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 quarterly period ended   September 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 November 7, 2003, the
registrant had outstanding 6,189,123 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
            September 30, 2003, and December 31, 2002                            1

            Consolidated Statements of Operations
            For the three months ended September 30, 2003 and 2002,
            and the nine months ended September 30, 2003 and 2002                2

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

            Consolidated Statements of Cash Flows
            For the nine months ended September 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>

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


                                                                     <c>              <c>               <c>
ASSETS
  Cash and Due from Banks                                                                $ 47,138          $ 37,046
  Federal Funds Sold and Other Short-term Investments                                          --            31,500
  Investments:
    Securities Available for Sale                                                         284,696           217,755
    Securities Held to Maturity (Fair Value of $39,906 and $54,972)                        37,537            51,614
    Trading Securities                                                                        731               846
---------------------------------------------------------------------------------------------------------------------
      Total Investments                                                                   322,964           270,215
---------------------------------------------------------------------------------------------------------------------
  Loans                                                                                   564,778           495,588
  Less: Allowance for Loan Losses                                                           7,937             8,497
---------------------------------------------------------------------------------------------------------------------
      Net Loans                                                                           556,841           487,091
---------------------------------------------------------------------------------------------------------------------
  Federal Home Loan Bank Stock                                                              3,632             3,632
  Bank Premises and Equipment, Net                                                         12,489            11,400
  Investment in Real Estate Limited Partnerships                                            5,670             3,551
  Other Real Estate Owned                                                                      --                57
  Other Assets                                                                             25,560            10,003
---------------------------------------------------------------------------------------------------------------------
      Total Assets                                                                       $974,294          $854,495
=====================================================================================================================
LIABILITIES
  Deposits:
    Demand Deposits                                                                      $109,121          $102,554
    Savings, NOW and Money Market Accounts                                                497,051           467,430
    Time Deposits $100 Thousand and Greater                                                46,299            37,916
    Other Time Deposits                                                                   154,575           147,374
---------------------------------------------------------------------------------------------------------------------
      Total Deposits                                                                      807,046           755,274
---------------------------------------------------------------------------------------------------------------------
  Demand Note Due U.S. Treasury                                                             2,232             4,000
  Other Short-term Borrowings                                                              65,000                --
  Other Liabilities                                                                         8,567            10,086
  Long-term Debt                                                                            5,956             2,377
---------------------------------------------------------------------------------------------------------------------
      Total Liabilities                                                                   888,801           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                                         5,927,360
                  Prior Period                                           5,925,082
  Capital in Excess of Par Value                                                           33,953            33,664
  Retained Earnings                                                                        59,961            55,827
  Treasury Stock, At Cost                                                                 (11,365)          (10,980)
                  Current Period Shares                                    724,400
                  Prior Period Shares                                      726,678
  Deferred Compensation Arrangements                                                        3,452             3,194
  Accumulated Other Comprehensive Income (Loss)                                              (575)              986
---------------------------------------------------------------------------------------------------------------------
      Total Stockholders' Equity                                                           85,493            82,758
---------------------------------------------------------------------------------------------------------------------
      Total Liabilities and Stockholders' Equity                                         $974,294          $854,495
=====================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements


<PAGE>  1


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

<TABLE>
<CAPTION>

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


                                                        <c>         <c>         <c>         <c>
INTEREST AND DIVIDEND INCOME
  Interest and Fees on Loans                               $ 8,177     $ 8,498     $24,513     $25,681
  Interest and Dividends on Investments
    U.S. Treasury and Agency Obligations                     1,765       2,861       6,221       8,388
    Other                                                    1,433         772       3,341       2,336
------------------------------------------------------------------------------------------------------
      Total Interest and Dividend Income                    11,375      12,131      34,075      36,405
------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
  Savings, NOW and Money Market Accounts                       621       1,376       2,307       4,225
  Time Deposits $100 Thousand and Greater                      453         311       1,065       1,004
  Other Time Deposits                                          685       1,012       2,490       3,315
  Other Borrowed Funds                                          84           6          97          20
  Long-term Debt                                                47          20         119          59
------------------------------------------------------------------------------------------------------
      Total Interest Expense                                 1,890       2,725       6,078       8,623
------------------------------------------------------------------------------------------------------
  Net Interest Income                                        9,485       9,406      27,997      27,782
  Provision for Loan Losses                                     --         (90)         --        (704)
------------------------------------------------------------------------------------------------------
  Net Interest Income after Provision for Loan Losses        9,485       9,496      27,997      28,486
------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
  Trust Company Income                                         337         370       1,051       1,209
  Service Charges on Deposits                                1,096       1,021       3,243       2,974
  Net Gains on Sales of Investment Securities                  570         173       1,413         173
  Other                                                        545       1,149       1,671       1,831
------------------------------------------------------------------------------------------------------
      Total Noninterest Income                               2,548       2,713       7,378       6,187
------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
  Salaries and Wages                                         2,983       2,882       8,642       8,145
  Employee Benefits                                            940         799       2,911       2,530
  Occupancy Expense, Net                                       702         674       2,067       1,893
  Equipment Expense                                            648         623       1,911       1,829
  Legal and Professional Fees                                  432         337       1,128       1,086
  Marketing                                                    370         273       1,028         784
  Equity in Losses of Real Estate Limited Partnerships         401         318       1,204         965
  Vermont Franchise Taxes                                      212         206         571         608
  Other Real Estate Owned, Net                                  30           6          89          81
  Other                                                      1,285       1,237       3,838       3,595
------------------------------------------------------------------------------------------------------
      Total Noninterest Expense                              8,003       7,355      23,389      21,516
------------------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes                     4,030       4,854      11,986      13,157
Provision for Income Taxes                                   1,105       1,381       3,287       3,661
------------------------------------------------------------------------------------------------------
NET INCOME                                                 $ 2,925     $ 3,473     $ 8,699     $ 9,496
======================================================================================================

