U. S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-QSB



                   QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                    FOR QUARTERLY PERIOD ENDED June 30, 1999

                        Commission File Number 000-25081


                                VAIL BANKS, INC.
        (Exact name of small business issuer as specified in its charter)

                    Colorado                           84-1250561
     ---------------------------------------------------------------------
     (State or other jurisdiction of       (I.R.S. Employer Identification
      incorporation or organization)                 Number)


               108 South Frontage Road West, Vail, Colorado 81657
               --------------------------------------------------
               (Address of principal executive offices) (Zip Code)


Issuer's telephone number, including area code: (970) 476-2002
                                                --------------

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 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 / /

          State the number of shares outstanding of each of the issuer's
          classes of common equity, as of the latest practicable date:

As of July 31, 1999 there were 6,040,608 shares of common stock ($1.00 par value
per share) outstanding.


<PAGE>


                                VAIL BANKS, INC.

<TABLE>
<CAPTION>

                                      INDEX

<S>  <C>      <S>                                                                     <C>
PART I        FINANCIAL INFORMATION

     Item 1.  Financial Statements


              Consolidated Balance Sheet at June 30, 1999 and December 31, 1998       3

              Consolidated Statements of Income for the Three and Six Months
              Ended June 30, 1999 and 1998                                            4

              Consolidated Statements of Cash Flows for the Six Months Ended
              June 30, 1999 and 1998                                                  5

              Notes to Unaudited Consolidated Financial Statements                    6

     Item 2.  Management's Discussion and Analysis of Financial Condition and
              Results of Operations                                                   8

PART II       OTHER INFORMATION

     Item 4.  Submission of Matters to a Vote of Security Holders                     14

     Item 6.  Exhibits and Reports on Form 8-K                                        14
</TABLE>



                                           2
<PAGE>

                          PART I FINANCIAL INFORMATION

ITEM 1.       FINANCIAL STATEMENTS

                                               VAIL BANKS, INC.
                                               AND SUBSIDIARIES

                                          CONSOLIDATED BALANCE SHEETS
                                                (in thousands)
<TABLE>
<CAPTION>

                                     ASSETS                                June 30,            December 31,
                                                                             1999                  1998
                                                                       ------------------    ----------------
                                                                          (unaudited)

<S>                                                                   <C>                             <C>
Cash and due from banks                                               $           24,092              28,469
Federal Funds sold                                                                13,650              43,105
Investment securities:
    Available for sale, at market value                                           38,222              33,022
    Held to maturity, at amortized cost                                            5,497               7,713

Loans                                                                            300,443             269,191
    Less allowance for loan losses                                                (2,512)             (2,590)
                                                                       ------------------    ----------------
         Net loans                                                               297,931             266,601
                                                                       ------------------    ----------------
Bank premises and equipment, net of accumulated depreciation
    and amortization                                                              33,957              31,647
Accrued interest receivable                                                        2,499               2,425
Deferred income taxes                                                                281                 971
Intangible assets, net                                                            24,027              22,959
Other assets                                                                       1,671               2,211
                                                                       ==================    ================
                                                                      $          441,827             439,123
                                                                       ==================    ================
                      LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
    Deposits:
       Demand, non-interest bearing                                   $           83,355              91,510
       Demand, interest bearing                                                  159,930             151,889
       Savings                                                                    47,418              42,165
       Time deposits of $100,000 and over                                         25,629              44,472
       Time deposits under $100,000                                               66,432              47,536
                                                                       ------------------    ----------------
                                                                                 382,764             377,572

Notes Payable                                                                        ---               1,114
Accrued interest payable and other liabilities                                     2,443               5,439
                                                                       ------------------    ----------------
         Total liabilities                                                       385,207             384,125
                                                                       ------------------    ----------------

Minority interest                                                                    636                 621
                                                                       ------------------    ----------------

Stockholders' equity:
    Common stock                                                                   6,041               6,041
    Additional paid-in capital                                                    46,772              46,772
    Retained earnings                                                              3,491               1,522
    Accumulated other comprehensive income                                         (320)                  42
                                                                       ------------------    ----------------
         Total stockholders' equity                                               55,984              54,377
                                                                       ==================    ================

                                                                      $          441,827             439,123
                                                                       ==================    ================

See accompanying notes to consolidated financial statements.
</TABLE>

                                                           3
<PAGE>

<TABLE>
<CAPTION>
                                                        VAIL BANKS, INC.
                                                        AND SUBSIDIARIES

                                                CONSOLIDATED STATEMENTS OF INCOME
                                                (in thousands, except share data)


