**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 **_______________________**
 
 **FORM
        10-Q**
 
 x
              **QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(****d****)
                  OF THE SECURITIES EXCHANGE ACT OF 1934****For
                  the quarterly period ended June 30, 2005**o
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(****d****)
                  OF THE SECURITIES EXCHANGE ACT OF 1934****For
                  the transition period from __________ to
                  ___________**
 __________________________________
 
 Commission
        File Number: 000-25081
 
 **VAIL
        BANKS, INC.**
 (Exact
        name of registrant as specified in its charter)
  **Colorado**
              **84-1250561**(State
                  or other jurisdiction of
              (I.R.S.
                  Employerincorporation
                  or organization)
              Identification
                  No.)
 
 **0015
        Benchmark Road, Suite 300, P.O. Box 6580, Avon, Colorado
        81620**
 (Address
        of principal executive offices)
 
 **(970)
        476-2002**
 (Registrant’s
        telephone number, including area code)
 
 **N/A**
 (Former
        name, former address and former fiscal year, if changed since last
        report)
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days.     Yes    
x No     
        o .
 
 Indicate
        by check mark whether the registrant is an accelerated filer (as defined
        in Rule
        12b-2 of the Exchange Act).
 
 Yes     oNo     
        x.
 
 Indicate
        the number of shares outstanding of each of the issuer’s classes of common
        stock, as of the latest practicable date:
 
 **As
        of July 31, 2005, there were 5,604,235 shares of common stock ($1.00
        par
        value per share) outstanding.**
 
  Table
            of Contents






**VAIL
        BANKS, INC.**
 
 **FORM
        10-Q**
 **FOR
        THE QUARTER ENDED JUNE 30, 2005**
 
 **TABLEOF
        CONTENTS**






**P****ART
                  I******
              **FINANCIAL
                  INFORMATION**Item
                  1.
              FINANCIAL
                  STATEMENTS*Consolidated
                  Balance Sheets*
              *3**Consolidated
                  Statements of Income and Comprehensive
                  Income*
              *4**Consolidated
                  Statements of Cash
                  Flows*
              *6**Notes
                  to Unaudited Consolidated Financial
                  Statements*
              *8*Item
                  2.
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS*Forward
                  Looking Statements*
              *16**Basis
                  of Presentation*
              *16**Overview*
              *16**Results
                  of Operations*
              *17**Financial
                  Condition*
              *18**Asset
                  Quality*
              *19**Liquidity*
              *20**Capital
                  Resources*
              *22*Item
                  3.
              QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK
              *23*Item4.
              CONTROLS
                  AND PROCEDURES
              *23***PART
                  II**
              **OTHER
                  INFORMATION**Item
                  1.
              LEGAL
                PROCEEDINGS
              *24*Item
                  2.
              UNREGISTERED
                    SALES OF EQUITY SECURITIES AND USE OF
                    PROCEEDS
              *24*Item
                  3.
              DEFAULTS
                UPON SENIOR SECURITIES
              *24*Item
                  4.
              SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY
                HOLDERS
              *24*Item
                  5.
              OTHER
                INFORMATION
              *25*Item
                  6.
              EXHIBITS
              *25*SIGNATURES
              *26*
 
 2
 Table
            of Contents







**PART
      I** **FINANCIALINFORMATION**








**Item
      1.** **FINANCIALSTATEMENTS**





**VAIL
                BANKS, INC.****Consolidated
                BalanceSheets**
              (unaudited)**June
                30,**
            
            December
                31,(in
                thousands, except share data)
            
            **2005**
            
            2004**ASSETS**Cash
                and due from banks
            
            **$**
            **17,887**
            
            
            18,360Federal
                funds sold
            
            
            **38,865**
            
            
            17,295Total
                cash and cash equivalents
            
            
            **56,752**
            
            
            35,655Investment
                securities, available for sale
            
            
            **96,046**
            
            
            103,779Investment
                securities, held to maturity
            
            
            **186**
            
            
            246Investments
                in Trust I and Trust II
            
            
            **743**
            
            
            743Loans
                held for sale
            
            
            **1,200**
            
            
            7,110Loans,
                net (includes related party loans of**$9,984**and $10,682at
                June 30, 2005 and December 31, 2004, respectively)
            
            
            **416,712**
            
            
            402,458Investments
                in bank stocks, at cost
            
            
            **4,508**
            
            
            4,457Premises
                and equipment, net
            
            
            **38,751**
            
            
            38,721Interest
                receivable
            
            
            **2,286**
            
            
            2,172Goodwill
            
            
            **35,970**
            
            
            35,970Other
                intangible assets, net
            
            
            **139**
            
            
            159Other
                assets
            
            
            **2,907**
            
            
            3,125**$**
            **656,200**
            
            
            634,595**LIABILITIES
                AND SHAREHOLDERS’ EQUITY**LiabilitiesDeposits
                (includes related party deposits of**$3,341**and $5,618 at June 30, 2005 andDecember 31, 2004,
                respectively)Non-interest
                bearing
            
            **$**
            **115,201**
            
            
            120,127Interest
                bearing
            
            
            **404,707**
            
            
            380,317Total
                deposits
            
            
            **519,908**
            
            
            500,444Securities
                sold under agreements to repurchase
            
            
            **17,134**
            
            
            894Federal
                Home Loan Bank advances
            
            
            **27,132**
            
            
            42,444Subordinated
                notes to Trust I and Trust II
            
            
            **24,743**
            
            
            24,743Interest
                payable and other liabilities
            
            
            **2,922**
            
            
            3,605Total
                liabilities
            
            
            **591,839**
            
            
            572,130Minority
                interest
            
            
            **2,444**
            
            
            2,563Commitments
                and contingencies (Notes 7 and 12)Shareholders’
                equityPreferred
                stock - $1 par value; 2,250,000 shares authorized, no shares issued
                andoutstanding
                at June 30, 2005 and December 31, 2004, respectively
            
            
            **—**
            
            
            **—**Common
                stock - $1 par value; 20,000,000 shares authorized, 5,604,235
                and5,326,504
                issued and outstanding at June 30, 2005 and December 31,
                2004,respectively
            
            
            **5,605**
            
            
            5,327Additional
                paid-in capital
            
            
            **35,638**
            
            
            34,944Retained
                earnings
            
            
            **21,339**
            
            
            20,249Accumulated
                other comprehensive loss, net of tax benefit of**$391**and $364 at June 30, 2005 and December 31, 2004, respectively
            
            
            **(665**
            **)**
            
            (618
            )Total
                shareholders’ equity
            
            
            **61,917**
            
            
            59,902**$**
            **656,200**
            
            
            634,595The
                accompanying notes are an integral part of these unaudited consolidated
                financial statements.





3
 Table
          of Contents





**VAIL
        BANKS, INC.**
 **Consolidated
        Statements of Incomeand Comprehensive
        Income**
 (in
        thousands, except share data)
 (unaudited)






Three
                months ended
              June
                30,
            
            Six
                months ended
              June
                30,**2005**
            
            2004
            
            **2005**
            
            2004Interest
                incomeInterest
                and fees on loans
            
            **$**
            **8,243**
            
            
            6,166
            
            
            **15,857**
            
            
            12,230Interest
                on investment securities
            
            
            **970**
            
            
            997
            
            
            **2,286**
            
            
            1,714Interest
                on federal funds sold and othershort-term investments
            
            
            **219**
            
            
            85
            
            
            **411**
            
            
            289Investments
                in Trust I and II
            
            
            **19**
            
            
            19
            
            
            **38**
            
            
            38Interest
                on bank stocks
            
            
            **58**
            
            
            48
            
            
            **113**
            
            
            104Total
                interest income
            
            
            **9,509**
            
            
            7,315
            
            
            **18,705**
            
            
            14,375Interest
                expenseDeposits
            
            
            **1,623**
            
            
            1,005
            
            
            **2,952**
            
            
            2,024Borrowings
            
            
            **241**
            
            
            345
            
            
            **605**
            
            
            717Federal
                funds purchased and securitiessold under agreements to
                repurchase
            
            
            **98**
            
            
            1
            
            
            **123**
            
            
            2Subordinated
                notes to Trust I and II
            
            
            **630**
            
            
            630
            
            
            **1,261**
            
            
            1,261Total
                interest expense
            
            
            **2,592**
            
            
            1,981
            
            
            **4,941**
            
            
            4,004Net
                interest income
            
            
            **6,917**
            
            
            5,334
            
            
            **13,764**
            
            
            10,371(Credit)/provision
                for loan losses
            
            
            **(36**
            **)**
            
            43
            
            
            **29**
            
            
            201Net
                interest income after (credit)/provision for loan
                losses
            
            
            **6,953**
            
            
            5,291
            
            
            **13,735**
            
            
            10,170Non-interest
                incomeGain
                on sale of premises and equipment
            
            
            **11**
            
            
            103
            
            
            **3**
            
            
            1,781Deposit
                related
            
            
            **645**
            
            
            692
            
            
            **1,265**
            
            
            1,377Mortgage
                broker fees
            
            
            **459**
            
            
            775
            
            
            **853**
            
            
            1,578Other
            
            
            **561**
            
            
            522
            
            
            **1,125**
            
            
            1,200Total
                non-interest income
            
            
            **1,676**
            
            
            2,092
            
            
            **3,246**
            
            
            5,936Non-interest
                expenseSalaries
                and employee benefits
            
