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

                                    FORM 10-Q



                  Quarterly Report Under Section 13 or 15(d)
                    of the Securities Exchange Act of 1934


For the quarter ended                         Commission File No.   0-16761
                                                                  -----------
  March 31, 2002

                           HIGHLANDS BANKSHARES, INC.


           West Virginia                                      55-0650793
-----------------------------------                      --------------------
(State or Other Jurisdiction of                             (I.R.S. Employer
 Incorporation or Organization)                           Identification No.)


                                 P. O. Box 929
                         Petersburg, West Virginia 26847

                                (304) 257-4111
                         ----------------------------
             (Registrant's Telephone Number, Including Area Code)



      Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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
requirement 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.

                  Class                        Outstanding at March 31, 2002
----------------------------------------       ------------------------------
Common Stock, par value - $5                            501,898 shares



<PAGE> 1

                           HIGHLANDS BANKSHARES, INC.

                                      INDEX


PART I   FINANCIAL INFORMATION

Item 1.  Financial Statements

         Consolidated Statements of Income - Three Months
         Ended March 31, 2002 and 2001                                   2

         Consolidated Balance Sheets - March 31, 2002 and
         December 31, 2001                                               3

         Consolidated Statements of Changes in Stockholders'
         Equity - Three Months Ended March 31, 2002 and 2001             4

         Consolidated Statements of Cash Flows - Three
         Months Ended March 31, 2002 and 2001                            5

         Notes to Consolidated Financial Statements                      6


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


PART II  OTHER INFORMATION                                              17

Item 1.  Legal Proceedings                                              17

Item 2.  Changes in Securities                                          17

Item 3.  Defaults upon Senior Securities                                17

Item 4.  Submission of Matters to a Vote of Security Holders            17

Item 5.  Other Information                                              17

Item 6.  Exhibit and Reports on Form 8K                                 17


         SIGNATURES                                                     18


<PAGE> 2

Part I   Financial Information
Item 1.  Financial Statements

                           HIGHLANDS BANKSHARES, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                            (In Thousands of Dollars)

                                                         Three Months Ended
                                                               March 31,
                                                          2002        2001
                                                        --------    --------
Interest Income
   Interest and fees on loans                           $  4,279    $ 4,373
   Interest on federal funds sold                             54        132
   Interest on time deposits                                  33         59
   Interest and dividends on investment securities
     Taxable                                                 319        355
     Nontaxable                                               52         37
                                                         -------     ------

   Total Interest Income                                   4,737      4,956
                                                         -------     ------

Interest Expense
   Interest on time deposits over $100,000                   580        579
   Interest on other deposits                              1,523      1,863
   Interest on borrowed money                                 53         57
                                                         -------     ------

   Total Interest Expense                                  2,156      2,499
                                                         -------     ------

Net Interest Income                                        2,581      2,457

Provision for Loan Losses                                    120        120
                                                         -------     ------

Net Interest Income After Loan Losses                      2,461      2,337
                                                         -------     ------

Noninterest Income
   Service charges                                           129        141
   Other                                                     150        133
                                                         -------     ------

   Total Noninterest Income                                  279        274
                                                         -------     ------

Noninterest Expense
   Salaries and employee benefits                          1,049        934
   Equipment and occupancy expense                           252        229
   Data processing                                           145        140
   Other                                                     434        417
                                                         -------     ------

   Total Noninterest Expense                               1,880      1,720
                                                         -------     ------

Income Before Income Taxes                                   860        891

Provision for Income Taxes                                   260        297
                                                         -------     ------

Net Income                                              $    600    $   594
                                                         =======     ======

Per Share Data

   Net Income                                           $  1.20     $  1.18
                                                         ======      ======

   Cash Dividends                                       $   .37     $   .34
                                                         ======      ======

Weighted Average Common Shares Outstanding              501,898     501,898
                                                        =======     =======

       The accompanying notes are an integral part of these statements.


<PAGE> 3

                           HIGHLANDS BANKSHARES, INC.
                           CONSOLIDATED BALANCE SHEETS
                            (In Thousands of Dollars)

                                                      March 31,  December 31,
                                                        2002         2001
                                                      --------     --------
     ASSETS

Cash and due from banks - noninterest bearing         $  6,634    $  6,492
Time deposits in other banks                             5,423       6,334
Federal funds sold                                      12,877      13,284
Securities held to maturity (note 2)                     1,602       1,603
Securities available for sale (note 3)                  29,708      29,460
Other investments (note 4)                                 792         792
Loans, net of unearned interest (note 5)               209,599     205,469
     Less allowance for loan losses (note 6)            (1,623)     (1,602)
                                                       --------    --------

