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

_______________________

FORM 10‐Q

|S | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  
|- | -----------------------------------------------------------------------------------------
|  | For the quarterly
period ended March 31, 2004                                            
| ̈ | TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|  | For the transition period from __________ to ___________                                 

__________________________________

Commission File Number: 000-25081

Vail Banks, Inc.(Exact name of registrant as specified in its charter)

Colorado

84‐1250561(State or other jurisdiction of

(I.R.S. Employerincorporation or organization)

Identification No.)


0015 Benchmark Road, Suite 300, P.O. Box 6580, Avon, Colorado
81620(Address of principal executive offices)

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

N/A (Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    YesS
No  ̈ .

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).
          Yes ̈
No  S .

Indicate the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:   As of
April 30, 2004, there were 5,314,093 shares of
common stock ($1.00 par value per share) outstanding.

---

---

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Vail Banks, Inc.

FORM 10-QFOR THE QUARTER ENDED MARCH 31, 2004

###### TABLE OF CONTENTS



|PART I                                                     | FINANCIAL INFORMATION                                                                 |   
|---------------------------------------------------------- | ------------------------------------------------------------------------------------- | --
|ITEM 1.                                                    | FINANCIAL STATEMENTS                                                                  |   
|Consolidated Balance Sheets                                | 3                                                                                    
|Consolidated Statements of Income and Comprehensive Income | 4                                                                                    
|Consolidated Statements of Cash Flows                      | 5                                                                                    
|Notes to Unaudited Consolidated Financial Statements       | 7                                                                                    
|ITEM 2.                                                    | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS |   
|Forward Looking Statements                                 | 13                                                                                   
|Basis of Presentation                                      | 13                                                                                   
|Overview                                                   | 13                                                                                   
|Results of Operations                                      | 14                                                                                   
|Financial Condition                                        | 15                                                                                   
|Asset Quality                                              | 15                                                                                   
|Liquidity                                                  | 17                                                                                   
|Capital Resources                                          | 18                                                                                   
|                                                           |                                                                                      
|ITEM 3.                                                    | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            | 20
|                                                           |                                                                                       |   
|ITEM 4.                                                    | CONTROLS AND PROCEDURES                                                               | 21
|                                                           |                                                                                       |   
|PART II                                                    | OTHER INFORMATION                                                                     |   
|                                                           |                                                                                       |   
|ITEM 6.                                                    | EXHIBITS AND REPORTS ON FORM 8-K                                                      | 22
|                                                           |                                                                                       |   
|SIGNATURES                                                 | 23                                                                                   
|                                                           |                                                                                       |   



2

TABLE OF
CONTENTS

# PART I          FINANCIAL INFORMATION

## Item 1.     
FINANCIAL
STATEMENTS

VAIL BANKS, INC.Consolidated Balance
Sheets

|                                                                            |                                                                                                                                                               |                                                                                                                  |        |         |                            |         |         |   | March 31, |  | December 31,
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------- | ------ | ------- | -------------------------- | ------- | ------- | - | --------- |  | ------------
|(in thousands, except share data)                                           |                                                                                                                                                               | 2004                                                                                                             |        | 2003   
|ASSETS                                                                      |                                                                                                                                                               |                                                                                                                  |        |         | (unaudited)                |         |        
|Cash and due from banks                                                     | $                                                                                                                                                             | 14,514                                                                                                           |        | 21,628 
|Federal funds sold                                                          |                                                                                                                                                               | 81,260                                                                                                           |        | 79,280 
|Total cash and cash equivalents                                             |                                                                                                                                                               | 95,774                                                                                                           |        | 100,908
|Interest-bearing deposits in banks                                          |                                                                                                                                                               | 2,000                                                                                                            |        | 2,000  
|Investment securities, available for sale                                   |                                                                                                                                                               | 110,219                                                                                                          |        | 76,554 
|Investment securities, held to maturity (fair value of                      |                                                                                                                                                               |                                                                                                                  |        |        
|                                                                            | $376(unaudited) and $397 as of March 31,
2004 and December 31, 2003, respectively)                                                                            |                                                                                                                  | 350    |         | 370                       
|Investments in bank stocks, at cost                                         |                                                                                                                                                               | 4,391                                                                                                            |        | 4,371  
|Investments in Trust I and Trust II (See Note 1)                            |                                                                                                                                                               | 743                                                                                                              |        | —      
|Loans held for sale                                                         |                                                                                                                                                               | 560                                                                                                              |        | 2,515  
|Loans, net (includes related party loans of $11,290 (unaudited) and
$11,239 |                                                                                                                                                               |                                                                                                                  |        |        
|as of March 31, 2004 and December 31, 2003,
respectively)                   |                                                                                                                                                               | 316,521                                                                                                          |        | 308,271
|Premises and equipment, net                                                 |                                                                                                                                                               | 34,201                                                                                                           |        | 38,147 
|Interest receivable                                                         |                                                                                                                                                               | 2,253                                                                                                            |        | 2,134  
|Goodwill                                                                    |                                                                                                                                                               | 35,969                                                                                                           |        | 36,758 
|Other intangible assets, net                                                |                                                                                                                                                               | 189                                                                                                              |        | 199    
|Other assets                                                                |                                                                                                                                                               |                                                                                                                  |        | 4,187   |                            | 3,383  
|                                                                            | $                                                                                                                                                             | 607,357                                                                                                          |        | 575,610
|LIABILITIES AND SHAREHOLDERS’ EQUITY                                        |                                                                                                                                                               |                                                                                                                  |        |        
|Liabilities                                                                 |                                                                                                                                                               |                                                                                                                  |        |         |                            |         |        
|                                                                            | Deposits (includes related party deposits of $3,209 (unaudited) and
$4,169 at March 31,
2004 and December 31, 2003, respectively)                             |                                                                                                                  |        |         |                           
|                                                                            |                                                                                                                                                               | Non-interest bearing                                                                                             | $      | 102,109 |                            | 101,305
|                                                                            |                                                                                                                                                               | Interest bearing                                                                                                 |        | 380,131 |                            | 347,210
|                                                                            |                                                                                                                                                               |                                                                                                                  |        |         | Total deposits             |         | 482,240 |   | 448,515  
|                                                                            | Federal funds purchased and securities sold under agreements to
repurchase                                                                                    |                                                                                                                  | 583    |         | 907                       
|                                                                            | Federal Home Loan Bank advances                                                                                                                               |                                                                                                                  | 34,770 |         | 39,461                    
|                                                                            | Guaranteed preferred
beneficial interest in Companys subordinated debt (See Note 1)                                                                          |                                                                                                                  | —      |         | 24,000                    
|                                                                            | Subordinated notes to Trust I and Trust II (See Note 1)                                                                                                       |                                                                                                                  | 24,743 |         | —                         
|                                                                            | Interest payable and other liabilities                                                                                                                        |                                                                                                                  | 4,717  |         | 4,165                     
|                                                                            |                                                                                                                                                               |                                                                                                                  |        |         | Total liabilities          |         | 547,053 |   | 517,048  
|Minority interest                                                           |                                                                                                                                                               | 696                                                                                                              |        | 703    
|Shareholders’ equity                                                        |                                                                                                                                                               |                                                                                                                  |        |        
|                                                                            | Preferred stock – $1 par value; 2,250,000 shares authorized, no
shares                                                                                        |                                                                                                                  |       
|                                                                            |                                                                                                                                                               | issued and outstanding at March 31, 2004 (unaudited)
and December 31, 2003
respectively                          |        | —       |                            | —      
|                                                                            | Common stock – $1 par value; 20,000,000 shares authorized,                                                                                                    |                                                                                                                  |        |         |                           
|                                                                            |                                                                                                                                                               | 5,298,093 (unaudited) and 5,283,264 issued and outstanding at March
31, 2004 and
December 31, 2003,
respectively |        | 5,298   |                            | 5,283  
|                                                                            | Additional paid-in capital                                                                                                                                    |                                                                                                                  | 34,144 |         | 33,916                    
|                                                                            | Retained earnings                                                                                                                                             |                                                                                                                  | 19,882 |         | 18,780                    
|                                                                            | Accumulated other comprehensive income (loss), net of tax expense
(benefit) of$167(unaudited)
and $(71) at March 31, 2004 and December 31, 2003, respectively |                                                                                                                  | 284    |         | (120)                     
|                                                                            |                                                                                                                                                               |                                                                                                                  |        |         | Total shareholders' equity |         | 59,608  |   | 57,859   
|                                                                            |                                                                                                                                                               |                                                                                                                  |        |         |                            |         |         | $ | 607,357   |  | 575,610     
|                                                                            |                                                                                                                                                               |                                                                                                                  |       

