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 September 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 October 31, 2003:
1,436,874 shares of Common Stock, $5 Par Value.


<PAGE> 1



                          HIGHLANDS BANKSHARES, INC.


                                     INDEX


                                                                        Page

PART I    FINANCIAL INFORMATION

Item 1.   Financial Statements

          Unaudited Consolidated Statements of Income - Nine Months
          Ended September 30, 2003 and 2002                               2

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

          Consolidated Balance Sheets - September 30, 2003
          (Unaudited) and December 31, 2002 (Audited)                     4

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

          Unaudited Consolidated Statements of Cash Flows - Nine Months
          Ended September 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     23

Item 4.   Controls and Procedures                                        23


PART II   OTHER INFORMATION

Item 1.   Legal Proceedings                                              24

Item 2.   Changes in Securities and Use of Proceeds                      24

Item 3.   Defaults upon Senior Securities                                24

Item 4.   Submission of Matters to a Vote of Security Holders            24

Item 5.   Other Information                                              24

Item 6.   Exhibits and Reports on Form 8K                                24


          SIGNATURES                                                     25



<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)

                                                           Nine Months Ended
                                                             September 30
                                                          2003        2002
Interest Income
   Interest and fees on loans                           $ 12,795    $12,974
   Interest on federal funds sold                            170        126
   Interest on time deposits                                  44         85
   Interest and dividends on investment securities
     Taxable                                                 681        913
     Nontaxable                                              120        154
                                                         -------     ------

   Total Interest Income                                  13,810     14,252
                                                         -------     ------

Interest Expense
   Interest on time deposits over $100,000                 1,320      1,573
   Interest on other deposits                              3,473      4,161
   Interest on borrowed money                                175        154
                                                         -------     ------

   Total Interest Expense                                  4,968      5,888
                                                         -------     ------

Net Interest Income                                        8,842      8,364

Provision for Loan Losses                                    995        470
                                                         -------     ------

Net Interest Income After Provision for Loan Losses        7,847      7,894
                                                         -------     ------

Noninterest Income
   Service charges                                           454        431
   Gains on investment in insurance contracts                169        107
   Insurance income                                          159        149
   Other                                                     248        205
                                                         -------     ------

   Total Noninterest Income                                1,030        892
                                                         -------     ------

Noninterest Expense
   Salaries and employee benefits                          3,251      3,116
   Equipment and occupancy expense                           851        780
   Data processing                                           441        423
   Other                                                   1,461      1,498
                                                         -------     ------

Total Noninterest Expense                                  6,004      5,817
                                                         -------     ------

Income Before Income Taxes                                 2,873      2,969

Provision for Income Taxes                                   927        956
                                                         -------     ------

Net Income                                              $  1,946    $ 2,013
                                                         =======     ======

Per Share Data

   Net Income                                           $   1.35    $  1.38
                                                         =======     ======

   Cash Dividends                                       $    .42    $   .38
                                                         =======     ======

Weighted Average Common Shares Outstanding             1,436,874  1,461,792
                                                       =========  =========

       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
                                                            September 30
                                                          2003         2002
Interest Income
   Interest and fees on loans                           $  4,289    $ 4,418
   Interest on federal funds sold                             48         30
   Interest on time deposits                                  15         20
   Interest and dividends on investment securities
     Taxable                                                 213        290
     Nontaxable                                               39         51
                                                         -------     ------

   Total Interest Income                                   4,604      4,809
                                                         -------     ------

Interest Expense
   Interest on time deposits over $100,000                   379        452
   Interest on other deposits                              1,097      1,298
   Interest on borrowed money                                 67         51
                                                         -------     ------

   Total Interest Expense                                  1,543      1,801
                                                         -------     ------

Net Interest Income                                        3,061      3,008

Provision for Loan Losses                                    240        210
                                                         -------     ------

Net Interest Income After Provision for Loan Losses        2,821      2,798
                                                         -------     ------

Noninterest Income
   Service charges                                           166        158
   Gains on investment in insurance contracts                 58         52
   Insurance income                                           52         53
   Other income                                               72         65
                                                         -------     ------

   Total Noninterest Income                                  348        328
                                                         -------     ------

Noninterest Expense
   Salaries and employee benefits                          1,110      1,050
   Equipment and Occupancy expense                           285        263
   Data processing expense                                   156        137
   Other                                                     525        550
                                                         -------     ------

   Total Noninterest Expense                               2,076      2,000
                                                         -------     ------

Income Before Income Taxes                                 1,093      1,126

Provision for Income Taxes                                   363        375
                                                         -------     ------

Net Income                                              $    730    $   751
                                                         =======     ======

