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

                                    FORM 10-Q

(Mark One)

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

[ ]  Transition  Report  Pursuant  to  Section  13 or 15(d) of the  Securities
Exchange Act of 1934


For the quarterly period ended June 30, 2003

Commission File No.   0-16761
                    -----------


                          HIGHLANDS BANKSHARES, INC.
                  (Exact name of registrant as specified in its charter)

           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 ....

      Indicate by check mark whether the issuer is an accelerated filer (as
defined in Rule 12b-2 of the Act). [ ___ ]

    State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. As of July 31, 2003: 1,436,874
shares of Common Stock, $5 Par Value.


<PAGE> 1


                           HIGHLANDS BANKSHARES, INC.


                                      INDEX


PART I    FINANCIAL INFORMATION

Item 1.   Financial Statements

          Unaudited Consolidated Statements of Income - Six Months
          Ended June 30, 2003 and 2002                                    2

          Unaudited Consolidated Statements of Income - Three Months
          Ended June 30, 2003 and 2002                                    3

          Unaudited Consolidated Balance Sheets - June 30, 2003 and
          December 31, 2002                                               4

          Unaudited Consolidated Statements of Changes in Stockholders'
          Equity - Six Months Ended June 30, 2003 and 2002                5

          Unaudited Consolidated Statements of Cash Flows - Six Months
          Ended June 30, 2003 and 2002                                    6

          Notes to Consolidated Financial Statements                      7

Item 2.   Management's Discussion and Analysis of
          Financial Condition and Results of Operations                   9

Item 3.   Quantitative and Qualitative Disclosures about Market Risk     24

Item 4.   Controls and Procedures                                        24


PART II   OTHER INFORMATION

Item 1.   Legal Proceedings                                              25

Item 2.   Changes in Securities                                          25

Item 3.   Defaults upon Senior Securities                                25

Item 4.   Submission of Matters to a Vote of Security Holders            25

Item 5.   Other Information                                              25

Item 6.   Exhibits and Reports on Form 8K                                25


          SIGNATURES                                                     26


<PAGE> 2


Part I  Financial Information
Item 1 Financial Statements

                           HIGHLANDS BANKSHARES, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
               (In Thousands of Dollars Except Per Share Amounts)
                                   (Unaudited)
                                                        Six Months Ended
                                                            June 30,
                                                       2003          2002
                                                    ----------    ----------
Interest Income
   Interest and fees on loans                      $     8,505   $    8,556
   Interest on federal funds sold                          123           96
   Interest on time deposits                                29           65
   Interest and dividends on investment securities
     Taxable                                               468          623
     Nontaxable                                             81          103
                                                    ----------    ---------

   Total Interest Income                                 9,206        9,443
                                                    ----------    ---------

Interest Expense
   Interest on time deposits over $100,000                 941        1,121
   Interest on other deposits                            2,376        2,863
   Interest on borrowed money                              108          103
                                                    ----------    ---------

   Total Interest Expense                                3,425        4,087
                                                    ----------    ---------

Net Interest Income                                      5,781        5,356

Provision for Loan Losses                                  755          260
                                                    ----------    ---------

Net Interest Income After Provision
   for Loan Losses                                       5,026        5,096
                                                    ----------    ---------
Noninterest Income
   Service charges                                         288          273
   Other                                                   394          291
                                                    ----------    ---------

   Total Noninterest Income                                682          564
                                                    ----------    ---------

Noninterest Expense
   Salaries and employee benefits                        2,142        2,066
   Equipment and occupancy expense                         566          517
   Data processing                                         284          286
   Other                                                   936          948
                                                    ----------    ---------

Total Noninterest Expense                                3,928        3,817
                                                    ----------    ---------

Income Before Income Taxes                               1,780        1,843

Provision for Income Taxes                                 564          581
                                                    ----------    ---------

Net Income                                         $     1,216   $    1,262
                                                    ==========    =========

Per Share Data--*

   Net Income                                      $       .85   $      .86
   Cash Dividends                                  $       .28   $      .23
Weighted Average Common Shares Outstanding           1,436,874    1,474,458


*--Prior year's per share figures restated to reflect stock split in form of
dividend in third quarter 2002.


       The accompanying notes are an integral part of these statements.


<PAGE> 3


                           HIGHLANDS BANKSHARES, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
               (In Thousands of Dollars Except Per Share Amounts)
                                   (Unaudited)
                                                        Three Months Ended
                                                             June 30,
                                                       2003           2002
                                                    ----------     ----------
Interest Income
   Interest and fees on loans                      $     4,280    $   4,277
   Interest on federal funds sold                           63           42
   Interest on time deposits                                15           32
   Interest and dividends on investment securities
     Taxable                                               234          304
     Nontaxable                                             38           51
                                                    ----------    ---------

   Total Interest Income                                 4,630        4,706
                                                    ----------    ---------

Interest Expense
   Interest on time deposits over $100,000                 456          541
   Interest on other deposits                            1,155        1,340
   Interest on borrowed money                               57           50
                                                    ----------    ---------

   Total Interest Expense                                1,668        1,931
                                                    ----------    ---------

Net Interest Income                                      2,962        2,775

Provision for Loan Losses                                  545          140
                                                    ----------    ---------

Net Interest Income After Provision
   for Loan Losses                                       2,417        2,635
                                                    ----------    ---------
Noninterest Income
   Service charges                                         150          144
   Other income                                            189          141
                                                    ----------    ---------

   Total Noninterest Income                                339          285
                                                    ----------    ---------

Noninterest Expense
   Salaries and employee benefits                        1,055        1,017
   Equipment and occupancy expense                         281          265
   Data processing expense                                 140          141
   Other                                                   477          514
                                                    ----------    ---------

   Total Noninterest Expense                             1,953        1,937
                                                    ----------    ---------

Income Before Income Taxes                                 803          983
Provision for Income Taxes                                 247          321
                                                    ----------    ---------

Net Income                                         $       556   $      662
                                                    ==========    =========

Per Share Data--*

   Net Income                                      $       .39   $      .46
   Cash Dividends                                  $       .14   $      .11
Weighted Average Common Shares Outstanding           1,436,874    1,439,970
                                                    =

*--Prior year's per share figures restated to reflect stock split in form of
dividend in third quarter 2002.


       The accompanying notes are an integral part of these statements.


