SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C. 20549



                                  FORM 10-Q

              QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
                       SECURITIES EXCHANGE ACT OF 1934


                  FOR THE QUARTER ENDED SEPTEMBER 30, 1998
                       COMMISSION FILE NUMBER 0-11595


                         MERCHANTS BANCSHARES, INC.
                          (A DELAWARE CORPORATION)
                   EMPLOYER IDENTIFICATION NO. 03-0287342


                  164 College Street, Burlington, VT  05401

                         Telephone:  (802) 658-3400


Indicate by check mark whether the registrant 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 has been subject to such 
filing requirement for the past 90 days.

                             YES   X    NO      
                                 -----     -----


    4,417,777 Shares Common Stock $.01 Par Outstanding September 30, 1998




                         MERCHANTS BANCSHARES, INC.

                             INDEX TO FORM 10-Q


PART I
  ITEM 1  FINANCIAL STATEMENTS

          Consolidated Balance Sheets
          September 30, 1998 and December 31, 1997                         1

          Consolidated Statements of Operations
          For the three months ended September 30, 1998 and 1997 and
          the nine months ended September 30, 1998 and 1997                2

          Consolidated Statements of Comprehensive Income
          For the three months ended September 30, 1998 and 1997 and
          the nine months ended September 30, 1998 and 1997                3

          Consolidated Statement of Changes in Stockholders' Equity
          For the nine months ended September 30, 1998 and 1997 and
          the Year ended December 31, 1997                                 4

          Consolidated Statements of Cash Flows
          For the nine months ended September 30, 1998 and 1997            5

          Footnotes to Financial Statements as of September 30, 1998     6-8

  ITEM 2  Management's Discussion and Analysis of Financial
          Condition and Results of Operations                           9-16

PART II - OTHER INFORMATION

  ITEM 1  Legal Proceedings                                               17

  ITEM 2  Changes in Securities                                         NONE

  ITEM 3  Defaults upon Senior Securities                               NONE

  ITEM 4  Submission of Matters to a Vote of Security Holders           NONE

  ITEM 5  Other Information                                             NONE

  ITEM 6  Exhibits and Reports on Form 8-K                              NONE

SIGNATURES                                                                18



                         Merchants Bancshares, Inc.
                         Consolidated Balance Sheets
                                  Unaudited

<TABLE>
<CAPTION>
                                                                           September 30,     December 31,
(In thousands except share and per share data)                                 1998              1997
---------------------------------------------------------------------------------------------------------
<S>                                                                          <C>               <C>
ASSETS
  Cash and Due from Banks                                                    $ 18,207          $ 20,139
  Investments:
    Debt Securities Held for Sale                                              65,374            44,241
    Debt Securities Held to Maturity                                          103,344           111,458
    Trading Securities                                                          1,075             1,031
-------------------------------------------------------------------------------------------------------
      Total Investments                                                       169,793           156,730
-------------------------------------------------------------------------------------------------------
  Loans                                                                       394,868           390,388
  Reserve for possible loan losses                                             13,723            15,831
-------------------------------------------------------------------------------------------------------
      Net Loans                                                               381,145           374,557
-------------------------------------------------------------------------------------------------------
  Federal Home Loan Bank Stock                                                  2,482             2,296
  Federal Funds Sold                                                            5,000                --
  Bank Premises and Equipment, Net                                             13,364            13,428
  Investment in Real Estate Limited Partnerships                                2,014             1,972
  Other Real Estate Owned                                                         818               591
  Other Assets                                                                 13,827            14,539
-------------------------------------------------------------------------------------------------------
      Total Assets                                                           $606,650          $584,252
=======================================================================================================

LIABILITIES
  Deposits:
    Demand                                                                   $ 80,062          $ 76,712
    Savings, NOW and Money Market Accounts                                    293,182           267,396
    Time Deposits $100 thousand and Greater                                    24,565            23,307
    Other Time                                                                134,208           138,429
-------------------------------------------------------------------------------------------------------
      Total Deposits                                                          532,017           505,844
-------------------------------------------------------------------------------------------------------
  Demand Note Due U.S. Treasury                                                 1,377             4,000
  Other Short-Term Borrowings                                                      --             4,000
  Other Liabilities                                                             7,352            11,057
  Long-Term Debt                                                                6,410             6,415
-------------------------------------------------------------------------------------------------------
      Total Liabilities                                                       547,156           531,316
-------------------------------------------------------------------------------------------------------

Commitments and Contingencies (Note 3)
STOCKHOLDERS' EQUITY
  Preferred Stock Class A Non-Voting
   Authorized - 200,000, Outstanding 0                                             --                --
  Preferred Stock Class B Voting
   Authorized - 1,500,000, Outstanding 0                                           --                --
  Common Stock, $.01 Par Value                                                     44                44
    Shares Authorized                                        7,500,000
    Outstanding,    Current Period                           4,284,323
                    Prior Period                             4,290,698
  Treasury Stock (At Cost)                                                     (2,521)           (2,220)
                    Current Period                             150,297
                    Prior Period                               143,922
  Capital in Excess of Par Value                                               33,086            33,223
  Retained Earnings                                                            26,210            21,537
  Deferred Compensation Arrangements                                            2,107               (10)
  Unrealized Gains on Securities Available for Sale, Net                          568               362
-------------------------------------------------------------------------------------------------------
      Total Stockholders' Equity                                               59,494            52,936
-------------------------------------------------------------------------------------------------------
      Total Liabilities and Stockholders' Equity                             $606,650          $584,252
=======================================================================================================

Book Value Per Common Share                                                  $  13.47          $  11.95
=======================================================================================================
</TABLE>

Note:  As of September 30, 1998, the Bank had off-balance sheet liabilities 
in the form of standby letters of credit to customers in the amount of 
$6,178

The accompanying notes are an integral part of these consolidated financial 
statements.



                         Merchants Bancshares, Inc.
                    Consolidated Statements of Operations
                                  Unaudited

<TABLE>
<CAPTION>
                                               Quarter Ended September 30,     Nine months ended September 30,
(In thousands except per share data)                1998        1997                  1998        1997
--------------------------------------------------------------------------------------------------------------

<S>                                                <C>         <C>                   <C>         <C>
INTEREST AND DIVIDEND INCOME
  Interest and Fees on Loans                       $ 9,073     $ 9,778               $27,692     $28,850
  Interest and Dividends on Investments
   U.S. Treasury and Agency Obligations              2,701       2,290                 7,987       6,971
    Other                                              195          69                   338         218
--------------------------------------------------------------------------------------------------------
      Total Interest Income                         11,969      12,137                36,017      36,039
--------------------------------------------------------------------------------------------------------

INTEREST EXPENSE
  Savings, NOW and Money Market Accounts             2,393       2,147                 6,814       6,275
  Time Deposits $100 Thousand and Greater              401         256                 1,182       1,037
  Other Time Deposits                                1,751       1,983                 5,290       5,592
  Other Borrowed Funds                                  26          48                   271         281
  Debt                                                 116         144                   344         437
--------------------------------------------------------------------------------------------------------
      Total Interest Expense                         4,687       4,578                13,901      13,622
--------------------------------------------------------------------------------------------------------
  Net Interest Income                                7,282       7,559                22,116      22,417
  Provision for Possible Loan Losses                    --          --                  (119)        300
--------------------------------------------------------------------------------------------------------
  Net Interest Income after Provision
   for Loan Losses                                   7,282       7,559                22,235      22,117
--------------------------------------------------------------------------------------------------------