Per Share Data

   Net Income                                           $    .51    $   .52
                                                         =======     ======

   Cash Dividends                                       $    .14    $   .13
                                                         =======     ======

Weighted Average Common Shares Outstanding             1,436,874  1,436,874
                                                       =========  =========

       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,
                                                        2003          2002
     ASSETS                                           (Unaudited)  (Audited)

Cash and due from banks                               $  6,281    $  8,226
Time deposits in other banks                             5,809       4,500
Federal funds sold                                      18,723      14,625
Securities held to maturity (note 2)                     1,365       1,369
Securities available for sale (note 3)                  32,618      23,496
Other investments (note 4)                                 961         672
Loans (note 5)                                         226,763     225,754
Allowance for loan losses (note 6)                      (2,414)     (1,793)
Bank premises and equipment                              6,610       6,873
Interest receivable                                      1,828       1,821
Investments in insurance contracts (note 7)              5,481       5,338
Other assets                                             1,525       1,466
                                                       -------     -------

   Total Assets                                       $305,550    $292,347
                                                       =======     =======

     LIABILITIES

Deposits:
   Noninterest bearing demand deposits                $ 35,668    $ 31,785
   Interest bearing
     Money market and checking                          21,350      20,936
     Money market savings                               16,011      16,996
     Savings                                            31,896      29,503
     Time deposits over $100,000                        49,316      45,392
     All other time deposits                           113,767     112,899
                                                       -------     -------

   Total Deposits                                      268,008     257,511

Borrowed money                                           5,393       4,030
Accrued expenses and other liabilities                   2,029       1,890
                                                       -------     -------

   Total Liabilities                                   275,430     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                                       21,192      19,850
Accumulated other comprehensive income                      82         220
                                                       -------     -------


   Total Stockholders' Equity                           30,120      28,916
                                                       -------     -------

   Total Liabilities and Stockholders' Equity         $305,550    $292,347
                                                       =======     =======


       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)
                                  (Unaudited)
<CAPTION>

                                                                           Accumulated
                                                                               Other
                                Common             Treasury   Retained    Comprehensive
                                Stock     Surplus    Stock     Earnings       Income        Total
<S>                            <C>       <C>       <C>         <C>         <C>           <C>

Balance, December 31, 2002     $ 7,184   $ 1,662   $     0     $19,850     $    220      $ 28,916
   Comprehensive Income
   Net Income                                                    1,946                      1,946
   Net change in unrealized
     appreciation on
     investment
     securities available
     for sale,
     net of taxes                                                              (138)         (138)
                                                                                           ------

   Total Comprehensive Income                                                               1,808

   Cash dividends paid                                            (604)                      (604)
                                -----     ------    ------      -------       ------        ------

   Balances, September 30,
    2003                       $ 7,184   $ 1,662   $           $21,192      $    82      $ 30,120
                                =======   ======    =======     ======       ======       =======


                                                                           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                                                     2,013                     2,013
   Net change in unrealized
     appreciation on investment
     securities available
     for sale,
     net of taxes                                                                39            39
                                                                                           ------

   Total Comprehensive Income                                                               2,052

   Treasury stock repurchased                      (1,217)                                 (1,217)
   Treasury stock retired         (340)             2,210        (1,870)
   Stock split effected in
     the form
     of dividend                 4,790                           (4,790)
   Cash dividends paid                                             (552)                     (552)
                                 -----    ------   ------         -------     ------       -------

   Balances, September 30,
     2002                      $ 7,184   $ 1,662  $           $  19,425    $    322      $ 28,593
                               =======    ======  ========    =========       =======    =======

</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)
                                   (Unaudited)

                                                            Nine Months Ended
                                                               September 30
                                                          2003         2002
Cash Flows from Operating Activities:
   Net income                                           $  1,946    $ 2,013
   Adjustments to reconcile net income to net
     cash provided by operating activities:
       Depreciation                                          460        392
       Net securities amortization                           410        227
       Provision for loan losses                             995        470
       Gains on investment in insurance contracts           (143)      (137)
       Increase in interest receivable                        (7)      (170)
       Increase in other assets                              (59)      (286)
       Increase in accrued expenses                          139         55
                                                         -------     ------

   Net Cash Provided by Operating Activities               3,741      2,564
                                                         -------     ------

Cash Flows from Investing Activities:
   Net change in time deposits in other banks             (1,309)     2,967
   Net change in federal funds sold                       (4,098)     5,035
   Proceeds from maturities of securities available
     for sale                                             12,459      6,817
   Proceeds from maturities of securities held
     to maturity                                               1        232
   Purchase of securities available for sale             (22,124)    (3,876)
   Purchase of other investments                            (290)       (67)
   Net change in loans                                    (1,383)   (19,903)
   Purchase of property and equipment                       (199)      (305)
                                                         --------    ------

