Table of Contents

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.  20549

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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, 2004                                            
|  |                                                                                           
|o | TRANSITION REPORT PURSUANT TO
  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|  |                                                                                           
|  | For
  the transition period from __________ to __________                                 

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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
  incorporation or organization)                     |  | (I.R.S. Employer
  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).     Yeso  No 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, 2004, there were 5,332,330 shares of
common stock ($1.00 par value per share) outstanding.

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VAIL BANKS, INC.

FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2004

TABLE
OF CONTENTS

|PART 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                                   | 15                                                                                     
|           | Basis of Presentation                                        | 15                                                                                     
|           | Overview                                                     | 15                                                                                     
|           | Results of Operations                                        | 16                                                                                     
|           | Financial Condition                                          | 17                                                                                     
|           | Asset Quality                                                | 18                                                                                     
|           | Liquidity                                                    | 19                                                                                     
|           | Capital Resources                                            | 21                                                                                     
|           | Recent Accounting Pronouncements                             | 21                                                                                     
|           |                                                              |                                                                                        
|           | ITEM 3.                                                      | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                             
|           |                                                              |                                                                                        
|           | ITEM 4.                                                      | CONTROLS AND PROCEDURES                                                                
|           |                                                              |                                                                                        
|PART II    | OTHER INFORMATION                                            |                                                                                        
|           |                                                              |                                                                                        
|           | ITEM 4.                                                      | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                    
|           |                                                              |                                                                                        
|           | ITEM 6.                                                      | EXHIBITS AND REPORTS ON FORM 8-K                                                       
|           |                                                              |                                                                                        
|SIGNATURES |                                                             
|           |                                                              |                                                                                        

2

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PART
I     FINANCIAL INFORMATION

Item
1.     FINANCIAL STATEMENTS

VAIL
BANKS, INC.
Consolidated Balance Sheets

|(in thousands,
  except share data)                                                                                                                                                                  |  | June 30,2004 |   | December 31,
  2003 |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | - | ------------------- | -
|                                                                                                                                                                                                     |  |              |   |                     |  
|ASSETS                                                                                                                                                                                               |  | (unaudited)  |   |                     |  
|Cash and due from banks                                                                                                                                                                              |  |              | $ | 18,871              |  
|Federal funds sold                                                                                                                                                                                   |  |              |   |                    |  
|                                                                                                                                                                                                     |  |              |   |                     |  
|Total cash and cash equivalents                                                                                                                                                                      |  |              |   | 18,871              |  
|Interest-bearing deposits in banks                                                                                                                                                                   |  |              |   | 2,000               |  
|Investment securities, available for sale                                                                                                                                                            |  |              |   | 137,877             |  
|Investment securities, held to maturity (fair value of
     $344 (unaudited) and $397 as of June 30,
  2004 and December 31, 2003, respectively)                                                     |  |              |   | 323                 |  
|Investments in bank stocks, at cost                                                                                                                                                                  |  |              |   | 4,372               |  
|Investments in Trust I and Trust II (See Note 1)                                                                                                                                                     |  |              |   | 743                 |  
|Loans held for sale                                                                                                                                                                                  |  |              |   | 2,028               |  
|Loans, net (includes related party loans of $11,068 (unaudited) and
  $11,239
       as of June 30, 2004 and December 31, 2003,
  respectively)                                                      |  |              |   | 345,512             |  
|Premises and equipment, net                                                                                                                                                                          |  |              |   | 34,901              |  
|Interest receivable                                                                                                                                                                                  |  |              |   | 2,256               |  
|Goodwill                                                                                                                                                                                             |  |              |   | 35,969              |  
|Other intangible assets, net                                                                                                                                                                         |  |              |   | 179                 |  
|Other assets                                                                                                                                                                                         |  |              |   | 5,396               |  
|                                                                                                                                                                                                     |  |              |   |                     |  
|                                                                                                                                                                                                     |  |              | $ | 590,427             |  
|                                                                                                                                                                                                     |  |              |   |                     |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                 |  |              |   |                     |  
|Liabilities                                                                                                                                                                                          |  |              |   |                     |  
|Deposits (includes related party
  deposits of $3,152 (unaudited)
  and $4,169 at June 30,        2004 and December 31, 2003, respectively)                                                          |  |              |   |                     |  
|Non-interest
  bearing                                                                                                                                                                               |  |              | $ | 105,883             |  
|Interest
  bearing                                                                                                                                                                                   |  |              |   | 361,052             |  
|                                                                                                                                                                                                     |  |              |   |                     |  
|Total
  deposits                                                                                                                                                                                     |  |              |   | 466,935             |  
|Federal funds purchased and securities
  sold under agreements to repurchase                                                                                                                         |  |              |   | 2,816               |  
|Federal Home Loan Bank advances                                                                                                                                                                      |  |              |   | 33,615              |  
|Guaranteed preferred beneficial
  interest in Companys subordinated debt (See Note 1)                                                                                                               |  |              |   |                    |  
|Subordinated notes to Trust I and Trust
  II (See Note 1)                                                                                                                                            |  |              |   | 24,743              |  
|Interest payable and other liabilities                                                                                                                                                               |  |              |   | 3,331               |  
|                                                                                                                                                                                                     |  |              |   |                     |  
|Total
  liabilities                                                                                                                                                                                  |  |              |   | 531,440             |  
|Minority interest                                                                                                                                                                                    |  |              |   | 689                 |  
|Shareholders equity                                                                                                                                                                                 |  |              |   |                     |  
|Preferred stock  $1 par value;
  2,250,000 shares authorized, no shares
          issued and outstanding at
  June 30, 2004 (unaudited) and December 31, 2003,
          respectively               |  |              |   |                    |  
|Common stock  $1 par value; 20,000,000
  shares authorized,
          5,326,330 (unaudited) and
  5,283,264 issued and outstanding at June 30, 2004 and
          December 31, 2003,
  respectively |  |              |   | 5,326               |  
|Additional paid-in capital                                                                                                                                                                           |  |              |   | 34,485              |  
|Retained earnings                                                                                                                                                                                    |  |              |   | 20,085              |  
|Accumulated other comprehensive loss,
  net of tax benefit of         $(940) (unaudited) and $(71)
  at June 30, 2004 and December 31, 2003, respectively                                            |  |              |   | (1,598              | )
|                                                                                                                                                                                                     |  |              |   |                     |  
|Total
  shareholders equity                                                                                                                                                                         |  |              |   | 58,298              |  
|                                                                                                                                                                                                     |  |              |   |                     |  
|                                                                                                                                                                                                     |  |              | $ | 590,427             |  
|                                                                                                                                                                                                     |  |              |   |                     |  

