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  
 September 30, 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 September 30, 1998
Common Stock, par value - $5                            501,898 shares


<PAGE> 1






                          HIGHLANDS BANKSHARES, INC.


                                     INDEX

                                                                        Page

PART I   FINANCIAL INFORMATION                                            2

Item 1.  Financial Statements

         Consolidated Statements of Income - Nine Months Ended
         September 30, 1998 and 1997                                      2

         Consolidated Statements of Income - Three Months Ended
         September 30, 1998 and 1997                                      3

         Consolidated Balance Sheets - September 30, 1998 and
         December 31, 1997                                                4

         Consolidated Statements of Changes in Stockholders' Equity -
         Nine Months Ended September 30, 1998 and 1997                    5

         Consolidated Statements of Cash Flows - Nine Months Ended
         September 30, 1998 and 1997                                      6

         Notes to Consolidated Financial Statements                       7


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


PART II  OTHER INFORMATION                                               20

Item 1.  Legal Proceedings                                               20

Item 2.  Changes in Securities                                           20

Item 3.  Defaults upon Senior Securities                                 20

Item 4.  Submission of Matters to a Vote of Security Holders             20

Item 5.  Other Information                                               20

Item 6.  Exhibit and Reports on Form 8K                                  20


         SIGNATURES                                                      22



<PAGE> 2

Part I Financial Information
Item 1 Financial Statements

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

                                                          Nine Months Ended
                                                             September 30,
                                                          1998        1997

Interest Income
   Interest and fees on loans                           $ 9,771     $ 9,071
   Interest on federal funds sold                           284         206
   Interest on time deposits                                 35          26
   Interest and dividends on investment securities
     Taxable                                               1500       1,771
     Nontaxable                                             128         142
                                                         ------      ------

   Total Interest Income                                 11,718      11,216
                                                         ------      ------

Interest Expense
   Interest on time deposits over $100,000                1,083       1,010
   Interest on other deposits                             4,674       4,473
   Interest on borrowed money                                23          68
                                                         ------      ------

   Total Interest Expense                                 5,780       5,551
                                                         ------      ------

Net Interest Income                                       5,938       5,665

Provision for Loan Losses                                   200         135
                                                         ------      ------

Net Interest Income after Loan Losses                     5,738       5,530
                                                         ------      ------

Noninterest Income
   Service charges                                          250         217
   Other                                                    278         288
   Investment security gains (losses)                        (3)          6
                                                         ------      ------

   Total Noninterest Income                                 525         511
                                                         ------      ------

Noninterest Expense
   Salaries and employee benefits                         2,172       2,141
   Occupancy expense                                        199         181
   Equipment expense                                        326         330
   Data processing expense                                  344         326
   Other                                                    974         874
                                                         ------      ------

   Total Noninterest Expense                              4,015       3,852
                                                         ------      ------

Income before Income Taxes                                2,248       2,189

Provision for Income Taxes                                  769         742
                                                         ------      ------

Net Income                                             $  1,479    $  1,447
                                                         ======      ======

Per Share Data

   Net Income                                          $   2.95    $   2.86
                                                         ======      ======

   Cash Dividends                                      $    .81    $    .75
                                                         ======      ======

Weighted Average Common Shares Outstanding              501,898     505,143
                                                        =======     =======



       The accompanying notes are an integral part of these statements.


<PAGE> 3

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


                                                         Three Months Ended
                                                             September 30,
                                                          1998        1997

Interest Income
   Interest and fees on loans                           $ 3,354     $ 3,103
   Interest on federal funds sold                            96          84
   Interest on deposits in other institutions                11           7
   Interest and dividends on investment securities
     Taxable                                                490         585
     Nontaxable                                              41          47
                                                         ------      ------

   Total Interest Income                                  3,992       3,826
                                                         ------      ------

Interest Expense
   Interest on time deposits over $100,000                  376         349
   Interest on other deposits                             1,577       1,537
   Interest on borrowed money                                11          31
                                                         ------      ------

   Total Interest Expense                                 1,964       1,917
                                                         ------      ------

Net Interest Income                                       2,028       1,909

Provision for Loan Losses                                    80          45
                                                         ------      ------

Net Interest Income after Loan Losses                     1,948       1,864
                                                         ------      ------

