UNITED STATES
                     SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C. 20549

                                  FORM 10-Q


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

For the period ended:  June 30, 2003

                                      or

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

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

Commission file number  0-11595


                         Merchants Bancshares, Inc.
           ------------------------------------------------------
           (Exact name of registrant as specified in its charter)


                      Delaware                     03-0287342
          -------------------------------      -------------------
          (State or other jurisdiction of        (I.R.S. Employer
           incorporation or organization)      Identification No.)


        275 Kennedy Drive, South Burlington, Vermont            05403
        --------------------------------------------          ----------
         (Address of principal executive offices)             (Zip Code)


                                 802-658-3400
             ----------------------------------------------------
             (Registrant's telephone number, including area code)


            ----------------------------------------------------
            (Former name, former address and former fiscal year,
                        if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.    [X] Yes     [ ] No

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[X] Yes  [ ] No

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: As of August 8, 2003,
the registrant had outstanding 6,180,468 shares of Common Stock, par value
$0.01 per share.


<PAGE>


                         MERCHANTS BANCSHARES, INC.
                                  FORM 10-Q
                              TABLE OF CONTENTS

<TABLE>


                                                                       <c>
PART I - FINANCIAL INFORMATION
  ITEM 1.   Financial Statements (Unaudited)

            Consolidated Balance Sheets
            June 30, 2003, and December 31, 2002                                1

            Consolidated Statements of Operations
            For the three months ended June 30, 2003 and 2002, and
            the six months ended June 30, 2003 and 2002                         2

            Consolidated Statements of Comprehensive Income
            For the three months ended June 30, 2003 and 2002, and
            the six months ended June 30, 2003 and 2002                         3

            Consolidated Statements of Cash Flows
            For the six months ended June 30, 2003 and 2002                     4

            Notes to Consolidated Financial Statements                      5 - 7

  ITEM 2.   Management's Discussion and Analysis of Financial
            Condition and Results of Operations                            7 - 15
  ITEM 3.   Quantitative and Qualitative Disclosures about Market Risk    15 - 17
  ITEM 4.   Controls and Procedures                                            17

PART II - OTHER INFORMATION
  ITEM 1.   Legal Proceedings                                                  18
  ITEM 2.   Changes in Securities and Use of Proceeds                          18
  ITEM 3.   Defaults upon Senior Securities                                    18
  ITEM 4.   Submission of Matters to a Vote of Security Holders                18
  ITEM 5.   Other Information                                                  18
  ITEM 6.   Exhibits and Reports on Form 8-K                                   18
  Signatures                                                                   19
  Exhibits
</TABLE>


<PAGE>


                         MERCHANTS BANCSHARES, INC.
                        PART I-Financial Information

ITEM 1.  FINANCIAL STATEMENTS

                         Merchants Bancshares, Inc.
                         Consolidated Balance Sheets
                                 (Unaudited)

<TABLE>
<CAPTION>

                                                                         June 30,    December 31,
(In thousands except share and per share data)                             2003          2002
-------------------------------------------------------------------------------------------------


                                                      <c>            <c>            <c>
ASSETS
  Cash and Due from Banks                                               $ 35,457       $ 37,046
  Federal Funds Sold and Other Short-term Investments                        513         31,500
  Investments:
    Securities Available for Sale                                        256,215        217,755
    Securities Held to Maturity
     (Fair Value of $44,591 and $54,972)                                  41,937         51,614
    Trading Securities                                                       760            846
-----------------------------------------------------------------------------------------------
      Total Investments                                                  298,912        270,215
-----------------------------------------------------------------------------------------------
  Loans                                                                  540,670        495,588
  Less: Allowance for Loan Losses                                          7,887          8,497
-----------------------------------------------------------------------------------------------
      Net Loans                                                          532,783        487,091
-----------------------------------------------------------------------------------------------
  Federal Home Loan Bank Stock                                             3,632          3,632
  Bank Premises and Equipment, Net                                        11,343         11,400
  Investment in Real Estate Limited Partnerships                           4,608          3,551
  Other Real Estate Owned                                                     --             57
  Other Assets                                                            10,625         10,003
-----------------------------------------------------------------------------------------------
      Total Assets                                                     $ 897,873       $854,495
===============================================================================================
LIABILITIES
  Deposits:
    Demand Deposits                                                    $ 100,441       $102,554
    Savings, NOW and Money Market Accounts                               488,717        467,430
    Time Deposits $100 Thousand and Greater                               44,812         37,916
    Other Time Deposits                                                  155,462        147,374
-----------------------------------------------------------------------------------------------
      Total Deposits                                                     789,432        755,274
-----------------------------------------------------------------------------------------------
  Demand Note Due U.S. Treasury                                            1,661          4,000
  Other Liabilities                                                       14,721         10,086
  Long-Term Debt                                                           6,257          2,377
-----------------------------------------------------------------------------------------------
      Total Liabilities                                                  812,071        771,737
-----------------------------------------------------------------------------------------------
  Commitments and Contingencies (Note 5)
STOCKHOLDERS' EQUITY
  Preferred Stock Class A Non-Voting
    Shares Authorized - 200,000, Outstanding 0                                --             --
  Preferred Stock Class B Voting
    Shares Authorized - 1,500,000, Outstanding 0                              --             --
  Common Stock, $.01 Par Value                                                67             67
    Shares Authorized                                    10,000,000
    Issued        Current Period                          6,651,760
                  Prior Period                            6,651,760
    Outstanding   Current Period                          5,922,879
                  Prior Period                            5,925,082
  Capital in Excess of Par Value                                          33,852         33,664
  Retained Earnings                                                       58,635         55,827
  Treasury Stock, At Cost                                                (11,383)       (10,980)
                  Current Period Shares                     728,881
                  Prior Period Shares                       726,678
  Deferred Compensation Arrangements                                       3,342          3,194
  Accumulated Other Comprehensive Income                                   1,289            986
-----------------------------------------------------------------------------------------------
      Total Stockholders' Equity                                          85,802         82,758
-----------------------------------------------------------------------------------------------
      Total Liabilities and Stockholders' Equity                       $ 897,873       $854,495
===============================================================================================
</TABLE>

See accompanying notes to the consolidated financial statements


<PAGE>  1


                         Merchants Bancshares, Inc.
                    Consolidated Statements of Operations
                                 (Unaudited)

<TABLE>
<CAPTION>

                                                 Three Months Ended     Six Months Ended
                                                      June 30,              June 30,
(In thousands except per share data)              2003       2002       2003       2002
-----------------------------------------------------------------------------------------


