $39,389,656       $  --     ($32,680,433)    $6,709,223
                                        =======  ===========  ===========  ============  ============  =============  =============
</TABLE>
        See accompanying summary of significant accounting policies and
                  notes to consolidated financial statements.
<PAGE>

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                       Years Ended
                                                         ----------------------------------------
SEE NOTE 13--SUPPLEMENTAL CASH FLOW INFORMATION              1996          1997          1998
-------------------------------------------------------- ------------  ------------  ------------
<S>                                                      <C>           <C>           <C>
Cash flows from operating activities:
Net Income (Loss) from continuing operations...........  ($8,453,030)     $474,406    $2,036,958
Adjustments to reconcile income from continuing
  operations to net cash provided by (used in)
  operating activities:
  Depreciation and amortization........................      918,585       960,527       998,649
  Provisions for allowances for bad debt, returns,
    adjustments and spoils.............................      771,018      (591,408)      (20,469)
  Inventory reserves...................................       15,000           --        (25,000)
  Loss on disposition and writedown of property and
    equipment..........................................      571,554       259,480        26,387
  Expenses paid in common stock and options............      228,363        27,095        51,000
  Changes in assets and liabilities:
      Accounts receivable..............................   (1,199,134)     (179,971)      398,649
      Inventories......................................     (425,001)      286,431      (570,107)
      Prepaid expenses and other assets................    1,160,918      (917,957)      177,954
      Accounts payable.................................     (798,281)     (594,149)      381,613
      Accrued expenses.................................    1,094,530      (613,002)     (398,712)
                                                         ------------  ------------  ------------
    Net cash provided by (used in)
      continuing operations............................   (6,115,478)     (888,548)    3,056,922
    Net cash used in discontinued operations...........   (1,967,602)     (137,902)          --
                                                         ------------  ------------  ------------
    Net cash provided by (used in) 
      operating activities.............................   (8,083,080)   (1,026,450)    3,056,922
                                                         ------------  ------------  ------------
Cash flows from investing activities:
  Purchase of property and equipment...................   (1,968,360)     (480,977)     (932,596)
  Repurchase of common stock...........................          --            --     (2,740,563)
  Proceeds from sale of property and equipment.........       75,383       159,095         5,293
  Purchase of intangible assets........................          --            --       (109,599)
  Proceeds from sale of subsidiary.....................        1,000           --            --
  Advances to related party............................     (350,000)          --            --
                                                         ------------  ------------  ------------
      Net cash used in investing activities............   (2,241,977)     (321,882)   (3,777,465)
                                                         ------------- ------------- -------------
Cash flows from financing activities:
  Bank overdrafts......................................      845,372      (839,680)       (5,692)
  Proceeds from revolving line of credit...............   20,081,967    15,078,913     8,181,621
  Repayments on revolving line of credit...............  (19,194,071)  (14,714,032)   (8,611,259)
  Proceeds from long-term debt.........................      457,474           --      2,399,234
Securities and debt issue costs........................      (64,951)      (71,308)          --
  Repayment of long-term debt and capital lease
    obligations........................................     (111,615)     (253,364)   (1,593,556)
  Dividends on preferred stock.........................          --       (148,755)          --
  Proceeds from issuance of preferred stock............    3,307,790           --            --
  Proceeds from issuance of common stock...............    3,789,936     1,982,057         1,612
                                                         ------------  ------------  ------------
      Net cash provided by financing activities........    9,111,902     1,033,831       371,960
                                                         ------------  ------------  ------------
Net decrease in cash and cash equivalents..............   (1,213,155)     (314,501)     (348,583)
Cash and cash equivalents, beginning of year...........    1,937,884       724,729       410,228
                                                         ------------  ------------  ------------
Cash and cash equivalents, end of year.................     $724,729      $410,228       $61,645
                                                         ============  ============  ============
</TABLE>
        See accompanying summary of significant accounting policies and
                  notes to consolidated financial statements.
<PAGE>


                        MONTEREY PASTA COMPANY
             SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


        Principles of Consolidation and Nature of Operations

        The consolidated financial statements include the accounts of 
Monterey Pasta Company (a producer and distributor of pasta and pasta 
sauces), together with its wholly-owned subsidiaries, Upscale Food 
Outlets, Inc. (a chain of fast food restaurants serving the Company's 
product - through April 1996) and Monterey Pasta Development Company  (a 
franchiser of restaurants - inactive).  All significant intercompany 
accounts and transactions have been eliminated in consolidation.  
Collectively, Monterey Pasta Company, Upscale Food Outlets, Inc. and 
Monterey Pasta Development Company are referred to as the "Company."  
As discussed in Note 15, the Company discontinued the operations of 
Upscale Food Outlets, Inc. and Monterey Pasta Development Company  
effective December 31, 1995. Accordingly, the restaurant and franchise 
businesses are accounted for as discontinued operations in the 
accompanying consolidated financial statements for all periods 
presented.

        The Company's production facility is located in Monterey County, 
California.  Its products are available throughout the United States as 
well as selected distribution areas in Canada.  The principal customers 
are retail groceries and club stores.  The Company offers credit and 
payment terms to its customers in line with industry practices, 
generally calling for unsecured trade accounts receivable.

        Accounting Periods 

        For quarterly reporting purposes the Company employs a 4-week, 4-
week, 5-week reporting period.  The fiscal year ends on the last Sunday 
of each calendar year (52/53-week year).  The 1996, 1997, and 1998 
fiscal years all contained 52 weeks and ended on December 29, 1996, 
December 28, 1997, and December 27, 1998, respectively. 

        Reclassifications

        Certain of the prior year financial statement amounts have been 
reclassified to conform to the current year presentation.

        Cash and Cash Equivalents

        The Company considers all highly liquid investments purchased with 
an original maturity of three months or less to be cash equivalents.     

        Accounts Receivable and Allowances

        The Company provides reserves for estimated credit losses, product 
returns, spoilage, and adjustments at a level deemed appropriate to 
adequately provide for known and inherent risks related to such amounts.  
The allowances are based on reviews of loss, return, spoilage, 
adjustment history, contractual relationships with customers, current 
economic conditions, and other factors that deserve recognition in 
estimating potential losses.  While management uses the best information 
available in making its determination, the ultimate recovery of recorded 
accounts, notes, and other receivables is also dependent on future 
economic and other conditions that may be beyond management's control.

        Inventories

        Inventories are stated at the lower of cost (using the first-in, 
first-out method) or market and consist principally of component 
ingredients to the Company's refrigerated pasta and sauces, finished 
goods, and packaging materials.

        Slotting and Advertising Costs

        The Company expenses advertising costs as incurred or when the 
related campaign commences.  Slotting fees paid or credited to club 
stores and grocery chains for shelf space allocations are amortized over  
the life of the agreement, generally one year.

        Property and Equipment

        Property and equipment are recorded at cost.  Depreciation is 
provided for on the straight-line method  over the estimated useful 
lives of the assets (or lease term for leasehold improvements if 
shorter):

<TABLE>
<S>                                          <C>
Leasehold improvements...................    7 to 12 years
Machinery and equipment..................    7 to 12 years
Office furniture and equipment...........    5 to 15 years
Vehicles.................................    5 to 7  years

</TABLE>

        Long-lived assets, including intangible assets, are assessed for 
possible impairment whenever events or changes in circumstances indicate 
that the carrying amounts may not be recoverable, or whenever management 
has committed to a plan to dispose of the assets.  Assets to be held and 
used affected by such an impairment loss are depreciated or amortized at 
their new carrying amount over the remaining estimated life;  assets to 
be sold or otherwise disposed of are not subject to further depreciation 
or amortization.

