SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C. 20549

                                  FORM 10-Q

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

                     FOR THE QUARTER ENDED JUNE 30, 1999
                       COMMISSION FILE NUMBER 0-11595

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

                  164 College Street, Burlington, VT  05401

                         Telephone:  (802) 658-3400

Indicate by check mark whether the registrant has filed all reports
required to be filed by section 13 or 15(D) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and has been subject to such
filing requirement for the past 90 days.

                            YES  [X]      NO  [ ]

      4,377,633 Shares Common Stock $.01 Par Outstanding June 30, 1999


                          MERCHANTS BANCSHARES, INC.

                             INDEX TO FORM 10-Q

PART I

  ITEM 1  FINANCIAL STATEMENTS

    Consolidated Balance Sheets
     June 30, 1999 and December 31, 1998                                1

    Consolidated Statements of Operations
     For the three months ended June 30, 1999 and 1998 and
     the six months ended June 30, 1999 and 1998                        2

    Consolidated Statements of Comprehensive Income
     For the three months ended June 30, 1999 and 1998 and
     the six months ended June 30, 1999 and 1998                        3

    Consolidated Statement of Changes in Stockholders' Equity
     For the six months ended June 30, 1999 and 1998 and
     the Year ended December 31, 1998                                   4

    Consolidated Statements of Cash Flows
     For the six months ended June 30, 1999 and 1998                    5

    Footnotes to Financial Statements as of June 30, 1999             6-7

  ITEM 2  Management's Discussion and Analysis of Financial
          Condition and Results of Operations                        8-15

PART II - OTHER INFORMATION

  ITEM 1  Legal Proceedings                                         16-17

  ITEM 2  Changes in Securities                                      NONE

  ITEM 3  Defaults upon Senior Securities                            NONE

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

  ITEM 5  Other Information                                          NONE

  ITEM 6  Exhibits and Reports on Form 8-K                           NONE

SIGNATURES                                                             18


                          Merchants Bancshares, Inc.
                         Consolidated Balance Sheets
                                  Unaudited

<TABLE>
<CAPTION>
                                                     June 30,    December 31,
(In thousands except share and per share data)         1999          1998
-----------------------------------------------------------------------------

<S>                                                  <C>           <C>
ASSETS
  Cash and Due from Banks                            $ 20,964      $ 30,528
  Investments:
    Debt Securities Held for Sale                      82,313        72,205
    Debt Securities Held to Maturity                   94,032       103,851
     (Fair Value of $93,184 and $108,198)
    Trading Securities                                  1,047         1,095
---------------------------------------------------------------------------
      Total Investments                               177,392       177,151
---------------------------------------------------------------------------
  Loans                                               421,631       405,492
  Reserve for possible loan losses                     11,365        11,300
---------------------------------------------------------------------------
      Net Loans                                       410,266       394,192
---------------------------------------------------------------------------
  Federal Home Loan Bank Stock                          2,951         2,482
  Bank Premises and Equipment, Net                     12,654        13,185
  Investment in Real Estate Limited Partnerships        3,021         2,860
  Other Real Estate Owned                                 198           470
  Other Assets                                         14,848        14,005
---------------------------------------------------------------------------
      Total Assets                                   $642,294      $634,873
===========================================================================

LIABILITIES
  Deposits:
    Demand                                           $ 71,172      $ 85,998
    Savings, NOW and Money Market Accounts            337,292       309,897
    Time Deposits $100 thousand and Greater            23,948        22,746
    Other Time                                        125,392       131,821
---------------------------------------------------------------------------
      Total Deposits                                  557,804       550,462
---------------------------------------------------------------------------
    Demand Note Due U.S. Treasury                       4,000           283
    Other Short-Term Borrowings                         5,500         9,000
    Other Liabilities                                   6,020         7,890
    Long-Term Debt                                      6,664         6,409
---------------------------------------------------------------------------
      Total Liabilities                               579,988       574,044
---------------------------------------------------------------------------
Commitments and Contingencies (Note 4)

STOCKHOLDERS' EQUITY
  Preferred Stock Class A Non-Voting
   Authorized - 200,000, Outstanding 0                     --            --
  Preferred Stock Class B Voting
   Authorized - 1,500,000, Outstanding 0                   --            --
  Common Stock, $.01 Par Value                             44            44
    Shares Authorized                    7,500,000
           Outstanding  Current Period   4,238,259
                        Prior Period     4,259,278
  Treasury Stock (At Cost)                             (3,675)       (3,133)
                        Current Period     196,361
                        Prior Period       175,342
  Capital in Excess of Par Value                       33,079        33,073
  Retained Earnings                                    31,640        28,308
  Deferred Compensation Arrangements                    2,252         2,166
  Unrealized Gains on Securities Available for
   Sale, Net                                           (1,034)          371
---------------------------------------------------------------------------
      Total Stockholders' Equity                       62,306        60,829
---------------------------------------------------------------------------
      Total Liabilities and Stockholders' Equity     $642,294      $634,873
===========================================================================

Book Value Per Common Share                          $  14.23      $  13.84
===========================================================================
</TABLE>

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


                         Merchants Bancshares, Inc.
                    Consolidated Statements of Operations
                                  Unaudited

<TABLE>
<CAPTION>
                                                      Quarter Ended June 30,    Six months ended June 30,
(In thousands except per share data)                    1999         1998           1999         1998
---------------------------------------------------------------------------------------------------------

<S>                                                   <C>          <C>            <C>          <C>
INTEREST AND DIVIDEND INCOME
  Interest and Fees on Loans                          $ 9,006      $ 9,376        $17,955      $18,619
  Interest and Dividends on Investments
    U.S. Treasury and Agency Obligations                2,590        2,698          5,287        5,285
    Other                                                 323           80            543          143
------------------------------------------------------------------------------------------------------
      Total Interest Income                            11,919       12,154         23,785       24,047
------------------------------------------------------------------------------------------------------

