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

                                  FORM 10-QSB


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


For the quarter ended                         Commission File No.   0-16761  
  March 31, 1998

                          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, 1998 
Common Stock, par value - $5                                501,898 shares


<PAGE> 1




                          HIGHLANDS BANKSHARES, INC.


                                     INDEX


                                                                       Page

PART I   FINANCIAL INFORMATION

Item 1.  Financial Statements

         Consolidated Statements of Income - Three Months
         Ended March 31, 1998 and 1997                                   2

         Consolidated Balance Sheets - March 31, 1998 and
         December 31, 1997                                               3

         Consolidated Statements of Cash Flows - Three
         Months Ended March 31, 1998 and 1997                            4

         Consolidated Statements of Changes in Stockholders'
         Equity - Three Months Ended March 31, 1998 and 1997             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                                                     19



<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,
                                                          1998        1997  
Interest Income
   Interest and fees on loans                           $  3,157    $ 2,935
   Interest on federal funds sold                             90         45
   Interest on time deposits                                  10         10
   Interest and dividends on investment securities
     Taxable                                                 529        591
     Nontaxable                                               44         49

   Total Interest Income                                   3,830      3,630

Interest Expense
   Interest on time deposits over $100,000                   351        322
   Interest on other deposits                              1,531      1,436
   Interest on borrowed money                                  3         12

   Total Interest Expense                                  1,885      1,770

Net Interest Income                                        1,945      1,860

Provision for Loan Losses                                     60         45

Net Interest Income After Loan Losses                      1,885      1,815

Noninterest Income
   Service charges                                            74         71
   Other                                                      90         76
   Income on security transactions                                        5

   Total Noninterest Income                                  164        152

Noninterest Expense
   Salaries and employee benefits                            718        691
   Occupancy expense                                          67         61
   Equipment expense                                         110        113
   Data processing                                           110        108
   Other                                                     312        284

   Total Noninterest Expense                               1,317      1,257

Income Before Income Taxes                                   732        710

Provision for Income Taxes                                   235        230

Net Income                                              $    497    $   480

Per Share Data

   Net Income                                           $   .99     $   .94

   Cash Dividends                                       $   .27     $   .25

Weighted Average Common Shares Outstanding              501,898     511,633


       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,
                                                        1998         1997  
     ASSETS

Cash and due from banks - interest bearing            $  3,823    $  3,246
Time deposits in other banks                               864         827
Federal funds sold                                       6,524       6,895
Securities held to maturity (note 2)                     4,426       4,577
Securities available for sale (note 3)                  30,401      31,683
Other investments                                        2,801         715
Loans, net of unearned interest (note 5)               140,682     137,105
   Less allowance for loan losses (note 6)              (1,320)     (1,370)

   Net Loans                                           139,362     135,735

Bank premises and equipment                              4,696       4,773
Interest receivable                                      1,560       1,548
Deferred income tax benefits                               167         165
Other assets                                               628         606

   Total Assets                                       $195,252    $190,770

     LIABILITIES

Deposits:
   Noninterest bearing
     Demand deposits                                  $ 16,071    $ 15,952
   Interest bearing
     Money market and checking                          16,916      15,774
     Money market savings                               12,686      12,179
     Savings                                            19,991      19,389
     Time deposits over $100,000                        23,286      23,328
     All other time deposits                            82,768      81,314

   Total Deposits                                      171,718     167,936

Borrowed money                                             252         226
Accrued expenses and other liabilities                   1,627       1,311

   Total Liabilities                                   173,597     169,473

   STOCKHOLDERS' EQUITY

Common stock ($5 par value, 1,000,000 shares
   authorized, 546,764 shares issued)                    2,734       2,734
Surplus                                                              1,662
1,662
Retained earnings                                       18,216      17,854
Net unrealized gain on securities available for sale        36          40

                                                        22,648      22,290
Treasury stock (at cost, 44,866 shares in 1998 
   and 1997)                                              (993)       (993)

   Total Stockholders' Equity                           21,655      21,297

   Total Liabilities and Stockholders' Equity         $195,252    $190,770


       The accompanying notes are an integral part of these statements.