NONINTEREST INCOME
  Trust Company Income                                 410         370                 1,449       1,143
  Service Charges on Deposits                          649         762                 2,072       2,331
  Merchant Discount Fees                               395         399                 1,060       1,139
  Gain (Loss) on Sale of Investments, Net               44          --                    44         (56)
  Other                                                272         209                   878         658
--------------------------------------------------------------------------------------------------------
      Total Noninterest Income                       1,770       1,740                 5,503       5,215
--------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES
  Salaries and Wages                                 2,309       2,069                 6,767       6,333
  Employee Benefits                                    420         435                 1,527       1,501
  Occupancy Expense, Net                               473         519                 1,513       1,634
  Equipment Expense                                    636         597                 1,895       1,662
  Legal and Professional Fees                          323         806                 1,626       1,925
  Provision for Impairment of Investment
   Securities                                           --          --                    --         229
  Equity in Losses of Real Estate
   Limited Partnerships                                 94         172                   263         516
  Expenses - Other Real Estate Owned                    51          61                   175         421
  Loss on Disposition of Fixed Assets                   45         132                   100         418
  Other                                              1,580       1,654                 4,649       4,786
--------------------------------------------------------------------------------------------------------
      Total Noninterest Expenses                     5,931       6,445                18,515      19,425
--------------------------------------------------------------------------------------------------------
Income Before Income Taxes                           3,122       2,854                 9,223       7,907
  Provision for Income Taxes                           789         665                 2,337       1,776
--------------------------------------------------------------------------------------------------------
NET INCOME                                         $ 2,333     $ 2,189               $ 6,886     $ 6,131
========================================================================================================

Basic and Diluted Earnings Per Common Share        $  0.53     $  0.50               $  1.55     $  1.39
</TABLE>


The accompanying notes are an integral part of these consolidated financial 
statements.



                          Merchants Bancshares, Inc.
               Consolidated Statements of Comprehensive Income
                                  Unaudited

<TABLE>
<CAPTION>
                                          Three Months Ended     Nine Months Ended
                                            September 30,          September 30,
(In thousands)                             1998       1997        1998       1997
----------------------------------------------------------------------------------

<S>                                       <C>        <C>         <C>        <C>
Net Income as Reported                    $2,333     $2,189      $6,886     $6,131

Change in Net Unrealized Appreciation
 of Securities, Net of Tax                   307         84         206         68
----------------------------------------------------------------------------------
Comprehensive Net Income                  $2,640     $2,273      $7,092     $6,199
==================================================================================
</TABLE>


The accompanying notes are an integral part of these consolidated financial 
statements.



                         Merchants Bancshares, Inc.
         Consolidated Statements of Changes in Stockholders' Equity
                  For the Year Ended December 31, 1997 and
              the Nine Months Ended September 30, 1998 and 1997
                                  Unaudited

<TABLE>
<CAPTION>
                                                                                                        Net Unrealized
                                                                                                         Appreciation
                                                      Capital in                           Deferred     (Depreciation)
                                             Common   Excess of    Retained   Treasury   Compensation   of Investment
(In thousands)                               Stock    Par Value    Earnings    Stock     Arrangements     Securities      Total
-------------------------------------------------------------------------------------------------------------------------------

<S>                                           <C>      <C>         <C>        <C>           <C>              <C>         <C>
Balance, December 31, 1996                    $44      $33,155     $14,845    $(2,038)      $   --           $244        $46,250
 Net Income                                    --           --       6,131         --           --             --          6,131
 Purchase of Treasury Stock                    --           --          --     (1,271)          --             --         (1,271)
 Sale of Treasury Stock                        --         (171)         --        941           --             --            770
 Dividends Paid                                --           --      (1,502)        --           --             --         (1,502)
 Unearned Compensation -
  Restricted Stock Awards                      --           --          --         --           (4)            --             (4)
 Change in Net Unrealized Appreciation
  (Depreciation) of Securities, Net of Tax     --           --          --         --           --             68             68
--------------------------------------------------------------------------------------------------------------------------------

Balance September 30, 1997                     44       32,984      19,474     (2,368)          (4)           312         50,442
 Net Income                                    --           --       2,702         --           --             --          2,702
 Purchase of Treasury Stock                    --           --          --       (119)          --             --           (119)
 Sales of Treasury Stock                       --          390          --         74           --             --            464
 Issuance of Stock under 
  Employee Stock Option Plans                  --         (151)         --        193           --             --             42
 Dividends Paid                                --           --        (639)        --           --             --           (639)
 Unearned Compensation -
  Restricted Stock Awards                      --           --          --         --           (6)            --             (6)
 Change in Net Unrealized Appreciation
  (Depreciation) of Securities, Net of Tax     --           --          --         --           --             50             50
--------------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 1997                     44       33,223      21,537     (2,220)         (10)           362         52,936
 Net Income                                    --           --       6,886         --           --             --          6,886
 Purchase of Treasury Stock                    --           --          --       (846)          --             --           (846)
 Sales of Treasury Stock                       --          (61)         --        344           --             --            283
 Issuance of Stock under
  Employee Stock Option Plans                  --          (76)                   225           --             --            149
 Dividends Paid                                --           --      (2,213)       (24)          --             --         (2,237)
 Unearned Compensation -
  Restricted Stock Awards                                                                      (14)                          (14)
 Compensation Arrangements                     --           --          --         --        2,131             --          2,131
 Change in Net Unrealized Appreciation
  (Depreciation) of Securities, Net of Tax     --           --          --         --           --            206            206
--------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998                   $44      $33,086     $26,210    $(2,521)      $2,107           $568        $59,494
================================================================================================================================
</TABLE>


                         Merchants Bancshares, Inc.
                    Consolidated Statement of Cash Flows
                                  Unaudited

<TABLE>
<CAPTION>
For the Nine Months Ended September 30,                                 1998         1997
-----------------------------------------------------------------------------------------
(In thousands)