INTEREST EXPENSE
  Savings, NOW and Money Market Accounts                2,435        2,235          4,758        4,421
  Time Deposits $100 Thousand and Greater                 323          395            662          781
  Other Time Deposits                                   1,522        1,770          3,100        3,538
  Other Borrowed Funds                                    132          149            294          245
  Debt                                                    117          114            233          228
------------------------------------------------------------------------------------------------------
      Total Interest Expense                            4,529        4,663          9,047        9,213
------------------------------------------------------------------------------------------------------
  Net Interest Income                                   7,390        7,491         14,738       14,834
  Provision for Possible Loan Losses                       --         (119)            --         (119)
------------------------------------------------------------------------------------------------------
  Net Interest Income after Provision
   for Loan Losses                                      7,390        7,610         14,738       14,953
------------------------------------------------------------------------------------------------------

NONINTEREST INCOME
  Trust Company Income                                    470          492            913          919
  Service Charges on Deposits                             742          724          1,397        1,423
  Merchant Discount Fees                                  336          322            676          665
  Gain (Loss) on Sale of Investments, Net
   Settlement proceeds                                     --           --          1,326          120
  Other                                                   304          438            525          606
------------------------------------------------------------------------------------------------------
      Total Noninterest Income                          1,852        1,976          4,837        3,733
------------------------------------------------------------------------------------------------------

NONINTEREST EXPENSES
  Salaries and Wages                                    2,317        2,258          4,677        4,458
  Employee Benefits                                       626          538          1,259        1,107
  Occupancy Expense, Net                                  509          508          1,241        1,040
  Equipment Expense                                       557          635          1,122        1,259
  Legal and Professional Fees                             355          757            992        1,303
  Marketing                                               396          300            574          443
  Equity in Losses of Real Estate
   Limited Partnerships                                   125           75            254          169
  Expenses - Other Real Estate Owned                       60            7            147          124
  Loss on Disposition of Fixed Assets                      50           28            102           55
  Other                                                 1,381        1,383          2,749        2,626
------------------------------------------------------------------------------------------------------
      Total Noninterest Expenses                        6,376        6,489         13,117       12,584
------------------------------------------------------------------------------------------------------
Income Before Income Taxes                              2,866        3,097          6,458        6,102
  Provision for Income Taxes                              601          789          1,470        1,548
------------------------------------------------------------------------------------------------------

NET INCOME                                            $ 2,265      $ 2,308        $ 4,988      $ 4,554
======================================================================================================

Basic Earnings Per Common Share                       $  0.52      $  0.52        $  1.14      $  1.03
Diluted Earnings Per Common Share                     $  0.52      $  0.52        $  1.14      $  1.02
</TABLE>

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


                         Merchants Bancshares, Inc.
               Consolidated Statements of Comprehensive Income
                                  Unaudited

<TABLE>
<CAPTION>
                                                    Three Months Ended        Six Months Ended
                                                         June 30,                  June 30,
(In thousands)                                      1999         1998         1999         1998
------------------------------------------------------------------------------------------------

<S>                                               <C>          <C>          <C>          <C>
Net Income as Reported                            $ 2,265      $ 2,308      $ 4,988      $ 4,554
Change in Net Unrealized Appreciation
 of Securities, Net of Tax                         (1,162)         (82)      (1,403)        (100)
------------------------------------------------------------------------------------------------
Comprehensive Income Before Transfers
 From Available for Sale to
 Held to Maturity                                   1,103        2,226        3,585        4,454
Impact of transfer from Available for Sale
 to Held to Maturity                                    1            4           (2)          (1)
------------------------------------------------------------------------------------------------
Comprehensive Income                              $ 1,104      $ 2,230      $ 3,583      $ 4,453
================================================================================================
</TABLE>

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


                         Merchants Bancshares, Inc.
         Consolidated Statements of Changes in Stockholders' Equity
                  For the Year Ended December 31, 1998 and
                 the six months ended June 30, 1999 and 1998
                                  Unaudited

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

<S>                              <C>      <C>         <C>         <C>          <C>              <C>          <C>
Balance, December 31, 1997       $44      $33,223     $21,537     $(2,220)     $  (10)          $    362     $52,936
  Net Income                      --           --       4,554          --          --                 --       4,554
  Purchase of Treasury Stock      --           --          --        (294)         --                 --        (294)
  Sale of Treasury Stock          --          (61)         --         189          --                 --         128
  Issuance of Stock under
   Employee Stock Option Plans    --           (9)         --         225          --                 --         216
  Dividends Paid                  --           --      (1,440)         --          --                 --      (1,440)
  Unearned Compensation --
   Restricted Stock Awards        --           --          --          --          (9)                --          (9)
  Change in Net Unrealized
   Appreciation (Depreciation)
   of Securities Available for
   Sale, Net of Tax               --           --          --          --          --               (100)       (100)
  Change in Net Unrealized
   Appreciation of Securities
   Transferred to the Held to
   Maturity Portfolio, Net
   of Tax                         --           --          --          --          --                 (1)         (1)
-------------------------------------------------------------------------------------------------------------------

Balance June 30, 1998             44       33,153      24,651      (2,100)        (19)               261      55,990
  Net Income                      --          --        5,268          --          --                 --       5,268
  Purchase of Treasury Stock      --          --           --      (1,126)         --                 --      (1,126)
  Sales of Treasury Stock         --          61           --        (189)         --                 --        (128)
  Issuance of Stock under
   Employee Stock Option Plans    --        (201)          --         149          --                 --         (52)
  Tax Benefit Related to Stock
   Option Exercises               --          60           --          --          --                 --          60
  Issuance of Stock under
   Deferred Compensation
   Arrangements                   --          --           --         133          --                 --         133
  Dividends Paid                  --          --       (1,611)         --          --                 --      (1,611)
  Unearned Compensation --
   Restricted Stock Awards        --          --           --          --         (11)                --         (11)
  Deferred Compensation           --          --           --          --       2,196                 --       2,196
  Change in Net Unrealized
   Appreciation (Depreciation)
   of Securities Available for
   Sale, Net of Tax               --          --           --          --          --                111         111
  Change in Net Unrealized
   Appreciation of Securities
   Transferred to the Held to
   Maturity Portfolio, Net
   of Tax                         --          --           --          --          --                 (1)         (1)
-------------------------------------------------------------------------------------------------------------------