        Intangible Assets

        Intangible assets consist of tradenames and other intangibles and 
are recorded at cost, net of accumulated amortization of  $240,470 and 
$277,349 in 1997 and 1998, respectively.  During 1998 intangible assets 
of $110,000 were recorded in connection with the purchase of the 
operating equipment, recipes, and trademarks of a small pasta 
manufacturer, representing the excess of purchase price over the fair 
value of assets acquired.  Intangibles are amortized over their 
respective useful lives, ranging from 5 to 10 years. 

        Income Taxes

        The Company accounts for corporate income taxes in accordance with 
Statement of Financial Accounting Standards (SFAS) No, 109, "Accounting 
for Income Taxes", which requires an asset and liability approach.  
This approach results in the recognition of deferred tax assets (future 
tax benefits) and liabilities for the expected future tax consequences 
of temporary timing differences between the book carrying amounts and 
the tax basis of assets and liabilities.  Future tax benefits are 
subject to a valuation allowance to the extent of the likelihood that 
the deferred tax assets may not be realized.

        Revenue Recognition

        The Company recognizes revenues through sales of pasta and sauce 
products primarily to grocery and club store chains.  Sales are recorded 
when goods are shipped for most customers and upon delivery to retail 
locations for the Direct Store Delivery program.  Consignment shipments 
to club store warehouses are recognized upon shipment to individual club 
store locations.  Potential returns, adjustments and spoilage allowances 
are provided for in accounts receivable allowances and accruals.

        Stock-based Compensation 

        As permitted under the provisions of SFAS No. 123, Accounting for 
Stock-Based Compensation, the Company continues to account for employee 
stock-based transactions under Accounting Principles Board Opinion (APB) 
No. 25, "Accounting for Stock Issued to Employees."  However, SFAS No. 
123 requires the Company to disclose pro forma net income and earnings 
per share as if the fair value method had been adopted.  Under the fair 
value method, compensation cost is measured at the grant date based on 
the fair value of the award and is recognized over the service period, 
which is usually the vesting period.  For non-employees, cost is also 
measured at the grant date, but is actually recognized over the vesting 
period, or immediately if no further services are required. 

        Use of Estimates

        The preparation of financial statements in conformity with 
generally accepted accounting principles requires management to make 
estimates and assumptions that affect the reported amount of assets and 
liabilities, disclosure of contingent assets and liabilities at the date 
of the financial statements, and the reported amounts of revenues and 
expenses during the period.  Actual results could differ from those 
estimates.

        New Accounting Pronouncements

Effective January 1, 1998, the Company adopted the provisions of SFAS No. 
132, Employers' Disclosures about Postretirement Benefits.  SFAS No. 132 
standardizes the disclosure requirements for pensions and other 
postretirement benefits to the extent practicable, requires additional 
information on changes in the benefit obligations and fair values of plan 
assets that will facilitate financial analysis, and eliminates certain 
disclosures that are no longer as useful as they were when previous 
related accounting standards were issued.  Results of operations and 
financial position were unaffected by implementation of this standard.   

        In June 1998, the Financial Accounting Standards Board issued SFAS 
133, Accounting for Derivative Instruments and Hedging Activities.  SFAS 
133 requires companies to recognize all derivative contracts as either 
assets or liabilities in the balance sheet and to measure them at fair 
value.  If certain conditions are met, a derivative may be specifically 
designated as a hedge, the objective of which is to match the timing of 
gain or loss recognition on the hedging derivative with the recognition 
of (i) the changes in the fair value of the hedged asset or liability 
that are attributable to  the hedged risk or (ii) the earnings' effect 
of the hedged forecast transaction.  For a derivative not designated as 
a hedging instrument, the gain or loss is recognized in income in the 
period of change.  SFAS 133 is effective for all fiscal quarters 
beginning after June 15, 1999.  Historically the Company has not entered 
into derivative contracts either to hedge existing risks or for 
speculative purposes.  Accordingly, the Company does not expect adoption 
of this new standard to affect its financial statements.

<PAGE>

MONTEREY PASTA COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.      Concentration of Credit Risk and Fair Value of Financial 
Instruments

        Concentration of Credit Risk

        Financial instruments, which potentially subject the Company to 
concentration of credit risk, include cash and accounts receivable.

        The Company maintains its cash accounts in Imperial Bank, Fresno, 
California.  The total bank cash balances are insured by the Federal 
Deposit Insurance Corporation (FDIC) up to $100,000.  At times the cash 
balances exceed such limits.

    FAIR VALUE OF FINANCIAL INSTRUMENTS

    At December 28, 1997 and December 27, 1998, estimated fair values for the
Company's financial instruments and methods and assumptions used in estimating
fair values were as follows:

<TABLE>
<CAPTION>
                                          1997                    1998
                                 ----------------------- -----------------------
                                              Estimated               Estimated
                                  Carrying      Fair      Carrying      Fair
                                   Amount       Value      Amount       Value
                                 ----------- ----------- ----------- -----------
<S>                              <C>         <C>         <C>         <C>
Cash and Cash Equivalents: the
  carrying amount in the
  balance sheet approximates
  fair value...................    $410,228    $410,228     $61,645     $61,645


Accounts Receivable, less
  allowances: the carrying
  amount in the balance sheet
  approximates fair value due
  to the relatively short-term
  maturity of the debt and the
  reserves reducing the
  amounts to estimated net
  realizable value.............   2,440,745   2,440,745   2,062,565   2,062,565

Notes and Loans Payable
  (credit facility): the
  carrying amount
  approximates fair value
  since the interest floats
  with the prime rate..........   1,589,265   1,589,265   2,048,255   2,048,255

Capitalized Leases Payable:
  the fair value is estimated
  based on current interest
  rates and comparable current
  available terms..............     207,652     207,652     228,733     228,733
</TABLE>

2. INVENTORIES

<TABLE>
<CAPTION>
                                                1997        1998
                                             ----------- -----------
<S>                                          <C>         <C>
Inventories consisted of the following:

  Production--Ingredients..................    $602,428    $865,693
  Production--Finished goods...............     382,736     560,762
  Paper goods and packaging materials......     288,382     417,198
                                             ----------- -----------
                                              1,273,546   1,843,653
  Allowances for spoils and obsolescence...     (55,000)    (30,000)
                                             ----------- -----------
                                             $1,218,546  $1,813,653
                                             =========== ===========
</TABLE>

3. PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                            1997        1998
                                                         ----------- -----------
<S>                                                      <C>         <C>
Property and equipment consisted of the following:

  Leasehold improvements..............................   $1,809,946  $1,852,958
  Machinery and equipment.............................    4,459,088   5,024,208
  Computers, office furniture and equipment...........      743,747     760,060
  Vehicles............................................      233,942     310,942
                                                         ----------- -----------
                                                          7,246,723   7,948,168
  Less accumulated depreciation and amortization......   (2,252,842) (3,188,936)
                                                         ----------- -----------
                                                          4,993,881   4,759,232
  Construction in progress............................       63,965     502,491
                                                         ----------- -----------
                                                         $5,057,846  $5,261,723
                                                         =========== ===========
</TABLE>

        During 1996, the Company identified certain property and equipment 
assets which were overvalued, obsolete, and/or no longer being used in 
the Company's operations, including office furniture and equipment 
purchased from a stockholder.  These assets were reduced to their 
estimated fair value of $326,701 at December 29, 1996, resulting in a 
loss on writedown of $452,000 in 1996 (included in loss on disposition 
and impairment of assets in the accompanying statements of operations), 
and were disposed of in 1997 and 1998.