                                                       Three months ended June 30,            Six months ended June 30,
                                                    -------------------------------       -----------------------------------
                                                          1999              1998               1999                1998
                                                    --------------    -------------       ---------------    ----------------
                                                      (unaudited)      (unaudited)          (unaudited)         (unaudited)
<S>                                                <C>                     <C>                   <C>             <C>
Interest income:
    Interest and fees on loans                     $       7,858               4,534                14,755           8,508
    Interest on investment securities                        547                 238                 1,040             524
    Interest on federal funds sold                           282                 419                   806             804
                                                    -------------        ------------         -------------    ------------
         Total interest income                             8,687               5,191                16,601           9,836
                                                    -------------        ------------         -------------    ------------
Interest expense:
    Demand deposits                                        1,250                 982                 2,486           1,911
    Savings deposits                                         332                  95                   642             197
    Time deposits                                            972                 718                 2,048           1,367
    Notes payable                                            ---                  26                    14              55
    Mandatorily convertible debentures                       ---                  39                   ---              77
    Interest on federal funds purchased
     and other borrowed funds                                ---                  13                   ---              15
                                                    -------------        ------------         -------------    ------------
         Total interest expense                            2,554               1,873                 5,190           3,622
                                                    -------------        ------------         -------------    ------------
         Net interest income                               6,133               3,318                11,411           6,214

Provision for loan losses                                     80                 ---                    80             ---
                                                    -------------        ------------         -------------    ------------
         Net interest income after provision
            for loan losses                                6,053               3,318                11,331           6,214

Other income:
    Service charges on deposit accounts                      609                 309                 1,148             606
    Other income                                             231                 292                   478             453
                                                    -------------        ------------         -------------    ------------
                                                             840                 601                 1,626           1,059
Other expenses:
    Salaries and employee benefits                         2,399               1,598                 5,012           3,204
    Occupancy expense                                        472                 470                   902             738
    Furniture and equipment expense                          460                 312                   899             575
    Amortization of intangible assets                        241                  45                   475              90
    Other operating expenses                               1,303                 736                 2,445           1,386
                                                    -------------        ------------         -------------    ------------
                                                           4,875               3,161                 9,733           5,993
                                                    -------------        ------------         -------------    ------------

         Income before income taxes                        2,018                 758                 3,224           1,280

Income tax expense                                           765                 263                 1,255             445
                                                    -------------        ------------         -------------    ------------
         Net income                                $       1,253                 495                 1,969             835
                                                    =============        ============         =============    ============
Other comprehensive income                         $        (365)                (16)                 (362)             (1)
                                                    =============        ============         =============    ============

Net income                                         $       1,253                 495                 1,969             835
Preferred stock dividends                                    ---                  59                   ---             118
                                                    -------------        ------------         -------------    ------------
Net income available to common stockholders        $       1,253                 436                 1,969             717
                                                    =============        ============         =============    ============

Weighted average common shares                         6,040,608           2,285,820             6,040,608       2,285,820
                                                    =============        ============         =============    ============

Net income per common share (basic)                $        0.21                0.19                  0.33            0.31
                                                    =============        ============         =============    ============

Net income per common share (diluted)              $        0.21                0.18                  0.32            0.30
                                                    =============        ============         =============    ============
</TABLE>

See accompanying notes to consolidated financial statements.

                                                               4
<PAGE>


                                                 VAIL BANKS, INC.
                                                 AND SUBSIDIARIES

                                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                  (in thousands)
<TABLE>
<CAPTION>
                                                                                         Six months ended
                                                                                             June 30,
                                                                                 ---------------------------------
                                                                                     1999               1998
                                                                                 --------------    ---------------
                                                                                   (unaudited)       (unaudited)
<S>                                                                             <C>                      <C>
Cash flows from operating activities:
    Net income                                                                  $       1,969               835
    Adjustments to reconcile net income to net cash provided (used) by
       operating activities:
        Amortization of intangible assets                                                 475                90
        Depreciation and amortization                                                     978               604
        Provision for loan losses                                                          80               ---
        Net amortization of premiums (accretion of discounts) on
           investment securities                                                           82                (6)
        Deferred income tax expense                                                       690               171
        Changes in operating assets and liabilities:
           Decrease (increase) in accrued interest receivable                             (74)               42
           Decrease (increase) in intangible and other assets                          (1,000)           (1,122)
           Increase (decrease) in accrued interest payable and other                   (2,798)           (3,267)
             liabilities
                                                                                 --------------    ---------------
                  Net cash provided (used) by operating activities                         402           (2,653)
                                                                                 --------------    ---------------

Cash flows from investing activities:
    Net decrease (increase) in federal funds sold                                      29,455            (2,387)
    Purchase of investment securities available for sale                              (16,873)             (348)
    Proceeds from maturities of investment securities held to maturity                  2,178             2,000
    Proceeds from maturities of investment securities available for sale               11,080             1,524
    Net decrease (increase) in loans                                                  (31,410)           (7,427)
    Purchase of bank premises and equipment                                            (3,287)           (2,055)
                                                                                 --------------    ---------------
                  Net cash provided (used) by investing activities                     (8,857)           (8,693)
                                                                                 --------------    ---------------

Cash flows from financing activities:
    Net increase (decrease) in deposits                                                 5,192            10,358
    Net increase (decrease) in repurchase agreements                                      ---               775
      Proceeds from issuance of common stock                                              ---               248
    Dividends paid                                                                        ---               (99)
    Repayments of notes payable                                                        (1,114)             (100)
                                                                                 --------------    ---------------
                  Net cash provided (used) by financing activities                      4,078            11,182
                                                                                 --------------    ---------------

                  Net decrease in cash and due from banks                              (4,377)             (164)

Cash and due from banks at beginning of period                                         28,469            16,680
                                                                                 --------------    ---------------


Cash and due from banks at end of period                                        $      24,092            16,516
                                                                                 ==============    ===============
Supplemental  disclosures of cash flow information:
    Cash paid during the period for:
    Interest expense                                                            $       5,356             3,524
                                                                                 ==============    ===============

    Income taxes                                                                $         490                12
                                                                                 ==============    ===============
</TABLE>

See accompanying notes to consolidated financial statements.