The accompanying notes are an integral part
of these unaudited 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
  June 30, |   | Six months ended
  June 30, |  
|-------------------------------------------------------------------------------------------------------- |  | ----------------------------- | - | --------------------------- | -
|                                                                                                         |  |                               |   |                             |  
|                                                                                                         |  | 2004                          |   | 2003                        |  
|                                                                                                         |  |                               |   |                             |  
|                                                                                                         |  | (unaudited)                   |   | (unaudited)                 |  
|Interest and
  dividend income                                                                           |  |                               |   |                             |  
|Loans,
  including fees                                                                                  |  |                               | $ | 6,166                       |  
|Investment
  securities                                                                                  |  |                               |   | 1,045                       |  
|Federal
  funds sold and other short-term
          investments                                          |  |                               |   | 85                          |  
|Investments
  in Trust I and II (See Note 1)                                                             |  |                               |   | 19                          |  
|                                                                                                         |  |                               |   |                             |  
|Total interest and dividend income                                                                       |  |                               |   | 7,315                       |  
|                                                                                                         |  |                               |   |                             |  
|Interest
  expense                                                                                       |  |                               |   |                             |  
|Deposits                                                                                                 |  |                               |   | 1,005                       |  
|Short-term
  borrowings                                                                                  |  |                               |   | 104                         |  
|Long-term
  borrowings                                                                                   |  |                               |   | 241                         |  
|Federal
  funds purchased and securities
          sold under agreements to
  repurchase                 |  |                               |   | 1                           |  
|Trust
  preferred securities (See Note 1)                                                                |  |                               |   |                            |  
|Subordinated
  notes to Trust I and II (See         Note 1)                                              |  |                               |   | 630                         |  
|                                                                                                         |  |                               |   |                             |  
|Total
  interest expense                                                                                 |  |                               |   | 1,981                       |  
|                                                                                                         |  |                               |   |                             |  
|Net
  interest income                                                                                    |  |                               |   | 5,334                       |  
|                                                                                                         |  |                               |   |                             |  
|Provision
  for loan losses                                                                              |  |                               |   | 43                          |  
|                                                                                                         |  |                               |   |                             |  
|Net
  interest income after provision
               for
  loan losses                                   |  |                               |   | 5,291                       |  
|                                                                                                         |  |                               |   |                             |  
|Non-interest
  income                                                                                    |  |                               |   |                             |  
|Gain
  on sale of premises and equipment                                                                 |  |                               |   | 103                         |  
|Deposit
  related                                                                                        |  |                               |   | 692                         |  
|Mortgage
  broker fees                                                                                   |  |                               |   | 775                         |  
|Other                                                                                                    |  |                               |   | 522                         |  
|                                                                                                         |  |                               |   |                             |  
|                                                                                                         |  |                               |   | 2,092                       |  
|                                                                                                         |  |                               |   |                             |  
|Non-interest
  expense                                                                                   |  |                               |   |                             |  
|Salaries
  and employee benefits                                                                         |  |                               |   | 3,994                       |  
|Occupancy                                                                                                |  |                               |   | 846                         |  
|Furniture
  and equipment                                                                                |  |                               |   | 611                         |  
|Amortization
  of intangible assets                                                                      |  |                               |   | 10                          |  
|Other                                                                                                    |  |                               |   | 1,158                       |  
|                                                                                                         |  |                               |   |                             |  
|                                                                                                         |  |                               |   | 6,619                       |  
|                                                                                                         |  |                               |   |                             |  
|                                                                                                         |  |                               |   |                             |  
|Income
  before income tax expense                                                                       |  |                               |   | 764                         |  
|Income tax
  expense                                                                                     |  |                               |   | 190                         |  
|                                                                                                         |  |                               |   |                             |  
|Net
  income                                                                                             |  |                               |   | 574                         |  
|Net change
  in unrealized gain/loss on
     investment securities available for sale,
     net of taxes |  |                               |   | (1,882                      | )
|                                                                                                         |  |                               |   |                             |  
|Comprehensive
  income                                                                                   |  |                               | $ | (1,308                      | )
|                                                                                                         |  |                               |   |                             |  

4

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

|                                 |  | Three months ended
  June 30, |           | Six months ended
  June 30, | 
|-------------------------------- |  | ----------------------------- | --------- | --------------------------- | 
|                                 |  |                               |           |                             | 
|                                 |  | 2004                          |           | 2003                        | 
|                                 |  |                               |           |                             | 
|                                 |  | (unaudited)                   |           | (unaudited)                 | 
|                                 |  |                               |           |                             | 
|Earnings per
  share             |  |                               |           |                             | 
|Basic                            |  | $                             | 0.11      |                             | 
|                                 |  |                               |           |                             | 
|Diluted                          |  | $                             | 0.11      |                             | 
|                                 |  |                               |           |                             | 
|Weighted
  average common shares |  |                               |           |                             | 
|Basic                            |  |                               | 5,050,161 |                             | 
|                                 |  |                               |           |                             | 
|Diluted                          |  |                               | 5,417,827 |                             | 

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

5

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

|                                                                                                     |  | Six months ended
  June 30, |  
|---------------------------------------------------------------------------------------------------- |  | --------------------------- | -
|                                                                                                     |  |                             |  
|                                                                                                     |  | 2004                        |  
|                                                                                                     |  |                             |  
|                                                                                                     |  | (unaudited)                 |  
|                                                                                                     |  |                             |  
|Cash flows
  from operating activities                                                               |  |                             |  
|Net
  income                                                                                         |  |                             | $
|Adjustments
  to reconcile net income to net cash provided by
          operating activities         |  |                             |  
|Net
  amortization of premiums on investment securities                                              |  |                             |  
|Gain
  on sale of loans                                                                              |  |                             |  
|Provision
  for loan losses                                                                          |  |                             |  
|Amortization
  of deferred loan fees                                                                 |  |                             |  
|(Gain)
  loss on sale of premises and equipment                                                      |  |                             |  
|Depreciation
  and amortization                                                                      |  |                             |  
|Gain
  on sale of foreclosed properties                                                              |  |                             |  
|Recognition
  of stock compensation on restricted common stock and
               stock
  options    |  |                             |  
|Deferred
  income tax expense                                                                        |  |                             |  
|Changes
  in operating assets and liabilities                                                        |  |                             |  
|Loans
  held for sale                                                                                |  |                             |  
|Interest
  receivable                                                                                |  |                             |  
|Other
  assets                                                                                       |  |                             |  
|Interest
  payable and other liabilities                                                             |  |                             |  
|Other,
  net                                                                                         |  |                             |  
|                                                                                                     |  |                             |  
|Net
  cash provided by operating activities                                                          |  |                             |  
|                                                                                                     |  |                             |  
|                                                                                                     |  |                             |  
|Cash flows
  from investing activities                                                               |  |                             |  
|Purchases of
  investment securities, available for sale                                             |  |                             |  
|Purchases
  of bank stocks                                                                           |  |                             |  
|Proceeds
  from maturities of investment securities, held to maturity                                |  |                             |  
|Proceeds
  from maturities/calls of investment securities, available for sale                        |  |                             |  
|Proceeds
  from redemption of bank stocks                                                            |  |                             |  
|Net
  (increase) decrease in loans                                                                   |  |                             |  
|Purchases
  of premises and equipment                                                                |  |                             |  
|Proceeds
  from sales of premises and equipment                                                      |  |                             |  
|Proceeds
  from sales of foreclosed properties                                                       |  |                             |  
|                                                                                                     |  |                             |  
|Net
  cash used by investing activities                                                              |  |                             |  
|                                                                                                     |  |                             |  
|                                                                                                     |  |                             |  
|Cash flows
  from financing activities                                                               |  |                             |  
|Net
  increase in deposits                                                                           |  |                             |  
|Net
  change in federal funds purchased and securities sold under
          agreements to repurchase |  |                             |  
|Net
  (decrease) increase in Federal Home Loan Bank advances                                         |  |                             |  
|Proceeds
  from issuance of common stock                                                             |  |                             |  
|Repurchase
  of common stock                                                                         |  |                             |  
|Payment
  of cash dividends on common stock                                                          |  |                             |  
|                                                                                                     |  |                             |  
|Net
  cash provided by financing activities                                                          |  |                             |  
|                                                                                                     |  |                             |  
|Net
  (decrease) increase in cash and cash equivalents                                               |  |                             |  
|Cash and
  cash equivalents at beginning of period                                                   |  |                             |  
|                                                                                                     |  |                             |  
|Cash and
  cash equivalents at end of period                                                         |  |                             | $
|                                                                                                     |  |                             |  

6

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

|                                                                                                          |  | Six months ended
  June 30, |  
|--------------------------------------------------------------------------------------------------------- |  | --------------------------- | -
|                                                                                                          |  |                             |  
|                                                                                                          |  | 2004                        |  
|                                                                                                          |  |                             |  
|                                                                                                          |  | (unaudited)                 |  
|                                                                                                          |  |                             |  
|Supplemental
  disclosures of cash flow information 
     Cash paid during the period for:                |  |                             |  
|Interest
  expense                                                                                        |  |                             | $
|                                                                                                          |  |                             |  
|Income
  taxes                                                                                            |  |                             | $
|                                                                                                          |  |                             |  
|                                                                                                          |  |                             |  
|Non-cash
  investing and financing transactions
      Foreclosure of collateralized loans, net of reserve |  |                             | $
|                                                                                                          |  |                             |  
|Net
  change in unrealized gain/loss on investment securities available
          for sale, net of taxes  |  |                             | $
|                                                                                                          |  |                             |  
|Reclassification
  of idle premises and equipment to other assets                                         |  |                             | $
|                                                                                                          |  |                             |  
|Reclassification
  of other assets to premises and equipment                                              |  |                             | $
|                                                                                                          |  |                             |  
|Issuance
  of restricted common stock                                                                     |  |                             | $
|                                                                                                          |  |                             |  

On
January 1, 2004, the Company adopted Financial Interpretation No. 46, Consolidation of Variable Interest Entities
(FIN 46). As a result of adoption, the Company deconsolidated its two business
trusts that had been formed in 2001 to issue trust preferred securities.  As a result, the Company added to its
balance sheet a $743,000 investment in the two trusts and $24.7 million of
subordinated notes payable to the two trusts, and removed from its balance sheet
the $24 million of trust preferred securities. In accordance with FIN 46, prior
period information was not restated.