4. NOTES, LOANS, AND CAPITALIZED LEASES PAYABLE

<TABLE>
<CAPTION>
Year-end debt consisted of the following:
                                                            1997        1998
                                                         ----------- -----------
<S>                                                      <C>         <C>
Credit Facility:
  Receivable and inventory revolver...................     $952,894    $523,256
  Equipment revolver..................................         --      $274,999
  Equipment term loan.................................      636,371   1,250,000
Capitalized leases payable............................      207,652     228,733
                                                         ----------- -----------
                                                          1,796,917   2,276,988
  Less current maturities.............................    1,273,216   1,779,227
                                                         ----------- -----------
                                                           $523,701    $497,761
                                                         =========== ===========
</TABLE>

        Credit Facility

        At December 27, 1998 had in place a $4,000,000 credit facility 
secured by substantially all assets of the Company, and comprised of the 
following:

- Accounts receivable and inventory revolver for up to $1,500,000 
with interest at prime (7.75% at December 27, 1998).  
- Equipment revolver for up to $500,000 with interest at prime 
plus .75% (8.50% at December 27, 1998), payable at $13,889 
monthly, plus interest.  
- Term note for up to $2,000,000 plus interest at prime plus .75% 
(8.50% at December 27, 1998) payable at $83,333 monthly, plus 
interest.  

        The terms of the Credit Facility, which expires July 22, 1999, 
prohibit the payment of cash dividends (except with written approval) on 
the Company's capital stock and restricts payments for, among other 
things, repurchasing shares of its capital stock.  Other terms of the 
Credit Facility limit the Company with respect to, among other things, 
(i) incurring additional indebtedness,  (ii) adversely changing the 
capital structure, and (iii) acquiring assets other than in the normal 
course of business including specific limits on annual capital 
expenditures.  As of December 27, 1998, there were no violations of any 
loan covenants.  The equipment revolver and term note are expected to be 
renewed and continue to be amortized as long term notes and, accordingly, 
are classified as long term in the accompanying balance sheets.  

        The March 12, 1999 acquisition of Frescala Foods, Inc. (see Note 
17), with an initial cash outlay of $1,345,000, necessitated the 
negotiation of a new two-year term note in the amount of $750,000 with an 
interest rate of prime plus .25%, a maturity date of March 5, 2001, and 
principal payments of $31,250 per month.   At the same time the rates on the  
two existing term notes were adjusted from .75% over prime to .25 over prime.  
Certain loan covenants were also adjusted to reflect balance sheet ratios 
expected from the assimilation of the new business.


         Capitalized Leases Payable

         The Company leases certain equipment under capitalized leases, 
including office equipment, a van and truck, as well as refrigeration 
equipment, most of which is located at retail sites of the Company's 
single largest customer (see Note 12). 

         The leases are collateralized by the underlying equipment with book 
values of $246,352, $236,403 and $249,996 in 1996, 1997 and 1998, 
respectively.    Future minimum lease payments consist of:

<TABLE>
<CAPTION>
              Year                              Total
--------------------------------             -----------
<S>                                          <C>
  1999...............................          $108,793
  2000...............................            89,663
  2001...............................            33,082
  2002...............................            26,273
  2003...............................             6,586
                                             -----------
                                                264,397
Less amounts representing interest...            35,664
                                             -----------
Net capitalized leases...............          $228,733
                                             ===========
</TABLE>

         Principal Payment Maturities

         Notes, loans and capitalized leases payable require principal 
payments (including the principal portion of capitalized leases above) as 
follows:

<TABLE>
<CAPTION>
                                               Amount
                                             -----------
<S>                                          <C>
  1999...............................        $1,779,227
  2000...............................           438,234
  2001...............................            28,663
  2002...............................            24,378
  2003...............................             6,486
                                             -----------
                                             $2,276,988
                                             ===========
</TABLE>

5.       Operating Leases

         The Company currently leases production, warehouse and corporate 
office space as well as certain equipment in Monterey County, California 
under both month-to-month and non-cancelable operating lease agreements, 
expiring through November 2004.  The terms of the leases generally 
require the Company to pay common area maintenance, taxes, insurance, and 
certain other costs.

         Future minimum annual lease payments due under non-cancelable 
operating leases with terms of more than one year and sublease income 
from the lease of the Company's former headquarters are as follows: 

<TABLE>
<CAPTION>
                                    Lease     Sublease
              Year                 Amount      Income         Net
-------------------------------------------- ----------- -----------
<S>                              <C>         <C>         <C>
  1999...........................  $541,000    $211,000    $330,000
  2000...........................   555,000     211,000     344,000
  2001...........................   366,000      26,000     340,000
  2002...........................   344,000        --       344,000
  2003...........................   351,000        --       351,000
  2004 and thereafter............   298,000        --       298,000
                                 ----------- ----------- -----------
                                 $2,455,000    $448,000  $2,007,000
                                 =========== =========== ===========
</TABLE>

         Gross rent expense under the leases for 1996, 1997, and 1998 
was $544,072, $509,225 and $536,738, respectively.  During 1997, the 
Company subleased its former San Francisco premises at a slight premium 
to the rent for which it has contractual liability.  The sublease expires 
on the same date as the underlying lease.   Sublease income for 1997 and 
1998 was $158,100 and $210,680 respectively.  The Company also subleased 
a portion of its Salinas headquarters for part of 1998 with sublease 
income of $48,132. 

6.       Stockholders' Equity

         Preferred Stock  

         During August 1996, 3,000 shares of Series A Convertible 
Preferred and 500 shares of Series B Convertible Preferred stock were 
issued at an average stated price of $1,000 per share under separate 
agreements amended in February and April 1997.   The shares were 
convertible to common stock at 80% of the market price, as defined in the 
agreements.   The $875,000 value of the guaranteed contractual discount 
rate, which is additional yield to the investors, was accounted for as a 
deemed dividend to the preferred stockholders. The Company's agreements 
for Series A and B Convertible Preferred stock provided for certain 
dividends, as well as penalties if the related common conversion shares 
were not registered by November 1, 1996.

        Under the amended agreements, which called for the exchange of the 
unconverted Series A and B shares for new Series A-1 and B-1 shares, 
$240,000 was paid to the holders of the Series A-1 stock on March 31, 
1997, in lieu of all prior penalties and dividends.  Also, $30,000 was 
paid to the holder of Series B-1 on April 4, 1997, in lieu of all prior 
penalties and dividends.  An additional $13,755 in penalties was incurred 
during the period from May 1, 1997 to May 6, 1997, the date of filing of 
the amended Registration Statement covering the related conversion 
shares.  The amended agreement for the Series B-1 Convertible Preferred 
stock called for additional penalties if the Registration Statement was 
not declared effective by July 31, 1997.  The Registration Statement was 
not declared effective until October 24, 1997.  Therefore, $30,000 was 
paid to the holder of the B-1 Convertible Preferred Stock on November 3, 
1997.

        In lieu of dividends for Series A-1 called for under the original 
agreements, the Company agreed to pay a total amount of $50,000 to 
holders of the new Series A-1 stock, constituting an annualized dividend 
equal to four percent (4%) of the purchase price of the Series A 
Preferred Stock through December 28, 1996.  The dividend was paid in the 
form of 37,037 shares of the Company's common stock, valued at $62,500 
based on 80% of the $1.6875 per share market price on the day the 
Registration Statement was effective.  No additional dividends will be 
payable on the Series A-1 stock.

        During March 1997, one-half of the Series B Convertible Preferred 
stock, with a face amount of $250,000 and a total book value of $298,771, 
was converted into 160,256 shares of Common Stock having a market value 
of $312,500.  Holders of the remaining unconverted Series B-1 stock 
received an 8% annual dividend from April 1, 1997 forward, payable in 
each quarter; with two dividends of $5,000 paid during 1997.  The 
remaining Series B-1 Preferred Stock was converted to 207,894 shares of 
common stock in October, 1997. Of the 207,894 shares of common stock 
issued, 22,660 shares represented penalty shares awarded due to late 
effectiveness of the Company's Registration Statement.

