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


<PAGE>


                                            VAIL BANKS, INC.


                                                  INDEX
<TABLE>
<CAPTION>
PART I            FINANCIAL INFORMATION
<S>      <S>           <C>                                                                           <C>
         Item 1.       Financial Statements

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

                       Consolidated Statements of Income for the Three and Nine Months Ended
                       September 30, 1999 and 1998                                                    4

                       Consolidated Statements of Cash Flows for the Nine Months Ended
                       September 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 6.       Exhibits and Reports on Form 8-K                                              14
</TABLE>


<PAGE>



                                           PART I FINANCIAL INFORMATION

ITEM 1.       FINANCIAL STATEMENTS

                                     VAIL BANKS, INC.
                                     AND SUBSIDIARIES

                               CONSOLIDATED BALANCE SHEETS
                                      (in thousands)
<TABLE>
<CAPTION>
                                     ASSETS                      September 30, December 31,
                                                                     1999          1998
                                                                 ------------    --------
                                                                 (unaudited)

<S>                                                              <C>              <C>
Cash and due from banks                                          $  30,064        28,469
Federal Funds sold                                                    --          43,105
Investment securities:
    Available for sale, at market value                             34,811        33,022
    Held to maturity, at amortized cost                              5,445         7,713

Loans                                                              323,750       269,191
    Less allowance for loan losses                                  (2,597)       (2,590)
                                                                 ---------      --------
         Net loans                                                 321,153       266,601
                                                                 ---------      --------
Bank premises and equipment, net of accumulated depreciation
    and amortization                                                33,707        31,647
Accrued interest receivable                                          2,733         2,425
Deferred income taxes                                                  640           971
Intangible assets, net                                              24,166        22,959
Other assets                                                         1,538         2,211
                                                                 ---------      --------
                                                                 $ 454,257       439,123
                                                                 =========      ========
                      LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
    Deposits:
       Demand, non-interest bearing                              $  84,206        91,510
       Demand, interest bearing                                    165,808       151,889
       Savings                                                      34,055        42,165
       Time deposits of $100,000 and over                           27,443        44,472
       Time deposits under $100,000                                 60,863        47,536
                                                                 ---------      --------
                                                                   372,375       377,572

Notes Payable                                                         --           1,114
Accrued interest payable and other liabilities                      23,853         5,439
                                                                 ---------      --------
         Total liabilities                                         396,228       384,125
                                                                 ---------      --------
Minority interest                                                      643           621
                                                                 ---------      --------

Stockholders' equity:
    Common stock                                                     6,041         6,041
    Additional paid-in capital                                      46,772        46,772
    Retained earnings                                                4,971         1,522
    Accumulated other comprehensive income                            (398)           42
                                                                 ---------      --------
         Total stockholders' equity                                 57,386        54,377
                                                                 ---------      --------
                                                                 $ 454,257       439,123
                                                                 =========      ========
</TABLE>

See accompanying notes to consolidated financial statements.

                                           -3-
<PAGE>

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

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

                                                                      Three months ended                   Nine months ended
                                                                         September  30,                       September 30,
                                                               -------------------------------     -------------------------------
                                                                   1999             1998               1999                1998
                                                               -------------    --------------     --------------     ------------
                                                               (unaudited)       (unaudited)        (unaudited)        (unaudited)
<S>                                                            <C>                 <C>               <C>               <C>
Interest income:
    Interest and fees on loans                                 $     8,478             4,886            23,233            13,394
    Interest on investment securities                                  574               291             1,614               815
    Interest on federal funds sold                                      42               316               848             1,120
                                                               -----------         ---------        ----------         ---------
         Total interest income                                       9,094             5,493            25,695            15,329
                                                               -----------         ---------        ----------         ---------
Interest expense:
    Demand deposits                                                  1,251               975             3,737             2,886
    Savings deposits                                                   265               105               907               302
    Time deposits                                                    1,085               885             3,133             2,252
    Notes payable                                                     --                  28                14                83
    Mandatorily convertible debentures                                --                  37              --                 114
    Interest on federal funds purchased
     and other borrowed funds                                           27                11                27                26
                                                               -----------         ---------        ----------         ---------
         Total interest expense                                      2,628             2,041             7,818             5,663
                                                               -----------         ---------        ----------         ---------
         Net interest income                                         6,466             3,452            17,877             9,666