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

7

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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 subsidiary, WestStar Bank
(WestStar).  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 (See Notes 11 and 13) that 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.

For prior
years, the financial statements also included Vail Banks Statutory Trust I and
Vail Banks Statutory Trust II, both wholly owned subsidiaries of Vail
Banks.  In January 2003, the Financial
Accounting Standards Board (FASB) issued Financial Interpretation No. 46, Consolidation of Variable Interest Entities
(FIN 46).  This interpretation of
Accounting Research Bulletin No. 51, Consolidated
Financial Statements (ARB 51), addresses consolidation by business
enterprises where ownership interests in an entity may vary over time.  FIN 46 requires that an enterprises
consolidated financial statements include only subsidiaries in which the
enterprise has a controlling financial interest.  The Company adopted FIN 46 on January 1, 2004.  As a result of adoption, the Company no
longer consolidates its two subsidiary trusts that had been formed in 2001 to
issue trust preferred securities because the Company does not have controlling
financial interests over the trusts, as specifically defined by FIN 46.   The effect of this change is that the
Company now excludes the trust preferred securities issued by the subsidiary
trusts from its consolidated balance sheets and includes the subordinated
debentures issued by the Company to the trusts. In accordance with FIN 46,
prior period information was not restated.  
Additionally, there was no cumulative effect on retained earnings or a
change in the Companys capital ratios as a result of this adoption.

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, 2003. 
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, 2003.  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 unaudited consolidated financial
statements.  Operating results for the
three and six months ended June 30, 2004, are not necessarily indicative of the
results that may be expected for the full year.

Certain
reclassifications have been made to the 2003 financial statements to conform to
the 2004 presentation.

2. 
INVESTMENT SECURITIES

Investment
securities consist of the following:

| |                                       |  | June 30, 2004    |   | December 31, 2003 | 
| | ------------------------------------- |  | ---------------- | - | ----------------- | 
| |                                       |  |                  |   |                   | 
| | (in thousands)                        |  | Amortized
  Cost |   | Fair
  Value      | 
| |                                       |  |                  |   |                   | 
| |                                       |  | (unaudited)      |   | (unaudited)       | 
| | Securities
  available for sale       |  |                  |   |                   | 
| | Government
  agencies                 |  |                  | $ | 42,642            | 
| | State
  and municipal                 |  |                  |   | 20,131            | 
| | Mortgage-backed
  securities          |  |                  |   | 73,136            | 
| | Agency
  preferred stock              |  |                  |   | 4,506             | 
| |                                       |  |                  |   |                   | 
| | Total
  securities available for sale |  |                  | $ | 140,415           | 
| |                                       |  |                  |   |                   | 
| |                                       |  |                  |   |                   | 
| | Securities
  held to maturity         |  |                  |   |                   | 
| | Mortgage-backed
  securities          |  |                  | $ | 323               | 
| |                                       |  |                  |   |                   | 
| | Total
  securities held to maturity   |  |                  | $ | 323               | 
| |                                       |  |                  |   |                   | 

8

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| |                                   |  | June 30, 2004    |   | December 31, 2003 | 
| | --------------------------------- |  | ---------------- | - | ----------------- | 
| |                                   |  |                  |   |                   | 
| | (in thousands)                    |  | Amortized
  Cost |   | Fair
  Value      | 
| |                                   |  |                  |   |                   | 
| |                                   |  | (unaudited)      |   | (unaudited)       | 
| |                                   |  |                  |   |                   | 
| | Investments
  in bank stocks      |  |                  |   |                   | 
| | Federal
  Home Loan Bank stock    |  |                  | $ | 2,319             | 
| | Federal
  Reserve Bank stock      |  |                  |   | 1,870             | 
| | Bankers
  Bank of the West stock |  |                  |   | 183               | 
| |                                   |  |                  |   |                   | 
| |                                   |  |                  | $ | 4,372             | 
| |                                   |  |                  |   |                   | 

The following table presents the components of investment income for
the three and six months ended June 30, 2004 and 2003.

| |                              |  | Three months endedJune 30, |   | Six months ended
  June 30, | 
| | ---------------------------- |  | -------------------------- | - | --------------------------- | 
| |                              |  |                            |   |                             | 
| | (in thousands)               |  | 2004                       |   | 2003                        | 
| |                              |  |                            |   |                             | 
| |                              |  | (unaudited)                |   | (unaudited)                 | 
| | Taxable
  interest income    |  |                            | $ | 732                         | 
| | Nontaxable
  interest income |  |                            |   | 265                         | 
| | Dividends                    |  |                            |   | 48                          | 
| |                              |  |                            |   |                             | 
| |                              |  |                            | $ | 1,045                       | 
| |                              |  |                            |   |                             | 

3. 
LOANS HELD FOR SALE

First
Western sells mortgage loans to certain investors subject to contractual
recourse provisions that may obligate them to repurchase a mortgage loan if
certain monthly payments during the first six months after the sale of the loan
are not made by the borrower.  As of
June 30, 2004, the maximum amount of loans First Western could potentially be required
to repurchase was $22.0 million.  This
amount does not necessarily represent future cash requirements as the Company
has historically repurchased no mortgage loans and does not anticipate that
future repurchases will be necessary.

4. 
LOANS

Loans
consist of the following:

| | (in thousands)                    |  | June 30,
  2004 |   | December 31,
  2003 |  
| | --------------------------------- |  | --------------- | - | ------------------- | -
| |                                   |  |                 |   |                     |  
| |                                   |  | (unaudited)     |   |                     |  
| | Commercial,
  industrial and land |  |                 | $ | 215,361             |  
| | Real estate
   construction      |  |                 |   | 58,855              |  
| | Real estate
   mortgage          |  |                 |   | 69,704              |  
| | Consumer and
  other              |  |                 |   | 5,952               |  
| |                                   |  |                 |   |                     |  
| |                                   |  |                 |   | 349,872             |  
| | Less:  Allowance for loan losses  |  |                 |   | (3,369              | )
| | Net
  deferred loan fees          |  |                 |   | (991                | )
| |                                   |  |                 |   |                     |  
| | Loans, Net                        |  |                 | $ | 345,512             |  
| |                                   |  |                 |   |                     |  

As of June
30, 2004 and December 31, 2003, $221,000 and $116,000, respectively, of deposit
account overdrafts have been reclassified to loans.

9

---

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)                         |  | 2004 |       
| | -------------------------------------- |  | ---- | ------
| |                                        |  |      |       
| |                                        |  |      |       
| | Balance at
  January 1, 2004           |  | $    | 11,239
| | New loans,
  including renewals        |  |      | 309   
| | Payments                               |  |      | (480  
| |                                        |  |      |       
| | Balance at
  June 30, 2004 (unaudited) |  | $    | 11,068
| |                                        |  |      |       

5. 
PROVISION AND ALLOWANCE FOR LOAN LOSSES

Transactions
in the allowance are summarized as follows:

| | (in thousands)                               |  | 2004 |      
| | -------------------------------------------- |  | ---- | -----
| |                                              |  |      |      
| | Allowance at
  January 1, 2004               |  | $    | 3,503
| | Loans
  charged off                          |  |      | (458 
| | Recoveries
  on loans previously charged off |  |      | 123  
| | Provision
  for loan losses                  |  |      | 201  
| |                                              |  |      |      
| | Allowance at
  June 30, 2004 (unaudited)     |  | $    | 3,369
| |                                              |  |      |      

6. 
PREMISES AND EQUIPMENT

On
March 5, 2004, the Company sold its bank building in Vail, Colorado and is
leasing back a portion of the space. 
The sale resulted in a pre-tax gain of approximately $1.7 million, all
of which was recognized at the time of sale. 
The lease, which is being accounted for as an operating lease, has a
term of five years with three five-year renewal options and will require future
minimum lease payments aggregating approximately $881,000.  WestStar financed $7.9 million of the
purchase price, of which $2 million was participated to another financial
institution, with a loan due in 2024 at an interest rate of 5.30%.   Commissions of $261,000 related to the sale
were paid to two related parties.