<PAGE> 4


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

                                                         Three Months Ended
                                                              March 31,
                                                          1998        1997  
Cash Flows from Operating Activities:
   Net income                                           $    497    $   480
   Adjustments to reconcile net income to net
     cash provided by operating activities:
       Income on securities transactions                                 (5)
       Depreciation                                           95         95
       Net amortization                                        1          1
       Provision for loan losses                              60         45
       Increase in interest receivable                       (12)      (159)
       (Increase) decrease in other assets                   (24)        44
       Increase in accrued expenses                          316        220

   Net Cash Provided by Operating Activities                 933        721

Cash Flows from Investing Activities:
   Proceeds from maturities of securities 
     available for sale                                    1,964      1,282
   Proceeds from maturities of securities 
     held to maturity                                        146        827
   Purchase of securities available for sale                (684)
   Purchase of other investments                          (2,085)       (76)
   Net change in time deposits in other banks                (37)        77
   Net change in loans                                    (3,687)    (3,701)
   Purchase of property and equipment                        (18)      (224)
   Net change in federal funds sold                          371       (506)

   Net Cash Consumed by Investing Activities              (4,030)    (2,321)

Cash Flows from Financing Activities:
   Purchase of treasury stock                                          (499)
   Net increase in deposits                                3,782      1,230
   Dividends paid in cash                                   (135)      (129)
   Other borrowed money                                       32      1,500
   Repayment of borrowed money                                (5)        (5)

   Net Cash Provided by Financing Activities               3,674      2,097

Net Increase in Cash and Cash Equivalents                    577        497

Cash and Cash Equivalents, Beginning of Period             3,246      3,195

Cash and Cash Equivalents, End of Period                $  3,823    $ 3,692

Supplemental Disclosures:
   Cash Paid For:
     Income taxes                                       $      2    $     2
     Interest                                              1,917      1,818

       The accompanying notes are an integral part of these statements.


<PAGE> 5
<TABLE>


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

<CAPTION>

                                                                              Accumulated
                                                                                Other
                                     Treasury    Common            Retained  Comprehensive
                                       Stock      Stock    Surplus Earnings  Income (Loss)    Total

<S>                                  <C>       <C>        <C>      <C>       <C>           <C>

Balances, December 31, 1996          $  (494)  $   2,734  $  1,662 $  16,478 $    (151)    $ 20,229
   Comprehensive Income
   Net income                                                            480                    480
   Net change in unrealized
     depreciation on investment
     securities available for sale,
     net of taxes                                                                 (169)        (169)

   Total Comprehensive Income                                            480      (169)         311
   Purchase of treasury stock           (499)                                                  (499)
   Dividends paid                                                       (129)                  (129)

   Balances, March 31, 1997          $  (993) $   2,734   $  1,662 $  16,829   $  (320)     $19,912



                                                                              Accumulated
                                                                                Other
                                     Treasury    Common            Retained  Comprehensive
                                       Stock      Stock    Surplus Earnings  Income (Loss)    Total




Balances, December 31, 1997          $  (993) $   2,734   $  1,662 $  17,854   $    40      $21,297
   Comprehensive Income
   Net income                                                            497                    497
   Net change in unrealized
     depreciation on investment
     securities available for
     sale, net of taxes                                                             (4)          (4)

   Total Comprehensive Income                                            497        (4)         493
   Dividends paid                                                       (135)                  (135)

   Balances, March 31, 1998          $  (993) $   2,734   $  1,662 $  18,216    $   36      $21,655


       The accompanying notes are an integral part of these statements.

</TABLE>

<PAGE> 6


                          HIGHLANDS BANKSHARES, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1    ACCOUNTING PRINCIPLES:

             The  consolidated  financial  statements  conform  to  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,  1998,  and the  results  of  operations  for the  three  month
          periods ended March 31, 1998 and 1997.  The notes  included  herein
          should  be  read  in  conjunction   with  the  notes  to  financial
          statements  included in the 1997 annual report to  stockholders  of
          Highlands Bankshares, Inc.


