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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-Q

(Mark One)

|ý | Quarterly Report Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March
31, 2002
|- | -------------------------------------------------------------------------------------------------------------------------------------
| ̈ | Transition Report Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition
period from _____ to _____



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Commission File Number
000-25081

VAIL BANKS, INC.



|Colorado                                     | 84-1250561         
|-------------------------------------------- | -------------------
|(State or
other jurisdiction of              | (I.R.S.
Employer   
|incorporation
or organization)               | Identification
No.)
|                                             |                    
|108
South Frontage Road West, Vail, Colorado | 81657              
|(Address of
principal executive offices)     | (Zip Code)         

(970) 476-2002

N/A

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. YesþNo ̈

Indicate the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:   As of April 30, 2002, there were 5,878,650 shares of
common stock ($1.00 par value per share) outstanding.

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Form 10-Q
For the QUARTER Ended MARCH 31, 2002

###### TABLE OF CONTENTS

PART I 
      FINANCIAL
INFORMATIONItem 1.    FINANCIAL
      STATEMENTSConsolidated Balance
      Sheets
    3Consolidated Statements of Income and Comprehensive
      Income
    4Consolidated Statements of Cash Flows
    5Notes to Unaudited Consolidated Financial
      Statements
    7Item 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
                          AND RESULTS OF
       OPERATIONSForward
Looking Statements
    12Basis
of Presentation
    12Overview
    12Results
Of Operations
    13Financial
Condition
    14Asset
Quality
    15Liquidity
    16Capital
Resources
    18Recently
Issued Accounting Standards
    19Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
    20PART II   OTHER INFORMATIONItem 6.   
      EXHIBITS AND REPORTS ON FORM
      8-K.
    22


2

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# PART I           FINANCIAL INFORMATION

## Item 1.       FINANCIAL
STATEMENTS

VAIL BANKS, INC.Consolidated Balance
SheetsMarch 31,

December 31,(in thousands, except share data)

2002

2001ASSETS




(unaudited)Cash and due from banks
$
21,936
$
21,711Federal funds sold

30,000

13,815Investment securities, available for sale

73,103

40,588Investment securities, held to maturity (fair value of$952 and $1,033 as of March 31, 2002 and December 31, 2001,
respectively)

923

998Loans held for sale

5,159

6,950Loans (includes related party loans of $4,032 and $4,024as of March 31, 2002 and December 31, 2001,
respectively)

367,326

391,725Allowance for loan losses

( 4,477)

(4,375)Net loans

362,849

387,350Premises and equipment, net

42,404

41,957Interest receivable

2,795

2,571Intangible assets, net

36,860

36,860Other assets



3,071

2,531$
579,100
$
555,331LIABILITIES AND SHAREHOLDERS’ EQUITYLiabilitiesDepositsNon-interest bearing
$
97,660
$
103,730Interest bearing

358,389

338,620Total deposits

456,049

442,350Short-term Federal Home Loan Bank advances

12,150

12,250Long-term Federal Home Loan Bank advances

17,850

8,850Interest payable and other liabilities

4,042

3,724Total liabilities

490,091

467,174Minority interest

723

701Trust preferred securities

24,000

24,000Shareholders’ equityPreferred stock – $1 par value; 2,250,000 shares authorized, no
sharesissued and outstanding at March 31, 2002 and December 31, 2001,
respectively

—

—Common stock – $1 par value; 20,000,000 shares authorized,5,871,656 and 5,754,152 shares issued and outstanding atMarch 31, 2002 and December 31, 2001, respectively

5,871

5,754Additional paid-in capital

42,471

42,531Retained earnings

16,388

15,155Accumulated other
comprehensive (loss) income, net of tax (benefit) expense of
      $(256) and $9 at March 31, 2002 and December 31,
2001, respectively

( 444)

16Total shareholders’ equity

64,286

63,456$
579,100
$
555,331The accompanying unaudited notes are an integral part of these consolidated
financial statements


3

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Vail Banks, Inc.
Consolidated Statements of Income and Comprehensive
Income(in thousands, except share data)

|                                                                                              |   | Three months ended
March  31,
|--------------------------------------------------------------------------------------------- | - | -----------------------------
|                                                                                              |   |                              
|                                                                                              |   | 2002                         
|                                                                                              |   |                              
|                                                                                              |   | (unaudited)                  
|                                                                                              |   |                              
|Interest income                                                                               |   |                              
|Interest and fees on loans                                                                    | $ | 7,888                        
|Interest on investment securities                                                             |   | 728                          
|Interest on federal funds sold and other short-term
investments                               |   | 82                           
|                                                                                              |   |                              
|Total interest income                                                                         |   | 8,698                        
|                                                                                              |   |                              
|Interest expense                                                                              |   |                              
|Deposits                                                                                      |   | 1,337                        
|Borrowings                                                                                    |   | 183                          
|Trust preferred securities                                                                    |   | 612                          
|                                                                                              |   |                              
|Total interest expense                                                                        |   | 2,132                        
|                                                                                              |   |                              
|Net interest income                                                                           |   | 6,566                        
|Provision for loan losses                                                                     |   | 212                          
|                                                                                              |   |                              
|Net interest income after provision for loan losses                                           |   | 6,354                        
|                                                                                              |   |                              
|Non-interest income                                                                           |   |                              
|Deposit related                                                                               |   | 882                          
|Mortgage broker fees                                                                          |   | 1,134                        
|Other                                                                                         |   | 904                          
|                                                                                              |   |                              
|                                                                                              |   | 2,920                        
|                                                                                              |   |                              
|Non-interest expense                                                                          |   |                              
|Salaries and employee benefits                                                                |   | 4,073                        
|Occupancy                                                                                     |   | 791                          
|Furniture and equipment                                                                       |   | 706                          
|Amortization of intangible assets                                                             |   | —                            
|Other                                                                                         |   | 1,348                        
|                                                                                              |   |                              
|                                                                                              |   | 6,918                        
|                                                                                              |   |                              
|Income before income tax expense                                                              |   | 2,356                        
|Income tax expense                                                                            |   | 836                          
|                                                                                              |   |                              
|Net income                                                                                    |   | 1,520                        
|Net change in unrealized (loss) gain on investment securities available for
sale,net of taxes |   | (460)                        
|                                                                                              |   |                              
|Comprehensive income                                                                          | $ | 1,060                        
|                                                                                              |   |                              
|Earnings per share                                                                            |   |                              
|Basic                                                                                         | $ | 0.27                         
|                                                                                              |   |                              
|Diluted                                                                                       | $ | 0.26                         
|                                                                                              |   |                              
|Weighted average common shares                                                                |   |                              
|Basic                                                                                         |   | 5,680,277                    
|Diluted                                                                                       |   | 5,943,687                    