On  June 30, 2004, the Company sold the right to
purchase its main bank building in Glenwood Springs, Colorado that will be
replaced by a new building currently under construction (See Note 13).  The sale resulted in a pre-tax gain of
approximately $107,000, all of which was recognized at the time of sale.

7. 
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, 2004 and December 31,
2003, the carrying amount of securities sold to secure repurchase agreements
was $666,000 and $907,000, respectively. 
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.

8. 
BORROWINGS

WestStar
is a member of the Federal Home Loan Bank of Topeka (FHLB) 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 loans
secured by certain mortgages or deeds of trust. As of June 30, 2004, the
Companys total borrowing capacity was $123.9 million of which $33.6 million of
borrowings were outstanding ($10.8 million was short-term and $22.8 million was
long-term) and $24.0 million in the form of stand-by irrevocable letters of
credit issued by the FHLB were 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, 2004. 
As of June 30, 2004, this authorized borrowing line totaled $42.1
million with $2.2 million outstanding.

WestStar
has also established overnight federal funds lines with First Tennessee Bank,
N.A. (First Tennessee) totaling $20.0 million. 
If drawn upon, $10.0 million will be a secured line and $10.0 million
will be an unsecured line.  These lines
are subject to cancellation by First Tennessee at any time upon the occurrence
of certain conditions.  As of June 30,
2004, no amounts were outstanding under the lines.

10

---

9. 
SHAREHOLDERS EQUITY

Stock Repurchase
Plan

At its
meeting on January 19, 2004, 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, 2004, 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 2005, aggregate approximately $29 million.  During the first six months of 2004, 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. 
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.

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 six months ended June 30, 2004 and
2003:

| |                                               |  | June 30,    |          
| | --------------------------------------------- |  | ----------- | ---------
| |                                               |  |             |          
| | (in thousands, except share data)             |  | 2004        |          
| |                                               |  |             |          
| |                                               |  |             |          
| |                                               |  | (unaudited) |          
| |                                               |  |             |          
| | Basic
  earnings per share computation        |  |             |          
| |                                               |  |             |          
| | Net income
  available to common shareholders |  | $           | 2,047    
| |                                               |  |             |          
| | Weighted
  average shares outstanding  basic |  |             | 5,034,712
| |                                               |  |             |          
| | Basic
  earnings per share                    |  | $           | 0.41     
| |                                               |  |             |          

11

---

| |                                                                           |  | June 30,    |          
| | ------------------------------------------------------------------------- |  | ----------- | ---------
| |                                                                           |  |             |          
| | (in thousands, except share data)                                         |  | 2004        |          
| |                                                                           |  |             |          
| |                                                                           |  | (unaudited) |          
| | Diluted
  earnings per share computation                                  |  |             |          
| | Net income
  available to common shareholders                             |  | $           | 2,047    
| |                                                                           |  |             |          
| |                                                                           |  |             | 5,034,712
| |                                                                           |  |             |          
| | Weighted
  average shares outstanding  basic 
    Shares assumed issued: |  |             |          
| | Stock
  options                                                           |  |             | 123,181  
| | Restricted
  stock                                                        |  |             | 252,015  
| |                                                                           |  |             |          
| |                                                                           |  |             |          
| | Weighted
  average shares outstanding  diluted                           |  |             | 5,409,908
| |                                                                           |  |             |          
| |                                                                           |  |             |          
| | Diluted
  earnings per share                                              |  | $           | 0.38     
| |                                                                           |  |             |          

During the
six months ended June 30, 2003, options to purchase an average of 44,000 shares
of common stock at an average exercise price of $12.25 per share were
outstanding, but were not included in the computation of diluted earnings per
share because the exercise prices of these options were greater than the
average market price of the common stock during such period.  There were no anti-dilutive options for the
six months ended June 30, 2004.

Stock Options

The Company
accounts for its stock options in accordance with SFAS No. 123, Accounting
for Stock-Based Compensation, which permits entities to expense over
the vesting period the fair value of stock-based awards as measured on the date
of grant.  Alternatively, SFAS 123
allows entities to apply 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 123 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.  Accordingly, stock-based
compensation expense for employee option grants is not recognized in the
consolidated financial statements, as options granted under the Plan generally
have an exercise price equal to the market value of the underlying common stock
on the date of grant.  However, during
May 2002, approximately 20,000 stock options were granted at a strike price
below market value.  The Company
recognized $2,000 and $3,000, of compensation expense during the six months
ended June 30, 2004 and 2003, respectively, related to these options.  Any non-employee stock option grants are
accounted for under 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:

|                          |  | 2004        |    | 2003        | 
|------------------------- |  | ----------- | -- | ----------- | 
|                          |  |             |    |             | 
|                          |  | (unaudited) |    | (unaudited) | 
|Dividend yield            |  |             | ** |             | 
|Expected
  life           |  |             | ** |             | 
|Expected
  volatility     |  |             | ** |             | 
|Risk-free
  interest rate |  |             | ** |             | 

** There
were no stock option grants during the first six months of 2004

Had the
Company determined compensation cost based on the fair value accounting
provisions prescribed by SFAS 123 and using the assumptions listed above, the
Companys net income and earnings per share would have been adjusted to the pro
forma amounts indicated below:

12

---

| |                                                                                                                          |  | Three months ended
  June 30, |   | Six months ended
  June 30, |  
| | ------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------- | - | --------------------------- | -
| |                                                                                                                          |  |                               |   |                             |  
| | (in thousands, except share data)                                                                                        |  | 2004                          |   | 2003                        |  
| |                                                                                                                          |  |                               |   |                             |  
| |                                                                                                                          |  | (unaudited)                   |   | (unaudited)                 |  
| | Net income                                                                                                               |  |                               |   |                             |  
| | As
  reported                                                                                                            |  |                               | $ | 574                         |  
| | Deduct:
  Total stock-based employee
          compensation determined under the
          fair value method, net of tax |  |                               |   | (35                         | )
| |                                                                                                                          |  |                               |   |                             |  
| |                                                                                                                          |  |                               |   |                             |  
| | Pro forma                                                                                                                |  |                               | $ | 539                         |  
| |                                                                                                                          |  |                               |   |                             |  
| |                                                                                                                          |  |                               |   |                             |  
| | Earnings per
  share  basic                                                                                             |  |                               |   |                             |  
| | As
  reported                                                                                                            |  |                               | $ | 0.11                        |  
| | Pro
  forma                                                                                                              |  |                               | $ | 0.11                        |  
| |                                                                                                                          |  |                               |   |                             |  
| | Earnings per
  share  diluted                                                                                           |  |                               |   |                             |  
| | As
  reported                                                                                                            |  |                               | $ | 0.11                        |  
| | Pro
  forma                                                                                                              |  |                               | $ | 0.09                        |  

On May 17,
shareholders approved an amendment 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 and to provide that the new total number of shares will increase on
January 1st of each year using a formula based on increases in the
total number of shares outstanding.  The
amendment also increased the number of shares reserved for the grant of
incentive stock options from 500,000 shares to 625,000 shares.

10. 
REGULATORY MATTERS

As of June
30, 2004, 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 11.45% and 13.30%,
respectively, and a Leverage ratio of 8.00%. 
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, 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, 2004, WestStar had Tier 1 and Total Risk-Based Capital
ratios of 11.13% and 12.00%, respectively, and a Leverage ratio of 7.76%.