NOTE 2    SECURITIES HELD TO MATURITY:

             The  amortized  cost  and  fair  value  of  securities  held  to
          maturity  as of  March  31,  1998 and  December  31,  1997,  are as
          follows:

                                                1998                 1997      
                                          Carrying  Fair      Carrying    Fair
                                           Amount   Value      Amount     Value

          US Treasury securities and
            obligations of US Government
            corporations and agencies    $  1,277 $  1,281   $  1,282  $  1,287
          Obligations of states and
            political subdivisions          3,149    3,239      3,295     3,390
 
            Total                        $  4,426 $  4,520   $  4,577  $  4,677


NOTE 3    SECURITIES AVAILABLE FOR SALE:

             The amortized  cost and fair value of  securities  available for
          sale as of March 31, 1998 and December 31, 1997 are as follows:

                                                1998                 1997      
                                          Carrying  Fair      Carrying    Fair
                                           Amount   Value      Amount     Value

          US Treasury securities and
            obligations of US Government
            corporations and agencies    $ 29,614 $ 29,738   $ 30,889  $ 31,014
          Obligations of states and
            political subdivisions            100      101        100       101
          Other investments                   630      562        630       568
 
            Total                        $ 30,344 $ 30,401   $ 31,619  $ 31,683


<PAGE> 7


                          HIGHLANDS BANKSHARES, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 4    OTHER INVESTMENTS:

          Other   investments   consist  of  two  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  this   investment  is  $2,086,000.   Other   investments
          totaling  $715,000  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,  1998  and
          December 31, 1997, is as follows:

                                                        1998         1997

          Commercial                                  $ 32,061    $ 30,717
          Real estate - construction                     2,839       2,189
                      - mortgages                       76,283      75,221
          Consumer installment                          31,495      31,492

            Total                                      142,678     139,619
          Unearned interest                             (1,996)     (2,514)

            Net loans outstanding                     $140,682    $137,105


NOTE 6    ALLOWANCE FOR LOAN LOSSES:

             A summary of  transactions  in the allowance for loan losses for
          the three months ended March 31, 1998 and 1997, follows:

                                                        1998         1997

          Balance, beginning of period                $  1,370    $  1,257
          Provisions charged to operating expenses          60          45
          Loan recoveries                                   23          45
          Loan charge-offs                                (133)        (60)

            Balance, end of period                    $  1,320    $  1,287



<PAGE> 8



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


Overview

    The  Company's  net income was $497,000 in the first  quarter of 1998, an
increase  of 3.54%  compared  to the  first  quarter  of 1997.  Earnings  per
share  were $.99 for the first  quarter  of 1998  compared  to $.94 per share
for the same quarter in 1997 (a 5.32%  increase).  The  Company's  annualized
return on average  equity was 9.26% in the first  quarter of 1998 compared to
9.54% for the first quarter of 1997.  Return on average  assets was 1.04% for
1998 and 1.06% for 1997.

    The  increase  in  earnings  per share for the first  quarter  was due to
moderate  increases in net interest income and noninterest  income.  Both are
reflective  of growth in assets and deposits  within the last twelve months -
a  6.03%  increase  in  interest  earning  assets  and a  8.35%  increase  in
deposits and other borrowed  money.  Net interest  income on a tax equivalent
basis  increased  4.34% due to increased  volume of loans  outstanding  and a
declining  cost of funds in time  deposits.  The  provision  for loan  losses
increased  slightly  due to a  higher  volume  of  loans  outstanding.  Other
noninterest  expenses increased 4.77%,  mainly the result of the opening of a
new branch of the Capon Valley Bank in Baker, West Virginia.

Net Interest Income

    The Company's net interest income on a tax equivalent  basis was 4.34% in
the first  quarter of 1998  compared to 4.41% for the first  quarter of 1997.
Commercial   rates  fell  from  8.97%  in  1997  to  8.70%  in  1998  due  to
competition  for loans in existing  and  expanding  markets.  Due to a strong
economy,  average commercial loans outstanding  increased 19.35% in the first
quarter of 1998  compared  to the first  quarter of 1997.  Rates on  consumer
loans declined  thirty-six basis points as volume increases  mirrored overall
loan growth  resulting  in a net rise in income.  Rates on real estate  loans
declined  fourteen basis points due to  competition  in the secondary  market
and changes in overall  market  conditions.  A 6.69% increase in average real
estate loans  outstanding  for the 1998 quarter  helped  increase real estate
income.  The  overall  decline of nineteen  basis  points in returns on loans
outstanding  was more than  offset by  declines in the rates paid on deposits
and borrowed money (see below) and volume increases.