        In December 1997 the $3,000,000 of Series A-1 Convertible Preferred 
Stock was converted into 4,108,108 shares of common stock.  On February 
13, 1998, the Company was notified by the NASDAQ Stock Market, Inc. 
("NASDAQ") that the Company's Series A convertible Preferred stock 
offering, as amended by the Series A-1 Agreement in March of 1997 had 
violated Rule 4460(i)(l)(D)(ii) which requires stockholder approval 
prior to the issuance of securities convertible into common stock equal 
to, or in excess of, 20% of outstanding shares at the time of issuance.  
The NASDAQ required the Company to repurchase 2,365,066 shares, held by 
Clearwater Fund IV, Ltd., or face delisting from the National NASDAQ 
market.  

        After reviewing its options, Company management, in concert with 
the Company's Board of Directors and its legal advisors, decided to 
begin negotiations with the Clearwater Fund IV, Ltd. to repurchase 
2,365,066 shares.  Negotiations were completed March 5, 1998 and the 
Company repurchased the shares for a total consideration of $2,690,263 
or $1.1375/share.  Outstanding shares after the repurchase were 
12,841,193, for a reduction of 15.6%.

         Common Stock  (see also Preferred Stock above)

         During 1996, a $4,000,000 convertible note payable 
originally issued in 1995 plus accrued interest at 7%  was converted into 
933,711 shares of common stock at an average gross price of $4.31 per 
share (before consideration of conversion discount and costs).   Included 
in the interest was $705,907 relating to a guaranteed discount from 
market price upon conversion treated as interest expense and an increase 
in the amounts credited to common stock.   In addition, 39,506 shares 
valued at $5.06 per share were issued to the noteholder in payment of a 
penalty due to a delay in the registration of the conversion shares with 
the Securities and Exchange Commission.

                In April 1996, the Company issued 916,000 shares of its common 
stock at a gross price of $4.38 per share in a private placement.  In 
June 1996, the Company issued 5,323 shares of its common stock at a gross 
price of $6.58 per  share to a related party in payment of a lease 
termination settlement (see Note 8).

                The Company adopted a Stockholder Rights Agreement in May 1996, 
which gives the stockholders the right to purchase one additional share 
of common stock at $28 for each share of common stock owned.  The Rights 
are exercisable upon announcement of pending attainment by a person or 
entity who (together with all affiliates) will become the beneficial 
owner, through purchase or by merger, of securities representing 20% or 
more of the voting power of all common stock, except in certain 
circumstances of stock acquisition or merger as permitted by a vote of 
the majority of the non-officer members of the Board of Directors.  The 
Rights, which expire upon the earlier of consummation of a merger 
permitted by vote of the Board as described above or December 31, 2004 
may be redeemed by the Company at $.001 each.

                During 1997, a financing consultant for the Company was granted 
options to buy 50,000 shares of common stock with an exercise price of 
$1.88, immediate vesting and expiring March 12, 1998.  The options 
expired unexercised.  The $22,357 fair value of the option grant was 
charged to expense in 1997. 

        In April 1997, the Company issued 1,600,000 shares of its common 
stock at a gross price of $1.35/share in a private placement.  The shares 
were registered as part of the Company Registration Statement on Form S-3 
which was effective October 24, 1997.

        In April 1997, the Company's then current Chief Executive Officer 
agreed to purchase 550,000 shares of common stock based on an agreement 
containing various time-served and performance restrictions in exchange 
for a full recourse note due December 31, 1997.  Certain of the 
performance restrictions were not met and 250,000 shares were forfeited 
during 1997, leaving 300,000 shares outstanding at December 28, 1997.  
The note, with a remaining balance of $562,500,  was converted to a non-
interest bearing non-recourse status effective December 31, 1997 with an 
expiration date of December 31, 1999.   Because the new note is non-
recourse, the shares and related note are treated for accounting purposes 
as canceled and replaced with options.  The $51,000 fair value of the 
resulting deemed option grant was charged to income on its December 31 
grant date, during the first quarter of 1998.

        In May of 1997 an executive search firm was granted options to 
purchase 7,767 shares of Company common stock with an exercise price of 
$2.06, immediate vesting, and a 3 year expiration.  The $4,738 fair value 
of the option grant was charged to expense in 1997.

        During November of 1997 the Company issued 77,087 shares of common 
stock in lieu of a guaranteed yield on the private placement common stock 
issued in March, 1997.  The yield was guaranteed at 8% from date of stock 
issuance until effectiveness of the Company's Registration Statement on 
Form S-3.  The Registration Statement was declared effective on October 
24, 1997 and $126,471 in penalties had accumulated.

        Employee Stock Purchase Plan

        In October 1994, the Company's Board of Directors adopted a 
qualified employee stock purchase plan.  Under the purchase plan, 
eligible employees (those who have completed one year of continuous 
employment with the Company) may purchase shares of the Company's common 
stock through payroll deductions not to exceed 10% of gross wages.  The 
Company has reserved 200,000 shares of its common stock for issuance 
under the purchase plan, which remains in effect until terminated by the 
Company's Board of Directors, or until all of the shares reserved for 
under the purchase plan have been issued.  Unless the Board has otherwise 
provided a higher amount prior to the commencement of an offering period, 
the offering exercise price for each purchase period is 85% of the lesser 
of (a) the fair market value of the shares on the offering date of such 
offering period or (b) the fair market value of the shares on the given 
purchase date.  There were 1,000, 1,225 and 1,420 shares of common stock 
issued under the plan in 1996, 1997 and 1998, respectively.

        Earnings per Share

        Basic earnings per share are based on earnings available to common 
stockholders divided by the weighted-average number of common shares 
actually outstanding during the period.  Diluted earnings per share also 
include any dilutive common stock equivalents assumed to be outstanding 
during the period (no includable equivalents in any period presented).  
Because of equivalent shares includable in different periods or at 
different amounts, per-share amounts for the four quarters do not 
necessarily equal per-share amounts for the entire year.

Options to purchase 589,681, 848,081, and 1,002,581 shares of common 
stock were outstanding at year end 1996, 1997, and 1998, respectively 
but were not included in the computation of diluted earnings per share 
because the options' exercise prices were greater than the average 
market price of the common shares.  Warrants to purchase 605,750, 
1,138,550 and 933,550 shares at year-end 1996, 1997 and 1998, 
respectively,  were not included for the same reason.


7.        Warrants and Stock Option Plan                  

          In April 1996, the Company issued warrants to purchase 400,750 
shares of its common stock at $6.50 per share in connection with a 
placement of 916,000 shares of common stock.  The warrants, with an 
estimated original value of $137,400, are valid for seven years, and 
include registration rights for the related shares which were registered 
effective October 24, 1997.

          In March 1997, the Company issued warrants for 532,800 shares of 
its common stock at $2.25 per share in connection with a private 
placement of 1,600,000 shares of common stock.  The warrants, with an 
estimated original value of $271,700, are valid for three years, and 
included registration rights for the related shares which were part of 
the Company's S-3 which was effective October 24, 1997.