<S>                                                                   <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income                                                            $  6,886     $  6,131
Adjustments to Reconcile Net Income to Net Cash
 Provided by Operating Activities:
  Provision for Possible Loan Losses                                      (119)          --
  Provision for Possible Losses on Other Real Estate Owned                   7           --
  Provision for Impairment of Investment Security                           --          229
  Provision for Depreciation and Amortization                            1,967        1,716
  Net Gains on Sales of Investment Securities                              (44)         (40)
  Net Gains on Sales of Loans and Leases                                  (213)          --
  Net Losses on Sales of Premises and Equipment                            100          418
  Net Gains on Sales of Other Real Estate Owned                            (73)        (147)
  Equity in Losses of Real Estate Limited Partnerships                     224          516
Changes in Assets and Liabilities:
  (Increase) in Interest Receivable                                       (369)        (610)
  Decrease in Interest Payable                                            (143)         (53)
  (Increase) Decrease in Other Assets                                   (3,920)         (83)
  Decrease in Other Liabilities                                         (3,563)      (1,272)
-------------------------------------------------------------------------------------------
      Net Cash Provided by (Used In) Operating Activities                  740        6,805
-------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from Sales of Investment Securities Available for Sale       14,053       18,065
  Proceeds from Maturities of Investment Securities                     26,505       10,524
  Proceeds from Sales of Loans and Leases                               14,231           --
  Proceeds from Sales of FHLB Stock                                         --          545
  Proceeds from Sales of Premises and Equipment                             --            6
  Proceeds from Sales of Other Real Estate Owned                           731        2,300
  Purchases of Available for Sale Investment Securities                (48,157)          --
  Purchases of Held to Maturity Investment Securities                   (5,232)     (23,254)
  Purchases of FHLB Stock                                                 (186)          --
  Loan Originations in Excess of Principal Payments                    (20,547)      (9,398)
  Investments in Real Estate Limited Partnerships                         (418)        (114)
  Purchases of Premises and Equipment                                   (1,099)      (3,578)
-------------------------------------------------------------------------------------------
      Net Cash Used in Investing Activities                            (20,119)      (4,904)
-------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net Increase (Decrease) in Deposits                                   26,173       (2,994)
  Net Decrease in Other Borrowed Funds                                  (6,623)      (2,501)
  Principal Payments on Debt                                                (4)          (4)
  Cash Dividends Paid                                                   (2,237)      (1,550)
  Acquisition of Treasury Stock                                           (294)      (1,271)
  Proceeds From Sales of Treasury Stock                                    283          434
  Proceeds From Exercise of Employee Stock Options                         149          193
-------------------------------------------------------------------------------------------
      Net Cash Provided by (Used In) Financing Activities               17,447       (7,693)
-------------------------------------------------------------------------------------------

Increase (Decrease) in Cash and Cash Equivalents                        (1,932)      (5,792)
Cash and Cash Equivalents Beginning of Year                             20,139       29,726
-------------------------------------------------------------------------------------------
Cash and Cash Equivalents End of Period                               $ 18,207     $ 23,934
===========================================================================================
Total Interest Payments                                               $ 14,044     $ 13,675
Total Income Tax Payments                                                1,420        3,570
Transfer of Loans and Premises to Other Real Estate Owned                  381          206
</TABLE>


The accompanying notes are an integral part of these consolidated financial 
statements.


                         MERCHANTS BANCSHARES, INC.
                             SEPTEMBER 30, 1998

NOTES TO FINANCIAL STATEMENTS:
See the Form 10-K filed as of December 31, 1997 for additional information.

NOTE 1: RECENT ACCOUNTING DEVELOPMENTS
In July 1998, the Emerging Issues Task Force ("EITF") issued guidance on 
Issue No. 97-14, "Accounting for Deferred Compensation Arrangements Where 
Amounts Earned Are Held in a Rabbi Trust and Invested" (the "Guidance").  
This Guidance establishes standards for reporting and accounting for certain 
deferred compensation agreements between Merchants Bancshares, Inc. (the 
"Company") and certain directors of the Company. This Guidance requires that 
the deferred compensation obligation be classified in the "Stockholders' 
Equity" section of the balance sheets. These amounts were previously 
classified as other liabilities in the "Liabilities" section of the Balance 
Sheets. The Company adopted this guidance prospectively on September 30, 
1998 and has reclassified deferred compensation obligations totaling $2.13 
million into the Stockholders' Equity section of the balance sheet as 
required. 

In June 1998, the Financial Accounting Standards Board  ("FASB") issued 
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting 
for Derivative Instruments and Hedging Activities". This statement 
establishes standards for reporting and accounting for derivative 
instruments ("derivatives") and hedging activities. The statement requires 
that derivatives be reported as assets or liabilities in the Consolidated 
Balance Sheets and that derivatives be reported at fair value. The statement 
establishes criteria for accounting for changes in the fair value of 
derivatives based on the intended use of the derivatives. The statement is 
effective for all fiscal quarters of fiscal years beginning after June 15, 
1999. Based on the Bank's current use of derivatives the Company does not 
expect the adoption of SFAS No. 133 to have a material impact on the 
company's financial position or results of operations.

In March 1998, the American Institute of Certified Public Accountants issued 
Statement of Position 98-1, "Accounting for the Costs of Computer Software 
Developed or Obtained for Internal Use" ("SOP 98-1"). This statement 
provides guidance on accounting for the costs of computer software developed 
or obtained for internal use. Under SOP 98-1 software costs incurred in the 
preliminary project stage are expensed as incurred. Once the capitalization 
criteria have been met subsequent costs associated with internal use 
software shall be capitalized in accordance with the guidance in SOP 98-1. 
Prior to the issuance of SOP 98-1 it has been the Company's policy to 
expense all such costs. SOP 98-1 is effective for financial statements for 
fiscal years beginning after December 15, 1998. The company does not expect 
that the adoption of SOP 98-1 will have a material impact on the Company's 
financial position or results of operations.

In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of 
an Enterprise and Related Information" ("SFAS No. 131"). This statement 
establishes the standards for reporting information about segments in annual 
and interim financial statements. SFAS No. 131 introduces a new model for 
segment reporting; the "management approach". The management approach is 
based on the way the chief operating decision-maker organizes segments 
within a company for making operating decisions and assessing performance. 
Reportable segments are based on products and services, geography, legal 
structure, management structure - any manner in which management 
disaggregates a company. This statement is effective and will be adopted for 
the Company's financial statements for the fiscal year ended December 31, 
1998 and requires the restatement of previously reported segment information 
for all periods presented.


NOTE 2: EARNINGS PER SHARE
The following table presents a reconciliation of the calculations of basic 
and diluted earnings per share for the quarter ended September 30, 1998:

<TABLE>
<CAPTION>
                                                                             Per Share
                                                    Income      Shares        Amount
--------------------------------------------------------------------------------------------
                                              (In thousands except share and per share data)

<S>                                                 <C>        <C>             <C>
Basic Earnings Per Share:
  Income Available to Common
   Shareholders                                     $2,332     4,428,638       $0.53
Diluted Earnings Per Share:
  Options issued to Executives                          --        10,850
  Income available to Common Shareholders
    Plus Assumed Conversions                        $2,332     4,439,488       $0.53
--------------------------------------------------------------------------------------------
</TABLE>


Basic earnings per common share were computed by dividing net income by the 
weighted average number of shares of common stock outstanding during the 
quarter. The computation of diluted earnings per share for the quarter ended 
September 30, 1998 excludes the effect of assuming the exercise of certain 
outstanding stock options because the effect would be anti-dilutive.  As of 
September 30, 1998 there were 48,346 of such options outstanding with an 
exercise price of $30.50.  

After adoption of SFAS No. 128, "Earnings Per Share" the Company is required 
to restate all prior period EPS data.  There was no effect on earnings per 
share for the quarter ended September 30, 1997.


NOTE 3: STOCK REPURCHASE PROGRAM

On September 3, 1998 the Company announced that its Board of Directors had 
authorized the company to repurchase, through September 4, 1999, up to $2.2 
million of its own securities, approximately 2% of outstanding shares at its 
then market value.   The stock buyback was authorized to take place 
periodically, subject to prevailing market conditions.  Purchases are to be 
made on the open market and funded from available cash. As of November 9, 
1998 the Company had repurchased 25,000 shares of its common stock at a 
total cost of approximately $574 thousand.