11. 
SEGMENT INFORMATION

Information
about reportable segments and reconciliation of such information to the
consolidated financial statements for the six months ended June 30 is as
follows:

| |                              |  | Six Months Ended June 30, 2004 (unaudited) |       
| | ---------------------------- |  | ------------------------------------------ | ------
| |                              |  |                                            |       
| | (in thousands)               |  | Banking                                    |       
| |                              |  |                                            |       
| |                              |  |                                            |       
| | Condensed
  income statement |  |                                            |       
| |                              |  |                                            |       
| | Total
  income               |  | $                                          | 18,645
| | Total
  expense              |  |                                            | 13,795
| |                              |  |                                            |       
| | Income
  before income taxes |  |                                            | 4,850 
| | Income
  taxes               |  |                                            | 1,606 
| |                              |  |                                            |       
| | Net
  income                 |  | $                                          | 3,244 
| |                              |  |                                            |       

13

---

| |                              |  | Six Months Ended June 30, 2003 (unaudited) |       
| | ---------------------------- |  | ------------------------------------------ | ------
| |                              |  |                                            |       
| | (in thousands)               |  | Banking                                    |       
| |                              |  |                                            |       
| |                              |  |                                            |       
| | Condensed
  income statement |  |                                            |       
| |                              |  |                                            |       
| | Total
  income               |  | $                                          | 18,773
| | Total
  expense              |  |                                            | 14,197
| |                              |  |                                            |       
| | Income
  before income taxes |  |                                            | 4,576 
| | Income
  taxes               |  |                                            | 1,486 
| |                              |  |                                            |       
| | Net
  income                 |  | $                                          | 3,090 
| |                              |  |                                            |       

12. 
RECENT ACCOUNTING PRONOUNCEMENTS

In March
2004, the Emerging Issues Task Force of the FASB reached consensus opinions
regarding the determination of whether an investment is considered impaired,
whether the identified impairment is considered other-than-temporary, how to
measure other-than-temporary impairment, and how to disclose unrealized losses
on investments that are not other-than-temporarily impaired. The consensus
opinions are detailed in Emerging Issues Task Force Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and
its Application to Certain Investments.  For the quarter ended June 30, 2004, the Company has determined
that it has the ability and intent to hold its investments classified as
available for sale for a reasonable period of time sufficient for the fair
value of the securities to recover.

13. 
SUBSEQUENT EVENTS

On
July 19, 2004, the Board of Directors (Board) declared a regular quarterly
dividend of $0.07 per share payable on August 13, 2004 to shareholders of
record on July 30, 2004.

On July 18,
2004, the Company entered into a partnership agreement with an investor to
construct and own a new facility in Glenwood Springs.  WestStar will lease the main level of the building and the
partnership anticipates selling or leasing the remaining portion of the
building to a third party.  The Company
will own approximately 70% of Glenwood/Rose L.P. and is committed to fund the
building construction costs of approximately $4.3 million, of which
approximately $3.2 million has already been expended.

On
August 1, 2004, First Western was merged into WestStar, effectively dissolving
the previously existing subsidiary relationship.  The merger will have no impact on the future consolidated
financial condition or results of operations of the Company as First Western
was previously owned 100% by WestStar and had been included in the consolidated
financial statements of the Company.

14

---

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 June 30, 2004, and its results of operations for the
three and six months ended June 30, 2004, in comparison to the three and six
months ended June 30, 2003. 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, 2003.

In January
2003, the FASB issued Financial Interpretation No. 46, Consolidation of Variable Interest Entities
(FIN 46).  This interpretation of
Accounting Research Bulletin No. 51, Consolidated
Financial Statements (ARB 51), addresses consolidation by business
enterprises where ownership interests in an entity may vary over time.  FIN 46 requires that an enterprises
consolidated financial statements include only subsidiaries in which the
enterprise has a controlling financial interest.  The Company adopted FIN 46 on January 1, 2004.  As a result of adoption, the Company
deconsolidated its two business trusts that had been formed in 2001 to issue
trust preferred securities because the Company does not have controlling
financial interests over the trusts, as specifically defined by FIN 46.   In accordance with FIN 46, prior period
information was not restated.   Additionally,
there was no cumulative effect on retained earnings or a change in the
Companys capital ratios as a result of this deconsolidation.

Overview

Net income
was $574,000 for the three months ended June 30, 2004, down from $1.1 million
for the three months ended June 30, 2003, a decrease of 50%.  Net income was $2.0 million for the six
months ended June 30, 2004, down from $2.1 million for the six months ended
June 30, 2003, a decrease of 3%.  First
quarter 2004 revenue included a $1.7 million gain, pre-tax, 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
$986,000.

Diluted
earnings per share for the three months ended June 30, 2004, was $0.11 compared
to $0.20 for the three months ended June 30, 2003, a decrease of 45%.  Diluted earnings per share for the six
months ended June 30, 2004, was $0.38 compared to $0.37 for the six months
ended June 30, 2003, an increase of 3%. 
Excluding the gain on the building sale, diluted earnings per share
would have been $0.18 for the first six months of  2004.

The
annualized return on average assets was 0.39% for the three months ended June
30, 2004 compared to 0.76% for the three months ended June 30, 2003.  The annualized return on average assets was
0.70% for the six months ended June 30, 2004 compared to 0.73% for the six
months ended June 30, 2003.  Excluding
the gain on the building sale, the annualized return on average assets would
have been 0.33% for the first six months of 2004.

15

---

The
annualized return on average equity was 3.93% for the three months ended June
30, 2004 compared to 7.08% for the three months ended June 30, 2003.  The annualized return on average equity was
7.02% for the six months ended June 30, 2004 compared to 6.54% for the six
months ended June 30, 2003.  Excluding
the gain on the building sale, the annualized return on average equity would
have been 3.40% for the first six months of 2004.

Results of Operations

Net
Interest Income.Net
interest income, on a fully tax-equivalent basis (FTE), decreased by $510,000,
or 9% to $5.5 million for the three months ended June 30, 2004 from $6.0
million for the three months ended June 30, 2003.   Net interest income,
on a fully tax-equivalent basis (FTE), decreased by $1.1 million, or 9% to
$10.6 million for the six months ended June 30, 2004 from $11.7 million for the
six months ended June 30, 2003.   The net interest margin on an FTE
basis was 4.38% for the three months ended June 30, 2004 as compared to 4.77%
for the comparable period in 2003.  The
net interest margin on an FTE basis was 4.28% for the six months ended June 30,
2004 as compared to 4.83% for the comparable period in 2003.  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 during
the first six months of 2004 as compared to the same period in 2003 was due
primarily to the following factors:  (1)
Average loan volumes decreased $13.0 million, or 4%, since June 30, 2003 as a
result of the soft economy and more conservative underwriting policies. (2)
Yields on loans declined due to the competitive environment and the 25 basis
point interest rate cut implemented by the Federal Reserve during second
quarter 2003.  For the first six months
of 2004 loans (excluding loan fees) yielded 6.56% as compared to the 7.44%
yield for the comparable period in 2003. 
(3) Yields on securities fell as a result of the lower interest rate
environment during 2004.  Additionally,
heavy prepayments during 2003 resulted in funds rolling over into lower
yielding securities.  For the first six
months of 2004 securities yielded 3.74% as compared to the 4.64% yield for the
comparable period in 2003.   These
factors were partially offset by the following items: (1) Loan fees increased
$531,000, or 45%, for the six months ended June 30, 2004 as compared to the six
months ended June 30, 2003.  While loan
yields excluding loan fees dropped 88 basis points for the six months ended
June 30, 2004 as compared to the six months ended June 30, 2003, loan yields
including loan fees dropped only 51 basis points during the comparable
periods.  (2) Deposit costs decreased 20
basis points to 1.88% for the first six months of 2004, as compared to 2.08%
for the first six months of 2003.