<PAGE> 4


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

                                                      June 30,   December 31,
                                                        2003         2002
                                                      --------     --------
     ASSETS                                           (Unaudited) (Audited)

Cash and due from banks - noninterest bearing         $  6,982    $  8,226
Time deposits in other banks                             6,536       4,500
Federal funds sold                                      23,525      14,625
Securities held to maturity (note 2)                     1,367       1,369
Securities available for sale (note 3)                  30,441      23,496
Other investments (note 4)                                 892         672
Loans (note 5)                                         226,062     225,754
Allowance for Loan Losses (note 6)                      (2,376)     (1,793)
Bank premises and equipment                              6,724       6,873
Interest receivable                                      1,768       1,821
Investments in insurance contracts (note 7)              5,435       5,338
Other assets                                             1,589       1,466
                                                       -------     -------

   Total Assets                                       $308,945    $292,347
                                                       =======     =======

     LIABILITIES

Deposits:
   Noninterest bearing demand deposits                $ 37,048    $ 31,785
   Interest bearing
     Money market and checking                          21,329      20,936
     Money market savings                               17,405      16,996
     Savings                                            30,959      29,503
     Time deposits over $100,000                        49,067      45,392
     All other time deposits                           116,333     112,899
                                                       -------     -------

   Total Deposits                                      272,141     257,511

Borrowed money                                           4,963       4,030
Accrued expenses and other liabilities                   2,151       1,890
                                                       -------     -------

   Total Liabilities                                   279,255     263,431
                                                       -------     -------

   STOCKHOLDERS' EQUITY

Common stock ($5 par value, 3,000,000 shares
   authorized, 1,436,874 outstanding)                    7,184       7,184
Surplus                                                  1,662       1,662
Retained earnings                                       20,664      19,850
Accumulated other comprehensive income                     180         220
                                                       -------     -------


   Total Stockholders' Equity                           29,690      28,916
                                                       -------     -------

   Total Liabilities and Stockholders' Equity         $308,945    $292,347
                                                       =======     =======

       The accompanying notes are an integral part of these statements.


<PAGE> 5


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

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


Balances, December 31,

    2002             $7,184   $ 1,662   $   0     $19,850   $   220  $28,916
   Comprehensive
     Income
   Net income                                       1,216              1,216
   Net change in
     unrealized
     appreciation on
     investment
     securities
     available for
     sale, net of
     taxes                                                      (40)    (40)
                      -----    ------    ----      ------    -------  ------

   Total Comprehensive
     Income                                                            1,176

     Dividends paid                                  (402)             (402)
                      -----    ------    ----      -------   ------   ------

   Balances, June 30,
     2003            $7,184   $ 1,662   $   0     $20,664   $   180  $29,690
                      =====    ======    ====      ======    ======   ======



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

Balance, December 31,
   2001              $ 2,734   $ 1,662   $(993)   $24,624   $  283   $28,310
   Comprehensive
     Income
   Net Income                                     1,262                1,262
   Net change in
     unrealized
     appreciation on
     investment
     securities
     available for
     sale, net of
     taxes                                                      34        34
                      ------     ------    ----     ----      -----    -----

   Total Comprehensive
     Income                                                            1,296

   Treasury stock
     purchased                           (1,217)                      (1,217)
   Dividends paid                                   (364)               (364)
                      ------     ------   -----    -----     -----   -------

   Balances, June 30,
     2002            $ 2,734    $ 1,662  $(2,210) $25,522   $  317   $28,025
                      ======     ======   =======  ======    =====    ======

       The accompanying notes are an integral part of these statements.


<PAGE> 6


                           HIGHLANDS BANKSHARES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (In Thousands of Dollars)
                                   (Unaudited)
                                                          Six Months Ended
                                                              June 30,
                                                          2003        2002
                                                       ----------   --------
Cash Flows from Operating Activities:
   Net income                                           $  1,216    $ 1,262
   Adjustments to reconcile net income to net
     cash provided by operating activities:
       Depreciation                                          297        264
       Net securities amortization                           226        148
       Provision for loan losses                             755        260
       Income from insurance investments                     (97)       (88)
       Decrease (Increase) in interest receivable             53       (108)
       Increase in other assets                             (123)      (616)
       Increase in accrued expenses                          262        423
                                                         -------     ------

   Net Cash Provided by Operating Activities               2,589      1,545
                                                         -------     ------

Cash Flows from Investing Activities:
   Net change in time deposits in other banks             (2,036)       548
   Net change in federal funds sold                       (8,900)     7,495
   Proceeds from maturities of securities
     available for sale                                    8,619      4,481
   Proceeds from maturities of securities
     held to maturity                                          2         31
   Purchase of securities available for sale             (15,831)    (3,376)
   Purchase of other investments                            (220)       (67)
   Net change in loans                                      (480)   (10,659)
   Purchase of property and equipment                       (148)      (140)
                                                         --------    ------

   Net Cash Consumed by Investing Activities             (18,994)    (1,687)
                                                         --------    ------

Cash Flows from Financing Activities:
   Net change in time deposits                             7,109     (8,769)
   Net change in other deposits                            7,521     10,791
   Dividends paid in cash                                   (402)      (364)
   Purchase of treasury stock                                        (1,217)
   Additional borrowed money                               1,200
   Repayment of borrowed money                              (267)      (247)
                                                        ---------   --------


   Net Cash Provided by Financing Activities              15,161        194
                                                         -------     ------

Net Increase (Decrease) in Cash and Cash Equivalents      (1,244)        52

Cash and Cash Equivalents, Beginning of Period             8,226      6,492
                                                         -------     ------

Cash and Cash Equivalents, End of Period                $  6,982    $ 6,544
                                                         =======     ======

Supplemental Disclosures:
   Cash Paid For:
     Income taxes                                       $    608    $   430
     Interest                                              3,345      4,052

       The accompanying notes are an integral part of these statements.


<PAGE> 7


                           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 necessary to present
          fairly the financial position as of June 30, 2003 and the results of
          operations for the three month periods and six month periods ended
          June 30, 2003 and 2002.