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

3TABLE OF
CONTENTS

VAIL BANKS, INC.

Consolidated Statements of Income and Comprehensive Income
(in thousands, except share data)

|                                                                                                    |   | Three months ended
March 31,
|--------------------------------------------------------------------------------------------------- | - | ----------------------------
|                                                                                                    |   | 2004                        
|                                                                                                    |   | (unaudited)                 
|Interest income                                                                                     |   |                             
|Interest and fees on loans                                                                          | $ | 6,064                       
|Interest on investment securities                                                                   |   | 773                         
|Interest on federal funds sold and other short-term
investments                                     |   | 204                         
|Investments in Trust I and Trust II (See Note 1)                                                    |   | 19                          
|Total interest income                                                                               |   | 7,060                       
|Interest expense                                                                                    |   |                             
|Deposits                                                                                            |   | 1,019                       
|Borrowings                                                                                          |   | 372                         
|Federal funds purchased and securities sold under agreements to
repurchase                          |   | 1                           
|Trust preferred securities (See Note 1)                                                             |   | —                           
|Subordinated notes to Trust I and Trust II (See Note
1)                                             |   | 631                         
|Total interest expense                                                                              |   | 2,023                       
|Net interest income                                                                                 |   | 5,037                       
|Provision for loan losses                                                                           |   | 158                         
|Net interest income after provision for loan losses                                                 |   | 4,879                       
|Non-interest income                                                                                 |   |                             
|Gain on sale of building                                                                            |   | 1,678                       
|Deposit related                                                                                     |   | 685                         
|Mortgage broker fees                                                                                |   | 803                         
|Other                                                                                               |   | 678                         
|                                                                                                    |   | 3,844                       
|Non-interest expense                                                                                |   |                             
|Salaries and employee benefits                                                                      |   | 4,019                       
|Occupancy                                                                                           |   | 845                         
|Furniture and equipment                                                                             |   | 562                         
|Amortization of intangible assets                                                                   |   | 10                          
|Other                                                                                               |   | 1,080                       
|                                                                                                    |   | 6,516                       
|Income before income tax expense                                                                    |   | 2,207                       
|Income tax expense                                                                                  |   | 734                         
|Net income                                                                                          |   | 1,473                       
|Net change in unrealized gain/loss on investment securities available for sale,
       net of taxes |   | 404                         
|Comprehensive income                                                                                | $ | 1,877                       
|Earnings per share                                                                                  |   |                             
|Basic                                                                                               | $ | 0.29                        
|Diluted                                                                                             | $ | 0.27                        
|Weighted average common shares                                                                      |   |                             
|Basic                                                                                               |   | 5,019,263                   
|Diluted                                                                                             |   | 5,401,988                   

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

4TABLE OF
CONTENTS

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

Three months ended
March 31,2004

2003(unaudited)

(unaudited)Cash flows from operating activitiesNet income
$
1,473

975Adjustments to reconcile net income to net cash provided
by 
       
operating activitiesNet amortization of premiums on investment
securities

151

113Gain on sale of loans

—

(95)Provision for loan losses

158

125Amortization of deferred loan fees

(334)

(37)Gain on sale of building

(1,678)