   Net Loans                                           207,976     203,867

Bank premises and equipment                              7,012       7,056
Interest receivable                                      2,062       1,818
Investments in insurance contracts                       5,143       5,100
Other assets                                             1,105         972
                                                       -------     -------

   Total Assets                                       $280,334    $276,778
                                                       =======     =======

     LIABILITIES

Deposits:
   Noninterest bearing
     Demand deposits                                  $ 31,612    $ 29,279
   Interest bearing
     Money market and checking                          19,276      17,936
     Money market savings                               12,345      11,407
     Savings                                            28,950      26,782
     Time deposits over $100,000                        44,094      45,182
     All other time deposits                           108,631     111,456
                                                       -------     -------

   Total Deposits                                      244,908     242,042

Borrowed money                                           4,401       4,523
Accrued expenses and other liabilities                   2,371       1,903
                                                       -------     -------

   Total Liabilities                                   251,680     248,468
                                                       -------     -------

   STOCKHOLDERS' EQUITY

Common stock ($5 par value, 3,000,000 shares
   authorized, 546,764 shares issued)                    2,734       2,734
Surplus                                                  1,662       1,662
Retained earnings                                       25,038      24,624
Accumulated other comprehensive income                     213         283
                                                       -------     -------

Treasury stock (at cost, 44,866 shares
   in 2002 and 2001)                                      (993)       (993)
                                                       --------    --------

   Total Stockholders' Equity                           28,654      28,310
                                                       -------     -------

   Total Liabilities and Stockholders' Equity         $280,334    $276,778
                                                       =======     =======

       The accompanying notes are an integral part of these statements.


<PAGE> 4
<TABLE>

                                                          HIGHLANDS BANKSHARES, INC.
                                        CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                                           (In Thousands of Dollars)

<CAPTION>

                                                                           Accumulated
                                                                               Other
                                        Common                  Retained   Comprehensive Treasury
                                         Stock      Surplus     Earnings       Income      Stock     Total


<S>                                    <C>         <C>         <C>             <C>        <C>      <C>
Balances, December 31, 2001            $   2,734   $   1,662   $   24,624      $  283     $ (993)  $  28,310
   Comprehensive Income
   Net income                                                         600                                600
   Net change in unrealized
     appreciation on investment
     securities available for sale,
     net of taxes                                                                 (70)                   (70)
                                                                                                      ------

   Total Comprehensive Income                                                                            530

   Dividends paid                                                    (186)                              (186)
                                       --------      ------      --------       -----       -----    -------

   Balances, March 31, 2002            $  2,734     $ 1,662     $   25,038     $  213      $ (993)  $  28,654
                                       ========      ======      =========      =====       =====    ========


                                                                           Accumulated
                                                                              Other
                                        Common                  Retained   Comprehensive  Treasury
                                         Stock    Surplus       Earnings       Income      Stock       Total

Balances, December 31, 2000             $ 2,734     $ 1,662      $  22,826     $   39      $ (993)  $  26,268
   Comprehensive Income
   Net income                                                          594                                594
   Net change in unrealized
     appreciation on investment
     securities available for sale,
     net of taxes                                                                 130                     130
                                                                                                        -----

   Total Comprehensive Income                                                                             724

   Dividends paid                                                     (171)                              (171)
                                         ------      ------         -------      -----       -----     -------

   Balances, March 31, 2001             $ 2,734     $ 1,662      $  23,249      $  169      $ (993)   $ 26,821
                                         ======      ======       ========        ====       =====     =======

                                     The accompanying notes are an integral part of these statements.

</TABLE>


<PAGE> 5

                           HIGHLANDS BANKSHARES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (In Thousands of Dollars)

                                                         Three Months Ended
                                                              March 31,
                                                          2002        2001
                                                        --------    --------
Cash Flows from Operating Activities:
   Net income                                           $    600    $   594
   Adjustments to reconcile net income to net
     cash provided by operating activities:
       Depreciation                                          132        126
       Income from insurance contracts                       (43)       (48)
       Net amortization                                       68          4
       Provision for loan losses                             120        120
       (Increase) decrease in interest receivable           (244)        27
       (Increase) decrease in other assets                   (93)        10
       Increase in accrued expenses                          468        344
                                                         -------     ------

   Net Cash Provided by Operating Activities               1,008      1,177
                                                         -------     ------

Cash Flows from Investing Activities:
   Net change in federal funds sold                          408     (5,256)
   Proceeds from maturities of securities
     available for sale                                    2,636      6,071
   Proceeds from maturities of securities
     held to maturity                                          1         65
   Purchase of securities available for sale              (3,063)    (7,562)
   Net change in time deposits in other banks                911         78
   Net change in loans                                    (4,229)    (4,714)
   Purchase of property and equipment                        (89)      (176)
                                                         --------    ------