Basic Earnings Per Common Share                            $  0.47     $  0.56     $  1.41     $  1.54
Diluted Earnings Per Common Share                          $  0.47     $  0.56     $  1.39     $  1.52
</TABLE>

See accompanying notes to consolidated financial statements


<PAGE>  2


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

<TABLE>
<CAPTION>

                                                             Three Months Ended     Nine Months Ended
                                                               September 30,          September 30,
(In thousands)                                                2003        2002       2003       2002
------------------------------------------------------------------------------------------------------


                                                          <c>         <c>        <c>        <c>
Net Income                                                   $ 2,925     $3,473     $8,699     $ 9,496
Change in Net Unrealized (Depreciation) Appreciation
 of Securities Available for Sale, Net of Tax                 (1,494)     1,991       (623)      2,847
Change in Net Unrealized Appreciation
 of Derivatives Qualifying as Hedges, Net of Tax                  --        499         --         878
Reclassification Adjustments for Net Securities
 Gains Included in Net Income, Net of Tax                       (370)      (112)      (918)       (112)
------------------------------------------------------------------------------------------------------
Comprehensive Income Before Transfers                          1,061      5,851      7,158      13,109
Impact of Transfer of Securities from Available for Sale
 to Held to Maturity                                              --         (2)       (20)        (14)
------------------------------------------------------------------------------------------------------
Comprehensive Income                                         $ 1,061     $5,849     $7,138     $13,095
======================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements


<PAGE>  3


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

<TABLE>
<CAPTION>

For the nine months ended September 30,                                      2003          2002
--------------------------------------------------------------------------------------------------
(In thousands)


                                                                        <c>           <c>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income                                                                 $   8,699     $   9,496
Adjustments to Reconcile Net Income to Net Cash
 (Used in) Provided by Operating Activities:
  Provision for Loan Losses                                                       --          (704)
  Depreciation and Amortization                                                3,831         2,675
  Net Gains on Sales of Investment Securities                                 (1,413)         (173)
  Net Gains on Sales of Loans                                                    (19)           --
  Net Losses (Gains) on Disposition of Premises and Equipment                     48          (257)
  Net Gains on Sales of Other Real Estate Owned                                   (8)          (30)
  Equity in Losses of Real Estate Limited Partnerships                         1,204           965
Changes in Assets and Liabilities:
  Increase in Interest Receivable                                                (53)         (751)
  Increase (Decrease) in Interest Payable                                         44          (682)
  (Increase) Decrease in Other Assets                                        (14,857)          251
  Decrease in Other Liabilities                                               (1,558)       (3,296)
--------------------------------------------------------------------------------------------------
      Net Cash (Used in) Provided by Operating Activities                     (4,082)        7,494
--------------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from Sales of Investment Securities Available for Sale             94,131        26,046
  Proceeds from Maturities of Investment Securities Available for Sale        55,474        35,357
  Proceeds from Maturities of Investment Securities Held to Maturity          14,042        11,032
  Purchases of Investment Securities Available for Sale                     (219,535)     (135,648)
  Loan Originations in Excess of Principal Payments                          (71,064)       (8,940)
  Purchases of Federal Home Loan Bank Stock                                       --           (12)
  Proceeds from Sales of Loans, Net                                            1,333            --
  Proceeds from Sales of Premises and Equipment                                   --           479
  Proceeds from Sales of Other Real Estate Owned                                  65           255
  Investments in Real Estate Limited Partnerships                             (3,323)         (964)
  Purchases of Bank Premises and Equipment                                    (2,482)       (1,356)
--------------------------------------------------------------------------------------------------
      Net Cash Used in Investing Activities                                 (131,359)      (73,751)
--------------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net Increase in Deposits                                                    51,772        32,436
  Net Increase in Short-term Borrowings                                       63,232         2,350
  Proceeds from Long-term Debt                                                 4,000            --
  Principal Payments on Long-term Debt                                          (421)          (44)
  Cash Dividends Paid                                                         (3,940)       (3,422)
  Acquisition of Treasury Stock                                                 (713)         (722)
  Increase in Deferred Compensation Arrangements                                 122           239
  Distributions Under Deferred Compensation Arrangements                        (141)         (147)
  Proceeds from the Exercise of Employee Stock Options                           129           245
--------------------------------------------------------------------------------------------------
      Net Cash Provided by Financing Activities                              114,040        30,935
--------------------------------------------------------------------------------------------------