          Stock Option Plan

          Effective August 31, 1993, the Company's Board of Directors adopted 
a stock option plan, subsequently amended and restated, which provides 
for the granting of incentive stock options or non-qualified stock 
options to eligible employees, consultants and outside directors.  The 
Company has reserved 1,740,000 shares of its common stock for issuance 
under the plan.  The plan provides that the option price shall not be 
less than the fair market value of the shares on the date of grant; 
therefore, no compensation expense is recorded for employees.  
Compensation or other expense is recorded for any non-employee grants at 
fair value of the option award.  Options generally vest over a period of 
one to three years and may be exercised for a period of up to ten years.  
In January of 1998, the Company filed a Form S-8 to register up to 
540,000 additional shares of common stock eligible to be issued pursuant 
to the Plan to increase the total number of registered shares to 
1,740,000.  The Plan was amended in July 1998 to allow two years from 
date of a transfer of control for the exercise of options for those 
employees and directors not retained after the transfer of control.

The following table shows activity in outstanding options during 1996, 
1997 and 1998.

<TABLE> 
<CAPTION> 
                                          1996                  1997                 1998
                                   --------------------- -------------------- ---------------------
                                               Weighted             Weighted              Weighted
                                                Average              Average              Average
                                               Exercise             Exercise              Exercise
                                     Shares      Price     Shares     Price     Shares     Price
                                   ----------- --------- ---------- --------- ---------- ----------
<S>                                <C>         <C>       <C>        <C>       <C>        <C>
Outstanding at beginning of year..  1,236,348     $6.70    589,681     $5.26    848,081      $3.24
    Granted (1) ..................    505,000      4.72    491,913      2.24    540,314       1.72
    Exercised.....................         --        --        --         --        --          --
    Canceled or expired (1)....... (1,151,667)     6.45   (233,513)     6.13   (385,814)      3.53
                                   ----------- --------- ---------- --------- ---------- ----------
Outstanding at end of year........    589,681     $5.26    848,081     $3.24  1,002,581      $2.24
                                   ===========           ==========           ==========

Options exercisable at year
  end.............................    495,823     $4.97    572,379     $3.73    826,581      $2.38
                                   ===========           ==========           ==========

Weighted average fair value of
  options granted during the
  year............................                $2.27                $0.97                 $0.38

(1) Including 43,146 and 50,314 shares repriced in 1997 and 1998.

</TABLE>

The following table shows information for options outstanding or 
exercisable as of December 27, 1998:

<TABLE>
<CAPTION>

                           Options Outstanding                   Options Exercisable
                   ----------------------------------  ----------------------------------
                                Weighted    Weighted                Weighted    Weighted
                                 Average    Average                  Average    Average
                                Remaining   Exercise                Remaining   Exercise
     Range of        Number    Contractual   Price       Number    Contractual   Price
 Exercise Prices    of Shares  Life (years)(per share)  of Shares  Life (years)(per share)
------------------ ----------- ----------- ----------  ----------- ----------- ----------
<S>                <C>         <C>         <C>         <C>         <C>         <C>
$ 0.00 - $  2.99..    890,081         5.9      $1.77      714,081         5.1      $1.81
  3.00 -    4.99..     10,000         7.7       3.88       10,000         7.7       3.88
  5.00 -    6.99..     92,500         2.1       6.08       92,500         2.1       6.08
       $7.00......     10,000         6.7      $7.00       10,000         6.7      $7.00
                   -----------                         -----------
                    1,002,581         5.5      $2.24      826,581         4.8      $2.38
                   ===========                         ===========
</TABLE>

        If the Company had elected the fair value method of accounting for 
stock-based compensation, compensation cost would be accrued at the 
estimated fair value of stock option grants over the service period, 
regardless of later changes in stock prices and price volatility.  The 
fair value at date of grant for options granted in 1996, 1997, and 1998 
has been estimated based on a modified Black-Scholes pricing model with 
the following assumptions:  no dividend yield for any year;  expected 
volatility for 1996, 1997 and 1998 grants of approximately 44%, 46%, and 
49% based on historical results;  risk-free interest rates of  6.65%, 
6.6% and 7.37%;  and expected lives of approximately five years for all 
grants.  The following table shows net income or loss and income or loss 
per share for 1996, 1997 and 1998 as if the Company had elected the fair 
value method of accounting for stock options.  

<TABLE>
<CAPTION>
                                            1996          1997          1998
                                        ------------  ------------  ------------
<S>                                     <C>           <C>           <C>
Net income (loss) as reported.........  ($8,233,032)     $511,288    $2,036,958
Additional compensation expense.......     (291,232)     (478,988)     (213,465)
                                        ------------  ------------  ------------
Proforma income (loss), as adjusted...   (8,524,264)       32,300     1,823,493
Dividends to preferred and certain
  common shareholders.................   (1,108,343)     (317,647)        --
                                        ------------  ------------  ------------
Proforma income (loss) attributable
  to common shareholders..............  ($9,632,607)    ($285,347)   $1,823,493
                                        ============  ============  ============

Net income (loss) per share
  (basic and diluted).................       ($1.13)        $0.02         $0.16
Additional compensation expense.......        (0.04)        (0.05)        (0.02)
                                        ------------  ------------  ------------
Proforma net income (loss) per share,
  as adjusted.........................       ($1.17)       ($0.03)        $0.14
                                        ============  ============  ============
</TABLE>


8.       Related Party Transactions

         The Company previously leased office space from a partnership in 
which a limited partner was a Stockholder, former Director, former 
President and former Chairman of the Board of the Company (see also Notes 
10 and 15).  Rent expense under this lease in 1996 was  $150,108.  The 
Company vacated this space in February 1996, and paid $65,000 plus 5,323 
shares of its common stock  (see Note 6) in settlement of the lease 
obligation.

         During 1996, the Company also purchased certain office furniture 
and equipment under a prior agreement  from the stockholder referred to 
above for $100,000.  Certain of the furniture purchased was reduced to 
its estimated fair value in 1996, resulting in a writedown of $55,000  
(see Note 3). Also during 1996, the Company repaid  $112,500,  previously 
received from a potential franchisee,  to a trust controlled by  this 
stockholder in connection with termination of franchising operations.

        Upscale Food Outlets, Inc. (UFO)  was purchased from the Company in 
April, 1996  by an entity owned by the stockholder referred to above.  
During 1996, the Company sold $62,350 in food products to UFO (see Note 
15).  Of this amount, $18,738 was not collected, and was and written off 
during 1997.  In addition, Other Income in 1996 includes $73,750 in 
short-swing profits recovered from this stockholder pursuant to Section 
16(b) of the Securities  & Exchange Act of 1934.

        The Company's former Chief Executive Officer, who is also a 
Director and Stockholder, is a director and stockholder of an entity from 
whom the Company contracted certain co-packing service and obtained raw 
materials at terms and prices similar to other third-party vendors.  
Another director, stockholder and former Chief Executive Officer of the 
related entity is also a co-founder, Director and Stockholder of the 
Company.   Payments to the related entity were $186,513 during 1996.  In 
1997, payments of $1,132 and billings of $18,703 for raw materials 
purchases were made to this entity.

        During  1996, the Company made payments of $137,252, in connection 
with purchases of carts and kiosks from another entity.  The co-founder, 
director and executive vice president of this entity is also a former 
Director of the Company.  During 1996, these carts and kiosks were 
reduced to their estimated fair market value resulting in a loss of 
$221,569 (see Note 3).

