Securities and Exchange Commission
                   Washington, D.C.  20549


                          FORM 10-K

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


For the Fiscal Year ended:               Commission File Number:
    December 31, 1997                           430893107


                 Highlands Bankshares, Inc.
   (Exact name of registrant as specified in its charter)


Virginia                                     54-1796693
________                                     __________
(State or other jurisdiction                 (I.R.S. Employer
of incorporation or organization)            Identification Number)

340 West Main Street
Abingdon, Virginia                           24210-1128
____________________                         __________
(Address of principal                        (Zip Code)
executive offices)

Registrant's telephone number, including area code:  (540)628-9181


 Securities registered pursuant to Section 12(b) of the Act:
                         Not Applicable
                         ______________

 Securities registered pursuant to Section 12(g) of the Act:
                Common Stock, $2.50 par value
                _____________________________
                      (Title of Class)


Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months and (2) has been subject to such filing requirements
for the past 90 days.
Yes_X_No___

Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (Section 229.405 of
this chapter) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to
this Form 10-K.  [   ]

As of December 31, 1997, there were 1,232,250 shares of
Common Stock outstanding.
<PAGE>1
             Documents Incorporated by Reference


List hereunder the following documents if incorporated by
reference and the Part of Form 10-K into which the documents
are incorporated:

(1)  Part II incorporates information by reference from the
  registrant's Annual Report to Stockholders for the fiscal
  year ended December 31, 1997.

(2)  Part III incorporates by reference from the
  registrant's proxy statement for its Annual Meeting of
  Stockholders scheduled for May 13, 1998.

(3)  Part IV incorporates by reference from:  (i) the
  registrant's Annual Report to Stockholders for the fiscal
  year ended December 31, 1997, and (ii) the registrant's
  proxy statement for its Annual Meeting of Stockholders
  scheduled for May 13, 1998.

The exhibit index is located on page 26.

<PAGE>2

Part I.

Item I.  Business

                           General

     Highlands Bankshares Inc. (the "Corporation") was
incorporated in Virginia in 1995 to serve as the holding
company for Highlands Union Bank, (the "Bank").  The
stockholders of the Bank approved the Plan of Reorganization
at the Annual Meeting on December 13, 1995, and the
reorganization was consummated on December 29, 1995 with the
Bank becoming a wholly-owned subsidiary of the Corporation.
The Bank is a state charted bank with principal offices in
Abingdon, Virginia.  The Bank was incorporated in 1985.

     At December 31, 1997, the Corporation had total assets
of $258,236,000, deposits of $236,646,000, and net worth of
$16,802,000.

     The Corporation's principal business activities, which
are conducted through the Bank, are attracting checking and
savings deposits from the general public through its retail
banking offices and originating and servicing loans secured
by first mortgage liens on single-family dwellings,
including condominium units. All of the retail banking
offices are located in Virginia.  The Corporation also lends
funds to retail banking customers by means of home equity
and installment loans, and originates residential
constructions loans and loans secured by commercial
property, multi-family dwellings and manufactured housing
units.  The Corporation invests in certain U.S. Government
and agency obligations and other investments permitted by
applicable laws and regulations.  The operating results of
the Corporation are highly dependent on net interest income,
the difference between interest income earned on loans and
investments and the cost of checking and savings deposits
and borrowed funds.

     The Bank is a member of the Federal Deposit Insurance
Corporation ("FDIC"), and it's deposit accounts are insured
up to $100,000 as applied by FDIC guidelines. The Bank is
also a member of the Federal Reserve System, as such, the
Bank and the Corporation are subject to the supervision,
regulation and examination of the Federal Reserve. As a
Virginia state chartered bank, the Bank is also subject to
supervision, regulation and examination by the Virginia
State Corporation Commission.

     The Corporation's only direct subsidiary is the Bank as
of December 31, 1997.  The Corporation's only material
assets as of this date are it's building and land, the net book
value of which is approximately $1.3 million, located at 266 West
Plumb Alley, Abingdon, Virginia, and the stock of the Bank.  The
Corporation's only material liability is the note payable on
this commercial building, approximately $828,000, which is
secured by a first deed of trust.

     The Corporation operates five full service offices and one
express facility throughout Washington County, Virginia and
the City of Bristol, Virginia, and Marion, Virginia.

     The results of operations for the fiscal years ended
December 31, 1997, 1996, and 1995 ("fiscal year 1997",
"fiscal year 1996" and "fiscal year 1995", respectively)
reflect the Corporation's strategies of expanding its
community banking operations.

     See "Management's Discussion and Analysis" of
operations and financial condition, included as part of the
Annual Report to Stockholders, for a detailed discussion of
certain aspects of the Corporation's business.

                     Lending Activities

Residential Mortgage Lending

     The Corporation's lending policy is generally to lend
up to 80% of the appraised value of residential property.
The Corporation lends up to 95% of the appraised value with
the normal requirement
<PAGE 3>

of insurance from private mortgage insurance companies. This
insurance normally covers amounts in excess of 80% loan to value
up to 95%.
     The in-house residential mortgages are comprised of
primarily one, three and five year adjustable rate mortgages
and a relatively small number of 15 year fixed rate
mortgages. Adjustable rate mortgages are indexed to 275
basis points over the average yield on United States
Treasury securities adjusted to a constant maturity of one,
three or five years. An adjustment limitation (increase or
decrease) of 4% over the life of the loan is included in the
one, three and five year adjustable rate
mortgages.
     The corporation's existing loan contracts generally
provide for repayment of residential mortgage loans over
periods ranging from 15 to 30 years. However, such loans
normally have remained outstanding for much shorter periods
of time as borrowers refinance or prepay their loans through
the sale of their homes.
     Most of the Corporation's residential mortgage loans
have "due on sale" clauses which allows the creditor the
right to declare a loan immediately due and payable in the
event the borrower sells or otherwise disposes of the real
property. Most of the Corporation's residential mortgage
loans are not assumable.
     Mortgage loans exceeding $450,000 but less than
$750,000 must be approved by the loan committee of the Board
of Directors. Mortgage loans in excess of $750,000 must be
approved by the Board of Directors.
     All of the Corporation's mortgage lending is subject to
loan origination procedures established by the Board of
Directors. Most originations require a property valuation by
state licensed appraisers, for a fee, approved by the Board
of Directors. Loan applications are obtained to determine
the borrowers ability to repay. Significant items are
verified through the use of credit reports, financial
statements, etc.
     It is generally the Corporation's policy to require
title insurance on first mortgage loans in excess of
$100,000 (lower where deemed necessary). It is also  the
Bank's general policy to require an attorney's opinion
statement on all first mortgage deeds of trust. Fire and
casualty insurance (extended coverage) is generally required
on all property serving as security for these loans. Hazard
insurance and flood insurance (where required) is generally
provided by customers prior to closing of the loan. The
borrower is generally responsible for paying insurance
premiums and real estate taxes.
     Federal regulations allow the Corporation to originate
loans on real estate within the State of Virginia, and
within limits, to originate and purchase loans or loan
participations secured by real estate located in any part of
the United States. During fiscal year 1997 the Corporation's
primary lending area was Washington County, Virginia and the
City of Bristol, Virginia.
     Residential loan originations come from many sources.
Some of these sources include existing customers, walk-in
applications, referrals from real estate brokers and others.
     Federal regulation limits loans to one borrower to a
maximum of 15% of unimpaired capital and unimpaired surplus
of the Bank.
     The Corporation receives fees in addition to interest
in connection with real estate loan originations, loan
modifications, late payments, etc. Income from these
activities varies from period to period depending on the
volume and type of loan made. Although not a significant
portion of the Corporation's income, late charges are
received when monthly payments are delinquent but are later
paid.
     The Corporation also offers secondary market fixed rate
mortgages with terms up to 30 years and up to 95% loan to
value. These loans and servicing rights generally sold
immediately into the secondary market and fees received
booked into income. These loans must meet certain criteria
generally set by the secondary market and are not a
significant portion of the Bank's residential mortgage
activity.
     Residential mortgages made up approximately 31.17% of
the loan portfolio as of December 31, 1997.

Construction and Commercial Real Estate Lending

     The Corporation generally makes construction loans for
periods up to one year on residential and commercial real
estate property. These loans are for interim financing and
are either paid off or converted to permanent financing when
completed. At December 31, 1997 outstanding construction
loans (net of undisbursed funds) totaled $3,716,000. These
loans are generally made at 80% or less of appraised value
at completion. Funds are advanced as the project is
completed after an inspection by a staff inspector or the
appraiser as deemed appropriate. These loans are made based
on established corporate underwriting standards. Most of
these construction loans are one to four family dwellings.
The Corporation generally charges a 1% origination fee on
these construction loans in addition to applicable interest.
     Loans on commercial properties, multi-family dwellings,
and apartment buildings are typically made at 75% to 80% of
the appraised value. These loans totaled $40,394,000 or
21.23% of total loans held for investment at December 31,
1997.
<PAGE>4

     Commercial and construction loans, by nature, entail
additional risk as compared to residential mortgage lending.
They are generally more complex and involve larger balances
than typical residential mortgages. Payments are typically
dependent upon successful operation of a related real estate
project or business as compared to individual earnings on
most residential mortgages. Therefore, the market risk is
somewhat greater. Construction delays, cost overruns or the
inability of the contractor to sell the finished product add
an element of risk to such lending.

Consumer lending

     The Corporation offers other types of loans in addition
to real estate mortgage and construction loans. Consumer
loans of many types are offered by the Corporation. Some of
these loans are loans to purchase automobiles, boats,
recreational vehicles and manufactured housing, as well as
other secured and unsecured consumer loans. The Corporation
further makes loans secured by savings accounts at 2% above
the rate of the savings instrument. The terms generally do
not exceed ten years for manufactured housing loans and five
years on other consumer loans. Outstanding consumer loans at
December 31, 1997 were $59,653,000.

Commercial and agriculture non-real estate loans

     The Corporation also makes commercial (including
agriculture) non-real estate loans. These loans in general
have higher risk associated with them than real estate
loans. They are generally secured by inventory, equipment,
accounts receivable, etc., or unsecured in some cases backed
by appropriate financial condition as per the underwriting
standards of the Corporation. Agriculture loans are
generally secured by machinery, equipment, other
miscellaneous assets or unsecured in keeping with the
underwriting standards of the Corporation. The timely pay
back is dependent upon the successful operation of the
business or farm. The outstanding balance of non-real estate
commercial loans was $24,395,000 at December 31, 1997 and
the outstanding balance of non-real estate agriculture loans
was $865,000 at December 31, 1997.

                         Investments

Investment Securities

     The Corporation invests in mortgage-backed securities,
agency notes and bonds, collateralized mortgage obligations
(CMO's), municipal bonds, equity securities and United
States Treasury Notes.

     A substantial portion of the mortgage-backed security
portfolio consists of securities that are either insured or
guaranteed by FHLMC, FNMA or GNMA. Guaranteed securities are
more liquid than individual mortgage loans. At December 31,
1997 the Corporation's mortgage-backed securities portfolio
had a carrying value of $36,424,000 or 14.10% of total
assets compared to $24,494,000 or 11.79% of total assets at
December 31, 1996. Amortized costs of mortgage-backed
securities were $36,299,000 at December 31, 1997 and
$24,499,000 for the comparable 1996 period. Due to
repayments and prepayments of the underlying loans, the
actual maturities of mortgage-backed securities are expected
to be substantially less than the scheduled maturities.

     The Corporation also holds investments in CMO's with a
market value at December 31, 1997 of $480,000 and amortized
cost of $476,000 compared to a market value of $498,000 and
amortized cost of $506,000 at December 31, 1996.

     The Corporation carried at fair value, $1,503,000 and
$999,000 in United States Treasury Notes at December 31, 1997
and 1996 respectively. These investments represented approximately
0.58% and 0.48% of total assets at those dates.

     The Corporation had $1,486,000 and $3,642,000 in United
States Government-sponsored Agency Obligations at December
31, 1997 and 1996 respectively. These investments represent
approximately 0.57% and 1.75% of total assets at those
dates.

     The Corporation holds the following equity investments:
Federal Reserve Bank Stock of $248,150 and $246,000 as of
December 31, 1997 and 1996 respectively; Federal Home Loan
Bank Stock of $781,000 and $560,000 for the same dates as
above; and Community Bankers' Bank Stock of $54,750 and
$54,750 for the same dates as above.
<PAGE>5

     The Corporation also holds investments in municipal
bonds of $972,000 and $1,031,000 as of December 31, 1997 and
1996 respectively. These investments represented
approximately 0.38% and 0.50% of total assets at those
dates.

Investment Activities

     Under Federal Reserve regulations, the Bank is required
to maintain certain liquidity ratios and does so by
investing in certain obligations and other securities which
qualify as liquid assets under Federal Reserve regulations.
See "Regulation".  As a state chartered bank, the Bank's
investment authority is limited by federal law which permits
investment in, among other things, certain certificates of
deposit issued by commercial bank, banker's acceptances,
loans to commercial banks for Federal Funds, United States
government and agency obligations of state governments, and
corporate bonds.