                                                       5
<PAGE>


                        Vail Banks, Inc. and Subsidiaries
              Notes to Unaudited Consolidated Financial Statements
                               As of June 30, 1999


(1)      Organization and Basis of Presentation

The  accompanying   unaudited  consolidated  financial  statements  include  the
accounts  of  Vail  Banks,  Inc.  (VBI or the  Company)  and  its  wholly  owned
subsidiaries,  WestStar Bank (WestStar), the Bank of Telluride (BOT) and Western
Colorado Bank (WCB).  WestStar and VBI own a 54.04%  interest in Avon 56 Limited
which is also included in the accompanying  consolidated  financial  statements.
All  entities  are  collectively  referred to as "Vail  Banks." All  significant
intercompany accounts and transactions have been eliminated in consolidation.

The accompanying  unaudited  consolidated  financial  statements,  which are for
interim  periods,  do not include all disclosures  provided in the  consolidated
financial  statements  as of  December  31,  1998.  These  interim  consolidated
financial  statements and the notes thereto  should be read in conjunction  with
VBI's  Annual  Report on Form 10-KSB as of and for the year ended  December  31,
1998.

In the opinion of  management  all  adjustments  necessary,  consisting  of only
normal  recurring  items,  have been  included  for a fair  presentation  of the
accompanying consolidated financial statements.  Operating results for the three
and six months ended June 30, 1999 are not necessarily indicative of the results
that may be expected for the full year.

(2)      Net Income Per Common Share

In March 1997, the Financial  Accounting Standards Board (FASB) issued Statement
of Financial  Accounting Standards (SFAS) No. 128, Earnings Per Share (SFAS 128)
which  replaced  APB  Opinion  No. 15 related to  standards  for  computing  and
presenting  earnings per share (EPS) and applies to entities  with publicly held
common stock or potential common stock.  SFAS 128 requires dual  presentation of
basic and diluted EPS on the face of the income  statement for all entities with
complex  capital  structures.  Also, SFAS 128 requires a  reconciliation  of the
numerator  and  denominator  of the basic EPS  computation  to the numerator and
denominator of the diluted EPS computation.  SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997,  including interim
periods.  SFAS  128 also  requires  restatement  of all  prior  period  EPS data
presented.

(3)      Comprehensive Income

Vail Banks  adopted  SFAS No. 130,  Reporting  Comprehensive  Income (SFAS 130),
effective  January  1,  1998.  SFAS  130  establishes  standards  for  reporting
comprehensive income and its components (revenues, expenses, gains, and losses).
Components  of  comprehensive  income  are net  income  and all other  non-owner
changes in equity.  The statement requires that an enterprise (a) classify items
of other  comprehensive  income by their nature in a financial statement and (b)
display the accumulated  balance of other  comprehensive  income separately from
retained  earnings and  additional  paid-in  capital in the equity  section of a
balance sheet.  Reclassification  of financial  statements  for earlier  periods
provided  for   comparative   purposes  is  required.   The  only  component  of
comprehensive income consists of net unrealized holding gains on securities, net
of related tax effects.

(4)      Operating Segments

Vail Banks adopted SFAS No. 131, Disclosures About Segments of an Enterprise and
Related  Information  (SFAS  131)  effective  January 1,  1998.  This  statement
establishes  standards for reporting  information  about  segments in annual and
interim  financial  statements.  SFAS 131  introduces  a new model  for  segment
reporting called the "management  approach." The management approach is based on
the way the chief operating decision-maker organizes segments within the company
for making operating  decisions and assessing  performance.  Reportable segments
are based on products  and  services,  geography,  legal  structure,  management
structure and any other in which  management  disaggregates a company.  Based on
the "management  approach" model, Vail Banks has determined that its business is


                                     6
<PAGE>

comprised  of a single  operating  segment  and that SFAS 131  therefore  has no
impact on its consolidated financial statements.

(5)      Accounting for Derivative Instruments and Hedging Activities

In  June  1998,  the  FASB  issued  SFAS  No.  133,  Accounting  for  Derivative
Instruments and Hedging Activities, which is effective for years beginning after
June 15, 2000. Vail Banks has not engaged in the use of derivatives and does not
conduct  hedging  activities;  thus  management  does  not  anticipate  that the
adoption of the new statement will have a significant  effect on earnings or the
financial position of Vail Banks.