—Depreciation and amortization

471

599(Gain) loss on sale of foreclosed
properties

(94)

21Recognition of stock compensation on restricted
common stock and
                stock options

100

79Deferred income tax expense

—

(44)Other

—

6Changes in operating assets and
liabilitiesLoans held for sale

1,955

4,132Interest receivable

(119)

(350)Other assets

173

(311)Interest payable and other
liabilities

(283)

(729)Other, net

(7)

—Net cash provided by operating activities

1,966

4,484Cash flows from investing activitiesPurchases of investment securities, available for sale

(43,078)

(59,308)Purchases of bank stocks

(20)

(510)Proceeds from maturities of investment
securities, held to maturity

20

73Proceeds from maturities/calls of investment
securities, available for sale

9,904

10,328Net increase in loans

(8,747)

(1,501)Purchases of premises and
equipment

(2,370)

(219)Proceeds from sales of premises and
equipment

8,254

51Proceeds from sales of foreclosed
properties

455

66Net cash used by investing activities

(35,582)

(51,020)Cash flows from financing activitiesNet increase in deposits

33,725

27,597Net change in federal funds purchased and
securities sold under
          agreements to repurchase

(324)

—Net (decrease) increase in Federal Home Loan
Bank advances

(4,691)

13,202Proceeds from issuance of common stock

143

—Repurchase of common stock

—

(1,691)Payment of cash dividends on common
stock

(371)

(343)Net cash provided by financing activities

28,482

38,765Net decrease in cash and cash equivalents

(5,134)

(7,771)Cash and cash equivalents at beginning of period

100,908

74,980Cash and cash equivalents at end of period
$
95,774

67,209


5TABLE OF
CONTENTS

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

Three months ended
March 31,2004

2003(unaudited)

(unaudited)Supplemental disclosures of cash flow informationCash paid during the period for:Interest expense
$
2,206

2,267Income taxes
$
—

275Non-cash investing and financing transactions
   Foreclosure of collateralized loans, net of reserve
$
673

642Net change in unrealized gain/loss on investment securities
         available for sale, net of taxes
$
404

(299)Reclassification of idle premises and equipment to other
assets
$
—

(274)Reclassification of other assets to premises and
equipment
$
—

57Issuance of restricted common stock
$
—

112


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

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

6TABLE OF
CONTENTS

VAIL BANKS, INC.Notes to Unaudited Consolidated Financial Statements

1. ORGANIZATION AND BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include the accounts of Vail Banks, Inc. (Vail Banks) and its wholly owned subsidiary,
WestStar Bank (WestStar). WestStar and Vail Banks own a combined 54.04%	 interest in Avon 56 Limited and WestStar owns a 100% interest in First Western Mortgage Services (See Note 11) that are also included in the accompanying consolidated financial
statements. All entities are collectively referred to as the Company. All significant intercompany accounts and transactions have been eliminated in consolidation.

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

The accompanying unaudited consolidated financial statements, which are for interim periods, do not include all disclosures provided in the consolidated
financial statements as of December 31, 2003. These interim unaudited consolidated financial statements and the notes thereto should be read in conjunction with the Companys Annual Report on Form 10-K as of and for the year ended December 31,
2003. In the opinion of the Company, all adjustments necessary, consisting of only normal recurring items, have been included for a fair presentation of the accompanying consolidated financial statements. Operating results for the three months ended
March 31, 2004, are not necessarily indicative of the results that may be expected for the full year.

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

2.  INVESTMENT SECURITIES

Investment securities consist of the following:

March 31, 2004

December 31, 2003Amortized

Fair

Amortized

Fair(in thousands)

Cost

Value

Cost

Value(unaudited)

(unaudited)Securities available for saleGovernment agencies
$
30,309

30,414

20,869

20,813State and municipal

20,232

20,349

20,282

20,277Mortgage-backed securities

54,717

54,991

31,080

31,075Agency preferred stock

4,510

4,465

4,514

4,389Total securities available
for sale
$
109,768

110,219

76,745

76,554Securities held to maturityMortgage-backed securities
$
350

376

370

397Total securities held to
maturity
$
350

376

370

397Investments in bank stocksFederal Home Loan Bank stock
$
2,338

2,338

2,318

2,318Federal Reserve Bank stock

1,869

1,869

1,869

1,869Bankers’ Bank of the West stock

184

184

184

184$
4,391

4,391

4,371

4,371


7TABLE OF
CONTENTS

The following table presents the components of investment income for the three months ended March 31, 2004 and 2003.

March 31,
	
	
	March 31,(in thousands)
	
	
	2004
	
	
	2003(unaudited)
	
	
	(unaudited)Taxable interest income
	
	$
	446
	
	
	652Nontaxable interest income
	
	
	271
	
	
	168Dividends
	
	
	56
	
	
	49$
	773
	
	
	869


3.  LOANS

Loans consist of the following:

(in thousands)

March 31,
2004

December 31,
2003(unaudited)Commercial, industrial and land
$
195,567

185,158Real estate - construction

60,326

63,844Real estate - mortgage

59,020

57,602Consumer and other

5,755

5,940320,668

312,544Less:  Allowance for loan losses

(3,361)

(3,503)Net
deferred loan fees

(786)

(770)Loans, Net
$
316,521

308,271


As of March 31, 2004 and December 31, 2003, $144,000 and $116,000, respectively, of deposit account overdrafts have been reclassified to loans.

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

(in thousands)

2004Balance at January 1, 2004
$
11,239New loans, including renewals

250Payments

(199
)Balance at March 31, 2004 (unaudited)
$
11,290


4.  PROVISION AND ALLOWANCE FOR LOAN LOSSES

Transactions in
the allowance are summarized as follows:

(in thousands)

2004Allowance at January 1,
2004
$
3,503Loans charged off

(338)Recoveries on loans previously charged off

38Provision for loan losses

158Allowance at March 31,
2004 (unaudited)
$
3,361


8TABLE OF
CONTENTS

5.  PREMISES AND EQUIPMENT

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

6. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction
date. At March 31, 2004 and December 31, 2003, the carrying amount of securities sold to secure repurchase agreements was $583,000 and $907,000, respectively. Securities sold under agreements to repurchase are reflected at the amount of cash
received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities.