NOTE 4: COMMITMENTS AND CONTINGENCIES:
Merchants Bank (the "Bank") is a counterclaim defendant in a litigation 
entitled Pasquale and Vatsala Vescio, Counterclaim Plaintiffs v. The 
Merchants Bank, Counterclaim Defendant, now pending in the United States 
Bankruptcy Court for the District of Vermont.

In this litigation, the Vescios have made a number of "lender liability" 
claims dealing with a commercial development known as Brattleboro West in 
Brattleboro, Vermont. The pending litigation arose out of a suit to 
foreclose on several real estate mortgages and personal property originally 
granted to the Bank by the Vescios in connection with the financing of a 
supermarket in the Brattleboro West project and various other projects.

Among other things, the Vescios have alleged that the Bank or its 
representatives violated supposed oral promises in connection with the 
origination and funding of the financing, and have claimed that the Bank is 
liable to them for damages based on the Bank's supposed "control" of the 
project and its alleged breach of covenants of "good faith" which the 
plaintiffs believe are to be implied from the loan documents. In addition, 
the plaintiffs have contended that the Bank breached some kind of duty of 
care they believe it owed to them, and have claimed that the Bank should not 
have exercised its contract rights when the loan went into default, but 
should have worked out the default in a way that was more favorable to the 
borrowers. The parties have conducted extensive discovery and the matter is 
now being tried in the Bankruptcy Court for the District of Vermont. 
Although it is not possible at this stage to predict the outcome of this 
litigation, the Bank believes that it has meritorious defenses to the 
plaintiffs' allegations. The Bank intends to vigorously defend itself 
against these claims.

The company, the bank, the Trust Company and certain of their directors are 
defendants in a lawsuit filed in November of 1994 (the "Vermont 
Proceedings"). The Vermont Proceedings arose from certain investments 
managed for Trust company customers and placed in the Piper Jaffray 
Institutional Government Income Portfolio (the "Portfolio"). In December of 
1994, the Companies made payments to the Trust Company customers in amounts 
that the Companies believed reimbursed those customers fully for Portfolio 
losses. The United States District Court for the District of Vermont has 
dismissed the Plaintiff's claims in the Vermont Proceedings with prejudice, 
as moot, and has ordered payment of approximately $99,000 in attorney's fees 
to the attorney's representing the plaintiff. The Plaintiff and his 
attorneys have appealed to the Second Circuit Court of Appeals the District 
Court's orders, and the Companies have appealed on certain limited issues.

The companies have separately pursued claims against others on account of 
the losses suffered as a result of the investments in the Portfolio. Claims 
against Piper Jaffray companies, Inc. were joined with the claims of others 
in a class action in the United States District Court for the District of 
Minnesota (the "Minnesota Proceedings"). The Minnesota Proceedings were 
settled by the parties and in February of 1997 the District Court ordered 
the net share of the settlement proceeds attributable to the Trust Company's 
investments to be paid to the Trust Company, starting approximately 60 days 
after the Court's order becomes final, except to the extent, if at all, any 
other court with jurisdiction has sooner given leave for some or all of 
those payments to be deposited with such other court pursuant to applicable 
rules. The attorneys representing the Plaintiff in the Vermont Proceedings 
and also representing, in the Minnesota Proceedings, the beneficiaries of 
four other Trust Company accounts, appealed that order to the Eighth Circuit 
Court of Appeals. Those attorneys took the position that notwithstanding the 
payments made by the companies to the Trust Company customers in December of 
1994, any amounts paid under the Minnesota Proceedings on account of the 
Trust Company's Portfolio investments should be paid directly to the 
affected Trust Company customers (net of legal fees to be paid to those 
attorneys). On July 24, 1998, the United States Circuit Court of Appeals for 
the Eighth Circuit issued a Per Curiam decision affirming the Order and on 
August 27, 1998 it denied a petition for rehearing.  The same attorneys have 
separately stated that they intend to bring further proceedings, seeking to 
intercept the payments to the Trust Company, or otherwise to require the 
Companies to pay such amounts directly to the affected Trust Company clients 
(net of legal fees to those attorneys). Any recovery by the Companies from 
the Minnesota Proceedings is subject to the terms of an agreement between 
the Companies and their insurance carrier, which reimbursed the Companies, 
in part, for the December, 1994 payments.


NOTE 5: RECLASSIFICATION:
Certain prior period amounts reported in the financial statements have been 
reclassified to be consistent with the current period presentation.


                         MERCHANTS BANCSHARES, INC.

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

All adjustments necessary for a fair statement of the nine months ended 
September 30, 1998 and 1997 have been included in the financial statements. 
The information was prepared from the books of Merchants Bancshares, Inc. 
(the Company) and its subsidiaries, Merchants Bank (the Bank) and Merchants 
Properties, Inc., without audit.

In the ordinary course of business, Merchants Bank makes commitments for 
possible future extensions of credit. On September 30, 1998, the Bank was 
obligated for $6.2 million of standby letters of credit. No losses are 
anticipated in connection with these commitments.

OVERVIEW
Merchants Bancshares, Inc. recorded net income of $2.33 million, or basic 
and diluted earnings per share of $.53 for the quarter ended September 30, 
1998, compared to $2.19 million, or basic and diluted earnings per share of 
$.50 per share for the same period a year earlier. Net income for the nine 
months ended September 30, 1998 was $6.89 million, or basic and diluted 
earnings per share of $1.55, compared to $6.13 million or basic and diluted 
earnings per share of $1.39 for the nine months ended September 30, 1997. 
The return on average assets and return on average equity for the third 
quarter of 1998 were 1.54% and 16.52%, respectively, compared to 1.51% and 
17.55% for the third quarter of 1997. The return on average assets and 
return on average equity for the nine months ended September 30, 1998 were 
1.54% and 16.71%, respectively, compared to 1.42% and 16.95% for the nine 
months ended September 30, 1997. 

BALANCE SHEET ANALYSIS
Total deposits increased by $26.17 million (5.2%) during the nine months 
ended September 30, 1998. Redesign and simplification of the Bank's product 
line, coupled with focused sales efforts, fueled this growth. The sales 
program, LYNX Banking, has as its' foundation fewer products that have 
potential lifetime appeal to the Bank's customers. The Bank's FreedomLYNX 
checking account has no minimum balance requirements, pays interest on 
balances over a minimum amount, and generally charges no fees. As the 
customer's needs change and balances grow they can move into the higher 
yielding MoneyLYNX money market product. Money market account balances 
overall have grown $32 million over the course of 1998 at a cost of funds of 
approximately 4.65%. Since the launch of the FreedomLYNX account in the 
fourth quarter of 1996 the Bank has opened accounts with total balances in 
excess of $15 million at a cost of funds of approximately 1.7%.