   Net Cash Used in Investing Activities                  (3,425)    (11,494)
                                                         --------    -------

Cash Flows from Financing Activities:
   Net increase in deposits                                2,867      8,858
   Dividends paid in cash                                   (186)      (171)
   Repayment of borrowed money                              (122)      (106)
                                                         --------    ------

   Net Cash Provided by Financing Activities               2,559      8,581
                                                         -------     ------

Net Increase (Decrease) in Cash and Cash Equivalents         142     (1,736)

Cash and Cash Equivalents, Beginning of Period             6,492      7,062
                                                         -------     ------

Cash and Cash Equivalents, End of Period                $  6,634    $ 5,326
                                                         =======     ======

Supplemental Disclosures:
   Cash Paid For:
     Income taxes                                       $      0    $     5
     Interest                                              2,116      2,424

       The accompanying notes are an integral part of these statements.


<PAGE> 6

                           HIGHLANDS BANKSHARES, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1    ACCOUNTING PRINCIPLES:

             The consolidated financial statements conform to U. S. generally
          accepted accounting principles and to general industry practices. In
          the opinion of management, the accompanying unaudited consolidated
          financial statements contain all adjustments (consisting of only
          normal recurring accruals) necessary to present fairly the financial
          position as of March 31, 2002 and the results of operations for the
          three month periods ended March 31, 2002 and 2001. The notes included
          herein should be read in conjunction with the notes to financial
          statements included in the 2001 annual report to stockholders of
          Highlands Bankshares, Inc.


NOTE 2    SECURITIES HELD TO MATURITY:

             The amortized cost and market value of securities held to maturity
          as of March 31, 2002 and December 31, 2001, are as follows:

                                         2002                  2001
                                   Amortized Market     Amortized   Market
                                     Cost     Value        Cost      Value

          Mortgage-Backed
            Securities              $     5  $     6      $    6   $     6
          Obligations of states and
            political subdivisions    1,597    1,641       1,597     1,633
                                     ------   ------       -----    ------

            Total                   $ 1,602  $ 1,647      $1,603   $ 1,639
                                     ======   ======       =====    ======


NOTE 3    SECURITIES AVAILABLE FOR SALE:

             The amortized cost and fair value of securities available for sale
          as of March 31, 2002 and December 31, 2001 are as follows:

                                         2002                  2001
                                   Amortized  Market    Amortized    Market
                                     Cost     Value        Cost      Value

          US Treasury securities and
            obligations of US
            Government corporations
            and agencies            $12,089  $12,230      $10,563  $10,760
          Mortgage-Backed             5,962    6,036       6,527     6,609
          Obligations of states and
            political subdivisions    5,738    5,802       6,319     6,381
          Other investments           5,580    5,640       5,602     5,710
                                     ------   ------       -----    ------

            Total                   $29,369  $29,708      $29,011  $29,460
                                     ======   ======       ======   ======


<PAGE> 7

                           HIGHLANDS BANKSHARES, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 4    OTHER INVESTMENTS:

             Other investments totaling $791,650 include investments in the
          Federal Home Loan Bank and other governmental entities whose
          transferability is restricted.


NOTE 5    LOANS OUTSTANDING:

             A summary of loans outstanding as of March 31, 2002 and December
          31, 2001, is as follows:

                                                        2002         2001
                                                        ----         ----

          Commercial                                  $ 41,120    $ 42,204
          Real estate- construction                      5,056       3,868
                     - mortgages                       116,122     111,668
          Consumer installment                          47,439      47,927
                                                       -------     -------

            Total                                      209,737     205,667
          Unearned interest                               (138)       (198)
                                                       --------    --------

            Net loans outstanding                     $209,599    $205,469
                                                       =======     =======


NOTE 6    ALLOWANCE FOR LOAN LOSSES:

             A summary of transactions in the allowance for loan losses for the
          three months ended March 31, 2002 and 2001 follows:

                                                        2002         2001
                                                        ----         ----

          Balance, beginning of period                $  1,602    $  1,493
          Provisions charged to operating expenses         120         120
          Loan recoveries                                   23          86
          Loan charge-offs                                (122)       (104)
                                                       --------    -------

            Balance, end of period                    $  1,623    $  1,595
                                                       =======     =======


NOTE 7    INVESTMENT IN INSURANCE CONTRACTS:

             Investment in insurance contracts consist of single premium
          insurance contracts which have the dual purposes of providing a rate
          of return to the Company which approximately equals the rate of return
          on one year Treasury obligations and providing life insurance and
          retirement benefits to employees. The carrying value of these
          investments was $5,143,000 at March 31, 2002 and $5,100,000 at
          December 31, 2001.


