SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

________________________

Form 10-Q

Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934

________________________


For the Quarterly Period Ended September, 1998, Commission Files 
Number 0-11012

VERMONT FINANCIAL SERVICES CORP.

A DELAWARE CORPORATION 

IRS EMPLOYER IDENTIFICATION NO.  03-0284445

100 Main Street, Brattleboro, Vermont 05301

Telephone:  (802) 257-7151

__________________________
                
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 requirement for the past 90 days.


Yes  X  No___

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.

As of October 31, 1998  12,847,914








VEREMONT FINANCIAL SERVICES CORP. AND SUBSIDIARIES

INDEX

Part I FINANCIAL INFORMATION

Item 1. Financial Statements
			
Consolidated Balance Sheets				3
		
Consolidated Statements of Income			4

Consolidated Statements of Cash Flows			5

Notes to Consolidated Financial Statements		6

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations		7

Item 3.  Quantitative and Qualitative Disclosures about
About Market Risk					9

Part II Other Information					10

Signatures						11










VERMONT FINANCIAL SERVICES CORP.


<TABLE>
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997
($ in thousands,except per share data)
(unaudited)

                                       <C>                     <C>  
                                    September 30,           December 31,
ASSETS                                  1998                    1997 
Cash and Due from Banks             $    70,837             $   95,495 
Interest Bearing Balances with Banks      4,486                     44 
Federal Funds Sold                       35,532                  2,470 
    Total Cash and Cash Equivalents     110,855                 98,009
Securities Available 
  U.S. Treasury and U.S. Government
    Agencies                            179,812                295,775 
  Mortgage Backed Securities            211,697                199,121 
  State and Municipal                     9,618                  9,987 
  Other                                 116,086                 22,766 
    Total Securities Available for Sale 517,213                527,649 
Loans:
  Commercial                            202,467                166,418 
  Commercial Real Estate                270,394                234,394 
  Residential Real Estate               753,979                804,329 
  Consumer                              116,632                109,360 
    Total Loans                       1,343,472              1,314,501 
  Less:  Allowance for Loan Losses       16,916                 18,943 
    Net Loans                         1,326,556              1,295,558 
Premises and Equipment                   41,691                 46,620 
Real Estate Held for Investment           1,269                  1,298 
Other Real Estate Owned (OREO) - net of 
  reserve of $0 in 1998 and $0 in 1997    2,276                  2,794 
Goodwill & Other Intangibles             58,269                 61,729 
Other Assets                             52,171                 63,795 
    Total Assets                     $2,110,300             $2,097,452 

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
  Demand                             $  263,591             $  228,935 
  Savings, NOW & Money Market
    Accounts                            981,777                915,937 
  Other Time:  Under $100,000           422,722                467,939 
               Over  $100,000            86,055                 68,863 
    Total Deposits                    1,754,145              1,681,674 
Federal Funds Purchased and
  Securities Sold
  Under Agreements to Repurchase         74,231                 87,818 
Liabilities for Borrowed Money           41,779                 86,899 
Other Liabilities                        25,628                 27,465 
    Total Liabilities                 1,895,783              1,883,856 
Stockholders' Equity
Common Stock - $1 Par Value
   Authorized 20,000,000 shares
   Issued :     1998 - 13,292,559
                1997 - 13,243,357        13,293                 13,243 
Preferred Stock - $1 Par Value
   Authorized 5,000,000 shares
Capital Surplus                         117,077                116,640 
Undivided Profits                        89,248                 81,562 
Other Comprehensive Income
  (see accompanying notes)                5,093                  2,152 
Treasury Stock, at cost - 
              1998 - 398,611
              1997 - 52                 (10,194)                    (1)
    Total Stockholders' Equity          214,517                213,596 
    Total Liabilities and
       Stockholders' Equity          $2,110,300             $2,097,452 
Fully Diluted Tangible Book Value   
    per Share of Common Stock            $12.12                 $11.48




</TABLE>
<TABLE>
VERMONT FINANCIAL SERVICES CORP. AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
                                      <C>      <C>             <C>       <C>
                                       Three Months Ended   Nine Months Ended
                                          September 30,        September 30,
                                     1998      1997          1998       1997
 