     The Corporation's investment committee, which meets
monthly, follows Federal Reserve guidelines with respect to
portfolio investment and accounting.  Such Federal Reserve
guidelines state that insured institutions must account for
securities held for investment, sale and/or trading in
accordance with generally accepted accounting principles.
The Corporation maintains a written investment policy to set
forth investment portfolio composition and investment
strategy.  The investment portfolio composition policy
considers, among other factors, the financial condition of
the institution, the types of securities, amounts of
investments in those securities and safety and soundness
considerations pertaining to the institution.  The
investment strategy considers, among other factors, interest
rate risk, anticipated maturity of each type of investment
and the intent of the institution with respect to each
investment.

Sources of Funds

General

     Deposit accounts have traditionally been the principal
source of the Corporation's funds for use in lending and for
other general business purposes.  In addition to deposits,
the Corporation derives funds from loan repayments, FHLB
advances and loan participation sales.  Borrowings may be
used on a short-term basis to compensate for seasonal or
other reductions in deposits or inflows at less than
projected levels, as well as on a longer term basis to
support expanded lending activities.

Deposit Activities

     The Corporation, in its continuing effort to remain a
competitive force in its markets, offers a wide variety of
deposit services, with varied maturities, minimum-balance
requirements and market-sensitive interest rates that are
attractive to all types of depositors.  The Corporation's
deposit products include checking accounts, passbook savings
accounts, money market deposit accounts, negotiable orders of
withdrawal accounts, individual retirement accounts and
certificates of deposit accounts. The Corporation is able to
offer a broad array of products that are consistent with
current Federal Reserve regulations, and as a major result,
the Corporation's deposit portfolio is, for the most part,
sensitive to general market fluctuations.
<PAGE>6

The following table sets forth the various types of accounts
offered by the Corporation at December 31, 1997:
<TABLE>
<CAPTION>
                         Weighted
                         Average           Minimum     Amount
                         Interest          Balance       In       % of
Type of Account            Rate    Term    Deposit    Thousands  Total
_______________          ________  ____   ________    _________  _____
</CAPTION>
<S>                        <C>     <C>    <C>         <C>        <C>
Checking Account           0.00%   none   $ 100.00    $ 30,930   13.07%
Interest Checking          3.57    none     100.00       9,704    4.10
Passbook Accounts          4.00    none      25.00      26,808   11.33
Money Market
    Deposit Accounts       3.74    none     500.00       5,361    2.26
Christmas Club Accts       4.00    none       5.00          17    0.01
Individual Retirement
    Accounts               6.56  various    500.00      22,898    9.68
Certificates of Deposit
    Accounts               6.06  various    500.00     140,928   59.55
                                                      ________  ______
Totals                                                $236,646  100.00%
                                                      ________  ______
</TABLE>

     The variety of deposit accounts offered by the
Corporation and the competitive rates paid on these deposit
accounts has increased the Corporation's ability to retain
deposits and has allowed it to be more competitive in
obtaining new funds, reducing the threat of
disintermediation (the flow of funds away from deposit
institutions into direct investment vehicles such as
government and corporate securities).  As customers have
become more rate conscious and willing to move funds to
higher yielding accounts, the ability of the Corporation to
attract and maintain deposits and the Corporation's cost of
funds have been, and will continue to be, significantly
affected by money market conditions.

     The following table sets forth information relating to
the Corporation's deposits flows during the years indicated.
<TABLE>
<CAPTION>
                                        Years Ended December 31
                                    ______________________________

(In Thousands)                         1997      1996       1995
______________                         ____      ____       ____
</CAPTION>
<S>                                 <C>        <C>        <C>
Increase (decrease) in deposits
  before interest credited          $ 38,967   $ 35,813   $ 25,086
Interest credited                      8,208      6,331      4,927
                                    ________   ________   ________
Net increase in deposits              47,175     42,144     30,013
                                    ________   ________   ________
Total deposits at year end          $236,646   $189,471   $147,327
                                    ________   ________   ________
</TABLE>

Borrowings

     The Corporation may obtain advances from the FHLB upon
the security of the capital stock it owns in the bank and
certain of its home mortgage loans provided certain
standards related to creditworthiness have been met. Such
advances may be made pursuant to several different credit
programs.  Each credit program has its own interest rate and
range of maturities and the FHLB prescribes the acceptable
uses to which the advances pursuant to each program may be
used, as well as limitations on the size of such advances.
Depending on the program, such limitations are based either
on a fixed percentage of the Corporation's net worth or on
the FHLB's assessment of the Corporation's creditworthiness.
The FHLB is required to review its credit limitations and
standards at least once every six months.  FHLB advances
have from time to time been available to meet seasonal and other
withdrawals of savings accounts and to expand lending.

     The Bank also has established credit arrangements with
several of it's correspondent banks. At December 31, 1997
the Bank had approximately $50,886,000 of unused lines of
credit, including FHLB unused lines of credit, to fund any
necessary cash requirements.
<PAGE>7

     The following table sets forth certain information as
to the Corporation's advances and other borrowings at the
dates indicated.  See Notes 8 and 10 to the Consolidated
Financial Statements, included as part of the Annual Report
to Stockholders, for information as to rates, maturities,
average balances and maximum amounts outstanding.
<TABLE>
<CAPTION>
                                         December 31
                                   ________________________
(In Thousands)                      1997     1996     1995
__________________                  ____     ____     ____
</CAPTION>
<S>                                <C>      <C>      <C>
Advances from FHLB                 $1,786   $1,929   $1,000
Other borrowings                      828        -        -
                                   ______   ______   ______
          Total borrowings         $2,614   $1,929   $1,000
                                   ______   ______   ______
</TABLE>

Employees

     The Corporation at December 31, 1997, had 126 full time
employees.  None of these employees are represented by a
collective agent, and the Corporation believes its employee
relations are excellent.

Competition

     The Corporation encounters competition for both
deposits and loans.  For deposits, competition comes from
other commercial banks, savings and loan associations and/or
savings banks, mutual money market funds, credit unions and
various other corporate and financial institutions.
Competition also comes from interest paying obligations
issued by various levels of government and from a variety of
securities paying dividends or interest.  Competition for
loans comes primarily from other commercial banks, savings
and loan associations and/or savings banks, insurance
companies, mortgage companies and other lending
institutions.

Subsidiaries

     The Corporation was incorporated in Virginia in 1995 to
serve as the holding company for the Bank.  The Bank is a
state chartered bank with principal offices in Abingdon,
Virginia.  The Bank was incorporated in 1985 under the laws
of the Commonwealth of Virginia.

Federal Home Loan Bank System

     The Bank is a member of the Federal Home Loan Bank
System, which consists of 12 regional Federal Home Loan
Banks.  The Federal Home Loan Bank System is regulated by
the Federal Housing Finance Board ("FHFB").  The FHFB is
composed of five members, including the Secretary of Housing
and Urban Development and four private citizens appointed by
the President with the advice and consent of the Senate for
terms of seven years.  At least one director must be chosen
from organizations with more than a two-year history of
representing consumer or community interests on banking
services, credit needs, housing or financial consumer
protections.

     The Bank, as a member of the FHLB of Atlanta, is
required to purchase and maintain stock in its bank in an
amount as if 30 percent of the member's assets were home
mortgage loans.

     The FHFB is required to adopt regulations establishing
standards of community investment or service for members of
the Federal Home Loan Banks as a condition for continued
access to advances.  The regulations are to take into
account the record of performance of the institution under
the Community Reinvestment Act of 1977 and its record of
lending to first time home buyers.

     In addition, new collateral requirements for advances
are to be established which will be designed to insure
credit quality and marketability of the collateral.
<PAGE>8

Regulation

General

     The Corporation and it's subsidiary are subject to the
supervision, regulation and examination of the Federal
Reserve Board, the Federal Deposit Insurance Corporation and
the state regulators of the Commonwealth of Virginia which
has jurisdiction over financial institutions and has
obtained regulatory approval for it's various activities to
the extent required.

Federal and State Laws and Regulations

     Bank holding companies and banks are extensively
regulated under federal and state law. To the extent that
the following information describes statutory and regulatory
provisions, it is qualified in it's entirety by reference to
such statutes and regulations. Any change in applicable law
or regulation may have a material effect on the business of
the Corporation and it's subsidiary.

Bank Holding Company Regulation

     The Corporation is registered as a "bank holding
company" with the Board of Governors of the Federal Reserve
System ("Federal Reserve"), and is subject to supervision by
the Federal Reserve under the Bank Holding Corporation Act
("BHC Act"). The Corporation is required to file with the
Federal Reserve periodic reports and such additional
information as the Federal Reserve may require pursuant to
the BHC Act. The Federal Reserve examines the Corporation
and the subsidiary bank.

     The BHC Act requires prior Federal Reserve approval
for, among other things, the acquisition by a bank holding
company of direct or indirect ownership or control of more
than 5% of the voting shares or substantially all of the
assets of any bank, or for a merger or consolidation of a
bank holding company with another bank holding company. With
certain exceptions, the BHC Act prohibits a bank holding
company from acquiring direct or indirect ownership or
control of the voting shares of any company which is not a
bank or bank holding company and from engaging directly or
indirectly in any activity other than banking or managing or
controlling banks or performing services for it's authorized
subsidiaries. A bank holding company may, however, engage in
or acquire an interest in a company that engages in
activities which the Federal Reserve has determined by
regulation or order to be so closely related to banking or
managing or controlling banks as to be a proper incident
thereto.

Bank Regulation

     The Bank, as a state chartered member of the Federal
Reserve Systems, is subject to regulation and examination by
the Virginia State Corporation Commission and the Federal
Reserve Board. In addition, the Bank is subject to the rules
and regulations of the Federal Deposit Insurance
Corporation, which currently insures the deposits of each
member bank to a maximum of $100,000 per depositor.

     The commercial banking business is affected by the
monetary policies adopted by the Federal Reserve Board.
Changes in the discount rate on member bank borrowings,
availability of borrowing at the "discount window", open
market operations, the imposition of any changes in reserve
requirements against member banks' deposits and certain
borrowings by banks and their affiliates, and the limitation
of interest rates which member banks may pay on deposits are
some of the instruments of monetary policy available to the
Federal Reserve Board. Taken together, these controls give
the Board a significant influence over the growth and
profitability of all banks. Management of the Bank is unable
to predict how the Board's monetary policies (or the fiscal
policies or economic controls imposed by Federal or state
governments) will affect the business and earnings of the
Bank or the Corporation, or what those policies or controls
will be.

     The references in this section to various aspects of
supervision and regulation are brief summaries which do not
purport to be complete and which are qualified in their
entirety by reference to applicable laws, rules and
regulations.
<PAGE>9

Federal Deposit Insurance Corporation Improvement Act

     The difficulties encountered nationwide by financial
institutions during 1990 and 1991 prompted federal
legislation designed to reform the banking industry and to
promote the viability of the industry and of the deposit
insurance system.  The Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), which became effective
on December 19, 1991, bolsters the deposit insurance fund,
tightens bank and thrift regulation and trims the scope of
federal deposit insurance as summarized below.

     FDICIA requires each federal banking regulatory agency
to prescribe, by regulation, standards for all insured
depository institutions and depository institution holding
companies relating to (i) internal controls, information
systems and audit systems; (ii) loan documentation; (iii)
credit underwriting; (iv) interest rate exposure; (v) asset
growth; (vi) compensation, fees and benefits; and (vii) such
other operational and managerial standards as the agency
determines to be appropriate.  The compensation standards
would prohibit employment contracts, compensation or benefit
arrangements, stock option plans, fee arrangements or other
compensatory arrangements that provide excessive
compensation, fees or benefits or could lead to material
financial loss.  In addition, each federal banking
regulatory agency must prescribe by regulation standards
specifying (i) a maximum ratio of classified assets to
capital; (ii) minimum earnings sufficient to absorb losses
without impairing capital; (iii) to the extent feasible, a
minimum ratio of market value to book value for publicly
traded shares of depository institutions and depository
institution holding companies; and (iv) such other standards
relating to asset quality, earnings and valuation as the
agency determines to be appropriate.  If an insured
institution fails to meet any of the standards promulgated
by regulation, then such institution will be required to
submit a plan to its federal regulatory agency specifying
the steps it will take to correct the deficiency.

     Prompt corrective action measures adopted in FDICIA and
which became effective on December 19, 1992, impose
significant new restrictions and requirements on depository
institutions that fail to meet their minimum capital
requirements.  Under new Section 38 of the Federal Deposit
Insurance Act ("FDI Act"), the federal banking regulatory
agencies have developed a classification system pursuant to
which all depository institutions are placed into one of
five categories based on their capital levels and other
supervisory criteria:  well capitalized, adequately
capitalized; undercapitalized; significantly
undercapitalized; and critically undercapitalized.

     The Bank met the requirements at December 31, 1997 to
be classified as "adequately capitalized".  This
classification is determined solely for the purposes of
applying the prompt corrective action regulations and may
not constitute an accurate representation of the
Corporation's overall financial condition.

     An undercapitalized depository institution is required
to submit a capital restoration plan to its principal
federal regulator.  The federal banking agencies may not
accept a capital plan without determining, among other
things, that the plan is based on realistic assumptions and
is likely to succeed in restoring the depository
institution's capital and is guaranteed by the parent
holding company.  If a depository institution fails to
submit an acceptable plan, it will be treated as if it were
significantly undercapitalized.

     Unless its principal federal regulator has accepted its
capital plan, an undercapitalized bank may not increase its
average total assets in any calendar quarter.  If an
undercapitalized institution's capital plan has been
accepted, asset growth will be permissible only if the
growth is consistent with the plan and the institution's
ratio of tangible equity to assets increases during the
quarter at a rate sufficient to enable the institutions to
become adequately capitalized within a reasonable time.