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

4

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Vail Banks, Inc.Consolidated
Statements of Cash Flows(in thousands)

|                                                                                                            |   | Three months ended
March 31,
|----------------------------------------------------------------------------------------------------------- | - | ----------------------------
|                                                                                                            |   |                             
|                                                                                                            |   | 2002                        
|                                                                                                            |   |                             
|                                                                                                            |   | (unaudited)                 
|                                                                                                            |   |                             
|Cash flows from operating activities                                                                        |   |                             
|Net income                                                                                                  | $ | 1,520                       
|Adjustments to reconcile net income to net cash provided
by
           operating activities                 |   |                             
|Net amortization of premiums on investment
securities                                                       |   | 65                          
|Provision for loan losses                                                                                   |   | 212                         
|Depreciation and amortization of premises and
equipment                                                     |   | 578                         
|Loss on sale of premises and
equipment                                                                      |   | 2                           
|Amortization of intangible assets                                                                           |   | —                           
|Gain on sale of foreclosed
properties                                                                       |   | (74)                        
|Recognition of stock compensation on
restricted common stock                                                |   | 44                          
|Recognition of stock compensation on
non-employee stock options                                             |   | 13                          
|Deferred income tax expense                                                                                 |   | —                           
|Changes in operating assets and liabilities,
net of effect of purchase
               business combinations |   |                             
|Loans held for
sale                                                                                         |   | 1,791                       
|Interest
receivable                                                                                         |   | (224)                       
|Other assets                                                                                                |   | (220)                       
|Interest payable and other
liabilities                                                                      |   | 318                         
|Other, net                                                                                                  |   | 22                          
|                                                                                                            |   |                             
|Net cash provided by operating activities                                                                   |   | 4,047                       
|                                                                                                            |   |                             
|                                                                                                            |   |                             
|Cash flows from investing activities, net of effect of purchase
business
    combinations                   |   |                             
|Purchases of investment securities, available
for sale                                                      |   | (37,804)                    
|Proceeds from maturities of investment
securities, held to maturity                                         |   | 76                          
|Proceeds from maturities/calls of investment
securities, available for sale                                 |   | 4,498                       
|Net decrease in loans                                                                                       |   | 24,000                      
|Purchases of premises and
equipment                                                                         |   | (1,027)                     
|Proceeds from sales of foreclosed
properties                                                                |   | 308                         
|                                                                                                            |   |                             
|Net cash paid for acquisitions                                                                              |   | —                           
|Net cash (used in) provided by investing activities                                                         |   | (9,949)                     
|                                                                                                            |   |                             
|                                                                                                            |   |                             
|Cash flows from financing activities, net of effect of purchase
business
      combinations                 |   |                             
|Net increase in deposits                                                                                    |   | 13,699                      
|Net decrease in federal funds
purchased                                                                     |   | —                           
|Net increase in Federal Home Loan Bank
advances                                                             |   | 8,900                       
|Repayment of line of credit                                                                                 |   | —                           
|Proceeds from issuance of trust preferred
securities                                                        |   | —                           
|Proceeds from issuance of common
stock                                                                      |   | —                           
|Repurchase of common stock                                                                                  |   | —                           
|Payment of cash dividends on common
stock                                                                   |   | (287)                       
|                                                                                                            |   |                             
|Net cash provided by financing activities                                                                   |   | 22,312                      
|                                                                                                            |   |                             
|Net increase in cash and cash equivalents                                                                   |   | 16,410                      
|Cash and cash equivalents at beginning of period                                                            |   | 35,526                      
|                                                                                                            |   |                             
|Cash and cash equivalents at end of period                                                                  | $ | 51,936                      
|                                                                                                            |   |                             

5

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Vail Banks, Inc.
Consolidated Statements of Cash Flows
(Continued)(in thousands)

|                                                                                                     |   | Three months ended
March 31,
|---------------------------------------------------------------------------------------------------- | - | ----------------------------
|                                                                                                     |   |                             
|                                                                                                     |   | 2002                        
|                                                                                                     |   |                             
|                                                                                                     |   | (unaudited)                 
|Supplemental disclosures of cash flow information                                                    |   |                             
|Cash paid during the period for:                                                                     |   |                             
|Interest expense                                                                                     | $ | 2,368                       
|                                                                                                     |   |                             
|Income taxes                                                                                         | $ | —                           
|                                                                                                     |   |                             
|                                                                                                     |   |                             
|Non-cash investing and financing transactions
   Foreclosure of collateralized loans, net of
reserve | $ | 289                         
|                                                                                                     |   |                             
|Unrealized (loss) gain on investment securities available
for sale,
 net of  taxes                   | $ | (460)                       
|                                                                                                     |   |                             
|Reclassification of software from premises and equipment
to
 other assets                            | $ | —                           
|                                                                                                     |   |                             
|Issuance of restricted common stock                                                                  | $ | 117                         
|                                                                                                     |   |                             
|                                                                                                     |   |                             
|Goodwill recorded in connection with acquisitions                                                    |   |                             
|Cash outflows for business acquisitions (net
of cash acquired)                                       | $ | —                           
|Net assets acquired (assets acquired less
liabilities issued and assumed)                            |   | —                           
|                                                                                                     |   |                             
|Goodwill recorded                                                                                    | $ | —                           
|                                                                                                     |   |                             

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

6

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Vail Banks, Inc.

### Notes to 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 subsidiaries, WestStar
Bank (WestStar), Vail Banks Statutory Trust I, and Vail Banks Statutory Trust II.   WestStar and Vail Banks own a combined
54.04% interest in Avon 56 Limited and WestStar owns a 100% interest in First Western Mortgage Services which are also included in the accompanying consolidated financial statements.  All entities are collectively referred
to as “the Company.”  All significant intercompany accounts and transactions have been eliminated in
consolidation.

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, 2001.  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,
2001.