Interest Income:
Interest and Fees on Loans        $ 28,771  $ 29,766     $ 85,435    $ 69,316 
Interest on Securities Available
 for Sale:
Taxable Interest Income              7,893     8,614       24,009      17,854 
Tax Exempt Income                       27       282          325         461 
Interest on Fed Funds Sold and
Other Short Term Investments           559       387        1,305         611 
Total Interest Income               37,250    39,049      111,074      88,242 
Interest Expense:
Interst on Deposits                 14,915    15,350       44,480      33,668 
Interest on Fed Funds Purchased,
 Borrowed Money
 and Securities Sold under Agreements
  to Repurchase                      1,486     2,397        5,120      4,857 
Total Interest Expense              16,401    17,747       49,600     38,525 
Net Interest Income                 20,849    21,302       61,474     49,717 
Less: Provision for Loan Losses        975       900        3,135      2,350 
Net Interest Income After Provision
 for Loan Losses                    19,874    20,402       58,339     47,367 
Other Operating Income
Securities Gains                        95       405          437        411 
Trust Department Income              1,526     1,488        4,678      4,259 
Service Charges on Deposit Accounts  3,386     3,224       10,475      6,355 
Credit Card Merchant Income          1,209     1,094        3,011      2,766 
Other Loan Related Fee Income          153       179          715        423 
Other Noninterest Income             3,341     2,160        8,764      5,509 
Total Other Operating Income         9,710     8,550       28,080     19,723 
Other Operating Expense
Salaries and Wages                   7,824     7,522       23,022     17,328 
Pension and Other Employee Benefits  1,755     1,569        5,246      4,430 
Occupancy of Bank Premises, net      1,705     1,729        5,427      3,635 
Furniture and Equipment              2,037     1,883        6,421      4,157 
Goodwill Amortization                1,129     1,104        3,388      1,445 
FDIC Assessment                        127       132          387        199 
Credit Card Merchant Expense           831       700        1,995      1,806 
OREO & Collection Expense/Losses, net  389       245        1,279        779 
Other Noninterest Expense            5,818     4,845       16,150     10,935 
Total Other Operating Expense       21,615    19,729       63,315     44,714 
Net Overhead                       (11,905)  (11,179)     (35,235)   (24,991)
Income Before Income Taxes           7,969     9,223       23,104     22,376 
Applicable Income Tax Expense        3,154     3,519        9,200      7,762 
Net Income                         $ 4,815   $ 5,704      $13,904    $14,614 


Average Shares Outstanding
          Basic                 13,054,743  13,310,111  13,187,133  10,846,288 
          Diluted               13,157,846  13,429,078  13,289,381  10,950,940 
Earnings Per Common Share 
  (Based on
   Average Number of Common Shares 
   Outstanding for the Respective Period)
   Net Income -- Basic               $0.37       $0.42      $1.05       $1.35 
   Net Income - Diluted              $0.37       $0.42      $1.05       $1.34 
(see accompanying notes)



</TABLE>
<TABLE>
VERMONT FINANCIAL SERVICES CORP. AND SUBSIDIARIES
Condensed Statements of Cash Flows
(unaudited)
                                                    <C>               <C>
                                                 9 months ended September 30,
                                                   1998               1997
OPERATING ACTIVITIES
(in thousands)

Net Income                                       $   13,904      $   14,614 
Adjustments to reconcile net income
 to net cash provided
 by operating activities:
    Provision for loan losses                         3,135           2,350 
    Provision for depreciation                        5,368           3,308 
    Amortization and accretion on securities            327             408 
    Deferred income taxes                               709          (2,247)
    Security (gains)                                   (437)           (411)
    Proceeds  from sale of loans                    176,452          99,323 
    Loans originated for sale                      (184,045)        (69,313)
    Losses on OREO                                       95             119 
    Decrease (Increase) in interest
      receivable and other assets                    15,588          (8,333)
    Decrease in real estate held for investment          29             422 
    (Decrease) in interest payable and other
      liabilities                                    (1,837)         (6,587)
     NET CASH PROVIDED BY OPERATING ACTIVITIES
        OPERATING ACTIVITIES                         29,288          33,653 
INVESTING ACTIVITIES
     Proceeds from the sale of the securities        12,842          91,924 
     Proceeds from the maturity of the securities   223,668          55,983 
     Purchases of securities                       (221,377)       (109,151)
     Proceeds from sales of OREO                      2,256           2,038 
     Net cash and cash equivalents from 
       Eastern Bancorp.                                   -          13,821 
     Net (increase) decrease in loans               (28,373)            170 
     Purchase of premises and equipment              (3,298)         (6,390)
     NET CASH (USED BY)PROVIDED BY INVESTING
        ACTIVITIES                                  (14,282)         48,395 