Provision for loan losses                                              150              --                 230              --
                                                               -----------         ---------        ----------         ---------
         Net interest income after provision
     for loan losses                                                 6,316             3,452            17,647             9,666

Other income:
    Service charges on deposit accounts                                640               367             1,788               973
    Other income                                                       254               234               732               687
                                                               -----------         ---------        ----------         ---------
                                                                       894               601             2,520             1,660
Other expenses:
    Salaries and employee benefits                                   2,476             1,718             7,488             4,922
    Occupancy expense                                                  456               429             1,358             1,167
    Furniture and equipment expense                                    398               249             1,297               824
    Amortization of intangible assets                                  253                74               728               164
    Other operating expenses                                         1,253               788             3,698             2,174
                                                               -----------         ---------        ----------         ---------
                                                                     4,836             3,258            14,569             9,251
                                                               -----------         ---------        ----------         ---------

         Income before income taxes                                  2,374               795             5,598             2,075

Income tax expense                                                     894               285             2,149               730
                                                               -----------         ---------        ----------         ---------
         Net income                                            $     1,480               510             3,449             1,345
                                                               ===========         =========        ==========         =========
Unrealized gain (loss) on available for sale securities                (78)               56              (440)               55
                                                               -----------         ---------        ----------         ---------
             Comprehensive income                              $     1,402               566             3,009             1,400
                                                               ===========         =========        ==========         =========

Net income                                                     $     1,480               510             3,449             1,345
Preferred stock dividends                                             --                  59              --                 177
                                                               -----------         ---------        ----------         ---------
Net income available to common stockholders                    $     1,480               451             3,449             1,168
                                                               ===========         =========        ==========         =========
Weighted average common shares                                   6,040,608         2,650,203         6,040,608         2,408,616
                                                               ===========         =========        ==========         =========

Net income per common share (basic)                            $      0.25              0.17              0.57              0.48
                                                               ===========         =========        ==========         =========

Net income per common share (diluted)                          $      0.24              0.16              0.57              0.47
                                                               ===========         =========        ==========         =========
</TABLE>

See accompanying notes to consolidated financial statements.

                                                                -4-
<PAGE>


                                                  VAIL BANKS, INC.
                                                  AND SUBSIDIARIES

                                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                   (in thousands)

<TABLE>
<CAPTION>
                                                                                        Nine months ended
                                                                                          September 30,
                                                                                 ---------------------------------
                                                                                     1999               1998
                                                                                 --------------    ---------------
                                                                                  (unaudited)       (unaudited)

<S>                                                                        <C>                            <C>
  Cash flows from operating activities:
    Net income                                                             $            3,449             1,345
    Adjustments to reconcile net income to net cash provided (used) by
       operating activities:
        Amortization of intangible assets                                                 728               164
        Depreciation and amortization                                                   1,624               978
              Provision for loan losses                                                   230               ---
        Net amortization of premiums (accretion of discounts) on
           investment securities                                                          123               (14)
        Deferred income tax expense                                                       331               138
        Changes in operating assets and liabilities:
           Increase in accrued interest receivable                                       (308)             (113)
           Increase in intangible and other assets                                     (1,259)           (6,315)
           Decrease in accrued interest payable and other liabilities                  (2,504)           (2,933)
                                                                                 ---------------------------------
                  Net cash provided (used) by operating activities                      2,414            (6,750)
                                                                                 ---------------------------------

Cash flows from investing activities:
    Net decrease in federal funds sold                                                 43,105             3,163
    Purchase of investment securities available for sale                              (16,895)           (3,675)
    Proceeds from maturities of investment securities held to maturity                  2,230             2,089
    Proceeds from maturities of investment securities available for sale               14,442             1,524
    Net increase in loans                                                             (54,782)          (29,360)
    Purchase of bank premises and equipment                                            (3,683)           (4,148)
                                                                                 ---------------------------------
                  Net cash used by investing activities                               (15,583)          (30,407)
                                                                                 ---------------------------------