            
            **4,109**
            
            
            3,994
            
            
            **8,304**
            
            
            8,013Occupancy
            
            
            **1,044**
            
            
            846
            
            
            **2,043**
            
            
            1,691Furniture
                and equipment
            
            
            **650**
            
            
            611
            
            
            **1,333**
            
            
            1,173Other
            
            
            **1,407**
            
            
            1,168
            
            
            **2,631**
            
            
            2,258Total
                non-interest expense
            
            
            **7,210**
            
            
            6,619
            
            
            **14,311**
            
            
            13,135Income
                before income tax expense
            
            
            **1,419**
            
            
            764
            
            
            **2,670**
            
            
            2,971Provision
                for income taxes
            
            
            **448**
            
            
            190
            
            
            **814**
            
            
            1,217Net
                income
            
            
            **971**
            
            
            574
            
            
            **1,856**
            
            
            1,754Net
                change in unrealized gain/(loss) oninvestment securities available for
                sale,net of taxes
            
            
            **424**
            
            
            (1,882
            )
            
            **(47**
            **)**
            
            (1,478
            )Comprehensive
                income/(loss)
            
            **$**
            **1,395**
            
            
            (1,308
            )
            
            **1,809**
            
            
            276










4
 Table
          of Contents







**VAIL
        BANKS, INC.**
 **Consolidated
        Statements of Income and Comprehensive Income** **(Continued)**
 (in
        thousands)
 (unaudited)





Three
                months ended
              June
                30,
            
            Six
                months ended
              June
                30,**2005**
            
            2004
            
            **2005**
            
            2004Earnings
                per shareBasic
            
            **$**
            **0.19**
            
            
            0.11
            
            
            **0.36**
            
            
            0.35Diluted
            
            **$**
            **0.18**
            
            
            0.11
            
            
            **0.34**
            
            
            0.32Weighted
                average common sharesBasic
            
            
            **5,180,909**
            
            
            5,050,161
            
            
            **5,132,746**
            
            
            5,034,712Diluted
            
            
            **5,335,764**
            
            
            5,417,827
            
            
            **5,403,438**
            
            
            5,409,908The
                accompanying notes are an integral part of these unaudited consolidated
                financial statements.








5
 Table
          of Contents





**VAIL
        BANKS, INC.**
 **ConsolidatedStatements
        of Cash Flows**
 (in
        thousands)
 (unaudited)





Six
                months ended
              June
                30,**2005**
            
            2004Cash
                flows from operating activitiesNet
                income
            
            **$**
            **1,856**
            
            **$**
            **1,754**Adjustments
                to reconcile net income to net cash provided by operating
                activitiesNet
                amortization of premiums on investment securities
            
            
            **244**
            
            
            **422**Provision
                for loan losses
            
            
            **29**
            
            
            **201**Amortization
                of deferred loan fees
            
            
            **(611**
            **)**
            
            **(333**
            **)**Gain
                on sale of premises and equipment
            
            
            **(3**
            **)**
            
            **(1,781**
            **)**Depreciation
                and amortization
            
            
            **1,044**
            
            
            **918**Gain
                on sale of foreclosed properties
            
            
            **(27**
            **)**
            
            **(119**
            **)**Recognition
                of stock compensation on restricted common stock and stock
                options
            
            
            **254**
            
            
            **201**Minority
                interest expense (income)
            
            
            **36**
            
            
            **(14**
            **)**Deferred
                income tax expense
            
            
            **—**
            
            
            **(1**
            **)**Changes
                in operating assets and liabilitiesLoans
                held for sale
            
            
            **5,910**
            
            
            **487**Interest
                receivable
            
            
            **(114**
            **)**
            
            **(122**
            **)**Other
                assets
            
            
            **49**
            
            
            **184**Interest
                payable and other liabilities
            
            
            **(683**
            **)**
            
            **(528**
            **)**Net
                cash provided by operating activities
            
            
            **7,984**
            
            
            **1,269**Cash
                flows from investing activitiesPurchases
                of investment securities, available for sale
            
            
            **(30,466**
            **)**
            
            **(80,520**
            **)**Increase
                in bank stocks from stock dividends received
            
            
            **(51**
            **)**
            
            **(20**
            **)**Proceeds
                from maturities of investment securities, held to maturity
            
            
            **59**
            
            
            **47**Proceeds
                from maturities/calls of investment securities, available for
                sale
            
            
            **37,882**
            
            
            **16,428**Proceeds
                from redemption of bank stocks
            
            
            **—**
            
            
            **19**Net
                increase in loans
            
            
            **(13,697**
            **)**
            
            **(38,187**
            **)**Purchases
                of premises and equipment
            
            
            **(1,150**
            **)**
            
            **(4,279**
            **)**Proceeds
                from sales of premises and equipment
            
            
            **99**
            
            
            **8,283**Proceeds
                from sales of foreclosed properties
            
            
            **248**
            
            
            **771**Net
                cash used by investing activities
            
            
            **(7,076**
            **)**
            
            **(97,458**
            **)**Cash
                flows from financing activitiesNet
                increase in deposits
            
            
            **19,464**
            
            
            **18,420**Net
                increase in federal funds purchased and securities sold
                underagreements to repurchase
            
            
            **16,240**
            
            
            **1,909**Net
                decrease in Federal Home Loan Bank advances
            
            
            **(15,312**
            **)**
            
            **(5,846**
            **)**Proceeds
                from issuance of common stock
            
            
            **718**
            
            
            **411**Distribution
                to minority partners
            
            
            **(155**
            **)**
            
            **—**Payment
                of cash dividends on common stock
            
            
            **(766**
            **)**
            
            **(742**
            **)**Net
                cash provided by financing activities
            
            
            **20,189**
            
            
            **14,152**Net
                increase (decrease) in cash and cash equivalents
            
            
            **21,097**
            
            
            **(82,037**
            **)**Cash
                and cash equivalents at beginning of period
            
            
            **35,655**
            
            
            **100,908**Cash
                and cash equivalents at end of period
            
            **$**
            **56,752**
            
            **$**
            **18,871**





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


6
 Table
          of Contents






**VAIL
        BANKS, INC.**
 **Consolidated
        Statements of Cash Flows (Continued)**
 (in
        thousands)
 (unaudited)





Six
                months ended
              June
                30,**2005**
            
            2004Supplemental
                disclosures of cash flow informationCash
                paid during the period for:Interest
                expense
            
            **$**
            **4,912**
            
            
            4,105Income
                taxes
            
            **$**
            **270**
            
            
            952Non-cash
              investing
              and financing transactionsForeclosure
                of collateralized loans, net of reserve
            
            **$**
            **25**
            
            
            1,078Net
                change in unrealized loss on investment securities available forsale,
                net of taxes
            
            **$**
            **(47**
            **)**
            
            (1,478
            )Restricted
                stock:Original
                issuance (205,000 shares)
            
            **$**
            **2,727**
            
            
            —Earned
                compensation
            
            
            **(75**
            **)**
            
            —Net
                restricted stock
            
            **$**
            **2,652**
            
            
            —










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





7
 Table
          of Contents




**VAIL
        BANKS, INC.**
 Notesto
        Unaudited Consolidated Financial
        Statements





**1.** **ORGANIZATION
      AND BASIS OF PRESENTATION**





The
      accompanying unaudited consolidated financial statements include the accounts
      of
      Vail Banks, Inc. (Vail Banks) and its wholly-owned subsidiary, WestStar Bank
      (WestStar). Vail Banks and WestStar own a combined 54.04% interest in Avon
      56
      Limited and 74.92% of Glenwood/Rose L.P. Both Avon 56 Limited and Glenwood/Rose
      L.P. are real estate partnerships. All entities are collectively referred to
      as
“the Company.” All significant intercompany accounts and transactions have been
      eliminated in consolidation. The Company’s two trusts are reported separately in
      accordance with Financial Interpretation No. 46 (Revised), *Consolidation
      of Variable Interest Entities* .





The
      accompanying unaudited consolidated financial statements, which are for interim
      periods, do not include all disclosures provided in the consolidated financial
      statements as of December 31, 2004. These interim unaudited consolidated
      financial statements and the notes thereto should be read in conjunction with
      the Company’s Annual Report on Form 10-K as of and for the year ended December
      31, 2004. In
      the
      opinion of the Company, all adjustments necessary, consisting of only normal
      recurring items, have been included for a fair presentation of the accompanying
      consolidated financial statements. Operating results for the six months ended
      June 30, 2005 are not necessarily indicative of the results that may be expected
      for the full year.





Certain
      reclassifications have been made to the 2004 financial statements to conform
      to
      the 2005 presentation.





**2.   
      INVESTMENT SECURITIES**




Investment
      securities consist of the following:




**June
                30, 2005**
            
            December
                31, 2004**Amortized**
            
            **Fair**
            
            Amortized
            
            Fair(in
                thousands)
            
            **Cost**
            
            **Value**
            
            Cost
            
            ValueSecurities
                available for saleGovernment
                agencies (1)
            
            
            **23,371**
            
            
            **23,016**
            
            
            24,308
            
            
            23,962State
                and municipal obligations
            
            
            **19,780**
            
            
            **20,296**
            
            
            19,663
            
            
            19,938Mortgage-backed
                securities
            
            
            **48,951**
            
            
            **48,121**
            
            
            56,294
            
            
            55,747Agency
                preferred stock
            
            
            **5,000**
            
            
            **4,613**
            
            
            4,496
            
            
            4,132Total
                securities available for sale
            
            **$**
            **97,102**
            
            **$**
            **96,046**
            
            $
            104,761
            
            $
            103,779Securities
                held to maturityMortgage-backed
                securities
            
            **$**
            **186**
            
            **$**
            **197**
            
            $
            246
            
            $
            262Total
                securities held to maturity
            
            **$**
            **186**
            
            **$**
            **197**
            
            $
            246
            
            $
            262(1)
                Includes mortgage-backed government
                agencies.