7. BORROWINGS

WestStar is a member of the Federal Home Loan Bank of Topeka (FHLB) and, as a regular part of its business, obtains both short and long-term advances
from this FHLB. Advances are collateralized primarily by FHLB stock owned by WestStar and loans secured by certain mortgages or deeds of trust. As of March 31, 2004, the Companys total borrowing capacity was $100.6 million of which $34.8 million
of borrowings were outstanding ($10.8 million was short-term and $24.0 million was long-term) and $24.0 million in the form of stand-by irrevocable letters of credit issued by the FHLB were pledged as collateral for uninsured public fund
deposits.

WestStar has established an unsecured, overnight federal funds line with Bankers Bank of the West that expires on August 31, 2004. As of March 31,
2004, this authorized borrowing line totaled $42.1 million with $0 outstanding.

WestStar has also established overnight federal funds lines with First Tennessee Bank, N.A. (First Tennessee) totaling $20.0 million. If drawn upon,
$10.0 million will be a secured line and $10.0 million will be an unsecured line. These lines are subject to cancellation by First Tennessee at any time upon the occurrence of certain conditions.  As of March 31, 2004, no amounts were outstanding
under the lines.

During 2003, the Company established a federal funds line with Provident Bank totaling $5.0 million. As of March 31, 2004, no amounts were outstanding
under this line.

Stock Repurchase Plan

At its meeting on January 19, 2004, the Companys Board of Directors reauthorized the Companys stock repurchase program that was originally
approved in February 2001. Since inception of the program through March 31, 2004, the Company has repurchased 1,535,380 shares at an average price of $12.10 per share, or approximately $19 million. The total amount of repurchases under the program,
both previously completed and allowable up to January 2005, aggregate approximately $29 million. During the first three months of 2004, the Company did not repurchase any common shares.

Restricted Stock

The Company accounts for its restricted stock grants in accordance with Accounting Principles Board (APB) Opinion No. 25. Accordingly, compensation
expense is recorded over the vesting period of the restricted stock equal to the value of the restricted shares using the market price of the stock on the grant date.

9TABLE OF
CONTENTS
Earnings Per Share

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

The following table presents the net income and weighted average common shares outstanding used to calculate earnings per share for the three months
ended March 31, 2004 and 2003:

March 31,(in thousands, except share data)

2004

2003(unaudited)

(unaudited)Basic earnings per share computationNet income available to common shareholders
$
1,473

975Weighted average shares outstanding – basic

5,019,263

5,507,487Basic earnings per share
$
0.29

0.18




March 31,(in thousands, except share data)


2004

2003(unaudited)

(unaudited)Diluted earnings per share computationNet income available to common shareholders
$
1,473

975Weighted average shares outstanding – basic

5,019,263

5,507,487Shares
assumed issued:Stock
options

127,975

123,027Restricted
stock

254,750

203,316Weighted average shares outstanding – diluted

5,401,988

5,833,830Diluted earnings per share
$
0.27

0.17


During the three months ended March 31, 2003, options to purchase an average of 72,000 shares of common stock at an average exercise price of $12.23 per
share were outstanding, but were not included in the computation of diluted earnings per share because the exercise prices of these options were greater than the average market prices of the common stock during such periods. There were no
anti-dilutive options for the three months ended March 31, 2004.

The Company accounts for its stock options in accordance with SFAS No. 123,Accounting for Stock-Based Compensation,which permits entities to expense over the vesting period the fair value of stock-based awards as measured on
the date of grant. Alternatively, SFAS 123 allows entities to apply the provisions of APB Opinion No. 25 while disclosing pro forma net income and pro forma earnings per share for employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS 123 had been applied. The Company has elected to apply the accounting provisions of APB Opinion No. 25 to employee stock option grants and provide the pro forma disclosure provisions of SFAS 123. Accordingly,
stock-based compensation expense for employee option grants is not recognized in the consolidated financial statements, as options granted under the Plan generally have an exercise price equal to the market value of the underlying common stock on
the date of grant. However, during May 2002, approximately 20,000 stock options were granted at a strike price below market value. The Company recognized $1,000, of compensation expense during both the three months ended March 31, 2004 and 2003
related to these options. Any non-employee stock option grants are accounted for under SFAS 123.

10TABLE OF
CONTENTS

The fair value of each employee stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model. The following
weighted-average assumptions were used:

2004

2003(unaudited)

(unaudited)Dividend yield

**

2.0%Expected life

**

7 yearsExpected volatility

**

26.0%Risk-free interest rate

**

3.6%


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

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

Three months ended March 31,(in thousands, except share data)

2004

2003(unaudited)

(unaudited)Net incomeAs reported
$
1,473

975Deduct:  Total stock-based employee
     compensation determined under the                 fair value method, net of tax

(38)

(53)Pro forma

1,435

922Earnings per share - basicAs reported

0.29

0.18Pro forma

0.29

0.17Earnings per share - dilutedAs reported

0.27

0.17Pro forma

0.25

0.15


9. REGULATORY MATTERS

As of March 31, 2004, the Company met all capital adequacy requirements to which it was subject.  As of that date, the Company had Tier 1 and Total Risk-Based Capital ratios of
12.02%	 and 14.04%,	 respectively, and a Leverage ratio of 7.88%	. Regulatory guidelines permit the Companys trust preferred securities to be included in the calculation of Tier 1, Total Risk-Based capital, and the Leverage Ratio, subject to
certain limitations.

As of March 31, 2004, WestStar met all capital adequacy requirements to which it was subject and exceeded the minimum ratios to be designated as well-capitalized. As of
March 31, 2004, WestStar had Tier 1 and Total Risk-Based Capital ratios of 11.54%	 and 12.47%,	 respectively, and a Leverage ratio of 7.54%	.