Cash flows from financing activities:
    Net increase (decrease) in deposits                                                (5,197)           31,232
    Net increase in federal funds purchased                                            21,075               927
      Proceeds from issuance of common stock                                              ---             5,714
    Dividends paid                                                                        ---              (158)
    Repayments of notes payable                                                        (1,114)             (150)
                                                                                 ---------------------------------
                  Net cash provided by financing activities                            14,764            37,565
                                                                                 ---------------------------------

                  Net increase in cash and due from banks                               1,595               408

Cash and due from banks at beginning of period                                         28,469            16,680
                                                                                 =================================
Cash and due from banks at end of period                                   $           30,064            17,088
                                                                                 =================================
Supplemental  disclosures of cash flow information:
  Cash paid during the period for:
    Interest expense                                                       $            8,050             5,604
                                                                                 =================================
    Income taxes                                                           $            1,460                52
                                                                                 =================================
</TABLE>

See accompanying notes to consolidated financial statements.

                                                        -5-
<PAGE>



                        Vail Banks, Inc. and Subsidiaries
              Notes to Unaudited Consolidated Financial Statements
                            As of September 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
subsidiary,  WestStar Bank (WestStar). 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 nine months ended September 30, 1999 are not  necessarily  indicative of the
results that may be expected for the full year.

(2)      Provision and Allowance for Loan Losses

Vail Banks' lending  personnel are responsible for the continuous  monitoring of
the quality of its loan portfolio.  In connection with the  determination of the
allowance  for  loan  losses,  management  obtains  independent  appraisals  for
significant  properties and assesses estimated future cash flows from borrowers'
operations and the liquidation of loan collateral. The allowance for loan losses
is based primarily on  management's  estimate of possible loan losses from these
procedures and historical experiences.  These estimates involve judgements and a
certain level of  subjectivity;  changes in economic  conditions may necessitate
revisions in future years.

Various regulatory  agencies,  as an integral part of their examination process,
periodically  review Vail Banks'  allowance  for loan losses.  Such agencies may
require Vail Banks to record  additional  provisions for potential  losses based
upon their evaluation of information available at the time of their examination.

Vail Banks  provides for loan losses by a charge to current year income based on
the  character  of the loan  portfolio,  current  economic  conditions  and such
factors as, in  management's  best  judgement,  deserve  current  recognition in
estimating loan losses.  In addition,  recoveries  realized on loans  previously
charged off are credited to the allowance for loan losses.

(3)      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.

(4)      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.

                                      -6-
<PAGE>


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 (losses) on securities,  net of related
tax effects.

(5)      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
comprised  of a single  operating  segment  and that SFAS 131  therefore  has no
impact on its consolidated financial statements.

(6)      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.

(7)      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.

(8)      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.

(9)      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  mergers  closed  August  6,  1999,  with  WestStar  Bank as the
surviving entity. The merger was accounted for at historical cost.

(10)     Acquisitions

On November 8, 1999, WestStar  Bank entered  into an agreement to acquire  First
Western Mortgage Services, Inc., a Colorado corporation,  for consideration that
includes  cash,  Vail Banks common  stock,  and  installment  notes.  Subject to
certain regulatory  approvals and customary  conditions to closing,  the sale is
expected to close in the first quarter of 2000 or shortly thereafter.

                                      -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 September 30, 1999 and its historical  results
of  operations  for the  three  and nine  months  ended  September  30,  1999 in
comparison to the three and nine months ended  September 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 September 30, 1998 and September 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  price for each  has 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 $3,449,000 for the nine
months ended  September  30, 1999 up from  $1,168,000  for the nine months ended
September  30,  1998,  an  increase  of 195%.  Net  income  available  to common
shareholders  was $1,480,000  for the quarter ended  September 30, 1999 compared
with $1,253,000 for the quarter ended June 30, 1999 and $451,000 for the quarter
ended September 30, 1998, increases of 18% and 228%, respectively.