Balance, December 31, 1998        44      33,073       28,308      (3,133)      2,166                371      60,829
  Net Income                      --          --        4,988          --          --                 --       4,988
  Purchase of Treasury Stock      --          --           --        (638)         --                 --        (638)
  Sales of Treasury Stock         --          --           --          --          --                 --          --
  Issuance of Stock under
   Employee Stock Option Plans    --          --           --          --          --                 --          --
  Tax Benefit Related to Stock
   Option Exercises               --          --           --          --          --                 --          --
  Sale of Treasury Stock          --          --           --          65          --                 --          65
  Issuance of Stock under
   Deferred Compensation
   Arrangements                   --          --           --          31         (31)                --          --
  Dividends Paid                  --          --       (1,656)         --          --                 --      (1,656)
  Unearned Compensation --
   Restricted Stock Awards        --           6           --          --         117                 --         123
  Change in Net Unrealized
   Appreciation (Depreciation)
   of Securities Available for
   Sale, Net of Tax               --          --           --          --          --             (1,403)     (1,403)
  Change in Net Unrealized
   Appreciation of Securities
   Transferred to the Held to
   Maturity Portfolio, Net
   of Tax                         --          --           --          --          --                 (2)         (2)
-------------------------------------------------------------------------------------------------------------------

Balance, June 30, 1999           $44     $33,079      $31,640     $(3,675)     $2,252            $(1,034)    $62,306
</TABLE>

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


                         Merchants Bancshares, Inc.
                    Consolidated Statement of Cash Flows
                                  Unaudited

<TABLE>
<CAPTION>
                                                        For the six months ended June 30,
(In thousands)                                                1999            1998
-----------------------------------------------------------------------------------------

<S>                                                         <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income                                                  $  4,988        $  4,554
Adjustments to Reconcile Net Income to Net Cash
 Provided by Operating Activities:
  Provision for Possible Loan Losses                              --            (119)
  Provision for Possible Losses on Other Real
   Estate Owned                                                   --               7
  Provision for Depreciation and Amortization                  1,248           1,288
  Net Gains on Sales of Loans and Leases                          --            (213)
  Net Losses on Sales of Premises and Equipment                  102              55
  Net Gains on Sales of Other Real Estate Owned                  (61)            (69)
  Equity in Losses of Real Estate Limited Partnerships           254             169
Changes in Assets and Liabilities:
  Increase in Interest Receivable                               (406)           (225)
  Decrease in Interest Payable                                  (420)           (160)
  Increase in Other Assets                                      (439)         (6,302)
  Decrease in Other Liabilities                               (1,449)         (1,400)
------------------------------------------------------------------------------------
      Net Cash Provided by (Used in) Operating Activities      3,817          (2,415)
------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from Sales of Investment Securities
   Available for Sale                                             --              --
  Proceeds from Maturities of Investment Securities           24,569          20,510
  Proceeds from Sales of Loans and Leases                         --          14,231
  Purchases of Federal Home Loan Bank Stock                     (468)           (186)
  Proceeds from Sales of Premises and Equipment                   --              --
  Proceeds from Sales of Other Real Estate Owned                 491             657
  Purchases of Available for Sale Investment Securities      (19,266)        (27,816)
  Purchases of Held to Maturity Investment Securities         (8,500)         (5,232)
  Principal Repayments Less than Loan Originations           (14,671)         (3,209)
  Investments in Real Estate Limited Partnerships               (416)           (192)
  Purchases of Premises and Equipment                           (478)           (342)
------------------------------------------------------------------------------------
      Net Cash Used in Investing Activities                  (18,739)         (1,579)
------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net Increase in Deposits                                     7,342          13,288
  Net Increase (Decrease) in Other Borrowed Funds                217          (4,000)
  Principal Payments on Debt                                      (3)             (3)
  Cash Dividends Paid                                         (1,656)         (1,440)
  Acquisition of Treasury Stock                                 (638)           (294)
  Proceeds From Sales of Treasury Stock                           65             128
  Issuance of stock under deferred compensation
   arrangements                                                   31              --
  Proceeds From Exercise of Employee Stock Options                --             216
------------------------------------------------------------------------------------
      Net Cash Provided by Financing Activities                5,358           7,895
------------------------------------------------------------------------------------

Increase (Decrease) in Cash and Cash Equivalents              (9,564)          3,901
Cash and Cash Equivalents Beginning of Year                   30,528          20,139
------------------------------------------------------------------------------------
Cash and Cash Equivalents End of Period                     $ 20,964        $ 24,040
====================================================================================

Total Interest Payments                                     $  9,467        $  4,823
Total Income Tax Payments                                      2,700           1,270
Transfer of Loans and Premises to Other Real Estate
 Owned                                                           140             381
</TABLE>

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


                         MERCHANTS BANCSHARES, INC.
                                JUNE 30, 1999

NOTES TO FINANCIAL STATEMENTS:
See the Form 10-K filed as of December 31, 1998 for additional information.

NOTE 1:  RECENT ACCOUNTING DEVELOPMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities". This statement
establishes standards for reporting and accounting for derivative
instruments ("derivatives") and hedging activities. The statement requires
that derivatives be reported as assets or liabilities in the Consolidated
Balance Sheets and that derivatives be reported at fair value. The
statement establishes criteria for accounting for changes in the fair value
of derivatives based on the intended use of the derivatives. The statement
is effective for all fiscal quarters of fiscal years beginning after June
15, 2000. Based on Merchants Bank's (the Bank's) current use of derivatives
Merchants Bancshares, Inc. (the Company) does not expect the adoption of
SFAS No. 133 to have a material impact on the Company's financial position
or results of operations.