    The Company  saw an overall  increase  of  nineteen  basis  points in the
yields on investment  securities  compared to 1997  results.  The increase is
reflective  of higher  rates on taxable  investments  and stems  mainly  from
reinvestments at increased rates.  Total  investments in securities  declined
in  the  first  quarter  of  1998  as  maturities  were  used  to  fund  loan
increases.  Interest  rates  on  federal  funds  sold  and  interest  bearing
deposits  increased  28 basis points as rates in the overall  market  hovered
between  5.50% and 5.75%  within the  quarter.  The  increase  in the average
balance of federal  funds  outstanding  reflects the increase in deposits,  a
flat yield curve and the Company's desire to increase liquidity.


<PAGE> 9



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


Net Interest Income (Continued)

    Interest  rates paid on  transaction  and  savings  amounts  increased  a
combined  five basis  points  due to higher  than  average  rates paid by the
local   competition.   The  rate   paid  on  these   deposit   accounts   has
traditionally  been higher than larger  institutions  within the state.  With
market  rates  quite  low  on  transaction  accounts,  customers  have  moved
additional   savings  to  instruments   yielding  higher  rates,   i.e.  time
deposits.  The average  balance in time  deposits grew 9.68% in 1998 compared
to 1997 and was a major  source  of  funding  for the loan  growth  discussed
earlier.  A nine  basis  point drop in rates paid on  deposits  between  1997
and 1998 reflects older  certificates  maturing and renewing at rates in line
with current market conditions.

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

Noninterest Income

    Noninterest  income  increased  7.89%  during  the first  quarter of 1998
compared  to the  same  quarter  in 1997.  The  increase  was due to  greater
income  from  service  charges on  transaction  accounts  and loan  servicing
income.  The  increase  was  in  line  with  asset  growth  and  management's
expectations.

Noninterest Expenses

    Overall  noninterest  expenses  rose 4.77% for the first  quarter of 1998
when  compared to the first  quarter of 1997.  Personnel  expenses  increased
3.91% in the  first  quarter  of 1998  over the same  quarter  in 1997 due to
merit and  inflationary  increases.  Occupancy  and  equipment  expense  rose
1.72%  while  data  processing  expenses  rose  1.85%  between  the  periods.
Increased costs for advertising,  ATM services,  stationery and communication
services  resulted in other  noninterest  expenses  increasing  9.86% in 1998
compared to 1997. The overall  increase in  noninterest  expense of 4.77% was
in line with management's expectations.

    Most  branch  operations  take one to three  years to become  profitable.
Management  believes  the  Keyser  location  will  provide  loan and  deposit
growth  immediately  and  will  attain  profitability  within  two  to  three
years.  The Baker  location,  which  opened in April  1997,  is located in an
area  with  good   potential   growth.   The   estimate  of  time  to  attain
profitability  at this location is two to four years.  Costs  incurred  prior
to  profitability  are viewed as a part of the  investment  in this  location
and are accepted as part of the costs incurred for long-term growth.

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,  Mineral  and
northern  Pendleton   counties.   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.


<PAGE> 10


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


Loan Portfolio (Continued)

    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.

    Loans outstanding  increased  $3,577,000 or 2.61% in the first quarter in
1998  compared to levels at December  31,  1997.  A 6.06% rise in  commercial
and  construction  loans was primarily  responsible for the increase.  Modest
gains in consumer and mortgage  lending  were also  experienced.  The loan to
deposit  ratio was 81.93% at March 31,  1998  compared  to 81.64% at December
31,  1997.  Loan  demand  is  expected  to  remain  satisfactory  in the near
future barring any credit tightening by the Federal Reserve.

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  $70,000  at March 31,  1998  compared  to zero  nonaccrual  loans at
December 31, 1997.