       Net income per common share (diluted) for the nine months ended September
30, 1999 was $0.57  compared to $0.47 for the nine months  ended  September  30,
1998,  an increase of 20%. Net income per common share  (diluted)  was $0.24 for
the quarter  ended  September 30, 1999 compared with $0.21 for the quarter ended
June 30, 1999 and $0.16 for the quarter ended September 30, 1998, an increase of
14% and 50%, respectively.

       On an  operating  basis,  operating  income  (defined  as net income plus
amortization)   totaled  $4,177,000  ($0.69  per  common  share,   diluted)  and
$1,509,000 ($0.49 per common share, diluted) for the nine months ended September
30, 1999 and September 30, 1998, respectively.  Operating income for the quarter
ended  September  30,  1999 was  $1,733,000  ($0.29 per common  share,  diluted)
compared with  $1,494,000  for the quarter ended June 30, 1999 ($0.25 per common
share, diluted) and $584,000 for the quarter ended September 30, 1998 ($0.17 per
common share, diluted), an increase of 16% and 197%, respectively.

                                      -8-
<PAGE>

       Operating  income to  average  tangible  assets was 1.0% and 0.6% for the
nine months ending  September  30, 1999 and  September  30, 1998,  respectively.
Operating  income to  average  tangible  assets was 0.4% for the  quarter  ended
September  30, 1999  compared  with 0.4% for the quarter ended June 30, 1999 and
0.2% for the quarter ended September 30, 1998.

       Net  income   available  to  common   shareholders   to  average   common
shareholders'  equity was 6.2% for the nine  months  ended  September  30,  1999
compared  to 6.7% for the nine  months  ended  September  30,  1998.  Net income
available to common shareholders to average common shareholders' equity was 2.6%
for the quarter ended September 30, 1999, versus 2.3% for the quarter ended June
30, 1999 and 2.2% for the quarter ended September 30, 1998.

       Cash earnings  (defined as net income plus depreciation and amortization)
was $5,801,000,  or $0.95 per common share (diluted),  for the nine months ended
September 30, 1999 versus $2,487,000,  or $0.80 per common share (diluted),  for
the nine months ended  September  30, 1998.  Cash earnings for the quarter ended
September 30, 1999 was $2,297,000, or $0.38 per common share (diluted), compared
to $2,058,000,  or $0.34 per common share (diluted),  for the quarter ended June
30, 1999,  and $929,000,  or $0.28 per common share  (diluted),  for the quarter
ended September 30, 1998.

       Cash  earnings  to  average  shareholders'  equity was 10.4% for the nine
months ended  September,  1999 and 12.2% for the nine months ended September 30,
1998.  Cash  earnings to average  shareholders'  equity was 4.0% for the quarter
ended  September  30, 1999 compared to 3.7% for the quarter ended June 30, 1999,
and 3.9% for the quarter ended September 30, 1998.


CONSOLIDATED CONDENSED BALANCE SHEETS

       The  Company's  total  assets   increased  by  $15,134,000,   or  3%,  to
$454,257,000 as of September 30, 1999, from $439,123,000 as of December 31, 1998
and by $186,861,000, or 70%, from $267,396,000 as of September 30, 1998.

       A healthy  Colorado  economy  continues to fuel the Company's strong loan
growth,  particularly in its Western Slope markets. During the nine months ended
September 30, 1999, the loan portfolio  increased by  $54,559,000,  or 20%, from
$269,191,000 as of December 31, 1998 to $323,750,000,  and by  $139,344,000,  or
76%, from $184,406,000 as of September 30, 1998.

       Investment  securities were $40,256,000 as of September 30, 1999 compared
to $40,735,000 as of December 31, 1998 (a decrease of 1%) and  $19,848,000 as of
September 30, 1998 (an increase of 103%).