(6)      Investment Securities

Vail  Banks  accounts  for  investment  securities  according  to SFAS No.  115,
Accounting for Certain Investments in Debt and Equity Securities. At the date of
purchase, Vail Banks is required to classify debt and equity securities into one
of  three  categories:   held  to  maturity,  trading  or  available  for  sale.
Investments  in debt  securities are classified as held to maturity and measured
at  amortized  cost  in the  financial  statements  only if  management  has the
positive  intent and ability to hold those  securities  to maturity.  Securities
that are bought and held principally for the purpose of selling them in the near
term are classified as trading and measured at fair value in the statements with
unrealized gains and losses included in earnings.  Investments not classified as
either  held to maturity or trading are  classified  as  available  for sale and
measured at fair value in the financial  statements  with  unrealized  gains and
losses  reported,  net of tax, in a separate  component  of other  comprehensive
income until realized.

(7)      Income Taxes

Income taxes are accounted for under the asset and  liability  method.  Deferred
tax assets  and  liabilities  are  recognized  for the  future tax  consequences
attributable  to  differences  between the book values and tax bases of existing
assets and  liabilities.  Deferred tax assets and liabilities are measured using
enacted  tax rates  expected  to apply to  taxable  income in the years in which
those temporary differences are expected to be recovered or settled.

(8)      Merger of Subsidiary Banks

In July 1999,  the  Division of Banking of the State of Colorado and the Federal
Reserve Bank of Kansas City approved the  application for the merger of WestStar
Bank  and  VBI's  other  subsidiary  banks,  Western  Colorado  Bank and Bank of
Telluride. The merger is expected to close during the third quarter of 1999 with
WestStar Bank as the surviving entity.



                                            7


<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION


BASIS OF PRESENTATION

     The following discussion and analysis provides  information  regarding Vail
Banks'  financial  condition as of June 30, 1999 and its  historical  results of
operations for the three and six months ended June 30, 1999 in comparison to the
three and six months ended June 30, 1998.  The  following  discussion  should be
read in conjunction with the consolidated financial statements and related notes
included elsewhere in this Quarterly Report on Form 10-QSB.

     The following acquisitions occurred which impacted financial results during
the time period between June 30, 1998 and June 30, 1999:

     Effective July 31, 1998, Vail Banks consummated the merger with Independent
Bankshares,  Inc.  ("Independent")  by paying  cash of $3.8  million and issuing
318,770  shares of Vail Banks Common Stock.  As of the merger date,  Independent
had total assets of $30.3 million, net loans of $17.0 million, total deposits of
$27.4 million and equity capital of $2.6 million.

     Effective  December  15,  1998,  Vail Banks  consummated  the  merger  with
Telluride Bancorp Ltd. ("Telluride") by paying cash of $13.3 million and issuing
908,913 shares of Vail Banks Common Stock. The cash consideration was paid using
a portion of the  proceeds  from the IPO. As of the merger date,  Telluride  had
total assets of $132.9  million,  net loans of $80.6 million,  total deposits of
$119.9 million and equity capital of $10.8 million.

     Effective May 21, 1999,  WestStar Bank  consummated the purchase of certain
assets and the  assumption  of certain  liabilities  from the Glenwood  Springs,
Colorado  branch of World  Savings Bank,  FSB,  Oakland,  California  ("World").
Approximately $36.1 million in deposits were acquired in the purchase.

     The mergers with  Independent and Telluride,  and the purchase of assets of
World have been  accounted  for under the  purchase  method of  accounting,  and
accordingly,  the  purchase  prices for each have been  allocated  to the assets
acquired and the liabilities  assumed based on their estimated fair values.  The
consolidated  statements  of  income  include  the  operations  of  Independent,
Telluride, and World since the date of the respective  transactions.  The excess
of purchase  price over net assets  acquired has been  recorded as an intangible
asset,  which is being amortized over 25 years.  With respect to the merger with
Independent,  the effect on results of operations  for the first seven months of
1998, had the purchase  transaction occurred at the beginning of the year, would
have been  material.  With respect to the merger with  Telluride,  the effect on
results of operations for the year 1998 was generally minimal as the transaction
closed with only 16 days  remaining in 1998.  However,  the effect on results of
operations  for the first eleven  months of 1998,  had the purchase  transaction
occurred at the beginning of the year, would have been material. With respect to
the  purchase of assets of World,  the effect on results of  operations  for the
first  five  months  of  1999,  had the  purchase  transaction  occurred  at the
beginning of the year, would not have been material.

OVERVIEW

     Net income  available to common  shareholders  was  $1,969,000  for the six
months  ended June 30, 1999 up from  $717,000  for the six months ended June 30,
1998,  an increase of 175%.  Net income  available  to common  shareholders  was
$1,253,000  for the quarter  ended June 30, 1999  compared with $716,000 for the
quarter  ended March 31, 1999 and $436,000 for the quarter  ended June 30, 1998,
increases of 75% and 187%, respectively.

     Net income per common  share  (diluted)  for the six months  ended June 30,
1999 was  $0.32  compared  to $0.30  for the six  months  ended  June 30,  1998,
an increase  of 6.7%.  Net income per common
share  (diluted)  was $0.21 for the
quarter  ended June 30, 1999 compared with $0.12 for the quarter ended March 31,
1999 and $0.18 for the quarter  ended June 30, 1998, an increase of 75% and 17%,
respectively.