     An institution that is undercapitalized may not solicit
deposits by offering rates of interest that are
significantly higher than the prevailing rates on insured
deposits in the institution's normal market areas or in the
market area in which the deposits would otherwise be
accepted.

     An undercapitalized institution may not branch, acquire an
interest in another business or institution or enter a new line of
business unless its capital plan has been accepted and its
principal federal regulator approves the proposed action.

     An insured depository institution may not pay
management fees to any person having control of the
institution nor may an institution, except under certain
circumstances and with prior regulatory
<PAGE>10

approval, make any capital distribution if, after making such
payment or distribution, the institution would be undercapitalized.

     Significantly undercapitalized depository institutions
may be subject to a number of requirements and restrictions,
including orders to sell sufficient voting stock to become
adequately capitalized, requirements to reduce total assets
and cessation of receipt of deposits from correspondent
banks.  Critically undercapitalized institutions are subject
to appointment of a receiver or conservator.

     If its principal federal regulator determines that an
adequately capitalized institution is in an unsafe or
unsound condition or is engaging in an unsafe or unsound
practice, it may require the institution to submit a
corrective action plan, restrict its asset growth and
prohibit branching, new acquisitions and new lines of
business.  An institution's principal federal regulator may
deem it to be engaging in an unsafe or unsound practices if
it receives a less than satisfactory rating for asset
quality, management, earnings or liquidity in its most
recent examination.

     In addition, regulators were required to draft a new
set of non-capital measures of bank safety, such as loan
underwriting standards and minimum earnings levels,
effective December 1, 1993.  The legislation also requires
regulators to perform annual on-site bank examinations,
place limits on real estate lending by banks and tightens
auditing requirements.

Federal And State Taxation

General

     The following discussion of federal taxation is a
summary of certain pertinent federal income tax matters as
they pertain to the Corporation.  With some exceptions,
including particularly the reserve for bad debts discussed
below, the Corporation is subject to federal income tax
under the Internal Revenue Code of 1986 (the "Code") in the
same general manner as other corporations.

Bad Debt Reserves

     Commercial banks such as the Bank, which meet certain
definitional tests primarily relating to their assets and
the nature of their businesses, are permitted to establish a
reserve for bad debts and to make annual additions to the
reserve.  These additions, may within specified formula
limits, be deducted in arriving at the Bank's taxable
income.  For purposes of computing the deductible addition
to its bad debt reserve, the Bank utilizes the experience
method.

     Under the experience method, the deductible annual
addition is the amount necessary to increase the balance of
the reserve at the close of the taxable year to the greater
of (1) the amount which bears the same ratio to loans
outstanding at the close of the taxable year as the total
net bad debts sustained during the current and five
preceding taxable years to bear to the sum of the loans
outstanding at the close of those six years or (2) the lower
of (a) the balance in the reserve account at the close of
the last taxable year prior to the most recent adoption of
the experience method (the base year is the last taxable
year beginning before 1988), or (b) if the amount of loans
outstanding at the close of the taxable year is less than
the amount of loans outstanding at the close of the base
year, the amount which bears the same ratio to loans
outstanding at the close of the taxable year as the balance
of the reserve at the close of the base year bears to the
amount of loans outstanding at the close of the base year.

Minimum Tax

     A 20% corporate alternative minimum tax generally will
apply to a base of regular taxable income plus certain tax
preferences ("alternative minimum taxable income" or "AMTI")
and will be payable to the extent such AMTI is in excess of
an exemption amount.  The Code provides that an item of tax
preference is the excess of the bad debt deduction over the
amount allowable under the experience method.  The other
items of tax preference that constitute AMTI include (a) tax-
exempt interest on newly-issued (generally, issued on or
after August 8, 1986) private activity bonds other than
certain qualified bonds and (b) 75% of the excess (if any)
of (i) 75% of adjusted current earnings as defined in the
Code, over (ii) AMTI (determined without regard to this
preference and prior to reduction by net operating losses).
<PAGE>11

Other

     For federal income tax purposes, the Corporation
reports its income and expenses on the accrual basis method
of accounting and uses a year ending December 31 for filing
its income tax returns.  The Corporation may carry back net
operating losses to the preceding two taxable years and
forward to the succeeding twenty taxable years.

     The Commonwealth of Virginia imposes an income tax on
corporations domiciled in the state.  The Virginia taxable
income is based on the federal taxable income with certain
adjustments for interest and dividend income on obligations
of securities of the United States and states other than
Virginia.  The tax rate is 6% of taxable income.

     See Note 9 to the Consolidated Financial Statements,
included as part of the Annual Report to Stockholders, for
additional information regarding the income taxes of the
Company.


Distribution of Assets, Liabilities and Shareholders'Equity; Interest
 Rates and Interest Differential
<TABLE>
<CAPTION>
                              Year Ended December 31,
        __________________________________________________________________
                  1997                 1996                 1995
        _____________________ _____________________ ______________________
                                (Dollars in Thousands)

        Average         Yield/Average         Yield/Average         Yield/
        Balance Interest Rate Balance Interest Rate Balance Interest Rate
        _______ ________ ____ _______ ________ ____ _______ ________ ____
</CAPTION>
<S>     <C>     <C>      <C>  <C>     <C>      <C>  <C>     <C>      <C>
     Assets
Interest
 earning
 assets
 (taxable-
 equivalent
 basis <F1>:

Loans (net
 of unearned
 discount
 <F2>   $175,542 $16,203 9.23% $131,449 $12,310 9.36% $102,216 $ 9,590 9.38%
Securities
<F3>      38,158   2,363 6.19    34,350   2,082 6.06    30,079   1,793 5.96
Federal funds
 sold      3,244     169 5.20     3,822     204 5.33     3,686     202 5.48
        ________ _______ ____  ________ _______ ____  ________ _______ ____
Total
 interest-
 earning
 assets
        $216,944 $18,735 8.64% $169,621 $14,596 8.61% $135,981 $11,585 8.52%
        ________ _______ ____  ________ _______ ____  ________ _______ ____
Liabilities
Interest-
 bearing
 liabilities:

Demand,
 savings &
 time
 dep.  $181,846 $10,099 5.55% $142,331 $ 7,714 5.42% $113,215 $ 6,086 5.37%
Other
 interest-
 bearing
 liabilities
          3,366     222 6.59     1,803     108 5.99     1,198      75 6.26
       ________ _______ ____  ________ _______ ____  ________ _______ ____
Total
interest-
bearing
liabilities
       $185,212 $10,321 5.57% $144,134 $ 7,822 5.43% $114,413 $ 6,161 5.38%
       ________ _______ ____  ________ _______ ____  ________ _______ ____
Net interest
 income         $ 8,414                $ 6,774                $ 5,424
Net margin on
 int. earning
 assets on a
 tax equivalent
 basis                  3.88%                  3.99%                  3.99%
Average
interest
spread                  3.07%                  3.18                   3.14%

<FN>
________________________
<F1>  Tax equivalent adjustments (using 34% federal tax
  rates) have been made in calculating yields on tax-free
  loans and investments. Virginia banks are exempt from state
  income tax.
<F2>  For the purposes of these computations, non-accruing
  loans are included in the daily average loan amounts
  outstanding.
<F3>  The yield on securities classified as available for
  sale is computed based on the average balance of the
  historical amortized cost balance without the effects of the
  fair value adjustment required by FAS 115
</FN>
</TABLE>
<PAGE>12

     As the largest component of income, net interest income
represents the amount that interest and
fees earned on loans and investments exceeds the interest
costs of funds used to support these earning
assets.  Net interest income is determined by the relative
levels, rates and mix of earning assets and interest-
bearing liabilities.  The following table attributes changes
in net interest income either to changes in average volume
or to average rates.  Changes in interest due to both rate and
volume have been allocated to volume and rate changes in proportion
to the relationship of the absolute dollar amounts of the change
in each.
<TABLE>
<CAPTION>
                         1997 Compared to 1996           1996 Compared to 1995
                   _______________________________ _____________________________
                    Increase   Increase            Increase   Increase
                   (decrease) (decrease)          (decrease) (decrease)
                     due to     due to      Net      due to     due to     Net
Increase (Decrease) change in  change in increase  change in  change in increase
 in                  volume      rate    (decrease)  volume      rate (decrease)
___________________  ______      ____    __________  ______      ____  ________
</CAPTION>
<S>                 <C>       <C>        <C>        <C>       <C>       <C>
INTEREST INCOME
Securities          $   278   $     3    $   281    $   288   $     1   $   289
Federal funds sold      (36)        1        (35)         7        (5)        2
Loans                 3,905       (12)     3,893      2,742       (22)    2,720
                    _______   _______    _______    _______   _______   _______
Total income change $ 4,147   $    (8)   $ 4,139    $ 3,037   $   (26)  $ 3,011
                    _______   _______    _______    _______   _______   _______

INTEREST EXPENSE
Savings and time
 deposits           $ 2,377   $     8    $ 2,385    $ 1,566   $    62   $ 1,628
Other interest-bearing
   liabilities          113         1        114         38        (5)       33
                    _______   _______    _______    _______   _______   _______
Total Expense
 Change             $ 2,490   $     9    $ 2,499    $ 1,604   $    57   $ 1,661
                    _______   _______    _______    _______   _______   _______
Increase (Decrease) in
  Net Interest
   Income           $ 1,657    $   (17)  $ 1,640    $ 1,433   $   (83)  $ 1,350
                    _______    _______   _______    _______    _______  _______
</TABLE>

Investment Portfolio

The following table presents the maturity distribution, market value,
book value and approximate tax equivalent yield (assuming a 34% federal
income tax rate) of the investment portfolio at December 31, 1997.

(Dollars in Thousands)
<TABLE>
<CAPTION>
                                   Five
                         One Year  Years
                  Within Through  Through After Ten           Total
                  One     Five      Ten      Ten              Book     Market
                  Year    Years    Years    Years    Yield    Value    Value
                  ____    _____    _____    _____    _____    _____    _____
</CAPTION>
<S>             <C>      <C>      <C>      <C>       <C>    <C>      <C>
U.S.T.N.'s      $   499  $ 1,004  $     -  $     -    5.90%  $ 1,493  $ 1,503
U.S. Gov Agency     799    4,014    2,168   31,409    6.33    38,275   38,390
State & Muni's        -      305      667        -    7.21       939      972
Other                 -        -        -    1,098    6.64     1,098    1,098
                _______  _______  _______  _______    ____   _______  _______
    TOTAL       $ 1,298  $ 5,323  $ 2,835  $32,507    6.19   $41,805  $41,963
                _______  _______  _______  _______    ____   _______  _______
</TABLE>
<PAGE>13

Loan Portfolio

     The table below classifies loans, net of unearned
income, by major category and percentage distribution at
December 31, 1997 for each of the past three years:
<TABLE>
<CAPTION>
                                    December 31,
                              (Dollars in thousands)

                   1997                1996               1995
            ___________________ ___________________ ___________________
Description  Amount  Percentage  Amount  Percentage  Amount  Percentage
___________  ______  __________  ______  __________  ______  __________
</CAPTION>
<S>         <C>        <C>      <C>         <C>     <C>        <C>
Commercial  $ 24,395   12.71%   $ 20,365    13.14%  $ 12,699   11.17%
Real Estate  104,818   54.59     101,491    65.50     76,516   67.27
Consumer      59,653   31.07      30,128    19.44     21,785   19.15
Other          3,139    1.63       2,967     1.92      2,743    2.41
            ________  ______    ________   ______   ________  ______
  Total     $192,005  100.00%   $154,951   100.00%  $113,743  100.00%
            ________  ______    ________   ______   ________  ______
</TABLE>

     The following table shows the maturity or next repricing
opportunity of loans outstanding as of December 31, 1997. Also
provided are the amounts due after one year classified according
to the sensitivity to changes in interest rates. Fixed rate loans are
classified based upon the period in which the final payment is due.
Floating rate loans are classified based on next repricing date.
<TABLE>
<CAPTION>
                                December 31, 1997

                             (Dollars in Thousands)

                 Within One       After One But     After Five
                    Year        Within Five Years      Years
              _________________ ________________ _________________
               Fixed   Floating  Fixed  Floating  Fixed   Floating
                Rate     Rate     Rate    Rate     Rate     Rate     Total
                ____     ____     ____    ____     ____     ____     _____
</CAPTION>
<S>           <C>      <C>      <C>      <C>     <C>      <C>      <C>
Commercial    $ 4,347  $ 7,861  $11,592  $     - $   595  $      -  $ 24,395
Real Estate    10,265   32,547   29,947   15,656  16,403         -   104,818
Consumer        3,999    1,100   53,772        -     782         -    59,653
Other             925      783    1,336        -      95         -     3,139
              _______  _______  _______  _______  _______  _______  ________
Total         $19,536  $42,291  $96,647  $15,656  $17,875  $     -  $192,005
              _______  _______  _______  _______  _______  _______  ________
</TABLE>

Non-performing loans

     The loan portfolio of the Bank is reviewed regularly by
senior officers to evaluate loan performance. The frequency
of the review is based on a rating of credit worthiness of
the borrower utilizing various factors such as net worth,
credit history, customer relationship, etc. The evaluations
emphasize different factors depending upon the type of loan
involved. The commercial and real estate type loans are
reviewed on the basis of estimated net realizable value
through an evaluation of collateral and the financial
strength of the borrower. Installment loans are evaluated
largely on the basis of delinquency data because of the
large number of such loans and relatively small size of each
individual loan.
     Management review of commercial and other loans may
result in a determination that a loan should be placed on a
non-accrual of interest basis. It is the policy of the Bank
to discontinue the accrual of interest on any loan on which
full collectability of principal and / or interest is
doubtful. Subsequent collection of interest is recognized as
income on a cash basis upon receipt. Placing a loan on non-
accrual status for the purpose of income recognition is not
in itself a reliable indication of potential loss of
principal. Other factors, such as the value of the
collateral securing the loan and the financial condition of
the borrower, serve as more reliable indications of
potential loss of principal.
     The policy of the Bank is that non-performing loans
consist of loans accounted for on a non-accrual basis and
loans which are contractually past due 90 days or more in
regards to interest and/ or principal payments. As of the
three periods ended December 31, 1997, 1996 and 1995, non-
accrual loans amounted to $888,000, $99,000 and $235,000,
respectively.  Interest income lost on non-accruing loans
was approximately $71,000, $6,000, and $12,000 for December
31, 1997, 1996, and 1995 respectively.
<PAGE>14

Summary of Loan Loss Experience

     The allowance for loan losses is increased by the
provision for loan losses and reduced by loans charged off
net of recoveries. The allowance for loan losses is
established and maintained at a level judged by management
to be adequate to cover any anticipated loan losses to be
incurred in the collection of outstanding loans. In
determining the adequate level of the allowance for loan
losses, management considers the following factors: (a) loan
loss experience; (b) problem loans, including loans judged
to exhibit potential charge-off characteristics, loans on
which interest is no longer being accrued, loans which are
past due and loans which have been classified in the most
recent regulatory examination; and (c) anticipated economic
conditions and the potential impact these conditions may
have on individual classifications of borrowers.