After-tax
      net unrealized losses on investment securities increased $47,000 during the
      first six months of 2005 from a loss of $618,000 at December 31, 2004 to a
      loss
      of $665,000 at June 30, 2005. The increase in the after-tax net unrealized
      losses on available for sale securities relates primarily to the 100 basis
      point
      increase in interest rates implemented by the Federal Reserve during the first
      and second quarters of 2005. Management does not believe any individual
      unrealized loss as of June 30, 2005 represents an other-than-temporary
      impairment.














8
 Table
          of Contents





**VAIL
        BANKS, INC.**
 Notes
        to
        Unaudited Consolidated Financial Statements








The
      following table presents the components of investment income for the three
      and
      six months ended June 30, 2005 and 2004.





Three
                months ended
              June
                30,****
            
            Six
                months ended
              June
                30,(in
                thousands)
            
            **2005**
            
            2004
            
            **2005**
            
            2004Taxable
                interest income
            
            **$**
            **746**
            
            
            732
            
            
            **1,719**
            
            
            1,178Nontaxable
                interest income
            
            
            **224**
            
            
            265
            
            
            **567**
            
            
            536$
            **970**
            
            
            997
            
            
            **2,286**
            
            
            1,714








**3.      
      LOANS**




Loans
      consist of the following:




(in
                    thousands)
                
                **June 30,**
                  **2005**
                
                December
                    31,
                  2004Commercial,
                    industrial and land
                
                **$**
                **224,899**
                
                $
                239,946Real
                    estate - construction
                
                
                **120,942**
                
                
                92,705Real
                    estate - mortgage
                
                
                **69,470**
                
                
                69,164Consumer
                    and other
                
                
                **6,502**
                
                
                5,814**421,813**
                
                
                407,629Less:   
                    Allowance for loan losses
                
                
                **(4,003**
                **)**
                
                (3,895
                )Net deferred loan fees
                
                
                **(1,098**
                **)**
                
                (1,276
                )Loans,
                    Net
                
                **$**
                **416,712**
                
                $
                402,458




As
      of
      June 30, 2005 and December 31, 2004, $157,000 and $74,000, respectively, of
      deposit account overdrafts have been reclassified to consumer and other loans.





No
      loans
      were transferred to foreclosed properties during the second quarter of 2005.
      Loans having carrying values of $16,000 and $405,000 were transferred to
      foreclosed properties during the first quarter of 2005 and the second quarter
      of
      2004, respectively.





The
      principal balance of loans on which the accrual of interest has been
      discontinued was $0 and $1.6 million at June 30, 2005 and 2004, respectively.
      As
      of June 30, 2005 and 2004, $181,000 and $8,000, respectively, of loans were
      past
      due 90 days and still accruing interest.





The
      majority of impaired loans requiring an allowance are measured using the fair
      value of the underlying collateral since these loans are considered collateral
      dependent. Any unsecured loans are measured using discounted cash flow analyses
      of the payments expected over the life of the loan considering any internal
      or
      external factors that currently exist that would impact the amount or timing
      of
      cash flows.





9
 Table
          of Contents




**VAIL
          BANKS, INC.**
 Notes
          to
          Unaudited Consolidated Financial Statements





The
      following is a summary of information pertaining to impaired loans:





**June
                30,**
            
            December
                31,(in
                thousands)
            
            **2005**
            
            2004Impaired
                loans without a valuation allowance
            
            **$**
            **4,373**
            
            **$**
            **5,539**Impaired
                loans with a valuation allowance
            
            
            **1,647**
            
            
            **2,006**Total
                impaired loans
            
            **$**
            **6,020**
            
            **$**
            **7,545**Valuation
                allowance related to impaired loans
            
            **$**
            **349**
            
            **$**
            **473**





In
      the
      ordinary course of business, the Company had loans receivable from directors,
      executive officers and principal shareholders (holders of more than five percent
      of the outstanding shares of common stock) of the Company and their affiliates
      as follows:





(in
                thousands)
            
            **2005**Balance
                at January 1, 2005
            
            **$**
            **10,682**New
                loans, including renewals
            
            
            **879**Payments
            
            
            **(1,577**
            **)**Balance
                at June 30, 2005
            
            **$**
            **9,984**







**4.       
      ALLOWANCE FOR LOAN LOSSES**




Transactions
      in the allowance are summarized as follows:




(in
                thousands)
            
            **2005**
            
            2004Allowance
                at January 1,
            
            **$**
            **3,895**
            
            
            3,503Loans
                charged off
            
            
            **(25**
            **)**
            
            (458
            )Recoveries
                on loans previously charged off
            
            
            **104**
            
            
            123Provision
                for loan losses
            
            
            **29**
            
            
            201Allowance
                at June 30,
            
            **$**
            **4,003**
            
            
            3,369








**5.** **INVESTMENT
      IN BANK STOCKS**




WestStar
      is a member of the Federal Home Loan Bank of Topeka (FHLB) and is, therefore,
      required to maintain an investment in stock of the FHLB equal to the greater
      of
      1% of certain residential mortgages or 5% of FHLB advances. The Company has
      a
      blanket pledge with the FHLB and has pledged all of its FHLB stock and certain
      qualifying loans to secure outstanding advances from the FHLB.




Investment
      in bank stocks consists of the following:





(in
                thousands)
            
            **June
                30,**
              **2005**
            
            December
                31,
              2004Federal
                Home Loan Bank Stock
            
            **$**
            **2,455**
            
            $
            2,404Federal
                Reserve Bank Stock
            
            
            **1,870**
            
            
            1,870Bankers’
                Bank of the West Stock
            
            
            **183**
            
            
            183**$**
            **4,508**
            
            $
            4,457








10
 Table
          of Contents


**VAIL
          BANKS, INC.**
 Notes
          to
          Unaudited Consolidated Financial Statements





**6.** **SECURITIES
      SOLD UNDER AGREEMENTS TO REPURCHASE**




Securities
      sold under agreements to repurchase, which are classified as secured borrowings,
      generally mature within one to four days from the transaction date. At June
      30,
      2005 and December 31, 2004, the carrying amount of securities sold to secure
      repurchase agreements was $17.1 million and $894,000, respectively. This $16.2
      million increase is due to the Company’s recent marketing efforts focused on
      increasing the use of this product. Securities sold under agreements to
      repurchase are reflected at the amount of cash received in connection with
      the
      transaction. The Company may be required to provide additional collateral based
      on the fair value of the underlying securities.





**7.      
      BORROWINGS**




As
      a
      member of the FHLB, and as a regular part of its business, WestStar obtains
      both
      short and long-term advances from the FHLB. Advances are collateralized
      primarily by FHLB stock owned by WestStar and loans secured by certain mortgages
      or deeds of trust. As of June 30, 2005, the Company’s total borrowing capacity
      was $128.4 million of which $27.1 million of borrowings were outstanding ($3.4
      million was short-term and $23.7 million was long-term). Additionally, the
      Company has $10.0 million in stand-by irrevocable letters of credit
      issued
      by the FHLB and pledged as collateral for uninsured public fund deposits.




WestStar
      has established an unsecured, overnight federal funds line with Bankers’ Bank of
      the West that expires on August 31, 2005. As of June 30, 2005, this authorized
      borrowing line totaled $38.2 million with no amounts outstanding.




WestStar
      has also established an unsecured, overnight federal funds lines with First
      Tennessee Bank, N.A. that expires on June 30, 2006. As of June 30, 2005, the
      authorized borrowing line totaled $20.0 million with no amounts outstanding.




**8.       
      SHAREHOLDERS’ EQUITY**




***Stock
      Repurchase Plan***




At
      its
      meeting on January 17, 2005, the Company’s Board of Directors reauthorized the
      Company’s stock repurchase program that was originally approved in February
      2001. Since inception of the program through June 30, 2005, the Company has
      repurchased 1,535,380 shares at an average price of $12.10 per share, or
      approximately $19 million. The total amount of repurchases under the program,
      both previously completed and allowable up to January 2006, aggregate
      approximately $29 million. The total amount of repurchases available under
      the
      program approximates $10.0 million.  During the first two quarters of
      2005,
      the Company did not repurchase any common shares.




***Restricted
      Stock***




The
      Company accounts for its restricted stock grants in accordance with Accounting
      Principles Board (APB) Opinion No. 25, *Accounting
      for Stock Issued to Employees* .
      Accordingly, compensation expense is recorded over the vesting period of the
      restricted stock equal to the value of the restricted shares using the market
      price of the stock on the grant date. Some restricted share awards were granted
      as variable plan awards. For those grants, the unearned compensation expense
      is
      adjusted at each balance sheet date to reflect the then-current market price
      of
      the stock.





In
      March
      2005, the Company granted 75,000 shares of restricted stock to two officers
      of
      the Company. These shares were granted under the Vail Banks, Inc. Stock
      Incentive Plan, (the Plan), and vest upon achievement of certain performance
      criteria. As such, they are accounted for as variable plan awards. The Company
      computed unearned compensation expense of $998,000, based on the market price
      of
      the stock on the date of grant, and has begun recognizing compensation expense
      ratably over the vesting period of 10 years. This compensation expense will
      be
      adjusted at each balance sheet date to reflect the then-current market price
      of
      the stock and to reflect any changes in the number of shares vested and
      remaining to vest in future periods.