    Real estate acquired  through  foreclosure was $214,000 at March 31, 1998
compared to $174,000 at December 31, 1997.  All  foreclosed  property held at
March 31, 1998 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,  1998,  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  changes,  changes  in the  nature  and value 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,      
                                                          1998         1997  

    Balance, beginning of period                        $ 1,370      $ 1,257
    Net charge-offs (recoveries)
      Charge-offs                                          (133)         (60)
      Recoveries                                             23           45

    Total net charge-offs *                                (110)         (15)
    Provision for credit losses                              60           45

      Balance, End of Period                            $ 1,320      $ 1,287

   * Components of net charge-offs:
      Real estate - mortgages                                             12
      Commercial                                           (103)
      Installment                                            (7)         (27)

      Total                                             $  (110)     $   (15)

    The allowance  for credit  losses of  $1,320,000  at March 31, 1998,  was
down $50,000  from its level at December  31, 1997.  The decline was due to a
couple of large  credit  losses  charged to the reserve in the first  quarter
of  1998.  The  allowance  was  equal  to  .94%  and  1.00%  of  total  loans
outstanding  at March 31,  1998 and  December  31,  1997,  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)


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, 1998 were  $37,628,000  compared to  $36,975,000 at
December 31,  1997.  Total  securities  and other  investments  as percent of
total  assets were  19.27% at March 31,  1998  compared to 19.38% at December
31, 1997.  The slight  increase in  securities  is in line with general asset
growth.

     The securities  portfolio consists of three components,  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  consist of investments in insurance  products which are designed
to  provide  a rate of  return  similar  to one  year  Treasury  obligations.
These  products  may  provide  additional  employee  benefits  based on their
annualized   performance.   Other   investments   also   include   restricted
securities   whose   ownership   is  required  to   participate   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 are reflected as changes in stockholders'  equity,  net of
the deferred tax effect.  As of March 31,  1998,  the cost of the  securities
available  for sale  exceeded  their market value by $57,000  ($36,000  after
tax considerations).

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 2.25% between  December 31, 1997 and March 31,
1998.  The cost of funds for the  first  quarter  of 1998 was 4.90%  compared
to 4.99%  for the  same  quarter  in  1997.  With  the  exception  of  demand
deposits,  the yields on all types of  deposits  declined  within the period.
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  has not  actively  pursued  deposits  in
excess of $100,000 due to the volatile nature of these relationships.

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,  1998,  the  Company's  total  risk
based capital ratio was 18.20% which is far above the  regulatory  minimum of
8.0%.  The ratio of total  capital  to total  assets  was 11.09% at March 31,
1998 which exceeds that of the Company's peers.


<PAGE> 13

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


Capital (Continued)

     In the first quarter of 1997, the Company  repurchased  12,168 shares of
common  stock at a cost of $499,000.  This  repurchase  reduced  total shares
outstanding by 2.37% and will be used for future corporate needs.

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.

     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 quite
limited.  In the past,  growth 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,  1998 the  Company  had a  negative  gap  position.  This
liability  sensitive position typically produces an unfavorable  contribution
to earnings  during a period of  increasing  rates.  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 actions to reposition itself when necessary.


<PAGE> 14

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


Effects of Inflation

     Inflation  significantly  affects  industries having high proportions of
property,  plant and  equipment or high levels of  inventories.  Although the
Company is not  significantly  affected in these areas,  inflation  does have
an impact on the  growth  of  assets.  As assets  grow  rapidly,  it  becomes
necessary  to increase  equity  capital at  proportionate  levels to maintain
the  appropriate  equity  to  asset  ratios.  Traditionally,   the  Company's
earnings and high capital  retention  levels have enabled the Company to meet
these needs.

     The  Company's   reported   earnings   results  have  been  affected  by
inflation,  but  isolating the effect is  difficult.  The different  types of
income  and  expense  are  affected  in  various  ways.  Interest  rates  are
affected by  inflation,  but the timing and  magnitude of the changes may not
coincide  with  changes in the  consumer  price  index.  Management  actively
monitors  interest  rate  sensitivity,  as  illustrated  by the Gap  Analysis
(Table II, page 16) in order to minimize the effects of  inflationary  trends
on interest rates.  Other areas of noninterest  expenses may be more directly
affected by inflation.