                                              <c>        <c>        <c>        <c>
INTEREST AND DIVIDEND INCOME
  Interest and Fees on Loans                     $ 8,304    $ 8,527    $16,336    $17,183
  Interest and Dividends on Investments
    U.S. Treasury and Agency Obligations           2,031      2,811      4,456      5,527
    Other                                          1,041        805      1,908      1,564
-----------------------------------------------------------------------------------------
      Total Interest and Dividend Income          11,376     12,143     22,700     24,274
-----------------------------------------------------------------------------------------
INTEREST EXPENSE
  Savings, NOW and Money Market Accounts             808      1,379      1,686      2,849
  Time Deposits $100 Thousand and Greater            266        335        612        693
  Other Time Deposits                                932      1,094      1,805      2,303
  Other Borrowed Funds                                11          4         13         14
  Long-Term Debt                                      45         20         72         39
-----------------------------------------------------------------------------------------
      Total Interest Expense                       2,062      2,832      4,188      5,898
-----------------------------------------------------------------------------------------
  Net Interest Income                              9,314      9,311     18,512     18,376
  Provision for Loan Losses                           --       (181)        --       (614)
-----------------------------------------------------------------------------------------
  Net Interest Income after Provision
   for Loan Losses                                 9,314      9,492     18,512     18,990
-----------------------------------------------------------------------------------------
NONINTEREST INCOME
  Trust Company Income                               369        450        714        839
  Service Charges on Deposits                      1,097      1,031      2,147      1,953
  Net Gains on Sales of Investment Securities        626         --        843         --
  Other                                              657        250      1,126        682
-----------------------------------------------------------------------------------------
      Total Noninterest Income                     2,749      1,731      4,830      3,474
-----------------------------------------------------------------------------------------
NONINTEREST EXPENSES
  Salaries and Wages                               2,922      2,587      5,659      5,263
  Employee Benefits                                  891        846      1,971      1,731
  Occupancy Expense, Net                             672        585      1,365      1,219
  Equipment Expense                                  664        611      1,263      1,206
  Legal and Professional Fees                        385        423        696        749
  Marketing                                          357        261        658        511
  Equity in Losses of Real Estate
   Limited Partnerships                              401        329        803        647
  Vermont Franchise Taxes                            213        203        359        402
  Other Real Estate Owned, Net                        35         44         59         75
  Other                                            1,275      1,165      2,553      2,358
-----------------------------------------------------------------------------------------
      Total Noninterest Expenses                   7,815      7,054     15,386     14,161
-----------------------------------------------------------------------------------------
Income Before Provision for Income Taxes           4,248      4,169      7,956      8,303
  Provision for Income Taxes                       1,208      1,152      2,182      2,280
-----------------------------------------------------------------------------------------
NET INCOME                                       $ 3,040    $ 3,017    $ 5,774    $ 6,023
=========================================================================================

Basic Earnings Per Common Share                  $  0.49    $  0.49    $  0.93    $  0.98
Diluted Earnings Per Common Share                $  0.49    $  0.48    $  0.93    $  0.97
</TABLE>

See accompanying notes to the consolidated financial statements


<PAGE>  2


                         Merchants Bancshares, Inc.
               Consolidated Statements of Comprehensive Income
                                 (Unaudited)

<TABLE>
<CAPTION>

                                                            Three Months Ended    Six Months Ended
                                                                 June 30,             June 30,
(In thousands)                                               2003        2002      2003      2002
--------------------------------------------------------------------------------------------------


                                                         <c>         <c>       <c>       <c>
Net Income                                                  $3,040      $3,017    $5,774    $6,023
Change in Net Unrealized Appreciation of Securities
 Available for Sale, Net of Tax                                617       2,180       871       856
Change in Net Unrealized Appreciation of
 Derivatives Qualifying as Hedges, Net of Tax                   --         379        --       379
Reclassification Adjustments for Securities
 (Gains)/Losses Included in Net Income,
 Net of Tax                                                   (407)         --      (548)       --
--------------------------------------------------------------------------------------------------
Comprehensive Income Before Transfers                        3,250       5,576     6,097     7,258
Impact of Transfer of Securities from Available for Sale
 to Held to Maturity                                            (8)         (5)      (20)      (12)
--------------------------------------------------------------------------------------------------
Comprehensive Income                                        $3,242      $5,571    $6,077    $7,246
==================================================================================================
</TABLE>

See accompanying notes to the consolidated financial statements


<PAGE>  3


                         Merchants Bancshares, Inc.
                    Consolidated Statements of Cash Flows
                                 (Unaudited)

<TABLE>
<CAPTION>

For the six months ended June 30,                                            2003         2002
------------------------------------------------------------------------------------------------
(In thousands)


                                                                       <c>           <c>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income                                                                $   5,774     $  6,023
Adjustments to Reconcile Net Income to Net Cash
 Provided by Operating Activities:
  Provision for Loan Losses                                                      --         (614)
  Depreciation and Amortization                                               2,315        1,657
  Net Gains on Sales of Investment Securities                                  (843)          --
  Net Losses (Gains) on Disposition of Premises and Equipment                    47           (8)
  Net Gains on Sales of Other Real Estate Owned                                  (8)          --
  Equity in Losses of Real Estate Limited Partnerships                          803          647
Changes in Assets and Liabilities:
  Increase in Interest Receivable                                              (204)        (877)
  Decrease in Interest Payable                                                  (68)        (591)
  (Decrease) Increase in Other Assets                                          (590)         217
  Increase (Decrease) in Other Liabilities                                    4,708       (4,301)
------------------------------------------------------------------------------------------------
      Net Cash Provided by Operating Activities                              11,934        2,153
------------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from Sales of Investment Securities Available for Sale            65,178           --
  Proceeds from Maturities of Investment Securities Available for Sale       28,749       20,432
  Proceeds from Maturities of Investment Securities Held to Maturity          9,647        7,874
  Purchases of Investment Securities Available for Sale                    (132,074)     (88,609)
  Loan Originations (in Excess of) Less than Principal Payments             (45,850)       6,070
  Purchases of Federal Home Loan Bank Stock                                      --          (12)
  Proceeds from Sales of Premises and Equipment                                  --            8
  Proceeds from Sales of Other Real Estate Owned                                 65           --
  Investments in Real Estate Limited Partnerships                            (1,860)        (743)
  Purchases of Bank Premises and Equipment                                     (890)        (967)
------------------------------------------------------------------------------------------------
      Net Cash Used in Investing Activities                                 (77,035)     (55,947)
------------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net Increase in Deposits                                                   34,158       15,962
  Net (Decrease) Increase in Short Term Borrowings                           (2,339)       2,147
  Proceeds from Long-Term Debt                                                4,000           --
  Principal Payments on Long-Term Debt                                         (120)          (9)
  Cash Dividends Paid                                                        (2,529)      (2,283)
  Acquisition of Treasury Stock                                                (713)        (345)
  Increase in Deferred Compensation Arrangements                                 80          187
  Distributions Under Deferred Compensation Arrangements                       (141)        (147)
  Proceeds from the Exercise of Employee Stock Options                          129          225
------------------------------------------------------------------------------------------------
      Net Cash Provided by Financing Activities                              32,525       15,737
------------------------------------------------------------------------------------------------

Decrease in Cash and Cash Equivalents                                       (32,576)     (38,057)
Cash and Cash Equivalents Beginning of Year                                  68,546       86,688
------------------------------------------------------------------------------------------------
Cash and Cash Equivalents End of Period                                   $  35,970     $ 48,631
================================================================================================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Total Interest Payments                                                 $   4,256     $  6,489
  Total Income Tax Payments                                                   3,457        3,650
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
  Distribution of Stock Under Deferred Compensation Arrangements                 55           55
  Distribution of Treasury Stock in Lieu of Cash Dividend                       437          552
</TABLE>

See accompanying notes to the consolidated financial statements


<PAGE>  4


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:

See Merchants Bancshares, Inc. ("Merchants") Annual Report on Form 10-K for
additional information.

Note 1: Recent Accounting Developments
In May 2003 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting
for Certain Financial Instruments with Characteristics of Both Liabilities
and Equity". This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics
of both liabilities and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset
in some circumstances). Many of those instruments were previously
classified as equity. This Statement is generally effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of this statement has not had a material impact on
Merchants' financial position or results of operations.

In April 2003 the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under
FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This Statement is generally effective for contracts entered
into or modified after June 30, 2003, and for hedging relationships
designated after June 30, 2003. The adoption of this statement has not had
a material impact on Merchants' financial position or results of
operations.

In December 2002 the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement
No. 123", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. This statement is effective for fiscal years ending after
December 15, 2002. The adoption of this statement changed certain
disclosures but did not impact Merchants' financial position or results of
operations.