Interest
income FTE decreased to $7.4 million for the three months ended June 30, 2004,
as compared to $8.2 million for the three months ended June 30, 2003.  During this time period, average earning
assets decreased $544,000, or less than 1%. 
Interest income FTE decreased to $14.6 million for the six months ended
June 30, 2004, as compared to $16.1 million for the six months ended June 30,
2003, despite the fact that average earning assets increased during this
period.  Average earning assets
increased $10.6 million, or 2%, from $489.7 million for the six months ended
June 30, 2003 to $500.3 million for the six months ended June 30, 2004.  Subsequent to June 30, 2003, the mix of
earning assets shifted away from higher yielding loans toward lower yielding investment
securities and federal funds sold. 
During the first six months of 2004, average loans declined to $322.1
million, or 64% of earning assets, as compared to $335.1 million, or 68% during
the first six months of 2003.  Average
federal funds sold increased to $60.3 million, or 12% of earning assets as
compared to $49.6 million, or 10% during the first six months of 2003 and
investment securities increased to $112.1 million, or 22% of earning assets as
compared to $98.0 million, or 20% during the first six months of 2003.  During this time, loans (including loan
fees) had a yield of 7.64% as compared to the 3.74% yield on investment
securities and 1.04% yield on federal funds sold.   As a result of this shift, the total yield on average earning
assets decreased 74 basis points to 5.88% for the first six months of 2004, as
compared to 6.62% for the first six months of 2003.

Interest
expense decreased to $2.0 million for the three months ended June 30, 2004, as
compared to $2.3 million for the corresponding period in 2003.  Interest expense decreased to $4.0 million
for the six months ended June 30, 2004, as compared to $4.4 million for the
corresponding period in 2003.  This
decrease for the six month period was comprised primarily of a $380,000
decrease in interest expense on deposits, and a $16,000 decrease in interest
expense on borrowings.  Although average
interest bearing deposits increased $7.6 million, or 2%, in 2004 over the
corresponding period in 2003, all of the growth was in lower cost checking,
savings and money market accounts resulting in this decrease in interest
expense.  The volume of higher cost
certificates of deposits decreased during this period, declining from an
average of $136.9 million during the first six months of 2003 to $119.9 million
during the first six months of 2004.  
Additionally, maturing certificates of deposit renewed at significantly
lower interest rates.   As a result of
these factors, the total cost of interest-bearing liabilities decreased 20
basis points to 1.88% for the first six months of 2004, as compared to 2.08%
for the first six months of 2003.   This
decrease in cost of interest bearing liabilities, however, was not in
proportion to the decrease in yield on average interest earning assets, resulting
in an overall decrease in net interest income and net interest margin for the
first six months of 2004.

16

---

Non-Interest
Income.  During
the three months ended June 30, 2004, non-interest income decreased by
$753,000, or 26% from the comparable quarter in 2003.   This decrease was primarily due to a $559,000 decrease in
mortgage broker fees as refinancing activity slowed.  During the six months ended June 30, 2004, non-interest income
increased by $208,000, or 4%.   This
increase was primarily attributable to the $1.8 million gain on the sales of
the Vail bank building and the main Glenwood Springs facility during the first
six months of 2004.  This increase was
partially offset by a $1.2 million decrease in mortgage broker fees.  During 2004, refinancing activity slowed as
compared to the refinancing boom of 2002 and 2003.

Non-Interest
Expense.  
Non-interest expense decreased $276,000, or 4%, to $6.6 million for the
three months ended June 30, 2004, from $6.9 million for the three months ended
June 30, 2003.  Non-interest expense
decreased $784,000, or 6%, to $13.1 million for the six months ended June 30,
2004, from $13.9 million for the six months ended June 30, 2003.  These decreases were largely attributable to
a decrease in salaries and benefits of $599,000 for the first six months of
2004 compared to the first six months of 2003 and a decrease in furniture and
equipment expense of $226,000 for the comparable periods.  Salaries and benefits decreased primarily
due to (1) a $682,000 decrease in mortgage incentive pay as a result of lower
mortgage origination volume and (2) a $250,000 decrease in employee insurance
costs primarily due to favorable healthcare claim volumes, partially offset by
(3) $428,000 of salaries and benefits expense attributable to the new Denver
Tech branch opened during third quarter 2003 compared to only $91,000 during
the comparable period during 2003. 
Furniture and equipment expense decreased primarily due to a decrease in
depreciation and amortization expense related to the fourth quarter 2003
write-off of $1.6 million of obsolete fixed assets.

The
efficiency ratio was 81% for both the six months ended June 20, 2004 and
2003.  The efficiency ratio was 89% for
the quarter ended June 30, 2004 compared to 80% for the quarter ended June 30,
2003.  This worsening of the efficiency
ratio was due to the decrease in revenue (net interest income plus non-interest
income) of $1.2 million from second quarter 2003 to second quarter 2004, while
at the same time non-interest expenses decreased by only $276,000.   Excluding the gain on the building sale,
the efficiency ratio would have been 90% for the six months ended June 30,
2004.

Income
Taxes.The
Companys effective income tax rate (income tax expense as a percentage of
pre-tax income) was 24.9% and 31.1%, respectively, for the three and six months
ended June 30, 2004 as compared to 30.5% and 30.2%, respectively, for the three
and six months ended June 30, 2003. 
During the second quarter 2004, tax-exempt interest from municipal
securities represented a higher percentage of pre-tax income than it did during
the same period in 2003, resulting in a lower effective tax rate.

Financial Condition

The
Companys assets increased by $14.8 million or 3%, to $590.4 million as of June
30, 2004, from $575.6 million as of December 31, 2003.

Federal
funds sold balances decreased by $79.3 million, or 100%, to $0 as of June 30,
2004 from $79.3 million at December 31, 2003.  
At June 30, 2004, the Company was in a federal funds purchased position,
with $2.2 million outstanding. 
Investment securities increased to $142.6 million as of June 30, 2004,
compared to $81.3 million as of December 31, 2003, a 75% increase.  During this period, the Company deployed
excess liquidity from cash equivalents (which included federal funds sold) and
deposit growth into short-term investments as well as loan growth.

As of June
30, 2004, loans held for sale decreased $487,000, or 19%, from December 31,
2003.  The ending balance of loans held
for sale at any particular date is dependent on the timing of the closing and
ultimate funding of these loans by the outside investor.  Thus, an increase or decrease in the ending
balance is primarily a function of this timing and not necessarily indicative
of trends in mortgage loan demand.

Gross loans
increased $37.3 million, or 12%, from December 31, 2003.   This increase was due to an increase in
loan demand.

Premises
and equipment decreased by $3.2 million, or 9%, from $38.1 million as of
December 31, 2003, to $34.9 million as of June 30, 2004.  This decrease was mainly attributable to the
sale of the Vail bank building that had a net book value of $5.8 million, sale
of the main Glenwood Springs facility that had a net book value of
approximately $740,000, and $898,000 of depreciation and amortization expense,
offset by the purchase of $4.3 million of premises and equipment primarily
related to equipment upgrades, remodeling of branches, the construction of a
new branch facility in Glenwood Springs, which replaces the building sold, and
the purchase of land to build a new branch facility in Fruita.

17

---

Goodwill
decreased by $789,000, or 2%, from $36.8 million as of December 31, 2003 to
$36.0 million as of June 30, 2004 in conjunction with the sale of the Vail bank
building.

Deposits
increased by $18.4 million, or 4%, from $448.5 million as of December 31, 2003,
to $466.9 million as of June 30, 2004. 
The largest increases were in the money market category, with a $16.3
million, or 16% increase, and in checking accounts, with a $13.7 million, or 7%
increase.  These increases are
attributable to the Companys continued focus on attracting new deposit
relationships and expanding existing relationships.

Federal
Home Loan Bank advances decreased $5.8 million, or 15% from $39.5 million as of
December 31, 2003 to $33.6 million as of June 30, 2004.  This decrease was due to repayment of
maturing advances.