9.      Income Taxes 

        The Company's income tax expense in 1998 consists of $31,135 for    
current State taxes; there was no tax expense in 1996, and 1997 tax expense
was $20,961.  A reconciliation between the Company's effective tax rate and
and U.S. federal income tax rate on loss from continuing operations follows:


<TABLE>
<CAPTION>
                                            1996          1997          1998
                                        ------------  ------------  ------------
<S>                                     <C>           <C>           <C>
Federal statutory rate..................      -34.0%         34.0%         34.0%
State income taxes, net of effect on
  Federal income taxes..................       -6.0%          7.7%          1.5%
Non-deductible meals and entertainment..        0.1%          3.8%          0.4%
Net operating losses for which tax
  benefits are reduced by valuation
  allowances............................       40.6%          --            2.0%
Utilization of net operating losses for
  which deferred income tax assets had 
  been reduced by valuation allowances..        --          -22.5%        -36.4%
Other...................................       -0.7%        -19.0%          --
                                        ------------  ------------  ------------
Effective income tax rate...............        0.0%          4.0%          1.5%
                                        ============  ============  ============
</TABLE>

        Deferred income taxes reflect the net tax effects of temporary 
differences between the carrying amounts of assets and liabilities for 
financial reporting purposes and the amounts used for income tax 
purposes.  Significant components of the Company's deferred tax assets 
are as follows:

<TABLE>
<CAPTION>
                                                          1997          1998
                                                      ------------  ------------
                                                      <C>           <C>
Federal net operating loss carryforward.............. $12,247,000   $11,507,000
Reserves for discontinued operations.................      72,000           --
Depreciation, amortization and writedown on
  fixed assets.......................................    (241,000)     (153,000)
State income and franchise taxes, net of effect 
  on Federal income taxes............................     873,000       495,000
Other................................................     182,000       226,000
                                                      ------------  ------------
                                                       13,133,000    12,075,000
Less valuation allowance............................. (13,133,000)  (12,075,000)
                                                      ------------  ------------
Net deferred tax assets..............................     $  --         $  --
                                                      ============  ============
</TABLE>

        Since the Company could not determine that it was more likely than 
not that the deferred tax assets would be realized, a 100% valuation 
allowance was provided in 1996, 1997, and 1998.  Both deferred tax assets 
and the valuation allowance decreased in 1998 by $272,000 as a result of 
changes in expectations regarding multi-state apportionment allocations 
as well as changes in expected state tax rates.

        At December 27, 1998, the Company had tax net operating loss (NOL) 
carryforwards of approximately $35 million and $12 million for Federal 
and State tax purposes, which expire in varying amounts through 2012.  
Should significant changes in the Company's ownership occur, the annual 
amount of NOL carryforwards available for future use would be limited.

10.     Litigation and Contingencies

        There are no material pending legal proceedings, other than routine 
litigation incidental to the Company's business, to which the Company is 
a party or to which any of its property is subject.  The Company's former 
restaurant subsidiary, UFO, has been a defendant in several lawsuits 
alleging breach of lease relating to restaurants closed in 1995 and 1996, 
and other vendor related cases.  The Company sold UFO in 1996 and 
contractually UFO continues to have sole responsibility for such 
litigation.  Although there can be no assurance given as to the results 
of such legal proceedings, based upon information currently available, 
management does not believe these proceedings will have a material 
adverse effect on the financial position or results of operations of the 
Company.  

        On August 5, 1997, Lance Mortensen, former President, Chief Executive 
Officer and director of the Company, filed a complaint against the 
Company for breach of implied covenant of good faith and fair dealing 
relating to a written employment contract.  The lawsuit was settled 
during May of 1998 through binding arbitration with no current profit or 
loss impact.

11.     Slotting and Advertising Costs 

        Included in the balance sheet under "Prepaid Expenses and Other" 
are slotting and advertising costs of  $1,326,925 at December 28, 1997, 
and $1,074,997 at December 27, 1998, relating primarily to slotting fees 
paid or credited to club stores and grocery chains for shelf space 
allocations.  Total advertising expenses and slotting fees included in 
Selling, General and Administrative expenses in the accompanying 
statements of operations for 1996, 1997 and 1998 were $3,635,796, 
$1,143,922 and $1,827,355, respectively.  The 1996 amounts included 
$780,106 in writedowns to net realizable value.

12.     Significant Customers

        Costco,  Sam's Club Stores and Safeway each accounted for portions 
of total revenues as follows:

<TABLE>
<CAPTION>
                                            1996          1997          1998
                                        ------------  ------------  ------------
<S>                                     <C>           <C>           <C>
Costco...............................            41%           50%           46%
Sam's Club Stores....................             0%           12%           33%
Safeway..............................             9%            8%            5%
</TABLE>

        At December 28, 1997, one customer, Costco, accounted for 37% of 
trade accounts receivable. At December 27, 1998, Costco accounted for 
38%, and Sam's Club Stores accounted for 28% of trade receivables.      

        The Company currently sells its products to six separate Costco 
regions which make purchasing decisions independently of one another.  
On a regular basis, these regions re-evaluate the products carried in 
their stores.  There can be no assurance that these Costco regions will 
continue to offer Monterey Pasta's products in the future or continue to 
allocate Monterey Pasta the same amount of shelf space.  Purchasing 
decisions for Sam's Club Stores ("Sam's"), the Company's second 
largest customer, are made at the head office level with input from the 
stores.  While the Company is in the third year of its relationship with 
Sam's, there can be no assurance that Sam's will continue to carry the 
Company's products.  Currently, the loss of either Costco or Sam's would 
materially adversely affect the Company's business operations.

No other single customer accounted for more than 10% of revenues or 
accounts receivable.

13. SUPPLEMENTAL CASH FLOW INFORMATION FOR 1996, 1997 AND 1998

<TABLE>
<CAPTION>
                                            1996          1997          1998
                                        ------------  ------------  ------------
<S>                                     <C>           <C>           <C>
CASH PAYMENTS:
  Interest...........................      $313,155      $255,145      $249,693
  Debt issue costs...................        64,951          --            --

NON-CASH OPERATING ACTIVITIES:
  Charges and adjustments to reserve
   for discontinued operations.......       260,229        36,882          --
  Reversal of restricted stock 
   purchase (Note 6) ................          --            --         562,500
  Fair value of options granted in
   return for services (Note 6)......          --          27,095        51,000
  Expense paid in common stock.......       228,363          --            --

NON-CASH FINANCING AND INVESTING
ACTIVITIES:
  Conversion of long term debt to
   common stock......................     4,461,412          --            --
  Transfer of fixed assets to assets
   held for sale.....................       326,701          --            --
  Issuance of note receivable in
   sale of subsidiary................     2,500,000          --            --
  Issuance of common stock in
   payment of expenses or assets.....       235,000          --            --
  Capitalization of leased equipment.       271,091        49,955       103,264
  Deemed dividends on preferred and
   private placement common stock
   paid in shares....................     1,050,000       227,225          --
  Purchase of restricted shares for
   note receivable (Note 6)..........          --         562,500          --

</TABLE>

14.     Employee Benefit Plan

        In 1996, the Company instituted a 401(k) Plan covering 
substantially all full-time employees with six months of service. Under 
the Plan, employees may elect to defer up to 15% of compensation 
(subject to certain limitations).  The Company matches one-half of 
employee contributions up to 6% of compensation.  In addition, the 
Company may make an annual discretionary profit-sharing contribution.   
Employee contributions, Company matching contributions and related 
earnings are always 100% vested.  Company profit-sharing contributions 
and related earnings vest 20% a year, with 100% vesting after five years 
of service.  During 1996, 1997 and 1998, the Company's expense for 
matching contributions was $21,970, $31,362 and $37,527, respectively; 
there were no profit-sharing contributions for 1996, 1997 or 1998.

15.     Discontinued Operations

        In early 1996, the Company decided to discontinue the operations 
of its restaurant and franchise subsidiaries, and wrote off the 
investment in those subsidiaries effective as of December 31, 1995.  In 
early 1996, all operations of the franchising subsidiary, as well as 
agreements with two franchisees, were terminated.  In April 1996, the 
Company's restaurant subsidiary, UFO, was sold to Upscale Acquisitions, 
Inc. (Upscale), which is wholly-owned by Mr. Lance Mortensen (see Note 
8).  Mr. Mortensen is the Chief Executive Officer, president, and a 
director of Upscale.  He is also a stockholder and former director, 
Chairman of the Board, President, and Chief Executive Officer of the 
Company.