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 three months ended March 31, 2002, are not
necessarily indicative of the results that may be expected for the full year.

Certain reclassifications have
been made to the 2001 financial statements to conform to the 2002 presentation.

2.  INVESTMENT SECURITIES

Investment securities consist of the following:

|                                    |   | March 31, 2002 |   | December 31, 2001
|----------------------------------- | - | -------------- | - | -----------------
|                                    |   |                |   |                  
|                                    |   | Amortized      |   | Fair             
|(in thousands)                      |   | Cost           |   | Value            
|                                   
|Securities available for sale       |   |                |   |                  
|U.S. Treasury                       | $ | 249            | $ | 255              
|Government agencies                 |   | 18,852         |   | 18,804           
|State and municipal                 |   | 2,536          |   | 2,544            
|Mortgage-backed securities          |   | 39,483         |   | 38,978           
|FHLMC preferred stock               |   | 4,502          |   | 4,484            
|Trust preferred securities          |   | 4,628          |   | 4,485            
|                                    |   |                |   |                  
|Total debt
securities               |   | 70,250         |   | 69,550           
|Equity securities                   |   | 3,553          |   | 3,553            
|                                    |   |                |   |                  
|Total securities
available for sale | $ | 73,803         | $ | 73,103           
|                                    |   |                |   |                  
|                                    |   |                |   |                  
|Securities held to maturity         |   |                |   |                  
|Mortgage-backed securities          | $ | 923            | $ | 952              
|                                    |   |                |   |                  
|Total securities held
to maturity   | $ | 923            | $ | 952              
|                                    |   |                |   |                  

As of March 31, 2002, equity securities were comprised of Federal Home Loan Bank (FHLB) stock of $1.5 million, Federal Reserve
stock of $1.9 million, and other equity investments of $184,000.   As of December 31, 2001, equity securities were
comprised of FHLB stock of $2.1 million, Federal Reserve stock of $793,000, and other equity investments of
$184,000.

7

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The following table presents the components of investment income for the three months
ended March 31, 2002 and 2001.

|(in thousands)             |   | March 31,
2002 |   | March 31,
2001
|-------------------------- | - | -------------- | - | --------------
|                          
|                           |   |                |   |               
|Taxable interest income    | $ | 587            | $ | 297           
|Nontaxable interest income |   | 92             |   | 45            
|Dividends                  |   | 49             |   | 53            
|                           |   |                |   |               
|                           | $ | 728            | $ | 395           
|                           |   |                |   |               

3.  LOANS

Loans consist of the following:

|(in thousands)                  |   | March 31,
2002 |   | December 31,
2001
|------------------------------- | - | -------------- | - | -----------------
|                               
|                                |   |                |   |                  
|Commercial, industrial and land | $ | 210,401        | $ | 214,662          
|Real estate – construction      |   | 78,924         |   | 90,449           
|Real estate – mortgage          |   | 62,487         |   | 68,898           
|Consumer and other              |   | 15,514         |   | 17,716           
|                                |   |                |   |                  
|                                | $ | 367,326        |   | 391,725          
|                                |   |                |   |                  

As of March 31, 2002 and December 31, 2001, $344,000 and $178,000, respectively, of
deposit account overdrafts have been reclassified to loans.

In the ordinary course of business, the Company has 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)                |   | 2002 
|----------------------------- | - | -----
|                             
|Balance at January 1, 2002    | $ | 4,024
|New loans, including renewals |   | 53   
|Payments, including renewals  |   | (45) 
|                              |   |      
|Balance at March 31, 2002     | $ | 4,032
|                              |   |      

4.  PROVISION AND ALLOWANCE FOR LOAN LOSSES

Transactions in the allowance are summarized as follows:

|(in thousands)                             |   | 2002 
|------------------------------------------ | - | -----
|                                          
|Allowance at January 1, 2002               | $ | 4,375
|Loans charged off                          |   | (171)
|Recoveries on loans previously charged off |   | 61   
|Provision for loan losses                  |   | 212  
|                                           |   |      
|Allowance at March 31, 2002                | $ | 4,477
|                                           |   |      

8

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5.  INTANGIBLE ASSETS

During June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, which provides guidance on
how to account for goodwill and intangible assets after an acquisition has been completed.  Specifically, all new and
pre-existing goodwill will no longer be amortized, but instead will be tested for impairment on an annual basis. The Company
adopted the provisions of SFAS 142 on January 1, 2002 and determined that the net unamortized goodwill of $36.9 million was not
impaired as of that date.

The following table presents comparative net income as if goodwill
amortization expense had not been recorded for the period ended March 31, 2001:

| | (in
      thousands, except per share data)      |   | March 31,
2002 |   | March 31,
2001
| | ------------------------------------------------ | - | -------------- | - | --------------
| |                                                 
| | NET INCOME                                       |   |                |   |               
| | Reported net income                              | $ | 1,520          | $ | 1,353         
| | Add back: 
      Goodwill amortization           |   | —              |   | 416           
| |                                                  |   |                |   |               
| | Adjusted net income                              | $ | 1,520          | $ | 1,769         
| |                                                  |   |                |   |               
| |                                                  |   |                |   |               
| | BASIC EARNINGS PER SHARE                         |   |                |   |               
| | Reported basic earnings per share                | $ | 0.27           | $ | 0.21          
| | Add back: 
      Effect of goodwill amortization |   | —              |   | 0.07          
| |                                                  |   |                |   |               
| | Adjusted basic earnings per share                | $ | 0.27           | $ | 0.28          
| |                                                  |   |                |   |               
| |                                                  |   |                |   |               
| | DILUTED EARNINGS PER SHARE                       |   |                |   |               
| | Reported diluted earnings per share              | $ | 0.26           | $ | 0.21          
| | Add back: 
      Effect of goodwill amortization |   | —              |   | 0.06          
| |                                                  |   |                |   |               
| | Adjusted diluted earnings per share              | $ | 0.26           | $ | 0.27          
| |                                                  |   |                |   |               

6. 
BORROWINGS

WestStar is a member of the FHLB of Topeka and, as a regular part of its business, obtains
both short and long-term advances from this FHLB. Advances are collateralized primarily by FHLB stock owned by WestStar and certain
mortgages or deeds of trust. As of March 31, 2002, the authorized borrowing line totaled $123.0 million of which $30.0 million was
outstanding ($12.1 million was short-term and $17.9 million was long-term). Additionally, $24.0 million was a stand-by irrevocable
letter of credit pledged as collateral for uninsured public fund deposits.