Noninterest Income
   Service charges                                           89          77
   Other income                                             102         108
   Investment security losses                                            (1)
                                                         ------      ------

   Total Noninterest Income                                 191         184
                                                         ------      ------

Noninterest Expense
   Salaries and employee benefits                           716         726
   Occupancy expense                                         71          62
   Equipment expense                                        106         111
   Data processing                                          117         109
   Other                                                    349         295
                                                         ------      ------

   Total Noninterest Expense                              1,359       1,303
                                                         ------      ------

Income before Income Taxes                                  780         745

Provision for Income Taxes                                  263         261
                                                         ------      ------

Net Income                                             $    517    $    484
                                                         ======      ======

Per Share Data

   Net Income                                          $   1.03    $    .96
                                                        =======     =======

   Cash Dividends                                      $    .27    $    .25
                                                        =======     =======

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


       The accompanying notes are an integral part of these statements.


<PAGE> 4

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

                                                     September 30,December 31,
                                                         1998        1997
     ASSETS

Cash and due from banks                                $  4,593    $  3,246
Time deposits in other banks                                837         827
Federal funds sold                                       11,725       6,895
Securities held to maturity (note 2)                      3,506       4,577
Securities available for sale (note 3)                   28,535      31,683
Other investments                                           731         715
Loans, net of unearned interest (note 4)                145,282     137,105
   Less allowance for loan losses (note 5)               (1,193)     (1,370)
                                                        -------     -------

   Net Loans                                            144,089     135,735

Bank premises and equipment                               4,570       4,773
Interest receivable                                       1,544       1,548
Investment in insurance contracts                         2,116
Other assets                                                632         771
                                                        -------     -------

   Total Assets                                        $202,878    $190,770
                                                        =======     =======

     LIABILITIES

Deposits:
   Noninterest bearing
     Demand deposits                                   $ 17,605    $ 15,952
   Interest bearing
     Money market and checking                           18,113      15,774
     Money market savings                                11,538      12,179
     Savings                                             21,283      19,389
     Time deposits over $100,000                         25,051      23,328
     All other time deposits                             84,658      81,314
                                                        -------     -------

   Total Deposits                                       178,248     167,936

Borrowed money                                              729         226
Accrued expenses and other liabilities                    1,412       1,311
                                                        -------     -------

   Total Liabilities                                    180,389     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                                        18,927      17,854
Net unrealized gain on securities available for sale        159          40
                                                        -------     -------

                                                         23,482      22,290
   Treasury stock (at cost, 44,866 shares in
      1998 and 1997)                                      (993)        (993)
                                                          ----         ---- 

   Total Stockholders' Equity                            22,489      21,297
                                                        -------     -------

   Total Liabilities and Stockholders' Equity          $202,878    $190,770
                                                        =======     =======

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

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

Balance, December 31, 1996     $ 2,734  $ 1,662  $ 16,478   $  (494)    $  (151)    $ 20,229
  Comprehensive Income
  Net Income                                        1,447                              1,447
  Net change in unrealized
   depreciation on investment
   securities available for sale,
   net of taxes                                                              73           73
                                 -----    -----     -----      ----       -----        -----

  Total Comprehensive Income                        1,447                    73        1,520
  Purchase of treasury stock                                   (499)                    (499)
  Dividends paid                                     (380)                              (380)
                                 -----    -----     -----      ----       -----        -----

  Balances, September 30, 1997 $ 2,734  $ 1,662  $ 17,545   $  (993)    $  (78)     $ 20,870
                                 =====    =====    ======     =====      =====       =======


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


Balance, December 31, 1997     $ 2,734  $ 1,662  $ 17,854    $ (993)     $  40       $21,297
   Comprehensive Income
   Net Income                                       1,479                              1,479
   Net change in unrealized
     appreciation on investment
     securities available for sale,
     net of taxes                                                         119            119
                                 -----    -----     -----     -----      -----         -----

   Total Comprehensive Income                       1,479                 119          1,598
   Dividends paid                                    (406)                              (406)
                                 -----    -----     -----     -----      -----         -----

   Balances, September 30, 1998 $ 2,734  $ 1,662  $ 18,927   $ (993)     $ 159      $ 22,489
                                 ======   ======   =======    =====       ====        ======
</TABLE>

       The accompanying notes are an integral part of these statements.