In
      March
      2005, the Board completed grants totaling 130,000 shares of restricted stock
      to
      two individuals as an inducement to become officers of the Company. These shares
      are unregistered and granted outside of the Plan. These shares vest upon
      achievement of certain performance criteria. As such, they are accounted for
      as
      variable plan awards. The Company computed unearned compensation expense of
      $1,729,000, based on the market price of the stock on the date of grant, and
      has
      begun recognizing compensation expense ratably over the vesting period of 10
      years. This compensation expense will be adjusted at each balance sheet date
      to
      reflect the then-current market price of the stock and to reflect any changes
      in
      the number of shares vested and remaining to vest in future
      periods.





11
 Table
          of Contents




**VAIL
          BANKS, INC.**
 Notes
          to
          Unaudited Consolidated Financial Statements





***Earnings
      Per Share***




Basic
      earnings per share represents net income available to common shareholders
      divided by the weighted-average number of common shares outstanding during
      the
      period. Diluted earnings per share is computed similar to basic earnings per
      share, except that the weighted average common shares outstanding is increased
      to include the number of additional common shares that would have been
      outstanding if dilutive potential common shares had been issued. Common
      equivalent shares are not included where inclusion would be anti-dilutive.





The
      following table presents the net income and weighted average common shares
      outstanding used to calculate earnings per share for the three and six months
      ended June 30, 2005 and 2004:





**For
                the three months ended**
              **June
                30,**
            
            **For
                the six months ended**
              **June
                30,**(in
                thousands, except share data)
            
            **2005**
            
            2004
            
            **2005**
            
            2004Basic
                earnings per share computationNet
                income available to common shareholders
            
            **$**
            **971**
            
            
            574
            
            
            **1,856**
            
            
            1,754Weighted
                average shares outstanding - basic
            
            
            **5,180,909**
            
            
            5,050,161
            
            
            **5,132,746**
            
            
            5,034,712Basic
                earnings per share
            
            **$**
            **0.19**
            
            
            0.11
            
            
            **0.36**
            
            
            0.35




















**For
                the three months ended**
              **June
                30,**
            
            **For
                the six months ended**
              **June
                30,**(in
                thousands, except share data)
            
            **2005**
            
            2004
            
            **2005**
            
            2004Diluted
                earnings per share computationNet
                income available to common shareholders
            
            **$**
            **971**
            
            
            574
            
            
            **1,856**
            
            
            1,754


Weighted
                average shares outstanding - basic
            
            
            **5,180,909**
            
            
            5,050,161
            
            
            **5,132,746**
            
            
            5,034,712Shares
                assumed issued:Stock
                options
            
            
            **125,321**
            
            
            118,387
            
            
            **124,719**
            
            
            123,181Restricted
                  stock
            
            
            **29,533**
            
            
            249,279
            
            
            **145,973**
            
            
            252,015Weighted
                average shares outstanding - diluted
            
            
            **5,335,763**
            
            
            5,417,827
            
            
            **5,403,438**
            
            
            5,409,908Diluted
                earnings per share
            
            **$**
            **0.18**
            
            
            0.11
            
            
            **0.34**
            
            
            0.32





There
      were no anti-dilutive options for the three or six months ended June 30, 2005
      and 2004.





12
 Table
          of Contents




**VAIL
          BANKS, INC.**
 Notes
          to
          Unaudited Consolidated Financial Statements





**Stock
      Options**




The
      Company accounts for its stock options in accordance with the provisions of
      APB
      Opinion No. 25 *,* while
      disclosing pro forma net income and pro forma earnings per share for employee
      stock option grants made in 1995 and future years as if the fair-value-based
      method defined in SFAS No. 123, *Accounting
      for Stock Based Compensation,* had been
      applied. The Company has elected to apply the accounting provisions of APB
      Opinion No. 25 to employee stock option grants and provide the pro forma
      disclosure provisions of SFAS 123.





The
      fair
      value of each employee stock option grant was estimated on the date of grant
      using the Black-Scholes option-pricing model. The following weighted-average
      assumptions were used for the six months ended June 30, 2005 and
      2004:





**2005**
            
            2004Dividend
                yield
            
            
            **2.17%**
            
            
            **Expected
                life
            
            
            **7
                years**
            
            
            **Expected
                volatility
            
            
            **24.9%**
            
            
            **Risk-free
                interest rate
            
            
            **4.2%**
            
            
            **




**
      There
      were no stock options granted during 2004.




There
      were 31,000 stock options granted during the first quarter of 2005 and no stock
      options granted during the second quarter of 2005. No stock options were granted
      during the first two quarters of 2004.





Had
      the
      Company determined compensation cost based on the fair value accounting
      provisions prescribed by SFAS 123 and using assumptions from the Black-Scholes
      option pricing model, the Company’s net income and earnings per share would have
      been adjusted to the pro forma amounts indicated below:





Three
                  months ended
                June
                  30,****
              
              Six
                  months ended
                June
                  30,(in
                  thousands, except share data)
              
              **2005**
              
              2004
              
              **2005**
              
              2004Net
                  incomeAs
                  reported
              
              **$**
              **971**
              
              
              574
              
              
              **1,856**
              
              
              1,754Deduct:
                  Total stock-based employeecompensation determined under thefair
                  value method, net of tax
              
              
              **(7**
              **)**
              
              (14
              )
              
              **(16**
              **)**
              
              (35
              )Pro
                  forma
              
              **$**
              **964**
              
              
              560
              
              
              **1,840**
              
              
              1,681Earnings
                  per share - basicAs
                  reported
              
              **$**
              **0.19**
              
              
              0.11
              
              
              **0.36**
              
              
              0.35Pro
                  forma
              
              **$**
              **0.19**
              
              
              0.11
              
              
              **0.36**
              
              
              0.34Earnings
                  per share - dilutedAs
                  reported
              
              **$**
              **0.18**
              
              
              0.11
              
              
              **0.34**
              
              
              0.32Pro
                  forma
              
              **$**
              **0.18**
              
              
              0.10
              
              
              **0.34**
              
              
              0.32





13
 Table
          of Contents




**VAIL
        BANKS, INC.**
 Notes
        to
        Unaudited Consolidated Financial Statements





**9.       
      REGULATORY MATTERS**




As
      of
      June 30, 2005, the Company met all capital adequacy requirements to which it
      was
      subject. As of that date, the Company had Tier 1 and Total Risk-Based Capital
      ratios of 10.47% and 12.04%, respectively, and a Leverage ratio of 7.98%.
      Regulatory guidelines permit the Company’s trust preferred securities to be
      included in the calculation of Tier 1, Total Risk-Based capital, and the
      Leverage Ratio, subject to certain limitations.





As
      of
      June 30, 2005, WestStar met all capital adequacy requirements to which it was
      subject and exceeded the minimum ratios to be designated as “well-capitalized.”
      As of June 30, 2005, WestStar had Tier 1 and Total Risk-Based Capital ratios
      of
      10.68% and 11.54%, respectively, and a Leverage ratio of 8.09%.





**10.      
      SEGMENT INFORMATION**





The
      Company believes that the activities and assets of the mortgage brokerage
      business segment are no longer of continuing significance and, therefore, do
      not
      warrant separate disclosure in the current period. Information about reportable
      segments and reconciliation of such information to the consolidated financial
      statements for the six months ended June 30, 2004 is as follows:





Six
                Months Ended June 30, 2004Mortgage(in
                thousands)
            
            Banking
            
            Brokerage
            
            Other
            
            TotalCondensed
                income statementTotal
                income
            
            $
            18,645
            
            
            1,646
            
            
            20
            
            
            20,311Total
                expense
            
            
            13,795
            
            
            1,374
            
            
            2,171
            
            
            17,340Income
                (loss) before income taxes
            
            
            4,850
            
            
            272
            
            
            (2,151
            )
            
            2,971Income
                tax expense (benefit)
            
            
            1,899
            
            
            102
            
            
            (784
            )
            
            1,217Net
                income (loss)
            
            $
            2,951
            
            
            170
            
            
            (1,367
            )
            
            1,754







**11.** **RECENT
      ACCOUNTING PRONOUNCEMENTS**




On
      April
      14, 2005, the Securities and Exchange Commission (SEC) adopted a new rule that
      amends the compliance dates for SFAS No. 123(R), *Share-Based
      Payment* .
      The
      SEC’s new rule allows companies to adopt SFAS No. 123(R) at the beginning of the
      next fiscal year, instead of the next reporting period that begins after June
      15, 2005. The Company will adopt the provisions of SFAS No. 123(R) on January
      1,
      2006. The Company estimates that adoption of this standard will have an
      insignificant effect on the Company’s consolidated financial condition or
      results of operations, similar to the results shown in the pro
      forma
      disclosure included in Note 8.





In
      May
      2005, the Financial Accounting Standards Board (FASB) issued SFAS. No. 154, *Accounting
      Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB
      Statement No. 3.* This
      statement changes the requirements for accounting for and reporting a change
      in
      accounting principle. It also provides guidance for applying changes required
      by
      an accounting pronouncement in the unusual instance that the pronouncement
      does
      not include specific transition guidance. This statement is effective for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. The Company does not expect adoption of this statement
      to have an effect on the results of future operations.





**12.      
      LEGAL CONTINGENCIES**




From
      time
      to time, the Company is party to or otherwise involved in legal proceedings
      arising in the normal course of business, such as claims to enforce liens,
      claims involving the making and servicing of real property loans and other
      issues relating to the business of the Company. Management of the Company does
      not believe that there is any pending or threatened proceeding against the
      Company which would have a material effect on the Company’s consolidated
      financial statements.