Decrease in Cash and Cash Equivalents                                        (21,408)      (35,322)
Cash and Cash Equivalents Beginning of Year                                   68,546        86,688
--------------------------------------------------------------------------------------------------
Cash and Cash Equivalents End of Period                                    $  47,138     $  51,366
==================================================================================================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Total Interest Payments                                                  $   6,034     $   9,305
  Total Income Tax Payments                                                    3,912         4,650
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                        625           833
</TABLE>

See accompanying notes to 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 January 2003 the FASB issued FASB Interpretation No. 46 ("FIN No. 46"),
"Consolidation of Variable Interest Entities." This interpretation provides
guidance on how to identify variable interest entities and how to determine
whether or not those entities should be consolidated. The interpretation
requires the primary beneficiaries of variable interest entities to
consolidate the variable interest entities if they are subject to a majority
of the risk of loss or are entitled to receive a majority of the residual
returns. It also requires that both the primary beneficiary and all other
enterprises with a significant variable interest in a variable interest
entity make certain disclosures. FIN No. 46 applies immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. It
applies in the first fiscal year or interim period ending after December 15,
2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The provisions of FIN No.
46 are not expected to have a material effect 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. Under SFAS 123, Merchants' net income and earnings per share
would have been the same as the amounts reported in the financial
statements. 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 nine month periods ended
September 30, 2003 and 2002.

<TABLE>
<CAPTION>

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


                                               <c>          <c>              <c>
Basic Earnings Per Common Share:
  Net Income Available to Common
   Shareholders                                   $2,925       6,185,433        $0.47
Diluted Earnings Per Common Share:
  Effect of Dilutive Stock Options                    --          70,019
  Net Income Available to Common
   Shareholders and Stock Option Exercise         $2,925       6,255,452        $0.47

                                                  Nine Months Ended September 30, 2003
                                                  ------------------------------------

Basic Earnings Per Common Share:
  Net Income Available to Common
   Shareholders                                   $8,699       6,183,356        $1.41
Diluted Earnings Per Common Share:
  Effect of Dilutive Stock Options                    --          59,582
  Net Income Available to Common
   Shareholders and Stock Option Exercise         $8,699       6,242,938        $1.39

                                                  Three Months Ended September 30, 2002
                                                  -------------------------------------

Basic Earnings Per Common Share:
  Net Income Available to Common
   Shareholders                                   $3,473       6,172,672        $0.56
Diluted Earnings Per Common Share:
  Effect of Dilutive Stock Options                    --          68,050
  Net Income Available to Common
   Shareholders and Stock Option Exercise         $3,473       6,240,722        $0.56

                                                  Nine Months Ended September 30, 2002
                                                  ------------------------------------

Basic Earnings Per Common Share:
  Net Income Available to Common
   Shareholders                                   $9,496       6,159,731        $1.54
Diluted Earnings Per Common Share:
  Effect of Dilutive Stock Options                    --          75,320
  Net Income Available to Common
   Shareholders And Stock Option Exercise         $9,496       6,235,051        $1.52
</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 nine month periods ending September 30, 2003 and 2002. As of September
30, 2003 and 2002, there were no anti-dilutive stock options outstanding.

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 September 30, 2003.


<PAGE>  6


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 is a party to financial instruments with off balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments primarily include commitments to extend credit
and financial guarantees. Such instruments involve, to varying degrees,
elements of credit and interest rate risk that are not recognized in the
accompanying consolidated balance sheets.

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 $6.5 million at September
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 September 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 September 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;

      (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 affect Merchants' financial performance and that of
             Merchants' borrowers and on the financial markets and the price
             of Merchants' common stock;


<PAGE>  7


      (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;

      (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; and

      (ix)   the fact that Merchants actively evaluates acquisition and
             other expansion opportunities and strategies, the
             implementation of which could affect Merchants' financial
             performance.

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; 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 September 30, 2003 and for the three
and nine months ended September 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 $2.93 million, or basic and diluted earnings
per share of 47 cents for the quarter ended September 30, 2003, compared to
$3.47 million, or basic and diluted earnings per share of 56 cents for the
same period a year earlier. The return on average assets and return on
average equity for the third quarter of 2003 were 1.25% and 13.91%
respectively, compared to 1.68% and 16.95% for the third quarter of 2002.
Merchants earned net income of $8.70 million, or basic earnings per share of
$1.41 and diluted earnings per share of $1.39 for the nine months ended
September 30, 2003, compared to $9.50 million, or basic earnings per share
of $1.54 and diluted earnings per share of $1.52 for the same period a year
earlier. The return on average assets and return on average equity for the
first nine months of 2003 were 1.31% and 13.82% respectively, compared to
1.56% and 16.07% for the first nine months of 2002.