<PAGE> 6

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

                                                          Nine Months Ended
                                                            September 30,
                                                         1998         1997
Cash Flows from Operating Activities:
   Net income                                           $ 1,479     $ 1,447
   Adjustments to reconcile net income to net
     cash provided by operating activities:
       Investment securities gains                           (3)         (6)
       Depreciation                                         278         284
       Increase in insurance contracts                      (46)
       Net accretion                                         (3)         (6)
       Provision for loan losses                            200         135
       (Increase) decrease in interest receivable             4        (184)
       Decrease in other assets                              68          11
       Increase in accrued expenses                         101         320
                                                         ------      ------

   Net Cash Provided by Operating Activities              2,078       2,001
                                                         ------      ------

Cash Flows from Investing Activities:

   Net change in federal funds sold                      (4,830)     (4,576)
   Proceeds from maturities of securities
      available for sale                                  8,714       6,539
   Proceeds from maturities of securities
      held to maturity                                    1,071       1,002
   Purchase of other investments                            (16)        (76)
   Net change in time deposits in other banks               (10)        181
   Purchase of securities available for sale             (5,370)     (5,130)
   Net change in loans to customers                      (8,554)     (8,834)
   Purchase of property and equipment                       (75)       (587)
   Investment in insurance contracts                     (2,070)           
                                                         ------      ------

   Net Cash Consumed by Investing Activities            (11,140)    (11,481)
                                                        -------     -------

Cash Flows from Financing Activities:
   Net increase in deposits                              10,312       9,636
   Increase in other borrowed money                         503       1,021
   Payment of dividends                                    (406)       (380)
   Purchase of treasury stock                                          (498)
                                                         ------      ------

   Net Cash Provided by Financing Activities             10,409       9,779
                                                         ------      ------

Net Increase in Cash and Cash Equivalents                 1,347         299

Cash and Cash Equivalents, Beginning of Period            3,246       3,196
                                                         ------      ------

Cash and Cash Equivalents, End of Period                $ 4,593     $ 3,495
                                                         ======      ======

Supplementary Disclosures:
   Cash paid for:
     Income taxes                                       $   749     $   679
     Interest expense                                     5,801       5,452

       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 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 September 30, 1998, and the results of operations for
          the nine and three month periods ended September 30, 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 market value of securities held to maturity
          as of September 30, 1998 and December 31, 1997, are as follows:

                                               1998                 1997   
                                         ------------------------------------
                                         Amortized Market    Amortized Market
                                           Cost    Value       Cost    Value 

          US Treasury securities and
            obligations of US government
            corporations and agencies     $   518  $   525    $1,282  $ 1,287
          Obligations of states and
            political subdivisions          2,988    3,119     3,295    3,390
                                           ------   ------     -----   ------

            Total                         $ 3,506  $ 3,644    $4,577  $ 4,677
                                           ======   ======     =====   ======


NOTE 3    SECURITIES AVAILABLE FOR SALE:

             The amortized cost and market value of securities available for
          sale as of September 30, 1998 and December 31, 1997, are as follows:

                                              1998                 1997 
                                        -------------------------------------
                                        Amortized Market     Amortized Market
                                         Cost     Value        Cost    Value 

          US Treasury securities and
            obligations of US government
            corporations and agencies     $27,409  $27,718   $30,889  $31,014
          Obligations of states and
            political subdivisions            255      261       100      101
          Other investments                   618      556       630      568
                                           ------   ------     -----   ------

            Total                         $28,282  $28,535   $31,619  $31,683
                                           ======   ======    ======   ======


<PAGE> 8

                          HIGHLANDS BANKSHARES, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 4    LOANS OUTSTANDING:

             A summary of loans outstanding as of September 30, 1998 and
          December 31, 1997, is as follows:

                                                        1998       1997

          Commercial                                 $ 30,406    $ 30,717
          Real estate - construction                    2,795       2,189
                      - mortgages                      80,731      75,221
          Consumer installment                         33,588      31,492
                                                       ------     -------

            Total                                     147,520     139,619
          Unearned interest                            (2,238)     (2,514)
                                                       ------     -------