Asset Quality

Provision
and Allowance for Loan Losses.  Provision expense for the three and six
months ended June 30, 2004, was $43,000 and $201,000, respectively, compared to
$125,000 and $250,000, respectively, for the three and six months ended June
30, 2003.  The allowance for loan losses
of $3.4 million as of June 30, 2004, decreased 4% from the $3.5 million level
as of December 31, 2003 and represents 0.97% of total loans and 217% of
non-performing loans as of June 30, 2004 as compared to 1.12% and 201%,
respectively at December 31, 2003.  
During this same time period, gross loans increased $37.3 million, or
8%, from $312.5 million at December 31, 2004 to $349.9 million at June 30,
2004, however non-performing loans decreased $192,000, or 11%.  Additionally, loans past due 30 or more days
and still accruing dropped to 0.24% of total loans from 0.47% at December 31,
2003.  This benchmark, often an
indicator of future loan non-performance, is at its lowest level since December
2000.  Accordingly, the $134,000
decrease in the allowance for loan losses from December 31, 2003 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, 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) |  | Six months ended
  June 30, |  
| | --------------------------------------------------- |  | --------------------------- | -
| |                                                     |  |                             |  
| |                                                     |  | 2004                        |  
| |                                                     |  |                             |  
| |                                                     |  | (unaudited)                 |  
| | Average
  total loans                               |  |                             | $
| |                                                     |  |                             |  
| |                                                     |  |                             |  
| | Total loans
  at end of period                      |  |                             | $
| |                                                     |  |                             |  
| |                                                     |  |                             |  
| | Allowance at
  beginning of period                  |  |                             | $
| | Loans
  charged off                                 |  |                             |  
| | Recoveries
  on loans previously charged off        |  |                             |  
| | Provision
  for loan losses                         |  |                             |  
| |                                                     |  |                             |  
| | Allowance at
  end of period                        |  |                             | $
| |                                                     |  |                             |  
| |                                                     |  |                             |  
| | Annualized
  net charge-offs to average loans       |  |                             |  
| | Allowance to
  total loans at end of period         |  |                             |  

18

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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,    |  
| | ---------------------------------------------- |  | ----------- | -
| |                                                |  |             |  
| |                                                |  | 2004        |  
| |                                                |  |             |  
| |                                                |  | (unaudited) |  
| | Nonaccrual
  loans                             |  |             | $
| | Restructured
  loans                           |  |             |  
| |                                                |  |             |  
| | Total
  non-performing loans                   |  |             |  
| | Foreclosed
  properties                        |  |             |  
| |                                                |  |             |  
| | Total
  non-performing assets                  |  |             |  
| | Loans 90
  days or more past due and accruing  |  |             |  
| |                                                |  |             |  
| | Total
  risk assets                            |  |             | $
| |                                                |  |             |  
| |                                                |  |             |  
| | Non-performing
  loans to total loans          |  |             |  
| |                                                |  |             |  
| | Non-performing
  assets to loan related assets |  |             |  
| |                                                |  |             |  
| | Non-performing
  assets to total assets        |  |             |  
| |                                                |  |             |  
| | Risk assets
  to loan related assets           |  |             |  

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.  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
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, 2004, the Company had cash and cash equivalents (including federal funds sold)
of $18.9 million, interest-bearing deposits in banks of $2.0 million, and
investment securities of $142.6 million. 
Approximately $137.9 million, or 97%, of the Companys investment
portfolio is classified as available-for-sale and can be readily sold, however
$64.7 million of this amount has been pledged to secure public fund deposits
and $666,000 of this amount has been sold under agreements to repurchase.  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

19

---

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 $2.0 million less
non-cash income of $492,000 less net decreases in operating assets and
liabilities of $286,000. Non-cash income consisted primarily of a $1.8 million
gain on the sale of premises and equipment 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 an $821,000 decrease in interest payable and
other liabilities offset by a $487,000 decrease in loans held for sale.

During the
six-month period ended June 30, 2003, cash of $4.1 million was provided by
operating activities consisting primarily of net income of $2.1 million plus
non-cash expenses of $1.4 million and net decreases in operating assets and
liabilities of $608,000. Non-cash expenses consisted primarily of $1.2 million
of depreciation and amortization expense on premises and equipment, a $250,000
loan loss provision, $195,000 of net amortization of premiums on investment
securities, $179,000 of stock compensation, and $177,000 of deferred income tax
expense.  The net decrease in operating
assets and liabilities was primarily due to a $2.7 million decrease in loans
held for sale offset by a $915,000 increase in other assets, a $692,000
increase in interest receivable, and a $519,000 decrease in interest payable
and other liabilities.

Net Cash from
Investing Activities

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 and/or calls of $16.5 million of investments
and $8.3 million of proceeds from the sale of premises and equipment.

During the
six-month period ended June 30, 2003, cash of $36.0 million was used for investing
activities.  These outflows consisted
primarily of the purchase of $66.9 million of investment securities and $1.1
million in purchases of premises and equipment, offset by the maturity and/or
calls of $21.8 million of investment securities, a decrease in loans of $8.1
million, and $2.0 million of proceeds from sales of foreclosed properties.

Net Cash from
Financing Activities

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 $2.2 million, offset by
the net repayment of FHLB advances of $5.8 million and the payment of dividends
on common stock of $742,000.

During the
six-month period ended June 30, 2003, cash of $38.4 million was provided by
financing activities consisting primarily of an increase in deposits of $28.7
million and the receipt of $15.7 million of proceeds from FHLB advances, offset
by the repurchase of $5.5 million of common stock and the payment of dividends
on common stock of $681,000.

Borrowings

WestStar
is a member of the Federal Home Loan Bank of Topeka (FHLB) 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 loans
secured by certain mortgages or deeds of trust. As of June 30, 2004, the
Companys total borrowing capacity was $123.9 million of which $33.6 million of
borrowings were outstanding ($10.8 million was short-term and $22.8 million was
long-term) and $24.0 million in the form of stand-by irrevocable letters of
credit issued by the FHLB were pledged as collateral for uninsured public fund
deposits.

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 high volume of dividends relative
to earnings paid in earlier years, beginning in 2004, any dividend payments
from WestStar to Vail Banks will require prior regulatory approval.  Management believes that approval will be
granted as long as WestStar maintains its well-capitalized regulatory status
and has no reason to believe that this well-capitalized regulatory status will
change.

On July 19,
2004, the Board declared a regular quarterly dividend of $0.07 per share
payable on August 13, 2004 to Vail Banks shareholders of record on July 30,
2004.

20

---

Stock Repurchase
Plan

At its
meeting on January 19, 2004, 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, 2004, 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 2005, aggregate approximately $29 million.  During the first six months of 2004, the
Company did not repurchase any common shares.

Stock
Options

On May 17,
shareholders approved an amendment 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 and to provide that the new total number of shares will increase on
January 1st of each year using a formula based on increases in the
total number of shares outstanding.  The
amendment also increased the number of shares reserved for the grant of
incentive stock options from 500,000 shares to 625,000 shares.

Capital Resources

As of June
30, 2004, shareholders equity had increased $439,000, or 1%, to $58.3 million
from $57.9 million as of December 31, 2003. 
This increase is primarily related to the retention of earnings of $2.0
million and the issuance of common stock of $411,000, offset by an increase in
other comprehensive loss of $1.5 million and payment of common stock dividends
of $742,000.

As of June
30, 2004 and 2003, the Company met all capital adequacy requirements to which
it was subject.  As of June 30, 2004,
the Company had Tier 1 and Total Risk-Based Capital ratios of 11.45% and
13.30%, respectively, and a Leverage ratio of 8.00%.  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, 2003, the Company had Tier 1
and Total Risk-Based Capital ratios of 12.95% and 14.60%, respectively, and a
Leverage ratio of 8.47%.

As of June
30, 2004 and 2003, 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,
2004, WestStar had Tier 1 and Total Risk-Based Capital ratios of 11.13% and
12.00%, respectively, and a Leverage ratio of 7.76%.  As of June 30, 2003, WestStar had Tier 1 and Total Risk-Based
Capital ratios of 13.39% and 14.25%, respectively, and a Leverage ratio of
8.74%.

Recent Accounting
Pronouncements

In March
2004, the Emerging Issues Task Force of the FASB reached consensus opinions
regarding the determination of whether an investment is considered impaired,
whether the identified impairment is considered other-than-temporary, how to
measure other-than-temporary impairment, and how to disclose unrealized losses
on investments that are not other-than-temporarily impaired. The consensus
opinions are detailed in Emerging Issues Task Force Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and
its Application to Certain Investments.  For the quarter ended June 30, 2004, the Company has determined
that it has the ability and intent to hold its investments classified as
available for sale for a reasonable period of time sufficient for the fair
value of the securities to recover.