        The purchase price for the shares of UFO sold to Upscale was 
$1,000 cash plus a note executed by Upscale for $2,500,000.  In 
addition, under the agreement, the Company advanced $350,000 to UFO 
subsequent to the purchase.  The purchase note was accounted for under 
the cost recovery method, which defers recognition of income (or 
reduction of loss) until payments are received.  The cash advances were 
not accounted for under the cost recovery method but were fully reserved 
at year end 1996 as possibly uncollectible.  The note and advances were 
written off during 1997.

        Net revenues from discontinued operations for 1996 were $1,796,000 
(prior to sale of UFO).  Operating losses from discontinued operations 
were $839,999 for 1996 (prior to sale of UFO).  The 1996 losses from 
business disposition and phaseout were charged directly to the reserves 
established during 1995, as were other expenditures related to the 
restaurant and franchising operations.  During 1996, the reserves were 
also reduced by $220,000 to reflect adjustments of estimates to the 
actual Company expenditures.  Remaining reserves of $388,000 at the end 
of 1996, less a $37,000 recovery, were utilized during 1997. 

16.     Quarterly Information (unaudited)

        The summarized quarterly financial data presented below and on the 
following page reflect all adjustments which, in the opinion of 
management, are of a normal and recurring nature necessary to present 
fairly the results of operations for the periods presented.

<PAGE>

<TABLE>
<CAPTION>
                                      First      Second       Third      Fourth
Year Ended 1997                      Quarter     Quarter     Quarter     Quarter       1997
---------------------------------- ----------- ----------- ----------- ----------- ------------
<S>                                <C>         <C>         <C>         <C>         <C>
Net Revenue....................... $6,535,502  $5,552,631  $5,199,556  $6,159,091  $23,446,780
Gross profit......................  2,805,173   2,454,507   1,952,385   2,473,702    9,685,767
Operating Income (loss)...........   (274,612)    237,286     349,336     390,390      702,400
Income (loss) from continuing
  operations......................   (346,921)    183,244     274,663     363,420      474,406
Net Income (loss).................  ($346,921)   $220,126    $274,663    $363,420     $511,288


Basic and diluted earnings/(loss)
  per common share (Note 6):           ($0.05)      $0.01       $0.02       $0.03        $0.02
                                   =========== =========== =========== =========== ============
</TABLE>


<TABLE>
<CAPTION>
                                      First      Second       Third      Fourth
Year Ended 1998                      Quarter     Quarter     Quarter     Quarter       1998
---------------------------------- ----------- ----------- ----------- ----------- ------------
<S>                                <C>         <C>         <C>         <C>         <C>
Net Revenue....................... $5,982,859  $6,307,531  $6,705,847  $7,221,060  $26,217,297
Gross profit......................  2,384,283   2,572,231   2,737,795   2,943,929   10,638,238
Operating Income .................    351,384     653,554     660,185     662,207    2,327,330
Income from continuing
  operations......................    324,717     542,573     569,477     600,191    2,036,958
Net Income (loss).................   $324,717    $542,573    $569,477    $600,191   $2,036,958


Basic and diluted earnings per
  common share (Note 6):..........      $0.02       $0.04       $0.05       $0.05        $0.16
                                   =========== =========== =========== =========== ============




</TABLE>


17.     Subsequent Events

        On March 12, 1999 the Company purchased the operating assets and  
inventory of Frescala Foods, Inc., a San Antonio, Texas based fresh pasta  
and sauce producer with an emphasis on private label production, for a  
consideration of $1,345,000 in cash and 300,000 options with immediate vesting
to purchase shares of the Company's common stock (see Note 4).  The options 
have an approximate fair market value of $145,000, an exercise price of 
$2.33 per share, and a three-year expiration.  Additionally, Frescala 
owners could receive an earn-out based upon Frescala sales above a 
predetermined level.  The earn-out will be calculated during the first 
year of combined operations.  Funding for the transaction will come from 
a new $750,000 two-year term note, use of existing accounts receivable 
and inventory line, and cash flow from operations.  

<PAGE>

                                  Schedule II

                             MONTEREY PASTA COMPANY
                       VALUATION AND QUALIFYING ACCOUNTS


<TABLE>
<CAPTION>
                                                Charged
                                     Balance       to     Write-Offs  Balance
                                    Beginning   Cost and  Charged to    End
                                     of 1996    Expense    Reserves   of 1996
                                    ---------- ---------- ---------- ----------
<S>                                 <C>        <C>        <C>        <C>
Allowances against Receivables--
  Spoils, Returns, Adjustments and
    Bad Debts....................... $153,267 $1,061,566  $701,016    $924,285
  Receivable from Related Party.....     --      350,000       --      350,000
Inventory Reserves--
  Spoils and Obsolescence...........   40,000     55,000     40,000     55,000

<CAPTION>
                                                Charged
                                     Balance       to     Write-Offs  Balance
                                    Beginning   Cost and  Charged to    End
                                     of 1997    Expense    Reserves   of 1997
                                    ---------- ---------- ---------- ----------
<S>                                 <C>        <C>        <C>        <C>
Allowances against Receivables--
  Spoils, Returns, Adjustments and
    Bad Debts....................... $924,285   $109,608   $701,016   $332,877
  Receivable from Related Party.....  350,000       --      350,000       --
Inventory Reserves--
  Spoils and Obsolescence...........   55,000     55,000     55,000     55,000

<CAPTION>
                                                Charged
                                     Balance       to     Write-Offs  Balance
                                    Beginning   Cost and  Charged to    End
                                     of 1998    Expense    Reserves   of 1998
                                    ---------- ---------- ---------- ----------
<S>                                 <C>        <C>        <C>        <C>
Allowances against Receivables--
  Spoils, Returns, Adjustments and
    Bad Debts....................... $332,877   $477,674   $498,143   $312,408
Inventory Reserves--
  Spoils and Obsolescence...........   55,000     55,000     80,000     30,000
</TABLE>

<PAGE>

                                   SIGNATURES

        Pursuant to the requirements of Section 13 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, in 
the city of San Francisco, State of California, on the 17th day of 
March, 1999.

        MONTEREY PASTA COMPANY 


        By:  /s/ R. LANCE HEWITT
                R. Lance Hewitt
                President and Chief 
                Executive Officer 


        By:  /s/STEPHEN L. BRINKMAN
               Stephen L. Brinkman
               Chief Financial Officer

    Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities
indicated and on the date indicated.