            Net loans outstanding                    $145,282    $137,105
                                                      =======     =======


NOTE 5    ALLOWANCE FOR LOAN LOSSES:

             A summary of transactions in the allowance for loan losses for the
          nine months ended September 30, 1998 and 1997, follows:

                                                        1998       1997

          Balance, beginning of period                $ 1,370    $  1,257
          Provisions charged to operating expenses        200         135
          Loan recoveries                                  59         121
          Loan charge-offs                               (436)       (182)
                                                       ------     -------

          Balance, end of period                      $ 1,193    $  1,331
                                                       ======     =======


<PAGE> 9

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


Overview

    Year to Date Operations

    The Company's nine month income of $1,479,000 represents a 2.21% increase in
total earnings and an increase of 3.15% in earnings per share compared to 1997.
Earnings represented a return of 9.08% on average equity for the first nine
months of 1998 compared to 9.38% for the same period in 1997. Returns on average
assets for the nine month period ending September 30, 1998 and 1997 were 1.00%
and 1.04%, respectively. The increase in earnings was due to an increasing
volume of earning assets and stability in noninterest expenses.

    The tax equivalent interest income increased by $494,000 in 1998 to
$11,793,000 as compared to 1997. A 5.07% increase in the level of earning assets
and a slight increase in the net interest spread was responsible for the
improvement. The increase in earning assets is attributable to a 9.64% increase
in average loans outstanding. The increase was primarily in real estate loans.
The funding of the asset growth was from deposits of local customers, primarily
time deposits.

    Noninterest income increased 2.74% in 1998 compared to 1997 due to an
increase in service charge income. Noninterest expenses increased 4.23% in 1998
due mainly to the higher cost of data processing and year 2000 compliance
expenses.

    Quarter Ending September 30 Operations

    Net income for the quarter ending September 30, 1998 increased 6.82% when
compared to 1997 operations. Increases in other noninterest expenses were more
than offset by an increase in the net interest margin and an increase in service
charge income. An increased provision for loan losses was the result of a
limited number of unforeseen bankruptcies.

Net Interest Income

    Year to Date Operations

    The Company's net interest margin on a tax equivalent basis was $6,013,000
in the first nine months of 1998 compared to $5,748,000 for 1997. The increase
was due to an increase in average earning assets (5.07%) and an increased spread
(the difference in rates earned on assets and paid on liabilities) from 3.53% in
1997 to 3.59% in 1998. Average loans outstanding grew by 9.64% from 1997 to
1998. This growth reflects good local and national economic conditions, moderate
interest rates and expanded banking facilities. The overall costs of funds
reflects the high level of competition for deposits in the Company's service
area which has traditionally paid higher rates on deposits than larger statewide
financial institutions. The deposit increase represents growth in all types of
accounts (particularly time deposits) and has been obtained primarily from
customers in the immediate service areas.


<PAGE> 10


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


Net Interest Income (Continued)

    Year to Date Operations (Continued)

    Loans outstanding at September 30, 1998 increased 8.93% over amounts at
September 30, 1997 and 7.95% on annualized basis since December 31, 1997. The
loan increase has been the result of opening branches in new market areas and a
continued effort to increase lending in existing markets. Loan growth has been
funded primarily by deposit growth with a moderate decline in the level of
security investments since December 31, 1997. The increase in the tax equivalent
net interest margin for 1998 over the 1997 amounts is the result of slight
declines in the costs of funds on all types of deposit accounts and an
annualized growth in earning assets of 5.07%. Barring any future increases in
interest rates by the Federal Reserve Bank, the Company anticipates its net
interest margin remaining stable or increasing slightly. Rates paid on deposits
are expected to remain stable or decline slightly over the next twelve months
and returns on and the levels of earning assets are expected to remain at
current levels during this period.

    Quarter Ending September 30 Operations

    The Company's net interest income on a tax equivalent basis of $2,052,000
was 4.39% of earning assets for the quarter ending September 30, 1998 compared
to $1,936,000 (4.31% of earning assets) for the same period in 1997. Increased
income from loans was the result of increases in volume as the level of average
loans outstanding rose in the period and rates of return declined. Yields on
investment securities and short term investments declined slightly from 1997
operations. A decline in rates paid on interest bearing liabilities was offset
by a decline in the yields on loans. The overall result was an increase in the
net interest margin percentage from 4.31% to 4.39%. The Company expects future
deposit rates to remain stable or decline slightly in the last quarter of 1998
as local rates on deposits move towards those of state and national competition.
Rates on loans will be heavily influenced by the local economy and to a lesser
degree by national policy changes.