Note 2: Stock-Based Compensation
Merchants has granted stock options to certain key employees. The options
granted vest completely after two years and are immediately exercisable
upon vesting. Nonqualified stock options may be granted at any price
determined by the Compensation Committee of Merchants' Board of Directors.
All stock options have been granted at or above fair market value at the
date of grant.

Merchants accounts for its stock-based compensation plans in accordance
with the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Merchants has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize the fair value of all
stock-based awards measured on the date of the grant as expense over the
vesting period, and has adopted SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement
No. 123," which, among other things, amends the disclosure requirements of
SFAS No. 123. Alternatively, SFAS No. 123 allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net income
and earnings per share disclosures for employee stock-based grants made in
1995 and future years as if the fair value based method defined in SFAS No.
123 had been applied. Merchants has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
required by SFAS No. 123.

The fair value of each option grant is estimated on the grant date using
the Black-Scholes option-pricing model. No options have been granted since
August 2001. Merchants' net income and earnings per share would have been
the same as the amounts reported in the financial statements had
compensation cost for awards under Merchants' stock-based compensation
plans been determined consistent with the method set forth under SFAS No.
123. Pro forma compensation expense for options granted is reflected over
the vesting period; therefore, future pro forma compensation expense may be
greater if additional options are granted.


<PAGE>  5


Note 3: Earnings Per Share
The following tables present reconciliations of the calculations of basic
and diluted earnings per share for the three and six month periods ended
June 30, 2003 and 2002.

<TABLE>
<CAPTION>

                                                              Weighted
                                                    Net       Average       Per Share
Three Months Ended June 30, 2003                   Income      Shares        Amount
                                             (In thousands except share and per share data)
------------------------------------------------------------------------------------------------


                                                <c>        <c>             <c>
Basic Earnings Per Common Share:
  Net Income Available to Common
   Shareholders                                    $3,040     6,182,218       $0.49
Diluted Earnings Per Common Share:
  Effect of Dilutive Stock Options                     --        54,867
  Net Income Available to Common
   Shareholders and Stock Option Exercise          $3,040     6,237,085       $0.49

<CAPTION>

                                                              Weighted
                                                    Net       Average       Per Share
Three Months Ended June 30, 2002                   Income      Shares        Amount
                                             (In thousands except share and per share data)
------------------------------------------------------------------------------------------------


                                                <c>        <c>             <c>
Basic Earnings Per Common Share:
  Net Income Available to Common
   Shareholders                                    $3,017     6,162,327       $0.49
Diluted Earnings Per Common Share:
  Effect of Dilutive Stock Options                     --        84,612
  Net Income Available to Common
  Shareholders and Stock Option Exercise           $3,017     6,246,939       $0.48

<CAPTION>

                                                              Weighted
                                                    Net       Average       Per Share
Six Months Ended June 30, 2003                     Income      Shares        Amount
                                             (In thousands except share and per share data)
------------------------------------------------------------------------------------------------


                                                <c>        <c>             <c>
Basic Earnings Per Common Share:
  Net Income Available to Common
   Shareholders                                    $5,774     6,182,335       $0.93
Diluted Earnings Per Common Share:
  Effect of Dilutive Stock Options                     --        54,363
  Net Income Available to Common
   Shareholders and Stock Option Exercise          $5,774     6,236,698       $0.93

<CAPTION>

                                                              Weighted
                                                    Net       Average       Per Share
Six Months Ended June 30, 2002                     Income      Shares        Amount
                                             (In thousands except share and per share data)
------------------------------------------------------------------------------------------------


                                                <c>        <c>             <c>
Basic Earnings Per Common Share:
  Net Income Available to Common
   Shareholders                                    $6,023     6,153,185       $0.98
Diluted Earnings Per Common Share:
  Effect of Dilutive Stock Options                     --        78,954
  Net Income Available to Common
   Shareholders And Stock Option Exercise          $6,023     6,232,139       $0.97
</TABLE>

Basic earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding for the three
and six month periods ending June 30, 2003 and 2002. As of June 30, 2003
and 2002, there were no anti-dilutive stock options outstanding.


<PAGE>  6


Note 4: Stock Repurchase Program
In January 2001 Merchants' Board of Directors approved a stock repurchase
program. In January 2003 the Board of Directors voted to extend the program
until January 2004. Under the program, Merchants is authorized to
repurchase up to 300,000 shares of its own common stock. Under the plan
Merchants purchased 177,881 shares of its own common stock on the open
market, at an average per share price of $21.52, through June 30, 2003.

Note 5: Commitments and Contingencies
Merchants is involved in routine legal proceedings occurring in the
ordinary course of business, which, in the aggregate, are believed by
management to be immaterial to its financial condition and results of
operations

Note 6: Guarantees
Merchants does not issue any guarantees that would require liability
recognition or disclosure, other than its standby letters of credit.
Standby letters of credit are conditional commitments issued by Merchants
to guarantee the performance of a customer to a third party. Standby
letters of credit generally arise in connection with lending relationships.
The credit risk involved in issuing these instruments is essentially the
same as that involved in extending loans to customers. Contingent
obligations under standby letters of credit totaled approximately $6.4
million at June 30, 2003, and represent the maximum potential future
payments Merchants could be required to make. Typically, these instruments
have terms of 12 months or less and expire unused; therefore, the total
amounts do not necessarily represent future cash requirements. Each
customer is evaluated individually for creditworthiness under the same
underwriting standards used for commitments to extend credit and on-balance
sheet instruments. Merchants policies governing loan collateral apply to
standby letters of credit at the time of credit extension. Loan-to-value
ratios are generally consistent with loan-to-value requirements for other
commercial loans secured by similar types of collateral. The fair value of
the Merchants' standby letters of credit at June 30, 2003, was
insignificant.

Note 7: Reclassifications
Certain amounts reported for prior periods have been reclassified to be
consistent with the current period presentation.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Forward-Looking Statements
Except for the historical information contained herein, this Quarterly
Report on Form 10-Q of Merchants Bancshares, Inc. may contain 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. Investors
are cautioned that forward-looking statements are inherently uncertain.
Actual performance and results of operations may differ materially from
those projected or suggested in the forward-looking statements due to
certain risks and uncertainties, including, without limitation:

      (i)    the fact that Merchants' success is dependent upon general
             economic conditions in Vermont and Vermont's ability to
             attract new business;

      (ii)   the fact that Merchants' earnings depend to a great extent
             upon the level of net interest income (the difference between
             interest income earned on loans and investments and the
             interest expense paid on deposits and other borrowings)
             generated by Merchants and thus Merchants' results of
             operations may be adversely affected by increases or decreases
             in interest rates;

      (iii)  the fact that the banking business is highly competitive and
             the profitability of Merchants depends upon Merchants' ability
             to attract loans and deposits in Vermont, where Merchants
             competes with a variety of traditional banking and
             nontraditional institutions such as credit unions and finance
             companies;

      (iv)   the fact that at June 30, 2003, a significant portion of
             Merchants' loan portfolio was comprised of commercial loans,
             exposing Merchants to the risks inherent in financings based
             upon analyses of credit risk, the value of underlying
             collateral, including real estate, and other more intangible
             factors, which are considered in making commercial loans;

      (v)    approximately 80% of Merchants' loan portfolio is comprised of
             real estate loans, exposing Merchants to the risks inherent in
             financings based upon analyses of credit risk and the value of
             underlying collateral. Accordingly, Merchants' profitability
             may be negatively impacted by errors in risk analyses, by loan
             defaults, and the ability of certain borrowers to repay such
             loans may be adversely affected by any downturn in general
             economic conditions;


<PAGE>  7


      (vi)   acts or threats of terrorism and actions taken by the United
             States or other governments as a result of such acts or
             threats, including possible military action, could further
             adversely affect business and economic conditions in the
             United States generally and in Merchants' markets, which could
             adversely effect Merchants' financial performance and that of
             Merchants' borrowers and on the financial markets and the
             price of Merchants' common stock;

      (vii)  changes in the extensive laws, regulations and policies
             governing bank holding companies and their subsidiaries could
             alter Merchants' business environment or affect Merchants'
             operations; and

      (viii) the potential need to adapt to industry changes in information
             technology systems, on which Merchants is highly dependent,
             could present operational issues or require significant
             capital spending.