WestStar has also established an unsecured, overnight federal funds line with
Bankers’ Bank of the West that expires on August 31, 2002.  As of March 31, 2002, the authorized borrowing line totaled
$37.3 million with $0 outstanding.

7. 
SHAREHOLDERS’ EQUITY

Stock Repurchase Plan

During February 2001, the Board authorized the repurchase of up to $10 million in
outstanding shares of the Company’s common stock.  In September 2001, the Board reauthorized the repurchase program to
allow for a total of $17 million in repurchases (including repurchases previously completed) through September 2002.  There
were no repurchases completed during the first quarter of 2002.  As of March 31, 2002, a cumulative total of 727,690 shares of
common stock had been repurchased at an average price of $11.40 per share.

Restricted Stock

On January 24, 2002, the Board approved the grant of 117,504 shares of
restricted stock to several officers of the Company. The Company will recognize compensation expense of $1.3 million ratably
over the vesting period of 10 years.

9

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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.  In addition, net income available to common
shareholders is adjusted for any changes in net income that would have resulted from the assumed conversion of the potential common
shares.

The following table presents the net income and weighted average common shares outstanding
used to calculate earnings per share for the three months ended March 31, 2002 and 2001:

|                                            |   | March, 31
|------------------------------------------- | - | ---------
|                                            |   |          
|(in thousands, except share data)           |   | 2002     
|                                           
|Basic earnings per share computation        |   |          
|                                            |   |          
|Net income available to common shareholders | $ | 1,520    
|                                            |   |          
|                                            |   |          
|Weighted average shares outstanding – basic |   | 5,680,277
|                                            |   |          
|                                            |   |          
|Basic earnings per share                    | $ | 0.27     
|                                            |   |          
|                                            |   |          
|Diluted earnings per share computation      |   |          
|                                            |   |          
|Net income available to common shareholders | $ | 1,520    
|                                            |   |          

|Weighted average shares outstanding – basic   |   |           |  |          
|--------------------------------------------- | - | --------- |  | ---------
|Shares
assumed issued:                        |   |           |  |          
|Stock
options                                 |   | 110,851   |  | 73,028   
|Restricted
stock                              |   | 152,559   |  | 49,176   
|                                              |   |           |  |          
|                                              |   |           |  |          
|Weighted average shares outstanding – diluted |   | 5,943,687 |  | 6,502,996
|                                              |   |           |  |          
|                                              |   |           |  |          
|Diluted earnings per share                    | $ | 0.26      |  | 0.21     
|                                              |   |           |  |          

Options to purchase an
average of 72,000 and 105,000 shares of common stock at average exercise prices of $12.14 and $11.46 per share were outstanding
during the three months ended March 31, 2002 and 2001, respectively, but were not included in the computation of diluted earnings
per share because the exercise prices of these options was greater than the average market prices of the common stock during the
quarter.

8.  REGULATORY MATTERS

As of
March 31, 2002, the Company met all capital adequacy requirements to which it was subject.  As of March 31, 2002, the Company
had Tier 1 and Total Risk-Based Capital ratios of 12.46% and 14.11%, respectively, and a Leverage ratio of 9.50%.  Regulatory
guidelines permit the Company’s trust preferred securities to be included in the calculation of Tier 1 and Total Risk-Based
capital, subject to certain limitations.

As of
March 31, 2002, WestStar met all capital adequacy requirements to which it was subject and exceeded the minimum ratios to be
designated as “well-capitalized.”  As of March 31, 2002, WestStar had Tier 1 and Total Risk-Based Capital
ratios of 12.01% and 13.12%, respectively, and a Leverage ratio of 9.15%.

10

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9.  RECENTLY ISSUED
ACCOUNTING STANDARDS

During
June 2001, the FASB issued SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets.  SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after
June 30, 2001 and discontinues the use of the pooling-of-interests method.  The Company adopted the provisions of SFAS 141 on
January 1, 2002.  Adoption did not have an effect on the Company’s consolidated financial statements.  SFAS 142
provides guidance on how to account for goodwill and intangible assets after an acquisition has been completed.  
Specifically, amortization of new and pre-existing goodwill has been eliminated, and instead, goodwill will be tested for
impairment on an annual basis. The Company adopted the provisions of SFAS 142 on January 1, 2002.   See “Note
5—Intangible Assets” for a discussion of the impact of this statement on the Company.

During June 2001, the
FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair
value can be made.  SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15,
2002.  The Company adopted this statement as of January 1, 2002, which did not have an effect on the Company’s
consolidated financial condition or results of operations.

During
August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.  The Company
adopted this statement as of January 1, 2002.  SFAS 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a segment of a business.  Adoption of this standard did not have
an effect on the Company’s consolidated financial condition or results of operations.

In
December 2001, the American Institute of Certified Public Accountants’ Accounting Standards Executive Committee issued
Statement of Position (SOP) 01-6, Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or
Finance the Activities of Others.  The SOP is effective for financial statements issued for fiscal years beginning after
December 15, 2001. Adoption of this standard did not have an effect on results of operations and consolidated financial
condition.

10.SUBSEQUENT
EVENTS

On April
16, 2002, the Board of Directors declared a regular quarterly dividend of $0.05 per share to shareholders of record on May 3,
2002.





11

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## Item
2.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

### Forward Looking 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.

### Basis of Presentation

The
following discussion and analysis provides information regarding the Company’s financial condition as of March 31, 2002, and
its results of operations for the three months ended March 31, 2002, in comparison to the three months ended March 31, 2001. 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, 2001.

### Overview

Net
income was $1.5 million for the three months ended March 31, 2002, up from $1.4 million for the three months ended March 31, 2001,
an increase of 12%.

Diluted
earnings per share for the three months ended March 31, 2002, was $0.26 compared to $0.21 for the three months ended March 31,
2001, an increase of 24%.

The
annualized return on average assets was 1.09% for the quarter ended March 31, 2002, compared to 0.96% for the quarter ended March
31, 2001.

The
annualized return on average equity was 9.63% for the quarter ended March 31, 2002, compared to 8.22% for the quarter ended March
31, 2001.