11TABLE OF
CONTENTS

10. SEGMENT INFORMATION

Information about reportable segments and reconciliation of such information to the consolidated financial statements for the three months ended March 31
is as follows:

Three Months Ended March 31, 2004 (unaudited)Mortgage(in thousands)

Banking

Brokerage

Other

TotalCondensed income statementTotal income
$
10,096

803

5

10,904Total expense

6,926

672

1,099

8,697Income before income
taxes

3,170

131

(1,094)

2,207Income taxes

1,083

49

(398)

734Net income
$
2,087

82

(696)

1,473




Three Months Ended March 31, 2003 (unaudited)Mortgage(in thousands)

Banking

Brokerage

Other

TotalCondensed income statementTotal income
$
9,184

1,448

1

10,633Total expense

7,079

1,122

1,041

9,242Income before income
taxes

2,105

326

(1,040)

1,391Income taxes

677

119

(380)

416Net income
$
1,428

207

(660)

975


11. 
SUBSEQUENT EVENTS

On April 19, 2004, the Board of Directors (Board) declared a regular quarterly dividend of $0.07 per share payable on May 14, 2004 to shareholders of
record on April 30, 2004.

On April 19, 2004, the Board approved the merger of First Western into WestStar, effectively dissolving the previously existing subsidiary relationship.
This merger will be consummated subsequent to regulatory approval and will have no impact on the future financial condition or results of operations of the Company as First Western was owned 100% by WestStar and was included in the consolidated
financial statements of the Company.

12TABLE OF
CONTENTS

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

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

Basis of Presentation

The following discussion and analysis provides information regarding the Companys financial condition as of March 31, 2004, and its results of
operations for the three months ended March 31, 2004, in comparison to the three months ended March 31, 2003. The following discussion should be read in conjunction with the unaudited consolidated financial statements and related notes included
elsewhere in this Quarterly Report on Form 10-Q, and in conjunction with the Companys Annual Report on Form 10-K for the year ended December 31, 2003.

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

Net income was $1.5 million for the three months ended March 31, 2004, up from $975,000 for the three months ended March 31, 2003, an increase of 51%.
First quarter 2004 revenue included a $1.7 million gain, pre-tax, on the sale of the Companys Vail bank building. Without this gain, net income would have been $412,000 for the first quarter 2004.

Diluted earnings per share for the three months ended March 31, 2004, was $0.27 compared to $0.17 for the three months ended March 31, 2003, an increase
of 59%. Excluding the gain on the building sale, diluted earnings per share would have been $0.07 for the first quarter 2004.

The annualized return on average assets was 1.00%	 for the three months ended March 31, 2004 compared to 0.69%	 for the three months ended March 31,
2003. Excluding the gain on the building sale, the annualized return on average assets would have been 0.28%	 for the first quarter 2004.

The annualized return on average equity was 10.13%	 for the three months ended March 31, 2004 compared to 5.99%	 for the three months ended March 31,
2003. Excluding the gain on the building sale, the annualized return on average equity would have been 2.88%	 for the first quarter 2004.

13TABLE OF
CONTENTS

Results of Operations

Net Interest Income.Net interest income, on a fully
tax-equivalent basis (FTE), decreased by $577,000, or 10% to $5.2 million for the three months ended March 31, 2004 from $5.7 million for the three months ended March 31, 2003.The net interest margin on an FTE basis was 4.17%	 for the three months ended March 31, 2004 as compared to 4.89%	 for the comparable period in 2003.
Net interest margin is influenced by the level and relative mix of earning assets, interest bearing liabilities, non-interest bearing liabilities and shareholders equity as well as the cost of interest bearing liabilities as compared to the
yield on earning assets. The decrease in net interest margin during the first three months of 2004 as compared to the same period in 2003 was due primarily to four factors: (1) a $23.7 million decrease, or 7%, in average loan volumes since March 31,
2003 as a result of the soft economy and more conservative underwriting policies; (2) average interest bearing deposits increased $16.0 million, or 5%, resulting in additional liquidity that the Company used to purchase lower yielding investments
and federal funds sold; (3) from January through July 2003, the Company capitalized on the low interest rate environment and its wholesale funding source to extend fixed rate financing to several customers, thereby locking in a spread (these
borrowings came at a higher interest cost than deposits); and (4), the 25 basis point interest rate cut implemented by the Federal Reserve during second quarter 2003.

Interest income FTE decreased to $7.2 million for the three months ended March 31, 2004, as compared to $7.8 million for the three months ended March 31,
2003, despite the fact that average earning assets increased during this period. Average earning assets increased 5%, from $476.7 million for the three months ended March 31, 2003 to $498.6 million for the three months ended March 31, 2004.
Subsequent to March 31, 2003, the mix of earning assets shifted away from higher yielding loans toward lower yielding investment securities and federal funds sold. During the first three months of 2004, average loans declined to 63% of earning
assets as compared to 71% during the first three months of 2003 while average federal funds sold and investment securities increased to 36% of earning assets as compared to 27% during the first three months of 2003. During this time, loans had a
yield of 7.75%	 as compared to the 4.05%	 yield on investment securities and 0.99%	 yield on federal funds sold. As a result of this shift, the total yield on average earning assets decreased 87 basis points to 5.80%	 for the first three months of
2004, as compared to 6.67%	 for the first three months of 2003.