<PAGE> 8

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


Overview

    The Company's net income was $600,000 in the first quarter of 2002, an
increase of 1.01% compared to the first quarter of 2001. Earnings per share were
$1.20 for the first quarter of 2002 compared to $1.18 per share for the same
quarter in 2001. The Company's annualized return on average equity was 8.43% in
the first quarter of 2002 compared to 8.95% for the first quarter of 2001.
Return on average assets was .86% for 2002 and .94% for 2001, respectively.

    The increase in earnings per share for the first quarter was due primarily
to a 5.05% increase in net interest income. Growth in average earning assets
(8.13%) and interest bearing liabilities (8.38%) within the last twelve months
offset a declining net interest spread between quarters. The increase in the tax
equivalent net interest income was 5.32% for the period. The provision for loan
losses of $120,000 was the same as 2001 and is reflective of lower net charge
offs in 2002. Noninterest income increased 1.82% because of greater income on
investments in insurance contracts. Other noninterest expenses increased 9.30%,
mainly the result of operating expenses at the new branch in Gore, Virginia
which opened in June 2001 and salary/benefit increases.

Net Interest Income

    The Company's net yield on interest earning assets on a tax equivalent basis
was 4.08% in the first quarter of 2002 compared to 4.27% for the first quarter
of 2001. The volume of all lending increased substantially in the last twelve
months due to a strong economy and additional branch locations. Commercial rates
increased from 7.61% in 2001 to 8.19% in 2002 due to internal pricing. Rates on
consumer loans decreased 146 basis points and rates on real estate loans
declined 65 basis points. The overall decrease of 83 basis points in returns on
average loans was offset by decreases in the rates paid on deposits and borrowed
money (see below) and declines in short-term investment rates.

    For the first quarter of 2002, the Company saw an overall decrease of 151
basis points in the yields on investment securities compared to 2001 results.
The increase is reflective of recent reinvestments at lower rates.  Average
investments in securities have increased over the last twelve months as
deposit growth has outpaced loan demand creating excess cash to invest. Interest
rates earned on fed funds sold and interest bearing deposits declined 297 basis
points as rates were cut eleven times in 2001 by the Federal Reserve Bank ("The
Fed") by one-quarter to one-half point each time. The increase in federal funds
is intended to act as a source of funding should maturing,  high rate
certificates leave the Banks. The Company experienced a $3.9 million decline
in the balance of certificates in the first quarter of 2002 due to repricing of
maturing certificates at much lower rates but this outflow has been met by
increased levels of demand and savings deposits.

    Customers appear reluctant to commit to long-term, fixed rates on
certificates when rates are at historical lows and are instead placing their
deposits in accounts that are highly liquid and will allow them to respond
quickly when rates increase.

    Interest rates paid on transaction and savings accounts declined a combined
117 basis points due to lower rates resulting from Fed action. The average
balance in time deposits grew 8.74% in 2002 compared to 2001 and was a source of
funding for the loan growth discussed earlier. A 99 point basis point decrease
in rates paid on time deposits between 2001 and 2002 reflects the declining rate
environment experienced throughout 2001, especially after the tragedies of
September 11.


<PAGE> 9

Item 2.     Management's  Discussion  and Analysis of Financial  Condition  and
            Results of Operations (Continued)


Net Interest Income (Continued)

    Beginning in 1999, the Company has borrowed amounts from the FHLB at fixed
rates of interest and loaned these monies to customers on a fixed rate basis.
The Company  anticipates  continuing to use this approach as a mechanism
to provide long-term financing to customers and limit market rate risk. In
addition, monies were borrowed on a short-term, variable rate basis to fund the
renovation and expansion at the Capon Valley Bank. The Bank anticipates
refinancing this variable rate debt when long-term interest rates are favorable.
The cost of all FHLB borrowings decreased 103 basis points from 2001 to 2002 due
to rate changes in market.

    A complete yield analysis is shown as Table I on page 15.

Noninterest Income

    Noninterest income for 2002 was virtually unchanged from 2001 levels.
Service charge income declined by 8.50% and other operating income increased by
12.78%. Service charge income declined as the result of a single customer being
sold to new investors who infused funds in the business and eliminated
overdrafts and their related fees. The net increase in other income is primarily
due to a corresponding increase in underwriting revenue of HBI Life Insurance
Company.