Results of Operations
Net Interest Income: Net interest income was $9.49 million for the third
quarter of 2003 which is slightly higher than $9.41 million for the third
quarter 2002, and was $28.00 million for the first nine months of 2003
compared to $27.78 million for the same period in 2002. The net interest
margin  decreased 50 basis points, from 4.81% to 4.31% for the third quarter
of 2003 compared to the third quarter of 2002, and decreased 35 basis
points, from 4.86% to 4.51%, for the first nine months of 2003 compared to
2002. Total average interest earning assets have increased $97.47 million
for the third quarter of 2003 compared to 2002, and have increased $70.23
million for the first nine months of this year compared to last year. At the
same time interest bearing liabilities have increased $87.15 million for the
third quarter and $59.44 million for the first nine months of 2003 compared
to 2002. The increase in net interest margin dollars, in spite of margin
compression, was driven by overall balance sheet growth. The yield on
interest earning assets decreased 104 basis points for the third quarter of
2003 compared to 2002, and 89 basis points for the first nine months of 2003
compared to 2002. At the same time, the cost of interest bearing liabilities
decreased 65 basis points for the third quarter of 2003 compared to 2002,
and 65 basis points for the first nine months of this year compared to last
year, leading to a decrease in net interest spread of 39 basis points and 24
basis points, respectively. The decreases in net interest rate spread and
margin reflect 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. Merchants' cost of funds for
deposits was 1.00% for the third quarter, and 1.16% for the first nine
months of the year. There is very little room to move deposit rates down
should interest rates decline further. The average interest rate earned on
the loan portfolio decreased from 7.02% for the third quarter of 2002 to
5.93% for the third quarter of 2003; and from 7.19% to 6.23% for the first
nine months of 2003 compared to 2002. This is a result of both lower
interest rates and changes in the makeup of Merchants' commercial and
commercial real estate loan portfolios. Merchants' customers have continued
to take advantage of the favorable interest rate environment by refinancing
their current debt, and moving from fixed rate to variable rate obligations.

The average interest rate earned on Merchants' investment portfolio
decreased to 3.89% from 5.07% for the third quarter of 2003 compared to the
same period in 2002, and decreased to 4.30% from 5.35% for the first nine
months of the current year . At the same time the average size of the
portfolio increased to $326.01 million from $278.40 million for the third
quarter of 2003 compared to 2002; and to $293.65 million from $260.03
million for the first nine months of this year compared to last year. The
additional income generated by Merchants' larger investment portfolio has
helped Merchants maintain its margin dollars at levels similar to last year,
in spite of continued interest rate margin compression.


<PAGE>  8


As mentioned above, deposit costs have also moved down over the last year,
but not as quickly as loan yields. The average rate on interest bearing
deposits decreased to 1.00% for the third quarter of 2003 from 1.67% for the
third quarter of 2002; and to 1.16% for the first nine months of 2003 from
1.81% for the first nine months of 2002. The average rate on Savings, NOW
and Money Market deposits for the third quarter of 2003 was 50 basis points,
less than half the 1.17% average rate for the third quarter of 2002. The
schedules on pages 12 - 13 show the yield analysis for the periods reported.

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 ("Allowance"), Merchants has discontinued its
practice of recording these recoveries as negative loan loss provisions. The
amount of the negative provision for the first nine months of 2002 was $704
thousand. Management reviews the Allowance at least quarterly and it
continues to be deemed adequate under current market conditions. (See the
discussion of Non-Performing Assets on pages 14 - 15 for more information on
the Allowance.)

Noninterest Income: Total noninterest income decreased $165 thousand to
$2.55 million for the third quarter of 2003 from $2.71 million for the third
quarter of 2002 , and increased $1.19 million to $7.38 million from $6.19
million for the first nine months of 2003 compared to 2002. Gains on sales
of investments totaled $570 thousand for the third quarter of 2003, and
$1.41 million year-to-date; gains on sales of investments were $173 thousand
for the quarter and nine months ended September 30, 2002. Additionally,
during the third quarter of last year, Merchants recognized a $272 thousand
gain on the sale of a branch building and a $449 thousand insurance
settlement. Excluding these items, total noninterest income increased $159
thousand for the third quarter of 2003 compared to the third quarter of
2002, and increased $672 thousand for the first nine months of 2003 compared
to 2002. The increase is due primarily to increases in net ATM and debit
card revenue and overdraft service charge revenue. Merchants' ATM/debit card
revenue, net of expenses, increased $44 thousand to $324 thousand for the
third quarter of 2003 and $141 thousand to $875 thousand for the first nine
months of 2003 compared to the same periods in 2002. Overdraft service
charge revenue increased $40 thousand to $712 thousand for the third quarter
of 2003 and $195 thousand to $2.08 million for the nine months ended
September 30, 2003 compared to the same periods in 2002.