   Net Cash Consumed by Investing Activities             (16,943)    (9,100)
                                                         --------    ------

Cash Flows from Financing Activities:
   Net change in time deposits                             4,792     (4,613)
   Net change in other deposits                            5,705     14,430
   Dividends paid in cash                                   (604)      (552)
   Purchase of treasury stock                                        (1,217)
   Repayment of borrowed money                              (421)      (366)
   Additional borrowed money                               1,785
                                                         -------     ------

   Net Cash Provided by Financing Activities              11,257      7,682
                                                         -------     ------

Net Increase (Decrease) in Cash and Cash Equivalents      (1,945)     1,146

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

Cash and Cash Equivalents, End of Period                $  6,281    $ 7,638
                                                         =======     ======

Supplemental Disclosures:
   Cash Paid For:
     Income taxes                                       $  1,050    $   956
     Interest                                              5,030      6,078

       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 (consisting of only
          normally occurring accruals) necessary to present fairly the financial
          position as of September 30, 2003 and the results of operations for
          the three month periods and nine month periods ended September 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 September 30, 2003 and December 31, 2002, are as follows (in
          thousands):

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

          Mortgage-backed
            securities              $     2  $     2      $    4   $     4
          Obligations of states and
            political subdivisions    1,363    1,457       1,365     1,447
                                     ------   ------       -----    ------

            Total                   $ 1,365  $ 1,459      $1,369   $ 1,451
                                     ======   ======       =====    ======


NOTE 3    SECURITIES AVAILABLE FOR SALE:

             The amortized cost and fair value of securities available for sale
          as of September 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  $  19,111 $ 19,232   $  8,844   $  8,961
          Mortgage-backed securities       7,307    7,367      5,410      5,582
          Obligations of states and
            political subdivisions         3,692    3,744      4,238      4,350
          Other investments                2,269    2,275      4,540      4,603
                                         --------   -----     -------   --------

            Total                       $ 32,379 $ 32,618   $ 23,032   $ 23,496
                                         ======   ======     ======      ======


<PAGE> 8



                          HIGHLANDS BANKSHARES, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 4    OTHER INVESTMENTS

            Other investments totaling $ 961,000 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 September 30, 2003 and
          December 31, 2002, is as follows (in thousands):

                                                        2003         2002

          Commercial                                  $ 42,701    $ 47,089
          Real estate - construction                     7,090       6,813
                      - mortgages                      128,145     121,558
          Consumer installment                          48,827      50,294
                                                       -------     -------

          Net loans outstanding                       $226,763    $225,754
                                                       =======     =======


NOTE 6    ALLOWANCE FOR LOAN LOSSES:

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

                                                        2003         2002

          Balance, beginning of period                $  1,793    $  1,603
          Provisions charged to operating expenses         995         470
          Loan recoveries                                  206         117
          Loan charge-offs                                (580)       (409)
                                                       --------    -------

            Balance, end of period                    $  2,414    $  1,781
                                                       =======     =======


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 approximately equal to the Company's average
          cost of funds and providing retirement benefits to employees. The
          carrying value of these investments was $5,481,000 at September 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 the second quarter of 2002, the Company repurchased stock from
unrelated parties in two separate transactions. Total shares repurchased were
22,940 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 were 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

        No recent accounting pronouncements had a 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 net income for the first nine months of 2003 decreased 3.33%
compared to the same period in 2002. Earnings per share were $1.35 for 2003
compared to $1.38 for 2002. The Company's annualized return on average equity
was 8.75% in 2003 compared to 9.47% for 2002. Return on average assets was .85%
for 2003 and .96% for 2002, respectively.

    Net interest income before provision for loan losses increased 5.71% from
2002 despite a decrease in the average loan balances year-to-date to deposit
ratio from 86.44% in 2002 to 83.89% in 2003. Due to regulatory guidance and the
recognition by Management of a need for additional allowance for loan losses
caused by increased delinquencies and the threat of continued economic decline,
the provision for loan losses charged against income during the nine months of
2003 was $995,000, up from $470,000 during the first nine months of 2002.

    Noninterest income rose as net insurance earnings by HBI Life Insurance
Company increased 205.04% and fiduciary earnings by Highlands Bankshares Trust
Company increased 78.65%. Service charge incomes were up 5.33% as the Company's
operations continue to expand.

    Noninterest expenses increased 3.21%. Salary expenses grew 4.33% due largely
to customary employee merit pay increases and increases in pension costs. Data
processing expense continues to grow as the company's asset base grows and
equipment expenses have increased as multiple projects have been begun to
upgrade operational systems.