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 1
<TABLE>

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

<CAPTION>
                                   Three Months Ended               Three Months Ended
                                     March 31, 1998                   March 31, 1997   

                                Average     Income/             Average     Income/
                                Balance 2   Expense   Rates     Balance 2   Expense    Rates

<S>                            <C>          <C>       <C>      <C>        <C>         <C>

Interest Income
   Loans
     Commercial                $ 31,043     $   675    8.70%   $ 26,009   $    583     8.97%
     Consumer                    29,097         806   11.08      26,423        756    11.44
     Real estate                 78,281       1,676    8.56      73,404      1,596     8.70

   Total Loans                  138,421       3,157    9.12     125,836      2,935     9.33

   Federal funds sold             6,429          90    5.60       3,384         45     5.32
   Interest bearing deposits        819          10    4.88         806         10     4.96
   Investments
     Taxable                     32,758         529    6.46      37,728        591     6.27
     Tax exempt 1                 3,348          70    8.36       3,691         78     8.45

   Total Earning Assets 1       181,775       3,856    8.49     171,445      3,659     8.54

Interest Expense
   Demand deposits               28,161         201    2.85      26,399        182     2.76
   Savings                       19,464         168    3.45      18,141        158     3.48
   Time deposits                105,967       1,513    5.71      96,616      1,418     5.87
   Other borrowed money             237           3    5.06         822         12     5.84

   Total Interest
     Bearing Liabilities       $153,829       1,885    4.90    $141,978      1,770     4.99

   Net Interest Margin                      $ 1,971                       $  1,889

   Net Yield on Interest Earning Assets 1              4.34%                           4.41%



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

</TABLE>


<PAGE> 16
TABLE II
<TABLE>

                                      HIGHLANDS BANKSHARES, INC.
                                  INTEREST RATE SENSITIVITY ANALYSIS
                                            MARCH 31, 1998
                                       (In Thousands of Dollars)


<CAPTION>

                                                                   More than
                                                                    5 Years
                                1 - 90  91 - 365  1 to 3   3 to 5  or Without
                                 Days     Days     Years    Years   Maturity     Total
<S>                            <C>      <C>      <C>      <C>       <C>        <C>

EARNINGS ASSETS

   Loans                       $22,828  $49,581  $48,401  $11,612   $ 8,260    $140,682
   Fed funds sold                6,524                                            6,524
   Securities                    6,634    6,741   16,029    3,465     4,759      37,628
   Interest bearing time
     deposits                      264      600                                     864

   Total                        36,250   56,922   64,430   15,077    13,019     185,698



INTEREST BEARING LIABILITIES

   Transaction accounts         16,916                                           16,916
   Money market savings         12,686                                           12,686
   Savings accounts             19,991                                           19,991
   Time deposits more
     than $100,000               4,450    9,393    7,404    2,039                23,286
   Time deposits less
     than $100,000              14,557   37,595   25,493    4,759       364      82,768
   Other borrowed money              6       18       52       58       118         252

   Total                        68,606   47,006   32,949    6,856       482     155,899


Rate sensitivity GAP           (32,356)   9,916   31,481    8,221    12,537      29,799

Cumulative GAP                 (32,356) (22,440)   9,041   17,262    29,799

Ratio of cummulative
   interest sensitive assets
   to cummulative interest
   sensitive liabilities         52.83%   80.59%  106.09%  111.11%   119.11%



Assumes all  transaction,  money market and savings deposit  accounts reprice
within 90 days.
</TABLE>


<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.

                                        27     Financial     Data    Schedule
                                               attached.

                                    (b) Reports  on  Form  8-K  filed  during
                                        the  three  months  ended  March  31,
                                        1998

                                        None


<PAGE> 18


                                 EXHIBIT INDEX



Exhibit
 Index                                                              Page Number

  27   Financial Data Schedule for the quarter ending March 31, 1998    20


<PAGE> 19


                                   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.



                                       LESLIE A. BARR                  
                                       Leslie A. Barr
                                       President


                                       CLARENCE E. PORTER               
                                       Clarence E. Porter
                                       Secretary/Treasurer



Date   May 13, 1998