FINANCING ACTIVITIES
    Net increase in deposits                         72,471          13,230 
    Net (decrease)in short-term borrowings          (58,707)        (25,518)
    Issuance of common stock                            982           9,869 
    Purchase of treasury stock                      (10,689)              - 
    Cash dividends                                   (6,217)         (4,738)
    NET CASH (USED BY) FINANCING ACTIVITIES          (2,160)         (7,157)
INCREASE IN CASH AND CASH EQUIVALENTS                12,846          74,891 
Cash and cash equivalents at beginning of period     98,009          63,797 
CASH AND CASH EQUIVALENTS AT END OF PERIOD         $110,855        $138,688 

(see accompanying notes)
Non-monetary Transactions:
     Transfer of loans to OREO for the periods ended  September 30, 1998
and 1997 totaled $1,833 and $2,078, respectively. 


VERMONT FINANCIAL SERVICES CORP.

Notes to Consolidated Financial Statements

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements
should be read with the audited financial statements and notes thereto
included in the annual report on Form 10-K and Form 10-K/A.  In the opinion
of Management, all adjustments which are necessary for the fair presentation
of the statement of the consolidated financial position of Vermont Financial
Services Corp., ("VFSC" or the "Company"), and the consolidated results of
the Company's operations and cash flow for the interim periods presented
herein are reflected and all such adjustments are of a normal recurring
nature. Certain items from interest income have been reclassified to
noninterest income and noninterest expense in accordance with Statement of 
Financial Accounting Standards (SFAS) No. 91, "Accounting for Nonrefundable
Fees and Costs Associated With Originating or Acquiring Loans and Initial
Direct Cost of Leases". There is no impact on net income associated with
these reclassifications.

Operating results for any interim period are not necessarily indicators of
results for any other interim period or the entire year.

2.	New Accounting Pronouncements

The Financial Accounting Standards Board (FASB)  has issued Financial 
Accounting Standard (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which establishes standards for the
way public enterprises are to report information about operating segments 
in annual financial statements and requires those enterprises to report
selected financial information about operating segments in its interim 
financial reports issued to shareholders. Under this statement, operating
segments are defined as components of a company for which separate financial
information is available and is used by management to allocate resources and
assess performance (management approach). This statement is effective for 
the Company's December 31, 1998 financial statements and is effective for
interim financial statements beginning in 1999. The company anticipates
providing segment information for its Trust Department and United Bank.

The FASB has also issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities", which provides for matching the timing of gain or
loss recognition on the hedging instrument with the recognition of (a) the
changes in fair value of the hedged asset or liability that are attributable
to the hedged risk or (b) the earnings effect of the hedged forecasted
transaction.  The standard is effective for fiscal quarters beginning after
June 15, 1999. The Company expects adoption of this standard to have an 
immaterial impact on its financial statements.

3.	Acquisition

On June 26, 1997, the Company acquired all of the outstanding common stock
of Eastern Bancorp, Inc. ("Eastern"), a thrift holding company with total
assets of approximately $800 million headquartered in Dover, NH, for 
approximately $26.9 million in cash and $72.7 million in VFSC common stock 
(1,784,774 shares at $41.5625 per share).

This acquisition was accounted for by the purchase method and, accordingly,
the results of operations  of Eastern have been included in VFSC's 
consolidated financial statements from June 27, 1997. The excess of the 
purchase price over the fair value of the net identifiable assets acquired
of approximately $57 million has been recorded as goodwill and is being
amortized on a straight-line basis over 15 years.

Eastern's primary subsidiary, Vermont Federal Bank, was merged into VFSC's
primary subsidiary, Vermont National Bank, on September 22,1997.
	
4.	Stock Split

On October 14, 1997 the Company paid a two-for-one stock split which was 
effected as a stock dividend. All per share and outstanding share amounts
have been retroactively restated for the effects of this stock split.