     The following table presents the Corporation's loan
loss experience for the past three years:
<TABLE>
<CAPTION>
                                  Years Ended December 31,
                                   (Dollars in Thousands)

                                1997       1996        1995
                                ____       ____        ____
</CAPTION>
<S>                         <C>         <C>         <C>
Allowance for loan losses at
   beginning of year        $   1,072   $     908   $     836

Loans charged off:
  Commercial                       42         170          19
  Real Estate                       -           -         122
  Consumer                        470          85          47
  Other                             -           -           -
                            _________   _________   _________
     Total                  $     512   $     255   $     188
                            _________   _________   _________
Recoveries of loans
  previously charged off:
  Commercial                $       6          32           -
  Real Estate                       -           -         106
  Consumer                         68          13          11
  Other                             -           -           -
                            _________   _________   _________
     Total                  $      74   $      45   $     117
                            _________   _________   _________

Net loans charged off       $     438   $     210   $      71
Provision for loan losses       1,002         374         143
                            _________   _________   _________
Allowance for loan losses
 end of year                $   1,636   $   1,072   $     908
                            _________   _________   _________
Average total loans
 (net of unearned income)   $ 175,542   $ 131,449   $ 102,216
Total loans (net of
 unearned income) at
 year-end                   $ 192,005   $ 154,951   $ 113,743

Ratio of net charge-offs
 to average loans               0.249%      0.160%      0.069%
Ratio of provision for
 loan losses to average loans   0.571%      0.285%      0.140%
Ratio of provision for loan
 losses to net charge-off     228.770%    178.100%    201.410%
Allowance for loan losses
 to year-end loans              0.852%      0.692%      0.798%
</TABLE>
<PAGE>15

Allocation of the allowance for loan losses

The following table provides an allocation of the allowance for loan
losses as of December 31, 1997:
<TABLE>
<CAPTION>
                    Year Ended December 31, 1997

                  Percent of Loans on each category

                       (Dollars in Thousands)

                   Allowance  Percentage Percentage
                      for      of Total      of
                   Loan Loss  Loan Loss  Total Loans
                   _________  _________  ___________
</CAPTION>
<S>                <C>          <C>         <C>
Commercial         $   540      33.01%      12.71%
Real Estate            167      10.21       54.59
Consumer               882      53.91       31.07
Other                    6       0.36        1.63
Unallocated             41       2.51        0.00
                   _______     ______      ______
   Total           $ 1,636     100.00%     100.00
                   _______     ______      ______
</TABLE>

Deposits

The following table provides a breakdown of deposits at December 31
for the years indicated is as follows:
<TABLE>
<CAPTION>
                               December 31,
                          (Dollars in Thousands)

                       1997        1996        1995
                       ____        ____        ____
</CAPTION>
<S>                 <C>         <C>         <C>
Non-interest bearing
demand deposits     $  30,930   $  26,002   $  20,303
Interest bearing
 demand deposits       15,065      13,379      11,665
Savings deposits       26,808      21,930      17,010
Time deposits         163,843     128,160      98,349
                    _________   _________   _________
   Total Deposits   $ 236,646   $ 189,471   $ 147,327
                    _________   _________   _________
</TABLE>

     The average daily amount of deposits and rates paid on
such deposits is summarized for the periods indicated in the
following table:
<TABLE>
<CAPTION>
                                  Year Ended December 31,
                                   (Dollars in Thousands)

                           1997              1996              1995
                           ____              ____              ____

                       Amount   Rate     Amount   Rate     Amount   Rate
                       ______   ____     ______   ____     ______   ____
</CAPTION>
<S>                  <C>        <C>    <C>        <C>    <C>        <C>
Non-interest bearing
 demand deposits     $  28,177  0.00%  $  22,566  0.00%  $  17,337  0.00%
Interest-bearing
 demand deposits        14,029  3.58      12,566  3.60      11,294  3.64
Savings deposits        24,600  4.00      20,516  4.01      16,950  4.48
Time deposits          143,217  6.01     109,249  5.89      84,971  5.89
                     _________         _________         _________
    Total            $ 210,023         $ 164,897         $ 130,552
                     _________         _________         _________
</TABLE>
<PAGE>16

The remaining maturities of time deposits at December 31, 1997 are as
follows (in thousands) :
<TABLE>
<CAPTION>

Maturity

</CAPTION>
<S>                                                 <C>
3 months or less....................................$  33,135
Over 3 through 12 months............................   84,993
Over 12 months......................................   45,715
                                                    _________
     Total                                          $ 163,843
                                                    _________
</TABLE>

Interest Rate Sensitivity Analysis

The following table provides the maturities of investment securities,
loans, and deposits as of December 31, 1997, and measures the interest rate
sensitivity gap for each range of maturity indicated:  The amounts below
also reflect various prepayment assumptions.
<TABLE>
<CAPTION>
                                    December 31 1997
                                 (Dollars in Thousands)
                                        Maturing

                                      After One
                                         But
                           Within One   Within   After Five
                              Year    Five Years   Years      Total
                              ____    __________   _____      _____
</CAPTION>
<S>                        <C>        <C>        <C>        <C>
Assets
Interest-bearing
  Investment Securities    $  30,030  $   7,493  $   4,440  $  41,963
  Fed Funds Sold               7,213          -          -      7,213
  Loans                       61,825    110,669     17,875    190,369
Noninterest-bearing
  Other Assets                 7,384          -     11,307     18,691
                           _________  _________  _________  _________
Total Assets               $ 106,452  $ 118,162  $  33,622  $ 258,236
                           _________  _________  _________  _________

LIABILITIES AND
SHAREHOLDERS' EQUITY

Interest-bearing
  All Interest-
   bearing Deposits        $ 134,384  $  71,332  $       -  $ 205,716
  Other interest-bearing
   Liabilities                   143          -      1,643      1,786
Noninterest-bearing
  Demand Deposits
   Non-interest               21,158      9,772          -     30,930
  Other Liabilities                -        828      2,174      3,002
  Shareholders' Equity             -          -     16,802     16,802
                           _________  _________  _________  _________
Total Liabilities
 and Shareholders'
 Equity                    $ 155,685  $  81,932  $  20,619  $ 258,236
                           _________  _________  _________  _________

Interest Rate
 Sensitivity GAP           $ (49,233) $  36,230  $  13,003  $       -

</TABLE>
<PAGE>17

Return on Equity and Assets

The following table highlights certain ratios for the periods indicated:
<TABLE>
<CAPTION>
                                              Year Ended December 31,
                                                   (Percentage)

                                       1997           1996           1995
                                       ____           ____           ____
</CAPTION>
<S>                                    <C>            <C>           <C>
Net income to:
  Average total assets                  0.84           0.97          1.00
  Average shareholders' equity         12.53          13.01         12.45

Dividend payout ratio
 (dividends declared per share
 divided by net income per share)       0.00           0.00          0.00

Average shareholders'equity to
 average total assets ratio             6.73           7.46          8.05
</TABLE>

Item 2. Properties

     The Corporation's and the Bank's main offices are
located at 340 West Main Street, Abingdon, Virginia. The
main office is a two story brick structure owned by the
Bank. The Bank utilizes the entire structure for it's
banking operations. The Bank maintains a separate drive-thru
facility which has five customer service lanes and is
located on the main office property. The main office opened
for operations in 1985. In addition, the Bank also has two
branch locations within Washington County, Virginia. The
East Abingdon branch is a one story brick facility located
at 24412 Maringo Road which operates as a full service
facility. This branch was completed and opened for
operations in 1993.The West Abingdon Express branch is a one-
story brick express facility which operates with four drive-
thru customer service lanes and a walk-up window. This is a
limited service facility. The West Abingdon Express branch
was completed and opened for operations in 1994 and is
located at Exit 14 I-81, Jonesboro Road, Abingdon, Virginia.
The Bank also has two full service branch locations within
the City of Bristol, Virginia. The East Bristol office is
located at 999 Old Airport Road, Bristol, Virginia. This is
a two-story brick facility with interior customer loan and
deposit areas as well as a four lane drive-thru facility.
This office was completed and opened for operations in 1988.
The Commonwealth office is located at 821 Commonwealth
Avenue, Bristol, Virginia. This is a two story block
building with interior full service customer facilities and
a four lane drive thru facility. This office was completed
and opened for operations in 1995. All of the Bank's
locations have ATM's on premises. All properties are owned
by the Bank and are free of liens.

     The Corporation acquired a commercial building during
1997 which is located at 266 West Plumb Alley , Abingdon,
Virginia.  The building is a two-story concrete structure
which was originally constructed by another bank for use as
an operations center.  The Corporation assumed the leases of
the building's current tenants.   The second floor of the
structure is leased to third parties.  During 1997, the
Corporation entered into a leasing arrangement with it's
subsidiary to lease the first floor to be used for its
operations center.  Currently the bookkeeping, proof,
accounting, shareholder's services, human resources,
internal audit and training departments are located there.
The Corporation has provided as security a first deed of trust on
this building for the related $828,000 debt owed at December
31, 1997.  The Bank constructed a two-story brick building
located at 1425 North Main Street, Marion, Virginia during 1997.
This building was placed in service during 1997 and is operational
as a full-service branch of the Bank.  This Branch building is
free of all liens.  The Bank also acquired another piece of
real estate located on North Main Street, Marion, Virginia
which is being developed to house a drive-up ATM.  The ATM
had not been placed in service as of December 31, 1997.
This property is also free of all liens.

Item 3. Legal Proceedings

     The Corporation is not involved in any pending legal
proceedings, other than non-material legal proceedings
undertaken in the ordinary course of business.
<PAGE>18

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

     There were no matters submitted to a vote of security
holders during the quarter ended December 31, 1997.

Part II.

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters

     There is no established trading market for the stock of
Highlands Bankshares, Inc.. At December 31, 1997 the
Corporation has approximately 966 stockholders of record.
The Corporation acts as it's own registered Stock Transfer
Agent, without charging a transfer fee, ensuring that all
applicable federal guidelines relating to stock transfers
are enforced. The Corporation maintains a list of
individuals who are interested in purchasing it's common
stock and connects these people with stockholders' who are
interested in selling their stock. These parties negotiate
the per share price independent of the Corporation. The
stock transfer agent of the Corporation attempts to keep a
record of what the stock sales are trading at by asking the
parties about the trade price per share.   Please refer to
the table below entitled Common Stock Performance for a
breakdown of the trades for the four quarters of 1997. It is
the opinion of management that this range accurately
reflects the market value of the Corporation's common stock
at the present time.
<TABLE>
<CAPTION>
               Common Stock Performance-December 31 1997

                                       Quarterly
                       High     Low     Average
                       ____     ___     _______
</CAPTION>
<S>                   <C>      <C>      <C>
First Quarter         $25.00   $22.00   $23.00

Second Quarter        $23.50   $22.00   $23.06

Third Quarter         $25.50   $23.00   $24.38

Fourth Quarter        $27.00   $23.00   $25.92
</TABLE>

     The Corporation's and the Bank's Board of Directors
determines whether to declare dividends and the amount of
any dividends declared. Such determinations by the Board
take into account the Corporation's financial condition,
results of operations, and other relevant factors. The
declaration, amount and timing of future dividends will be
determined by the Board of Directors after a review of the
Corporation's operations and will be dependent upon, among
other factors, the Corporation's income, operating costs,
overall financial condition and capital requirements and
upon general business conditions. The Corporation's only
source of funds for cash dividends will be dividends paid to
the Corporation by the Bank, which is subject to regulatory
restrictions. During 1996 the Bank declared and paid cash
dividends of $500,000 to the Corporation for operating
costs. The Corporation did not declare or pay any cash
dividends during 1997.