Noninterest Expenses

    Overall noninterest expense increased 9.30% in 2002 as the result of
operating expense increases at Capon Valley Bank's new Gore Branch which opened
in June 2001, a marketing campaign with additional advertising expenses and an
increase in expenses relative to employee benefit plan administration of 401-K.
Personnel expense increases of 12.31% were the result of a 8.08% increase in
full time equivalent employees due to growth and reorganization and an increase
in average wages. Expenses for occupancy, equipment and data processing expenses
increased 7.59% due to costs of upgrading data processing  equipment and
equipping an additional branch facility. Other noninterest expenses increased
4.08% due to asset growth and additional branch locations. The overall increase
in noninterest expense of 9.30% is in line with management estimates for the
first quarter of the year and the increase in average earning assets of 8.13%.

Loan Portfolio

    The Company is an active residential mortgage and construction lender and
generally extends commercial loans to small and medium sized businesses within
its primary service area. The Company's commercial lending activity extends
across its primary service areas of Grant, Hardy, Randolph, Mineral, Hampshire,
northern Pendleton counties in West Virginia and Frederick County in Virginia.
Consistent  with its focus on  providing community-based financial services,
the Company does not attempt to diversify its loan portfolio geographically by
making significant amounts of loans to borrowers outside of its primary service
area.

    The principal economic risk associated with each of the categories of loans
in the Company's portfolio is the creditworthiness of its borrowers. Within each
category, such risk is increased or decreased depending on prevailing economic
conditions. The risk associated with the real estate mortgage loans and
installment loans to individuals  varies based upon employment levels,
consumer confidence, fluctuations in value of residential real estate and other
conditions that affect the ability of consumers to repay indebtedness. The risk
associated with commercial,  financial and agricultural loans varies based
upon the strength and activity of the local economies of the Company's market
areas. The risk associated with real estate construction loans varies based upon
the supply of and demand for the type of real estate under construction.


<PAGE> 10

Item 2.     Management's  Discussion  and Analysis of Financial  Condition  and
            Results of Operations (Continued)


Loan Portfolio (Continued)

    Loans outstanding increased $4,130,000 or 2.01% in the first quarter in 2002
compared to levels at December 31, 2001. The first quarter of any year is
traditionally slow as farming and logging operations are hampered by weather
conditions and retail borrowing in the first quarter is put on hold until the
spring. Thus, the first quarter increase in the loan portfolio was not
anticipated but certainly  welcomed. A 4.88% rise in real estate construction
and mortgage loans was primarily responsible for the first quarter increase
with modest losses in consumer and commercial lending. The loan to deposit
ratio was 85.58% at March 31, 2002 compared to 84.89% at December 31, 2001.
Loan demand is expected to remain satisfactory in the near future barring
any significant declines in the local or national economies.

Asset Quality and Risk Elements

    Nonperforming loans include nonaccrual loans, loans 90 days or more past due
and restructured loans. Nonaccrual loans are loans on which interest accruals
have been suspended or discontinued permanently. Restructured loans are loans on
which the original interest rate or repayment terms have been changed due to
financial hardship of the borrower. Nonaccrual loans totaled $951,000 at March
31, 2002 compared to $885,000 in nonaccrual loans at December 31, 2001. The
increase was the result of one mortgage loan that went into bankruptcy and is
pending foreclosure.

    Real estate acquired through foreclosure was $72,000 at March 31, 2002 and
$77,000 at December 31, 2001. All foreclosed property held was in the Company's
primary service area. The Company's practice is to value real estate acquired
through foreclosure at the lower of (i) an independent current appraisal or
market analysis less anticipated costs of disposal, or (ii) the existing loan
balance. The Company is actively marketing all foreclosed real estate and does
not anticipate material write-downs in value before disposition.

    An inherent risk in the lending of money is that the borrower will not be
able to repay the loan under the terms of the original agreement. The allowance
for loan losses (see subsequent section) provides for this risk and is reviewed
periodically for adequacy. This review also considers concentrations of loans
in terms of geography, business type or level of risk.  While lending is
geographically diversified within the service area, the Company does have some
concentration of loans in the area of agriculture (primarily poultry farming),
timber and related industries.  Management recognizes these concentrations and
considers them when structuring its loan portfolio. As of March 31, 2002,
management is not aware of any significant potential problem loans in which the
debtor is currently meeting their obligations as stated in the loan agreement
but which may change in future periods.


<PAGE> 11

Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operations (Continued)


Allowance for Loan Losses

     Management evaluates the loan portfolio in light of national and local
economic conditions, changes in the nature of the portfolio and industry
standards. The Company's loan classification system, which rates existing loans,
provides the basis for adjusting the allowance for loan losses. Management
reviews these classification  totals, along with internally generated loan
review reports, past due reports, historical loan loss experience and
individual borrower's financial health to determine the necessary amount to
be provided in the allowance for loan losses. Management evaluates nonperforming
loans relative to their collateral value and makes the appropriate adjustments
to the allowance when needed.