              The notes included herein should be read in conjunction with the
          notes to financial statements included in the 2002 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 June 30, 2003 and December 31, 2002, are as follows (in thousands):

                                         2003                  2002
                                         ----                  ----
                                   Amortized   Fair      Amortized   Fair
                                     Cost      Value       Cost      Value

          Mortgage-backed
            securities              $     3  $     3      $    4   $     4
          Obligations of states and
            political subdivisions    1,364    1,463       1,365     1,447
                                     ------   ------       -----    ------

            Total                   $ 1,367  $ 1,466      $1,369   $ 1,451
                                     ======   ======       =====    ======


NOTE 3    SECURITIES AVAILABLE FOR SALE:

             The amortized cost and fair value of securities available for sale
          as of June 30, 2003 and December 31, 2002 are as follows (in
          thousands):

                                         2003                  2002
                                         ----                  ----
                                   Amortized   Fair     Amortized    Fair
                                     Cost      Value       Cost      Value

          US Treasury securities
            and obligations of US
            Government corporations
            and agencies            $15,820  $15,968      $8,844   $ 8,961
          Mortgage-backed securities  8,175    8,306       5,410     5,582
          Obligations of states and
            political subdivisions    3,773    3,867       4,238     4,350
Other investments                     2,273    2,300       4,540     4,603
                                     ------   ------       -----    ------

            Total                   $30,041  $30,441      $23,032  $23,496
                                     ======   ======       ======   ======


<PAGE> 8


                           HIGHLANDS BANKSHARES, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4    OTHER INVESTMENTS

             Other investments totaling $ 892,000 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 June 30, 2003 and December 31,
          2002, is as follows (in thousands):

                                                        2003         2002
                                                        ----         ----

          Commercial                                  $ 45,814    $ 47,089
          Real estate - construction                     6,412       6,813
                      - mortgages                      125,309     121,558
          Consumer installment                          48,564      50,351
                                                       -------     -------

            Total                                      226,099     225,811
          Unearned interest                                (37)        (57)
                                                       --------    --------

            Net loans outstanding                     $226,062    $225,754
                                                       =======     =======


NOTE 6    ALLOWANCE FOR LOAN LOSSES:

             A summary of transactions in the allowance for loan losses for the
          six months ended June 30, 2003 and 2002, follows:

                                                        2003         2002
                                                        ----         ----

          Balance, beginning of period                $  1,793    $  1,603
          Provisions charged to operating expenses         755         260
          Loan recoveries                                  121          96
          Loan charge-offs                                (293)       (236)
                                                       --------    -------

            Balance, end of period                    $  2,376    $  1,723
                                                       =======     =======


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 Company's
          average cost of funds and providing life insurance and retirement
          benefits to employees. The carrying value of these investments was
          $5,435,000 at June 30, 2003 and $5,338,000 at December 31, 2002.


<PAGE> 9


                           HIGHLANDS BANKSHARES, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8    CAPITAL STOCK TRANSACTIONS:

             In separate transactions during the second quarter of 2002, the
          Company repurchased stock from two unrelated parties. Total shares
          repurchased were 22,940 (68,820 on an after-split basis) at a cost of
          $1,217,000.

             In June 2002, the Company approved a stock split effected in the
          form of a dividend which was distributed September 3, 2002 to
          shareholders of record as of August 1, 2002. This transaction resulted
          in an increase of shares outstanding from 478,958 as of June 30, 2002
          to 1,436,874 as of September 30, 2002. Earnings per share and
          dividends per share calculations for prior periods have been adjusted
          for this stock dividend. The Board of Directors also voted to retire
          67,806 shares of treasury stock in the third quarter of 2002.



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

Critical Accounting Policies

    The Company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States ("GAAP"). The
financial statements contained within these statements are, to a significant
extent, financial information that is based on measures of the financial effects
of transactions and events that have already occurred. A variety of factors
could affect the ultimate value that is obtained either when earning income,
recognizing an expense, recovering an asset or relieving a liability. In
addition, GAAP itself may change from one previously acceptable method to
another method. Although the economics of these transactions would be the same,
the timing of events that would impact these transactions could change.

    The allowance for loan losses is an estimate of the losses in the loan
portfolio. The allowance is based on two basic principles of accounting: (i)
SFAS No. 5, Accounting for Contingencies, which requires that losses be accrued
when they are probable of occurring and estimable and (ii) SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, which requires that losses be
accrued based on the differences between the value of collateral, present value
of future cash flows or values that are observable in the secondary market and
the loan balance.

Recent Accounting Pronouncements

    In December 2001, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") no. 01-6, Accounting by Certain
Entities (Including Entities with Trade Receivables) That Lend to or Finance the
Activities of Others, to reconcile and conform the accounting and financial
reporting provisions established by various AICPA industry audit guides. SOP No.
01-6 was effective for annual and interim financial statements issued for fiscal
years beginning December 15, 2001 and did not have a material impact on the
Company's consolidated financial statements.

    All other recent accounting pronouncements had no material impact on the
Company's consolidated financial statements.


<PAGE> 10


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

Forward Looking Statements

    This filing may contain certain forward-looking statements (as defined in
the Private Securities Litigation Act of 1995), which reflect management's
beliefs and expectations based on information currently available. These
forward-looking statements are inherently subject to significant risks and
uncertainties. These risks and uncertainties can include, but are not limited
to, changes in general economic and financial market conditions,  the
Company's ability to effectively carry out business plans, changes in regulatory
or legislative requirements, or changes in competitive conditions. Although
Management  believes  the  expectations  reflected  in  such
forward-looking statements are  reasonable,  actual results may differ
materially.


Overview

    Year to Date

    The Company's year to date net income was $1,216,000, a decrease of 3.65%
compared to 2002. Earnings per weighted average share were $.85 for 2003
compared to $.86 per share for 2002. The Company's annualized return on average
equity was 8.25% in 2003 compared to 9.03% for 2002 and 9.17% for 2001. Return
on average assets was .80% for 2003, .92% for 2002 and .94% for 2001.

    Due to regulatory guidance and the recognition by Management of a need for
additional allowance for loan losses because of increased delinquencies and the
threat of continued economic decline, the provision for loan losses charged
against income during the first half of 2003 was $755,000, up from $260,000
during the first half of 2002. Net interest margin increased 7.94% as average
balances of earning assets grew 10.76% compared to average balances in the first
six months of 2002 while average balances of interest bearing liabilities grew
4.93% compared to 2002. This net increase in earning assets to interest bearing
liabilities was offset in part by average rates on earning assets falling 89
basis points while rates paid on interest bearing deposits declined by 77 basis
points. Non-interest income increased 20.92% due to increases in trust fees and
returns earned by HBI Life Insurance Company. Non-interest expense increased
2.91% as data processing and other expense remained flat, salary expense grew by
a modest 3.63% and equipment and occupancy expense grew 9.48%.