Interest expense decreased to $2.02 million for the three months ended March 31, 2004, as compared to $2.09 million for the corresponding period in 2003.
This decrease was comprised primarily of a $153,000 decrease in interest expense on deposits, offset by a $63,000 increase in interest expense on borrowings. Although average interest bearing deposits increased $16.0 million, or 5%, in 2004 over the
corresponding period in 2003, all of the growth was in lower cost checking, savings and money market accounts resulting in this decrease in interest expense.  The volume of higher cost certificates of deposits decreased during this period, declining
from an average of $129.1 million during first quarter 2003 to $121.9 million during first quarter 2004. Additionally, maturing certificates of deposit renewed at significantly lower interest rates. The increase in interest expense on borrowings was
due to higher average borrowings at a slightly lower average cost during 2004 over 2003. During the three months ended March 31, 2004, average borrowings were $62.3 million at an average cost of 6.38%	 as compared to $57.5 million at 6.50%	for the
three months ended March 31, 2003. As a result of these factors, the total cost of interest-bearing liabilities decreased 19 basis points to 1.90%	 for the first three months of 2004, as compared to 2.09%	 for the first three months of 2003. This
decrease in cost of interest bearing liabilities, however, was not in proportion to the decrease in yield on average interest earning assets, resulting in an overall decrease in net interest income and net interest margin for the first three months
of 2004.

Non-Interest Income. During the three months ended March 31, 2004,
non-interest income increased by $961,000, or 33%, to $3.8 million for the three months ended March 31, 2004, from $2.9 million for the three months ended March 31, 2003. This increase was primarily attributable to the $1.7 million gain on the sale
of the Vail bank building during March 2004.  This increase was partially offset by a $647,000 decrease in mortgage broker fees. During first quarter 2004, refinancing activity slowed as compared to the refinancing boom of 2002 and 2003.

Non-Interest Expense. Non-interest expense decreased $508,000, or
7%, to $6.5 million for the three months ended March 31, 2004, from $7.0 million for the three months ended March 31, 2003. This decrease was largely attributable to a decrease in salaries and benefits of $306,000 compared to first quarter 2003 and
a decrease in furniture and equipment expense of $146,000. Salaries and benefits decreased primarily due to (1) a $361,000 decrease in mortgage incentive pay as a result of lower mortgage origination volume and (2) a $100,000 decrease in employee
insurance costs primarily due to favorable healthcare claim volumes, partially offset by (3) $225,000 of salaries and benefits expense attributable to the new Denver Tech branch opened during third quarter 2003. Furniture and equipment expense
decreased primarily due to a decrease in depreciation and amortization expense related to the fourth quarter 2003 write-off of $1.6 million of obsolete fixed assets.

14TABLE OF
CONTENTS

The efficiency ratio improved to 73% for the quarter ended March 31, 2004 from 82% for the quarter ended March 31, 2003. This decrease in the efficiency
ratio was due to the increase in revenue (net interest income plus non-interest income) of $341,000 from first quarter 2003 to first quarter 2004, while at the same time non-interest expenses decreased by $508,000. Excluding the gain on the building
sale, the efficiency ratio would have been 90% for the first quarter 2004.

Income Taxes.The Companys effective income tax rate
(income tax expense as a percentage of pre-tax income) was 33.3% for the three months ended March 31, 2004 as compared to 29.9% for the three months ended March 31, 2003. This increase in the effective income tax rate was primarily due to an
increase in pre-tax income during 2004. During the first quarter 2004, tax-exempt interest from municipal securities represented a lower percentage of pre-tax income than it did during 2003, thus resulting in a higher effective tax rate.

Financial Condition

The Company's assets increased by $31.7 million or 6%, to $607.4 million as of March 31, 2004, from $575.6 million as of December 31, 2003.

Federal funds sold balances increased by $2.0 million, or 2%, to $81.3 million as of March 31, 2004 from $79.3 million at December 31, 2003.  Investment
securities increased to $110.2 million as of March 31, 2004, compared to $76.6 million as of December 31, 2003, a 44% increase. During this period, deposits grew more quickly than quality loan demand, resulting in additional funds to
invest.

As of March 31, 2004, loans held for sale decreased $2.0 million, or 78%, from December 31, 2003. The ending balance of loans held for sale at any
particular date is dependent on the timing of the closing and ultimate funding of these loans by the outside investor. Thus, an increase or decrease in the ending balance is primarily a function of this timing and not indicative of trends in
mortgage loan demand.

Gross loans increased $8.1 million, or 3%, from December 31, 2003. This increase was due to an increase in loan demand as the economy began to
improve.

Premises and equipment decreased by $3.9 million, or 10%, from $38.1 million as of December 31, 2003, to $34.2 million as of March 31, 2004. This
decrease was mainly attributable to the sale of the Vail bank building, which had a net book value of $5.8 million, and $445,000 of depreciation and amortization expense, offset by the purchase of $2.5 million of premises and equipment primarily
related to equipment upgrades, remodeling of branches, the construction of a new branch facility in Glenwood Springs to replace an older building and the purchase of land to build a new branch facility in Fruita.

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

Deposits increased by $33.7 million, or 8%, from $448.5 million as of December 31, 2003, to $482.2 million as of March 31, 2004. The largest increase was
in the money market category, with a $30.0 million, or 29% increase, due in part to the seasonal increase in deposits during the winter ski season.  Additionally, the Company continued to focus on attracting new deposit relationships. Finally,
customers have been keeping their money in short-term interest bearing accounts presumably so they can easily reinvest it as the economy and markets improve.

Provision and Allowance for Loan Losses.Provision expense for
the three months ended March 31, 2004, was $158,000 compared to $125,000 for the three months ended March 31, 2003. The allowance for loan losses of $3.4 million as of March 31, 2004, decreased 4% from the $3.5 million level as of December 31, 2003
and represents 1.05%	 of total loans and 205% of non-performing loans as of March 31, 2004 as compared to 1.02%	 and 109%, respectively at December 31, 2003. During this same time period, average loans increased $3.7 million, or 1%, however
non-performing loans decreased $111,000, or 6%. Accordingly, the $142,000 decrease in the allowance for loan losses from December 31, 2003 reflects the Companys revised estimate of probable losses in the loan portfolio.