     At December 31, 1997, there were approximately 966
holders of the Corporation's common stock (based on the
number of record holders as of that date).
<PAGE>19

Item 6. Selected Financial Data

     The following table sets forth certain selected
consolidated financial data for the past five years.
<TABLE>
<CAPTION>
                                           Years Ended December 31,
                                (Dollars in thousands, except per share data)


                              1997      1996        1995        1994        1993
</CAPTION>                    ____      ____        ____        ____        ____
<S>                       <C>         <C>         <C>         <C>         <C>
Income Statement Amounts:

  Gross interest income   $  18,735  $  14,596  $  11,585  $   8,425   $   6,433
  Gross interest expense     10,321      7,822      6,161      3,985       3,064
  Net interest income         8,414      6,774      5,424      4,440       3,369
  Provision for possible
   Loan losses                1,002        374        143        120         150
  Net interest income after
    provision                 7,412      6,400      5,281      4,320       3,219
  Other operating income        888        660        488        425         395
  Other operating expense     5,382      4,439      3,541      3,004       2,264
  Income before income
    taxes and other items     2,918      2,621      2,228      1,741       1,350
  Income taxes                  966        857        779        581         442
  Income before cumulative
    effect of change in
    accounting principles     1,952      1,764      1,449      1,160         908
  Cumulative effect of
    change in accounting
    principles                    -          -          -          -           -
  Net income              $   1,952  $   1,764  $   1,449  $   1,160   $     908

Per Share Data <F1>:

  Net income per share    $    1.59   $    1.45   $    1.19 $    0.96  $    0.98
  Cash dividends per share        -           -           -         -          -
  Book value (at year end)    13.64       11.97       10.52      8.43       8.33

Balance Sheet Amounts (at
  year-end):

  Total assets            $ 258,236   $ 207,739   $ 162,543 $ 128,749  $ 105,520
  Total loans (net of
    unearned income)        192,005     154,951     113,743    93,738     67,212
  Total deposits            236,646     189,471     147,327   117,314     94,853
  Long-term debt              2,614       1,929           -         -          -
  Total equity               16,802      14,617      12,812    10,243     10,042

<FN>
_______________________
<F1> Adjusted for 1995 two-for-one stock split, 1992 25% stock dividend
 and 1990 20% stock dividend.
</FN>
</TABLE>

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

     The information required herein is incorporated by
reference from pages 5 to 9 of the Annual Report to
Stockholders for the fiscal year ended December 31, 1997.

Item 8. Financial Statements and Supplementary Data

     The financial statements and supplementary data
required herein are incorporated by reference from pages F-1
to F-23 of the Annual Report to Stockholders for the fiscal
year ended December 31,1997.

Item 9. Changes in Accountants and Disagreements with
Accountants on Accounting and Financial Disclosure

     None.
<PAGE>20

Part III.

Item 10.  Directors and Executive Officers of the Registrant

     The information required herein is incorporated by
reference to "The Board of Directors", "Executive Officers
Who Are Not Directors", "Security Ownership of Certain
Beneficial Owners" and "Compliance With Filing Requirements
Under the Securities Exchange Act of 1934" contained in the
definitive proxy statement for the Registrant's 1997 Annual
Meeting of Stockholders to be subsequently filed.

Item 11. Executive Compensation

     The information required herein is incorporated by
reference to "Remuneration" contained in the definitive
proxy statement for the Registrant's 1997 Annual Meeting of
Stockholders to be subsequently filed.

Item 12. Security Ownership of Certain Beneficial Owners and
Management

     The information required herein is incorporated by
reference to "Security Ownership of Management" and
"Security Ownership of Certain Beneficial Owners" contained
in the definitive proxy statement for the Registrant's 1997
Annual Meeting of Stockholders to be subsequently filed.

Item 13. Certain Relationships and Related Transactions

     The information required herein is incorporated by
reference to "Indebtedness of Management" contained in the
definitive proxy statement for the Registrant's 1997 Annual
Meeting of Stockholders to be subsequently filed.

Part IV.

Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K

  (a) (1) The following financial statements are
          incorporated by reference into Item 8 hereof
          from Exhibit 13 hereof:

          Consolidated Statements of Financial Condition as
          of December 31, 1997 and 1996

          Consolidated Statements of Operations for each of
          the years in the three year period
          ended December 31, 1997

          Consolidated Statements of Stockholder's Equity
          for each of the years in the three year
          period ended December 31, 1997

          Consolidated Statements of Cash Flows for each of
          the years in the three year
          period ended December 31, 1997

          Notes to Consolidated Financial Statements for
          December 31, 1997, 1996 and 1995

          Independent Auditors' Report

  (a) (2) There are no financial statement schedules
          required to be filed herewith

       3a The following exhibits are filed as part of
          this report on Form 10-K, and this list
          includes the Exhibit Index.
<PAGE>21

                          Exhibits

       3a None

      (b) No reports on Form 8-K have been filed during the last
          quarter of the period covered by this
          report.

      (c) See (a) (3) above for all exhibits filed herewith and
          the Exhibit Index.

      (d) Separate financial statements are not applicable.

<PAGE>22

                         SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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.

Date:  March 26, 1998
BY:___________________________
                                    Samuel L. Neese
                                    Executive Vice President and
                                    Chief Executive Officer

     Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities indicated on March 26, 1997.
<TABLE>
<CAPTION>

          Signature                                   Title
          _________                                   _____
</CAPTION>
<S>                           <C>       <C>
/S/ James D Morefield         03-26-98
______________________________________
James D. Morefield            Date      Chairman of the Board, and Director


/S/ James D. Morre, Jr.       03-26-98
______________________________________
Dr. James D. Moore, Jr.       Date      President


/S/ J. Carter Lambert         03-26-98
______________________________________
J. Carter Lambert             Date      Vice Chairman


/S/ Samuel L. Neese           03-26-98
______________________________________
Samuel L. Neese               Date      Executive Vice President, and
                                        Chief Executive Officer

/S/ James T. Riffe            03-26-98
______________________________________
James T. Riffe                Date      Executive Vice President and Cashier


/S/ William E. Chaffin        03-26-98
______________________________________
William E. Chaffin            Date      Director


/S/ V. D. Kendrick            03-26-98
______________________________________
V.D. Kendrick                 Date      Director


/S/ Clydes B. Kiser           03-26-98
______________________________________
Clydes B. Kiser               Date      Director


/S/ Charles P. Olinger        03-26-98
______________________________________
Charles P. Olinger            Date      Director


/S/ William J. Singleton      03-26-98
______________________________________
William J. Singleton          Date      Director


/S/ H. Ramsey White, Jr.      03-26-98
______________________________________
Dr. H. Ramsey White, Jr.      Date      Director

</TABLE>
<PAGE>23
______________________________________________________________________________

HIGHLANDS BANKSHARES, INC.
1997 ANNUAL REPORT
______________________________________________________________________________

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
                                                     1997/    1997/
Results of Operations    1997      1996      1995    1996     1996
                         ____      ____      ____    ____     ____
                      (In Thousands except share
                          and per share data)      Percentage Change
                      ____________________________ _________________
</CAPTION>
<S>                   <C>       <C>       <C>       <C>     <C>
Net Interest Income   $  8,414  $  6,774  $  5,424  24.21%  24.89%
Net Income <Loss>        1,952     1,764     1,449  10.66   21.74

Financial Condition at Year-End

Assets                 258,236   207,739   162,543  24.31   27.81
Loans                  192,005   154,951   113,743  23.91   36.23
Securities              41,963    31,345    32,276  33.87   <2.88>
Deposits               236,646   189,719   147,327  24.74   28.77
Stockholders' Equity    16,802    14,617    12,812  14.95   14.09
Shares Outstanding       1,232     1,222     1,218   0.82    0.33

Significant Ratios

Return on average
  assets                  0.84      0.97      1.00 <13.40>  <0.03>
Return on average
  equity                 12.53     13.01     12.45  <3.69>   4.50
Average stockholders'
 equity to average
 assets                   6.73      7.46      8.05  <9.79>  <7.33>
Allowance for loan
 losses as a percentage
 of total loans           0.85      0.69      0.80  23.19  <13.75>

Per Share Data
Based on weighted-average shares outstanding

Net Income               $1.59     $1.45     $1.19   9.66   21.85
Stockholders' equity
 (book value) per
 shares outstanding at
 year-end                13.64     11.97     10.52  13.95   13.88

<PAGE>

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER  31,  1997
AND 1996

Net  interest income for the year-ended December 31, 1997 increased 24.21%,
approximately  $1.64  million over 1996.  Average interest  earning  assets
increased  $47.3  million from 1996 to 1997 while average  interest-bearing
liabilities increased $41.1 million.  The yield on average interest-earning
assets  for the year ended December 31, 1997 was 8.64% compared with  8.61%
for  the comparable 1996 period.  The 1997 yield on loans decreased  by  13
basis  points  as compared to 1996 period at 9.36%.  The yield  on  average
investments increased 0.10% to 6.11% from December 31, 1996 to  1997.   The
yield  on  average interest-bearing liabilities increased 14  basis  points
during 1997 to 5.57% as compared to 5.43% during 1996.  Net income for  the
year-ended December 31, 1997 was $1.95 million, an increase of 10.66%  over
the  1996  period.  Income tax expense for 1997 increased  12.72%  to  $966
thousand as compared to $857 thousand for the 1996 period.

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER  31,  1996
AND 1995

Net  interest income for the year-ended December 31, 1996 increased 24.89%,
approximately  $1.35  million over 1995.  Average interest  earning  assets
increased  $34.1  million from 1995 to 1996 while average  interest-bearing
liabilities increased $29.7 million.  The yield on average interest-earning
assets  for the year-ended December 31, 1996 was 8.61% compared with  8.56%
for  the  comparable 1995 period.  The 1996 yield on loans decreased  by  2
basis points as compared to the 1995 period at 9.38%. The  yield on average
investments remained constant at 6.01% for December 31,1996 and  1995.  The
yield  on  average interest-bearing liabilities increased  5  basis  points
during 1996 to 5.43% as compared to 5.38% during 1995.  Net income for  the
year-ended December 31, 1996 was $1.76 million, an increase of 21.74%  over
the  1995  period.  Income tax expense for 1996 increased  10.01%  to  $857
thousand as compared to $779 thousand for the 1995 period.
<PAGE>


COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND 1996

Total assets at December 31, 1997 totaled $258.2 million compared to $207.7
million  at  December 31, 1996. This 24.31% growth in assets was  primarily
due  to the large volume of loans originated. Total loans increased 23.91%,
or  $37.1  million over the comparable 1996 period.  The security portfolio
increased  33.87% to $42.0 million during 1997 as contrasted  to  the  1996
period.   Total deposits increased to $236.6 million or 24.74% from  1996's
level of $189.7 million. Stockholder's equity increased 14.95% during 1997.
The  Financial Accounting Standards Board's (FASB) Statement on  Accounting
Standards  No.  115 was implemented during 1994.  FASB's SAS  115  required
that  all  securities  classified as "Available-for-Sale"  be  adjusted  to
market  value  through the use of a valuation account, and that  any  paper
gains  or  losses be run through the Stockholder's Equity  section  of  the
balance  sheet.  The effect of implementing SAS 115 caused an  decrease  in
Stockholder's  Equity  at December 31, 1996 of $18  thousand,  net  of  the
related  deferred tax.  As of December 31, 1997 the Corporation's  security
portfolio  had  $104 thousand in paper gains, net of gains deferred  taxes.
The Corporation notes that it does have the ability and intent to carry  to
maturity   approximately   $41.9  million   of   the   "Available-for-Sale"
securities.

COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1996 AND 1995

Total assets at December 31, 1996 totaled $207.7 million compared to $162.5
million  at  December 31,1995.  This 27.81% growth in assets was  primarily
due  to the large volume of loans originated. Total loans increased 36.23%,
or  $41.2  million over the comparable 1995 period. The security  portfolio
decreased  2.88%  to $31.3 million during 1996 as contrasted  to  the  1995
period.  The  majority of principal payments received  were  used  to  fund
loans, rather than reinvesting in lower yielding securities, which resulted
in  the  2.88% decrease in the security portfolio. Total deposits increased
to   $189.7  million  or  28.77%  from  1995's  level  of  $147.3  million.
Stockholder's Equity increased 14.09% during 1996. The Financial Accounting
Standards  Board's  (FASB) Statement on Accounting Standards  No.  115  was
implemented  during  1994.  FASB's SAS 115  required  that  all  securities
classified as "Available-for-Sale" be adjusted to market value through  the
use  of  a  valuation account, and that any paper gains or  losses  be  run
through  the Stockholder's Equity section of the balance sheet. The  effect
of  implementing  SAS  115  caused an increase in Stockholder's  Equity  at
December 31, 1995 of $18 thousand, net of the related deferred tax.  As  of
December 31, 1996 the Corporation's security portfolio had $18 thousand  in
paper  losses  and  had net unrealized holding gains of  approximately  $18
thousand,  net of deferred taxes.  The Corporation notes that it does  have
the ability and intent to carry to maturity approximately $31.3 million  of
the "Available-for-Sale" securities.
<PAGE>


COMPARISON OF SIGNIFICANT RATIOS AT DECEMBER 31, 1997 AND 1996

Return  on  average  assets dropped slightly to 0.84%  for  the  year-ended
December 31, 1997 as compared to 0.97% for the comparable 1996 period.  The
24.31%  growth in assets, the absorption of the operational costs from  the
new  branch openings, and the addition of over one million to the allowance
for  loan loss account  all had significant impact relating to the decrease
in  this performance ratio.  Return on average equity decreased 3.69%  from
13.01%   at  December  31,  1996  to  12.53%  at  year-end  1997.   Average
stockholders'  equity to average assets declined to 6.73% at  December  31,
1997  from 7.46% at December 31, 1996.  Non-performing loans to total loans
increased  to  0.47% as of December 31, 1997 as compared to 0.01%  for  the
comparable 1996 period.  Allowance for loan losses as a percentage of total
loans  increased  23.19% to 0.85% at December 31, 1997.   The  decrease  in
average stockholders' equity to average assets is primarily attributable to
the enormous amount of growth which the Corporation  sustained during 1997.