Total loans have increased $4.48 million (1.15%) during the nine months. 
This increase is noteworthy because the Bank sold approximately $15 million 
in loans during the first and second quarters of 1998. Substantially all of 
the sold loans were commercial real estate credits. Total loans increased by 
$15.65 million over the course of the third quarter. As part of its strategy 
to replace runoff in the commercial real estate portfolio the Bank has 
revamped its residential real estate products over the last year.  A new, 
streamlined portfolio mortgage product, ReaLYNX, was introduced during the 
first quarter of 1998. ReaLYNX was designed to shorten the turnaround time 
on residential mortgages with reduced documentation requirements from 
borrowers. Additionally, the Bank introduced a new fixed rate home equity 
line of credit product, HomeLYNX, during 1997. The balances bear interest at 
a competitive fixed rate for five years. The home equity line of credit 
product is one of the Bank's most profitable products, the risk profile is 
low, and the back office costs are lower than most other types of loans. 
Outstanding balances in the new home equity line of credit product at 
September 30, 1998 were $17 million. The result of these efforts can be seen 
in the changes in the portfolio mix during the first nine months of the 
year. During the first nine months of 1998 the Bank's residential real 
estate portfolio increased by $26.03 million, while the commercial real 
estate portfolio decreased by $17.12 million, and the commercial loan 
portfolio decreased by $3.26 million. The Bank has taken steps to protect 
its variable rate funding sources. During the first nine months of 1998 the 
Bank entered into three-year interest rate cap contracts to mitigate the 
effects on net interest income in the event interest rates on variable rate 
deposits increase. The notional amount of these contracts is $50 million. 
The Bank has also entered into three-year interest rate floors to mitigate 
the effect of net interest income in the event interest rates on floating 
rate loans decline. The notional amount of these contracts is $30 million. 

In July 1998, the Emerging Issues Task Force (EITF) issued guidance on Issue 
No. 97-14, "Accounting for Deferred Compensation Arrangements Where amounts 
Earned Are Held in a Rabbi Trust and Invested" (the "Guidance"). This 
Guidance establishes standards for reporting and accounting for certain 
deferred compensation agreements between Merchants Bancshares, Inc. and 
certain directors of the Company. This Guidance requires that the deferred 
compensation obligation, totaling $2.13 million, be classified in the equity 
section of the balance sheet. These amounts were previously classified as 
other liabilities in the "Liabilities" section of the Balance Sheets. The 
Company adopted this guidance prospectively on September 30, 1998. 

RESULTS OF OPERATIONS
Third quarter net interest income before the provision for possible loan 
losses decreased $277 thousand from 1997 to 1998. Year to date net interest 
income before the provision for possible loan losses was $301 thousand less 
in 1998 than the comparable period in 1997. This decrease in net interest 
income is primarily attributable to the current interest rate environment. 
Although the Bank's average net interest earning assets have increased $13 
million from the third quarter of 1997 to the third quarter of 1998 and $12 
million for the first nine months of the year, the average spread on those 
assets has decreased by 51 basis points quarter over quarter, and 34 basis 
points for the first nine months of the year. During the third quarter the 
Company saw its' net interest margin decrease 24 basis points, from 5.35% to 
5.11%, the margin has decreased 28 basis points year over year. Many of the 
bank's funding sources are tied to short-term rates, which have not fallen 
as rapidly as long-term rates. The Bank's average cost of funds has remained 
virtually unchanged from 1997 to 1998, while the average yield on interest 
earning assets has decreased by 57 basis points quarter over quarter, and 35 
basis points year over year. The recent rate cuts by the Federal Reserve 
Bank may benefit the Bank by helping to decrease its cost of funds. The 
schedule on pages 15 and 16 shows the yield analysis for the periods 
reported.

Due to the continued strength of the Bank's asset quality, and management's 
assessment of the adequacy of the loan loss reserve as an indicator of that 
strength, there was no provision taken for loan losses in the third quarter 
of 1998 or 1997. During the second quarter of 1998 the Company recognized a 
recovery on loan that had previously been charged down of $119 thousand. 
This amount was credited to income through the provision for loan losses. 
Reserve coverage continues to be very strong at 3.47% of total loans and 
256% of non-performing loans. The improved asset quality achieved over the 
last two years will be maintained as the portfolio grows by adhering to the 
strong underwriting standards that have been established.

Total non-interest income has increased $30 thousand from the same quarter a 
year earlier, and $288 thousand (5.52%) for the first nine months of 1998. 
Merchants Trust Company (the "Trust Company") has shown increased revenue of 
approximately $40 thousand (11%) for the quarter, and $306 thousand (27%) 
for the first nine months of 1998. Of the year to date increase, $120 
thousand is attributable to proceeds from a settlement of litigation brought 
by the Trust Company in 1996. The balance of the increase is due to a 
combination of new business development, implementation of a new fee 
schedule, and a favorable market environment. Offsetting this increase in 
revenue was a decrease in service charges on deposits of approximately $113 
thousand (15%) for the quarter and $259 thousand (11%) year to date. The 
decrease in service charge revenue is due primarily to the Bank's 
FreedomLYNX checking account product, an account which generally charges no 
fees if the customer has a direct deposit, an automatic loan payment or a 
debit card. Merchant discount fees remained virtually unchanged for the 
quarter, and decreased $79 thousand (7%) year to date, due primarily to 
lower transaction volumes. These changes are consistent with the Bank's 
strategy to emphasize margin dollars over fee income. 

Total non-interest expenses for the third quarter have decreased $514 
thousand (8%) year over year, and have decreased by $910 thousand (5%) for 
the first nine months. Salaries, wages and employee benefits have increased 
by $225 thousand (9%) for the third quarter and $460 thousand (6%) for the 
first nine months of the year. The Bank has increased staff by 11 full time 
equivalent employees over the last year, 10 of which are in the sales 
departments. This additional staff will support the Bank's sales efforts and 
will help to fuel continued balance sheet growth. Legal and professional 
fees have decreased $482 thousand (60%) for the third quarter and $325 
thousand (17%) for the first nine months of 1998. This decrease is due 
primarily to the timing of expenses incurred by the Bank as it defends 
itself in certain litigation. For more information on this litigation see 
Part II, Item 1, Legal Proceedings. Expenses associated with Other Real 
Estate Owned ("OREO") decreased $10 thousand (16%) for the quarter ended 
September 30, 1998 versus the prior year quarter and $246 thousand (58%) for 
the first nine months of 1998 versus the first nine months of 1997. This 
decrease is due primarily to reimbursement of expenses and gains recognized 
upon the sale of certain properties. Additionally, in conjunction with its 
conversion to the Windows NT platform and other capital improvements the 
Bank recognized expenses associated with the retirement of certain assets 
totaling $132 thousand for the second quarter of 1997, and $418 thousand for 
the first nine months of last year. Losses recognized in conjunction with 
the disposition of fixed assets during the third quarter of 1998 totaled $45 
thousand and $100 thousand year to date. 