    A complete yield analysis is shown as Table I on page 18.

Noninterest Income

    Year to Date Operations

    Noninterest income for the year to date ending September 30, 1998 increased
2.74% from year to date amounts at September 30, 1997. An increase in service
charge income of 15.21% was the result of an increased number of accounts
subject to service charges. A decline in other income due to lower earnings from
the insurance subsidiary and a slight security loss in 1998 compared to a slight
gain in 1997 tempered overall noninterest income increases.

    Quarter Ending September 30 Operations

    Noninterest income for the quarter ending September 30, 1998 increased 3.80%
compared to 1997 operations as the result of higher service charges for the same
reasons as cited above.


<PAGE> 11


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


Noninterest Expenses

    Year to Date Operations

    Overall, noninterest expense increased 4.23% in the first nine months of
1998 when compared to the same period in 1997. Personnel expenses increased
1.45% as the result of merit raises. Occupancy and equipment expenses increased
2.74% as the result of asset growth and inflation. Data processing expenses
increased by 5.52% as a result of increase transaction volume and rate
increases. Other noninterest expenses increased by 11.44% due to asset growth
and costs in preparing for the upcoming year 2000. The overall increase in
noninterest expenses of 4.23% is in line with the increase in assets and is in
line with management's expectations.

    Quarter Ending September 30 Operations

    Overall, noninterest expenses increased 4.30% for the quarter ending
September 30, 1998 compared to the quarter ending September 30, 1997. The
reasons for the quarterly increase include the cost of year 2000 preparedness
and higher data processing costs.

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 (Grant, Hardy, Mineral, northern Pendleton and
southeastern Hampshire 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.

    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 $8,177,000 or 5.96% in the first nine months in
1998. The bulk of this increase was in real estate loans with smaller increases
in other types of loans. The loan to deposit ratio was 81.51% at September 30,
1998 compared to 81.64% at December 31, 1997. Management believes this level of
lending activity is satisfactory to generate adequate earnings without undue
credit risk. Loan demand is expected to remain satisfactory in the near future
with any growth a function of local and national economic conditions.


<PAGE> 12


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


Asset Quality

    Nonperforming loans include nonaccrual loans, loans 90 days or more past due
and restructured loans. Under the Company's criteria for classification of
nonperforming loans, loans that are both (a) past due 90 days or more and (b)
not deemed nonaccrual due to an assessment of collectibility are specifically
excluded from the definition of nonperforming assets. 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 Company
had $88,000 of nonperforming loans at September 30, 1998 compared to $27,000 at
June 30, 1998 and zero at December 31, 1997. Accruing loans past due 90 days or
more, and excluded from classification as nonperforming assets, totaled
$1,584,000 at September 30, 1998, $1,037,000 at June 30, 1998 and $1,247,000 at
December 31, 1997.

    Real estate acquired through foreclosure was $140,000 at September 30, 1998
compared to $174,000 at December 31, 1997. All foreclosed property held at
September 30, 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 September 30, 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.

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.


<PAGE> 13


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


Allowance for Loan Losses (Continued)

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

                                       Quarter Ended    Nine Months Ended
                                       September 30,       September 30,
                                       1998     1997       1998     1997

    Balance, beginning of period     $ 1,358  $ 1,290    $ 1,370  $ 1,257
    Net charge-offs (recoveries)
      Charge-offs                        267       32        436      182
      Recoveries                         (22)     (28)       (59)    (121)
                                      ------   ------     ------   ------

    Total net charge-offs *              245        4        377       61
    Provision for credit losses           80       45        200      135
                                      ------   ------     ------   ------

      Balance, End of Period         $ 1,193  $ 1,331    $ 1,193  $ 1,331
                                      ======   ======     ======   ======

   * Components of net charge-offs:
      Real estate mortgages               53        1         53        8
      Commercial                          27       (3)       132       13
      Installment                        165        6        192       40
                                       -----    -----      -----     ----