14
 Table
          of Contents




**VAIL
        BANKS, INC.**
 Notes
        to
        Unaudited Consolidated Financial Statements





**13.      
      SUBSEQUENT EVENTS**




On
      July
      18, 2005, the Board of Directors (Board) declared a regular quarterly dividend
      of $0.07 per share payable on August 12, 2005 to shareholders of record on
      July
      29, 2005.




On
      July
      8, 2005, the Company commenced operations in a new retail office in Fruita,
      Colorado.




















15
 Table
          of Contents











**Item
      2.** **MANAGEMENT’SDISCUSSION
      AND ANALYSIS OF FINANCIAL CONDITION AND
      RESULTS OF OPERATIONS** ****





**ForwardLooking
      Statements**





This
      Quarterly Report on Form 10-Q contains forward-looking statements within the
      meaning of the Private Securities Litigation Reform Act of 1995. These
      forward-looking statements include, but are not limited to, statements about
      our
      plans, objectives, expectations and intentions and other statements contained
      in
      this report that are not historical facts. When used in this report, the words
      “expects,”“anticipates,”“intends,”“plans,”“believes,”“seeks,”“estimates” and
      similar expressions are generally intended to identify forward-looking
      statements. These forward-looking statements are inherently subject to
      significant business, economic and competitive uncertainties and contingencies,
      many of which are beyond our control. In addition, these forward-looking
      statements are subject to assumptions with respect to future business strategies
      and decisions that are subject to change. Actual results may differ materially
      from the results discussed in these forward-looking statements as a result
      of
      the impact of economic conditions and interest rates, loan losses, risks related
      to the execution of the Company’s growth strategy, the possible loss of key
      personnel, factors that could affect the Company’s ability to compete in its
      trade areas, changes in regulations and government policies and other factors
      discussed in the Company’s filings with the Securities and Exchange Commission.
      Vail Banks does not intend to update any forward-looking statements whether
      written or oral, relating to matters discussed in this Quarterly Report on
      Form
      10-Q.





**Basisof
      Presentation** ****





The
      following discussion and analysis provides information regarding the Company’s
      financial condition as of June 30, 2005, and its results of operations for
      the
      three and six months ended June 30, 2005, in comparison to the three and six
      months ended June 30, 2004. The following discussion should be read in
      conjunction with the unaudited consolidated financial statements and related
      notes included elsewhere in this Quarterly Report on Form 10-Q, and in
      conjunction with the Company’s Annual Report on Form 10-K for the year ended
      December 31, 2004.





**Overview******





Net
      income was $971,000 for the three months ended June 30, 2005, an increase of
      $397,000, or 69%, from $574,000 in the second quarter of 2004. Net income was
      $1.9 million for the six months ended June 30, 2005, an increase of $102,000,
      or
      6%, from $1.8 million for the six months ended June 30, 2004. First quarter
      2004
      revenue included a $1.7 million pre-tax gain on the sale of the Company’s Vail
      bank building. Without this gain, net income for the six months ended June
      30,
      2004 would have been $986,000a .





Diluted
      earnings per share for the three months ended June 30, 2005 were $0.18 compared
      to $0.11 for the second quarter of 2004, an increase of 64%. Diluted earnings
      per share for the six months ended June 30, 2005 were $0.34, a 6% increase
      over
      the $0.32 diluted earnings per share for the six months ended June 30, 2004.
      Excluding the first quarter 2004 gain on the building sale, diluted earnings
      per
      share would have been $0.18 a for the
      first six months of 2004.





The
      annualized return on average assets was 0.60% for the three months ended June
      30, 2005 compared to 0.39% for the three months ended June 30, 2004, a 54%
      increase. The annualized return on average assets was 0.57% for the six month
      ended June 30, 2005 compared to 0.60% for the same period in 2004. Excluding
      the
      first quarter 2004 gain on the building sale, the annualized return on average
      assets would have been 0.33% a for the
      first six months of 2004.




The
      annualized return on average equity was 6.39% for the three months ended June
      30, 2005 compared to 3.95% for the three months ended June 30, 2004, a 62%
      increase. The annualized return on average equity was 6.18% for the six months
      ended June 30, 2005 compared to 6.04% for the six months ended June 30, 2004.
      Excluding the first quarter 2004 gain on the building sale, the annualized
      return on average equity would have been 3.40% a for the
      six months ended June 30, 2004.







aThis is
      a non-GAAP measure presented for comparability between periods. This calculation
      reflects the results that would have been achieved as of June 30, 2004 if the
      sale of the Vail bank building had not occurred.





16
 Table
          of Contents





**Resultsof
      Operations** ****




*Net
      Interest Income.* Net
      interest income, on a fully tax-equivalent basis (FTE), increased by $1.5
      million, or 27%, to $7.0 million for the three months ended June 30, 2005 from
      $5.3 million for the three months ended June 30, 2004. Net interest income,
      FTE
      basis, increased by $3.2 million, or 30%, to $13.8 million for the six months
      ended June 30, 2005 from $10.6 million for the six months ended June 30, 2004.
      The net interest margin on an FTE basis was 5.00% for the three months ended
      June 30, 2005 as compared to 4.38% for the three months ended June 30, 2004.
      The
      net interest margin on an FTE basis was 5.05% for the six months ended June
      30,
      2005 as compared to 4.28% for the comparable period in 2004. Net interest margin
      is influenced by the level and relative mix of earning assets, interest bearing
      liabilities as well as the cost of interest bearing liabilities as compared
      to
      the yield on earning assets. The increase in net interest margin during the
      second quarter of 2005 as compared to the second quarter of 2004 was due
      primarily to the $82.0 million, or 25%, increase in average loans since June
      30,
      2004 as a result of the
      strong economy and an internal focus on growing the loan portfolio. The growth
      in average deposits, up $54.7 million or, 12%, from June 30, 2004 enabled the
      Company to grow the loan portfolio while reducing higher-rate debt. Average
      notes payable and other borrowings decreased $11.1 million, or 32%, since June
      30, 2004 to an average balance of $23.7 million for the second quarter 2005. The
      225
      basis point interest rate increases implemented by the Federal Reserve from
      June
      2004 through June 2005 have also contributed to the increase in the net interest
      margin. Interest income FTE increased to $9.6 million for the three months
      ended
      June 30, 2005 from $7.4 million for the three months ended June 30, 2004. During
      this time period, average earning assets increased $60.0 million, or 12%, from
      $502.0 million for the three months ended June 30, 2004 to $562.0 million for
      the three months ended June 30, 2005. During the second quarter of 2005, average
      loans increased to 73% of earning assets as compared to 66% during the second
      quarter of 2004, while
      average federal funds sold and investment securities decreased to 26% of earning
      assets as compared to 33% during the second quarter of 2004.  During
      the second quarter of 2005, loans had a yield of 8.04% as compared to the 3.75%
      yield on investment securities and 3.09% yield on federal funds sold. As a
      result of this shift, the total yield on average earning assets increased 87
      basis points to 6.84% for the second quarter of 2005, as compared to 5.97%
      for
      the second quarter of 2004.




Interest
      expense increased to $2.6 million, a change of $611,000 or 31%, for the three
      months ended June 30, 2005, as compared to $2.0 million for the corresponding
      period in 2004. This increase was comprised primarily of a $618,000, or 61%,
      increase in interest expense on deposits, due to an increase in average balances
      and an increase in cost of funds due to rising interest rates during the three
      months ended June 30, 2005, as compared to the corresponding period in 2004.
      Average interest bearing deposits increased $33.3 million, or 9%, in 2005 over
      the corresponding period in 2004. As a result, the total cost of
      interest-bearing liabilities increased 37 basis points to 2.22% for the second
      quarter of 2005, as compared to 1.85% for the second quarter of 2004. This
      increase in cost of interest bearing liabilities, however, was not in proportion
      to the increase in yield on average interest earning assets, resulting in an
      overall increase in net interest income and net interest margin for the second
      quarter of 2005.




During
      the second quarter 2005, interest expense increased $243,000, or 10%, from
      the
      first quarter 2005. The increase was comprised primarily of a $367,000, or
      27%,
      increase in interest expense on deposits, due to an increase in average balances
      and an increase in cost of funds as a result of rising interest rates. Average
      interest bearing deposits increased $17.8 million, or 3%, between the first
      and
      second quarters of 2005. The increase in interest expense on deposits was
      partially offset by a decrease in interest expense on notes payable and other
      borrowings, which decreased $123,000, or 34%, between the first and second
      quarters of 2005. This decrease was primarily due to the pay down of $6.1
      million of FHLB advances early in the second quarter of 2005, as well as the
      maturity of $8.0 million in FHLB advances in March 2005. Average notes payable
      and other borrowings decreased $14.9 million, or 38%, between the first and
      second quarters of 2005.





*Non-Interest
      Income* .
      During
      the three months ended June 30, 2005, non-interest income decreased by $416,000,
      or 20%, to $1.7 million from $2.1 million for the three months ended June 30,
      2004. This decrease was primarily attributable to the $316,000 decrease in
      mortgage broker fees as origination volumes continue to lag behind those of
      2004. Also contributing to the decline was the decrease in income from sales
      of
      premises and equipment. During the second quarter of 2004, the Company sold
      the
      right to purchase its main bank building in Glenwood Springs, Colorado for
      a
      pre-tax gain of approximately $107,000. During the six months ended June 30,
      2005, non-interest income decreased $2.7 million, or 45%, due in part to the
      items mentioned above as well as the $1.7 million pre-tax gain on the sale
      of
      the Vail bank building during March 2004. Non-interest income increased
      $106,000, or 7%, during the second quarter 2005, in comparison to the first
      quarter 2005, primarily due to an increase in mortgage broker fee
      income.