YEAR 2000
Introduction:  The Company, like most users of computers, computer software 
and equipment utilizing computer software faces a critical challenge 
regarding the Year 2000 date change.  The Year 2000 issue, which is common 
to most corporations, and especially important to banks, concerns the 
inability of information systems, primarily computer software programs, to 
properly recognize and process date sensitive information as the Year 2000 
approaches.  If not corrected, many computer applications could fail or 
create inaccurate results.  The bank regulatory agencies which regulate the 
conduct of the Company, the Bank and the Trust Company, through the auspices 
of the Federal Financial Institutions Examination Council (FFIEC) have 
issued compliance guidelines requiring financial institutions to develop and 
implement plans to address the Year 2000 issues.  During the past fifteen 
months, the Company has devoted substantial time and resources toward 
ensuring that the Company's and its subsidiaries' operations will not be 
adversely impacted by the pending date change.  The Bank's primary 
regulator, the Federal Deposit Insurance Corporation has been monitoring, 
and continues to monitor, the Bank's planning and implementation process on 
a regular basis.  The Company has also contracted with Arthur Andersen LLP 
to perform an independent review of the Company's Year 2000 preparations.  
These reviews will commence during the fourth quarter of 1998 and will 
continue into 1999.  The Company's management remains committed to the 
continued deployment of the necessary internal and external resources toward 
addressing the Year 2000 issue.

State of Readiness: As required by the Company's and its subsidiaries' 
regulatory agencies, the Company, through its Year 2000 Committee (the 
Committee) has developed a Year 2000 compliance plan.  The Company's plan 
addresses the five basic phases of achieving Year 2000 compliance; (i) 
project management, (ii) awareness, (iii) assessment, (iv) testing and (v) 
renovation and implementation.  Project management began in the middle of 
1997 as the Committee was formed.  Since its formation, the Committee has 
met on a regular basis to discuss and plan the specific actions that the 
Company, the Bank and the Trust Company need to take to verify that the 
Company and its subsidiaries will be prepared for the date change.  In 
addition, the Company has developed a strategy to ensure that its software 
vendors are also taking steps to address the millennium change.  The 
Committee is comprised of senior executive officers of the Company, the Bank 
and the Trust Company.  The Committee is chaired by the Bank's Senior 
Operations Officer, and includes the Company's Chief Financial Officer, the 
Bank's Chief Auditor/Risk Management Officer, the Bank's Information Systems 
Manager, the Bank's Senior Loan Underwriter, the Bank's Deposit Operations 
Manager, a Trust Company Officer and the Bank's Facilities/Administration 
Manager.  The Committee provides progress reports to the Company's senior 
management and reports at least quarterly to the Company's Board of 
Directors.  

Through the Committee, the Company has also taken steps to promote awareness 
of the Year 2000 problem throughout its entire organization.  In addition, 
the Company has sought to raise the awareness of its vendors, service 
providers and larger borrowing customers as to the Year 2000 problem in 
light of the critical role these entities play in the operations of the 
Company.  The Committee has contacted each of these entities and requested a 
Year 2000 plan and testing information.  The Company has received responses 
from substantially all of its vendors and service providers.  The majority 
of the Company's borrowers have also responded.  The Committee intends to 
follow-up with these customers frequently throughout the next year and into 
the Year 2000.

Assessment is the process of identifying all mission-critical applications 
that could be adversely affected by the date change.  The Company's 
assessment phase is substantially complete. Throughout its history, 
independently of the Year 2000 issue, the Company has sought to purchase its 
critical core hardware and software from vendors who it perceives as having 
strong reputations as leading financial industry service providers. The 
Company has received and installed Year 2000 compliant software upgrades 
from all but one of these mission critical vendors.  Management expects to 
have all critical Year 2000 software upgrades installed prior to December 
31, 1998. Substantial progress has been made with respect to the fourth 
phase of the Company's Year 2000 plan, testing. Testing of the Company's 
core computer and peripheral equipment infrastructure has been successfully 
completed and substantial progress has been made in the testing of the 
infrastructure of the Company's personal computer desktop network.  Testing 
of critical customer accounting software applications has begun and is 
targeted for completion by April 1999, well in advance of the FFIEC 
suggested testing completion date.  All other systems and applications have 
been scheduled for testing prior to September 30, 1999.  In the Plan, each 
of these non-mission critical systems has an established target date by 
which steps must be taken to replace any non-compliant systems.  The Company 
is confident that all tests will be completed well in advance of those 
target dates.

The final phase of the Plan, renovation and implementation, involves 
obtaining and implementing renovated software applications provided by the 
Company's vendors.  As noted above, this phase of the Plan has already 
commenced and will continue throughout 1999.  To date, the Company has not 
identified any system which presents a material risk of not being Year 2000 
compliant in a timely fashion or for which a suitable alternative cannot be 
implemented.

Costs to Address the Year 2000 Issue: The total financial costs associated 
with the Year 2000 problem cannot be predicted at this time with absolute 
certainty.  As may be expected, the Committee currently estimates that there 
will be costs associated with replacing certain non-compliant software 
and/or hardware.  The Company has hired a full-time project coordinator to 
oversee the testing phase of the Year 2000 project.  Although no other staff 
additions are currently planned, the Committee estimates that about 30-35 
people are spending some portion of their time working on the Year 2000 
project.  Additionally, the Company has hired a third party to evaluate the 
Bank's loan loss reserve adequacy in light of Year 2000 concerns.  At this 
time, the Company does not anticipate a need for any additional loan loss 
provision related specifically to Year 2000 risks.  The Company plans to 
replace many of the Bank's ATMs as well as upgrade certain software and 
equipment.  Management had approved the replacement of the ATMs prior to 
Year 2000 budget planning since most of them were 15 to 20 years old.  Out 
of the total estimated $1.26 million in capital costs $890 thousand is 
budgeted to upgrade the ATM network.  The Bank has spent $568 thousand for 
ATM and other Year 2000 upgrades in 1998. These costs have been, and when 
incurred in the future will be, capitalized and depreciated over the 
estimated useful lives of the assets, as such assets represent replacement 
of existing equipment. Direct (non-capital expenditures) Year 2000 expenses 
incurred year to date total approximately $126 thousand and have been 
charged to expense as incurred.  Additional expenses related to the project 
are currently estimated to be $230 thousand and will be charged to expense 
as incurred.

Risks of Year 2000 Issues: The Year 2000 problem presents potential risks to 
the Company, its subsidiaries and their operations.  As stated above, the 
Company purchases substantially all of its technology applications from 
third parties that face the same Year 2000 challenge as the Company. Thus, 
the Company's operations could be adversely affected if the operations of 
these third parties are adversely affected by the Year 2000 problem.  Most 
significantly, the Company faces risks that are specific to the business of 
banking.  Included among these risks is the risk that the Year 2000 date 
change may result in the inability to process and underwrite loan 
applications, to credit deposits and withdrawals from customer accounts, to 
credit loan payments or track delinquencies, to properly reconcile and 
record daily activity or to engage in similar normal banking activities.  
Additionally, if the Bank's commercial loan customers are not Year 2000 
compliant and suffer adverse effects with respect to their own operations, 
their ability to meet their obligations to the Bank could be adversely 
affected.  Furthermore, as a commercial bank, the Bank could potentially 
experience deposit run-off prior to the Year 2000 date change as a result of 
customer concern about the potential availability of their funds or a change 
in interest rates. Moreover, to the extent that the risks posed by the Year 
2000 problem are pervasive in data processing and transmission and 
communications services worldwide, the Company cannot predict with any 
certainty that its operations will remain materially unaffected after 
January 1, 2000 or on dates preceding this date at which time post-January 
1, 2000 dates become significant within the Bank's systems.  Finally, to the 
extent that certain utility and communication services used by the Company 
face Year 2000 problems, the Company's operations could be disrupted.