      Total                          $   245  $     4    $   377  $    61
                                      ======   ======     ======   ======


    The allowance for credit losses, of $1,193,000 at September 30, 1998, was
down $165,000 from its level at June 30, 1998, and down $177,000 from December
31, 1997 levels. The allowance was equal to .82%, .95% and .94% of total loans
at September 30, 1998, June 30, 1998 and December 31, 1997, respectively. The
unusually large amount of net charge offs in the third quarter of 1998 was the
result of a couple of large bankruptcies. Some recoveries are expected from
these actions but it is too premature to estimate the amount at this time. 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> 14


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 deposits. The remaining portions are
held as investments or used to assist the Company in liquidity and
asset/liability management. Total securities at September 30, 1998 were
$32,772,000 compared to $36,975,000 at December 31, 1997. Securities as percent
of total assets were 16.15% at September 30, 1998 compared to 19.38% at December
31, 1997. The decline in securities is a result of controlled loan growth, a
flattened yield curve and increases in federal funds sold.

     The securities portfolio consists of three components: securities held to
maturity, securities available for sale and restricted 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. Restricted investments include investments in federal
agencies such as the Federal Reserve Bank and the Federal Home Loan Bank. 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
within the year in market values are reflected as changes in stockholders'
equity, net of the deferred tax effect. As of September 30, 1998, the cost of
the securities available for sale exceeded their market value by $253,000
($159,000 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. Deposit accounts include demand deposits, savings, money market
and certificates of deposit.

     Total deposits increased 6.14% between December 31, 1997 and September 30,
1998, in all deposit areas except money market savings accounts. The cost of
funds for the first nine months of 1998 was 4.91% compared to 5.02% for the same
period in 1997. The yields on all deposits declined slightly within the period
except demand deposits. 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 and saw
only moderate increases in these deposits in the first nine months of 1998.

Borrowed Money

     The Company will occasionally borrow funds from the Federal Home Loan Bank
to reduce market rate risks. Such borrowings are on a relatively small scale and
are not a significant source of funding to the Company.


<PAGE> 15


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 September 30, 1998, the Company's total risk based capital ratio
was 18.11% which is far above the regulatory minimum of 8.0%. The ratio of total
capital to total assets was 11.08% at September 30, 1998.

     Management believes this level of capital is adequate to meet current
requirements and allow for future growth.

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 and proceeds from the maturity of investment securities have 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 September 30, 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> 16


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


Year 2000 Project

     Each of the subsidiary banks has appointed a group of individuals from
within the Bank to identify critical areas for year 2000 compliance and to
determine if that area will be year 2000 compliant. Critical compliance areas
include third party data processing, internal computer readiness, check and
deposit transaction processing, security, liquidity planning and correspondent
banking. The Company has begun to ascertain its compliance internally through
the help of computer and information consultants and the upgrade of computer and
information processing hardware. Noncompliance items and systems have been
identified. Most remediation is complete and testing of remediation results is
under way. Testing of substantially all systems is anticipated to be complete by
December 31, 1998. Testing of external interfaces is scheduled for the first
quarter of 1999. Continuing discussions with third party vendors who perform
data processing functions and with correspondent banking institutions do not
indicate any critical shortcomings in their compliance at this time.

     As of September 30, 1998, the Company has incurred $370,000 in services and
equipment costs in its efforts to become year 2000 compliant. Most of these
expenditures include amounts for normal and scheduled equipment upgrades. The
Company has budgeted $625,000 in total expenditures through December 31, 1999
for its compliance effort. Roughly 60 to 70% of this amount will be for
equipment replacements and upgrades. Some of the costs of the year 2000 project
include the cost of Company personnel who will spend significant time on the
project. The Company does not anticipate that these costs when aggregated will
have a materially negative impact on the Company operations in any one period.

     The impact of year 2000 issues on the Company will depend not only on
corrective actions that the Company takes, but also on the way in which year
2000 issues are addressed by governmental agencies, businesses and other third
parties that provide services or data to, or receive services or data from, the
Company, or whose financial condition or operational capability is important to
the Company. To reduce this exposure, the Company has an ongoing process of
identifying and contacting mission critical third party vendors and other
significant third parties to determine their year 2000 plans and target dates.
Notwithstanding the Company's efforts, there can be no assurance that mission
critical third party vendors or other significant third parties will adequately
address their year 2000 issues.