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*Non-Interest
      Expense* .
      Non-interest expense increased $591,000, or 9%, to $7.2 million for the three
      months ended June 30, 2005, from $6.6 million for the three months ended June
      30, 2004. This increase was attributable to the following: (1) an increase
      in
      salaries and benefits of $115,000, or 3%, compared to second quarter 2004 due
      primarily to an increase in full-time equivalent associates which increased
      from
      238 in June 2004 to 254 in June 2005; (2) an increase in occupancy expenses
      of
      $198,000, or 23%, primarily due to the move to the new Glenwood branch in the
      third quarter of 2004, and the remodeling of existing branches; (3) an increase
      in furniture and equipment expense of $39,000, or 6%, due to the completion
      of
      the Glenwood Springs building and completion of significant remodeling of the
      Company’s Avon and Norwood retail offices; (4) an increase of $92,000, or 53%,
      in marketing and promotion costs for the new brand launch, *WestStar
      Bank* . *Expect
      Action* ;
      (5) an
      increase of $51,000, or 204%, in checking and savings losses; and (6) an expense
      of $63,000 related to prepayment penalties for the repayment of $6.1 million
      of
      FHLB advances prior to their maturity dates.





The
      efficiency ratio was 84% for both the three and six months ended June 30, 2005
      compared to 89% for the three months ended June 30, 2004 and 81% for the six
      months ended June 30, 2004. Excluding the gain on the building sale, the
      efficiency ratio would have been 90%b for the six months ended June
      30, 2004. The decrease in the efficiency ratio was due to the increase in
      revenue (net interest income plus non-interest income) of $1.2 million, or
      16%,
      for the three months ended June 30, 2005 compared to the three months ended
      June
      30, 2004, while at the same time non-interest expenses increased by a lesser
      degree, 9% or $591,000. Revenue (net interest income plus non-interest income)
      increased $703,000, or 4%, for the six months ended June 30, 2005 compared
      to
      the six months ended June 30, 2004, while non-interest expenses increased 9%,
      or
      $1.2 million, causing the efficiency ratio to increase. Excluding the gain
      on
      the building sale, revenue would have increased $2.4 millionb, or
      16%, for the six months ended June 30, 2005 which is at a greater rate than
      the
      increase in non-interest expense, thereby reducing the efficiency ratio from
      90% b to 84%.





*Income
      Taxes.* The
      Company’s effective income tax rate (income tax expense as a percentage of
      pre-tax income) was 31.6% and 30.5%, respectively, for the three and six months
      ended June 30, 2005 as compared to 24.9% and 41.0%, respectively for the three
      and six months ended June 30, 2004. The increase in the effective tax rate
      for
      the three months ended June 30, 2005 was primarily due to tax-exempt interest
      from municipal securities representing a lower percentage of pre-tax income
      than
      it did during the same period in 2004. The decrease in the effective income
      tax
      rate for the six months ended June 30, 2005 was primarily due to additional
      income tax expense recorded during the first quarter of 2004 as a result of
      the
      Vail building sale.




**FinancialCondition**





The
      Company's assets increased by $21.6 million or 3%, to $656.2 million as of
      June
      30, 2005, from $634.6 million as of December 31, 2004.





Federal
      funds sold balances increased by $21.6 million, or 125%, to $38.9 million as
      of
      June 30, 2005 from $17.3 million at December 31, 2004. Investment securities
      decreased to $96.2 million as of June 30, 2005, compared to $104.0 million
      as of
      December 31, 2004, an 8% decrease. The decrease in investment securities is
      due
      primarily to principal payments received on mortgage-backed securities.





The
      Company’s mortgage division originates consumer mortgage loans with the intent
      to sell those loans to third parties. As of June 30, 2005, loans held for sale
      decreased $5.9 million, or 83%, from December 31, 2004. The ending balance
      of
      loans held for sale at any particular date is dependent on the timing of the
      closing and ultimate funding of the loans by third parties. Thus, an increase
      or
      decrease in the ending balance is primarily a function of timing and may not
      be
      indicative of trends in mortgage loan demand.







b This is a non-GAAP measure presented for comparability between periods. This
        calculation reflects the results that would have been achieved as of June
        30,
        2004 if the sale of the Vail bank building had not occurred.







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Deposits
        increased by $19.5 million, or 4%, from $500.4 million as of December 31,
        2004,
        to $519.9 million as of June 30, 2005. The largest increase was in money
        market
        deposits, with a $37.0 million, or 28% increase. This was partially offset
        with
        a $10.0 million, or 8%, decrease in certificates of deposit. The overall
        increase in deposits is primarily due to the Company’s marketing efforts and
        continued focus on enhancing existing deposit relationships and attracting
        new
        deposit relationships. Core deposits, which exclude certificates of deposits,
        increased $29.4 million, or 8%, since December 31, 2004 to $405.5 million
        at
        June 30, 2005.




**AssetQuality**





*Provision
      and Allowance for Loan Losses.* A credit
      to the provision and provision expense for the three and six months ended June
      30, 2005 was $(36,000) and $29,000, respectively. Due to continued strong credit
      quality during the second quarter of 2005, and net recoveries of $50,000 for
      the
      quarter, the Company reversed $36,000 of previously recorded provision expense
      to fairly state the allowance for loan losses at June 30, 2005. Provision
      expense was $43,000 and $201,000, respectively, for the three and six months
      ended June 30, 2004. The allowance for loan losses of $4.0 million as of June
      30, 2005 was up slightly from $3.9 million as of December 31, 2004, and
      represents 0.95% of total loans as of June 30, 2005, as compared to 0.96% of
      total loans at December 31, 2004. Since December 31, 2004, average loans have
      increased $16.7 million, or 4%. Loans
      past due 90 days or more and still accruing interest increased $164,000, to
      $181,000 at June 30, 2005 compared to $17,000 at December 31, 2004. However,
      loans past due 90 days or more and still accruing interest improved since
      the first quarter 2005 by $872,000, or 83%. The
      $108,000 increase in the allowance for loan losses from December 31, 2004
      reflects the Company’s revised estimate of probable losses in the loan
      portfolio.





The
      amount of the provision for loan losses is based on regular evaluations of
      the
      loan portfolio, with particular attention directed toward non-performing,
      delinquent, and other potential problem loans. During these evaluations,
      consideration is also given to such factors as management’s evaluation of
      specific loans, the level and composition of delinquent and non-performing
      loans, historical loan loss experience, results of examinations by regulatory
      agencies, internal asset review processes, the market value of collateral,
      the
      strength and availability of guarantees, concentrations of credit and other
      judgmental factors.





The
      following table presents, for the periods indicated, an analysis of the
      allowance for loan losses and other related data.





**Allowance
                for Loan Losses Analysis**(in thousands)
            
            Six
                months ended
              June
                30,**2005**
            
            2004Average
                total loans
            
            **$**
            **406,943**
            
            
            322,088Total
                loans at end of period
            
            **$**
            **420,715**
            
            
            348,881Allowance
                at beginning of period
            
            **$**
            **3,895**
            
            
            3,503Loans
                charged off
            
            
            **(25**
            **)**
            
            (458
            )Recoveries
                on loans previously charged off
            
            
            **104**
            
            
            123Provision
                for loan losses
            
            
            **29**
            
            
            201Allowance
                at end of period
            
            **$**
            **4,003**
            
            
            3,369Annualized
                net recoveries (charge-offs) to average loans
            
            
            **0.04**
            **%**
            
            (0.21
            )%Allowance
                to total loans at end of period
            
            
            **0.95**
            **%**
            
            0.97
            %








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 Table
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*Non-Performing
      Assets* .
      The
      following table presents information regarding non-performing assets as of
      the
      dates indicated:





**Non-Performing
                Assets**(in
                thousands)****
            
            June
                30,**2005**
            
            2004Nonaccrual
                loans
            
            $
            —
            
            
            1,555Restructured
                loans
            
            
            —
            
            
            —Total
                non-performing loans
            
            
            —
            
            
            1,555Foreclosed
                properties
            
            
            **589**
            
            
            788Total
                non-performing assets
            
            
            **589**
            
            
            2,343Loans
                90 days or more past due and accruing
            
            
            **181**
            
            
            8Total
                risk assets
            
            **$**
            **770**
            
            
            2,351Non-performing
                loans to total loans
            
            
            **0.00**
            **%**
            
            0.45
            %Non-performing
                assets to loan related assets
            
            
            **0.14**
            **%**
            
            0.67
            %Non-performing
                assets to total assets
            
            
            **0.09**
            **%**
            
            0.40
            %Risk
                assets to loan related assets
            
            
            **0.18**
            **%**
            
            0.67
            %





Foreclosed
      properties are recorded at the lower of cost or fair value less estimated costs
      to sell. Anticipated losses are recorded at the time of transfer from loans.
      Management is not aware of any significant adverse trends relating to its loan
      portfolio.