       Deposits decreased by $5,197,000,  or 1%, to $372,375,000 as of September
30,  1999,  from   $377,572,000  as  of  December  31,  1998  and  increased  by
$134,928,000,  or 57%, from  $237,447,000 as of September 30, 1998. The decrease
in  deposits   experienced  in  the  first  nine  months  of  1999  was  largely
attributable to seasonal factors and management's  efforts to reduce higher cost
certificates of deposit.

       During 1999,  noninterest-bearing deposits decreased by $7,304,000, while
interest-bearing  deposits increased by $2,107,000.  Noninterest-bearing  demand
deposits  comprised  23% of total  deposits as of September  30, 1999 and 24% of
total  deposits as of December  31, 1998,  compared to 23% as of  September  30,
1998.

       Federal funds sold  decreased by  $43,105,000  in the  nine-month  period
ending  September  30,  1999,   while  federal  funds  purchased   increased  to
$21,075,000,  which are  included  in the  accrued  interest  payable  and other
liabilities  category on the balance  sheet.  The decrease in federal funds sold
and the  subsequent  increase in federal funds  purchased is a result of funding
growth in the loan portfolio.

RESULTS OF OPERATIONS

         NET INTEREST  INCOME.  Net interest income was $17,877,000 for the nine
months ended  September  30, 1999, an increase of  $8,211,000,  or 85%, from the
nine-month  period ended  September 30, 1998. Net interest income was $6,466,000
for the quarter ended September 30, 1999, an increase of $333,000 or 5% compared
with the  quarter  ended June 30,  1999 and an  increase  of  $3,014,000  or 87%
compared with the quarter ended  September 30, 1998. The net interest margin was

                                      -9-

<PAGE>

6.8% for the nine months ended September 30, 1999, compared to 6.3% for the nine
months ended  September 30, 1998,  and 7.2% for the quarter ended  September 30,
1999,  up from 7.0% for the quarter ended June 30, 1999 and up from 6.3% for the
quarter ended September 30, 1998. These increases are due primarily to the yield
on an increasing  loan  portfolio  coupled with decreases in the level of higher
cost deposits. Additionally, growth of the Company's average earning assets also
supported  the  margin  increase.  Average  earning  assets  increased  66%,  or
$141,670,000,  to $357,657,000 as of September 30, 1999, from $215,987,000 as of
September 30, 1998.

         PROVISION AND ALLOWANCE FOR LOAN LOSSES. Provision expense for the nine
months ending September 30, 1999 totaled  $230,000  compared to none recorded in
the nine months  ending  September  30, 1998.  Although  down  slightly from the
$2,590,000  level as of  December  31,  1998,  the  allowance  for  loan  losses
increased  during  the third  quarter  ended  September  30,  1999 by $85,000 to
$2,597,000, or 0.80% of loans, from $2,512,000 as of June 30, 1999. The increase
since June 30, 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 level of outstanding  loans have increased to
$311,778,000 for the quarter ending September 30, 1999 from $286,035,000 for the
quarter ending June 30, 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                                    Nine months ended
                                                                              September 30,
                                                                     --------------------------------
                                                                         1999              1998
                                                                     -------------     --------------
                                                                     (unaudited)        (unaudited)
      <S>                                                       <C>                          <C>
      Average total loans                                       $         288,768            160,714
                                                                     =============     ==============

      Total loans at end of period                              $         323,750            184,406
                                                                     =============     ==============

      Allowance at beginning of period                          $           2,590              1,364
          Charge-offs                                                       (291)               (86)
          Recoveries                                                           68                 27
          Provision for loan losses                                           230                ---
            Allowance - merger                                                ---                192
                                                                     -------------     --------------
      Allowance at end of period                                $           2,597              1,497
                                                                     =============     ==============

      Net charge-offs to average total loans                                0.08%              0.04%

      Allowance to total loans at end of period                             0.80%              0.81%
</TABLE>