    Quarter Ending June 30

    Net income for the quarter ending June 30, 2003 decreased 16.01% to $556,000
compared to 2002 income of $662,000. Earnings per share for the second quarter
of 2003 were $.39 versus $.46 in 2002. Provisions for loan losses taken during
the second quarter of 2003 were $545,000 compared to $140,000 during the same
period in 2002. Net interest income increased 6.77%, while non-interest income
increased 18.95% and non-interest expenses remained relatively unchanged with a
..88% increase.


<PAGE> 11


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

Net Interest Income

    Year to Date

    The Company's net yield on interest earning assets on a tax equivalent basis
was 4.07% through June 30, 2003 compared to 4.19% for the first six months of
2002.

    Average loan volumes during this period were 7.51% higher than in 2002 due
to stable overall loan balances through the first six months of 2003 coupled
with strong loan growth throughout the last six months of 2002. Average rates on
loans continue to drop due to continued rate cuts by the Federal Reserve Bank
("The Fed"). Average yields on loans were 61 basis points lower during the first
six months of 2003 as compared to the first six months of 2002.

    Deposit volume growth continues to remain strong. Average balances of
interest bearing deposits grew 11.71% from 2002, with the largest increases seen
in money market checking  accounts  (16.47%) and savings accounts
(14.97%). Average rates paid on interest bearing deposits fell 96 basis points
during the first six months of 2003 when compared to the first six months of
2002.

    Recent increases in deposits volumes, coupled with slowing loan growth in
2003, contributed to average balances of Fed Funds sold being 86.40% higher
during the first six months of 2003 compared to the same period a year ago. This
increase in balances was offset by a 52 basis point reduction in yields on Fed
Funds sold, with a net increase of 28.13% in interest earned.

    During 2002, loan growth was funded in part by reductions in balances of
securities and Fed Funds sold. As loan growth has now stabilized while deposit
growth remains strong, balances of securities have been replenished. Average
balances of securities during the first six months of 2003 were 5.31% higher
than during the first six months of 2002. However, drastically reduced yields on
investment opportunities contributed to average yields on taxable securities
falling 162 basis points. Average yields on non-taxable rose 32 basis points.

    As business needs dictate, the Company will from time to time borrow amounts
from the FHLB at fixed rates of interest and loan these monies to customers on a
fixed rate basis. Capon Valley Bank also borrowed from the FHLB at a fixed rate
to fund renovations to its main office in Wardensville, WV. Average volumes of
borrowed money fell slightly (1.50%) during the six month period ended June 30,
2003 as compared the six months ended 2002. Balances fell only slightly as
repayment of the debt was offset by a $1.2 million increase in borrowing during
May of 2003. Average rates paid on these borrowings increased slightly from 2002
to 2003, due in large part to the transition from a variable rate debt facility
to a fixed rate on the borrowing related to Capon Valley Bank's renovation.

    Quarter Ending June 30

    The Company's net interest income on a tax equivalent basis of $2,985,000
was 4.12% of average earning assets for the quarter ending June 30, 2003
compared to net interest income of $2,805,000 (4.31% of average earning assets)
for the same period in 2002.

    Income from loans grew slightly as average loan balance growth of 5.91% was
offset by a 44 basis point decrease in yields. Balances of Fed Funds sold
increased 121.18%. Average balances of deposits increased 11.71% as compared to
2002 and this increase, coupled with the lesser increase in loan growth,
contributed to the increase in average balances of Fed Funds sold, a 15.10%
increase in average balances of securities investments and a 13.36% increase in
interest bearing deposits in other banks. The growth in balances of Fed Funds
sold was offset in part by a 55 basis point drop in yields during the second
quarter of 2003 as compared to the second quarter of 2002, with a net result of
a 50.00% increase in earnings on Fed Funds sold. Yields on taxable securities
fell 185 basis points and yields on non-taxable securities rose 21 basis points
when compared to 2002.


<PAGE> 12


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

Net Interest Income (Continued)

Quarter Ending June 30 (Continued)

    Interest costs on deposits continue to fall. During the second quarter of
2003, compared to the second quarter of 2002, average rates on interest bearing
demand accounts fell 32 basis points, average rates on savings accounts fell 47
basis points and average rates on time deposits fell 115 basis points. As long
term, high rate CDs continue to mature, Management expects this trend of
reduction in average rates paid on time deposits to continue in the short term.

    A complete yield analysis is shown as Table I on pages 22 & 23.


Noninterest Income

    Year to Date

    Noninterest income for the first six months of 2003 rose $118,000 from the
same period in 2002. Service charge income increased 5.49%, as average volumes
of deposit accounts and other banking services grew. Other operating income
increased by 35.40% largely because of an increase of $13,000 in trust fees and
an increase of $76,000 in insurance income.

    Quarter Ending June 30

    Noninterest  interest  income for the quarter ending June 30, 2003
increased 18.95%. Service charge income increased 4.17% and other operating
income increased 34.04% largely due to increases in trust and insurance income.


Noninterest Expenses

    Year to Date

    Non-interest expense increased 2.91% in 2003. Equipment and occupancy
expense increased 9.48%. largely related to recent efforts at upgrading internal
information  systems.  Data  processing  expense  and  other
miscellaneous operating  expenses were relatively flat (.70% and 1.27%
declines respectively) as the rapid growth in loans and deposits experienced
during recent years began to stabilize and additional costs associated with this
growth also stabilized. Also, rising costs seen in recent years from the
addition of new banking locations were not repeated. Salary and related expense
increased 3.64% as a 2.73% reduction in full time equivalent employees was
offset by a 6.54% increase in cost per employee due to annual merit increases.

    Quarter Ending June 30

    Non-interest expenses increased .83% for the quarter ending June 30, 2003
compared to the quarter ending June 30, 2002. Salaries and benefit costs
increased 3.74% compared to 2002 while equipment expense increased 6.04%. Data
processing expense declined slightly (.71%) and miscellaneous operating expense
fell 7.20% compared to the second quarter of 2002.