     The Company is developing contingency plans for implementation in the event
that mission critical third party vendors or other significant third parties
fail to adequately address year 2000 issues. Such plans principally involve
identifying alternate vendors or internal remediation. The Company is also
enhancing its existing business resumption plans to reflect year 2000 issues and
is developing plans designed to coordinate the efforts of its personnel and
resources in addressing any year 2000 problems that become evident after
December 31, 1999. There can be no assurance that any such plans will fully
mitigate any such failure or problems. Furthermore, there may be certain mission
critical third parties, such as utilities or telecommunication companies, where
alternative arrangements or sources are limited or unavailable.

     The Company's credit risk associated with borrowers may increase to the
extent borrowers fail to adequately address year 2000 issues. As a result, there
may be increases in the Company's problem loans and credit losses in future
years. It is not, however, possible to quantify the potential impact of such
losses at this time.

     If year 2000 issues are not adequately addressed by the Company and third
parties, the Company's business, results of operations and financial position
could be materially adversely affected.


<PAGE> 17


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


Year 2000 Project (Continued)

     The foregoing year 2000 discussion contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements, including without limitation, anticipated costs, the dates by which
the Company expects to substantially complete programming changes, remediation
and testing of systems and the impact of the redeployment of existing staff, are
based on management's best current estimates, which were derived utilizing
numerous assumptions about future events, including the continued availability
of certain resources, representations received from third party service
providers and other factors. However, there can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to identify and convert all relevant computer systems,
results of year 2000 testing, adequate resolution of year 2000 issues by
governmental agencies, businesses or other third parties who are service
providers, suppliers, borrowers or customers of the Company, unanticipated
system costs, the need to replace hardware, the adequacy of and ability to
implement contingency plans and similar uncertainties. The "forward-looking
statements" made in the foregoing year 2000 discussion speak only as of the date
on which such statements are made, and the Company undertakes no obligation to
update any forward-looking statement to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events.

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 19) 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> 18

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

                              Nine Months Ended           Nine Months Ended
                             September 30, 1998          September 30, 1997

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

Rate Related Income
   Loans
     Commercial             $31,422  $2,080   8.83%     $26,549  $1,781   8.94%
     Consumer                30,045   2,509  11.13%      27,035   2,314  11.41%
     Real Estate             80,418   5,182   8.59%      75,822   4,976   8.75%
                             ------   -----   ----       ------   -----   ----

     Total                  141,885   9,771   9.18%     129,406   9,071   9.35%

   Federal funds sold         6,935     284   5.46%       4,906     206   5.60%
   Interest bearing deposits    853      35   5.47%         715      26   4.85%
   Investments
     Taxable                 31,918   1,500   6.27%      37,372   1,771   6.32%
     Tax exempt (1)           3,314     203   8.17%       3,592     225   8.35%
                              -----     ---   ----        -----    ----   ----

   Total Earning Assets (1) 184,905  11,793   8.50%     175,991  11,299   8.55%
                            -------  ------ ------     --------  ------   -----

Interest Expense
   Demand deposits           28,830     615   2.84%      27,706     587   2.82%
   Savings                   19,944     519   3.47%      18,541     489   3.52%
   Time deposits            107,494   4,623   5.73%      99,722   4,407   5.89%
   Other borrowed money         557      23   5.51%       1,517      68   5.98%
                             ------  ------  -----      -------    ----   -----

   Total Interest Bearing
     Liabilities            156,825   5,780   4.91%     147,486   5,551   5.02%
                            -------  ------   ----      -------   -----   -----

   Net Interest Margin              $ 6,013            $  5,748
                                     ======               =====

Net Yield on Interest
   Earning Assets (1)                         4.34%                       4.35%
                                             =====                       =====

(1) Yields are on a taxable equivalent basis using an assumed tax rate of 37%.