Noninterest Expenses: Total noninterest expense increased $648 thousand to
$8.00 million from $7.36 million for the third quarter of 2003 compared to
2002, and $1.87 million for the first nine months of this year compared to
last year. Salary expense has increased $101 thousand to $2.98 million for
the third quarter, and $497 thousand to $8.64 million year-to-date when
comparing 2003 to 2002. Merchants salary administration plan is now fully
implemented, salary increases for employees who received increases during
2003 have averaged 9.78%. Additionally, Merchants has fully staffed its new
Vermont locations in St. Albans and White River Junction, these additional
salaries account for approximately $100 thousand of the year-to-date
increase . Employee benefits costs have increased $141 thousand to $940
thousand for the quarter and $381 thousand to $2.91 million; this
represents a 15% increase in employee benefit costs year-to-date compared
to the same period last year. Health insurance expense has increased 7.8%
from $989 thousand for the first nine months of 2002 to $1.07 million for
the same period in 2003.  Additionally, Merchants is continuing to
experience increases in its pension plan expense. Although the pension plan
was curtailed in 1995, decreases in the market value of pension plan assets
have caused increased expense recognition. Year-to-date pension plan
expense has increased to $263 thousand in 2003 from $75 thousand in 2002.

Occupancy and equipment expenses increased $53 thousand to $1.35 million for
the third quarter of 2003 compared to 2002, and $256 thousand to $3.98
million for the first nine months of 2003 compared to 2002. 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 third quarter of 2004. The total estimated cost of the
project is approximately $2.09 million; approximately $1.86 million of these
costs will be capitalized and depreciated over three to five years. The
remaining $230 thousand of the total costs are being directly expensed as
incurred. Merchants recorded $27 thousand in direct expenses for this
project during the third quarter of 2003, and expects to expense $203
thousand during the remainder of 2003 through 2004. An additional component
of the increase was the costs associated with Merchants new Vermont
locations. Occupancy and equipment expense for these two new branches
totaled $81 thousand year-to-date.

Merchants' marketing expenses increased $97 thousand to $370 thousand for
the third quarter of 2003 compared to 2002 and $244 thousand to $1.03
million for the first nine months of 2003 compared to 2002 as Merchants
continued to actively market its Free Checking for Life(R) product. The
strong deposit growth experienced during 2003 is evidence of the success of
Merchants' marketing efforts. Merchants' equity in losses of real estate
limited partnerships increased $83 thousand to $401 thousand for the third
quarter and $239 thousand to $1.20 million for the first nine months of 2003
compared to 2002 as Merchants continued to invest in community-based
affordable housing limited 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 can be used as an offset to the income
tax provision.


<PAGE>  9


Balance Sheet Analysis
Third quarter 2003 growth in average deposits and loans over the third
quarter of 2002 were 8.73% and 13.87% respectively. Quarter-end loan
balances were $564.78 million, an increase of $69.19 million over year-end
loan balances, and an annualized growth rate of 18.61%. Merchants has seen a
significant increase in loan demand for the first nine 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 October 2003 Merchants had closed $84
million in new balances in this product at an average rate of 4.86%. The
success of this product has greatly contributed to total net new growth of
$53.28 million in residential real estate for the first nine months of the
year. Additionally, commercial loan activity has been strong as a result of
Merchants' active calling program. Commercial real estate outstanding
balances have increased more than $20 million since year end.

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

<TABLE>
<CAPTION>

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


                                                  <c>                   <c>
Commercial, Financial And Agricultural Loans         $ 88,743              $ 93,856
Real Estate Loans - Residential                       259,512               206,231
Real Estate Loans - Commercial                        199,386               179,156
Real Estate Loans - Construction                        9,895                 9,154
Installment Loans                                       6,888                 6,663
All Other Loans                                           354                   528
-----------------------------------------------------------------------------------
Total Loans                                          $564,778              $495,588
===================================================================================
</TABLE>

Quarter-end deposits were $807.05 million, an increase of $51.77 million
over year-end deposit balances, and an annualized growth rate of 9.14%.
Average deposits for the third quarter of 2003 were $800.20 million, an
increase of $64.23 million over average deposits for the third quarter of
2002. Savings, NOW and Money Market balances grew to $497.05 million from
$467.43 million during the nine months ended September 30, 2003. At the same
time, total time deposits grew to $200.87 million from $185.29 million. Our
customers have found our flexible TimeLYNX(R) CD very attractive in the
current interest rate environment. Balances in this product have grown by
$5.63 million to $69.44 million since year end.  Additionally, many of our
customers have opted to extend their CD maturities to get a higher yield.
Balances in our 60 month CD product have grown by $7.07 million to $21.00
million since December 31, 2002.

In September 2003 Merchants opened its new branch in White River Junction,
Vermont. The branch is a free-standing, 1,850 square foot, full-service
banking facility, the construction of which was completed in 90 days. This
branch is the model Merchants will use to implement its retail banking
expansion strategy. Construction of Merchants' permanent location in St.
Albans, Vermont began in the latter part of September and Merchants expects
occupancy before the end of this year.