<PAGE> 13


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

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,
and 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.

    Growth in loan balances has been flat during the first half of 2003, with
total loan balances growing .14% since December 31, 2002. Local economic
activity has slowed, and refinancing and home purchase activity spurred by the
low interest rates has declined somewhat from 2002 levels. Balances of mortgage
loans and real estate construction loans rose 2.61% since December 31, 2002
compared to a growth of 6.98% during the first six months of 2002. This increase
was offset by declines in both commercial loans (2.71%) and consumer lending
(3.55%). The loan to deposit ratio was 83.07% at June 30, 2003 compared to
87.67% at December 31, 2002. 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.

    The following table summarizes the company's non-performing loans for the
periods ended June 30, 2003 and December 31, 2002.

                                                         June 30  December 31,
      (in thousands)                                      2003       2002
                                                          ----       ----

      Non-accrual loans                                $   1,224  $     299
      Restructured Loans                                     646        662
      Loans past due 90 days or more
        and still accruing interest                        2,098      1,918


        Total                                          $   3,968  $   2,879
                                                        ========   ========


<PAGE> 14


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

Asset Quality and Risk Elements (Continued)

    The substantial increase in non-accrual loans is due in large part to the
moving of 2 large commercial real estate loans to non-accrual status. Since June
30, the real estate collateralizing one of these loans has been foreclosed and
sold with nearly full recovery of the loan amount. Loans 90 days and more
delinquent have increased significantly during 2003 as economic conditions have
deteriorated. It is Management's belief that as economic conditions are
projected to improve during the coming months, that a large portion of these
loans remain collectable in full. However, Management will continue to monitor
these loans closely to prevent the promulgation of significant loan losses.

    Real estate acquired through foreclosure was $188,000 at June 30, 2003 and
$517,000 at December 31, 2002. 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 June 30, 2003, 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.


Allowance for Loan Losses

    The allowance for loan losses is an estimate of the losses in the current
loan portfolio. The allowance is based on two principles of accounting: (i) SFAS
5, Accounting for Contingencies which requires that losses be accrued when they
are probable of occurring and estimatable and (ii) SFAS 114, Accounting by
Creditors for Impairment of a Loan, which requires that loans be identified
which have characteristics of impairment as individual risks, (e.g. the
collateral, present value of cash flows or observable market values are less
than the loan balance).

    Each of Company's banking subsidiaries, Capon Valley Bank and The Grant
County Bank, determines its allowance for loan losses independently. Each bank
pays particular attention to individual loan performance, collateral values,
borrower financial condition and overall national and local economic conditions.
The determination of adequate allowance at each bank is done in a three step
process. The first step is to identify problem loans above a certain threshold
and estimated losses are calculated based on collateral values and projected
cash flows. The second step is to identify loans above a certain threshold which
are problem loans due to the borrowers' payment history or deteriorating
financial condition. Losses in this category are determined based on historical
loss rates adjusted for current economic conditions. The final step is to
calculate a loss for the remainder of the portfolio using  historical
loss  information  for each type of loan classification. The determination
of specific allowances and weights is in some part subjective and actual losses
may be greater or less than the amount of the allowance. However, Management
believes that the allowance represents a fair assessment of the losses that
exist in the loan portfolio.


<PAGE> 15


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

Allowance for Loan Losses (Continued)

     Both banks classify loans into the following categories: impaired,
doubtful, substandard, special mention and other loans past due 90+ days and
assign loss rates to each. Within these categories, Real Estate, Installment
Loans, Commercial Loans and Lines of Credit are assigned a specific loss rate
based on historical losses and management's estimate of losses. The allowance
associated with loans classed as impaired is calculated at 100% of the
identified impairment.

     Loans 90 days or more past due and nonaccrual loans are included in one of
the five categories above. Credit card balances 90 days or more past due are
categorized as substandard and are assigned a loss rate of 50%. Generally, all
loans in excess of $250,000 are evaluated individually as well as any loan
regardless of size that is classified as loss, doubtful, substandard or special
mention.  This detailed review  identifies each applicable loan for
specific impairment and a specific allocation for that impaired amount is set
aside as the first element in the calculation. Rates assigned each category may
vary over time and between the banks as historical loss rates, loan structure
and economic conditions change.

     The remaining portfolio balances are assigned a loss factor based on the
historical net loss after recoveries over the last five years.  Loss
experience per classification  varies  significantly based on risk and
collateral. Installment and commercial loans generally have higher loss volumes
than secured real estate loans. The net result creates a low and high range of
allocated allowance. The Company's actual allowance balance is compared to this
range and adjusted as deemed necessary.

     Management has analyzed the potential risk of loss on the Company's loan
portfolio given the loan balances and the value of the underlying collateral and
has recognized losses where appropriate. Nonperforming loans are closely
monitored on an ongoing basis as part of the Company's loan review process.
Management reviews the loan loss allowance at the end of each quarter. Based
primarily on the Company's loan classification system, which classifies problem
credits as substandard, doubtful or loss, additional provisions for losses are
made monthly. The ratio of the allowance for loan losses to total loans
outstanding was 1.05% at June 30, 2003 compared to .85% at March 31, 2003 and
..79% at December 31, 2002. The allowance for loan losses of $2,376,000 at June
30, 2003, was up $583,000 from its level at December 31, 2002 and up $460,000
from its level at March 31, 2003.

     As economic conditions continue to be stagnant, delinquencies have
continued to rise and loans which have not previously been classified as
impaired, doubtful, substandard, or special mention in recent periods have been
moved into one of these categories. This increase in delinquencies, coupled with
a request by bank examiners of Capon Valley Bank to increase that Bank's
allowance for loan loss led to a $545,000 provision charged against income in
the second quarter of 2003.

      In early 2003, during the course of routine examination of the Company's
two subsidiary banks, The Grant County Bank and Capon Valley Bank, examiners
identified certain supervisory issues. Results of these regulatory examinations
are not  published or publicly  available.  During these examinations,
one of the regulatory agencies which exerts supervisory control on the Company's
subsidiary banks indicated that a requirement for an increased allowance for
loan losses would be directed to Capon Valley Bank. In prior 10Q and 10K
filings, the Company indicated that Management of the Bank did not agree with
the regulator's conclusions, that the regulatory directive did not meet the
requirements of GAAP, and was in the process of appealing those conclusions.
During recent months, a directive for an increase in the allowance,
significantly reduced from earlier indications, was presented to the Bank. This
reduced amount, coupled with a continued rise in delinquencies and loan
impairments, prompted a Management decision to comply with the reduced
requirement and to increase the allowance for loan losses during the second
quarter of 2003.