As a
result of the acquisitions and mergers completed since 1995, the Company had unamortized goodwill of $36.9 million as of March 31,
2002 and December 31, 2001.  Effective January 1, 2002, the Company implemented Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets, which eliminates amortization expense on goodwill.  For
comparability purposes, the following 2001 figures show pro forma earnings and ratios as if goodwill amortization expense had not
been recorded during 2001.  The supplemental pro forma data presented herein does not exclude the effects of other non-cash
operating expenses such as depreciation, provision for loan losses, or deferred income taxes associated with the results of
operations.

Earnings
excluding amortization of goodwill for the three months ended March 31, 2002, was $1.5 million ($0.26 per share, diluted) compared
with $1.8 million for the three months ended March 31, 2001, ($0.27 per share, diluted), a decrease of 14% in pro forma earnings
and 4% in pro forma diluted earnings per share.

The
annualized return on tangible assets (annualized pro forma earnings to average tangible assets) was 1.17% for the three months
ended March 31, 2002, and 1.35% for the three months ended March 31, 2001.

12

---



The
annualized return on tangible equity was 22.69% for the three months ended March 31, 2002, compared to 25.23% for the three months
ended March 31, 2001.

On
February 1, 2002, the Company closed four WestStar branch locations.  The branches were limited service facilities located
near larger full-service WestStar branches.  The Company has consolidated the related customer accounts into these nearby
branches.

### Results of Operations

Net Interest Income. Net interest income, on a fully tax-equivalent basis, decreased by
$602,000, or 8%, to $6.6 million for the three months ended March 31, 2002, from $7.2 million for the three months ended March 31,
2001.  The decrease from the quarter ended March 2001 to the quarter ended March 2002 was primarily due to the multiple
interest rate cuts implemented by the Federal Reserve during 2001, partially offset by a larger decrease in average interest
bearing liabilities than in average interest earning assets during this period.  During the first quarter 2002, average
earning assets were approximately 119% of average interest bearing liabilities, while during the first quarter 2001, they were
approximately 117% of average interest bearing liabilities.

The
interest margin on a fully tax-equivalent basis for the three months ended March 31, 2002, was 5.76% compared to 6.26% for the
three months ended March 31, 2001. Net interest margin is influenced by the level and relative mix of earning assets,
interest bearing liabilities, non-interest bearing liabilities and shareholders’ equity as well as the cost of interest
bearing liabilities as compared to the yield on earning assets.  The decrease in net interest margin from first quarter 2001
was primarily due to the multiple interest rate cuts implemented by the Federal Reserve throughout 2001 as well as a shift in the
mix of earning assets.  Average loans, which have a higher yield, decreased during first quarter 2002 as compared to first
quarter 2001, while at the same time average federal funds sold and investment securities, which yield less than loans,
increased.  As a result, the yield on earning assets decreased 219 basis points, from 9.80% for the
quarter ended March 31, 2001 to 7.61% for the quarter ended March 31, 2002, which was partially offset by a 195 basis point
decrease in the cost of interest bearing liabilities from 4.15% for the quarter ended March 31, 2001 to 2.20% for the quarter ended
March 31, 2002.

During first quarter
2002, interest income, on a fully tax-equivalent basis, decreased to $8.8 million from $11.3 million for first quarter 2001,
primarily as a result of a decrease in yield on average earning assets and a slight decrease in the balance of average earning
assets.  Yield on average earning assets declined to 7.61% for first quarter 2002 from 9.80% for first quarter 2001 primarily
due to the multiple interest rate cuts implemented by the Federal Reserve during 2001, the shift in the mix of
average earning assets from loans to investments, as well as a slight overall decrease in average earning assets. 
Average earning assets decreased $1.7 million, or less than 1%, primarily due to a decrease in average loans, partially offset by
an increase in average investments and federal funds sold.  Although average interest earning assets decreased slightly from
first quarter 2001 as a result of the factors previously mentioned, the quarter-end balance of interest earning assets at March 31,
2002 increased $22.4 million, or 5%, to $476.5 million from the quarter-end balance of $454.1 million at March 31, 2001.  This
increase in quarter-end balances was primarily related to a $48.6 million increase in federal funds sold and investment securities
which occurred during first quarter 2002 offset by a $26.2 million decrease in loans and loans held for sale.  See discussions
of these individual fluctuations in the “Financial Condition” section, below.

During first quarter
2002, interest expense decreased $2.0 million, or 48%, from $4.1 million in first quarter 2001. This decrease was primarily due to
the rate cuts discussed above, the Company’s efforts to manage interest rates paid on deposits relative to the current rate
environment, and a decrease in average interest bearing liabilities of $7.6 million, or 2% from first quarter 2001.  The
decrease in average interest bearing liabilities was primarily due to a decrease in average deposits offset by an increase in the
average balance of trust preferred securities and other borrowings.  Average interest bearing deposits decreased $45.2 million
due to deposit attrition resulting from repricing of interest bearing deposit products to reflect the current lower interest rate
environment and the anticipated $15 million withdrawal during the second quarter 2001 of a temporary money market deposit account
established in December 2000.  Average trust preferred securities increased $16.7 million, due to the full quarter impact of
the $24.0 million of trust preferred securities issued during February and March 2001.   Average borrowings increased
$20.8 million as a result of the leveraging strategy employed by the Company during 2002.  See further discussion, below, in
the “Financial Condition” section.

Non-Interest Income. Non-interest income increased by $532,000, or 22%, to $2.9 million for the
three months ended March 31, 2002, from $2.4 million for the three months ended March 31, 2001.  This increase over the first
quarter of 2001 was primarily

13

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attributable to an increase in mortgage broker fees, partially offset by a decrease in deposit
related service charges.  Mortgage broker fees increased $461,000, or 68%, from first quarter 2001 due to increased
refinancing activity in light of the recent decline in interest rates. Deposit related income decreased $68,000, or 7%, from first
quarter 2001 primarily due to the $38.9 million, or 8% decrease in average deposits from first quarter 2001.  
Additionally, higher average balances in checking accounts during first quarter 2002 as compared to first quarter 2001 resulted in
lower minimum account balance charges and lower overdraft fees during first quarter 2002.