    Quarter Ending September 30

    Net income for the quarter ending September 30, 2003 decreased to $730,000
from $751,000 during the third quarter of 2002. Annualized return on average
assets for the quarter were .95% and return on average equity was 9.72%.

     A 1.76% increase in net interest income and a 6.10% increase in noninterest
income were offset by increases in noninterest expense (3.80%) and an increase
in the provision for loan losses (14.29%).


<PAGE> 11



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

Net Interest Income

    Year to Date

    Net interest income for the first nine months of 2003 was 5.72% greater than
net interest income of the same period in 2002. The company experienced a net
interest margin of 4.15% during the first nine months of 2003, down from 4.28%
during the same period in 2002.

    Compared to recent prior quarters, increases in loan demand slowed
considerably during the latter part of 2002, and this continued into 2003.
Average loan balances January through September grew 13.25% from 1999 to 2000,
14.23% from 2000 to 2001 and 9.19% from 2001 to 2002. From 2002 to 2003, the
Company's growth of average loan balances January through September increased
5.13% and the gross loan balance as of September 30, 2003 was .45% greater than
at December 31, 2002. While loan demand has been stable enough to maintain
current balances of loans outstanding, Management expects that due to continued
sluggish conditions in both the national and local economies, coupled with
increased competition for loans, loan growth in the near future will remain
relatively low. Continued decreases by the Federal Reserve Board (the "Fed")
during 2002 of the target rate for fed funds coupled with increased competition
for loans, both from local community banks and larger state and national
mortgage firms, contributed to a drop of 49 basis points on interest earned on
loans.

    Demand for deposit products was strong through the later parts of 2002 and
early portions of 2003. This caused the average balance of interest bearing
deposits during the first nine months of 2003 to increase 8.08% when compared to
2002. The largest portions of this growth was seen during the first quarter of
2003 as deposits grew 4.68% from December 31, 2002 to March 31, 2003. As loan
demand growth began to flatten over this same time period, both of the Company's
subsidiary banks began to experience increasing balances of lower earning liquid
assets such as deposits in other banks and fed funds sold and lowered deposit
rates accordingly to slow deposit growth. Deposit balances have declined .58%
from March 31, 2003 to September 30, 2003. Historically, levels of competition
for deposits in the Company's service area and the cash needs generated by loan
growth have caused the Company's subsidiary banks to traditionally pay higher
rates on deposits than larger, statewide financial institutions. The increasing
liquidity position through the first nine months of 2003 caused it to be
unnecessary to pay significantly higher deposit rates than other local
institutions, and the rates at both of the Company's subsidiary banks are at
present typically near those of other local banks and depository institutions.
Older, above market time deposits continued to mature during 2003 and have been
replaced by time deposits with lower rates, causing a 91 basis point decline in
average rates paid on time deposits during 2003 compared to 2002.

    During 2001 and 2002, loan growth was funded in part through reductions in
balances of fed funds sold and investment securities. As loan growth slowed and
deposit growth increased early in the year, the funds from the increased
deposits were used in part to increase balances of investment securities and fed
funds sold. A 109.90% increase in average fed funds sold offset a 59 basis point
decline in rates to cause a $44,000 increase in earnings on fed funds sold. An
8.59% increase in average securities balances was offset by a decline in rates
earned on securities due to the depressed interest rate environment.


<PAGE> 12


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

Net Interest Income (Continued)

    The Company periodically borrows money from the Federal Home Loan Bank
(FHLB). These borrowings are typically used to fund loan growth but have also
been used to fund renovation of Capon Valley Bank's main office building.
Expenses related to other borrowed fund rose from $154,000 during 2002 to
$175,000 during 2003. Year to date average balances of borrowed funds increased
6.30% from the first nine months of 2002 compared to the same period in 2003 and
the September 30, 2003 balance of other borrowed funds was 33.82% higher than at
December 31, 2002. Although the Company has found itself in an extremely
favorable liquidity position such that new loans could be funded through
balances of more liquid lower earning assets such as fed funds sold, the Company
during 2003 has chosen to fund certain larger fixed rate commercial loans by
borrowing from the Federal Home Loan Bank (FHLB). In borrowing from the FHLB at
fixed rates and maturity periods similar to these larger commercial loans, the
Company has attempted to minimize future interest rate risk.


    Quarter Ending September 30

    Net interest income on a taxable equivalent basis for the period ending
September 30, 2003 increased 1.51% compared to the same quarter in 2002. The
average balance of all interest bearing assets during the quarter increased
9.19% over the same period a year ago while the balance of interest bearing
liabilities grew 7.05%. Rate cuts by the Fed during 2001 and 2002 contributed to
declining yields as higher yielding loans and securities matured and were
replaced by lower yielding assets. This decline in yields was offset in part by
a reduction on the average cost of interest bearing liabilities. Balances of fed
funds sold and interest bearing deposits increased substantially as the loan
growth experienced in recent years slowed and was outpaced by deposit growth.