NOTE 2:  EARNINGS PER SHARE

The following table presents a reconciliation of the calculations of basic
and diluted earnings per share for the quarter ended June 30, 1999:

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

<S>                                            <C>         <C>            <C>
Basic Earnings Per Share:
  Income Available to Common Shareholders      $2,265      4,378,149      $0.52
Diluted Earnings Per Share:
  Options issued to Executives                     --          6,011
  Income available to Common Shareholders
   Plus Assumed Conversions                    $2,265      4,384,160      $0.52
</TABLE>

Basic earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
quarter. The computation of diluted earnings per share for the quarter
ended June 30, 1999 excludes the effect of assuming the exercise of certain
outstanding stock options because the effect would be anti-dilutive. As of
June 30, 1999 there were 51,070 of such options outstanding with an
exercise price of $27.75 and 48,346 of such options outstanding with an
exercise price of $30.50.

NOTE 3:  STOCK REPURCHASE PROGRAM

On September 3, 1998 the Company announced that its Board of Directors
authorized the Company to repurchase up to $2.2 million of its own
securities, approximately 2% of outstanding shares at its then market
value, through September 4, 1999.  The stock buyback was authorized to take
place periodically, subject to prevailing market conditions. Purchases are
to be made on the open market and funded from available cash. As of August
11, 1999, the Company had repurchased 78,000 shares of its common stock at a
total cost of approximately $1.9 million.

NOTE 4:  COMMITMENTS AND CONTINGENCIES:

The Bank is a counterclaim defendant in a litigation entitled Pasquale and
Vatsala Vescio, Counterclaim Plaintiffs v. The Merchants Bank, Counterclaim
Defendant, now pending in the United States Bankruptcy Court for the
District of Vermont.

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

Among other things, the Vescios have alleged that the Bank or its
representatives violated supposed oral promises in connection with the
origination and funding of the financing, and have claimed that the Bank is
liable to them for damages based on the Bank's supposed "control" of the
project and its alleged breach of covenants of "good faith" which the
plaintiffs believe are to be implied from the loan documents. In addition,
the plaintiffs have contended that the Bank breached a duty of care they
believe it owed to them, and have claimed that the Bank should not have
exercised its contract rights when the loan went into default, but should
have worked out the default in a way that was more favorable to the
borrowers.  Trial concluded in United States Bankruptcy Court in November
1998. In June of 1999, before entry of any findings or a decision on the
merits, the trial judge recused himself from all cases involving the Bank.
He completed his term as bankruptcy judge on July 31, 1999. No successor
judge has been appointed. Two judges have temporarily been assigned to the
bankruptcy court pending a new appointment. The timing of a decision on the
merits of the case at the trial level cannot be predicted at this time.
Although it is not possible at this stage to predict the outcome of this
litigation, the Bank believes that it has meritorious defenses to the
plaintiffs' allegations. The Bank intends to vigorously defend itself
against these claims.

On March 25, 1999 the Merchants Trust Company (the Trust Company) received,
as trustee, a recovery of $4.8 million on account of settlement of a 1994
class action suit filed in the United States District Court for the
District of Minnesota. The Trust Company's claims, and the class action,
arose from investments made in 1994 and earlier in the so-called Piper
Jaffray Institutional Government Income Portfolio ("Piper Jaffray"). In the
first quarter of 1999, the company realized $1.3 million as a result of
that recovery. The balance of the $4.8 million is due to the Company's
insurance carrier, pursuant to an agreement made with the carrier in
December of 1994.

Lawyers representing the beneficiaries of five Trust Company accounts have
asserted that their clients (the "Named Customers") and others similarly
situated have not been fully reimbursed for damages allegedly suffered
because of certain investments made by the Trust Company during 1993 and
1994 in Piper Jaffray.  The Companies believe full reimbursement has been
provided and that the Trust Company has no further liability on account of
the Piper Jaffray investment.  On July 15, 1999 the Trust company filed an
action with the United States District Court for the District of Vermont
seeking a declaratory judgement that the Trust Company has no further
liability to the Named Customers

Merchants Bancshares, Inc. and certain of its subsidiaries have been named
as defendants in various other legal proceedings arising from their normal
business activities. Although the amount of any ultimate liability with
respect to such proceedings cannot be determined, in the opinion of
management, based upon the opinion of counsel on the outcome of such
proceedings, any such liability will not have a material effect on the
consolidated financial position of Merchants Bancshares, Inc. and its
subsidiaries.


                         MERCHANTS BANCSHARES, INC.

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

All adjustments necessary for a fair statement of the six months ended June
30, 1999 and 1998 have been included in the financial statements. The
information was prepared from the books of Merchants Bancshares, Inc. (the
Company) and its subsidiaries, Merchants Bank (the Bank) and Merchants
Properties, Inc., without audit.

In the ordinary course of business, Merchants Bank makes commitments for
possible future extensions of credit. On June 30, 1999, the Bank was
obligated to fund $7.8 million of standby letters of credit. No losses are
anticipated in connection with these commitments.

OVERVIEW

Merchants Bancshares, Inc. earned net income of $2.27 million, or diluted
earnings per share of $.52 for the quarter ended June 30, 1999, compared to
$2.31 million, or basic and diluted earnings per share of $.52 per share
for the same period a year earlier. The return on average assets and return
on average equity for the second quarter of 1999 were 1.41% and 14.63%,
respectively, compared to 1.54% and 16.72% for the second quarter of 1998.

Merchants Bank agreed to acquire two branches from Vermont National Bank,
pending regulatory approval, as part of the branch divestiture resulting
from the merger of Chittenden Bank and Vermont National Bank.  Merchants
Bank plans a fourth quarter 1999 integration of these branches and began
incurring costs related to the conversion and integration of the branches
during the second quarter of 1999.  These costs totaled $80 thousand for
the quarter.

The Bank has been working for the past two years on alternative delivery
options for its core Retail products. It recently signed a Master Marketing
Agreement with a group of insurance companies based in Middlebury, Vermont
that market their products under the name Co-operative Insurance Companies
(The "Co-op"). The Co-op's agents will sell the Bank's products and will be
paid a fee based on the specific product sold. Initially the program will
be limited to the Bank's mortgage products, but it is anticipated among the
parties that the deposit products of the Bank will be introduced to the
agent network, pending regulatory approval.