**Liquidity******





Liquidity
      is a measure of the Company’s ability to meet its commitments and obligations
      with available funds. These
      commitments may include paying dividends to shareholders, funding new loans
      for
      borrowers, funding withdrawals by depositors, paying general and administrative
      expenses, and funding capital expenditures. Historically,
      the Company's primary source of funds has been customer deposits. Scheduled
      loan
      repayments are also a relatively stable source of funds. Deposit inflows and
      unscheduled loan repayments, which are influenced by fluctuations in the general
      level of interest rates, returns available on other investments, competition,
      economic conditions and other factors, are relatively volatile. Other sources
      of
      liquidity include sale or maturity of investment securities and the ability
      to
      borrow funds. Company borrowing may be used on a short-term basis to compensate
      for reductions in other sources of funds (such as deposit inflows at less than
      projected levels). Company borrowing may also be used on a longer-term basis
      to
      support expanded lending and investing activities and to match the maturity
      or
      repricing intervals of assets.





As
      of
      June 30, 2005, the Company had cash and cash equivalents (including federal
      funds sold) of $56.8 million and investment securities of $96.2 million.
      Approximately $96.0 million of the Company’s investment portfolio is classified
      as available-for-sale and can be readily sold, however $64.1 million and $26.4
      million of this amount have been pledged to secure uninsured public fund
      deposits and securities sold under agreements to repurchase,
      respectively .
      Accordingly, these pledged amounts may
      not
      be available to meet general liquidity needs. Based on current plans and
      business conditions, the Company expects that its cash, cash equivalents,
      investment securities and available borrowing capacity under its credit
      facilities, together with any amounts generated from operations, will be
      sufficient to meet the Company's liquidity requirements for the next 12 months.
      However, there can be no assurance that the Company will not be required to
      seek
      other financing sooner or that such financing, if required, will be available
      on
      terms satisfactory to the Company.





***Cash
      Flows***





*Net
      Cash from Operating Activities*





During
      the six-month period ended June 30, 2005, cash of $8.0 million was provided
      by
      operating activities consisting primarily of net income of $1.9 million plus
      non-cash items of $966,000 and net decreases in operating assets and liabilities
      of $5.2 million.
      Non-cash items consisted primarily of amortization and depreciation on premises
      and equipment of $1.0 million, net amortization of premiums on investment
      securities of $244,000, recognition of compensation expense on restricted common
      stock and stock options of $254,000, minority interest expense of $36,000 and
      a
      $29,000 loan loss provision, partially offset by the amortization of deferred
      loan fees of $611,000 and gain on the sale of foreclosed properties of $27,000.
      The net decrease in operating assets and liabilities was primarily due to a
      $5.9
      million decrease in loans held for sale, partially offset by a $683,000 decrease
      in interest payable and other liabilities and a $114,000 increase in interest
      receivable.





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During
      the six-month period ended June 30, 2004, cash of $1.3 million was provided
      by
      operating activities consisting primarily of net income of $1.8 million less
      non-cash items of $506,000 and net decreases in operating assets and liabilities
      of $21,000. Non-cash items consisted primarily of a $1.8 million pre-tax gain
      on
      the sale of the Vail bank building and $333,000 of deferred loan fee
      amortization, offset by $918,000 of depreciation and amortization expense on
      premises, equipment and intangible assets, a $201,000 loan loss provision and
      $422,000 of net amortization of premiums on investment securities. The net
      decrease in operating assets and liabilities was primarily due to a $528,000
      decrease in interest payable and other liabilities offset by a $487,000 decrease
      in loans held for sale.





*Net
      Cash from Investing Activities*





During
      the six-month period ended June 30, 2005, cash of $7.1 million was used for
      investing activities. These outflows consisted primarily of the purchase of
      $30.5 million of investment securities, $13.7 million of net increases in loans,
      $1.2 million for purchases of premises and equipment, partially offset by
      proceeds from the maturity, call or principal payments received on investment
      securities of $37.9 million.





During
      the six-month period ended June 30, 2004, cash of $97.5 million was used for
      investing activities. These outflows consisted primarily of the purchase of
      $80.5 million of investment securities, a $38.2 million increase in loans and
      $4.3 million in purchases of premises and equipment, offset by the maturity,
      call or principal payment received on investment securities of $16.5 million
      and
      $8.3 million of proceeds from the sale of the Vail bank building.





*Net
      Cash from Financing Activities*





During
      the six-month period ended June 30, 2005, cash of $20.2 million was provided
      by
      financing activities consisting primarily of increases in deposits of $19.5
      million and an increase of $16.2 million in securities sold under agreements
      to
      repurchase, partially offset by the repayment of FHLB advances of $15.3 million.





During
      the six-month period ended June 30, 2004, cash of $14.2 million was provided
      by
      financing activities consisting primarily of an increase in deposits of $18.4
      million, and an increase in federal funds purchased of $1.9 million, offset
      by
      the repayment of FHLB advances of $5.8 million.





***Borrowings***





As
      a
      member of the FHLB and, as a regular part of its business, WestStar obtains
      both
      short and long-term advances from the FHLB. Advances are collateralized
      primarily by FHLB stock owned by WestStar and loans secured by certain mortgages
      or deeds of trust. As of June 30, 2005, the Company’s total borrowing capacity
      was $128.4 million of which $27.1 million of borrowings were outstanding ($3.4
      million was short-term and $23.7 million was long-term). Additionally, the
      Company has $10.0 million in the form of stand-by irrevocable letters of credit
      issued by the FHLB and pledged as collateral for uninsured public fund deposits.




On
      April
      4, 2005, the Company repaid $6.1 million of higher rate FHLB advances prior
      to
      their maturity dates. Although the Company incurred a $63,000 prepayment
      penalty, the Company anticipates future cost savings, as current funding sources
      are at lower interest rates.





***Dividends***




Payment
      of dividends is at the discretion of the Board and is determined by taking
      into
      account the earnings, capital levels, cash requirements, and the financial
      condition of Vail Banks and WestStar, as well as applicable government
      regulations and other relevant factors. The principal source of Vail Banks’
      income is dividends from WestStar. There are statutory and regulatory
      requirements applicable to the payment of dividends by WestStar to Vail Banks,
      as well as by Vail Banks to its shareholders. Due to the
      volume of dividends paid relative to earnings in earlier years, dividend
      payments from WestStar to Vail Banks require prior regulatory approval.
      Management believes that approval will be granted as long as WestStar maintains
      its well-capitalized regulatory status.


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On
      April
      18, 2005, the Board declared a regular quarterly dividend of $0.07 per share
      payable on May 13, 2005 to Vail Banks’ shareholders of record on April 29, 2005.





On
      July
      18, 2005, the Board declared a regular quarterly dividend of $0.07 per share
      payable on August 12, 2005 to Vail Banks’ shareholder of record on July 29,
      2005.





***Stock
      Repurchase Plan***




At
      its
      meeting on January 17, 2005, the Company’s Board of Directors reauthorized the
      Company’s stock repurchase program that was originally approved in February
      2001. Since inception of the program through June 30, 2005, the Company has
      repurchased 1,535,380 shares at an average price of $12.10 per share, or
      approximately $19.0 million. The total amount of repurchases under the program,
      both previously completed and allowable up to January 2006, aggregate
      approximately $29.0 million. The total amount of repurchases available under
      the
      program approximates $10.0 million. During the first six months of 2005, the
      Company did not repurchase any common shares.





**CapitalResources** ****





As
      of
      June 30, 2005, shareholders’ equity had increased $2.0 million, or 3%, to $61.9
      million from $59.9 million as of December 31, 2004. This increase is primarily
      related to the retention of earnings of $1.9 million and an increase of $972,000
      for the issuance of common stock; offset by an increase in accumulated other
      comprehensive loss of $47,000 due to the unrealized loss on available-for-sale
      securities, and the payment of common stock dividends of $766,000.





As
      of
      June 30, 2005 and 2004, the Company met all capital adequacy requirements to
      which it was subject. As of June 30, 2005, the Company had Tier 1 and Total
      Risk-Based Capital ratios of 10.47% and 12.04%, respectively, and a Leverage
      ratio of 7.98%. As of June 30, 2004, the Company had Tier 1 and Total Risk-Based
      Capital ratios of 11.05% and 11.93%, respectively, and a Leverage ratio of
      7.71%.





As
      of
      June 30, 2005 and 2004, WestStar met all capital adequacy requirements to which
      it was subject and exceeded the minimum ratios to be designated as
“well-capitalized **.** ”
      As of
      June 30, 2005, WestStar had Tier 1 and Total Risk-Based Capital ratios of 10.68%
      and 11.54%, respectively, and a Leverage ratio of 8.09%. As of June 30, 2004,
      WestStar had Tier 1 and Total Risk-Based Capital ratios of 13.39% and 14.25%,
      respectively, and a Leverage ratio of 8.74%.













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 Table
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**Item
      3.** **QUANTITATIVEAND
      QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK** ****





**Quantitative
      and Qualitative Disclosures About Market Risk**





Market
      risk is the exposure to loss resulting from changes in interest rates, foreign
      currency exchange rates, commodity prices and equity prices. The primary market
      risk to which the Company is exposed is interest rate risk arising from the
      instruments and transactions entered into by the Company. They include loans,
      securities available for sale, deposit liabilities, and borrowings. Interest
      rate risk occurs when interest-sensitive assets and liabilities reprice at
      different times as market interest rates change. Interest-sensitive assets
      and
      liabilities are those that are subject to repricing in the near term, including
      both variable rate instruments and those fixed rate instruments that are
      approaching maturity. For example, if fixed-rate assets are funded with
      floating-rate debt, the spread between asset and liability rates will decline
      or
      turn negative if rates increase. Additionally, interest rate risk results from
      changing spreads between asset and liability rates.