These factors, as well as general economic and market conditions in the
United States, may materially and adversely affect the market price of
shares of Merchants' common stock. Because of these and other factors, past
financial performance should not be considered an indicator of future
performance. The forward-looking statements contained herein represent
Merchants' judgment as of the date of this Form 10-Q, and Merchants
cautions readers not to place undue reliance on such statements.

General
All adjustments necessary for a fair presentation of the consolidated
financial statements of Merchants as of and for the six months ended June
30, 2003 and 2002, have been included. The information was prepared from
the unaudited financial statements of Merchants Bancshares, Inc. and its
subsidiaries, Merchants Bank, Merchants Trust Company and Merchants
Properties, Inc.

Overview
Merchants earned net income of $3.04 million, or basic and diluted earnings
per share of 49 cents for the quarter ended June 30, 2003, compared to
$3.02 million, or basic earnings per share of 49 cents and diluted earnings
per share of 48 cents for the same period a year earlier. The return on
average assets and return on average equity for the second quarter of 2003
were 1.39% and 14.38% respectively, compared to 1.50% and 15.53% for the second
quarter of 2002. Merchants earned net income of $5.77 million, or basic and
diluted earnings per share of 93 cents for the six months ended June 30,
2003, compared to $6.02 million, or basic earnings per share of 98 cents
and diluted earnings per share of 97 cents for the same period a year
earlier. The return on average assets and return on average equity for the
first six months of 2003 were 1.34% and 13.77% respectively, compared to
1.50% and 15.61% respectively for the first six months of 2002.

Results of Operations
Net Interest Income: Net interest income for the second quarter of 2003 was
unchanged from the same quarter a year ago at $9.3 million and was $18.5
million for the first half of 2003 compared to $18.4 million for the same
period in 2002. Although Merchants' net interest margin has continued to
come under pressure over the last twelve months, overall balance sheet
growth has helped to offset some of this margin compression. The net
interest margin for the second quarter of 2003 has decreased by 40 basis
points, from 4.95% to 4.55%, compared to the second quarter of 2002, and
has decreased by 32 basis points, from 4.93% to 4.61%, for the first half
of 2003 compared to 2002. This decrease reflects the effect of the current
prolonged low interest rate environment, which, if it continues, is likely
to negatively impact the net interest margin for the remainder of 2003. The
yield on interest earning assets continued to decrease at a faster pace
than the cost of interest bearing liabilities during the quarter. The yield
on interest earning assets decreased 89 basis points for the second quarter
of 2003 compared to 2002, and 85 basis points for the first six months of
2003 compared to 2002. At the same time, the cost of interest bearing
liabilities for the second quarter decreased 59 basis points, and 64 basis
points for the first six months of this year compared to last year. The
schedules on pages 10-11 show the yield analysis for the periods reported.

The average interest rate earned on the loan portfolio decreased from 7.25%
in the second quarter of 2002 to 6.23% in the second quarter of 2003. This
is a result of both lower interest rates and changes in the makeup of
Merchants' commercial and commercial real estate loan portfolios.
Merchants' commercial real estate portfolio totaled $192 million at June
30, 2003, variable rate loans make up over 75% of the portfolio. At June
30, 2002, the commercial real estate portfolio was $167 million and just
over 60% were variable rate loans. Merchants' commercial loan portfolio has
experienced a similar shift. The commercial loan portfolio at June 30,
2003, was $92 million, with variable rate loans comprising over 70% of the
total, as contrasted with June 30, 2002 balances of $86 million, with
variable rate loans comprising less than 60% of the total. Merchants'
customers have continued to refinance their current debt to take advantage
of the favorable interest rate environment. This shift has helped to
exacerbate the current margin compression, but has also had the effect of
moving Merchants' balance sheet to an asset-sensitive interest rate gap
position, which should leave Merchants well poised for a rise in interest
rates.


<PAGE>  8


Deposit costs have also moved down over the last year, but not as quickly
as loan yields. The average rate on Savings, NOW and Money Market accounts
has decreased from 1.22% for the second quarter of 2002 to 0.67% for the
second quarter of the current year; for the first half of the year the rate
has decreased from 1.27% in 2002 to 0.72% in 2003. The cost of Merchants'
premier product, Free Checking for Life(R), has decreased from an average rate
of 0.61% for the month of June of 2002 to 0.48% for the month of June of
2003. The cost of time deposits has decreased from 3.28% to 2.43% quarter
over quarter, and has decreased from 3.49% to 2.51% for the first six
months of 2003 compared to 2002.

Provision for Loan Losses: In recent years, Merchants has recorded its
recoveries on previously charged off obligations as a negative loan loss
provision. As a result of declines in the unallocated portion of the
allowance for loan losses, Merchants has discontinued its practice of
recording these recoveries as negative loan loss provisions. Merchants
recorded charge-offs of $681 thousand and recoveries of $71 thousand during
the first two quarters of 2003. The amount of the negative provision for
the first six months of last year was $614 thousand. The allowance for loan
losses is reviewed quarterly by management and continues to be deemed
adequate under current market conditions. See the discussion of Non-
Performing Assets on pages 13 - 16 for more information on the allowance
for loan losses.

Noninterest income: Total noninterest income increased $1.02 million from
the second quarter of 2002 to the second quarter of 2003, and by $1.36
million for the first six months of 2003 compared to the same period of
2002. Excluding net gains on sales of investments of $626 thousand for the
second quarter of 2003 and $843 thousand for the first six months of the
year, total noninterest income increased $392 thousand from the second
quarter of 2002 to the second quarter of 2003 and by $513 thousand for the
first six months of 2003 compared to the same period of 2002. The increase
is due primarily to increases in net ATM and debit card revenue and
overdraft service charge revenue. Merchants' ATM and debit card revenue,
net of expenses, increased $72 thousand for the second quarter of 2003 and
$97 thousand for the first six months of 2003 compared to the same period
in 2002. Merchants' overdraft fee revenue increased $155 thousand from
$1.21 million for the first six months of 2002 to $1.37 million during the
first six months of 2003; and increased $50 thousand for the second quarter
of 2003 compared to 2002. Merchants Trust Company income for the second
quarter of this year was $81 thousand less than the same quarter of 2002,
and was $125 thousand less than 2002 for the first six months of the year.
This decrease was primarily due to continuing reductions in asset market
values, changes in the Trust Company's fee schedule and the realignment of
resources as a result of the decision made in 2002 to discontinue brokerage
advisory and discount brokerage services.