5.	Comprehensive Income

The Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income" as of January 1, 1998.  SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components (such as
changes in unrealized investment gains and losses). Comprehensive income 
includes net income and any changes in equity from non-owner sources that 
bypass the income statement. The purpose of reporting comprehensive income
is to report a measure of all changes in equity of an enterprise that result
from recognized transactions and other economic events of the period other 
than transactions with owners in their capacity as owners. Application of 
SFAS No. 130 has not impacted the amounts previously reported for net income
or effected the comparability of previously issued financial statements.


</TABLE>
<TABLE>
The following table summarizes comprehensive income for the nine months ended
September 30, 1998 and 1997:
                                                  <C>         <C>   
                                                  1998       1997
Net Income                                      $13,904     $14,614
Other comprehensive income, net of tax:
  Unrealized gains (losses) on investments
  Unrealized holding gain (loss) arising during 
  the period net of income tax expense of  $126 
  and $159 for 1998 and 1997, respectively.      3,204        2,841
  Less reclassification adjustment for gains 
  included in net income net of income tax 
  expense of $(174) and $(144) for 1998 and 
  1997, respectively.
                                                  (263)       (267)
Other comprehensive income                       2,941       2,574
Comprehensive income                           $16,845     $17,188


ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
	
For the Three-Month Periods Ended September 30,1998 and 1997

Net income for the three months ended September 30, 1998 was $4.8 million, 
a 16% decrease from the $5.7 million earned in the third quarter of 1997
and equal to $4.8 million earned in the second quarter of 1998. Diluted
earnings per share for the third quarter of 1998 were $0.37 compared to
$0.42 for the third quarter of 1997and $0.36 for the second quarter of 1998.

Net revenue for the third quarter of 1998 was $30.4 million up $0.9 million
from the $29.5 million for the second quarter and up $1.0 million from the
third quarter of 1997. Net interest income was $20.8 million for the third
quarter, a $0.5 million decrease from the third quarter of 1997. A $24.0
million decrease in average earning assets and a 12 basis point decrease in
net interest margin accounted for this reduction. Noninterest income was
$9.7 million for the third quarter of 1998, a $1.2 million increase over 
the $8.5 million for the third quarter of 1997. Nearly all the increase 
was due to mortgage loan related fee income.

Noninterest expense for the third quarter of 1998 increased $1.9 million
over the third quarter of 1997. This increase was primarily due to $0.8
million of expense related to two consultants and $0.6 million in "Year
2000" (see further discussion below) expenses. 

For the Nine-Month Periods Ended September 30, 1998 and 1997

Overview

The nine months ended September 30, 1998 resulted in net income of
$13,904,000, or a 5% decrease from $14,614,000 in earnings for the same
period of 1997. Diluted earnings per share for the nine months ended
September 30, were $1.05 and $1.34 for the first nine months of 1998 and
1997, respectively. Diluted cash earnings per share (earnings before the
effects of the amortization of goodwill) were $1.31 and $1.47 for the nine
months ended September 30, 1998 and 1997, respectively. The reduction in
earnings per share reflects the additional shares issued in conjunction 
with last year's acquisition of Eastern Bancorp, Inc. and $850,000 of
pre-tax expenses associated with the integration of Eastern's subsidiary, 
Vermont Federal Bank(VFB), into Vermont Financial Services Corp.'s main 
banking subsidiary, Vermont National Bank(VNB).

Except for historical information contained herein, the matters discussed
in this filing, may express "forward-looking" statements. Those
"forward-looking" statements may involve risk and uncertainties, including
statements concerning future events or performances and assumptions  and 
other statements that are other than statements of historical facts. The
Company wishes to caution readers not to place undue reliance on any 
forward-looking statements, which speak only as of the date made. Readers 
are advised that various factors - including, but not limited to, changes 
in laws, regulations or Generally Accepted Accounting Principles; the 
Company's competitive position within the markets served or increasing 
consolidation within the banking industry; certain customers and vendors of 
critical systems or services failing to comply with Year 2000 programming 
issues; unforeseen changes interest rates; any unforeseen downturns in the
local, regional or national economies - could cause the Company's actual 
results or circumstances for future periods to differ materially from those
anticipated or projected. Vermont Financial Services Corp. does not 
undertake, and specifically disclaims any obligation, to publicly release
the result of any revisions that may be made to any forward-looking 
statements to reflect the occurrence of unanticipated events or circumstances
after the date of such statements.