<PAGE> 16


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

Allowance for Loan Losses (Continued)

    Because of its large impact on the local economy, Management continues to
monitor the economic health of the poultry industry. The Company has direct
loans to poultry growers and the industry is a large employer in the Company's
trade area. Loan requests for poultry house loans or expansion continue to be
presented for approval. In June of 2003, Pilgrim's Pride Corporation announced
the purchase of certain divisions of ConAgra Foods, Inc. including processing
facilities operated by ConAgra in Hardy County. Management anticipates that this
purchase will have no adverse impact on operations of either subsidiary bank or
on the operations of the non-bank subsidiaries. In the fall of 2002, Perdue
Farms, Inc. ceased operations at its Petersburg processing plant. At present,
this facility sits idle. In part because of this closure, the unemployment rate
in Grant County has grown from 6.7% in October of 2002 to 12.20% in May of 2003,
the last month for which data are available.  While management  believes
that this closure has contributed to the slow-down in loan growth, the overall
impact of the closure on the Company has been minimized by the Company's
geographic diversity as the other counties in the Company's primary service area
maintain healthy economies.

    The adequacy of the allowance for loan losses is computed quarterly and the
allowance adjusted  prior to the issuance of the quarterly  financial
statements. All loan losses charged to the allowance are approved by the boards
of directors of each bank at their regular meetings. The allowance is reviewed
for adequacy after considering  historical loss rates, current economic
conditions (both locally and nationally) and any known credit problems that have
not been considered under the above formula. The Company believes that its
allowance must be viewed in its entirety and, therefore, is available for 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.

    An analysis of the loan loss allowance for the six month periods ended June
30, 2003 and June 30, 2002 and for the quarters ended June 30, 2003 and June 30,
2002 is set forth in the following table (in thousands):

                                       Quarter Ended     Six Months Ended
                                         June 30,            June 30,
                                    ------------------ --------------------
    Allowance for loan losses          2003    2002        2003     2002
    -------------------------          ----    ----        ----     ----

    Balance, beginning of period     $ 1,916  $ 1,623    $ 1,793  $ 1,603
    Net charge-offs (recoveries)
      Charge-offs                       (143)    (114)      (293)    (236)
      Recoveries                          58       74        121       96
                                      ------   ------     ------   ------

    Total net charge-offs                (85)     (40)      (172)    (140)
    Provision for loan losses            545      140        755      260
                                      ------   ------     ------   ------

      Balance, End of Period         $ 2,376  $ 1,723    $ 2,376  $ 1,723
                                      ======   ======     ======   ======


<PAGE> 17


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

Allowance for Loan Losses (Continued)

   An analysis of the components of net charge-offs for the six month periods
ended June 30, 2003 and June 30, 2002 and for the quarters ended June 30, 2003
and June 30, 2002 is set forth in the following table (in thousands):

                                       Quarter Ended     Six Months Ended
                                         June 30,           June 30,
                                    ------------------ --------------------
                                       2003     2002       2003     2002
                                       ----     ----       ----     ----
   Components of net charge-offs:
      Real estate                    $   (26) $    22    $   (33) $    13
      Commercial                          16       (2)        11      (18)
      Installment                        (75)     (60)      (150)    (135)
                                      -------  ------     -------  ------

      Total                          $   (85) $   (40)   $  (172) $  (140)
                                      =======  ======     =======  ======


     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 June
30, 2003 and December 31, 2002:
<TABLE>

                    June 30, 2003                   December 31, 2002
                    -------------                   -----------------
<CAPTION>

   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  $  693          29%          20%            $  543         30%           21%
Mortgage       809          34%          59%               504         28%           57%
Consumer       734          31%          21%               652         37%           22%
Unallocated    140           6%            %                94          5%             %
             -----        ----          ---              -----        ---           ---

   Totals   $2,376         100%         100%            $1,793        100%          100%
             =====        ====          ===              =====        ===           ===

</TABLE>


<PAGE> 18


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

Securities

     The Company's securities portfolio serves numerous purposes. Portions of
the portfolio may secure certain public and trust deposits. The remaining
portions are held as investments or used to assist the Company in liquidity and
asset/liability management. Total securities at June 30, 2003 were $32,700,000
compared to $25,537,000 at December 31, 2002. Securities as a percentage of
total assets were 10.58% at June 30, 2002 compared to 8.74% at December 31,
2002.

     During 2002, high loan demand caused the Company to fund loan growth
through reductions in balances of fed funds sold and securities. As a result,
securities balances dropped dramatically during 2002. During the first six
months of 2003, as loan demand slowed and deposit balances increased, the
Company took steps to increase it's security portfolio to former levels. As
interest rates remain low, the Company has been reluctant to purchase securities
with long term maturities.

     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 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 June 30, 2003,
the fair value of the securities  available for sale exceeded their cost by
$400,000 ($252,000 after tax considerations).

Deposits

     The Company's main source of funds remains deposits received from
individuals, governmental  entities and  businesses  located within the
Company's service area.

    Although interest rates remain at or near historical lows, in the latter
months of 2002 and during the first quarter of 2003, the Company's subsidiary
banks nonetheless  experienced  significant  deposit growth as
customers appeared to be more rate sensitive when making decisions regarding
selection of financial  institutions  within which to place deposits.
Levels of competition for deposits in the Company's service area have caused the
Company's subsidiary banks to traditionally pay higher rates on deposits than
larger, statewide financial institutions. Although steps have been taken in
recent years to reduce this differential and have been moderately successful,
the subsidiary banks remain marginally above the competition in rates paid on
deposits and these higher rates appear to have drawn deposit customers to the
Company's subsidiary banks during recent months. Total deposits increased 5.68%
between December 31, 2002 and June 30, 2003.