<PAGE>  9


                         Merchants Bancshares, Inc.
                  Average Balance Sheets and Average Rates
                                 (Unaudited)

<TABLE>
<CAPTION>

(Dollars in Thousands, Fully Taxable Equivalent)                           Three Months Ended
                                                    ----------------------------------------------------------------
                                                             June 30, 2003                     June 30, 2002
                                                               Interest                          Interest
                                                    Average    Income/     Average    Average    Income/     Average
                                                    Balance    Expense      Rate      Balance    Expense      Rate
                                                    ------------------------------    ------------------------------


                                                 <c>         <c>         <c>       <c>         <c>         <c>
INTEREST EARNING ASSETS
Loans (1) (2)                                       $534,569    $ 8,308     6.23%     $472,159    $ 8,534     7.25%
Taxable Investments                                  273,564      3,028     4.44%      262,305      3,528     5.39%
Federal Funds Sold and Securities Purchased
 Under Agreements to Resell                           12,781         44     1.38%       21,056         88     1.68%
                                                    ----------------------------      ----------------------------
      Total Interest Earning Assets                 $820,914    $11,380     5.56%     $755,520    $12,150     6.45%
                                                    ----------------------------      ----------------------------
Noninterest Earning Assets                            50,922                            50,667
                                                    --------                          --------
      Total Assets                                  $871,836                          $806,187
                                                    ========                          ========

INTEREST BEARING LIABILITIES
Interest Bearing Deposits:
  Savings, NOW and Money Market Deposits            $480,244    $   807     0.67%     $455,074    $ 1,379     1.22%
  Time Deposits                                      198,026      1,198     2.43%      174,266      1,427     3.28%
                                                    ----------------------------      ----------------------------
      Total Savings and Time Deposits                678,270      2,005     1.19%      629,340      2,806     1.79%
                                                    ----------------------------      ----------------------------
Federal Funds Purchased and Securities Sold
 Under Agreements to Repurchase                           33         --     1.52%           --         --       --
Short-Term Borrowings                                  2,284         11     1.93%        1,147          4     1.40%
Long-Term Debt                                         6,287         46     2.93%        2,420         20     3.31%
                                                    ----------------------------      ----------------------------
      Total Interest Bearing Liabilities             686,874      2,062     1.20%      632,907      2,830     1.79%
                                                    ----------------------------      ----------------------------
Noninterest Bearing Deposits                          93,085                            89,954
Other Liabilities                                      7,307                             5,615
Sotckholders' Equity                                  84,570                            77,711
                                                    --------                          --------
      Total Liabilities and Stockholders' Equity     871,836                           806,187
                                                    ========                          ========

Net Earning Assets                                  $134,040                          $122,613
                                                    ========                          ========

Net Interest Income (Fully Taxable Equivalent)                  $ 9,318                           $ 9,320
                                                                =======                           =======

Net Interest Rate Spread                                                    4.36%                             4.66%
                                                                            ====                              ====

Net Interest Margin                                                         4.55%                             4.95%
                                                                            ====                              ====

<FN>
<F1>  Includes principal balance of non-accrual loans and fees on loans.
<F2>  Excludes prepayment fees of $165 related to early payments by certain
      loan customers in 2002.
</FN>
</TABLE>


<PAGE>  10


                         Merchants Bancshares, Inc.
                  Average Balance Sheets and Average Rates
                                 (Unaudited)

<TABLE>
<CAPTION>

(Dollars in Thousands, Fully Taxable Equivalent)                            Six Months Ended
                                                    ----------------------------------------------------------------
                                                             June 30, 2003                     June 30, 2002
                                                               Interest                          Interest
                                                    Average    Income/     Average    Average    Income/     Average
                                                    Balance    Expense      Rate      Balance    Expense      Rate
                                                    ------------------------------    ------------------------------


                                                 <c>         <c>         <c>       <c>         <c>         <c>
INTEREST EARNING ASSETS
Loans (1) (2)                                       $516,273    $16,345     6.38%     $472,388    $17,198     7.34%
Taxable Investments                                  277,468      6,256     4.55%      250,838      6,846     5.50%
Federal Funds Sold and Securities Purchased
 Under Agreements to Resell                           15,731        108     1.38%       29,635        245     1.67%
                                                    ----------------------------      ----------------------------
      Total Interest Earning Assets                 $809,472    $22,709     5.66%     $752,861    $24,289     6.51%
                                                    ----------------------------      ----------------------------
Noninterest Earning Assets                            50,928                            50,651
                                                    --------                          --------
      Total Assets                                  $860,400                          $803,512
                                                    ========                          ========

INTEREST BEARING LIABILITIES
Interest Bearing Deposits:
  Savings, NOW and Money Market Deposits            $474,392    $ 1,686     0.72%     $451,996    $ 2,849     1.27%
  Time Deposits                                      193,953      2,417     2.51%      172,753      2,994     3.49%
                                                    ----------------------------      ----------------------------
      Total Savings and Time Deposits                668,345      4,103     1.24%      624,749      5,843     1.89%
                                                    ----------------------------      ----------------------------
Federal Funds Purchased and Securities Sold
 Under Agreements to Repurchase                           16         --     1.52%           --         --       --
Short-Term Borrowings                                  1,520         13     1.72%        1,890         14     1.49%
Long-Term Debt                                         4,759         72     3.05%        2,423         41     3.41%
                                                    ----------------------------      ----------------------------
      Total Interest Bearing Liabilities             674,640      4,188     1.25%      629,062      5,898     1.89%
                                                    ----------------------------      ----------------------------
Noninterest Bearing Deposits                          93,063                            90,577
Other Liabilities                                      8,857                             6,699
Sotckholders' Equity                                  83,840                            77,174
                                                    --------                          -------
      Total Liabilities and Stockholders' Equity    $860,400                          $803,512
                                                    ========                          ========

Net Earning Assets                                  $134,832                          $123,799
                                                    ========                          ========

Net Interest Income (Fully Taxable Equivalent)                  $18,521                           $18,391
                                                                =======                           =======

Rate Spread                                                                 4.41%                             4.62%
                                                                            ====                              ====

Net Interest Margin                                                         4.61%                             4.93%
                                                                            ====                              ====

<FN>
<F1>  Includes principal balance of non-accrual loans and fees on loans.
<F2>  Excludes prepayment fees of $165 related to early payments by certain
      loan customers in 2002.
</FN>
</TABLE>


<PAGE>  11


Noninterest expenses: Total noninterest expense increased $761 thousand
from $7.05 million to $7.82 million for the second quarter of 2003 compared
to 2002, and by $1.23 million from $14.16 million to $15.39 million for the
first six months of the year. Merchants has continued its salary
administration project, which began with branch staff in 2002 and is
continuing with back office staff this year. Related salary increases are
being phased in over the course of 2003. The salary administration project
has contributed to the overall increase in salaries and employee benefits
of $380 thousand for the second quarter of this year and $636 thousand year
to date compared to last year. Additionally, Merchants is continuing to
experience increases in its pension plan expense. Although the pension plan
was curtailed in 1995, recent decreases in the market value of pension plan
assets have caused increased expense recognition. During the second quarter
of 2003 Merchants contributed $750 thousand to the pension plan. This
contribution was accounted for as a reduction to the minimum pension
liability, which is included in the other liabilities category in the
accompanying consolidated balance sheets.

Occupancy and Equipment expenses increased by $140 thousand for the second
quarter of 2003 compared to 2002, and by $203 thousand for the first six
months of 2003. This increase is due to increased software maintenance
costs, and normal increases in building maintenance and rental expenses.
Merchants anticipates that there may be additional expense increases
related to its network server infrastructure and desktop computer upgrade,
which is expected to be completed by the second quarter of 2004.
Approximately $200 thousand of the total estimated $2.07 million cost will
be expensed during 2003 and 2004, the balance of the cost of the project
will be capitalized and depreciated over three to five years. Merchants'
equity in losses of real estate limited partnerships increased $72 thousand
for the second quarter and $156 thousand for the first six months of 2003
compared to 2002 as Merchants continued to invest in community-based
affordable housing partnerships. Merchants finds these investments
attractive because they provide an opportunity for Merchants to invest in
affordable housing in the communities in which it does business, as well as
providing federal tax credits which are used as an offset to the income tax
provision.