COMPARISON OF SIGNIFICANT RATIOS AT DECEMBER 31, 1996 AND 1995

Return  on  average  assets dropped slightly to 0.97%  for  the  year-ended
December 31, 1996 as compared to the 1.00% for the comparable 1995  period.
The  27.81%  growth  in assets and the absorption of the operational  costs
from  the  new Bristol Branch both had significant impact relating  to  the
decrease  in  this  performance ratio.  Return on average equity  increased
4.50% from 12.45% at December 31, 1995 to 13.01% at year-end 1996.  Average
stockholders'  equity to average assets declined to 7.46% at  December  31,
1996 from 8.05% at December 31, 1995.   Non-performing loans to total loans
increased  to  0.01% as of December 31, 1996 as compared to 0.00%  for  the
comparable 1995 period.  Allowance for loan losses as a percentage of total
loans  decreased  7.33% to 0.69% at December 31, 1996.   The  decreases  in
average  stockholder's  equity to average assets  and  allowance  for  loan
losses  as  a  percentage of total loans reflects the  enormous  amount  of
growth which the Corporation has sustained during 1996.
<PAGE>


COMPARISON OF PER SHARE DATA FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

Net income per share, on a weighted average basis, increased 9.66% to $1.59
at  December 31, 1997 as compared to $1.45 for the comparable 1996  period.
Book  value  per share of common stock increased by 13.95%  to  $13.64  per
share  as  compared  to $11.97 at December 31, 1996.  The  Corporation  had
approximately $104 thousand in paper gains as of December 31 1997,  net  of
deferred  taxes,  due  to  FASB;s SAS 115 which affected   the  book  value
computation.

COMPARISON OF PER SHARE DATA FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

Net  income  per  share, on a weighted average basis, increased  21.85%  to
$1.45  at  December 31, 1996 as compared to $1.19 for the  comparable  1995
period.  Book value per share of common stock increased by 13.88% to $11.97
per  share as compared to $10.52 at December 31, 1995. The Corporation  had
approximately $18 thousand in paper losses as of December 31, 1996, net  of
deferred taxes, due to FASB's SAS 115, which had virtually no effect on the
book value computation.
<PAGE>


                    HIGHLANDS BANKSHARES, INC.
                               &
                      HIGHLANDS UNION BANK

                       BOARD OF DIRECTORS

                         J.D. Morefield
                            Chairman

J. Carter Lambert                       Dr. James D. Moore, Jr.
Vice Chairman                           President

William E. Chaffin                      V.D. Kendrick
Clydes B. Kiser                         Charles P. Olinger
William J. Singleton                    Dr. H. Ramsey White, Jr.

                         BOARD COMMITTEES

Loan Committee           Audit Committee        Investment Committee
William E. Chaffin       V.D. Kendrick          J.D. Morefield
J.D. Morefield           J. Carter Lambert      James D. Moore, Jr.
James D. Moore, Jr.      Charles P. Olinger
Charles P. Olinger
Charles P. Olinger       H. Ramsey White, Jr.
H. Ramsey White, Jr.     William E. Chaffin
                         William J. Singleton

Personnel/Compensation   Appraisal Committee    Building Committee
Clydes B. Kiser          V.D. Kendrick          V.D. Kendrick
J. Carter Lambert        J.D. Morefield         Clydes B. Kiser
J.D. Morefield           J. Carter Lambert      J.D. Morefield
Charles P. Olinger       Samuel L. Neese        James D. Moore, Jr.
H. Ramsey White, Jr.     C.B. Hale              William E. Chaffin
                         William J. Singleton

                      HIGHLANDS BANKSHARES, INC.
                              OFFICERS

Dr. James D. Moore, Jr.   Samuel L. Neese            James T. Riffe
President                 Executive Vice President   Excutive Vice President
                          Chief Executive Officer    Chief Operating Officer

Robert M. Little, Jr.     James R. Edmondson         Melinda S. Bishop
Controller                Assistant Controller       Senior Internal Auditor

Monica M. Anderson
Internal Auditor


<PAGE>PERSONNEL

                     HIGHLANDS UNION BANK OFFICERS

                         Dr. James D. Moore, Jr.
                               President

Samuel L. Neese           James T. Riffe            C. B. Hale
Executive Vice President, Executive Vice President, Business Development
Chief Executive Officer   Cashier, CRA Officer &    & CRA Outreach Officer
                          Chief Operations Officer

W. Clark Hutton           Gary L. Dutton            Tim L. Robinson
Senior Vice President,    Vice President, Senior    Vice President, Senior
Senior Loan Officer       Loan Officer-Washington   Loan Officer-Bristol
                          County

Charles E. Holmes         C. Wayne Perry            John W. Snodgrass
Vice President,           Vice President, Credit    Vice President, Branch
Commercial Loan Officer   Review & Compliance       Manager
                          Officer

Robert M. Little, Jr.     James R. Edmondson        Christine S. Eldreth
Controller                Vice President,           Vice President, Loan
                          Accounting                Operations, Consumer
                                                    Loan Officer

Edward T. Farmer          Curtis B. Fleenor         Lynda S. Hayes
Vice President,           Vice President, Main      Vice President,
Operations, P.C.          Office, Consumer Lending  Financial Services
Coordinator               Manager                   Manager

Beth A. Morefield         M. Suleen Reeder          David O. Rhea
Vice President, Dealer    Vice President, Mortgage  Loan Vice President,
Finance Manager           Loan Officer, Manager of  Commercial Loan Officer
                          Mortgage

Darlene M. Rose           Marie F. Shy              Melinda S. Bishop
Vice President, Manager   Vice President, Branch    Senior Internal Auditor
of Consumer Loan          Manager
Operations

Monica M. Anderson        Robert M. Howard          Janice M. Eldreth
Internal Auditor          Human Resource Officer,   Assistant Vice President,
                          Training Officer          Computer Operations
                                                    Officer

Beverly A Sharrett        Robin G. Frost            Edna M. Moore
Assistant Vice President, Assistant Vice President, Assistant Vice President,
Assistant Branch Manager, Branch Officer            Mortgage Loan Officer
Consumer Loan Officer                               Manager of Secondary
                                                    Market Mortgage

Malinda W. Pickett        Mark B. Redman            Mary Jane Robinson
Assistant Vice President, Assistant Vice President, Assistant Vice President,
Branch Manager            Branch Manager, Security  Student Loan Officer,
                          Officer                   Consumer Loan Officer
Mark W. Farris
Loan Officer

<PAGE>PERSONNEL




Dear Shareholders:

We   are   pleased   to  report  the  extraordinary   growth
experienced during recent years by Highlands Bankshares Inc.
continued  in  1997.  Assets increased  by  $50  million  or
24.3%, net loans increased by $36 million or 23.7%, and  net
earnings  increased by $188,000 or 10.6%.  Return on  equity
was  12.53%  and return on assets was .84%.  This  was  down
slightly  from 1996 primarily due to the large  increase  in
contributions to loan loss reserve in 1997 compared to 1996.
The  loan  portfolio has increased $77 million the last  two
years.   To  support  this significant growth  in  the  loan
portfolio,  a  total of $1,000,750 was contributed  to  loan
loss reserve in 1997 compared to $374,000 in 1996.

At year-end 1997, Highlands Union Bank's assets had grown to
in  excess  of $1/4 billion.  Since opening for business  in
1985,  your  company's growth rates have far  surpassed  the
industry    averages.    A   combination   of   high-quality
traditional  personal  service as well  as  state-of-the-art
technology  services afford us the opportunity to  fill  the
needs and expectations of today's customers.

We  are  also  extremely proud of the regional and  national
recognition Highlands Union Bank received in 1997.  The bank
was  named  "Business of the Year" at the 1997 Greater  Tri-
Cities  Business  Awards presented by The Business  Journal,
NationsBank  and  Brown, Edwards &  Company.   In  addition,
Highlands  Union was recognized by the national publication,
Working  Woman magazine, as one of the nation's best  small-
business-friendly  lenders.   According  to  the  magazine's
survey  utilizing data released by the U.S.  Small  Business
Administration  (SBA), Highlands Union is  one  of  only  27
banks  in the U.S. to have received a perfect score  --  and
the only bank in Virginia.

Several  exciting initiatives were begun in 1997,  including
the  opening of a new Highlands Union Bank branch in Marion,
Va.   In  addition,  the bank began offering  customers  the
convenience of telebanking and Visa check cards.    Also  in
1997,  a new financial services division of Highlands  Union
was  formed. Through an affiliation with Independent Bankers
Association  Financial Services, fixed  annuities,  variable
annuities, mutual funds and discount brokerage services (all
non-insured products) were made available.

As  a  result  of the growth and expansion,  your  bank  has
outgrown the operational space at the main office.  We  were
fortunate to find the former NationsBank operation center on
Valley  Street,  Abingdon,  available  for  purchase.   This
additional  space,  purchased  and  occupied  in   mid-1997,
allowed  for the relocation of most operational services  to
the  center,  thus providing additional space  at  the  main
office for customer service.

To  provide  the  capital needed to  support  the  continued
growth,  we  began the process of issuing  $7.5  million  in
capital  securities.  The issue is scheduled to be finalized
in  January  1998.  It is an issue of Trust Preferred  Stock
issued  by  Highlands  Capital Trust I and  underwritten  by
McKinnon and Company Inc.

As  we  move  into the future, the directors,  officers  and
employees  of Highlands Bankshares Inc. and Highlands  Union
Bank  will continue to explore opportunities for growth  and
earnings enhancement.

We  look forward to 1998 with excitement.  On behalf of  the
directors,  officers  and  employees,  thank  you  for  your
continued confidence and support.

Sincerely,


Samuel L. Neese                              James T. Riffe
Chief Executive Officer                      Chief Operating Officer

<PAGE>SHAREHOLDER'S LETTER




                  HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY

                        CONSOLIDATED FINANCIAL REPORT

                              DECEMBER 31, 1997



<PAGE>COVER



                               C O N T E N T S


                                                             Page

INDEPENDENT AUDITOR'S REPORT                                   F1

FINANCIAL STATEMENTS
  Consolidated Balance Sheets                                  F2
  Consolidated Statements of Income                            F3
  Consolidated Statements of Stockholders' Equity              F4
  Consolidated Statements of Cash Flows                        F5
  Notes to Consolidated Financial Statements             F6 - F23


<PAGE>CONTENTS

                     INDEPENDENT AUDITOR'S REPORT


Board of Directors and Stockholders
Highlands Bankshares, Inc. and Subsidiary
Abingdon, Virginia

We have audited the accompanying consolidated balance sheets
of  Highlands Bankshares, Inc. and Subsidiary as of December
31,  1997,  1996,  and  1995  and the  related  consolidated
statements  of income, stockholders' equity, and cash  flows
for  the  years then ended.  These financial statements  are
the   responsibility   of   the  Bank's   management.    Our
responsibility  is to express an opinion on these  financial
statements based on our audits.

We   conducted  our  audits  in  accordance  with  generally
accepted  auditing standards.  Those standards require  that
we plan and perform the audit to obtain reasonable assurance
about  whether the financial statements are free of material
misstatement.   An  audit includes  examining,  on  a   test
basis,  evidence supporting the amounts and  disclosures  in
the  financial statements.  An audit also includes assessing
the  accounting  principles used and  significant  estimates
made  by  management,  as  well as  evaluating  the  overall
financial  statements presentation.   We  believe  that  our
audits provide a reasonable basis for our opinion.

In   our  opinion,  the  consolidated  financial  statements
referred  to above present fairly, in all material respects,
the  financial  position of Highlands Bankshares,  Inc.  and
Subsidiary  as of December 31, 1997, 1996 and 1995  and  the
results  of its operations and its cash flows for the  years
then  ended in conformity with generally accepted accounting
principles.