    Customers appear to be reluctant to commit to long-term, fixed rates on
certificates when rates are at historical lows and instead are placing their
deposits in accounts that are highly liquid and will allow them to respond
quickly when rates increase.  Accordingly,  non-interest  demand
deposit balances grew 16.56% from December 31, 2002 to June 30, 2003, while
interest bearing transaction account and savings account balances increased
3.35% and time deposit balances increased 4.49%. Time deposits continue to make
up the bulk of deposit balances as time deposits equaled 60.78% of total
deposits at June 30, 2003 and 61.47% of total deposits at December 31, 2002.


<PAGE> 19


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

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 June 30, 2003, the Company's total risk based capital
ratio was 14.52% which is far above the regulatory minimum of 8.0%. The leverage
ratio of total capital to total assets was 9.65% at June 30, 2003.

Dividends

     At its regular meeting on August 12, 2003, the Company's Board of Directors
declared a dividend of 14 cents per share payable on September 30, 2003 to
shareholders of record as of September 2, 2003.

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 liquidity exposure. 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 insignificant. In the past,
growth in deposits has been sufficient to fund the net increase in loans and
investment securities

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 June 30, 2003 the Company had a negative gap position through the first
three months, shifting to a positive gap by the end of one year. With the
largest amount of interest sensitive assets and liabilities repricing within one
year, the Company believes it is in an excellent position to respond to rapid
market rate changes quickly. 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 it when necessary.


<PAGE> 20


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


Regulatory Matters

     On August 13, 2003, a Memorandum of Understanding between the Board of
Directors of Capon Valley Bank, the Federal Reserve Bank of Richmond and The
West Virginia Division of Banking was presented to the Directors of Capon Valley
Bank by representatives of the Federal Reserve Bank of Richmond. This Memorandum
addressed issues cited by Federal Reserve examiners in their January 2003
examination. The Memorandum requires that certain management functions,
including  selected  credit  functions and internal  control
procedures, be improved within time frames set by the Federal Reserve Bank of
Richmond. The Memorandum also requires that progress reports be filed on a
scheduled basis with the Federal Reserve Bank of Richmond by the Management and
Board of Capon Valley Bank and that Capon Valley Bank increase it's Allowance
for Loan Losses (previously discussed under the Allowance for Loan Loss Section
of Management Discussion and Analysis).


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> 21
Table 1


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

                        Six Months Ended          Six Months Ended
                          June 30, 2003                   June 30, 2002
                     Average Income/          Average  Income/
                     Balance Expense Rates    Balance  Expense Rates
Interest Income
   Loans 1, 3
     Commercial5    $ 10,424 $  475   9.11%  $ 11,568  $  461    7.97%
     Consumer         49,016  2,594  10.58%    54,207   3,147   11.61%
     Real estate5    166,289  5,436   6.54%   144,180   4,948    6.86%
                     -------  -----  -----    -------   -----  ------

   Total             225,729  8,505   7.54%   209,955   8,556    8.15%

   Federal funds
     sold             21,551    123   1.14%    11,562      96    1.66%
   Interest bearing
     deposits          5,694     29   1.02%     5,324      65    2.44%
   Investments
     Taxable 4        28,920    468   3.24%    25,756     623    4.84%
     Tax exempt 2,4    4,202    128   6.09%     5,695     163    5.77%
                      ------  -----   ----    -------   -----   -----

   Total Earning
     Assets          286,096  9,253    6.47%  258,292   9,503    7.36%
                     -------  -----   -----   -------   -----   -----

Interest Expense
   Money markets      21,430      89    .83%   18,399     106    1.15%
   Savings            47,798     240   1.00%   41,575     305    1.47%
   Time deposits     165,640   2,988   3.61%  150,276   3,573    4.76%
   Other borrowed
     money             4,280     108   5.05%    4,344     103    4.74%
                      ------   -----   ----   -------   -----   -----

   Total Interest
     Bearing
     Liabilities     239,148   3,425   2.86%  214,594   4,087    3.81%
                     -------  ------   ----   -------   -----    ----

   Net Interest Income       $ 5,828                   $5,416
                              ======                    =====

   Net Yield on
     Interest Earning
     Assets                            4.07%                     4.19%
                                       ====                      ====

1 Interest income on loans includes loan fees.
2 On a taxable equivalent basis based on a tax rate of 37%.
3 Average Balances include non-accrual loans
4 Average  balance  information  is reflective of historical  cost and has not
  been adjusted for changes in market value.
5 Loans  classified  as  Commercial  loans  in this  analysis  are  loans  for
  commercial purposes not secured by real estate. Loans  for  commercial
  purposes  and  secured  by  real  estate  may  be classified as Commercial
  loans elsewhere in this document.


<PAGE> 22
Table I (Continued)


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

                        Three Months Ended       Three Months Ended
                          June 30, 2003                   June 30, 2002
                     Average Income/          Average  Income/
                     Balance Expense Rates    Balance  Expense Rates

Interest Income
   Loans 1, 3
     Commercial5    $ 10,895  $  255  9.36%  $ 11,708 $   226    7.72%
     Consumer         48,607   1,181  9.72%    53,837   1,578   11.72%
     Real estate5    167,254   2,844  6.80%   148,558   2,473    6.67%
                     -------   -----  ----    -------  ------  ------

   Total             226,756   4,280  7.55%   214,103   4,277    7.99%

   Federal funds
     sold             21,625      63  1.17%     9,777      42    1.72%
   Interest bearing
     deposits          6,008      14   .93%     5,300      32    2.42%
   Investments
     Taxable 4        31,361     234  2.98%    25,104     304    4.84%
     Tax exempt 2,4    4,242      61  5.75%     5,828      81    5.56%
                     -------   -----  ----    -------   -----   -----

   Total Earning
     Assets          289,992   4,652  6.42%   260,112   4,736    7.28%
                     -------  ------  ----    -------  ------   -----

Interest Expense
   Money markets      21,759      41   .75%    19,767      56    1.14%
   Savings            48,816     114   .93%    43,087     160    1.48%
   Time deposits     165,825   1,456  3.51%   146,032   1,665    4.56%
   Other borrowed
     money             4,614      57  4.94%     4,221      50    4.74%
                     -------   -----  ----    -------   -----   -----

   Total Interest
     Bearing
     Liabilities     241,014   1,668  2.77%   213,107   1,931    3.62%
                     -------  ------ -----    -------  ------   -----

   Net Interest
     Income                  $ 2,985                  $ 2,805
                              ======                   ======

   Net Yield on
     Interest Earning
     Assets                           4.12%                      4.31%
                                      ====                      =====

1 Interest income on loans includes loan fees.
2 On a taxable equivalent basis based on a tax rate of 37%.
3 Average Balances include non-accrual loans
4 Average  balance  information  is reflective of historical  cost and has not
  been adjusted for changes in market value.
5 Loans  classified  as  Commercial  loans  in this  analysis  are  loans  for
  commercial purposes not secured by real estate.  Loans for commercial
  purposes and secured by real estate may be classified as  Commercial  loans
  elsewhere in this document.