Results of Operations

Net interest income of $61.5 million for the first nine months of 1998 
represented a $11.8 million increase from the same period in 1997. The 
increase was primarily a result of the acquisition of earning assets and 
financial resources from Eastern Bancorp, Inc. Net interest margin was
4.49% and net interest spread was 4.42% during the first nine months 
of 1998, compared to 4.76% and 4.54%, respectively, during the same 
period in 1997.  A $401.7 million increase in largely lower yielding 
average earning assets caused the lower margin and spread.

Noninterest income, before securities gains, increased $8,331,000 primarily 
due to a $4,120,000 increase in service charges on deposits, a $419,000 
increase in trust department income, a $710,000 increase in ATM income 
and a $1,556,000 increase in mortgage related fee income .

Noninterest expense increased $18,601,000 largely due to a $6,510,000, 
or 30%, increase in salaries and benefits.  This increase was due to 
the additional staff associated with the purchase of Eastern and normal 
salary adjustments for existing staff. Primarily attributable to the 
Eastern merger were increases in occupancy/equipment expenses and goodwill
amortization of $4,056,000 and $1,943,000. Other noninterest expense 
increased $5,215,000, or 48%, primarily due to the following:


</TABLE>
<TABLE>
                                        <C>          <C>
	Expense Item		                    	Increase(000)		Increase (%)
	Marketing Expense			                  $631			       79%
	Professional Services(*)		           1,688	 		     178
	Printing & Supplies			                 426	         33
	Deposit Related Franchise Taxes(**)    655			      124
	Telephone Expense			                   565			       45
	Postage				                            573			       53
				                              	   -----			    -----
		(total)			                         $4,538			       77%

(*)  does not include increase related to integration of VFB into VNB
(**) reflects 100% increase in statutory rate effective August 1,1998


Asset Quality

Nonperforming assets totaled $13.8 million as of September 30, 1998, a
$12.0 million decrease from $25.8 million on September 30, 1997 and a 
$6.0 million decrease from $19.8 million at December 31, 1997.  As of
September 30, 1998 nonperforming assets were 0.65% of total assets, 
down from 1.20% a year ago and 0.94% at December 31, 1997.

The allowance for loan losses was $16.9 million at September 30, 1998,
down from $20.6 million a year ago and $18.9 million at December 31,1997,
reflecting the lower levels of nonperforming assets.  The allowance for
loan losses was 147% of nonperforming loans and 122% of nonperforming
assets as of September 30, 1998. During the third quarter the Company 
sold $6.3 million of nonperforming assets at a $1.0 million discount, which
resulted in charge-offs on these loans totaling $1.0 million during the
third quarter. This sale reduced the level of nonperforming assets but was 
also the major cause of the quarter's high level of net charge-offs at 
$2.7 million. As a result of the reduced level of nonperforming assets the 
Company was able to reduce the provision for loan losses by $60,000 for the
third quarter from the level of the two prior quarters.


</TABLE>
<TABLE>
<CAPTION>
The following table provides information with respect to the Company's past
due loans, the Components of nonperforming assets and the allowance for 
loan losses at the dates indicated:
<S>                                             <C>                <C>	
                                       September 30, 1998  December 31, 1997
Loans 90 days past due and still
 accruing interest                             $3,541             $6,055
Nonperforming assets:
     Nonaccrual loans                         $11,540            $17,006
     Other real estate owned                    2,277              2,794
Total nonperforming assets                    $13,817            $19,800
Nonperforming assets to period end 
   loans net of unearned income, plus
   other real estate owned                       1.03%              1.50%
Allowance for loan losses                     $16,916            $18,943



The following table details the Company's impaired loans as of  September 
30, 1998:

	Total impaired loans	                                   $23,757
	Impaired loans with a specific valuation reserve	         2,441
	Impaired loans without a specific valuation reserve     	21,316
	Valuation reserve for impaired loans	                       796
	Average impaired loans                                 	$28,967

Financial Condition

Total assets of $2.1 billion, decreased $0.1 billion while total deposits
of $1.8 billion and total loans of $1.3 billion, remained essentially the 
same as their September 30, 1997 balances. Compared to their yearend 
balances, assets, loans and deposits largely remained unchanged. Increases 
of $36.0 million in each of Commercial Loans and Commercial Real Estate 
loans was mostly offset by a $51.0 million decrease in Residential Real Estate
Loans. These balances include the reclassification of approximately $60 
million in loans from Commercial Loans to Commercial Real Estate Loans.  
As of September 30, 1998 goodwill had decreased to approximately $58.3 
million from $60.8 million at June 30, 1997 and $61.7 million at December 
31, 1997 as a result of finalization of the purchase accounting adjustments 
associated with the Eastern merger and normal amortization of approximately 
$1.1 million per quarter.