RESULTS OF OPERATIONS

Net Interest Income: The Bank continues to experience margin compression as
a result of the continuing flat yield curve environment. Many of the bank's
funding sources are tied to short-term rates, while the assets are tied to
longer term rates. The Bank's average interest earning assets were $39
million higher for the first six months of 1999 than they were for the
first six months of 1998.  At the same time, the Bank's interest bearing
liabilities were $36 million higher than the same period in 1998. The
average spread on those assets has decreased by 29 basis points period over
period. During the first six months of 1999 the Bank's net interest margin
decreased by 10 basis points and has decreased 39 basis points compared to
the first six months of 1998. The Bank's average cost of funds has
decreased by 37 basis points for the first six months of 1999 compared to
the same period in 1998; while the average yield on interest earning assets
has decreased 66 basis points.  This decrease in yield on interest earning
assets is attributable to both the continuing flat yield curve and is also
caused by the Bank's ongoing efforts to de-emphasize higher risk commercial
real estate loans in favor of lower risk, and generally lower yielding,
residential real estate.  The schedule on pages 14 and 15 shows the yield
analysis for the periods reported.

Provision for Loan Losses: The improved asset quality achieved over the
last few years will be maintained as the portfolio grows by adhering to the
strong underwriting standards that have been established.  Management's
analysis of the reserve adequacy concluded that a provision for possible
loan losses was not necessary during the first six months of 1999.  See the
discussion of Non-Performing Assets on page 12 for more information on the
loan loss reserve.

Non-interest income: Excluding certain litigation settlement proceeds of
$1.3 million received in 1999 and $120 thousand received in 1998; non-
interest income has decreased slightly for the first six months of 1999
compared to 1998.   For more information on the settlement proceeds see
Part II, Item 1, Legal Proceedings. Other noninterest income decreased by
$81 thousand (13.3%) for the first six months of 1999 compared to 1998, and
decreased $134 thousand for the second quarter of 1999 compared to the
second quarter of 1998. There are several factors contributing to these
changes.  The Bank sold loans totaling $13 million on June 30, 1998, and
recognized a gain of $213 thousand on that sale; there have been no gains
on loan sales during 1999. This decrease in revenue was offset by increased
ATM fees and debit card fee income.  The Bank implemented an ATM surcharge
for non-Bank customers during the fourth quarter of 1998.  ATM and debit
card fees were $130 thousand higher for the first six months of 1999
compared to 1998, and were $73 thousand higher for the second quarter of
1999 compared to the second quarter of 1998.  The Bank's total deposit
service charge revenue is $26 thousand (2%) lower for the first six months
of 1999 compared to the first six months of 1998. The decrease in service
charge revenue is due primarily to the success of the Bank's FreedomLYNX(r)
checking account product, an account that generally charges no fees.
Monthly service charges have decreased by $103 thousand for the first six
months of 1999.  The decrease in monthly service charge revenue has been
largely offset by an increase in the Bank's overdraft charges, a component
of Service Charges on Deposits.  The increase in the overdraft charges took
effect May 1, 1999; net overdraft revenue for the first six months of 1999
was $89 thousand higher than the first six months of 1998.

Non-interest expenses: Total non-interest expenses for the six months ended
June 30, 1999 have increased $533 thousand (4.2%). Marketing expenses were
$96 thousand higher during the second quarter of 1999 compared to the same
period in 1998, and were $131 thousand higher for the first six months of
1999 compared to the same period in 1998.  The Bank launched two major
marketing campaigns during the first half of the year, celebrating its
150th birthday and promoting its "Free Checking for Life" initiative.
Through September 30, 1999 the Bank will drop all electronic requirements
for its FreedomLYNX(r) account and offer the account free for life. The
"Free Checking for Life" campaign has helped to more than double
FreedomLYNX(r) sales activity.  These sales efforts have served to fuel the
continued strong deposit growth the Bank has experienced this year (see
Balance Sheet analysis).

Salaries, wages and employee benefits have increased by $147 thousand
(5.3%) for the second quarter of 1999 compared to the second quarter of
1998; and $219 thousand (4.9%) for the first six months of 1999 compared to
the first six months of 1998.  The Bank has authorized three new positions
during the last year, all of whom are in the sales departments. This
additional staff will support the Bank's sales efforts and will help to
fuel continued balance sheet growth. Additionally, the Bank has seen
incremental increases in salary costs related to Year 2000 testing and
preparation.  Occupancy expenses were flat for the second quarter of 1999
compared to the second quarter of 1998, and were $201 thousand higher
(19.3%) for the first six months of 1999 compared to the same period in
1998.  This increase is due primarily to a one-time charge taken as a
result of the Bank's vacating a property under lease.  Legal and
professional fees have decreased $402 thousand (53.1%) quarter over quarter
and $311 thousand (23.9%) for the first six months of 1999 compared to the
first six months of 1998.  The decrease for the quarter is attributable to
a $60 thousand recovery of legal expenses from our insurance company, as
well as the timing of expenses incurred by the Bank as it defends itself in
certain litigation. For more information on this litigation see Part II,
Item 1, Legal Proceedings.

BALANCE SHEET ANALYSIS

Average deposits increased $14.6 million during the first six months of
1999, and are $40.3 million higher than one year ago. The Bank's continued
focused sales efforts have fueled this growth. The sales program, LYNX
Banking, has as its foundation fewer products that have potential lifetime
appeal to the Bank's customers. The Bank's FreedomLYNX(r) checking account
has no minimum balance requirements, pays interest on balances over a
minimum amount, and generally charges no fees. Due to the efforts of our
sales staff more than 5,600 new FreedomLYNX(r) accounts were opened during
the first six months of the year and total balances at June 30, 1999 were
$31 million.  The cost of funds for this product is approximately 1.38%.
The Bank's MoneyLYNX(tm) and CommerceLYNX(tm) Money Market accounts have also
been a great success.  These products, although just a year old, had $101
million in balances at quarter end. Money market account balances overall
have grown $32 million over the course of the first six months of the year
at a cost of funds of approximately 4.07%.