The
      Company’s Asset/Liability Management Committee manages interest rate risk. The
      principal objective of asset/liability management is to manage the levels of
      interest-sensitive assets and liabilities to minimize net interest income
      fluctuations in times of fluctuating market interest rates. To effectively
      measure and manage interest rate risk, the Company uses computer simulations
      that determine the impact on net interest income of numerous interest rate
      scenarios, balance sheet trends and strategies. These simulations cover the
      following financial instruments: short-term financial instruments, investment
      securities, loans, deposits, and borrowings. These simulations incorporate
      assumptions about balance sheet dynamics, such as loan and deposit growth and
      pricing, changes in funding mix, and asset and liability repricing and maturity
      characteristics. Simulations are run under various interest rate scenarios
      to
      determine the impact on net income and capital. From these computer simulations,
      interest rate risk is quantified and appropriate strategies are developed and
      implemented. As of June 30, 2005, the Company has never used interest rate
      derivative financial instruments as an asset/liability management tool to hedge
      mismatches in interest rate exposures.





Management
      continually monitors the Company’s exposure to fluctuations in market rates. One
      of the tools management utilizes to estimate the sensitivity of net interest
      revenue to changes in interest rates is an interest rate simulation model.
      Such
      estimates are based upon a number of assumptions for each scenario, including
      the level of loan growth and deposit and loan repricing characteristics. The
      simulation model measures the potential change in net interest income for future
      periods under various interest rate scenarios.   Based on these
      simulation models, if interest rates increased 50 basis points each quarter
      for
      the remainder of 2005, net interest income would increase an estimated $1.3
      million during the last six months of 2005.  If rates continued to increase
      50 basis points in both the first and second quarters of 2006 and then stayed
      constant for the remainder of 2006, net interest income would increase an
      estimated $5.9 million for the twelve months ended December 31, 2006. 
      On
      the contrary, if interest rates decreased 25 basis points each quarter for
      the
      remaining two quarters of 2005, net interest income would decrease an estimated
      $500,000 during that time.  If interest rates continued to decrease
      25
      basis points in both the first and second quarters of 2006 and then stayed
      constant for the remainder of 2006, net interest income would decrease
      an estimated $2.4 million for the twelve months ended December 31,
      2006.





The
      increase in short-term rates by the Federal Reserve during 2004, and thus far
      in
      2005, have effectively repriced a significant portion of the Company’s loan
      portfolio. Due to the deposit growth during the first six months of 2005, the
      Company has been able to minimize increases to funding costs, while capitalizing
      on the increased yield on loans, thereby increasing the net interest margin.





**Item
      4.** **CONTROLSAND
      PROCEDURES**





Company
      management, including the Chief Executive Officer and Chief Financial Officer,
      supervised and participated in an evaluation of the Company’s disclosure
      controls and procedures (as defined in rules of the Securities and Exchange
      Commission) as of June 30, 2005. Based on, and as of the date of, that
      evaluation, the Company’s Chief Executive Officer and Chief Financial Officer
      have concluded that the Company’s disclosure controls and procedures were
      effective in accumulating and communicating information to management, including
      the Chief Executive Officer and Chief Financial Officer, as appropriate to
      allow
      timely decisions regarding required disclosures of that information under the
      Securities and Exchange Commission’s rules and forms and that the disclosure
      controls and procedures are designed to ensure that the information required
      to
      be disclosed in reports that are filed or submitted under the Securities and
      Exchange Act of 1934, as amended, are recorded, processed, summarized and
      reported within the time periods specified in the Securities and Exchange
      Commission’s rules and forms.





There
      were no significant changes in the Company’s internal controls or in other
      factors that could significantly affect these controls subsequent to the date
      of
      their evaluation.





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 Table
          of Contents








**PART
      II**  **OTHERINFORMATION**





**Item
      1.** **LEGALPROCEEDINGS.**





Vail
      Banks and its banking subsidiary periodically are parties to or otherwise
      involved in legal proceedings arising in the normal course of business, such
      as
      claims to enforce liens, claims involving the making and servicing of real
      property loans and other issues incident to their business. Management does
      not
      believe that there is any pending or threatened proceeding against Vail Banks
      or
      its banking subsidiary which, if determined adversely, would have a material
      effect on the business, results of operations, or financial position of Vail
      Banks or its banking subsidiary.





**Item
      2.** **UNREGISTEREDSALES
      OF EQUITY SECURITIES AND USE OF
      PROCEEDS.**





None.





**Item
      3.** **DEFAULTSUPON
      SENIOR SECURITIES.**





None.





**Item
      4.** **SUBMISSIONOF
      MATTERS TO A VOTE OF SECURITY
      HOLDERS.**




On
      May
      16, 2005, the Company held its annual meeting of shareholders. At that meeting,
      the security holders voted on the following items:






1.   
      Election of directors—Directors were elected with the following
      results:






**Name**
            **Term**
            **Votes
                Cast**
              **For
                Election**
            **Votes
                Cast**
              **Against
                Election**
            **Votes**
              **Withheld**
            **Abstentions**
            **Broker
                Non-Votes**Kay
                Chester
            3
                years
            4,542,907
            0
            437,595
            0
            0James
                G. Flaum
            3
                years
            4,544,065
            0
            436,437
            0
            0Dan
                E. Godec
            3
                years
            4,805,268
            0
            175,234
            0
            0Robert
                L. Knous
            3
                years
            4,515,879
            0
            464,623
            0
            0Byron
                A. Rose
            3
                years
            4,544,065
            0
            436,437
            0
            0Donald
                L. Vanderhoof
            3
                years
            4,781,088
            0
            199,414
            0
            0





2.
            Security
                holders voted to ratify the selection of Perry-Smith LLP as Vail
                Banks’
                independent public accountants for the fiscal year 2005. The results
                of
                the vote were as follows: votes cast for the proposal were 4,945,369,
                votes cast against the proposal were 12,590, votes withheld were
                0,
                abstentions were 22,543, and broker non-votes were
                0.





Due
      to
      typographical errors, the Company’s Quarterly Report on Form 10-Q for the second
      quarter of 2004 (filed with the SEC on August 13, 2004 and amended on October
      26, 2004) incorrectly reported the votes cast “for,”“against” and “withheld”
      with respect to matters considered at the 2004 annual meeting of shareholders.





24
 Table
          of Contents







The
      following is a fully revised table showing the votes cast for the matters
      considered at the 2004 annual shareholders meeting:








1.
            Election
                of directors—Directors were elected with the following
                results:





**Name**
            **Term**
            **Votes
                Cast**
              **For
                Election**
            **Votes
                Cast**
              **Against
                Election**
            **Votes**
              **Withheld**
            **Abstentions**
            **Broker
                Non-Votes**E.B.
                Chester, Jr.
            3
                years
            2,946,033
            0
            319,999
            0
            0S.
                David Gorsuch
            3
                years
            3,032,634
            0
            233,398
            0
            0James
                M. Griffin
            3
                years
            3,249,834
            0
            16,198
            0
            0Garner
                F. Hill II
            3
                years
            3,246,134
            0
            19,898
            0
            0Gary
                S. Judd
            3
                years
            3,202,365
            0
            63,667
            0
            0





2. Security
      holders voted to amend the Amended and Restated Stock Incentive Plan (the Plan)
      to increase the number of shares of common stock reserved for issuance under
      the
      Plan from the current 1,000,000 shares to 1,250,000 shares, and to provide
      that
      the new total number of shares will increase on January 1 st of each
      year equal to twenty percent of the increase in the total number of shares
      outstanding on such January 1 st over the
      total number of shares outstanding on the immediately preceding January
      1 st .
      Security holders also voted to amend the Plan to increase the number of shares
      reserved for the grant of “incentive stock options” from 500,000 shares to
      625,000 shares. The results of the vote were as follows: votes cast for the
      proposal were 2,795,190, votes cast against the proposal were 470,842, votes
      withheld were 0, abstentions were 0, and broker non-votes were 0.





3. Security
      holders voted to ratify the selection of Dalby, Wendland & Co., P.C. as Vail
      Banks’ independent public accountants for the fiscal year 2004. The results of
      the vote were as follows: votes cast for the proposal were 3,245,358, votes
      cast
      against the proposal were 20,322, votes withheld were 0, abstentions were 352,
      and broker non-votes were 0.





**Item
      5.** **OTHERINFORMATION.**





None.





**Item
      6.     EXHIBITS.**





**(a)**
            **Exhibits**





31.1
            Certification
                byGary
                S. Judd, Chief Executive Officer and President of the Company,
                as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002





31.2
            Certification
                by Brady T. Burt, Chief Financial Officer of the Company, as adopted
                pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002





32.1
            Certification by Gary
              S. Judd, Chief Executive Officer and President of the Company,
              pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
              906 of
              the Sarbanes-Oxley Act of 2002





32.2
            Certification
                by Brady T. Burt, Chief Financial Officer of the Company, pursuant
                to 18
                U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002





25
 Table
          of Contents





**SIGNATURES**








Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by
      the
      undersigned thereunto duly authorized.







**VAIL
                  BANKS, INC.**Date:
                  August 12, 2005
              /s/Gary
                  S. JuddGary
                  S. Judd*Chief
                  Executive Officer and President**(Principal
                  Executive Officer)**August 12,
                  2005*Date: August
                  12, 2005
              /s/
                  Brady T. BurtBrady
                  T. Burt*Chief
                  Financial Officer**(Principal
                  Financial Officer)**August
                  12, 2005*
 
 26