Merchants' quarterly average investment portfolio increased 17.1% year over
year. The quarter-end balance was $322.96 million, a $52.75 million increase
over year-end investment balances of $270.22 million. Over the last two
quarters Merchants has been working closely with its investment advisor and
has grown its average investment portfolio $44.70 million in that time
period.  At the same time Merchants has increased its average short-term
borrowing position $29.39 million and ended the quarter with $65 million in
short-term borrowings with the Federal Home Loan Bank of Boston ("FHLB").
Merchants realized gains on sales of securities over the course of the
quarter as several securities with shorter maturities were sold and the
proceeds reinvested into medium term bonds. Merchants continues to maintain
an average duration in the portfolio of 2.5 years, which will help to limit
exposure to rising rates. Merchants expects that the pace of growth in both
the loan and investment portfolios will decrease over the remainder of the
year, and excess deposits will be used to pay off a portion of Merchants'
short-term borrowings.


<PAGE>  10


In the ordinary course of business, Merchants makes commitments for possible
future extensions of credit. On September 30, 2003, Merchants was obligated
to fund $6.5 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 noninterest expenses in the consolidated statements of
operations.

Total income tax expense was $3.29 million for the first nine months of
2003, compared to $3.66 million for the same period in 2002. Merchants
recognized favorable tax benefits of $990 thousand for the first nine months
of 2003, compared to $1.02 million 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 nine 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 September 30, 2003; an
overnight line of credit with the FHLB of $15 million; an estimated
additional borrowing capacity with the FHLB of $90 million; and the ability
to borrow through the use of repurchase agreements, collateralized by
Merchants' investments, with certain approved counterparties. Merchants'
investment portfolio, which is managed by Merchants' Asset Liability
Committee ("ALCO"), totaled $322.96 million at September 30, 2003, and is a
strong source of cash flow for Merchants.

As of September 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 September 30,
2003 and 2002:

<TABLE>
<CAPTION>

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


                            <c>        <c>        <c>        <c>
As of September 30, 2003
Merchants Bancshares, Inc.:
  Tier 1 Risk-Based Capital    $81,848    12.55%     $26,080    4.00%
  Total Risk-Based Capital      89,733    13.76%      52,160    8.00%
  Tier 1 Leverage Capital       81,848     8.77%      37,321    4.00%

As of September 30, 2002
Merchants Bancshares, Inc.:
  Tier 1 Risk-Based Capital    $78,404    15.49%     $20,251    4.00%
  Total Risk-Based Capital      84,761    16.74%      40,502    8.00%
  Tier 1 Leverage Capital       78,404     9.49%      33,047    4.00%
</TABLE>


<PAGE>  11


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

<TABLE>
<CAPTION>

(In thousands, fully taxable equivalent)                                    Three Months Ended
                                                    ------------------------------------------------------------------
                                                           September 30, 2003                 September 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)                                       $547,414    $ 8,183      5.93%     $480,743    $ 8,512      7.02%
Taxable Investments                                  326,012      3,194      3.89%      278,404      3,557      5.07%
Federal Funds Sold and Securities Purchased
 Under Agreements to Resell                            1,008          4      1.57%       17,815         76      1.69%
                                                    -----------------------------      -----------------------------
      Total Interest Earning Assets                  874,434    $11,381      5.16%      776,962    $12,145      6.20%
                                                    -----------------------------      -----------------------------
Noninterest Earning Assets                            59,911                             50,900
                                                    --------                           --------
      Total Assets                                  $934,345                           $827,862
                                                    ========                           ========

INTEREST BEARING LIABILITIES
Interest Bearing Deposits:
  Savings, NOW and Money Market Deposits            $495,705    $   621      0.50%     $467,073    $ 1,376      1.17%
  Time Deposits                                      200,642      1,138      2.25%      174,540      1,323      3.01%
                                                    -----------------------------      -----------------------------
      Total Savings and Time Deposits                696,347      1,759      1.00%      641,613      2,699      1.67%
                                                    -----------------------------      -----------------------------

Federal Funds Purchased and Securities Sold
 Under Agreements to Repurchase                           54         --      1.33%           --         --        --
Short-term Borrowings                                 30,518         84      1.09%        1,794          6      1.33%
Long-term Debt                                         6,029         47      3.09%        2,388         20      3.32%
                                                    -----------------------------      -----------------------------
      Total Interest Bearing Liabilities             732,948      1,890      1.02%      645,795      2,725      1.67%
                                                    -----------------------------      -----------------------------
Noninterest Bearing Deposits                         103,853                             94,354
Other Liabilities                                     13,433                              5,759
Sotckholders' Equity                                  84,111                             81,954
                                                    --------                           --------
      Total Liabilities and Stockholders' Equity    $934,345                           $827,862
                                                    ========                           ========
Net Earning Assets                                  $141,486                           $131,167
                                                    ========                           ========

Net Interest Income (Fully Taxable Equivalent)                  $ 9,491                            $ 9,420
                                                                =======                            =======

Net Interest Rate Spread                                                     4.14%                              4.53%
                                                                             ====                               ====

Net Interest Margin                                                          4.31%                              4.81%
                                                                             ====                               ====