Non-Interest Expense.   Non-interest expense, before amortization of intangible assets,
increased by $411,000, or 6%, to $6.9 million for the three months ended March 31, 2002, from $6.5 million for the three months
ended March 31, 2001.  This increase is largely attributable to the increasing costs of employee related and occupancy
expenses as well as operating expenses of the Grand Junction branch that opened during third quarter 2001.

The
efficiency ratio, before amortization expense on intangible assets, increased to 73% for the quarter ended March 31, 2002, from 68%
for the quarter ended March 31, 2001.  This increase in the efficiency ratio was due to the decline in revenue (net interest
income plus non-interest income) of $97,000 during first quarter 2002 while non-interest expenses before intangible amortization
expense increased by $411,000 during the same period.

Income
Taxes. The Company’s effective income tax rate (income tax expense as a percentage of
pre-tax income) was 35.5% for the three months ended March 31, 2002 as compared to 42.7% for the three months ended March 31,
2001.  The decrease in the effective rate is primarily due to elimination of intangible amortization expense for first quarter
2002.  See discussion in the “Overview” section, above.  The majority of the Company’s intangible
amortization expense in first quarter 2001 was not deductible for tax purposes, thus resulting in a higher effective tax
rate.

Financial Condition

The
Company's assets increased by $23.8 million or 4%, to $579.1 million as of March 31, 2002, from $555.3 million as of December 31,
2001.

Federal
funds sold balances increased by $16.2 million, or 117%, to $30.0 million as of March 31, 2002 from $13.8 million at December 31,
2001.  Investment securities increased to $74.0 million as of March 31, 2002, compared to $41.6 million as of December 31,
2001, a 78% increase.  During this period, quality loan demand decreased while deposits continued to grow, resulting in
additional cash inflows to invest.   Additionally, due to the low interest rate on borrowings, the Company leveraged its
capital by increasing Federal Home Loan Bank (FHLB) borrowings and using the proceeds to purchase high quality government agency
and other securities.  Between December 31, 2001 and March 31, 2002, FHLB borrowings increased $8.9 million, or
42%.

As of
March 31, 2002, loans held for sale decreased $1.8 million, or 26%, from December 31, 2001, due to a slowing of mortgage
origination activity as mortgage interest rates have begun to increase.

Loans
decreased $24.4 million, or 6%, from December 31, 2001, due to the continued softening of the economy, as well as an internal shift
toward more conservative underwriting policies in response to the slowing economy.

Premises
and equipment increased by $447,000, or 1%, from $42.0 million as of December 31, 2001, to $42.4 million as of March 31,
2002.  This increase is mainly attributable to the purchase of $1.0 million of premises and equipment primarily related to the
construction and furnishing of a new building in Dillon, Colorado to replace the existing branch building in Dillon, as well as
equipment upgrades.  This increase was offset by $578,000 of depreciation expense.

Deposits
increased by $13.7 million, or 3%, from $442.4 million as of December 31, 2001, to $456.0 million as of March 31, 2002.  The
increase in deposits was largely attributable to the introduction of a new short-term certificate of deposit (CD) product as well
as seasonal factors.  The new CD product allows one rate change per term and one addition to the balance during the
term.  This “flexible” CD enabled WestStar to attract new money as well as retain funds from maturing
CD’s.



14

---



### Asset Quality

Provision and Allowance for Loan
Losses

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, external and 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) |   | Three months ended
March 31,
|------------------------------------------------- | - | ----------------------------
|                                                  |   |                             
|                                                  |   | 2002                        
|                                                  |   |                             
|                                                  |   |                             
|Average total loans                               | $ | 383,272                     
|                                                  |   |                             
|                                                  |   |                             
|Total loans at end of period                      | $ | 367,326                     
|                                                  |   |                             
|                                                  |   |                             
|Allowance at beginning of period                  | $ | 4,375                       
|Loans charged off                                 |   | (171)                       
|Recoveries on loans previously charged
off        |   | 61                          
|Provision for loan losses                         |   | 212                         
|                                                  |   |                             
|Allowance at end of period                        | $ | 4,477                       
|                                                  |   |                             
|                                                  |   |                             
|Annualized net charge-offs to average loans       |   | 0.12%                       
|Allowance to total loans at end of period         |   | 1.22%                       

15

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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)         |   | March 31,
|-------------------------------------------- | - | ---------
|                                             |   |          
|                                             |   | 2002     
|                                             |   |          
|                                             |   |          
|Nonaccrual loans                             | $ | 3,198    
|Restructured loans                           |   | —        
|                                             |   |          
|Total non-performing
loans                   |   | 3,198    
|Foreclosed properties                        |   | 284      
|                                             |   |          
|Total non-performing
assets                  |   | 3,482    
|Loans 90 days or more past due and accruing  |   | 124      
|                                             |   |          
|Total risk assets                            | $ | 3,606    
|                                             |   |          
|                                             |   |          
|Non-performing loans to total loans          |   | 0.87%    
|                                             |   |          
|Non-performing assets to loan related assets |   | 0.95%    
|                                             |   |          
|Non-performing assets to total assets        |   | 0.60%    
|                                             |   |          
|Risk assets to loan related assets           |   | 0.98%    

The Company believes that it has
adequate collateral to recover the majority of the balance of the nonaccrual loans.   Foreclosed properties are recorded
at the lower of cost or fair value less estimated costs to sell.  All 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 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 unstable.  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 March 31, 2002, the Company
had cash and cash equivalents (including federal funds sold) of $51.9 million and investment securities of $74.0 million. 
Almost 99% of the Company’s investment portfolio is classified as available-for-sale and can be readily sold to meet
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.

16

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Cash Flows

Net Cash from Operating Activities

During the three-month period
ended March 31, 2002, cash of $4.0 million was provided by operating activities consisting primarily of net income of $1.5 million
plus non-cash expenses of $840,000 and net decreases in operating assets and liabilities of $1.7 million. Non-cash expenses
consisted primarily of $578,000 of depreciation and amortization expense on premises and equipment and a $212,000 loan loss
provision.  The net decrease in operating assets and liabilities was primarily due to a $1.8 million decrease in loans held
for sale, a $318,000 increase in interest payable and other liabilities, a $220,000 increase in other assets, and a $224,000
increase in interest receivable.  The decrease in loans held for sale was primarily due to reduced loan demand as mortgage
interest rates began to rise.