15TABLE OF
CONTENTS

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

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

> Allowance for Loan Losses Analysis (in thousands)
> 
> Threemonths ended
>  March 31,2004
> 
> 2003(unaudited)
> 
> (unaudited)Average total loans
> $
> 314,667
> 
> 338,411Total loans at end of period
> $
> 319,882
> 
> 331,503Allowance at beginning of period
> $
> 3,503
> 
> 3,747Loans charged off
> 
> (338)
> 
> (534)Recoveries on loans previously charged
> off
> 
> 38
> 
> 43Provision for loan losses
> 
> 158
> 
> 125Allowance at end of period
> $
> 3,361
> 
> 3,381Annualized net charge-offs to average loans
> 
> 0.38
> 
> 0.59Allowance to total loans at end of period
> 
> 1.05
> 
> 1.02

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

> Non-Performing Assets(in
> thousands)
> 
> March 31,2004
> 
> 2003(unaudited)
> 
> (unaudited)Nonaccrual loans
> $
> 1,636
> 
> 3,089Restructured loans
> 
> —
> 
> —Total non-performing
> loans
> 
> 1,636
> 
> 3,089Foreclosed properties
> 
> 674
> 
> 796Total non-performing
> assets
> 
> 2,310
> 
> 3,885Loans 90 days or more past due and accruing
> 
> 15
> 
> 83Total risk assets
> $
> 2,325
> 
> 3,968Non-performing loans to total loans
> 
> 0.51%
> 
> 0.93%Non-performing assets to loan related assets
> 
> 0.72%
> 
> 1.17%Non-performing assets to total assets
> 
> 0.38%
> 
> 0.66%Risk assets to loan related assets
> 
> 0.73%
> 
> 1.19%

The Company believes that it has adequate collateral to recover the majority of the balance of the nonaccrual loans. Foreclosed properties are recorded
at the lower of cost or fair value less estimated costs to sell. Anticipated losses are recorded at the time of transfer from loans. Management is not aware of any significant adverse trends relating to its loan portfolio.

16TABLE OF
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Liquidity

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

As of March 31, 2004, the Company had cash and cash equivalents (including federal funds sold) of $95.8 million, interest-bearing deposits in banks of
$2.0 million, and investment securities of $115.0 million. Approximately $110.2 million, or 96%, of the Companys investment portfolio is classified as available-for-sale and can be readily sold, however $58.4 million of this amount has been
pledged to secure public fund deposits and $583,000 of this amount has been sold under agreements to repurchase. Accordingly, these pledged amounts may not be available to meet general liquidity needs.  Based on current plans and business
conditions, the Company expects that its cash, cash equivalents, investment securities and available borrowing capacity under its credit facilities, together with any amounts generated from operations, will be sufficient to meet the Company's
liquidity requirements for the next 12 months. However, there can be no assurance that the Company will not be required to seek other financing sooner or that such financing, if required, will be available on terms satisfactory to the Company.

Net Cash from Operating Activities

During the three-month period ended March 31, 2004, cash of $2.0 million was provided by operating activities consisting primarily of net income of $1.5
million less non-cash income of $1.2 million plus net decreases in operating assets and liabilities of $1.7 million. Non-cash income consisted primarily of a $1.7 million gain on the sale of the Vail bank building and $334,000 of deferred loan fee
amortization, offset by $471,000 of depreciation and amortization expense on premises, equipment and intangible assets, a $158,000 loan loss provision and $151,000 of net amortization of premiums on investment securities. The net decrease in
operating assets and liabilities was primarily due to a $2.0 million decrease in loans held for sale and a $173,000 decrease in other assets, offset by a $283,000 increase in interest payable and other liabilities and a $119,000 decrease in interest
receivable.

During the three-month period ended March 31, 2003, cash of $4.5 million was provided by operating activities consisting primarily of net income of
$975,000 plus non-cash expenses of $767,000 and net decreases in operating assets and liabilities of $2.7 million. Non-cash expenses consisted primarily of $580,000 of depreciation and amortization expense on premises and equipment, a $125,000 loan
loss provision and $113,000 of net amortization of premiums on investment securities. The net decrease in operating assets and liabilities was primarily due to a $4.1 million decrease in loans held for sale offset by a $729,000 decrease in interest
payable and other liabilities, a $350,000 increase in interest receivable and a $311,000 increase in other assets.

Net Cash from Investing Activities

During the three-month period ended March 31, 2004, cash of $35.6 million was used for investing activities. These outflows consisted primarily of the
purchase of $43.1 million of investment securities, an $8.7 million increase in loans and $2.4 million in purchases of premises and equipment, offset by the maturity and/or calls of $9.9 million of investments and $8.3 million of proceeds from the
sale of the Vail bank building.

During the three-month period ended March 31, 2003, cash of $51.0 million was used for investing activities. These outflows consisted primarily of the
purchase of $59.8 million of investment securities and a $1.5 million increase in loans, offset by the maturity and/or calls of $10.4 million of investment securities.

17TABLE OF
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Net Cash from Financing Activities

During the three-month period ended March 31, 2004, cash of $28.5 million was provided by financing activities consisting primarily of an increase in
deposits of $33.7 million, offset by the repayment of FHLB advances of $4.7 million.

During the three-month period ended March 31, 2003, cash of $38.8 million was provided by financing activities consisting primarily of an increase in
deposits of $27.6 million and the receipt of $13.2 million of proceeds from FHLB advances, offset by the repurchase of $1.7 million of common stock and the payment of dividends on common stock of $343,000.

Borrowings

WestStar is a member of the Federal Home Loan Bank of Topeka (FHLB) and, as a regular part of its business, obtains both short and long-term advances
from this FHLB. Advances are collateralized primarily by FHLB stock owned by WestStar and loans secured by certain mortgages or deeds of trust. As of March 31, 2004, the Companys total borrowing capacity was $100.6 million of which $34.8 million
of borrowings were outstanding ($10.8 million was short-term and $24.0 million was long-term) and $24.0 million in the form of stand-by irrevocable letters of credit issued by the FHLB were pledged as collateral for uninsured public fund
deposits.