                         /s/ Brown, Edwards & Company, L.L.P.
                         CERTIFIED PUBLIC ACCOUNTANTS

468 East Main Street
Abingdon, VA 24210
February 13, 1998

<PAGE>F1


                   HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
                         CONSOLIDATED BALANCE SHEETS
                      December 31, 1997, 1996 and 1995
                               (In thousands)

</TABLE>
<TABLE>
<CAPTION>
                                        1997       1996      1995
                                        ____       ____      ____
</CAPTION>
<S>                                  <C>        <C>        <C>
ASSETS
 Cash and due from banks (Note 18)   $   7,712  $   8,008  $   5,618
 Federal funds sold                      7,213      7,948      5,535
 Investment securities available
   for sale (Note 3)                    41,963     31,345     32,276
 Loans, net of allowance for loan
  losses of $1,636, $1,072 and $908
  for 1997, 1996 and 1995,
  respectively (Notes 4 and 5)         190,369    153,879    112,835

 Premises and equipment (Note 6)         7,062      4,583      4,346
 Interest receivable                     1,495      1,271      1,068
 Other assets (Note 9)                   2,422        705        865
                                     _________  _________  _________
      Total Assets                   $ 258,236  $ 207,739  $ 162,543
                                     _________  _________  _________

LIABILITIES AND STOCKHOLDERS' EQUITY

 Deposits (Note 7)
   Interest bearing                  $ 205,716  $ 163,468  $ 127,024
   Noninterest bearing                  30,930     26,003     20,303
                                     _________  _________  _________
      Total Deposits                   236,646    189,471    147,327
                                     _________  _________  _________
 Short term borrowings (Note 8)              -          -      1,000
 Interest, taxes and other
   liabilities                           2,174      1,722      1,404
 Long-term debt (Note 10)                2,614      1,929          -
                                     _________  _________  _________
                                         4,788      3,651      2,404
                                     _________  _________  _________
      Total Liabilities                241,434    193,122    149,731
                                     _________  _________  _________
STOCKHOLDERS' EQUITY
   Common stock (Notes 12 and 14)        3,081      3,054      3,044
   Surplus                               5,271      5,187      5,120
   Undivided profits                     8,346      6,394      4,630
   Net unrealized gains (losses)
     on securities available for
     sale, net of taxes of $54,
     $(9), and $9 in 1997, 1996 and
     1995, respectively                    104        (18)        18
                                     _________  _________  _________
      Total Stockholders' Equity        16,802     14,617     12,812
                                     _________  _________  _________
      Total Liabilities and
       Stockholders' Equity          $ 258,236  $ 207,739  $ 162,543
                                     _________  _________  _________
</TABLE>

The Notes to Consolidated Financial Statements are an integral part of
these statements.
<PAGE>F2

                 HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF INCOME
                Years Ended December 31, 1997, 1996 and 1995
                               (In thousands)
<TABLE>
<CAPTION>
                                       1997       1996       1995
                                       ____       ____       ____
</CAPTION>
<S>                                 <C>         <C>        <C>
INTEREST INCOME
   Loans receivable and fees
    on loans                        $   16,203  $  12,310  $   9,590
   Securities available for sale         2,363      2,082      1,793
   Federal funds sold                      169        204        202
                                    __________  _________  _________
            Total Interest Income       18,735     14,596     11,585
                                    __________  _________  _________
 INTEREST EXPENSE
  Deposits                              10,099      7,714      6,086
  Federal funds purchased                   29          9         11
  Other borrowed funds                     176         99         64
  Long-term debt                            17          -          -
                                    __________  _________  _________
        Total interest expense          10,321      7,822      6,161
                                    __________  _________  _________
 Net interest income                     8,414      6,774      5,424

 Provision for loan losses               1,002        374        143
                                    __________  _________  _________
        Net interest income after
         provision for loan losses       7,412      6,400      5,281
                                    __________  _________  _________
 NON-INTEREST INCOME
   Securities gains (losses), net           10         23         (1)
   Service charges on deposit accounts     514        474        371
   Insurance commissions                    25         24         25
   Other service charges,
    commissions and fees                   207         96         58
   Other operating income, rents           132         43         35
                                    __________  _________  _________
          Total Non-Interest Income        888        660        488
                                    __________  _________  _________
 NON-INTEREST EXPENSES
   Salaries and employee benefits
    (Note 13)                            2,972      2,481      1,904
   Compensation related to stock
    options granted (Note 14)               32         53          4
   Occupancy expense of bank premises      441        298        212
   Furniture and equipment expense         596        564        510
   Other operating expenses (Note 20)    1,341      1,043        911
                                    __________  _________  _________
          Total Non-Interest Expenses    5,382      4,439      3,541
                                    __________  _________  _________
   Income Before Income Taxes            2,918      2,621      2,228

   Income Tax Expense (Note 9)             966        857        779
                                    __________  _________  _________
   Net Income                       $    1,952  $   1,764  $   1,449
                                    __________  _________  _________

 Earnings Per Common Share (Note 12)$     1.59  $    1.45  $    1.19
                                    __________  _________  _________
 Earnings Per Common Share-assuming
  dilution                          $     1.52  $    1.38  $    1.14
                                    __________  _________  _________
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
<PAGE> F3

                    HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  Years Ended December 31, 1997, 1996 and 1995
                                 (In thousands)
<TABLE>
<CAPTION>
                                                               Net
                                                           Unrealized
                                                           Gain (loss)
                                                               on
                                                           Securities  Total
                          Common Stock                      Available  Stock-
                        ________________           Undivided   for     holders'
                        Shares Par Value  Surplus   Profits    sale    Equity
                        ______ _________  _______   _______    ____    ______
</CAPTION>
<S>                     <C>      <C>       <C>      <C>     <C>      <C>
Balance,
 December 31, 1994      1,216    $3,038    $5,116   $3,181  $(1,092) $10,243

   Net income               -         -         -    1,449        -    1,449

   Common stock issued
    for stock options
    exercised               2         6         -        -        -        6

   Stock options
    granted (Note 14)       -         -         4        -        -        4

   Net changes in
    unrealized gains
    (losses) on available
    for sale securities,
    net of taxes of $572    -         -         -        -    1,110    1,110
                        _____    ______    ______   ______  _______  _______
Balance,
 December 31, 1995      1,218     3,044     5,120    4,630       18   12,812

   Net income               -         -         -    1,764        -    1,764

    Common stock
    issued for stock
    options exercised       4        10        14        -        -       24
    Stock options
    granted (Note 14)       -         -        53        -        -       53

    Net changes in
    unrealized gains
    (losses) on available
    for sale securities,
    net of taxes of
    $(19)                   -         -         -        -      (36)     (36)
                        _____    ______    ______   ______  _______  _______
Balance,
 December 31, 1996      1,222    $3,054    $5,187   $6,394  $   (18) $14,617

   Net income               -         -         -    1,952        -    1,952

   Common stock
    issued for stock
    options exercised      10        27        52        -        -       79

   Stock options
     granted (Note 14)      -         -        32        -        -       32

   Net changes in
    unrealized gains
    (losses) on available
    for sale securities,
    net of taxes of
    $(63)                   -         -         -        -      122      122
                        _____    ______    ______   ______  _______  _______
Balance,
 December 31, 1997      1,232    $3,081    $5,271   $8,346  $   104  $16,802
                        _____    ______    ______   ______  _______  _______
</TABLE>

The Notes to Consolidated Financial Statements are an integral part of
these statements.
<PAGE>F4

                HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
                  CONSOLIDATED STATEMENTS OF CASH FLOWS
               Years Ended December 31, 1997, 1996 and 1995
                              (In thousands)
<TABLE>
<CAPTION>
                                           1997      1996     1995
                                           ____      ____     ____
</CAPTION>
<S>                                     <C>       <C>       <C>
 CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                           $  1,952  $  1,764  $  1,449
   Adjustments to reconcile net
    income to net cash provided by
    operating activities:
      Provision for loan losses            1,002       374       143
      Provision for deferred income taxes   (124)      (67)      596
      Deferred compensation expense           32        53         4
      Depreciation and amortization          328       214       157
      Net realized (gains) losses on
       available for sale securities         (10)      (23)        1
      Net amortization on securities         122       125        76
      (Increase) decrease in interest
       receivable                           (224)     (203)     (262)
      (Increase) decrease in other
       assets                             (1,593)      227       299
      Increase (decrease) in interest,
       taxes and other liabilities           452       318       (58)
                                        ________  ________  ________
          Net Cash Provided by
           Operating Activities            1,937     2,782     2,405
                                        ________  ________  ________

 CASH FLOWS FROM INVESTING ACTIVITIES:
   Securities available for sale:
      Proceeds from sale of securities    14,560    12,779       586
      Proceeds from maturities of debt
       securities                            565     2,125     3,209
      Purchase of securities             (25,740)  (14,128)   (7,648)
   Net (increase) decrease in
    federal funds sold                       735    (2,413)   (5,534)
   Net increase in loans                 (37,492)  (41,418)  (20,077)
   Premises and equipment expenditures    (2,800)     (446)   (1,899)
                                        ________  ________  ________
             Net Cash Used in
              Investing Activities       (50,172)  (43,501)  (31,363)
                                        ________  ________  ________
 CASH FLOWS FROM FINANCING ACTIVITIES:
   Net increase in certificates
    of deposit                            35,683    29,811    22,582
   Net increase in demand, savings
    and other deposits                    11,492    12,333     7,432
   Increase (decrease) in federal
    funds purchased                            -         -      (327)
   Proceeds from issuance of
    long-term debt                           840         -         -
   Repayment of long-term debt               (12)        -         -
   Repayment of short-term borrowings       (143)      929     1,000
   Proceeds from issuance of common stock     79        36         6
                                        ________  ________  ________
          Net cash provided by
           financing activities           47,939    43,109    30,693
                                        ________  ________  ________
          Net increase (decrease) in
           cash and cash equivalents        (296)    2,390     1,735

 CASH AND CASH EQUIVALENTS AT
  BEGINNING OF YEAR                        8,008     5,618     3,883
                                        ________  ________  ________
 CASH AND CASH EQUIVALENTS AT
  END OF YEAR                           $  7,712  $  8,008  $  5,618
                                        ________  ________  ________
 SUPPLEMENTAL DISCLOSURE OF NON-CASH
   TRANSACTIONS:

   Unrealized gain (loss) in
    value of securities available for
    sale (net of tax effects of $63,
    $(19), and $572 at December 31,
    1997, 1996 and 1995, respectively   $    122  $    (36) $  1,110
                                        ________  ________  ________
 SUPPLEMENTAL DISCLOSURES OF CASH FLOW
   INFORMATION:

 Cash paid during the year for:
   Interest                             $  9,802  $  7,595  $  5,629
                                        ________  ________  ________
   Income taxes                         $  1,011  $    901  $    783
                                        ________  ________  ________
</TABLE>

The Notes to Consolidated Financial Statements are an integral part of
these statements.
<PAGE>F5

               HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          December 31, 1997
                           (In thousands)

Note  1.  Summary of Significant Accounting Policies

Basis of Presentation:

The accounting and reporting policies of Highlands Bankshares, Inc. and
Subsidiary conform to generally accepted accounting principles and the
predominant practices within the banking industry.  The accompanying
consolidated financial statements have been prepared on the accrual basis.

Principles of Consolidation:

The accompanying consolidated financial statements include the accounts of
Highlands Bankshares, Inc. and Subsidiary (the "Company") and its wholly-
owned subsidiary, Highlands Union Bank (the "Bank").  All significant
intercompany  balances and transactions have been  eliminated  in
consolidation.

Nature of Operations:

Highlands Bankshares, Inc. and Subsidiary operates in Abingdon, Virginia and
surrounding Southwest Virginia, under the laws of the Commonwealth of
Virginia.  The Company was organized December 29, 1995.  Highlands Union
Bank, its wholly-owned subsidiary, began banking operations on April 27,
1985.  The Bank operates under a state bank charter and provides full
banking services.  As a state bank, the Bank is subject to regulation by the
Federal  Reserve Board and the Virginia State Bureau of Financial
Institutions.

Securities Available for Sale:

Securities classified as available for sale are those debt securities that
the Company intends to hold for an indefinite period of time, but not
necessarily to maturity.  Any decision to sell a security classified as
available for sale would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of the Company's
assets and liabilities, liquidity needs, regulatory capital considerations,
and other similar factors.

Securities available for sale are carried at fair value.  Unrealized gains
or losses are reported as increases or decreases in stockholders' equity,
net of the related deferred tax effect.  Realized gains or losses,
determined on the basis of the cost of specific securities sold, are
included in earnings. Premiums and discounts are recognized in interest
income using the interest method over the period to maturity.

Loans Receivable and Allowance for Loan Losses:

The reserve for possible loan losses for financial statement purposes is
based upon management's evaluation of amounts required to maintain the
reserve at an adequate level upon consideration of losses charged to the
reserve, current economic conditions, changes in the size and character of
the loan portfolio, and other relevant factors which, in management's
judgment, deserve current recognition.

Premises and Equipment:

Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on the straight-line method over estimated useful
lives.  Maintenance and repairs are charged to current operations while
improvements are capitalized.  Disposition gains and losses are reflected in
current operations.

                                 (Continued)
<PAGE>F6

                 HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             December 31, 1997
                               (In thousands)

Note  1.  Summary of Significant Accounting Policies (Continued)

Intangible Assets:

Organizational costs are stated at cost less accumulated amortization.
Amortization is computed on the straight-line method over 60 months.

Cash and Cash Equivalents:

For purposes of reporting cash flows, cash and cash equivalents are those
amounts included in the balance sheet caption "Cash and due from banks".

Income Taxes:

Under the asset and liability method, deferred income taxes are recognized
for the tax consequences of "temporary differences" by applying enacted
statutory tax rates to the differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.