<PAGE> 18 (Continued)

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

                              Three Months Ended         Three Months Ended
                              September 30, 1998         September 30, 1997

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

Rate Related Income
   Loans
     Commercial             $31,127  $  698    8.96%    $26,739  $  602   9.00%
     Consumer                31,110     872   11.21%     27,843     793  11.39%
     Real Estate             82,571   1,784    8.64%     77,980   1,708   8.76%
                             ------   -----    ----      ------   -----   ----

     Total                  144,808   3,354    9.26%    132,562   3,103   9.36%

   Federal funds sold         7,054      96    5.44%      5,854      84   5.74%
   Interest bearing deposits    811      11    5.43%        529       7   5.29%
   Investments
     Taxable                 31,126     490    6.30%     36,974     585   6.33%
     Tax exempt (1)           3,225      65    8.06%      3,560      74   8.31%
                              -----     ---    ----       -----    ----   ----

   Total Earning Assets (1) 187,024   4,016    8.59%    179,479   3,853   8.59%
                            -------   -----   ------    -------   -----   ----

Interest Expense
   Demand deposits           28,445     203    2.85%     27,874     210   3.01%
   Savings                   20,271     178    3.51%     18,883     167   3.54%
   Time deposits            108,871   1,572    5.78%    102,850   1,509   5.87%
   Other borrowed money         734      11    5.99%      2,003      31   6.19%
                             ------  ------   -----     -------    ----   ----

   Total Interest Bearing
     Liabilities            158,321   1,964    4.96%    151,610   1,917   5.06%
                            -------   -----   -----     -------   -----   ----

   Net Interest Margin              $ 2,052                     $ 1,936
                                     ======                       =====

Net Yield on Interest
   Earning Assets (1)                          4.39%                      4.31%
                                              =====                       =====

(1) Yields are on a taxable equivalent basis using an assumed tax rate of 37%.


<PAGE> 19

TABLE II

                          HIGHLANDS BANKSHARES, INC.
                      INTEREST RATE SENSITIVITY ANALYSIS
                              SEPTEMBER 30, 1998
                           (In Thousands of Dollars)


                          1 - 90  91 - 365  1 to 3   3 to 5  More than
                           Days     Days     Years    Years   5 Years   Total
EARNINGS ASSETS

   Loans                 $ 20,994 $ 53,365 $ 49,000 $ 12,842 $ 9,081  $145,282
   Fed funds sold          11,725                                       11,725
   Securities               3,172    8,387   12,467    3,174   5,572    32,772
   Time deposits in
     other banks              237      600                                 837
                           ------  -------  -------  -------  ------    ------

   Total                   36,128   62,352   61,467   16,016  14,653   190,616
                          -------  -------  -------  ------- -------   -------


INTEREST BEARING LIABILITIES

   Transaction accounts    18,113                                       18,113
   Money market accounts   11,538                                       11,538
   Savings accounts        21,283                                       21,283
   Time deposits more
     than $100,000          2,953   14,387    6,269    1,442            25,051
   Time deposits less
     than $100,000         12,078   42,393   24,542    5,545     100    84,658
   Other borrowed money        15       47      138      156     373       729
                           ------  -------  -------  -------  ------    ------

   Total                   65,980   56,827   30,949   7,143      473   161,372
                          -------  -------  -------  ------    -----   -------



Rate sensitivity GAP      (29,852)   5,525   30,518   8,873   14,180    29,244

Cumulative GAP            (29,852) (24,327)   6,191  15,064   29,244

Ratio of cumulative
   interest sensitive assets
   to cumulative interest
   sensitive liabilities    54.76%   80.19%  104.03% 109.36%  118.12%


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


<PAGE> 20


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.

                                           3(ii) Bylaws of Highlands Bankshares,
                                                 Inc. are incorporated by
                                                 reference to Appendix D to
                                                 Highlands Bankshares, Inc.'s
                                                 Form S-4 filed October 20,
                                                 1986.

                                            27   Financial Data Schedule
                                                 attached

                                      (b) Reports on Form 8-K filed during the
                                          nine months ended September 30, 1998.

                                          None


<PAGE> 21


                                 EXHIBIT INDEX



Exhibit
 Index                                                            Page Number

  27       Financial Data Schedule for the quarter ending
             September 30, 1998                                        23



<PAGE> 22


                                   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


                                       JOHN A. VANMETER
                                       John A. VanMeter
                                       Chairman



Date    November 10, 1998