                                      8

<PAGE>

     On an  operating  basis,  operating  income  (defined  as net  income  plus
amortization)  totaled $2,444,000 ($0.40 per common share, diluted) and $925,000
($0.31 per common  share,  diluted)  for the six months  ended June 30, 1999 and
June 30, 1998,  respectively.  Operating  income for the quarter  ended June 30,
1999 was $1,494,000 ($0.25 per common share, diluted) compared with $950,000 for
the quarter ended March 31, 1999 ($0.16 per common share,  diluted) and $540,000
for the  quarter  ended June 30,  1998  ($0.18 per common  share,  diluted),  an
increase of 57% and 177%, respectively.

     Operating  income to average  tangible assets was 0.6% and 0.4% for the six
months ending June 30, 1999 and June 30, 1998, respectively. Operating income to
average  tangible  assets was 0.4% for the quarter  ended June 30, 1999 compared
with 0.2% for both quarters ended March 31, 1999 and June 30, 1998.

     Net  income to  average  common  shareholders'  equity was 3.6% for the six
months  ended June 30, 1999  compared to 4.9% for the six months  ended June 30,
1998. Net income to average common shareholders' equity was 2.3% for the quarter
ended June 30, 1999,  versus 1.3% for the quarter  ended March 31, 1999 and 2.9%
for the quarter ended June 30, 1998.

     Cash earnings  (defined as net income plus  depreciation and  amortization)
was $3,504,000,  or $0.57 per common share  (diluted),  for the six months ended
June 30, 1999 versus $1,558,000, or $.53 per common share (diluted), for the six
months ended June 30, 1998.  Cash  earnings for the quarter  ended June 30, 1999
was $2,058,000, or $0.34 per common share (diluted),  compared to $1,446,000, or
$0.24 per common share  (diluted),  for the quarter  ended March 31,  1999,  and
$879,000,  or $0.29 per common share  (diluted),  for the quarter ended June 30,
1998.

     Cash earnings to average common  shareholders'  equity was 6.4% for the six
months ended June 30, 1999 and 9.2% for the six months ended June 30, 1998. Cash
earnings to average common  shareholders'  equity was 3.7% for the quarter ended
June 30, 1999  compared to 2.6% for the quarter  ended March 31, 1999,  and 5.1%
for the quarter ended June 30, 1998.


CONSOLIDATED CONDENSED BALANCE SHEETS

     The Company's total assets increased by $2,704,000,  or 1%, to $441,827,000
as of  June  30,  1999,  from  $439,123,000  as of  December  31,  1998  and  by
$201,714,000, or 84%, from $240,113,000 as of June 30, 1998.

     A healthy  Colorado  economy  continues to fuel the  Company's  strong loan
growth,  particularly in its Western Slope markets.  During the six months ended
June 30,  1999,  the loan  portfolio  increased  by  $31,252,000,  or 12%,  from
$269,191,000 as of December 31, 1998 to $300,443,000,  and by  $138,132,000,  or
85%, from $162,311,000 as of June 30, 1998.

     Investment  securities  were  $43,719,000  as of June 30, 1999  compared to
$40,735,000  as of December 31, 1998, an increase of 1%, and  $16,546,000  as of
June 30, 1998, an increase of 164%.

     Deposits increased by $5,192,000, or 1%, to $382,764,000 as of June 30,
1999,  from  $377,572,000 as of December 31, 1998 and by  $166,191,000,  or 77%,
from $216,573,000 as of June 30, 1998.

     During 1999,  noninterest-bearing  deposits decreased by $8,155,000,  while
interest-bearing deposits increased by $13,347,000.  Non interest bearing demand
deposits  comprised  22% of total  deposits as of June 30, 1999 and 24% of total
deposits as of both December 31, 1998 and June 30, 1998.

     Federal funds sold decreased by $29,455,000 in the six-month  period ending
June 30, 1999.  Federal funds sold  decreased  during the six month period ended
June  30,  1999 as  funds  were  utilized  in  funding  growth  of the  loan and
investment  portfolios.  The nominal  deposit growth during 1999 resulted from a
combination of the acquisition of the deposits of the Glenwood Springs branch of


                                       9

<PAGE>

World Savings,  which added  $36,100,000 to deposits,  offset by normal seasonal
decreases in resort market deposits.

RESULTS OF OPERATIONS

     NET INTEREST INCOME. Net interest income was $11,411,000 for the six months
ended June 30,  1999,  an increase of  $5,197,000,  or 84%,  from the  six-month
period ended June 30, 1998.  Net interest  income was $6,133,000 for the quarter
ended June 30, 1999,  an increase of $855,000 or 16%  compared  with the quarter
ended  March 31, 1999 and an increase of  $2,815,000  or 85%  compared  with the
quarter ended June 30, 1998. The net interest margin was 6.5% for the six months
ended June 30,  1999,  compared to 6.2% for the six months  ended June 30, 1998,
and 7.0% for the quarter ended June 30, 1999, up from 6.1% for the quarter ended
March 31,  1999 and up from 6.6% for the  quarter  ended  June 30,  1998.  These
increases are due primarily to the yield on an  increasing  loan volume  coupled
with  decreases in the level of higher cost  deposits.  Growth of the  Company's
average  earning  assets also  supported the margin  increase.  Average  earning
assets increased 75%, or $150,328,000, to $352,061,000 as of June 30, 1999, from
$201,733,000 as of June 30, 1998.