<PAGE> 23
Table II

                           HIGHLANDS BANKSHARES, INC.
                       INTEREST RATE SENSITIVITY ANALYSIS
                                  JUNE 30, 2003
                            (In Thousands of Dollars)

                                                          More than
                                                           5 Years
                      1 - 90   91 - 365  1 to 3   3 to 5    or no
                       Days      Days     Years    Years   Maturity  Total
EARNING ASSETS

   Loans              $38,566  $ 99,352  $61,619  $11,882  $14,643 $226,062
   Fed funds sold      23,525                                        23,525
   Securities          10,029    11,690    7,316      726    2,939   32,700
   Time deposits in
     other banks        6,336       200                               6,536
                       ------    ------    -----    -----    -----  -------

   Total               78,456   111,242   68,935   12,608   17,582  288,823
                       ------   -------   ------   ------   ------  -------



INTEREST BEARING LIABILITIES

   Transaction
     accounts          21,329                                        21,329
   Money market
     savings           17,405                                        17,405
   Savings accounts    30,959                                        30,959
   Time deposits more
     than $100,000      6,222   23,003   12,096    7,746             49,067
   Time deposits less
     than $100,000     21,229   53,077   30,805   11,222            116,333
   Other borrowed money   142      425    1,134    1,134    2,128     4,963
                       ------   ------   ------ --------  -------   -------

   Total               97,286   76,505   44,035   20,102    2,128   240,056
                       ------   ------   ------   ------    -----   -------


Rate sensitivity GAP  (18,830)  34,737   24,900   (7,494)  15,454

Cumulative GAP        (18,830)  15,907   40,807   33,313   48,767

Ratio of cumulative
   interest sensitive
   assets to cumulative
   interest sensitive
   liabilities         80.65%   109.15%  118.73%  114.00%  120.32%


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


<PAGE> 24


Item 3 Quantitative and Qualitative Disclosures About Market Risk

      Not Applicable

Item 4 Controls and Procedures

Evaluation of Disclosure Controls and Procedures

     As a result of the enactment of the Sarbanes-Oxley Act of 2002, issuers
such as Highlands Bankshares, Inc. that file periodic reports under the
Securities Exchange Act of 1934 (the "Act") are now required to include in those
reports certain information concerning the issuer's controls and procedures for
complying with the disclosure requirements of the federal securities laws.
Under rules adopted by the Securities and Exchange Commission effective August
29, 2002,  these disclosure  controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by an issuer in the reports it files or submits under the Act,
is  communicated to the issuer's management, including its principal
executive officer or officers and principal financial officer or officers, or
persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure.

     We have established our disclosure controls and procedures to ensure that
material information related to Highlands Bankshares, Inc. is made known to our
principal executive officers and principal finance officer on a regular basis,
in particular during the periods in which our quarterly and annual reports are
being prepared. These disclosure controls and procedures consist principally of
communications between and among the President and the Finance Officer, and the
other executive officers of Highlands Bankshares, Inc. and its subsidiaries to
identify any new transactions, events, trends, contingencies or other matters
that may be material to the Company's operations. As required, we will evaluate
the effectiveness of these disclosure controls and procedures on a quarterly
basis. Based on this evaluation, the Management of Highlands Bankshares, Inc.,
including the Finance Officer, concluded that such disclosure controls and
procedures were operating effectively as designed as of the date of such
evaluation.

Changes in Internal Controls

     During the period reported upon, there were no significant changes in the
internal controls of Highlands Bankshares, Inc. pertaining to its financial
reporting and control of its assets or in other factors that could significantly
affect these controls.


<PAGE> 25


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 -

        On April 8, 2003, the stockholders held their annual meeting. The
        following items were approved by the shareholders by the required
        majority:

        1) Election of the Board of Directors as proposed in the proxy material
           without any additions or exceptions.
                  Thomas B. McNeill, Sr. 948,290   For   20,597   Against
                  Clarence E. Porter     964,480   For    4,407   Against
                  L. Keith Wolfe         965,620   For    3,624   Against
                  Steven C. Judy         965,380   For    3,507   Against
        2) Ratification of S. B. Hoover & Company,  L.L.P. as auditors for the
           year ending  December 31, 2003;  965,200 For, 2,607 Against,  1,080
           Abstain

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.

3 (ii)  Bylaws of Highlands Bankshares,  Inc. are incorporated by reference to
        Exhibit 3(ii) to Highland  Bankshares,  Inc.'s Form 10-Q filed May 15,
        2003.

31.1    Certification of Chief Executive Officer Pursuant to section 302 of
        the Sarbanes-Oxley Act of 2002 Chapter 63, Title 18 USC Section 1350 (A)
        and (B).

31.2    Certification of Executive Officer Pursuant to section 302 of the
        Sarbanes-Oxley Act of 2002 Chapter 63, Title 18 USC Section 1350 (A) and
        (B).

31.3    Certification of Executive Officer Pursuant to section 302 of the
        Sarbanes-Oxley Act of 2002 Chapter 63, Title 18 USC Section 1350 (A) and
        (B).

31.4    Certification of Chief Financial Officer Pursuant to section 302 of
        the Sarbanes-Oxley Act of 2002 Chapter 63, Title 18 USC Section 1350 (A)
        and (B).

32.1    Statement of Chief Executive  Officer and Financial  Officer  Pursuant
        to 18  U.S.C.ss.1350.

        (b) Reports on Form 8-K filed  during the three  months ended June 30,
            2003--None


<PAGE> 26


                                    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/ R. ALAN MILLER
                                       --------------------------------------
                                       R. Alan Miller
                                       Finance Officer


Date:  August 13, 2003