Merchants' marketing expenses increased by $96 thousand for the second
quarter of 2003 compared to 2002 and by $147 thousand for the first six
months of the year as Merchants has continued to aggressively market its
premier product, Free Checking for Life(R), and to prepare for its entry
into two new markets during 2003. Sales of Free Checking for Life(R),
continue to be strong, and average balances in Free Checking for Life(R)
accounts increased from $89 million for the month of June 30, 2002, to $109
million for the month of June 30, 2003, a 22% increase. Merchants' St.
Albans, VT, branch, which opened in a temporary location in April 2003, is
one of the top five sales branches based on average weekly sales. Merchants
expects to occupy its permanent St. Albans location during the fourth
quarter of 2003 and plans to open its new location in White River Junction,
VT, during the third quarter of 2003.

Balance Sheet Analysis
Second quarter 2003 growth in average deposits and loans over the second
quarter of last year were 7.2% and 13.2% respectively. Quarter-end loan
balances were $540.7 million, an increase of $45.1 million over year-end
loan balances, and an annualized growth rate of 18.2%. Merchants has seen a
significant increase in loan demand for the first six months of this year.
Residential mortgage activity has been very high during 2003, as mortgage
rates have dropped to their lowest level in 40 years. Merchants has had
great success with its new 10-year fully amortizing mortgage product
RealLYNX-10(r), introduced in January 2003. This product was originally
introduced at a 4.95% rate, and was lowered to 4.65% for the months of June
and July. Through the first week of August 2003 Merchants has closed $49
million in new balances in this product and has over $20.8 million in
applications currently in process; contributing to total net new growth in
residential real estate for the first six months of the year of $33
million. Additionally, commercial loan activity has been strong as a result
of Merchants' active calling program. Commercial real estate outstanding
balances have increased by over $13 million since year end.

The following table summarizes the components of Merchants loan portfolio
as of June 30, 2003, and December 31, 2002.

<TABLE>
<CAPTION>

      (In thousands)                                  June 30, 2003    December 31, 2002
      ----------------------------------------------------------------------------------

      
                                                <c>                <c>
      Commercial, Financial And Agricultural Loans       $ 92,092           $ 93,856
      Real Estate Loans - Residential                     239,322            206,231
      Real Estate Loans - Commercial                      192,456            179,156
      Real Estate Loans - Construction                      8,613              9,154
      Installment Loans                                     6,459              6,663
      All Other Loans                                       1,728                528
      ------------------------------------------------------------------------------
      Total Loans                                        $540,670           $495,588
      ==============================================================================
</TABLE>


<PAGE>  12


Quarter-end deposits were $789.4 million, an increase of $34.2 million over
year-end deposit balances, and an annualized growth rate of 9.0%. Average
deposits for the second quarter of 2003 were $771.4 million, an increase of
$52.1 million over average deposits for the second quarter of 2002.
Merchants has redeployed excess funds into the investment portfolio which,
at June 30, 2003, was $298.9 million, compared to $273.4 million at June
30, 2002, and $270.2 million at December 31, 2002. Merchants plans to
continue to expand the investment portfolio over the course of 2003.
Merchants continues to work to enhance yield and minimize risk by
diversifying the investment portfolio while keeping the effective duration
of the investment portfolio at or below 2.5 years.

In the ordinary course of business, Merchants makes commitments for
possible future extensions of credit. On June 30, 2003, Merchants was
obligated to fund $6.4 million of standby letters of credit. No losses are
anticipated in connection with these commitments.

Income Taxes
Merchants and its subsidiaries are taxed on income by the Internal Revenue
Service at the federal level. The State of Vermont levies franchise taxes
on banks based upon average deposit levels in lieu of taxing income.
Franchise taxes are included in non-interest expenses in the consolidated
statements of operations.

Total income tax expense was $2.18 million for the first six months of
2003, compared to $2.28 million for the same period in 2002. Merchants
recognized favorable tax benefits of $330 thousand for the first six months
of 2003, compared to $342 thousand for the same period in 2002,
representing the amount of the federal tax credits earned during those
periods. Merchants' statutory tax rate was 35% for all periods. The
recognition of low income housing tax credits has contributed to Merchants'
effective tax rate of 27% for the first six months of 2003.

Liquidity and Capital Resources
Liquidity, as it pertains to banking, can be defined as the ability to
generate cash in the most economical way to satisfy loan demand, deposit
withdrawal demand, and to meet other business opportunities which require
cash. Merchants has a number of sources of liquid funds; including $25
million in available Federal Funds lines of credit at June 30, 2003; an
overnight line of credit with the Federal Home Loan Bank ("FHLB") of $15
million; an estimated additional borrowing capacity with FHLB of $121
million; and the ability to borrow $60 million through the use of
repurchase agreements, collateralized by Merchants' investments, with
certain approved counterparties. Merchants' investment portfolio, which
totaled $298.9 million at June 30, 2003, is managed by Merchants' Asset /
Liability Committee and is a strong source of cash flow for Merchants.

As of June 30, 2003, Merchants exceeded all applicable regulatory capital
requirements. The following table represents the actual capital ratios and
capital adequacy requirements for Merchants as of June 30, 2003 and 2002:

<TABLE>
<CAPTION>

                                                        For Capital
                                     Actual          Adequacy Purposes
(In thousands)                 Amount     Percent    Amount     Percent
-----------------------------------------------------------------------


                            <c>        <c>        <c>        <c>
As of June 30, 2003
Merchants Bancshares, Inc.:
  Tier 1 Risk-Based Capital    $80,206    13.33%     $24,062    4.00%
  Total Risk-Based Capital      87,730    14.58%      48,124    8.00%
  Tier 1 Leverage Capital       80,206     9.21%      34,817    4.00%

As of June 30, 2002
Merchants Bancshares, Inc.:
  Tier 1 Risk-Based Capital    $76,228    15.39%     $19,813    4.00%
  Total Risk-Based Capital      82,452    16.65%      39,626    8.00%
  Tier 1 Leverage Capital       76,228     9.51%      32,176    4.00%
</TABLE>

Non-Performing Assets and the Allowance for Loan Losses
Stringent credit quality is a major strategic focus of Merchants. Although
Merchants has been successful to date in minimizing its problem assets,
there is no assurance that Merchants will not have increased levels of
problem assets in the future, particularly in light of current or future
economic conditions.


<PAGE>  13

The following table summarizes Merchants' non-performing assets as of June
30, 2003, March 31, 2003, December 31, 2002, and June 30, 2002:

<TABLE>
<CAPTION>

(In thousands)                          June 30, 2003     March 31, 2003     December 31, 2002     June 30, 2002
-----------------------------------------------------------------------------------------------------------------


                                        <c>                <c>                 <c>                 <c>
Nonaccrual Loans                           $4,085             $2,858              $1,925              $2,067
Loans Past Due 90 Days or More and
 Still Accruing                                32                 89                  46                 133
Restructured Loans                            201              1,737               1,728                 190
------------------------------------------------------------------------------------------------------------
Total Non-performing Loans ("NPL")          4,318              4,684               3,699               2,390
Other Real Estate Owned ("OREO")               --                 57                  57                 353
------------------------------------------------------------------------------------------------------------
Total Non-performing Assets ("NPA")        $4,318             $4,741              $3,756              $2,743
============================================================================================================
</TABLE>

Non-performing assets have increased over the last year. This increase is
clearly reflective of a weak local and national economy, which, if it
continues, may contribute to further increases in levels of non-performing
assets. The individual components of the non-performing asset portfolio
remain fluid with the total maintained at a manageable and modest level.