    A complete yield analysis is shown as Table I on page 21.

Noninterest Income

    Year to Date

       Noninterest income totaled $1,030,000 during the first nine months of
2003, an increase of 15.47% from the same period a year ago. Service charge
income on accounts increased 5.33%. Income related to the sale of insurance
products and the insurance earnings of HBI Life Insurance Company increased
76.77% from a year ago to $189,000. Gains on sales of other real estate owned
decreased from $22,000 in 2002 to $8,000 in 2003. As the company's asset and
customer base continues to grow, transaction related fees rose 12.14% during
2003 as compared to 2002.


    Quarter Ending September 30

    Noninterest income for the quarter ended September 30, 2003 increased 6.10%
compared to the same period a year ago. Service charge income increased compared
to 2002 due to expanded operations. Although insurance related income and trust
fees have increased year to date, both areas of these operations decreased
during the third quarter of 2003 as compared to 2002. Transaction related fees
increased 12.48% during the third quarter of 2003 compared to 2002.



<PAGE> 13



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


Noninterest Expenses

    Year to Date

    Noninterest expense totaled $6,004,000 during the first nine months of 2003,
an increase of 3.21% over the same period in 2002.

    The cost of salaries and employee benefits increased 4.33%. While customary
merit increases contributed to the increase, also playing a significant role in
the increase were increases in pension costs. Due to the depressed investment
market, costs relating to Grant County Bank's defined benefit plan have
increased.

    Occupancy and equipment expense increased 9.10%. As the Company's subsidiary
banks have sought to improve their operational capabilities, projects have been
undertaken to upgrade systems. This has caused the Company's equipment
depreciation expense to increase 17.35% compared to 2002. As these upgrades
continue, the company expects these costs to continue to rise in the near
future, with this increase being offset by cost advantages in other areas as
these systems provide greater efficiency. Advertising expense fell 35.69% during
the first nine months of 2003 compared to the same period in 2002: during 2002,
The Grant County Bank incurred fees for a celebration of its 100th year
anniversary. Director Fees increased 14.70% and largely due to expanded audit
procedures and regulatory examinations, legal and professional fees increased
17.68%.

    Quarter Ending September 30

    Overall, noninterest expenses increased 3.80% for the quarter ending
September 30, 2003 compared to the quarter ending September 30, 2002 for largely
the same reasons as the year-to-date increases in noninterest expense.

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 northern Pendleton counties in West Virginia and western Frederick County in
Virginia. Consistent with its focus on providing community-based financial
services, the Company does not attempt to diversify its loan portfolio
geographically by making significant amounts of loans to borrowers outside of
its primary service area.

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



<PAGE> 14



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

Loan Portfolio (Continued)

    The loan to deposit ratio was 84.98% at September 30, 2003 compared to
87.67% at December 31, 2002 and 89.37% one year ago. The downturn in both the
national and local economies has had an impact on the slowing loan growth as
quality loans have been more difficult to obtain. However, loan demand has
remained strong enough such that the Company has been able to maintain its loan
balances. Barring any significant changes in the local or national economies,
loan demand is expected to remain satisfactory in the near future. Significant
growth in loan balances is not expected in the coming quarters, but Management
expects current balances of loans to continue at or near their current levels.


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 September 30, 2003 and December 31, 2002.

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

      Nonaccrual loans                                 $     958    $     299
      Restructured loans                                     642          662
      Loans past due 90 days or more
        and still accruing interest                        2,797        1,918


        Total                                          $   4,397    $   2,879
                                                        ========     ========


    Growth of delinquencies in the consumer loan portfolio has been a primary
cause of the balances of loans 90 days or more past due rising 45.83% since
December 31, 2002. Unless collections on these loans improve and balances are
reduced, a larger portion of these loans than has been historically customary
may need to be charged off in the coming quarters. This may have an effect of
lowering the Allowance for Loan Losses to unacceptable levels and the Company
may need to contribute a larger provision to the Allowance than has been
customary.

    Real estate acquired through foreclosure was $263,000 at September 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 September 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.


<PAGE> 15



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


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.

     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.


<PAGE> 16



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

Allowance for Loan Losses (Continued)

     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 1.07% at September 30, 2003, 1.05% at June 30, 2003, .85% at
March 31, 2003 and .79% at December 31, 2002. This increasing ratio represents
Management's belief that rising delinquencies and continued economic stagnation
have created larger losses in the loan portfolio. 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, has led to a
$995,000 provision charged against income during 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 exerting 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 10-Q and 10-K 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.