     PROVISION  AND  ALLOWANCE  FOR LOAN LOSSES.  Provision  expense for the six
months ending June 30, 1999 totaled $80,000 compared to none recorded in the six
months ending June 30, 1998. Although down slightly from the $2,590,000 level as
of December 31, 1998, the allowance for loan losses  increased during the second
quarter ended June 30, 1999 by $68,000 to  $2,512,000,  or 0.84% of loans,  from
$2,444,000 as of March 31, 1999.  The increase  since March 31, 1999 is intended
to support the normal potential loss content in the growth of the Company's loan
portfolio. Key indicators of asset quality have remained positive, while average
outstanding  loan amounts have increased to $286,035,000  for the quarter ending
June 30, 1999 from $268,010,000 for the quarter ending March 31, 1999.

     The allowance for loan and lease losses represents management's recognition
of the risks of  extending  credit  and its  evaluation  of the  potential  loss
content of the loan and lease portfolio.  The Company maintains an allowance for
loan  losses  based  upon,  among other  things,  such  factors as the amount of
problem  loans  and  leases,   general  economic  conditions,   historical  loss
experience,  and the evaluation of the underlying  collateral  including holding
and disposal costs.  Specific  allowances are provided for individual loans when
ultimate  collection  is  considered  questionable  by  management.   Management
actively  monitors the Company's asset quality and will charge off loans against
the allowance for loan losses when  appropriate  and will provide  specific loss
allowances  when  necessary.  Although  management  believes  it uses  the  best
information  available to make  determinations with respect to the allowance for
loan losses,  future adjustments may be necessary if economic  conditions differ
from the assumptions  used in making the initial  determinations.  The following
table presents, for the period indicated,  an analysis of the allowance for loan
and lease losses and other related data.

<TABLE>
<CAPTION>

      ALLOWANCE FOR LOAN LOSSES ANALYSIS                     Six months ended June 30,
                                                          --------------------------------
                                                              1999              1998
                                                          -------------     --------------
                                                          (unaudited)        (unaudited)
<S>                                                      <C>                     <C>
      Average total loans                                $    277,072            153,015
                                                          =============     ==============


      Total loans at end of period                       $     300,443            162,311
                                                          =============     ==============

      Allowance at beginning of period                   $       2,590              1,364
          Charge-offs                                            (204)               (54)
          Recoveries                                                46                 25
          Provision for loan losses                                 80                ---
                                                          -------------     --------------

      Allowance at end of period                         $       2,512              1,335
                                                          =============     ==============

      Net charge-offs to average total loans                     0.06%              0.02%

      Allowance to total loans at end of period                  0.84%              0.82%
</TABLE>

                                       10

<PAGE>

     NONINTEREST INCOME. Total noninterest income increased by $567,000, or
54%, to $1,626,000 for the six months ended June 30, 1999,  from  $1,059,000 for
the six months  ended June 30,  1998.  Total  noninterest  income  increased  by
$54,000,  or 7%, to $840,000  for the three  months  ended June 30,  1999,  from
$786,000 for the three months ended March 31, 1999 and by $239,000, or 40%, from
$601,000  for the  three  months  ended  June 30,  1998.  These  increases  were
primarily attributable to increases in deposit volumes and service charges.

     NONINTEREST  EXPENSES.   Total  noninterest  expense,  before  amortization
expense, increased by $3,355,000, or 57%, to $9,258,000 for the six months ended
June  30,  1999,  from  $5,903,000  for the six  months  ended  June  30,  1998.
Noninterest expense, before amortization expense, increased by $10,000, or 0.2%,
to $4,634,000 for the three months ended June 30, 1999,  from $4,624,000 for the
three months ended March 31, 1999 and by $1,518,000, or 49%, from $3,116,000 for
the three months ended June 30, 1998.

     The efficiency ratio, before amortization expense, decreased to 71% for the
six months  ended June 30, 1999 from 81% for the six months ended June 30, 1998.
The efficiency ratio, before amortization expense,  decreased to 66% for quarter
ended June 30,  1999 from 76% for the  quarter  ended March 31, 1999 and 80% for
the quarter ended June 30, 1998. The efficiency  ratio,  including  amortization
expense,  decreased  to 75% for the six months  ended June 30, 1999 from 82% for
the six months ended June 30, 1998. The efficiency ratio, including amortization
expense,  decreased  to 70% for  quarter  ended  June 30,  1999 from 80% for the
quarter ended March 31, 1999 and 81% for the quarter ended June 30, 1998.

     The increase in  noninterest  expense is primarily  attributed to recurring
personnel,  occupancy and other  expenses  associated  with internal  growth and
acquisitions  made  by  the  Company.  Such  expenses  have  been  necessary  to
accommodate the Company's overall growth.

     FEDERAL INCOME TAX. For approximately five years, Vail Banks has utilized a
net operating loss ("NOL") carryforward  obtained from a 1993 merger. Under GAAP
requirements,  net income includes an equivalent  expense that would be paid for
taxation. A federal taxation rate of 34% is used for this purpose.