Total NPL decreased $366 thousand from March 31, 2003 to June 30, 2003.
During the quarter a $1.5 million reduction in restructured loans was
offset in part by a $1.2 million increase in nonaccrual loans.
Approximately $1.1 million of the net increase in nonaccrual loans was
attributable to a transfer of loans that were previously classified as
restructured. This transfer was driven primarily by further deterioration
in the financial condition of one borrower. During the quarter a charge-off
of $363 thousand was taken on this borrower and the balance was moved to
nonaccrual. Total additions to nonaccrual loans from March 31, 2003 to June
30, 2003 were almost $2.5 million, including the transfers from
restructured loans. These increases in nonaccrual loans were offset in part
by $125 thousand in loans that were transferred back to accrual status,
$502 thousand in payments and $602 thousand in charges to the Allowance for
Loan Losses ("Allowance").

As of June 30, 2003, approximately $936 thousand of the loans listed as
non-performing were secured by cash and marketable securities. In addition,
guarantees from the Unites States Small Business Administration covered
approximately $1.1 million of the remaining nonaccrual loans.

Loans past due 90 days or more and still accruing interest decreased $57
thousand during the second quarter of 2003. Merchants did not have any OREO
as of June 30, 2003.

Early in July 2003 Merchants reached an agreement to sell approximately
$2.1 million in sub-performing and non-performing loans. The sale closed on
July 30, 2003. Total reductions in non-performing loans related to the sale
were approximately $900 thousand. Merchants recognized a small net recovery
on the sale.

The following table summarizes year-to-date activity in Merchants'
Allowance through the dates indicated:

<TABLE>
<CAPTION>

(In thousands)                        June 30, 2003     March 31, 2003     December 31, 2002     June 30, 2002
--------------------------------------------------------------------------------------------------------------


                                      <c>                <c>                 <c>                 <c>
Allowance Beginning of Year              $8,497             $8,497              $8,815              $8,815
Charge-Offs :
  Commercial, Lease Financing
   and all Other Loans                     (590)               (39)               (311)                (11)
  Real Estate - Mortgage                    (82)                (2)                 (7)                 (6)
  Installment & Other                        (9)                (8)                 --                  (3)
----------------------------------------------------------------------------------------------------------
      Total Loans Charged Off              (681)               (49)               (318)                (20)
----------------------------------------------------------------------------------------------------------
Recoveries:
  Commercial, Lease Financing
   and all Other Loans                       20                 13                 755                 439
  Real Estate - Mortgage                     49                 19                 187                 175
  Installment & Other                         2                 --                   3                  --
----------------------------------------------------------------------------------------------------------
      Total Recoveries                       71                 32                 945                 614
----------------------------------------------------------------------------------------------------------
Net Loan Recoveries (Charge-Offs)          (610)               (17)                627                 594
----------------------------------------------------------------------------------------------------------
Provision for Loan Losses                    --                 --                (945)               (614)
----------------------------------------------------------------------------------------------------------
Allowance End of Period                  $7,887             $8,480              $8,497              $8,795
==========================================================================================================
</TABLE>

Charges to the Allowance were significantly higher than the first quarter
of 2003 as management elected to recognize $538 thousand of charges against
loans that previously received an allocation from the general reserve. The
net result did not have


<PAGE>  14


any impact on the adequacy of the Allowance. Management does not anticipate
that the increased charges represent the beginning of an increase in
charge-off activity, or signal a decline in overall asset quality.

The Allowance is based on management's estimate of the amount required to
reflect the risks in the loan portfolio, based on circumstances and
conditions at each reporting date. Merchants reviews the adequacy of the
Allowance at least quarterly. Factors considered in evaluating the adequacy
of the Allowance include previous loss experience, current economic
conditions and their effect on the borrowers, the performance of individual
loans in relation to contract terms and estimated fair values of properties
to be foreclosed. The method used in determining the amount of the
Allowance is not based on maintaining a specific percentage of Allowance to
total loans or total NPA. Rather, the methodology is a comprehensive
analytical process of assessing the credit risk inherent in the loan
portfolio. This assessment incorporates a broad range of factors, which
indicate both general, and specific credit risk, as well as a consistent
methodology for quantifying probable credit losses. Losses are charged
against the Allowance when management believes that the collectibility of
principal is doubtful. To the extent management determines the level of
anticipated losses in the portfolio has significantly increased or
diminished, the Allowance is adjusted through current earnings. As part of
Merchants' analysis of specific credit risk, detailed and extensive reviews
are done on larger credits and problematic credits identified on the
watched asset list, non-performing asset listings and internal credit
rating reports. An outside loan review firm examines Merchants' commercial
loan portfolio three times per year. Over the course of the year,
approximately 75% of commercial loan balances are reviewed, including all
relationships over $750 thousand and criticized and classified loans over
$500 thousand. Issues addressed by the loan review process include the
accuracy of Merchants' internal risk ratings system, loan quality, and
adequacy of the Allowance. Loans deemed impaired at June 30, 2003, totaled
$4.0 million, of this total $3.7 million are included as non-performing
assets in the table above. Impaired loans have been allocated $23 thousand
of the Allowance.

The Allowance level reflects management's current strategies and efforts to
maintain the Allowance at a level adequate to provide for loan losses based
on an evaluation of known and inherent risks in the loan portfolio. Among
the factors that management considers in establishing the level of the
Allowance are overall findings from an analysis of individual loans, the
overall risk characteristics and size of the loan portfolio, past credit
loss history, management's assessment of current economic and real estate
market conditions and estimates of the current value of the underlying
collateral. Management considered the balance of the Allowance adequate at
June 30, 2003.

The following table reflects Merchants' non-performing asset and coverage
ratios as of June 30, 2003, March 31, 2003, December 31, 2002, and June 30,
2002:

<TABLE>
<CAPTION>

                                     June 30, 2003     March 31, 2003     December 31, 2002     June 30,2002
------------------------------------------------------------------------------------------------------------


                                      <c>               <c>                  <c>                <c>
NPL to Total Loans                       0.80%             0.91%                0.75%              0.50%
NPA to Total Loans plus OREO             0.80%             0.92%                0.76%              0.58%
Allowance for Loan Losses to
 Total Loans                             1.46%             1.64%                1.71%              1.85%
Allowance for Loan Losses to NPL          186%              181%                 230%               368%
Allowance for Loan Losses to NPA          186%              179%                 226%               321%
</TABLE>

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

General
Management and the Board of Directors are committed to sound risk
management practices throughout the organization. Merchants has developed
and implemented a centralized risk management monitoring program. Risks
associated with Merchants' business activities and products are identified
and measured as to probability of occurrence and impact on Merchants (low,
moderate, or high), and the control or other activities in place to manage
those risks are identified and assessed. Periodically, department-level and
senior managers re-evaluate and report on the risk management processes for
which they are responsible. This documented program provides management
with a comprehensive framework for monitoring Merchants' risk profile from
a macro perspective, while also serving as a tool for assessing internal
controls over financial reporting as required under the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), and the Sarbanes
Oxley Act of 2002.