     The provision for credit losses and changes in the allowance for credit
losses are shown below (in thousands of dollars).

                                                          Quarter Ended
                                                             March 31,
                                                          2002     2001
                                                        -------- --------

    Balance, beginning of period                         $ 1,602  $ 1,493
    Net charge-offs (recoveries)
      Charge-offs                                           (122)    (104)
      Recoveries                                              23       86
                                                          ------   ------

    Total net charge-offs *                                  (99)     (18)
    Provision for credit losses                              120      120
                                                          ------   ------

      Balance, End of Period                             $ 1,623  $ 1,595
                                                          ======   ======

   * Components of net charge-offs:
      Real estate                                        $    (8) $
      Commercial                                             (16)      (8)
      Consumer                                               (75)     (10)
                                                          -------  ------

      Total                                              $   (99) $   (18)
                                                          =======  ======

    The allowance for credit losses of $1,623,000 at March 31, 2002, was up
$21,000 from its level at December 31, 2001. The increase was due to net loan
growth in the first quarter. The allowance was equal to .77% and .78% of total
loans outstanding at March 31, 2002 and December 31, 2001, respectively. The
Company believes that its allowance must be viewed in its entirety and,
therefore, is available for potential credit losses in its entire portfolio,
including loans, credit-related commitments and other financial instruments. In
the opinion of management, the allowance, when taken as a whole, is adequate to
absorb reasonably estimated credit losses inherent in the Company's portfolio.


<PAGE> 12

Item 2. Management's  Discussion  and Analysis of Financial  Condition  and
        Results of Operations (Continued)


Allowance for Loan Losses (Continued)

     The following table shows the allocation of loans in the loan portfolio and
the corresponding amounts of the allowance allocated by loan types as of March
31, 2002 and December 31, 2001:

<TABLE>

<CAPTION>
                           March 31, 2002                        December 31, 2001
                           --------------                        -----------------
   Loan          Allowance  Percentage Percentage of     Allowance  Percentage  Percentage of
   Type         Allocation of Allowance Total Loans     Allocation of Allowance Total Loans

<S>               <C>         <C>         <C>              <C>        <C>          <C>
Commercial        $  538       33%         20%             $  486      30%          21%
Mortgage             624       39%         58%                576      36%          56%
Consumer             461       28%         22%                450      28%          23%
Unallocated                      %           %                 90       6%            %
                   -----      ----       ----               -----     ---          ---

   Totals         $1,623      100%        100%             $1,602     100%         100%
                   =====      ===        ====               =====     ===          ===

</TABLE>

     Until recently, the allowance allocation weighted toward commercial loans
due to its sensitivity to economic conditions. During 2001 the adoption of FFIEC
guidelines SAB 102 placed more weight of the allowance toward the higher balance
makeup of the portfolio in combination with specific allocations toward impaired
loans. As a result, a shift of weighted allowance has gone to mortgage loans
which carry 58% of the balances and 39% of the allocation as the highest
category currently.

     Commercial loans carry the largest percentage of the allowance as these
loans tend to be more sensitive to changes in economic conditions and generally
show losses earlier than consumer and mortgage lending. Mortgage lending carries
a lower percentage of the allowance as losses on these types of loans have shown
a lower loss rate in previous periods and tend to be well collateralized.
Consumer and credit card losses tend to have a loss rate that is reflective both
of the current economy and the levels of collateral required by the lender and
have been a moderate source of losses in prior periods.

Securities

     The Company's securities portfolio serves several purposes. Portions of the
portfolio secure certain public and trust deposits while the remaining portions
are held as investments or used to assist the Company in liquidity and asset
liability management. Total securities and other investments at March 31, 2002
were $32,102,000 compared to $31,855,000 at December 31, 2001. Total securities
and other investments as a percentage of total assets were 11.45% at March 31,
2002 compared to 11.51% at December 31, 2001. The modest increase in security
investments is due to overall asset growth.


<PAGE> 13

Item 2. Management's  Discussion  and Analysis of Financial  Condition  and
        Results of Operations (Continued)

Securities (Continued)

     The securities portfolio consists of three components, specifically,
securities held to maturity,  securities  available for sale and other
investments. Securities are classified as held to maturity when management has
the intent and the Company has the ability at the time of purchase to hold the
securities to maturity. Held to maturity securities are carried at cost,
adjusted for amortization of premiums and accretion of discounts. Securities to
be held for indefinite periods of time are classified as available for sale and
accounted for at market value. Securities available for sale include securities
that may be sold in response to changes in market interest rates, changes in the
security's prepayment risk, increases in loan demand, general liquidity needs
and other similar factors. Other investments include restricted securities whose
ownership is required for participation in certain governmental programs. The
Company's recent purchases of all securities have generally been limited to
securities of high credit quality with short to medium term maturities. Changes
in the market values of securities available for sale, net of the deferred tax
effect, are reflected as changes in accumulated other comprehensive income. As
of March 31, 2002, the market value of the securities available for sale
exceeded their cost by $338,000 ($213,000 after tax effect).