<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>  12


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

<TABLE>
<CAPTION>

<CAPTION>

(In thousands, fully taxable equivalent)                                    Nine Months Ended
                                                    ------------------------------------------------------------------
                                                           September 30, 2003                 September 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)                                       $526,653    $24,528      6.23%     $475,173    $25,545      7.19%
Taxable Investments                                  293,650      9,450      4.30%      260,027     10,403      5.35%
Federal Funds Sold and Securities Purchased
 Under Agreements to Resell                           10,823        112      1.38%       25,695        321      1.67%
                                                    -----------------------------      -----------------------------
      Total Interest Earning Assets                  831,126    $34,090      5.48%      760,895    $36,269      6.37%
                                                    -----------------------------      -----------------------------
Noninterest Earning Assets                            53,922                             50,734
                                                    --------                           --------
      Total Assets                                  $885,048                           $811,629
                                                    ========                           ========

INTEREST BEARING LIABILITIES
Interest Bearing Deposits:
  Savings, NOW and Money Market Deposits            $481,496    $ 2,307      0.64%     $457,021    $ 4,225      1.24%
  Time Deposits                                      196,183      3,555      2.42%      173,348      4,319      3.33%
                                                    -----------------------------      -----------------------------
      Total Savings and Time Deposits                677,679      5,862      1.16%      630,369      8,544      1.81%
                                                    -----------------------------      -----------------------------
Federal Funds Purchased and Securities Sold
 Under Agreements to Repurchase                           29         --      1.41%           --         --        --
Short-term Borrowings                                 11,185         97      1.16%        1,858         20      1.44%
Long-term Debt                                         5,182        119      3.07%        2,411         59      3.27%
                                                    -----------------------------      -----------------------------
      Total Interest Bearing Liabilities             694,075      6,078      1.17%      634,638      8,623      1.82%
                                                    -----------------------------      -----------------------------
Noninterest Bearing Deposits                          96,660                             91,836
Other Liabilities                                     10,382                              6,387
Sotckholders' Equity                                  83,931                             78,768
                                                    --------                           --------
      Total Liabilities and Stockholders' Equity    $885,048                           $811,629
                                                    ========                           ========

Net Earning Assets                                  $137,051                           $126,257
                                                    ========                           ========

Net Interest Income (Fully Taxable Equivalent)                  $28,012                            $27,646
                                                                =======                            =======

Net Interest Rate Spread                                                     4.31%                              4.55%
                                                                             ====                               ====

Net Interest Margin                                                          4.51%                              4.86%
                                                                             ====                               ====

<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>  13


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.

The following table summarizes Merchants' non-performing assets through the
dates indicated:

<TABLE>
<CAPTION>

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


                                           <c>                <c>                <c>                  <c>
Nonaccrual Loans                              $2,862             $4,085             $1,925               $2,009
Loans Past Due 90 Days or More
 and Still Accruing                               16                 32                 46                   81
Restructured Loans                                87                201              1,728                1,796
---------------------------------------------------------------------------------------------------------------
Total Non-performing Loans ("NPL")             2,965              4,318              3,699                3,886
Other Real Estate Owned ("OREO")                  --                 --                 57                   46
---------------------------------------------------------------------------------------------------------------
Total Non-performing Assets ("NPA")           $2,965             $4,318             $3,756               $3,932
===============================================================================================================
</TABLE>

The level of non-performing assets fell during the third quarter after
increasing for over a year due to the weak local and national economy.  The
decrease in non-performing assets can largely be attributed to a sale of
sub-performing and non-performing loans that closed in July. Gross proceeds
from the sale were $2.10 million; net of amounts due to the SBA Merchants
received proceeds of $1.31 million and recognized a small net recovery.
The sale reduced non-performing loans by approximately $850 thousand. This,
coupled with the fact that there were no significant additions to NPA
during the quarter, generated the overall decrease. Total NPL decreased
$1.35 million from June 30, 2003 to September 30, 2003. During the quarter
restructured loans dropped $114 thousand and there was a $1.22 million
decrease in nonaccrual loans. The previously described loan sale, a $100
thousand charge to the Allowance, and regularly scheduled loan payments of
$235 thousand all contributed to the decrease. Only $42 thousand in loans
were added to nonaccrual during the quarter. Management believes the
reduced level of NPL is reflective of the overall quality of the loan
portfolio. As of September 30, 2003, approximately $919 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 $840 thousand of the remaining nonaccrual loans.

Loans past due 90 days or more and still accruing interest decreased $16
thousand during the third quarter of 2003. Merchants did not have any OREO
as of September 30, 2003.