During the three-month period ended March 31, 2001, cash of $579,000 was provided by operating activities consisting of net income
of $1.4 million plus non-cash expenses of $1.4 million offset by net increases in operating assets and liabilities of $2.2 million.
Non-cash expenses consisted primarily of $559,000 of depreciation and amortization expense on premises and equipment, amortization
of intangible assets of $416,000, and a $300,000 loan loss provision.  The net increase in operating assets and liabilities
consisted primarily of a $2.6 million increase in loans held for sale and a decrease in interest payable and other liabilities of
$103,000, offset by a decrease in interest receivable of $449,000.  The increase in loans held for sale was primarily due to
the multiple interest rate reductions (150 basis points) during first quarter 2001 which resulted in increased
mortgage origination activity.

Net Cash from Investing Activities

During the three-month period
ended March 31, 2002, cash of $9.9 million was used by investing activities.  These outflows consisted primarily of the
purchase of $37.8 million of investment securities and the purchase of $1.0 million of premises and equipment, offset by a $24.0
million decrease in loans, the maturity and/or calls of $4.6 million of investment securities and $308,000 of proceeds from sales
of foreclosed properties.

The Company provided cash from investing activities during the three-month period ended March 31, 2001 aggregating $13.5 million.
These inflows consisted primarily of the maturity or calls of $7.3 million of investment securities and a $9.5 million net decrease
in loans, offset by the purchase of investment securities of $2.5 million.   The decrease in loans was due to the general
softening of the Colorado economy, as well as an internal shift toward more conservative underwriting policies.

Net Cash from Financing Activities

During the three-month period
ended March 31, 2002, cash of $22.3 million was provided by financing activities consisting primarily of an increase in deposits of
$13.7 million and the receipt of $8.9 million of proceeds from FHLB advances, offset by the payment of dividends on common stock of
$287,000.

During the three-month period ended March 31, 2001, cash of $16.1 million was provided by financing activities consisting primarily
of the receipt of $24 million of proceeds from the issuance of trust preferred securities and an increase in deposits of $5.7
million.  These inflows were partially offset by the repayment of $10.4 million of short-term borrowings, the repurchase of
$3.0 million of outstanding common stock of the Company, and payment of dividends on common stock of $260,000.   During
February and March 2001, the Company issued $24 million of trust preferred securities.  A portion of these proceeds was used
to repay outstanding borrowings as well as to repurchase shares of the Company’s common stock.  The increase in deposits
was primarily due to the Company’s focused effort to increase deposit levels, a shift by the
public toward bank investments as a result of stock market declines, and seasonal factors.

17

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Borrowings

WestStar is a member of the FHLB
of Topeka and, as a regular part of its business, obtains advances from the FHLB.  Advances are collateralized primarily by
FHLB stock owned by WestStar and certain mortgage loans or deeds of trust.  As of March 31, 2002, the authorized borrowing
line totaled $123.0 million.  Of this amount, $24 million was an irrevocable stand-by letter of credit pledged as collateral
for uninsured public fund deposits, $12.1 million was outstanding as short-term advances and $17.9 million was outstanding as
long-term advances.

WestStar has also established an
unsecured, overnight federal funds line with Bankers’ Bank of the West (Bankers’ Bank).  As of March 31, 2002, the
authorized borrowing line totaled $37.3 million, with $0 outstanding.

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.  On April 16, 2002, the Board declared a regular quarterly dividend of $0.05 per share
to shareholders of record on May 3, 2002.

Stock Repurchase Plan

During February 2001,
the Board authorized the repurchase of up to $10 million of the outstanding shares of the Company’s common stock.  In
September 2001, the Board reauthorized the repurchase program to allow for a total of $17 million in repurchases (including
repurchases previously completed) through September 2002.  As of March 31, 2002, 727,690 shares of common stock had been
repurchased at an average price of $11.40 per share, or approximately $8.3 million.  No shares were repurchased during first
quarter 2002.

### Capital Resources

As of March 31, 2002,
shareholders’ equity had increased $830,000, or 1%, to $64.3 million from $63.5 million as of December 31, 2001.  This
increase is primarily related to the retention of $1.5 million of earnings and the issuance of $117,000 of restricted stock, offset
by the payment of common stock dividends of $287,000 and a decrease in accumulated other comprehensive income of $460,000 related
to increased unrealized losses on investment securities available for sale.

As of March 31, 2002 and 2001,
the Company met all capital adequacy requirements to which it was subject.  As of March 31, 2002, the Company had Tier 1 and
Total Risk-Based Capital ratios of 12.46% and 14.11%, respectively, and a Leverage ratio of 9.50%.  Regulatory guidelines
permit the Company’s trust preferred securities to be included in the calculation of Tier 1 and Total Risk-Based capital,
subject to certain limitations.  As of March 31, 2001, the Company had Tier 1 and Total Risk-Based Capital ratios of 
12.11% and 13.78%, respectively, and a Leverage ratio of 9.25%.

As of March 31, 2002 and March
31, 2001, WestStar met all capital adequacy requirements to which it was subject and exceeded the minimum ratios to be designated
as “well-capitalized.”  As of March 31, 2002, WestStar had Tier 1 and Total Risk-Based Capital ratios of
12.01% and 13.12%, respectively, and a Leverage ratio of 9.15%.  As of March 31, 2001, WestStar had Tier 1 and Total
Risk-Based Capital ratios of 9.50% and 10.63%, respectively, and a Leverage ratio of 7.25%.

18

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Recently Issued Accounting
Standards

During June 2001, the FASB issued
SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets.  SFAS 141 requires
that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and discontinues the use
of the pooling-of-interests method.  The Company adopted the provisions of SFAS 141 on January 1, 2002.  Adoption did not
have an effect on the Company’s consolidated financial statements.  SFAS 142 provides guidance on how to account for
goodwill and intangible assets after an acquisition has been completed.  Specifically, amortization of new and pre-existing
goodwill has been eliminated, and instead goodwill will be tested for impairment on an annual basis. The Company adopted the
provisions of SFAS 142 on January 1, 2002.   See “Note 5—Intangible Assets” for a discussion of the
impact of this statement on the Company.