      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 grew from 6.7% in October of 2002 to 12.20% in May of 2003.
However, this rate has been declining in recent months, and the unemployment
rate for the County stood at 7.7% in September 2003. 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.


<PAGE> 17



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

Allowance for Loan Losses (Continued)

     The adequacy of the allowance for loan losses is computed quarterly and the
allowance, if necessary, is 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 nine month periods ended
September 30, 2003 and September 30, 2002 and for the quarters ended September
30, 2003 and September 30, 2002 is set forth in the following table (in
thousands):

                                       Quarter Ended     Nine Months Ended
                                       September 30,        September 30,
    Allowance for loan losses          2003    2002       2003     2002
    -------------------------          ----    ----       ----     ----

    Balance, beginning of period     $ 2,376  $ 1,723    $ 1,793  $ 1,603
    Net charge-offs (recoveries)
      Charge-offs                       (287)    (173)      (580)    (409)
      Recoveries                          85       21        206      117
                                      ------   ------     ------   ------

    Total net charge-offs               (202)    (152)      (374)    (292)
    Provision for loan losses            240      210        995      470
                                      ------   ------     ------   ------

      Balance, End of Period         $ 2,414  $ 1,781    $ 2,414  $ 1,781
                                      ======   ======     ======   ======



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

                                       Quarter Ended     Nine Months Ended
                                       September 30,        September 30,
                                     ----------------    -----------------------
                                       2003      2002       2003     2002
                                       ----      ----       ----     ----
   Components of net charge-offs:
      Real estate                    $        $   (19)   $   (33)   $    (6)
      Commercial                         (51)     (74)       (40)       (92)
      Installment                       (151)     (59)      (301)      (194)
                                      -------  ------     -------   ------

      Total                          $  (202) $  (152)   $  (374)   $  (292)
                                      =======  ======     =======    ======


<PAGE> 18



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

Allowance for Loan Losses (Continued)

     The following table shows the allocation of loans in the loan portfolio and
the corresponding amounts of the allowance allocated by loan types as of
September 30, 2003 and December 31, 2002:
<TABLE>

                           September 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       $    740        31%           19%         $     543        30%              21%
Mortgage              831        34%           60%               504        28%              57%
Consumer              762        32%           21%               652        37%              22%
Unallocated            81         3%             %                94         5%                %
                   ------       ----          ----          --------      -----              ---
   Totals        $  2,414       100%          100%          $  1,793       100%             100%
                  =======       ====           ===           ======       =====             =====

</TABLE>

Securities

     The Company's securities portfolio serves numerous purposes. While
providing the Company with a return, portions of the portfolio may secure
certain public and trust deposits and the remaining portions are used to assist
the Company in liquidity and asset/liability management. Securities as a
percentage of total assets were 11.44% at September 30, 2003 compared to 8.74%
at December 31, 2002. During 2002, loan growth was funded in part through
reductions in securities holdings. As loan growth slowed through the fourth
quarter of 2002 and into 2003, securities relative to total assets have been
increased.

     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 September 30,
2003, the fair value of the securities available for sale exceeded their cost by
$239,000 ($151,000 after tax considerations).


<PAGE> 19




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


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.

     Deposit balances increased 4.08% from December 31, 2002 and September 30,
2003. The average cost of deposits for the first nine months of 2003 was 2.72%
compared to 3.52% for the same period in 2002. The majority of the Company's
deposits are time deposits that are attractive to persons seeking high yields on
their deposits but without the need for liquidity.

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, 2003, the Company's total risk based capital ratio
was 12.55% which is above the regulatory minimum of 8.0%. The leverage ratio of
total capital to total assets was 9.66% at September 30, 2003.

     Highlands Bankshares, Inc. operating funds, funds with which to pay
shareholder dividends and funds for the exploration of new business ventures
have been, in the past, supplied through dividends paid by subsidiary banks. The
various regulatory authorities impose restrictions on dividends paid by a state
bank. A state bank cannot pay dividends without the consent of the relevant
banking authorities in excess of the total net profits of the current year and
the combined retained profits of the previous two years. As of October 1, 2003,
the subsidiary banks could pay dividends to Highlands Bankshares, Inc. of
approximately $1,593,000 without permission of the regulatory authorities. The
following tables summarize the dividend limits (in thousands) as of October 1,
2003 for Capon Valley Bank (CVB) and The Grant County Bank (GCB).