Market Risk
Market risk is the risk of loss in a financial instrument arising from
adverse changes in market rates and prices such as interest rates, foreign
currency exchange rates, commodity prices, and equity prices. Merchants'
primary market risk exposure is interest rate risk. An important component
of Merchants' asset and liability management process is the ongoing
monitoring and management of this risk, which is governed by established
policies that are reviewed and approved annually


<PAGE>  15


by its Board of Directors. The Board of Directors delegates responsibility
for carrying out the asset and liability management policies to the
Asset/Liability Committee ("ALCO"). In this capacity the ALCO develops
guidelines and strategies impacting Merchants' asset and liability management
related activities based upon estimated market risk sensitivity, policy limits
and overall market interest rate levels and trends. Merchants has an outside
investment advisory firm which helps it identify opportunities for increased
yield, without significantly increasing risk, in the investment portfolio. The
firm specializes in stable value and fixed income portfolios, and has a
staff of investment professionals who research and track each bond. During
the course of the last year Merchants' position in corporate debt securities
has increased to $43 million. Management feels that opportunities for
increased yield, without taking on undue risk, exist in the corporate market.
Merchants currently limits its position in corporate debt securities to
approximately 50% of capital and generally purchases corporate securities with
a rating of A or above. Merchants has also invested $23 million in Commercial
Mortgage Backed Securities, another area management feels has the
opportunity for increased yield without taking on undue risk. The goal is
to enhance performance on an absolute and a risk-adjusted basis.

Interest Rate Risk
The ALCO is responsible for evaluating and managing the interest rate risk
which arises naturally from imbalances in repricing, maturity and cash flow
characteristics of Merchants' assets and liabilities. The ALCO is
responsible for ensuring that the Board of Directors receives accurate
information regarding Merchants' interest rate risk position at least
quarterly. The ALCO uses an outside consultant to perform rate shocks of
Merchants' balance sheet, and to perform a variety of other analyses. The
consultant's most recent review was as of May 31, 2003. At that time, because
of the current rate environment, the consultant modified the rate shock model
and modeled a 100 basis point decrease as well as a 200 basis point increase.
At that time the change in net interest income for the next 12 months from
Merchants' expected or "most likely" forecast was as follows:

<TABLE>
<CAPTION>

                                             Percent Change in
                        Rate Change         Net Interest Income
                   --------------------------------------------

                   
                            <c>
                   Up 200 basis points             2.43%
                   Down 100 basis points          (2.88%)
</TABLE>

The consultant also ran additional simulations, which modeled an upward
movement in rates with a flattening yield curve, and a simulation using
Merchants' current growth assumptions. These types of dynamic analyses give
the ALCO a more thorough understanding of how Merchants' balance sheet will
perform in a variety of rate environments.

The preceding sensitivity analysis does not represent Merchants' forecast
and should not be relied upon as being indicative of expected operating
results. These estimates are based upon numerous assumptions including
without limitation: the nature and timing of interest rate levels including
yield curve shape, prepayments on loans and securities, deposit run-off
rates, pricing decisions on loans and deposits and reinvestment/replacement
of asset and liability cash flows, among others. While assumptions are
developed based upon current economic and local market conditions,
Merchants cannot make any assurances as to the predictive nature of these
assumptions including how customer preferences or competitor influences
might change.

As market conditions vary from those assumed in the sensitivity analysis,
actual results will likely differ due to: the varying impact of changes in
the balances and mix of loans and deposits differing from those assumed,
the impact of possible off balance sheet hedging strategies, and other
internal/external variables. Furthermore, the sensitivity analysis does not
reflect all actions that ALCO might take in responding to or anticipating
changes in interest rates.

The model used to perform the balance sheet simulation assumes a parallel
shift of the yield curve over twelve months and reprices every interest-
bearing asset and liability on the Merchants' balance sheet. The model uses
contractual repricing dates for variable products, contractual maturities
for fixed rate products, and product-specific assumptions for deposits such
as Free Checking For Life(r) accounts and Money Market accounts which are
subject to repricing based on current market conditions. Investment
securities with call provisions are examined on an individual basis in each
rate environment to estimate the likelihood of a call. The model also
assumes that the rate at which certain mortgage related assets prepay will
vary as rates rise and fall, based on prepayment estimates derived from the
Office of Thrift Supervision Net Portfolio Value Model.

Credit Risk
A network of loan officers manages credit risk, with review by Merchants'
Credit Department and oversight by Merchants' Board of Directors. The Board
of Directors grants each loan officer the authority to originate loans on
behalf of Merchants


<PAGE>  16


and establishes policies regarding loan portfolio diversification and loan
officer lending limits. Merchants' loan portfolio is continuously monitored
for performance, creditworthiness and strength of documentation through the
use of a variety of management reports and with the assistance of an external
loan review firm. Credit ratings are assigned to commercial loans and are
routinely reviewed. Loan officers or the loan workout function take remedial
actions to assure full and timely payment of loan balances when necessary.
Merchants' policy is to discontinue the accrual of interest on loans when
scheduled payments become contractually past due 90 or more days and the
ultimate collectibility of principal or interest becomes doubtful.

ITEM 4.  CONTROLS AND PROCEDURES

The principal executive officer, principal financial officer, and other
members of senior management of Merchants have evaluated the disclosure
controls and procedures of Merchants as of the end of the period covered by
this quarterly report. Based on this evaluation, Merchants has concluded
that the disclosure controls and procedures effectively ensure that
information required to be disclosed in Merchants' filings and submissions
with the Securities and Exchange Commission under the Exchange Act, is
accumulated and communicated to our management (including the principal
executive officer and principal financial officer) and is recorded,
processed, summarized and reported within the time periods specified by the
Securities and Exchange Commission. In addition, Merchants has reviewed its
internal controls and there have been no significant changes in its
internal controls or in the other factors that could significantly affect
those controls subsequent to the date of its last evaluation.


<PAGE>  17


                         MERCHANTS BANCSHARES, INC.
                                   PART II

ITEM 1.  LEGAL PROCEEDINGS

Merchants is involved in routine legal proceedings occurring in the
ordinary course of business, which in the aggregate are believed by
management to be immaterial to its financial condition and results of
operations

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

None

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None

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

The Company held its Annual Meeting of Shareholders on Tuesday, April 29,
2003, for the purpose of electing three directors, Joseph L. Boutin, Peter
A. Bouyea and Charles A. Davis, to serve for three-year terms, and electing
one director, Lorilee A. Lawton to serve a two-year term. Mr. Boutin
received 5,441,265 votes for and 31,272 votes against, Mr. Bouyea received
5,443,288 votes for and 29,248 votes against, Mr. Davis received 5,346,545
votes for and 110,940 votes against, and Ms. Lawton received 5,443,683
votes for and 28,854 votes against. There were no abstentions. At the time
of the annual meeting there were 6,185,996 shares entitled to vote. Shares
voted either in person or by proxy totaled 5,472,537, or 88.47% of the
shares entitled to vote.

ITEM 5.  OTHER INFORMATION

None

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

Exhibits:
   31.1 - Certification of Chief Executive Officer of the Company Pursuant
to Securities Exchange Act Rules 13a-14 and 15d-14
   31.2 - Certification of Chief Financial Officer of the Company Pursuant
to Securities Exchange Act Rules 13a-14 and 15d-14
   32.1 - Certification of Chief Executive Officer of the Company pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
   32.2 - Certification of Chief Financial Officer of the Company pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

Current Reports on Form 8-K
      Merchants Bancshares, Inc. filed a Current Report on Form 8-K on
      April 18, 2003, related to first quarter 2003 earnings release.
      Merchants Bancshares, Inc. filed a Current Report on Form 8-KA on May
      1, 2003, related to a technical correction to the April 18, 2003,
      Form 8-K.


<PAGE>  18


                         MERCHANTS BANCSHARES, INC.
                                 SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                          Merchants Bancshares, Inc.

                                          /s/ Joseph L. Boutin
                                          --------------------
                                          Joseph L. Boutin
                                          President &
                                          Chief Executive Officer

                                          /s/ Janet P. Spitler
                                          --------------------
                                          Janet P. Spitler
                                          Chief Financial Officer &
                                          Treasurer

                                          August 14, 2003
                                          ---------------
                                          Date


<PAGE>  19