During June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS 143 requires that
the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made.  SFAS 143 is effective for financial statements issued for fiscal years
beginning after June 15, 2002.  The Company adopted this statement as of January 1, 2002, which did not have an effect on the
Company’s consolidated financial condition or results of operations.

During August 2001, the FASB
issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.  The Company adopted this
statement as of January 1, 2002.  SFAS 144 addresses financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. Adoption of this standard did not have an effect
on the Company’s consolidated financial condition or results of operations.

In December 2001, the American
Institute of Certified Public Accountants’ Accounting Standards Executive Committee issued Statement of Position (SOP) 01-6,
Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of
Others.  The SOP is effective for financial statements issued for fiscal years beginning after December 15, 2001.
Adoption of this standard did not have an effect on results of operations and consolidated financial condition.





19

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## Item
3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative Disclosures About Market Risk

The table below provides
information about the Company’s financial instruments as of December 31, 2001 that are sensitive to changes in interest
rates.

|                               |                                | Principal Amount Maturing in:        |        |         
|------------------------------ | ------------------------------ | ------------------------------------ | ------ | --------
|                               |                                |                                      |        |         
|(in thousands)                 |                                | 2002                                 | 2003   | 2004    
|                              
|INTEREST RATE SENSITIVE ASSETS |                                |                                      |        |         
|                               |                                |                                      |        |         
|Federal funds sold             |                                | $13,815                              | $—     | $—      
|Weighted average interest rate |                                | 1.06%                                | 0.00%  | 0.00%   
|Adjustable-rate securities     |                                | —                                    | 418    | —       
|Weighted average interest rate |                                | 0.00%                                | 5.35%  | 0.00%   
|Fixed-rate securities          |                                | 1,990                                | 566    | 1,155   
|Weighted average interest rate |                                | 5.51%                                | 4.64%  | 4.87%   
|Equity securities              |                                | —                                    | —      | —       
|Weighted average interest rate |                                | 0.00%                                | 0.00%  | 0.00%   
|Loans held for sale            |                                | 6,950                                | —      | —       
|Weighted average interest rate |                                | 5.72%                                | 0.00%  | 0.00%   
|Adjustable-rate loans          |                                | 141,467                              | 34,514 | 23,405  
|Weighted average interest rate |                                | 6.36%                                | 6.29%  | 6.38%   
|Fixed-rate loans               |                                | 37,053                               | 21,143 | 35,225  
|                               | Weighted average interest rate |                                      | 8.55%  | 9.72%   
|                               |                                |                                     
|                               |                                | Total interest rate sensitive assets |        | $201,275
|                               |                                |                                      |        |         
|Weighted average interest
rate |                                | 6.37%                                | 7.55%  | 7.70%   
|                               |                                |                                     



INTEREST RATE SENSITIVE LIABILITIES

|Interest-bearing checking, savings and money market accounts |       | $—                                        | $—    | $—      | $—      | $—     | $239,033 | $239,033 | $239,033
|------------------------------------------------------------ | ----- | ----------------------------------------- | ----- | ------- | ------- | ------ | -------- | -------- | --------
|Weighted average interest rate                               |       | 0.00%                                     | 0.00% | 0.00%   | 0.00%   | 0.00%  | 0.78%    | 0.78%    |         
|Fixed-rate time deposits                                     |       | 86,793                                    | 9,399 | 2,413   | 545     | 437    | —        | 99,587   | 100,538 
|Weighted average interest rate                               | 3.84% | 4.25%                                     | 4.36% | 5.53%   | 3.99%   | 0.00%  | 3.90%    |         
|Fixed-rate borrowings                                        |       | 12,250                                    | 4,250 | 3,700   | 500     | 400    | —        | 21,100   | 20,999  
|Weighted average interest rate                               | 2.37% | 3.66%                                     | 4.45% | 5.10%   | 5.45%   | 0.00%  | 3.12%    |         
|Trust preferred                                              |       | —                                         | —     | —       | —       | —      | 24,000   | 24,000   | 24,000  
|Weighted average interest rate                               |       | 0.00%                                     | 0.00% | 0.00%   | 0.00%   | 0.00%  | 10.19%   | 10.19%   |         
|                                                             |       |                                          
|                                                             |       | Total interest rate sensitive liabilities |       | $99,043 | $13,649 | $6,113 | $1,045   | $837     | $263,033
|                                                             |       |                                           |       |        
|Weighted average interest
rate                               |       | 3.66%                                     | 4.06% | 4.42%   | 5.32%   | 4.69%  | 1.64%    | 2.31%    |         
|                                                             |       |                                           |       |        

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.

20

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Interest
rate risk is managed by the Company’s Asset/Liability Management Committee.  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.  During 2001 and the first quarter of 2002,
the Company did not use interest rate derivative financial instruments as an asset/liability management tool to hedge mismatches in
interest rate exposures.

During
the first three months of 2002, Vail Banks experienced increased liquidity which was used in part to purchase longer term
investment securities and invest in short-term federal funds sold.  While the liquidity position increased, the balance sheet
restructuring overall lessened the asset sensitive nature of the balance sheet.  Therefore, Vail Banks was less sensitive to
changes in interest rates at March 31, 2002 than at December 31, 2001.

During
the remainder of 2002, the Company will face risk primarily from the possibility of lower interest rates. Although the
Company’s gap position is slightly negative at March 31, 2002, due to the low level of deposit rates, the bank is more
sensitive to downward changes in rates.  If rates fall, asset yields will decline faster than the cost of interest bearing
liabilities, leading to a decline in the margin. The extent of this decline will depend on the degree to which retail deposit rates
change relative to market rates. The 475 basis point reduction in short-term rates by the Federal Reserve Bank during 2001
effectively repriced a significant portion of the Company’s loan portfolio.  While it also produced an opportunity to
reduce funding costs, at the current level of interest rates, further reductions in funding costs may be limited.

21

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PART
II OTHER INFORMATION

Item 6. EXHIBITS
AND REPORTS ON FORM 8-K.

> (a)         Exhibits

None

> (b)        Reports
>     on Form 8-K

None.

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SIGNATURES

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



VAIL
        BANKS, INC.Date: May 13,
        2002
      /s/
        Lisa M. DillonLisa
        M. Dillon
             PresidentDate: May 13,
        2002
      /s/ Peter G. WillistonPeter
        G. Williston
             Senior Executive Vice
        President and Chief  Financial Officer