Payment of dividends is at the discretion of the Board and is determined by taking into account the earnings, capital levels, cash requirements, and the
financial condition of Vail Banks and WestStar, as well as applicable government regulations and other relevant factors.  The principal source of Vail Banks income is dividends from WestStar.  There are statutory and regulatory requirements
applicable to the payment of dividends by WestStar to Vail Banks, as well as by Vail Banks to its shareholders. Due to the high volume of dividends relative to earnings paid in earlier years, beginning in 2004, any dividend payments from WestStar to
Vail Banks will require prior regulatory approval. Management believes that approval will be granted as long as WestStar maintains its well-capitalized regulatory status.

On April 19, 2004, the Board declared a regular quarterly dividend of $0.07 per share payable on May 14, 2004 to Vail Banks shareholders of record
on April 30, 2004.

At its meeting on January 19, 2004, the Companys Board of Directors reauthorized the Companys stock repurchase program that was originally approved in February 2001.
Since inception of the program through March 31, 2004, the Company has repurchased 1,535,380 shares at an average price of $12.10 per share, or approximately $19 million. The total amount of repurchases under the program, both previously completed
and allowable up to January 2005, aggregate approximately $29 million. During the first three months of 2004, the Company did not repurchase any common shares.

As of March 31, 2004, shareholders equity had increased $1.7 million, or 3%, to $59.6 million from $57.9 million as of December 31, 2003.  This
increase is primarily related to the retention of earnings of $1.5 million and an increase in other comprehensive income of $404,000, offset by the payment of common stock dividends of $371,000.

18TABLE OF
CONTENTS

As of March 31, 2004 and 2003, the Company met all capital adequacy requirements to which it was subject. As of March 31, 2004, the Company had Tier 1
and Total Risk-Based Capital ratios of 12.02%	 and 14.04%,	 respectively, and a Leverage ratio of 7.88%	. Regulatory guidelines permit the Companys trust preferred securities to be included in the calculation of Tier 1, Total Risk-Based
capital and the Leverage Ratio, subject to certain limitations. As of March 31, 2003, the Company had Tier 1 and Total Risk-Based Capital ratios of 13.57%	 and 14.99%,	 respectively, and a Leverage ratio of 9.59%	.

As of March 31, 2004 and 2003, WestStar met all capital adequacy requirements to which it was subject and exceeded the minimum ratios to be designated as
well-capitalized. As of March 31, 2004, WestStar had Tier 1 and Total
Risk-Based Capital ratios of 11.54%	 and 12.47%,	 respectively, and a Leverage ratio of 7.54%	. As of March 31, 2003, WestStar had Tier 1 and Total Risk-Based Capital ratios of 13.04%	 and 13.94%,	 respectively, and a Leverage ratio of
9.21%	.









19TABLE OF
CONTENTS

Item 3.    
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK

Quantitative Disclosures About Market Risk

The table below provides information about the Companys financialinstrumentsas of December31, 2003that are sensitive to 
changes in interest rates.

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

(a)  These interest rates are not adjusted to reflect tax equivalent yields.
(b)  The above amounts represent scheduled maturities and do not include prepayments that may occur.

Qualitative Disclosures About Market Risk

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

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The Companys Asset/Liability Management Committee manages interest rate risk. The principal objective of asset/liability management is to manage
the levels of interest-sensitive assets and liabilities to minimize net interest income fluctuations in times of fluctuating market interest rates. To effectively measure and manage interest rate risk, the Company uses computer simulations
that
determine the impact on net interest income of numerous interest rate scenarios, balance sheet trends and strategies. These simulations cover the following financial instruments:
short-term financial instruments, investment securities, loans, deposits, and borrowings. These simulations incorporate assumptions about balance sheet dynamics, such as loan and deposit growth and pricing, changes in funding mix, and asset and
liability repricing and maturity characteristics. Simulations are run under various interest rate scenarios to determine the impact on net income and capital. From these computer simulations, interest rate risk is quantified and appropriate
strategies are developed and implemented.  As of March 31, 2004, the Company has never used interest rate derivative financial instruments as an asset/liability management tool to hedge mismatches in interest rate exposures.

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

The reduction in short-term rates by the Federal Reserve during 2001, 2002 and 2003 effectively repriced a significant portion of the Companys loan portfolio. While it also
produced an opportunity to reduce funding costs, at the current level of interest rates, further reductions in funding costs may be more limited.

Item 4.
CONTROLS AND PROCEDURES

Company management, including the vice chairman and chief financial officer, supervised and participated in an evaluation of the Companys
disclosure controls and procedures (as defined in rules of the Securities and Exchange Commission) as of March 31, 2004. Based on, and as of the date of, that evaluation, the Companys president and chief financial officer have concluded that
the Companys disclosure controls and procedures were effective in accumulating and communicating information to management, including the vice chairman and chief financial officer, as appropriate to allow timely decisions regarding required
disclosures of that information under the Securities and Exchange Commissions rules and forms and that the disclosure controls and procedures are designed to ensure that the information required to be disclosed in reports that are filed or
submitted under the Securities and Exchange Act of 1934, as amended, are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms.

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





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PART II OTHER INFORMATION

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

|(a) | Exhibits                                                                                                                                                                                                      
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | 31.1                                                                                                                                                                                                          
|    | 31.2                                                                                                                                                                                                          
|    | 32.1                                                                                                                                                                                                          
|    | 32.2                                                                                                                                                                                                          
|(b) | Reports on Form 8-K                                                                                                                                                                                           
|    | The Company filed a Current Report on Form 8-K dated February 5, 2004, under Items 7 and 12. The report included a press release reporting Vail Banks results of operations and
financial condition for 2003.

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SIGNATURES

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

VAIL BANKS, INC.Date:
May 13, 2004
/s/GARYS.JUDD Gary S. JuddChief Executive Officer and President
 (Principal Executive OfficerDate:
May 13, 2004
/s/PETERG.WILLISTON Peter G. WillistonSenior Executive Vice President and Chief Financial Officer
 (Principal Financial and Accounting Officer)






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