                 2001               2002           2003 Year to Date   Dividend
            Net                Net                   Net                Limit
          Income  Dividends  Income    Dividends   Income  Dividends  October 1,
                                                                         2003
          ----------------------------------------------------------------------
CVB      $1,110   $1,532   $ 1,076     $  975     $   562   $   --   $  241
GCB       1,468    1,531     1,627        975       1,417      653    1,352
          -----    -----    ------        ---      ------    -----    -----
Total    $2,578   $3,063   $ 2,703    $ 1,950     $ 1,979   $  653   $1,593

     In addition to regulatory restrictions on dividends, the Company's
subsidiary banks must maintain certain regulatory minimum levels of capital.
During 2001 and 2002, the Company funded the creation of Highlands Bankshares
Trust Company and repurchased shares of the Company's stock through dividends
from the subsidiary banks. Although these large subsidiary dividends, coupled
with decreased return on average assets during recent quarters, have created the
need for the Company to more closely manage its Capital, management does not
foresee the need for a reduction in shareholder dividends in the foreseeable
future or for there to be a problem with the subsidiary banks being able to
dividend operating funds to the holding company.

     In addition to funds from the subsidiaries, the Company has at its disposal
other options for funding which include, but are not limited to, Trust Preferred
Securities and debt. The Company is currently pursuing a line of credit with a
commercial bank. This line of credit will be used to more closely manage capital
to maximize the business opportunities of the Company and it subsidiaries. It is
anticipated that this debt will be obtained during the fourth quarter of 2003.


<PAGE> 20



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

Liquidity

     Liquidity is the ability to meet present and future loan commitments,
deposit withdrawals and operating cash needs. Liquidity is provided primarily
from cash provided by operations and reduction of cash on hand, funds deposited
with other financial institutions and fed funds sold. Additional liquidity needs
can be met through the acquisition of deposits, borrowings from the Federal Home
Loan Bank, and through fed funds purchased. To further meet its liquidity needs,
the Company also maintains lines of credit with correspondent financial
institutions and the Federal Reserve Bank of Richmond.

     As of September 30, 2003, the Company's total of cash, due from banks and
fed funds sold totaled $30,813 or 11.19% of total liabilities. 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. In the past,
growth in deposits has been sufficient to fund the net increase in loans and
investment securities.

     The primary needs for liquidity with the Company exist within the
operations of the subsidiary banks. However, certain operations such as
administrative functions occur within the parent company. Operating liquidity
for Highlands Bankshares Inc. comes from dividends from its subsidiaries.
Although the additional management of dividends as discussed above is needed,
the Company expects that no regulatory dividend restriction will cause the
subsidiary banks to not be able to dividend funds to Highlands Bankshares, Inc.
and that the Company will be able to meet the operational obligations of it's
parent organization.

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, 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 quickly to
rapid market rate changes. 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.

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

                        Nine  Months Ended                Nine Months Ended
                        September  30, 2003              September 30, 2002
                     ---------------------------     --------------------------
                     Average     Income/               Average    Income/
                     Balance    Expense    Rates       Balance    Expense  Rates
Interest Income
   Loans 1, 3
     Commercial 5    $ 11,278   $  702     8.30%      $ 13,543    $  716   7.05%
     Consumer          48,979    3,710    10.10%        53,715     4,509  11.19%
     Real estate 5    165,838    8,383     6.74%       147,813     7,749   6.99%
                      -------   ------    ------       -------     -----  -----

   Total              226,095   12,795     7.55%       215,071    12,974   8.04%
   Federal funds
     sold              21,219      170     1.07%        10,109       126   1.66%
   Interest bearing
     deposits           5,952       44      .99%         5,055        85   2.24%
   Investments
     Taxable 4         29,044      681     3.13%        24,932       913   4.88%
     Tax exempt 2,4     3,974      188     6.30%         5,473       244   5.94%
                        -----    -----     ----          -----     -----   -----

   Total Earning
      Assets          286,284   13,878     6.46%       260,640    14,342   7.34%
                     ---------   -----   -------       -------    ------  -----

Interest Expense
   Money markets       21,186      113      .71%        19,293       175   1.21%
   Savings             47,937      313      .87%        43,255       424   1.35%
   Time deposits      165,560    4,367     3.52%       154,587     5,134   4.43%
   Borrowed money       4,589      175     5.08%         4,317       154   4.76%
                        -----    -----     ----         -----      -----   -----

   Total Interest
     Bearing
     Liabilities      239,272    4,968     2.77%       221,452     5,887   3.54%
                      -------   -------   ------       -------     -----   -----

   Net Interest Income         $ 8,910                           $ 8,455
                                 =====                             =====

   Net Yield on
     Interest Earning
     Assets                                4.15%                           4.33%
                                           ====                           =====

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> 21 (Continued)