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

<TABLE>
<CAPTION>

(In thousands)                       September 30, 2003    June 30, 2003    December 31, 2002    September 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                       (706)              (590)              (311)                  (13)
  Real Estate - Mortgage                     (120)               (82)                (7)                 (107)
  Installment and Other Consumer              (17)                (9)                --                   (16)
-------------------------------------------------------------------------------------------------------------
      Total Loans Charged Off                (843)              (681)              (318)                 (136)
-------------------------------------------------------------------------------------------------------------
Recoveries:
  Commercial, Lease Financing
   and all Other Loans                        152                 20                755                   311
  Real Estate - Mortgage                      130                 49                187                   378
  Installment and Other Consumer                1                  2                  3                    15
-------------------------------------------------------------------------------------------------------------
      Total Recoveries                        283                 71                945                   704
-------------------------------------------------------------------------------------------------------------
Net Loan Recoveries (Charge-offs)            (560)              (610)               627                   568
-------------------------------------------------------------------------------------------------------------
Provision for Loan Losses                      --                 --               (945)                 (704)
-------------------------------------------------------------------------------------------------------------
Allowance End of Period                    $7,937             $7,887             $8,497                $8,679
=============================================================================================================
</TABLE>

Charge-offs for the third quarter of 2003 were $162 thousand and were $843
thousand year-to-date. Recoveries for the third quarter of 2003 were $212
thousand and were $283 thousand year-to-date.


<PAGE>  14


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 September 30, 2003, totaled $2.6 million; of this total $2.5 million are
included as non-performing assets in the table above. This compares with
impaired loans totaling $4.0 million at June 30, with the decline largely
attributable to the previously described loan sale.

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
September 30, 2003.

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

<TABLE>
<CAPTION>

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


                                        <c>                <c>                <c>                   <c>
NPL to Total Loans                         0.52%              0.80%              0.75%                 0.79%
NPA to Total Loans plus OREO               0.52%              0.80%              0.76%                 0.80%
Allowance for Loan Losses to
 Total Loans                               1.41%              1.46%              1.71%                 1.77%
Allowance for Loan Losses to NPL            268%               186%               230%                  223%
Allowance for Loan Losses to NPA            268%               186%               226%                  221%
</TABLE>

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

General
Management and Merchants' 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; it also serves 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 by Merchants' Board of
Directors. The Board of Directors delegates responsibility for carrying out
the asset and liability


<PAGE>  15


management policies to the 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 increased to $43.9 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 also invested $31.95 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.

Included in the securities available for sale portfolio is an asset backed
security issued in connection with a securitization of medical equipment
leases.  The servicer for the payments on these leases recently declared
bankruptcy. The cost basis of the bond is $4.83 million and the market value
is $4.02 million, resulting in an unrealized loss of $815 thousand as of
September 30, 2003. The bond owned by Merchants is in the first, and
accordingly the most secure, tranche of the securitization.  The bonds
started trading below par in August 2003 and are currently rated A1 by
Moody's. Merchants has evaluated this investment for other than temporary
impairment under GAAP and has determined that a write-down of the investment
is not currently necessary. Merchants and its investment advisor are closely
monitoring the situation and believe that the risk of principal loss on
these bonds is small based on current circumstances.

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 August 31, 2003. This review shows
that Merchants' one year interest rate sensitivity gap has shifted from an
almost neutral position at the end of the year to a $48 million liability-
sensitive position. As Merchants' has continued to fully invest its cash
position, and strategically increase and reposition its investment portfolio
using short-term borrowings, the leverage on the balance sheet has caused a
shift to a liability sensitive position. Merchants anticipates that much of
the short term borrowing currently on the balance sheet will be paid off by
deposit growth in the next nine to twelve months.

At the August 31 review, the consultant modified the rate shock model and
modeled a 100 basis point decrease as well as a 200 basis point increase,
because of the current rate environment. 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            (0.10)%
                Down 100 basis points          (1.91%)
                --------------------------------------------
</TABLE>

The analysis currently shows some margin compression in both the rising and
falling rate scenarios; if rates fall further it will be difficult for
Merchants to lower deposit rates enough to compensate for anticipated
decreases in loan rates.  In a rising rate scenario, anticipated increases
in deposit rates outstrip increases in loan and investment rates during the
first twelve months.  This trend slows and eventually reverses in year two.
The degree to which this exposure materializes will depend, in part, on
Merchants' ability to manage deposit rates as interest rates rise or fall.

The analysis discussed above includes no growth assumptions. 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. The growth model showed that margin dollars increase in
a rising rate environment as Merchants continues to grow its balance sheet.
The flattening yield curve scenario resulted in additional margin
compression. 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


<PAGE>  16


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
The Board of Directors reviews and approves Merchants' loan policy on an
annual basis. Among other things, the loan policy establishes restrictions
regarding the types of loans that may be granted, and the distribution of
loan types within Merchants' portfolio. Merchants' Board of Directors grants
each loan officer the authority to originate loans on behalf of Merchants,
subject to certain limitations. These authorized lending limits are reviewed
at least annually and are based upon the lender's knowledge and experience.
Loan requests that exceed a lender's authority require the signature of
Merchants' credit division manager, senior loan officer, and/or president.
All extensions of credit of $2.5 million or greater to any one borrower or
related party interest, are reviewed and approved by the Loan Committee of
Merchants' Board of Directors. 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

None

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 July 18,
  2003, with respect to a press release it issued announcing its results for
  the quarter-ended June 30, 2003
  Merchants Bancshares, Inc. filed a Current Report on Form 8-KA on August
  8, 2003, related to a correction to the July 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

                                       November 12, 2003
                                       -----------------
                                       Date


<PAGE>  19