Total loans have increased $16.1 million (4.0%) during the second quarter.
The Bank continued to experience growth in its streamlined portfolio
mortgage product, RealLYNX(tm), during 1999. Balances grew $11.1 million
(10.4%) during the first six months of the year. The Bank is re-focusing
its efforts on small business development, the results can be seen in the
$5.2 million (8.1%) growth in the commercial loan portfolio. At the same
time the Bank continues to de-emphasize its commercial real estate
portfolio, which has increased slightly over $1 million during the first
six months of 1999. Installment loans and Homelines decreased $844 thousand
during the year, a reflection of the current highly competitive environment
for these types of credit.

The Bank has taken steps to protect its variable rate funding sources. The
Bank has entered into three-year interest rate cap contracts to mitigate
the effects on net interest income in the event interest rates on variable
rate deposits increase.  The aggregate notional amount of these contracts
is $50 million. The Bank has also entered into three-year interest rate
floors to mitigate the effect of net interest income in the event interest
rates on floating rate loans decline. The aggregate notional amount of
these contracts is $30 million.  The interest rate floors are currently in
the money and the Bank has recorded income of $41 thousand on those floors
year to date.

YEAR 2000

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

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

Through the Committee, the Company has also taken steps to promote
awareness of the Year 2000 issue throughout its entire organization. In
addition, the Company has sought to raise the awareness of its vendors,
service providers and larger borrowing customers as to the Year 2000 issue
in light of the critical role these entities play in the operations of the
Company. The Committee has contacted each of these entities and requested a
Year 2000 plan and testing information. The Company has received responses
from 100% of its vendors and service providers. The majority (94%) of the
Company's significant borrowers have also responded. The Committee intends
to follow-up with these customers throughout 1999 and into the Year 2000.

Assessment is the process of identifying all mission-critical applications
that could be adversely affected by the date change. The Company's
assessment phase is substantially complete. Throughout its history,
independent of Year 2000 issues, the Company has sought to purchase its
critical core hardware and software from vendors who it perceives as having
strong reputations as leading financial industry service providers. The
Company has received and installed Year 2000 compliant software upgrades
from all mission critical vendors. Substantial progress has been made with
respect to the fourth phase of the Company's Year 2000 plan, testing.
Testing of the Company's core computer and peripheral equipment
infrastructure and the infrastructure of the Company's personal computer
desktop network has been successfully completed. Testing of mission
critical customer accounting software applications was completed
successfully on June 16, 1999, in advance of the June 30, 1999 FFIEC
suggested testing completion date. All other systems and applications have
been scheduled for testing prior to September 30, 1999. In the Plan, each
of these non-mission critical systems has an established target date by
which steps must be taken to replace any non-compliant systems. The Company
is confident that all tests will be completed in advance of those target
dates.

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

Costs to Address the Year 2000 Issue: The total financial costs associated
with the Year 2000 problem cannot be predicted at this time with absolute
certainty. As may be expected, the Committee currently estimates that there
will be costs associated with replacing certain non-compliant software
and/or hardware. The Company has hired a full-time project coordinator to
oversee the testing phase of the Year 2000 project. Although no other staff
additions are currently planned, the Committee estimates that approximately
30-35 people (about 10% of our staff) are spending some portion of their
time working on the Year 2000 project. Additionally, the Company has hired
a third party to evaluate the Bank's loan loss reserve adequacy in light of
Year 2000 concerns. At this time, the Company does not anticipate a need
for any additional loan loss provision related specifically to Year 2000
risks. The Company has replaced all of the Bank's ATMs as well as upgraded
certain software and equipment. Management had approved the replacement of
the ATMs prior to Year 2000 budget planning since most were 15 to 20 years
old. Out of the total estimated $1.2 million in capital costs $838 thousand
is budgeted to upgrade the ATM network. The Bank spent $680 thousand for
ATM and other Year 2000 upgrades during 1998 and $382 thousand for the
first half of 1999. These costs have been, and when incurred in the future
will be, capitalized and depreciated over the estimated useful lives of the
assets, as such assets represent replacement of existing equipment, which
are not mainly being remediated for Year 2000. The Bank has incurred direct
(non-capital expenditures) Year 2000 expenses totaling $69 thousand for the
first half of 1999, and $163 thousand for all of 1998, these expenses have
been charged to expense as incurred. Additional expenses related to the
project are currently estimated to be $147 thousand and will be charged to
expense as incurred.

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

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

RISK MANAGEMENT

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

INCOME TAXES

The Company recognized $730 thousand in low income housing tax credits for
the first six months of 1999 and $540 thousand for the same period in 1998,
representing the amount of the income tax credits earned during those
quarters. The recognition of these low income housing tax credits has
reduced the Company's effective tax rate to 21% and 23% for the quarter and
six months ended June 30, 1999, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity, as it pertains to banking, can be defined as the ability to
generate cash in the most economical way to satisfy loan demand, deposit
withdrawal demand, and to meet other business opportunities, which require
cash. The Bank has a number of sources of liquid funds; including $25
million in available Federal Funds lines of credit at June 30, 1999; an
overnight line of credit with the Federal Home Loan Bank (FHLB) of $15
million; an estimated additional borrowing capacity with FHLB of $76
million; and the ability to borrow through the use of repurchase
agreements, collateralized by the Bank's investments, with certain approved
counterparties.