     NONPERFORMING  ASSETS.  The  Company's   nonperforming  assets  consist  of
nonaccrual loans, restructured loans, loans past due over 90 days and other real
estate owned.  Nonperforming  assets were $1,098,000 as of June 30, 1999, (0.25%
of total  assets)  compared with  $1,788,000 as of December 31, 1998,  (0.41% of
total  assets) and  $107,000 as of June 30,  1998 (0.04% of total  assets).  The
following table presents  information  regarding  nonperforming assets as of the
dates indicated:

<TABLE>
<CAPTION>

    NONPERFORMING ASSETS                                                              June 30,
                                                                          --------------------------------
                                                                              1999              1998
                                                                          -------------     --------------
                                                                          (unaudited)        (unaudited)
<S>                                                                     <C>                         <C>
      Nonaccrual loans                                                  $          202                 51
      Other loans 90 days past due                                                 467                 56
      Other real estate                                                            429                  0
                                                                           ------------     --------------


           Total nonperforming assets                                   $        1,098                107
                                                                          =============     ==============

      Nonaccrual and other loans 90 days past due to total loans                 0.22%              0.07%

      Nonperforming assets to total loans plus real estate                       0.36%              0.07%

      Nonperforming assets to total assets                                       0.25%              0.04%
</TABLE>

                                       11

<PAGE>

CAPITAL RESOURCES

     Stockholders'  equity  as of June 30,  1999  increased  $36.8  million,  or
191.1%,  to $56.0 million from $19.2 million as of June 30, 1998.  This increase
was  due to  the  Common  Stock  issued  in  connection  with  the  merger  with
Independent and Telluride,  the retention of current period earnings,  a private
offering  of $3.0  million  in Common  Stock,  and the stock  issued in the IPO.
Stockholders' equity was reduced by $467,000 in December 1998, due to a one-time
early  conversion  payment upon the required  conversion  of preferred  stock to
common stock in connection with the IPO.

     Vail Banks currently maintains  risk-weighted  capital and leverage (Tier 1
capital to average  total  assets)  ratios in excess of the  minimum for a "well
capitalized" designation.  The company's Tier 1 leverage ratio increased to 8.0%
as of June 30,  1999,  from 7.7% as of December 31, 1998 and 6.2% as of June 30,
1998, while the total risk-based capital ratio decreased to 11.4% as of June 30,
1999 from 12.3% as of December  31,  1998,  but was up from 10.4% as of June 30,
1998.  The decrease in the total  risk-based  capital ratio  experienced in 1999
was  largely  attributable  to a shift from  federal  funds to loans,  which are
assigned a higher risk weight.


LIQUIDITY

     The Company's  liquidity  management  objective is to ensure its ability to
satisfy the cash  requirements of depositors and borrowers and allow the Company
to meet its own cash needs. 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 general level of interest rates, returns available
on other investments,  competition,  economic conditions and other factors,  are
relatively  unstable.  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  activities  and to match the  maturity  or
repricing intervals of assets.


DATA PROCESSING AND YEAR 2000 READINESS

IMPACT OF THE YEAR 2000 ISSUE

     Generally,  the year 2000 risk  involves  computer  programs  and  computer
hardware that are not able to perform without  interruption  into the year 2000.
The arrival of the year 2000 poses a unique  worldwide  challenge to the ability
of all systems to correctly  recognize the date change form December 31, 1999 to
January 1, 2000. If Vail Banks' systems did not correctly  recognize such a date
change,  computer  applications that rely on the date field could fail or create
erroneous results. Such erroneous results could affect interest,  payment or due
dates or could  cause the  temporary  inability  to process  transactions,  send
invoices  or  engage  in  similar  normal  business  activities.  If it  is  not
adequately addressed by Vail Banks or its suppliers and borrowers, the year 2000
issue  could  result  in a  material  adverse  impact on Vail  Banks'  financial
condition and results of operations.

VAIL BANKS' STATE OF READINESS

     Since 1995, Vail Banks has been assessing its year 2000  readiness.  It has
formed a committee  charged with the task of identifying  and  remediating  date
recognition  problems in both information  technology  ("IT") and non-IT systems
that include microcontrollers and other embedded computer technology.  Guided by
requirements  of and  examination  by  banking  regulators,  the  committee  has
developed a  comprehensive  plan to assess Vail Banks' year 2000  readiness with
respect  the both IT and  non-IT  systems.  Its  inventory  of such  systems  is
complete,  and Vail Banks believes its IT systems are year 2000 ready. Primarily
for operational  reasons,  Vail Banks replaced  critical  mainframe and PC-based
systems in 1996 and 1997,  incurring a capital  expenditure of  approximately $2
million. The systems vendor certified to Vail Banks that the system is year 2000
ready,  and Vail Banks is  currently in the process of  validation.  Vail Banks'
inventory of the year 2000 readiness of its non-IT systems is also complete, and
no mission critical systems were found to be deficient.


                                       12

<PAGE>

     Vail Banks has completed the remediation or replacement of its systems.
Testing has occurred in 1998 and further testing will occur during the remainder
of 1999. Vail Banks believes that it has identified all major internal  business
and operational functions that will be impacted by the year 2000 date change.