21

---

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, 2003 that are sensitive to changes in interest rates.

|                                                             |  | Principal Amount Maturing (b) in: |         |      |   |        |  
|------------------------------------------------------------ |  | --------------------------------- | ------- | ---- | - | ------ | -
|                                                             |  |                                   |         |      |   |        |  
|(in thousands)                                               |  | 2004                              |         | 2005 |   | 2006   |  
|                                                             |  |                                   |         |      |   |        |  
|INTEREST RATE SENSITIVE ASSETS                               |  |                                   |         |      |   |        |  
|                                                             |  |                                   |         |      |   |        |  
|Federal funds sold and interest earning deposits             |  | $                                 | 81,280  |      | $ |       |  
|Weighted average interest
  rate                             |  |                                   | 0.93    | %    |   | 0.00   | %
|Adjustable-rate securities                                   |  |                                   |        |      |   |       |  
|Weighted average interest
  rate (a)                         |  |                                   | 0.00    | %    |   | 0.00   | %
|Fixed-rate securities                                        |  |                                   | 454     |      |   | 2,577  |  
|Weighted average interest
  rate (a)                         |  |                                   | 6.79    | %    |   | 2.30   | %
|Investments in bank stocks                                   |  |                                   |        |      |   |       |  
|Weighted average interest
  rate                             |  |                                   | 0.00    | %    |   | 0.00   | %
|Loans held for sale                                          |  |                                   | 2,515   |      |   |       |  
|Weighted average interest
  rate                             |  |                                   | 4.73    | %    |   | 0.00   | %
|Adjustable-rate loans                                        |  |                                   | 132,491 |      |   | 27,237 |  
|Weighted average interest
  rate                             |  |                                   | 6.39    | %    |   | 6.38   | %
|Fixed-rate loans                                             |  |                                   | 18,570  |      |   | 7,443  |  
|Weighted average interest
  rate                             |  |                                   | 6.51    | %    |   | 7.84   | %
|                                                             |  |                                   |         |      |   |        |  
|Total interest rate sensitive assets                         |  | $                                 | 235,310 |      | $ | 37,257 |  
|                                                             |  |                                   |         |      |   |        |  
|                                                             |  |                                   |         |      |   |        |  
|Weighted average interest rate                               |  |                                   | 4.49    | %    |   | 6.39   | %
|                                                             |  |                                   |         |      |   |        |  
|                                                             |  |                                   |         |      |   |        |  
|INTEREST RATE SENSITIVE LIABILITIES                          |  |                                   |         |      |   |        |  
|Interest-bearing checking, savings and money market accounts |  | $                                 |        |      | $ |       |  
|Weighted average interest
  rate                             |  |                                   | 0.00    | %    |   | 0.00   | %
|Fixed-rate time deposits                                     |  |                                   | 92,686  |      |   | 26,325 |  
|Weighted average interest
  rate                             |  |                                   | 1.92    | %    |   | 2.68   | %
|Securities sold under agreements to repurchase               |  |                                   | 907     |      |   |       |  
|Weighted
  average interest rate                             |  |                                   | 0.38    | %    |   | 0.00   | %
|Fixed-rate borrowings                                        |  |                                   | 9,690   |      |   | 6,465  |  
|Weighted average interest
  rate                             |  |                                   | 3.60    | %    |   | 3.76   | %
|Trust preferred                                              |  |                                   |        |      |   |       |  
|Weighted average interest
  rate                             |  |                                   | 0.00    | %    |   | 0.00   | %
|                                                             |  |                                   |         |      |   |        |  
|Total interest rate sensitive liabilities                    |  | $                                 | 103,283 |      | $ | 32,790 |  
|                                                             |  |                                   |         |      |   |        |  
|Weighted average interest rate                               |  |                                   | 2.06    | %    |   | 2.89   | %
|                                                             |  |                                   |         |      |   |        |  

(a)  These interest rates are
not adjusted to reflect tax equivalent yields.

(b)  The above amounts represent
scheduled maturities and do not include prepayments that may occur.

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.

22

---

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, 2004, the Company has never
used interest rate derivative financial instruments as an asset/liability
management tool to hedge mismatches in interest rate exposures.

During the
second quarter of 2004, Vail Banks experienced a decrease in liquidity from the
first quarter of 2004 due to investment in securities, increased loan demand
and a decrease in deposits.  This
decreased liquidity position decreased the asset sensitivity of the balance
sheet and has made Vail Banks less sensitive to changes in interest rates at
June 30, 2004 than at December 31, 2003. 
Given the Companys interest rate gap position at June 30, 2004, if
rates fall, asset yields will decline faster than the cost of interest bearing
liabilities, leading to a decline in the margin.  If rates rise, asset yields will increase faster than the cost of
interest bearing liabilities, leading to an increase in the margin.  The extent of this decline or increase will
depend on the degree to which deposit rates change relative to market rates.

The
reduction in short-term rates by the Federal Reserve during 2001, 2002 and 2003
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 more limited.  On June 30, 2004, the Federal Reserve raised
the target Fed Funds rate 25 basis points from 1.00% to 1.25%.

Item 4.     CONTROLS
AND PROCEDURES

Company
management, including the vice chairman 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, 2004.  Based on, and as of
the date of, that evaluation, the Companys chief executive officer and
president and the chief financial officer have concluded that the Companys
disclosure controls and procedures were effective in accumulating and
communicating information to management, including the vice chairman, chief executive
officer and president, and the 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.

23

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PART II OTHER INFORMATION

Item
4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.

On
May 17, 2004, 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 | 
|------------------- |  | --------- |  | ------------------------- |  | ----------------------------- |  | ---------------- |  | ----------- |  | ---------------- | 
|                    |  |           |  |                           |  |                               |  |                  |  |             |  |                  | 
|                    |  |           |  |                           |  |                               |  |                  |  |             |  |                  | 
|E.B.
  Chester, Jr. |  | 3
  years |  | 2,770,670                 |  | 0                             |  | 319,999          |  | 0           |  | 0                | 
|                    |  |           |  |                           |  |                               |  |                  |  |             |  |                  | 
|S. David
  Gorsuch  |  | 3
  years |  | 2,857,271                 |  | 0                             |  | 23,398           |  | 0           |  | 0                | 
|                    |  |           |  |                           |  |                               |  |                  |  |             |  |                  | 
|James M.
  Griffin  |  | 3
  years |  | 3,074,471                 |  | 0                             |  | 16,198           |  | 0           |  | 0                | 
|                    |  |           |  |                           |  |                               |  |                  |  |             |  |                  | 
|Garner F.
  Hill II |  | 3
  years |  | 3,070,771                 |  | 0                             |  | 19,898           |  | 0           |  | 0                | 
|                    |  |           |  |                           |  |                               |  |                  |  |             |  |                  | 
|Gary S. Judd        |  | 3
  years |  | 3,027,002                 |  | 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 1st of each year equal to
twenty percent of the increase in the total number of shares outstanding on
such January 1st over the total number of shares outstanding on the
immediately preceding January 1st. 
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 2,747,997, votes cast against the proposal were 342,672,
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 3,069,995, votes cast against the proposal were 20,322, votes withheld
were 0, abstentions were 352, and broker non-votes were 0.

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

| | (a) | Exhibits
| | --- | --------
| |     |         
| |     | 31.1    
| |     |         
| |     | 31.2    
| |     |         
| |     | 32.1    
| |     |         
| |     | 32.2    

24

---

| | (b) | Reports on Form 8-K                                                                                                                                                                                                                              
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                  
| |     | The Company
  filed a Current Report on Form 8-K dated April 21, 2004, under Items 7 and
  12.  The report included a press
  release reporting Vail Banks results of operations and financial condition
  for the quarter ended March 31, 2004.

25

---

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 13, 2004 | /s/ GARY S. JUDD                                             
|                       |                                                              
|                       | Gary S. Judd                                                 
|                       | Chief Executive Officer and President                        
|                       | (Principal Executive Officer)                                
|                       |                                                              
|                       |                                                              
|Date:  August 13, 2004 | /s/  PETER G. WILLISTON                                      
|                       |                                                              
|                       | Peter G.
  Williston                                         
|                       | Senior Executive
  Vice President and Chief Financial Officer
|                       | (Principal Financial and Accounting
  Officer)               

26