NON-PERFORMING ASSETS AND THE RESERVE FOR POSSIBLE LOAN LOSSES

The following tables summarize the Bank's non-performing assets as of June
30, 1999, December 31, 1998, and June 30, 1998:

<TABLE>
<CAPTION>
(In thousands)                       June 30, 1999    December 31, 1998    June 30, 1998
----------------------------------------------------------------------------------------

<S>                                     <C>                 <C>               <C>
Nonaccrual Loans                        $1,979              $2,103            $4,853
Loans Past Due 90 Days
 or More and Still Accruing                 48                 170               438
Restructured Loans                         469                 320               333
------------------------------------------------------------------------------------
Total Non-performing Loans (NPL)         2,496               2,593             5,624
Other Real Estate Owned                    198                 470               377
------------------------------------------------------------------------------------
Total Non-performing Assets (NPA)       $2,694              $3,063            $6,001
====================================================================================
</TABLE>

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

Discussion of events affecting NPA:  Significant events affecting the
categories of NPA are discussed below:

Nonaccrual Loans:
      During the second quarter of 1999 approximately $893 thousand in
      reductions to nonaccrual loans were offset in part by approximately
      $586 thousand of additions.  Of the reported increase, approximately
      $171 thousand was concentrated in one account, with the remaining
      balance comprised of loans from eleven borrowers.

Loans Past Due 90 Days:
      Loans past due 90 days decreased $15 thousand in the second quarter,
      after dropping $107 thousand in the quarter ended March 31, 1999.

Restructured Loans:
      There was a net decrease of $10 thousand in restructured loans during
      the second quarter of 1999.

Other Real Estate Owned:
      Two properties with a total net book value of $140 thousand were
      added to this category during the period.

The reserve for possible loan losses is based on management's estimate of
the amount required to reflect the risks in the loan portfolio, based on
circumstances and conditions known or anticipated at each reporting date.
Merchants Bank reviews the adequacy of the Reserve for Possible Loan Losses
("RPLL") at least quarterly. Factors considered in evaluating the adequacy
of the reserve 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 RPLL is
not based on maintaining a specific percentage of RPLL to total loans or
total nonperforming assets. 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 RPLL when management believes that the collectibility of
principal is doubtful. To the extent management determines the level of
anticipated losses in the portfolio have significantly increased or
diminished, the RPLL is adjusted through current earnings. As part of the
Bank's analysis of specific credit risk, detailed and extensive reviews are
done on larger credits and problematic credits identified on the watched
asset list, nonperforming asset listings and internal credit rating
reports. Loans deemed impaired at June 30, 1999 totaled $2.9 million, of
this total $2.5 million are included as non-performing assets in the table
above.  Impaired loans have been allocated $157 thousand of the RPLL.

The continued high level of the RPLL reflects management's current
strategies and efforts to maintain the reserve 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 reserve 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.

The following table reflects the Bank's non-performing asset and coverage
ratios as of June 30, 1999, December 31, 1998 and June 30, 1998:

<TABLE>
<CAPTION>
                                        June 30, 1999    December 31, 1998    June 30, 1998
-------------------------------------------------------------------------------------------

<S>                                         <C>                <C>               <C>
Percentage of Non-performing
 Loans to Total Loans                       0.59%              0.64%             1.48%
Percentage of Non-performing Assets
 to Total Loans plus Other Real
 Estate Owned                               0.64%              0.75%             1.58%
Percentage of RPLL to Total Loans           2.70%              2.79%             3.64%
Percentage of RPLL to NPL                    455%               436%              245%
Percentage of RPLL to NPA                    422%               369%              230%
</TABLE>

Management considers the balance of the RPLL adequate at June 30, 1999.
Management's assessment of the adequacy of the RPLL concluded that a
provision was not necessary during the first or second quarters of 1999.


Merchants Bancshares, Inc.
Supplemental Information

<TABLE>
<CAPTION>
                                                                     Three Months Ended
                                           -------------------------------------------------------------------
                                                      June 30, 1999                      June 30, 1998
(In thousands except share and per share data)
                                                         Interest                           Interest
                                            Average      Income/    Average    Average      Income/    Average
(Fully Taxable Equivalent)                  Balance      Expense     Rate      Balance      Expense     Rate
--------------------------------------------------------------------------------------------------------------

<S>                                         <C>          <C>         <C>       <C>          <C>         <C>
INTEREST EARNING ASSETS
  Loans (1)                                 $416,731     $ 9,021     8.68%     $391,538     $ 9,395     9.62%
  Taxable Investments                        182,462       2,896     6.37%      168,205       2,738     6.53%
  Federal Funds Sold and Securities
   Purchased Under Agreements to Resell        1,451          17     4.70%        2,918          40     5.50%
-------------------------------------------------------------------------------------------------------------
Total Interest Earning Assets               $600,644     $11,934     7.97%     $562,661     $12,173     8.68%
=============================================================================================================

INTEREST BEARING LIABILITIES
  Savings, NOW and Money Market Deposits    $331,974     $ 2,435     2.94%     $278,265     $ 2,235     3.22%
  Time Deposits                              147,926       1,845     5.00%      160,885       2,164     5.40%
-------------------------------------------------------------------------------------------------------------
      Total Savings and Time Deposits        479,900       4,280     3.58%      439,150       4,399     4.02%

  Federal Funds Purchased                      1,483          19     5.14%          997          15     6.05%
  Other Borrowed Funds                         9,228         113     4.89%        9,670         135     5.59%
  Debt                                         6,662         117     7.04%        6,412         114     7.13%
-------------------------------------------------------------------------------------------------------------
      Total Interest Bearing Liabilities     497,273       4,529     3.65%      456,229       4,663     4.10%

Other Liabilities & Stockholders' Equity
 (Net of Non-Interest Earning Assets)        103,371                            106,432
                                            --------                           --------

Total Liabilities & Stockholders' Equity
 (Net of Non-Interest Earning Assets)       $600,644                           $562,661
                                            ========                           ========

Rate Spread                                                          4.32%                              4.58%
                                                                     ====                               ====

Net Yield on Interest Earning Assets                                 4.95%                              5.35%
                                                                     ====                               ====

<FN>
<F1> Includes principal balance of non-accrual
</FN>
</TABLE>

Merchants Bancshares, Inc.
Supplemental Information

<TABLE>
<CAPTION>
                                                                      Six Months Ended
                                            ------------------------------------------------------------------
                                                      June 30, 1999                      June 30, 1998
(In thousands except share and per share data)
                                                         Interest                           Interest
                                            Average      Income/    Average    Average      Income/    Average
(Fully Taxable Equivalent)                  Balance      Expense     Rate      Balance      Expense     Rate
--------------------------------------------------------------------------------------------------------------