         NONINTEREST INCOME. Total noninterest income increased by $860,000,  or
52%, to $2,520,000 for the nine months ended September 30, 1999, from $1,660,000
for the nine months ended September 30, 1998. Total noninterest income increased
by $54,000,  or 6%, to $894,000 for the three months ended  September  30, 1999,
from $840,000 for the three months ended June 30, 1999 and by $293,000,  or 49%,
from  $601,000 for the three months ended  September 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 $4,754,000,  or 52%, to  $13,841,000  for the nine months
ended  September 30, 1999,  from  $9,087,000 for the nine months ended September
30,  1998.  Noninterest  expense,  before  amortization  expense,  decreased  by
$51,000,  or 1%, to  $4,583,000  for the three months ended  September 30, 1999,
from  $4,634,000  for the three  months  ended June 30,  1999 and  increased  by
$1,399,000,  or 44%, from  $3,184,000  for the three months ended  September 30,
1998.

         The efficiency ratio, before amortization expense, decreased to 68% for
the nine months  ended  September  30,  1999 from 80% for the nine months  ended
September 30, 1998. The efficiency ratio, before amortization expense, decreased
to 62% for quarter ended  September 30, 1999 from 66% for the quarter ended June
30, 1999 and 79% for the quarter ended September 30, 1998. The efficiency ratio,
including  amortization  expense,  decreased  to 71% for the nine  months  ended
September 30, 1999 from 82% for the nine months ended  September  30, 1998.  The
efficiency ratio, including  amortization expense,  decreased to 66% for quarter
ended  September  30, 1999 from 70% for the quarter  ended June 30, 1999 and 80%
for the quarter ended September 30, 1998.

       The increase in noninterest  expense from prior year periods 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.  Recent  improvements in
the efficiency ratio have been achieved through management's concerted effort to
consolidate operating activities of branches and recently acquired banks.

         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  $2,100,000 as of September 30, 1999,
(0.46% of total assets) compared with $1,788,000 as of December 31, 1998, (0.41%
of total assets) and $296,000 as of September 30, 1998 (0.11% of total  assets).
The following table presents  information  regarding  nonperforming assets as of
the dates indicated:
<TABLE>
<CAPTION>

      NONPERFORMING ASSETS                                                         September 30,
                                                                          --------------------------------
                                                                              1999              1998
                                                                          -------------     --------------
                                                                          (unaudited)        (unaudited)
      <S>                                                            <C>                               <C>
      Nonaccrual loans                                               $           1,860                 78
      Other loans 90 days past due                                                   5                 39
      Other real estate                                                            235                179
                                                                          --------------    --------------
           Total nonperforming assets                                $           2,100                296
                                                                          ==============    ==============

      Nonaccrual and other loans 90 days past due to total loans                 0.58%              0.06%

      Nonperforming assets to total loans plus other real estate                 0.65%              0.16%

      Nonperforming assets to total assets                                       0.46%              0.11%
</TABLE>

         The increase in nonperforming assets is attributable to two loans, both
of which were in Telluride's loan portfolio at the time of acquisition.


                                      -11-
<PAGE>


CAPITAL RESOURCES

       Stockholders' equity as of September 30, 1999 increased $32.2 million, or
128%,  to $57.4  million  from $25.2  million as of  September  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,  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 8.2%
as of  September  30,  1999,  from 7.7% as of  December  31, 1998 and 6.2% as of
September 30, 1998, while the total risk-based  capital ratio decreased to 11.6%
as of September  30, 1999 from 12.3% as of December  31,  1998,  but was up from
9.9% as of September  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 the 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 continues the validation process. Vail Banks' inventory of
the year 2000 readiness of its non-IT  systems is also complete,  and no mission
critical systems were found deficient.

         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.


                                      -12-
<PAGE>

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  compliant 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.

         Vail Banks has embarked  upon a program to educate its  depositors  and
borrowers regarding year 2000 issues. Vail Banks' educational  programs focus on
emphasizing sound financial preparations for 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  transmission,  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 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

                  (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:  November 15, 1999              /S/ LISA M. DILLON
                                                   Lisa M. Dillon,
                                          Title:   President and Chief
                                                   Executive Officer



         Date:  November 15, 1999              /S/ KIRK S. COLBURN
                                                   Kirk S. Colburn,
                                          Title:   Secretary
                                                   (principal financial officer)