TABLE I


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

                             Three Months Ended           Three Months Ended
                             September 30, 2003            September 30, 2002
                        --------------------------   --------------------------
                       Average    Income/              Average   Income/
                       Balance    Expense     Rates    Balance  Expense    Rates
Interest Income
   Loans 1, 3
     Commercial 5     $ 10,008     $  227     9.08%   $ 14,062   $  256    7.28%
     Consumer           48,907      1,116     8.94%     55,549    1,361    9.80%
     Real estate 5     167,895      2,946     7.02%    153,227    2,801    7.31%
                       ------      ------    -----     -------    -----    -----

   Total               226,810      4,289     7.56%    222,838    4,418    7.93%

   Federal funds sold   20,565         48      .93%      7,257       30    1.65%
   Interest bearing
     deposits            6,263         15      .96%      3,636       20    2.20%
   Investments
     Taxable 4          30,624        213     2.79%     23,803      290    4.87%
     Tax exempt 2,4      4,043         60     5.89%      5,225       81    6.20%
                         -----      -----      ----     -----     -----   -----

   Total Earning
      Assets           288,305      4,625     6.42%    262,759    4,839    7.37%
                        ------      -----    ------    -------    -----   ------

Interest Expense
   Money markets        21,110         24       .45%    20,590       57    1.10%
   Savings              48,211         73       .61%    46,463      132    1.21%
   Time deposits       165,244      1,379      3.34%   154,188    1,561    4.05%
   Borrowed money        5,366         67      4.99%     4,195       51    4.86%
                         -----       -----     ----     -----     -----   -----

   Total Interest Bearing
     Liabilities       239,931      1,543      2.57%   224,136    1,801    3.21%
                       -------      -----     ------   ------     -----  ------

   Net Interest Income           $  3,082                       $ 3,038
                                    =====                       =====

   Net Yield on Interest
     Earning
     Assets                                    4.28%                       4.62%
                                               ====                       =====

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 II

                          HIGHLANDS BANKSHARES, INC.
                      INTEREST RATE SENSITIVITY ANALYSIS
                              SEPTEMBER 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
EARNINGS ASSETS

   Loans                $58,484  $ 88,451  $ 53,972  $11,953  $13,903  $226,763
   Fed funds sold        18,723                                          18,723
   Securities            12,715    12,304     7,486      933    1,506    34,944
   Time deposits in other
     banks                5,609                 200                       5,809
                          ------   ------    ------    ----- -   -----   ------

   Total                 95,531   100,755    61,658   12,886   15,409   286,239
                         ------   -------     ------  ------   ------   -------



INTEREST BEARING LIABILITIES

   Transaction accounts  21,350                                          21,350
   Money market savings  16,011                                          16,011
   Savings accounts      31,896                                          31,896
   Time deposits more
     than $100,000        7,080    21,888    12,506    7,842             49,316
   Time deposits less
     than $100,000       19,816    50,058    31,624   12,269            113,767
   Borrowed money           154       462     1,233    1,233    2,311     5,393
                          ------   ------    ------   ------    -----   ------

   Total                 96,307    72,408    45,363   21,344    2,311   237,733
                        --------    -----    ------    -----   ------   -------


Rate sensitivity GAP       (776)   28,347    16,295   (8,458)  13,098    48,506

Cumulative GAP             (776)   27,571    43,866   35,408   48,506

Ratio of cumulative
   interest sensitive
   assets to
   cumulative interest
   sensitive liabilities  99.19%  116.34%    120.49%  115.04%  120.40%



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


<PAGE> 23



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. 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 Chief Executive Officer and Chief Financial
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, and most recently did so as of the end of the period covered by
this report.

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.

      Due to the nature of the Company's business as stewards of assets of
customers, internal controls are of the utmost importance. The company has
established procedures undertaken during the normal course of business to
reasonably ensure that fraudulent activity of either an amount material to these
results or in any amount is not occurring. In addition to these controls and
review by executive officers, the Company retains the services of Yount, Hyde &
Barbour, P.C., a public accounting firm, to complete regular internal audits to
examine the processes and procedures of the Company and its subsidiary banks to
ensure that these processes are both reasonably effective to prevent fraud, both
internal and external, and that these processes comply with relevant regulatory
guidelines of all relevant banking authorities. The findings of Yount, Hyde &
Barbour are presented both to Management of the subsidiary banks and to the
Audit Committee.


<PAGE> 24




PART II  OTHER INFORMATION

Item 1. Legal Proceedings--Not Applicable

Item 2. Changes in Securities and Use of Proceeds--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
        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 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 September
            30, 2003--None



<PAGE> 25






                                   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:  November 12, 2003