<S>                                         <C>          <C>         <C>       <C>          <C>         <C>
INTEREST EARNING ASSETS
  Loans (1)                                 $412,834     $17,985     8.79%     $390,864     $18,657     9.63%
  Taxable Investments                        181,853       5,799     6.43%      163,409       5,362     6.62%
  Federal Funds Sold and Securities
   Purchased Under Agreements to Resell        1,365          31     4.58%        2,407          66     5.53%
-------------------------------------------------------------------------------------------------------------
      Total Interest Earning Assets         $596,052     $23,815     8.06%     $556,680     $24,085     8.72%
=============================================================================================================

INTEREST BEARING LIABILITIES
  Savings, NOW and Money Market Deposits    $322,301     $ 4,758     2.98%     $276,087     $ 4,421     3.23%
  Time Deposits                              149,625       3,762     5.07%      161,336       4,319     5.40%
-------------------------------------------------------------------------------------------------------------
      Total Savings and Time Deposits        471,926       8,520     3.64%      437,423       8,740     4.03%

  Federal Funds Purchased                      1,782          42     4.75%        1,108          32     5.82%
  Other Borrowed Funds                         8,543         249     5.88%        7,885         213     5.44%
  Debt                                         6,664         233     7.04%        6,414         228     7.18%
-------------------------------------------------------------------------------------------------------------
      Total Interest Bearing Liabilities     488,915       9,044     3.73%      452,830       9,213     4.10%

Other Liabilities & Stockholders' Equity
 (Net of Non-Interest Earning Assets)        107,137                            103,850
                                            --------                           --------

Total Liabilities & Stockholders' Equity
 (Net of Non-Interest Earning Assets)       $596,052                           $556,680
                                            ========                           ========

Rate Spread                                                          4.33%                              4.62%
                                                                     ====                               ====

Net Yield on Interest Earning Assets                                 5.00%                              5.39%
                                                                     ====                               ====

<FN>
<F1> Includes principal balance of non-accrual
</FN>
</TABLE>


                         MERCHANTS BANCSHARES, INC.
                                JUNE 30, 1999

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

Reference is made to the Form 10-K filed for the year ended December 31,
1998 for disclosure of current legal proceedings against the Company, the
Bank, the Merchants Trust Company (the "Trust Company") (the "Companies")
and certain directors and trustees of the Companies.

The Bank is a counterclaim defendant in a litigation entitled Pasquale and
Vatsala Vescio, Counterclaim Plaintiffs v. The Merchants Bank, Counterclaim
Defendant, now pending in the United States Bankruptcy Court for the
District of Vermont.

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

Among other things, the Vescios have alleged that the Bank or its
representatives violated supposed oral promises in connection with the
origination and funding of the financing, and have claimed that the Bank is
liable to them for damages based on the Bank's supposed "control" of the
project and its alleged breach of covenants of "good faith" which the
plaintiffs believe are to be implied from the loan documents. In addition,
the plaintiffs have contended that the Bank breached a duty of care they
believe it owed to them, and have claimed that the Bank should not have
exercised its contract rights when the loan went into default, but should
have worked out the default in a way that was more favorable to the
borrowers.  Trial concluded in United States Bankruptcy Court in November
1998. In June of 1999, before entry of any findings or a decision on the
merits, the trial judge recused himself from all cases involving the Bank.
He completed his term as bankruptcy judge on July 31, 1999. No successor
judge has been appointed. Two judges have temporarily been assigned to the
bankruptcy court pending a new appointment. The timing of a decision on the
merits of the case at the trial level cannot be predicted at this time.
Although it is not possible at this stage to predict the outcome of this
litigation, the Bank believes that it has meritorious defenses to the
plaintiffs' allegations. The Bank intends to vigorously defend itself
against these claims.

On March 25, 1999 the Trust Company received, as trustee, a recovery of
$4.8 million on  account of settlement of a 1994 class action suit filed in
the United States District Court for the District of Minnesota. The Trust
Company's claims, and the class action, arose from investments made in 1994
and earlier in the so-called Piper Jaffray Institutional Government Income
Portfolio ("Piper Jaffray"). In the first quarter of 1999, the company
realized $1.3 million as a result of that recovery. The balance of the $4.8
million is due to the Company's insurance carrier, pursuant to an agreement
made with the carrier in December of 1994.

Lawyers representing the beneficiaries of five Trust Company accounts have
asserted that their clients (the "Named Customers") and others similarly
situated have not been fully reimbursed for damages allegedly suffered
because of certain investments made by the Trust Company during 1993 and
1994 in Piper Jaffray.  The Companies believe full reimbursement has been
provided and that the Trust Company has no further liability on account of
the Piper Jaffray investment.  On July 15, 1999 the Trust company filed an
action with the United States District Court for the District of Vermont
seeking a declaratory judgement that the Trust Company has no further
liability to the Named Customers.

Merchants Bancshares, Inc. and certain of its subsidiaries have been named
as defendants in various other legal proceedings arising from their normal
business activities. Although the amount of any ultimate liability with
respect to such proceedings cannot be determined, in the opinion of
management, based upon the opinion of counsel on the outcome of such
proceedings, any such liability will not have a material effect on the
consolidated financial position of Merchants Bancshares, Inc. and its
subsidiaries.

Item 2 - Changes in Securities - NONE

Item 3 - Defaults upon Senior Securities - NONE

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

Item 5 - Other Issues - NONE

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


                         MERCHANTS BANCSHARES, INC.

                                  FORM 10-Q

                                JUNE 30, 1999

                                 SIGNATURES

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

                                       Merchants Bancshares, Inc.


                                       /s/ Joseph L. Boutin
                                       --------------------------------
                                       Joseph L. Boutin, President


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

                                       August 13, 1999
                                       --------------------------------
                                       Date