Deposits

     The Company's main source of funds is customer deposits received from
individuals, governmental  entities,  and businesses located within the
Company's service area. Deposit accounts include demand deposits, savings, money
market and certificates of deposit.

     Total deposits increased 1.18% between December 31, 2001 and March 31,
2002, exclusively in the form of demand, savings and money market accounts. The
cost of funds for the first quarter of 2002 was 3.99% compared to 5.01% for the
same quarter in 2001. Primarily responsible for this decrease was the general
decline in interest rates throughout 2001. The majority of the Company's
deposits are time deposits which are attractive to persons seeking high yields
on their deposits but without the need for liquidity. The Company did see a
decline in time deposits as customers have been reluctant to commit deposits to
longer terms when rates are at historic lows.

Capital

     The Company seeks to maintain a strong capital base to expand facilities,
promote public  confidence,  support current  operations and grow at a
manageable level. As of March 31, 2002, the Company's total risk based capital
ratio was 15.71% which is far above the regulatory minimum of 8.0%. The leverage
ratio of total capital to total assets was 10.46% at March 31, 2002 which is in
line with the Company's peer group.

Liquidity

     Liquidity is the ability to meet present and future financial obligations
through either the sale or maturity of existing assets or the acquisition of
additional funds through liability management. Liquid assets include cash,
interest bearing deposits with banks, federal funds sold, investments and loans
maturing within one year. The Company's ability to obtain deposits and purchase
funds at favorable rates determines its liability liquidity. As a result of the
Company's management of liquid assets and the ability to generate liquidity
through liability funding, management believes that the Company maintains
overall liquidity sufficient to satisfy its depositors' requirements and meet
its customers' credit needs.


<PAGE> 14

Item 2. Management's  Discussion  and Analysis of Financial  Condition  and
        Results of Operations (Continued)

Liquidity (Continued)

     Additional sources of liquidity available to the Company include, but are
not limited to, loan repayments, the ability to obtain deposits through the
adjustment of interest rates and the purchasing of federal funds. To further
meet its liquidity needs, the Company also maintains lines of credit with
correspondent financial  institutions  and the Federal Reserve Bank of
Richmond. Both subsidiary banks have lines of credit with the Federal Home Loan
Bank of Pittsburgh although utilization has been limited. In the past, growths
in deposits and proceeds from the maturity of investment securities have been
sufficient to fund the net increase in loans.

Interest Rate Sensitivity

     In conjunction with maintaining a satisfactory level of liquidity,
management must also control the degree of interest rate risk assumed on the
balance sheet.  Managing this risk involves regular  monitoring of the
interest sensitive assets relative to interest sensitive liabilities over
specific time intervals.

     At March 31, 2002 the Company had a slightly negative gap position through
the first twelve months.  With the largest amount of interest sensitive
assets and liabilities repricing within three years, the Company monitors these
areas very closely. Early withdrawal of deposits, prepayments of loans and loan
delinquencies are some of the factors that could affect actual versus expected
cash flows. In addition, changes in rates on interest sensitive assets and
liabilities may not be equal, which could result in a change in net interest
margin. While the Company does not match each of its interest sensitive assets
against specific interest sensitive liabilities, it does review its positions
regularly and takes necessary actions to correct when necessary.

Securities and Exchange Commission Web Site

     The Securities and Exchange Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission, including Highlands
Bankshares, Inc., and the address is (http://www.sec.gov).


<PAGE> 15
TABLE I

                           HIGHLANDS BANKSHARES, INC.
                          NET INTEREST MARGIN ANALYSIS
                          (Dollar Amounts in Thousands)


                          Three Months Ended          Three Months Ended
                            March 31, 2002              March 31, 2001
                         --------------------        --------------------

                      Average   Income/          Average   Income/
                      Balance2  Expense  Rates   Balance2  Expense    Rates


Interest Income
   Loans
     Commercial       $11,428  $   235    8.23%   $12,246   $  233     7.61%
     Consumer          54,577    1,569   11.50     51,927    1,683    12.96
     Real estate      139,802    2,475    7.08    127,175    2,457     7.73
                      -------  ------   -----    -------    -----   ------

   Total Loans        205,807    4,279    8.31    191,348    4,373     9.14

   Federal funds sold  13,012       54    1.66     10,321      132     5.12
   Interest bearing
     deposits           5,348       33    2.47      5,377       59     4.39
   Investments
     Taxable           26,408      319    4.83     21,937      355     6.47
     Tax exempt 1       5,101       82    6.43      3,116       59     7.57
                        -----    ------   -----     ------    -----   -----