Capital Resources

Stockholders' equity increased from $213.6 million at year end to $214.5 
million at September 30, 1998. Equity as a percent of total assets decreased 
from 10.17% at year end 1997 to 10.16% at September 30, 1998.  This decrease 
was primarily the result of the earnings retained by the Company net of $10.7
million in stock repurchases under the 1998 stock repurchase plan described 
below.  Also, Tier I and Total Risk Based Capital ratios decreased slightly to
11.89% and 13.14% from their year end levels of 11.98% and 13.24%, 
respectively.  The above ratios are in excess of all regulatory 
requirements and place the Company in the "well capitalized" regulatory 
classification.

Year 2000
The Project

Many of the world's computer systems (including those in non-information 
technology equipment and systems) currently record years in a two-digit 
format.  If not addressed, such computer systems will be unable to properly
interpret dates beyond the year 1999, which could lead to business 
disruptions (the "Year 2000" issue). The potential costs and uncertainties 
associated with the Year 2000 issue will depend on a number of factors, 
including software, hardware and the nature of the industry in which a 
company operates.  Additionally, companies must coordinate with other entities 
with which they electronically interact. VFSC, like most financial service 
providers, is dependent on computer-generated information and processing and 
thus may be significantly affected by the Year 2000 issue.  The Company began 
its Year 2000 Project in late 1996.  The Year 2000 project has been 
structured following the guidance set forth in several statements that have 
been issued by the Federal Financial Institutions Examination Counsel 
("FFIEC").  VFSC is monitored in its Year 2000 efforts by various 
regulators, including the Federal Reserve Board and the Office of the 
Comptroller of the Currency.

The overall project has five phases: awareness, assessment, renovation, 
validation and implementation.  In the awareness phase, the Company defined 
the Year 2000 issue, communicated the Year 2000 issue to all employees and 
obtained executive level support and funding. In the assessment phase, the 
Company created a comprehensive Year 2000 plan which includes conducting 
an inventory of all systems which may be affected by the Year 2000 issue 
including facilities and related non-information technology systems 
(embedded systems), such as vaults, alarms, elevators, telephone and 
electric power, computer systems, hardware, and services and products 
provided by third parties, and assessing the risk of non-compliance for 
each identified system. In the renovation phase, the Company renovates or 
fixes certain systems, while others are replaced or retired.  In the 
validation phase, the Company conducts testing to ensure all systems, 
including renovated systems, are Year 2000 complaint for present and future 
dates.  Finally, in the implementation phase, the Company places complaint 
systems in production.  The Company has completed the awareness and 
assessment phases and is in the renovation and validation phases for all of 
its mission critical systems.   
 
The Company purchases the software for its mission critical systems from 
nationally recognized vendors, and although it services these applications 
it does very little custom coding for those systems.  In order to perform 
the assessment of its systems, the Company initiated communications with 
each vendor as to the Year 2000 readiness of their product(s) and 
continues to monitor vendor status.  The Company has also initiated 
communications with its suppliers, data exchange partners and large 
customers to determine the status of their Year 2000 efforts.  

Thus the renovation phase principally consists of the installation of the 
vendor identified Year 2000 compliant versions of the system and the 
validation of the functionality of the system as well as forward date
(dates in the next century) verification.  As of September 30, 1998, 
Management estimates that 42% of the renovation has been completed. 
The Company presently plans to have 75% of the renovation complete by 
December 31, 1998.  Forward date testing is expected to be 
substantially complete, by that date, with the remainder of forward date 
testing and the validation of all internal and external data exchange 
interfaces to be completed by March 31, 1999.  Validation of 
non-mission-critical systems will continue during 1999. The company's 
schedule meets the required regulatory deadlines.