<TABLE>
<CAPTION>
           Name                           Title                     Date
--------------------------  ----------------------------------  -------------
<S>                         <C>                                 <C>
/s/ CHARLES B. BONNER       Director                            March 3, 1999
-------------------------
Charles B. Bonner

/s/ FLOYD R. HILL           Director                            March 5, 1999
-------------------------
Floyd R. Hill

/s/ THOMAS E. KEES          Director                            March 5, 1999
-------------------------
Thomas E. Kees

/s/ R. LANCE HEWITT         President, Chief Executive Officer  March 10, 1999
-------------------------     and Director
R. Lance Hewitt

/s/ VAN TUNSTALL            Director                            March 4, 1999
-------------------------
Van Tunstall

/s/ JAMES WONG              Director                            March 5, 1999
-------------------------
James Wong
</TABLE>

<PAGE>

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Number    Exhibit Title
--------  ------------------------------------------------------------------
<C>       <S>

  3.1     Certificate of Incorporation dated August 1, 1996 (incorporated by
          reference from Exhibit B to the Company's 1996 Proxy)

  3.2     Bylaws of the Company (incorporated by reference from Exhibit C
          to the 1996 Proxy)

  4.1     Form of Warrant for purchase of the Company's Common Stock, dated as
          of July 1, 1996 (incorporated by reference from Exhibit 4.5 filed with
          the Company's 1996 Form S-3)

  4.2     Form of Registration Rights Agreement dated April 1996, among the
          Company, Spelman & Co., Inc. and investor (incorporated by reference
          from Exhibit 10.42 filed with the Company's original  March 31, 1996 
          Quarterly Report on Form 10-Q on May 1, 1996 ("1996 Q-1 10-Q"))

  4.3     Stockholder Rights Agreement dated as of May 15, 1996 between the
          Company and Corporate Stock Transfer, as rights agent (incorporated by
          reference from Item 2 of Form 8-A filed with the Securities and
          Exchange Commission on May 28, 1996)

  4.4     Amendment to Registration Rights Agreement, dated as of April 20, 1997
          among the Company, Spelman and company, inc., and investor, amending the
          Registration Rights Agreement entered into as of April 1996 (incorporated
          by reference from Exhibit 4.9 filed with the Company's 1996 Form 10-K/A)

  4.5     Registration Rights Agreement dated as of December 31, 1996 among the 
          Company, Sentra Securities Corporation and investor (incorporated by
          reference from Exhibit 4.12 filed with the Company's 1996 Form 10-K/A)

  4.6     Form of Warrant ("Sentra Warrant") for purchase of the Company's Common 
          Stock dated March 1997 issued in connection with the Company's March 
          1997 Private Placement (incorporated by reference from Exhibit 4.13 filed 
          with the Company's Pre-Effective Amendment No. 1 to the Registration
          Statement on Form S-3 filed on May 6, 1997 ("1997 Amendment No. 1
          to Form S-3"))

  4.7*    Stock Purchase Agreement between the Company and Kenneth A. Steel, Jr.  
          dated April 29, 1997 (incorporated by reference from Exhibit 4.14 filed 
          with the 1997 Amendment No. 1 to Form S-3)

 10.1*    Second Amended and Restated 1993 Stock Option Plan (as amended on
          August 1, 1996) (incorporated by reference to Exhibit 10.1 filed with the 
          Company's 1996 Form 10-K)

 10.2*    1995 Employee Stock Purchase Plan (incorporated by reference from
          Exhibit 10.15 to the Company's 1994 Form 10-K)

 10.3     Monterey County Production Facility Lease of the Company, as amended
          (incorporated by reference from Exhibit 10.03 to the SB-2)

 10.4     Amendment No. 1 dated February 1, 1995 and Amendment No. 2 dated March
          1, 1995 to Monterey County Production Facility Lease of the Company
          (incorporated by reference from Exhibit 10.6 filed with the 1995 Form 10-K)

 10.5     Amendment No. 3 dated September 12, 1997 and Amendment No. 4 dated 
          February 6, 1998 to Monterey County Production Facility Lease of the 
          Company (incorporated by reference from Exhibit 10.5 filed with the 
          Company's September 27, 1998 Quarterly Report on Form 10-Q dated  
          November 4, 1998 ("1998 Q3 10-Q"))

 10.6     Trademark Registration -- MONTEREY PASTA COMPANY, under Registration No.
          1,664,278 registered on November 12, 1991 with the U.S. Patent and 
          Trademark Office (incorporated by reference from Exhibit 10.09 to  
          the SB-2)

 10.7     Trademark Registration -- MONTEREY PASTA COMPANY, under Registration No.
          1,943,602 registered on December 26, 1995 with the U.S. Patent and 
          Trademark Office (incorporated by reference from Exhibit 10.24 to the 
          1995 Form 10-K)

 10.8     Trademark Registration -- MONTEREY PASTA COMPANY, under Registration No.
          1,945,131 registered on January 2, 1996 with the U.S. Patent and 
          Trademark Office (incorporated by reference from Exhibit 10.25 to the 
          1995 Form 10-K)

 10.9     Trademark Registration -- MONTEREY PASTA COMPANY, under Registration No.
          1,951,624 registered on January 23, 1996 with the U.S. Patent and 
          Trademark Office (incorporated by reference from Exhibit 10.26 to the 
          1995 Form 10-K)

 10.10    Trademark Registration -- MONTEREY PASTA COMPANY, under Registration No.
          1,953,489 registered on January 30, 1996 with the U.S. Patent and 
          Trademark Office (incorporated by reference from Exhibit 10.27 to the 
          1995 Form 10-K)

 10.11    Registration Rights Agreement dated as of June 15, 1995 with the GFL  
          Advantage Fund Limited, as amended on October 13 and 19, 1995, 
          respectively, (incorporated by reference from Exhibit 10.02 to the  
          1995 Q2 10-Q, and Exhibits 10.6 and 10.7 to the Company's S-3 Registration 
          Statement No. 33-96684, filed on December 12, 1995 ("1995 S-3"))

 10.12*   The Company's 401 (k) Plan, established to be effective as of January 1, 
          1996, adopted by the Board of Directors on June 7, 1996 (incorporated by
          reference from Exhibit 10.44 to the Company's Quarterly Report on Form
          10-Q on August 13, 1996 ("1996 Q2 10-Q"))

 10.13*   Directed Employee Benefit Trust Agreement dated June 17, 1996 between
          the Company and The Charles Schwab Trust Company, as Trustee of the 
          Company's 401 (k) Plan (incorporated by reference from Exhibit 10.45
          to the 1996 Q2 10-Q)

 10.14    Security and Loan Agreement (Accounts Receivable and/or Inventory) dated 
          July 24, 1997 between the Company and Imperial Bank (incorporated by
          reference from Exhibit 10.47 of the Company's Pre-Effective Amendment No. 3
          to Form S-3 filed on October 14, 1997 ("1997 Amendment No. 3 to Form S-3"))

 10.15    Agreement regarding Employment, Trade Secrets, Inventions, and Competition
          dated May 26, 1997 with Lance Hewitt (incorporated by reference from 
          Exhibit 10.48 of the 1997 Amendment No. 3 to Form S-3)

 10.16    Employment Agreement dated August 25, 1997 with Mr. Stephen L. Brinkman
          incorporated by reference from Exhibit 10.49 to the Company's September 
          28, 1997 Quarterly Report on form 10-Q filed on November 10, 1997)

 10.17    First Amendment to Security and Loan Agreement dated July 24, 1997 
          between the Company and Imperial Bank (incorporated by reference from
          Exhibit 10.50 in the Company's 1997 Form 10-K)

 10.18    Second Amendment to Security and Loan Agreement dated July 24, 1997
          between the Company and Imperial Bank (incorporated by reference from
          Exhibit 10.18 filed with the Company's 1998 Q3 10-Q)

 10.19    Security and Loan Agreement dated July 23, 1998 between the Company and
          Imperial Bank (incorporated by reference from Exhibit 10.19 filed
          with the Company's 1998 Q3 10-Q)

 10.20    Addendum to Security and Loan Agreement dated July 23, 1998 between the
          Company and Imperial Bank (incorporated by reference from Exhibit 10.20
          filed with the Company's 1998 Q3 10-Q)

 10.21    Agreement for Handling and Storage Services between the Company and  
          CS Integrated LLC dated February 8, 1999

 10.22    Defined Benefit Administrative Service Agreement between the Company and
          First Mercantile Trust dated December 15, 1998

 27.1     Financial Data Schedule
</TABLE>
-------------------------
*   Management contract or compensatory plan or arrangement covering executive
    officers or directors of Monterey Pasta Company and its subsidiary, Upscale
    Food Outlets, Inc.