   Total Earning
     Assets 1         255,676    4,767    7.46    232,099    4,978     8.58
                      -------   ------   -----    -------    -----   ------

Interest Expense
   Demand deposits     29,397       48     .65     29,494      175     2.34
   Savings             27,697      147    2.12     23,835      163     2.74
   Time deposits      154,520    1,908    4.94    142,106    2,104     5.93
   Other borrowed
     money              4,467       53    4.75      3,947       57     5.78
                      -------    ------   -----     ------    -----   ------

   Total Interest
     Bearing
     Liabilities     $216,081    2,156    3.99   $199,382    2,499     5.01
                      =======   ------   -----    =======    -----   ------

   Net Interest Margin         $ 2,611                      $2,479
                                ======                       =====

   Net Yield on Interest
     Earning Assets 1                     4.08%                        4.27%
                                         ======                      ======

   1 Yields are on a taxable equivalent basis.
   2 Includes loans in nonaccrual status.


<PAGE> 16
TABLE II

                           HIGHLANDS BANKSHARES, INC.
                       INTEREST RATE SENSITIVITY ANALYSIS
                                 MARCH 31, 2002
                            (In Thousands of Dollars)



                                                          More than
                                                           5 Years
                        1 - 90  91 - 365  1 to 3  3 to 5  or Without
                         Days     Days     Years   Years   Maturity  Total
EARNINGS ASSETS

   Loans               $29,161  $92,008  $54,537  $24,467  $ 9,426  $209,599
   Fed funds sold       12,877                                        12,877
   Securities            1,578    5,025   16,307    2,304    6,888    32,102
   Time deposits in
     other banks         5,123      200      100                       5,423
                         -----   ------   ------   ------   ------    ------

   Total                48,739   97,233   70,944   26,771   16,314   260,001
                        ------   ------   ------   ------   ------   -------



INTEREST BEARING LIABILITIES

   Transaction accounts 19,276                                       19,276
   Money market savings 12,345                                       12,345
   Savings accounts     28,950                                       28,950
   Time deposits more
     than $100,000      12,278   17,865   11,835    2,116            44,094
   Time deposits less
     than $100,000      23,112   50,339   28,713    6,467           108,631
   Other borrowed money    125      308    1,323      705    1,940    4,401
                         -----   ------   ------   ------   ------   ------

   Total                96,086   68,512   41,871    9,288    1,940   217,697
                         ------  ------   ------   ------   ------   -------


Rate sensitivity GAP   (47,347)  28,721   29,073   17,483   14,374    42,304

Cumulative GAP         (47,347)          (18,626)  10,447   27,930    42,304

Ratio of cummulative
   interest sensitive assets
   to cummulative interest
   sensitive liabilities  50.72%   88.68%  105.06% 112.95%  119.43%


Assumes all transaction, money market and savings deposit accounts reprice
within 90 days.


<PAGE> 17

Part II Other Information


Item 1. Legal Proceedings -               Not Applicable

Item 2. Changes in Securities -           Not Applicable

Item 3. Defaults Upon Senior Securities - Not Applicable

Item 4. Submission of Matters to a Vote
        of Security Holders -             Not Applicable

Item 5. Other Information -               Not Applicable

Item 6. Exhibits and Reports on 8-K -  (a)Exhibits
                                          --------

                                        3 (i)  Articles of Incorporation of
                                               Highlands Bankshares, Inc. are
                                               incorporated by reference to
                                               Appendix C  to  Highlands
                                               Bankshares, Inc.'s Form S-4 filed
                                               October  20, 1986; amended on
                                               December 8, 1997 and
                                               incorporated in 1997 Form 10-KSB.

                                        3 (ii) Bylaws       of       Highlands
                                               Bankshares,       Inc.      are
                                               incorporated  by  reference  to
                                               Appendix    D    to    Highland
                                               Bankshares,   Inc.'s  Form  S-4
                                               filed    October   20,    1986;
                                               amended  on  December  8,  1997
                                               and  incorporated  in 1997 Form
                                               10-KSB.

                                       (b)     Reports   on  Form  8-K  filed
                                               during the three  months ended
                                               March 31, 2002

                                               None


<PAGE> 18

                                    Signature


    Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                       HIGHLANDS BANKSHARES, INC.



                                       /s/ LESLIE A. BARR
                                       --------------------------
                                       Leslie A. Barr
                                       President


                                       /s/ ALAN L. BRILL
                                       --------------------------
                                       Alan L. Brill
                                       Secretary


May 14, 2002