Contingency Plans: In light of these risks and uncertainties, the Company is 
developing contingency plans to mitigate the risks associated with the Year 
2000 date change and to provide a business continuity strategy.  The Company 
is developing these plans through building on its internal disaster 
Recovery/Contingency plans, which were updated during the second quarter of 
1998.  This planning effort included a Business Impact Analysis relating to 
mission critical systems and is the foundation documentation that will be 
used to finalize the Year 2000 mission critical service provider Contingency 
plans. 

The discussion above contains certain forward-looking statements.  The costs 
of the Year 2000 conversion, the date which the Company has set to complete 
its Year 2000 project and statements about anticipated compliance are based 
on the Company's current estimates and are subject to various uncertainties 
that could cause actual results to differ materially from the Company's 
expectations.  Such uncertainties include, among others, the success of the 
Company in identifying systems that are not Year 2000 compliant, the nature 
and amount of programming required to upgrade or replace each of the 
affected systems, the availability of qualified personnel, consultants and 
other resources, and the success of the Year 2000 compliance efforts of 
others.  Readers are cautioned not to place undue reliance on these forward 
looking statements.

RISK MANAGEMENT
There have been no significant changes in the Company's risk profile, or 
management's risk management practices, since year-end.

INCOME TAXES
The Company recognized $240 thousand in low income housing tax credits for 
each of the first three quarters of 1997 and 1998, representing the amount 
of the income tax credits earned during those quarters. The recognition of 
these low income housing tax credits has reduced the Company's effective tax 
rate to 25% for the quarter and nine months ended September 30, 1998.

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. The Bank has a number of sources of liquid funds; including $20 
million in available Federal Funds lines of credit at June 30, 1998; an 
overnight line of credit with the Federal Home Loan Bank (FHLB) of $15 
million; an estimated additional borrowing capacity with FHLB of $62 
million; and the ability to borrow through the use of repurchase agreements, 
collateralized by the Bank's investments, with certain approved 
counterparties.

NON-PERFORMING ASSETS

The following tables summarize the Bank's non-performing assets as of 
September 30, 1998, December 31, 1997, and September 30, 1997:

<TABLE>
<CAPTION>
(In thousands)                  September 30, 1998    December 31, 1997    September 30, 1997
---------------------------------------------------------------------------------------------

<S>                                  <C>                   <C>                   <C>
Nonaccrual Loans                     $4,752                $2,686                $3,175
Loans Past Due 90 Days or
 More and Still Accruing                279                   403                   707
Restructured Loans                      327                   215                 2,157
---------------------------------------------------------------------------------------
Total Non-performing Loans            5,358                 3,304                 6,039
Other Real Estate Owned                 818                   591                   225
---------------------------------------------------------------------------------------
Total Non-performing Assets          $6,176                $3,895                $6,264
=======================================================================================
</TABLE>


Note: Included in nonaccrual loans are certain loans whose terms have been 
substantially modified in troubled debt restructuring.


<TABLE>
<CAPTION>
                                     September 30, 1998    December 31, 1997    September 30, 1997
-------------------------------------------------------------------------------------------------

<S>                                        <C>                   <C>                  <C>
Percentage of Non-performing 
 Loans to Total Loans                      1.36%                 0.85%                1.52%
Percentage of Non-performing
 Assets to Total Loans plus Other
 Real Estate Owned                         1.56%                 1.00%                1.58%
Percentage of RPLL to Total Loans          3.47%                 4.06%                4.07%
Percentage of RPLL to NPL                   256%                  479%                 268%
Percentage of RPLL to NPA                   222%                  406%                 258%
-------------------------------------------------------------------------------------------------
</TABLE>


Loans deemed impaired totaled $5.9million, of this total $4.7million are 
included as non-performing assets in the table above. Impaired loans have 
been allocated $664 thousand of the Reserve for Possible Loan Losses (RPLL).

Approximately 77% of the Non-Performing Loans (NPL) are secured by real 
estate, which significantly reduces the Company's exposure to loss. Based 
upon the secured nature of a significant portion of the NPL, the strength of 
the local real estate market, and management's assessment of the current and 
prospective level of risk in the loan portfolio, the balance of the RPLL is 
considered adequate at September 30, 1998. Management's assessment of the 
adequacy of the RPLL concluded that a provision was not necessary during the 
first three quarters of 1998.

DISCUSSION OF EVENTS AFFECTING NPA
Significant events affecting the categories of NPA are discussed below:

Nonaccrual Loans:
-----------------
      During the third quarter of 1998 there was a $101 thousand decrease in 
      this category. The increase since December 31, 1997 is concentrated in 
      two relationships. 

Loans Past Due 90 Days:
-----------------------
      Loans past due 90 days decreased $125 thousand from December 31, 1997 
      to September 30, 1998. Approximately 46% of the balances at September 
      30, 1998 carry guarantees from the U.S. Small Business Administration.

Restructured Loans:
-------------------
      The reported increase was driven by the addition of a single 
      relationship.

Other Real Estate Owned (OREO)
------------------------------
      The Bank made the decision, during the quarter, to dispose of a former 
      Bank facility and a building that houses one of the Bank's branches. 
      These two buildings were reclassified as OREO during the third quarter 
      of 1998. The buildings were sold during October of 1998, reducing OREO 
      balances by $368 thousand.


                         Merchants Bancshares, Inc.
                          Supplemental Information
                                 (Unaudited)


<TABLE>
<CAPTION>
                                                                         Three Months Ended
                                                 ------------------------------------------------------------------
                                                       September 30, 1998                 September 30, 1997
(In thousands except share and per share data)

                                                             Interest                           Interest
                                                 Average     Income/     Average    Average     Income/     Average
(Fully Taxable Equivalent)                       Balance     Expense      Rate      Balance     Expense      Rate
                                                 -------------------------------    -------------------------------

<S>                                              <C>         <C>          <C>       <C>         <C>          <C>
INTEREST EARNING ASSETS
  Loans (1)                                      $386,026    $ 9,092      9.34%     $396,140    $ 9,778      9.79%
  Taxable Investments                             170,403      2,744      6.39%      139,277      2,320      6.61%
  Federal Funds Sold and Securities Purchased
   Under Agreements to Resell                      10,963        153      5.54%        2,821         39      5.48%
                                                 -------------------------------    -------------------------------
Total Interest Earning Assets                    $567,392    $11,989      8.38%     $538,238    $12,137      8.95%
                                                 ===============================    ===============================

INTEREST BEARING LIABILITIES
  Savings, NOW and Money Market Deposits         $292,303    $ 2,393      3.25%     $266,012    $ 2,147      3.20%
  Time Deposits                                   158,674      2,153      5.38%      164,802      2,239      5.39%
                                                 -------------------------------    -------------------------------
      Total Savings and Time Deposits             450,977      4,546      4.00%      430,814      4,386      4.04%

  Federal Funds Purchased                              --         --                     328          4      5.32%
  Other Borrowed Funds                              2,372         26      4.35%        3,087         44      5.60%
  Debt                                              6,411        116      7.18%        9,445        144      6.04%
                                                 -------------------------------    -------------------------------
Total Interest Bearing Liabilities                459,760      4,688      4.05%      443,674      4,578      4.09%