COSTS TO ADDRESS YEAR 2000 ISSUES

     Vail Banks does not anticipate that the year 2000 related costs  (excluding
the $2 million  expenditure for the IT system  mentioned above) will be material
to its financial  condition or results of  operations.  Excluding the $2 million
expenditure,  Vail  Banks  estimates  that its total  costs for the  evaluation,
remediation and testing of its IT and non-IT systems in connection with the year
2000 issue will be $200,000, all of which as been incurred to date.

RISK OF THIRD PARTY YEAR 2000 ISSUES

     The impact of year 2000  non-compliance  by outside  parties with whom Vail
Banks transacts  business cannot be accurately  gauged.  Vail Banks has surveyed
its major business  partners to ascertain their year 2000  readiness.  All major
third party  providers are year 2000 ready at this time.  Vail Banks relies upon
the Federal  Reserve for  electronic  funds  transfers  and check  clearing  and
understands  that the Federal  Reserve has  upgraded its systems to be year 2000
ready.  Testing of the Federal  Reserve  systems will be completed by the end of
the third quarter of 1999. If the Federal Reserve does not successfully complete
all  modifications  required  by the date  change  and is  forced  to  interrupt
automated  services  to Vail  Banks,  Vail Banks  could  experience  significant
difficulties.

     Vail  Banks has  embarked  upon a program  to educate  its  depositors  and
borrowers regarding year 2000 issues. Vail Banks' educational  programs focus on
emphasizing  the  contractual  obligations  of its  customers  despite year 2000
issues.

VAIL BANKS' CONTINGENCY PLANS

     Vail Banks has finalized its contingency  planning with respect to the year
2000 date change and believes that should its own systems fail, it could convert
to a  manual  entry  system  for a  period  of  approximately  14  days  without
significant  losses.  The Company believes any mission critical systems could be
recovered and operating within approximately seven days.

     In addition,  Vail Bank's  preliminary  contingency plan takes into account
the risk that the Federal Reserve will not make the necessary modifications that
will enable it to handle  electronic  funds  transfers and check clearing by the
year 2000.  So long as Vail Banks is able to obtain  the  necessary  information
from the Federal  Reserve in some  manner,  such as by  telephone  or  facsimile
transmissions,  and manually post  transactions,  Vail Banks does not expect the
resulting  impact on its  financial  condition  or result  of  operations  to be
material, unless protracted.

FORWARD LOOKING STATEMENTS

     The  discussion  in  this  report   contains   forward-looking   statements
including,  without  limitation,  statements relating to the Company's Year 2000
compliance,  which are made pursuant to the safe harbor provision of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that the
expectations reflected in the forward-looking  statements are reasonable, it can
give no  assurance  that such  expectations  will be  correct or  realized.  The
forward-looking  statements  involve  risks and  uncertainties  that  affect the
Company's  operations,  financial performance and other factors and discussed in
the Company's filings with the Securities and Exchange  Commission.  These risks
include 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 complete in
its trade  areas,  changes in  regulations  and  government  policies  and other
factors  discussed  in the  Company's  filing with the  Securities  and Exchange
Commission.  In particular,  risks related to the Company's year 2000 compliance
include those discussed under the heading "Data Processing Systems and Year 2000
compliance" in this report.


                                       13

<PAGE>

                            PART II OTHER INFORMATION

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

On May 18, 1999,  the Company held its annual meeting of  shareholders.  At that
meeting,  the following items were submitted to a vote of security  holders with
the following results:

1. The following directors were elected:

<TABLE>
<CAPTION>
                                            VOTES CAST          VOTES CAST         VOTES                       BROKER NON-
           NAME                TERM        FOR ELECTION      AGAINST ELECTION     WITHHELD     ABSTENTIONS        VOTES
           ----                ----        ------------      ----------------     --------     -----------        -----

<S>                          <C>            <C>                     <C>           <C>               <C>             <C>
Kay H. Chester               3 years        4,370,061               0             162,278           0               0
James G. Flaum               3 years        4,370,461               0             161,878           0               0
Robert L. Knous              3 years        4,370,311               0             162,028           0               0
Byron A. Rose                3 years        4,369,911               0             162,428           0               0
Donald L. Vanderhoof         3 years        4,370,461               0             161,878           0               0
</TABLE>


ITEM 6.  EXHIBITS, LIST AND REPORTS ON FORM 8-K.

             (A)      EXHIBITS

         The  following  exhibits  are  required to be filed with this Report on
10-QSB by Item 601 of Regulation S-B.

         EXHIBIT
           NO.       DESCRIPTION OF EXHIBIT
         -------     ----------------------

          27.1       Financial Data Schedule (for SEC use only)

             (B)     REPORTS ON FORM 8-K.

          None




                                       14

<PAGE>


                                   SIGNATURES


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


                                         VAIL BANKS, INC.
                                         (REGISTRANT)



     Date: August 16, 1999                 /s/ Lisa M. Dillon
          --------------------             -------------------------------------
                                           Lisa M. Dillon,
                                    Title: President and Chief Executive Officer



     Date: August 16, 1999                 /s/ Kirk S. Colburn
          --------------------             -------------------------------------
                                           Kirk S. Colburn,
                                    Title: Secretary
                                           (principal financial officer)





                                       15