Costs

Management estimates the costs of its Year 2000 project to be $4.0 million.
To date, $1.0 million has been expended with a total expenditure for 
1998 estimated to be $2.2 million and for 1999, $1.8 million. The 
$1.0 million already incurred includes $0.9 in operating expense(s) and 
$0.1 million in capital expenditures. The $4.0 million estimated 
total cost of the project includes $1.0 million for capital expenditures, 
including upgrades of hardware and software for ATM machines and software 
for the Retail Delivery System (teller/platform automation) which will be 
incurred primarily in 1998 and depreciated over three to five years 
depending on useful life. 

The Company is relying primarily on internal staff resources to complete 
the project.  The costs of the project will be obtained from normal 
operating budgets and are not expected to have a material effect on the 
Company.

Risks

There are many risks associated with the Year 2000 issue, including the 
possibility of a failure of the Company's computer and non-information 
technology systems.  Such failures could have a material adverse effect on 
the Company and may cause systems malfunctions, incorrect or incomplete 
transaction processing resulting in failed trade settlements, the 
inability to reconcile accounting books and records and disruptions of 
funding requirements. While the Company is attempting to mitigate the 
risks for systems under its control, the company obtains most of the 
hardware and software from external vendors.   In addition, even if the 
Company successfully remediates its Year 2000 issues, it can be 
materially and adversely affected by failures of third parties to 
remediate their own Year 2000 issues.  The failure of third parties with 
which the Company has financial or operational relationships such as clearing
organizations, regulatory agencies, other banks, borrowers,  counterparties, 
vendors and utilities, to remediate their computer and non-information 
technology systems issues in a timely manner could result in a material 
financial risk to the Company.

The Company has initiated communications with its commercial loan customers 
to assess their Year 2000 readiness.  As of September 30, 1998 the Company 
had completed the assessment on approximately 75% of the dollar obligations 
represented by such customers.  The Company continues to monitor these 
customers.

If the above mentioned risks are not remedied, the Company may experience 
business interruption or shutdown, financial loss, regulatory actions, 
damage to the Company's franchise and legal liability.

Contingency Plan

The Company has initiated contingency planning for its mission critical 
systems and processes, including a business impact analysis and risk 
assessment of these processes. The contingency plan will be completed by
12/31/98 and will be monitored quarterly during 1999 for any changes or 
additional contingencies that may be required.

Recent Developments

The Company has retained the services of a national consulting firm to review
each business line and support area within its organization, including the 
mortgage banking, consumer lending, commercial loan, trust and the operations
and technology area. Costs totaling $0.7 million were expensed in the third 
quarter. The Company expects that immediately realizable profit 
opportunities will offset most of the third quarter expense, but expects the
most significant revenue enhancements and cost savings will not be seen 
until 1999. 

The Company also plans a major renovation to its branch operations in 
Chittenden County, Vermont at a total cost of approximately $2-3 million. 
In addition, the company plans to purchase new remittance processing 
equipment, upgrade VNB's credit card software and purchase a new system 
for originating mortgage loans, each costing approximately $0.5 million. 
All additions will be funded through operations of the Company.	On May 21, 
1998, the Company announced that its Board of Directors has authorized the
repurchase of up to 500,000 shares of it's outstanding common stock, 
approximately 3.8% of the 13,275,970 shares outstanding as of March 31, 
1998. Shares purchased under this program will be held in treasury stock 
to cover unexercised stock options that are expected to be exercised in 
the future. The repurchase program will be accomplished through transactions 
on the open market. Through September 30, 1998. 425,886 shares had been 
repurchased at an average price of $24.95.

ITEM 3. 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity and Liquidity

See discussion and analysis of interest rate sensitivity and liquidity 
provided in the Company's Annual Report filed on Form 10-K and Form 
10-K/A for the year ended December 31, 1997. There have been no material 
changes in reported market risks faced by the Company since the filing of 
the Company's Annual Report Form 10-K and Form 10-K/A.

PART II.  OTHER INFORMATION
	
ITEM 1.  LEGAL PROCEEDINGS
		NONE

ITEM 2.  CHANGES IN SECURITIES 
		NONE

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
		NONE

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
		NONE

ITEM 5.  OTHER INFORMATION
		NONE

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
		NONE

VERMONT FINANCIAL SERVICES CORP.

Dated November 12, 1998	_____________________________________
                      		John D. Hashagen, Jr.

Dated November 12, 1998	_____________________________________
                        Richard O. Madden
		Page 11 of 11




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