Other Liabilities & Stockholders' Equity
 (Net of Non-Interest Earning Assets)             107,632                             94,564
                                                 --------                           --------

Total Liabilities & Stockholders' Equity
 (Net of Non-Interest Earning Assets)            $567,392                           $538,238
                                                 ========                           ========

Rate Spread                                                               4.34%                              4.85%
                                                                          =====                              =====

Net Yield on Interest Earning Assets                                      5.11%                              5.57%
                                                                          =====                              =====

<F1>  Includes principal balance of non-accrual loans and fees on loans
</TABLE>


                         Merchants Bancshares, Inc.
                          Supplemental Information
                                 (Unaudited)



<TABLE>
<CAPTION>
                                                                         Nine Months Ended
                                                 ------------------------------------------------------------------
                                                       September 30, 1998                 September 30, 1997
(In thousands except share and per share data)

                                                             Interest                           Interest
                                                 Average     Income/     Average    Average     Income/     Average
(Fully Taxable Equivalent)                       Balance     Expense      Rate      Balance     Expense      Rate
                                                 -------------------------------    -------------------------------

<S>                                              <C>         <C>          <C>       <C>         <C>          <C>
INTEREST EARNING ASSETS
  Loans (1)                                      $386,091    $27,758      9.54%     $393,643    $28,849      9.80%
  Taxable Investments                             165,759      8,096      6.53%      142,518      7,113      6.67%
  Federal Funds Sold and Securities Purchased
   Under Agreements to Resell                       5,061        220      5.81%        1,892         77      5.44%
                                                 -------------------------------    -------------------------------
Total Interest Earning Assets                    $559,911    $36,074      8.61%     $538,053    $36,039      8.96%
                                                 ===============================    ===============================

INTEREST BEARING LIABILITIES
  Savings, NOW and Money Market Deposits         $281,533    $ 6,814     3.24%      $264,572    $ 6,275      3.17%
  Time Deposits                                   160,547      6,472     5.39%       164,370      6,629      5.39%
                                                 -------------------------------    -------------------------------
      Total Savings and Time Deposits             442,080     13,286     4.02%       428,942     12,904      4.02%

  Federal Funds Purchased                             735         32     5.82%           913         40      5.90%
  Other Borrowed Funds                              6,020        239     5.31%         5,796        241      5.55%
  Debt                                              6,412        344     7.18%         9,735        437      6.00%
                                                 -------------------------------    -------------------------------
Total Interest Bearing Liabilities                455,247     13,901     4.08%       445,386     13,622      4.09%

Other Liabilities & Stockholders' Equity
  (Net of Non-Interest Earning Assets)            104,664                             92,667
                                                 --------                           --------

Total Liabilities & Stockholders' Equity
 (Net of Non-Interest Earning Assets)            $559,911                            $538,053
                                                 ========                            ========

Rate Spread                                                              4.53%                               4.87%
                                                                         =====                               =====

Net Yield on Interest Earning Assets                                     5.29%                               5.57%
                                                                         =====                               =====

<F1>  Includes principal balance of non-accrual loans and fees on loans
</TABLE>


                         MERCHANTS BANCSHARES, INC.
                             SEPTEMBER 30, 1998


PART II - OTHER INFORMATION

Item 1 - Legal Proceedings
Reference is made to the Form 10-K filed for the year ended December 31, 
1997 for disclosure of current legal proceedings against the Company, the 
Bank, the Merchants Trust Company (the "Trust Company") (the "Companies") 
and certain directors and trustees of the Companies.  

Merchants Bank is a counterclaim defendant in a litigation entitled Pasquale 
and Vatsala Vescio, Counterclaim Plaintiffs v. The Merchants Bank, 
Counterclaim Defendant, now pending in the United States Bankruptcy Court 
for the District of Vermont. There have been no material developments in the 
third quarter of 1998. For further information please refer to the Form 10-K 
filed for the year ended December 31, 1997.

The company, the bank, the Trust Company and certain of their directors are 
defendants in a lawsuit filed in November of 1994 (the "Vermont 
Proceedings"). The Vermont Proceedings arose from certain investments 
managed for Trust company customers and placed in the Piper Jaffray 
Institutional Government Income Portfolio (the "Portfolio"). In December of 
1994, the Companies made payments to the Trust Company customers in amounts 
that the Companies believed reimbursed those customers fully for Portfolio 
losses. The United States District Court for the District of Vermont has 
dismissed the Plaintiff's claims in the Vermont Proceedings with prejudice, 
as moot, and has ordered payment of approximately $99,000 in attorney's fees 
to the attorney's representing the plaintiff. The Plaintiff and his 
attorney's have appealed to the Second Circuit Court of Appeals the District 
Court's orders, and the Companies have appealed on certain limited issues.

The companies have separately pursued claims against others on account of 
the losses suffered as a result of the investments in the Portfolio. Claims 
against Piper Jaffray companies, Inc. were joined with the claims of others 
in a class action in the United States District Court for the District of 
Minnesota (the "Minnesota Proceedings"). The Minnesota Proceedings were 
settled by the parties and in February of 1997 the District Court ordered 
the net share of the settlement proceeds attributable to the Trust Company's 
investments to be paid to the Trust Company, starting approximately 60 days 
after the Court's order becomes final, except to the extent, if at all, any 
other court with jurisdiction has sooner given leave for some or all of 
those payments to be deposited with such other court pursuant to applicable 
rules. The attorneys representing the Plaintiff in the Vermont Proceedings 
and also representing, in the Minnesota Proceedings, the beneficiaries of 
four other Trust Company accounts, appealed that order to the Eighth Circuit 
Court of Appeals. Those attorneys took the position that notwithstanding the 
payments made by the companies to the Trust Company customers in December of 
1994, any amounts paid under the Minnesota Proceedings on account of the 
Trust Company's Portfolio investments should be paid directly to the 
affected Trust Company customers (net of legal fees to be paid to those 
attorneys). On July 24, 1998, the United States Circuit Court of Appeals for 
the Eighth Circuit issued a Per Curiam decision affirming the Order and on 
August 27, 1998 it denied a petition for rehearing.  The same attorneys have 
separately stated that they intend to bring further proceedings, seeking to 
intercept the payments to the Trust Company, or otherwise to require the 
Companies to pay such amounts directly to the affected Trust Company clients 
(net of legal fees to those attorneys). Any recovery by the Companies from 
the Minnesota Proceedings is subject to the terms of an agreement between 
the Companies and their insurance carrier, which reimbursed the Companies, 
in part, for the December, 1994 payments.

Item 2 - Changes in Securities - NONE

Item 3 - Defaults upon Senior Securities - NONE

Item 4 - Submission of Matters to a Vote of Security Holders  - NONE

Item 5 - Other Issues - NONE

Item 6 - Exhibits and Reports on Form 8-K - NONE


                         MERCHANTS BANCSHARES, INC.

                                  FORM 10-Q

                             SEPTEMBER 30, 1998

                                 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


                                       /s/ Janet P. Spitler
                                       --------------------
                                       Janet P. Spitler, Treasurer

                                       November 12, 1998
                                       -----------------
                                       Date