Income on Loans and Loan Fees:

Accrual of interest on commercial loans, mortgages and consumer single-
payment loans is based generally on the daily amount of principal
outstanding.  Interest on installment loans is reported as income over the
term of the loan under the simple interest method and the sum-of-the-months'-
digits (Rule of 78's) method.  The Rule of 78's method is not materially
different from the interest method.  Beginning with 1996 the Bank has
discontinued the use of the "Rule of 78's".

It is the Bank's policy to discontinue the accrual of interest on loans
based on their delinquency status and evaluation of the related collateral
and the financial strength of the borrower.  The accrual of interest income
is normally discontinued when a loan becomes 90 days past due as to
principal or interest.  Management may elect to continue the accrual of
interest when the net realizable value of collateral is sufficient to cover
the principal balance and accrued interest.  When interest accruals are
discontinued, interest accrued and not collected in the current year is
reversed and interest accrued and not collected in prior years is charged to
the allowance for credit losses when the loan is actually charged off.

For mortgage loans, the portion of loan origination fees that exceeds the
direct costs of underwriting and closing loans is deferred.  The deferred
fees received are amortized to income over the estimated lives of the
mortgage loans using a straight line method.  The deferred fees received in
connection with installment loans are amortized over the life of the loan.
The aforementioned amortization methods are not materially different from
the interest method.

Earnings Per Common Share:

Earnings per common share are calculated based on the weighted average
outstanding shares during the year.  Earnings per common share assuming
dilution are calculated based on the weighted average outstanding shares
during the year plus stock options outstanding at year end.

Estimates:

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.  Actual
results could differ from those estimates.

                                 (Continued)
<PAGE>F7

                  HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             December 31, 1997
                               (In thousands)

Note  1.  Summary of Significant Accounting Policies (Continued)

Reclassification of Financial Statement Presentation:

Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform with the 1997 financial statement presentation.  Such
reclassifications had no effect on net income as previously reported.

Note  2.  Business Combination

On December 29, 1995 Highlands Bankshares, Inc. issued approximately 1.2
million shares of its common stock in exchange for all the outstanding
common stock of Highlands Union Bank.  In addition, outstanding employee
stock options to purchase Highlands Union Bank common stock were converted
into options to purchase shares of Highlands Bankshares, Inc.  The merger
has been accounted for as a pooling of interests.

Note  3.  Investment Securities

Debt and equity securities have been classified in the consolidated
statements of financial condition according to management's intent.  The
amortized cost and market value of securities classified as available for
sale are as follows:
<TABLE>
<CAPTION>
                                                 1997
                             _________________________________________
                                          Gross       Gross
                             Amortized Unrealized  Unrealized   Fair
                                Cost      Gains      Losses    Values
                                ____      _____      ______    ______
</CAPTION>
<S>                          <C>        <C>        <C>        <C>
 U.S. Treasury securities    $  1,493   $     10   $      -   $  1,503
 U.S. Government agencies
  and corporations              1,500          -         14      1,486
 State and political
  subdivisions                    939         33          -        972
 Mortgage Backed Securities    36,775        129          -     36,904
 Other securities               1,098          -          -      1,098
                             ________   ________   ________   ________
                             $ 41,805   $    172   $     14   $ 41,963
                             ________   ________   ________   ________
</TABLE>
<TABLE>
<CAPTION>
                                              1996
                             _________________________________________
                                          Gross     Gross
                             Amortized Unrealized Unrealized   Fair
                                Cost      Gains     Losses     Value
                                ____      _____     ______     _____
</CAPTION>
<S>                          <C>        <C>        <C>        <C>
 U.S. Treasury securities    $  1,003   $      -   $      4   $    999
 U.S. Government agencies
  and corporations              3,500          -         38      3,462
 State and political
  subdivisions                  1,004         27          -      1,031
 Mortgage Backed Securities    25,005          -         13     24,992
 Other securities                 861          -          -        861
                             ________   ________   ________   ________
                             $ 31,373   $     27   $     55   $ 31,345
                             ________   ________   ________   ________
</TABLE>
                                 (Continued)
<PAGE>F8
                 HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             December 31, 1997
                               (In thousands)

Note  3.  Investment Securities (Continued)
<TABLE>
<CAPTION>
                                             1995
                             _________________________________________
                                         Gross      Gross
                              Amortized Unrealized Unrealized   Fair
                                Cost      Gains     Losses      Value
                                ____      _____     ______      _____
</CAPTION>
<S>                          <C>        <C>        <C>        <C>
 U.S. Treasury securities    $  3,008   $      -   $     20   $  2,988
 U.S. Government agencies
  and corporations              8,139         68         67      8,140
 State and political
  subdivisions                  1,331         77          -      1,408
 Mortgage Backed Securities    18,861        152        182     18,831
 Other securities                 909          -          -        909
                             ________   ________   ________   ________
                             $ 32,248   $    297   $    269   $ 32,276
                             ________   ________   ________   ________
</TABLE>

Investment securities available for sale with a carrying value of $3,571,
$1,003, and $3,808 at December 31, 1997, 1996 and 1995 respectively, and a
market value of $3,595, $998, and $3,782 at December 31, 1997, 1996 and 1995
were pledged as collateral on public deposits and for other purposes as
required or permitted by law.

The amortized cost and estimated fair value of securities available for sale
at December 31, 1997 by contractual maturity are shown below.  Expected
maturities may differ from contractual  maturities, because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
                                                  Approximate
                                         Amortized   Market
                                            Cost     Value
                                            ____     _____
</CAPTION>
<S>                                      <C>       <C>
Due in one year or less                  $    500  $    499
Due after one year through five years       2,643     2,639
Due after five years through ten years        789       823
Due after ten years                             -         -
                                         ________  ________
                                            3,932     3,961
                                         ________  ________

Mortgage-backed securities                 36,775    36,904
Other securities                            1,098     1,098
                                         ________  ________
                                           37,873    38,002
                                         ________  ________
                                         $ 41,805  $ 41,963
                                         ________  ________
</TABLE>

                                 (Continued)
<PAGE>F9

                 HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             December 31, 1997
                               (In thousands)

Note  3.  Investment Securities (Continued)

Gross realized gains and losses for the years ended December 31, 1997, 1996
and 1995 on investment securities available for sale are as follows:
<TABLE>
<CAPTION>
                           1997     1996     1995
                           ____     ____     ____
</CAPTION>
<S>                       <C>      <C>      <C>
Realized gains            $  34    $  50    $   3
Realized losses           $ (24)   $ (27)   $  (4)
</TABLE>

Note  4.  Loans

The composition of the net loans is as follows:
<TABLE>
<CAPTION>
                   1997       1996       1995
                   ____       ____       ____
</CAPTION>
<S>             <C>        <C>        <C>
Commercial      $  24,404  $  20,370  $  12,699
Real estate       104,899    101,570     76,590
Installment        59,798     30,656     23,342
Other               3,139      2,967      2,743
                _________  _________  _________
                  192,240    155,563    115,374
                _________  _________  _________

Deduct:
Unearned discount     127        455      1,377
Allowance for
 loan losses        1,636      1,072        908
Net deferred loan
 fees                 108        157        254
                _________  _________  _________
                    1,871      1,684      2,539
                _________  _________  _________
                $ 190,369  $ 153,879  $ 112,835
                _________  _________  _________
</TABLE>

In May 1993, the Financial Accounting Standards Board issued Statement No.
114, "Accounting by Creditors for the Impairment of a Loan" which is
effective for fiscal years beginning after December 15, 1995.  In October
1995, certain provisions of Statement No. 114 were amended by Statement No.
118.  Statements 114 and 118 address the methods to be used by a creditor to
measure the impairment of a loan and the proper recognition of a change in
the value of an impaired loan.  The Company has no loans that are considered
impaired in conformity with SFAS 114.

Nonaccruing  loans totaling $888, $99, and $235 at December 31, 1997, 1996
and 1995 are included in the above loans.  Interest income lost on these
nonaccruing loans was approximately $71, $6, and $12, for December 31, 1997,
1996 and 1995, respectively.

Loans have been pledged as part of the floating blanket lien to secure
Federal Home Loan Bank advances. (Note 8)
<PAGE>F10

                 HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             December 31, 1997
                               (In thousands)

Note  5.  Allowance for Loan Losses

Activity in the allowance for loan losses is as follows for the periods
ended December 31, 1997, 1996, 1995:
<TABLE>
<CAPTION>
                            1997       1996     1995
                            ____       ____     ____
</CAPTION>
<S>                     <C>        <C>        <C>
Balance, beginning      $   1,072  $     908  $     836
Provisions charged to
 operations                 1,002        374        143
Loans charged to reserve     (512)      (255)      (188)
Recoveries                     74         45        117
                        _________  _________  _________
Balance, ending         $   1,636  $   1,072  $     908
                        _________  _________  _________
</TABLE>

Note  6.  Premises and Equipment

Premises and equipment, stated at cost, are comprised of the following:

<TABLE>
<CAPTION>
                            1997      1996       1995
                            ____      ____       ____
</CAPTION>
<S>                     <C>        <C>        <C>
Land                    $   1,847  $   1,451  $   1,301
Bank premises               4,445      2,909      2,876
Equipment                   2,184      1,316      1,053
                        _________  _________  _________
                            8,476      5,676      5,230
Less accumulated
 depreciation               1,414      1,093        884
                        _________  _________  _________
                        $   7,062  $   4,583  $   4,346
                        _________  _________  _________
</TABLE>

The depreciation expense is $321, $209, and $157 thousand for 1997, 1996,
and 1995, respectively.

Note  7.  Deposits

The composition of deposits is as follows:
<TABLE>
<CAPTION>
                                    December 31,
                           _______________________________
                               1997      1996    1995
                               ____      ____    ____
</CAPTION>
<S>                        <C>        <C>        <C>
Demand                     $  45,995  $  39,381  $  31,968
Savings                       26,808     21,930     17,010
Time deposits, $100,000 or
 more                         37,890     31,007     26,297
Other time deposits          125,953     97,153     72,052
                           _________  _________  _________
                           $ 236,646  $ 189,471  $ 147,327
                           _________  _________  _________
</TABLE>
                                 (Continued)
<PAGE>F11

                 HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             December 31, 1997
                               (In thousands)

Note  7.  Deposits (Continued)

The remaining  maturities of time deposits at December 31, 1997 are as
follows:
<TABLE>
<S>                             <C>
Three months or less            $   33,135
Three through twelve months         84,993
Over twelve months                  45,715
                                __________
                                $  163,843
                                __________
</TABLE>

Note  8.  Short Term Borrowings

Borrowed funds consist of Federal Home Loan Bank advances which are secured
by a floating blanket lien on loans of the Bank.  Short-term borrowings for
December 31, 1997, 1996 and 1995 were $0, $0, and $1,000, respectively.
Specific mortgage loans with a balance of $55,787 at December 31, 1997 were
pledged to the FHLB as collateral.

Note  9.  Income Taxes

The components of the net deferred tax asset at December 31, 1997, 1996 and
1995 were as follows:
<TABLE>
<CAPTION>
                            1997    1996     1995
                            ____    ____     ____
</CAPTION>
<S>                      <C>      <C>      <C>
Deferred tax assets:
Allowance for loan
 loss                    $   471  $   323  $   245
Deferred compensation
 accruals                     84       90       78
Gain (loss) on securities
 available for sale            -        9        -
                         _______  _______  _______
                             555      422      323
                         _______  _______  _______
Deferred tax liability:
Depreciation
 differences                (155)    (128)    (106)
Gain (loss) on securities
 available for sale          (54)      (-)      (9)
                         _______  _______  _______
                            (209)    (128)    (115)
                         _______  _______  _______
Net deferred tax asset   $   346  $   294  $   208
                         _______  _______  _______
</TABLE>

The net deferred tax asset is included in the balance sheet under the
caption "Other Assets".
                                 (Continued)
<PAGE>F12

                 HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             December 31, 1997
                               (In thousands)

Note  9.  Income Taxes (Continued)

The components of income tax expense (benefit) related to continuing
operations are as follows:
<TABLE>
<CAPTION>
                         1997      1996      1995
                         ____      ____      ____
</CAPTION>
<S>                   <C>       <C>       <C>
Federal:
  Current             $  1,090  $    924  $    755
  Deferred                (124)      (67)       24
                      ________  ________  ________
      Total           $    966  $    857  $    779
                      ________  ________  ________
</TABLE>

The Bank's income tax expense differs from the statutory federal rate of 34%
as follows:
<TABLE>
<CAPTION>
                                 1997     1996    1995
                                 ____     ____    ____
</CAPTION>
<S>                           <C>      <C>      <C>
Statutory rate applied to
 earnings before income taxes $   992  $   891  $   758
Tax exempt interest               (10)     (15)     (20)
Other, net                        (16)      19       41
                              _______  _______  _______
                              $   966  $   857  $   779
                              _______  _______  _______
</TABLE>

Note 10. Long-Term Debt

During the year, Highlands Bankshares Inc. and Subsidiary  had the following
long-term debt agreements:
<TABLE>
<CAPTION>
                                                  1997    1996   1995
                                                  ____    ____   ____
</CAPTION>
<S>                                              <C>     <C>     <C>
Note payable Federal Home Loan Bank dated
June 6, 1996 for $1,000,000 with an annual
interest rate of 6.07%, due June 8, 1998.  The
note requires annual interest payments.  The
loan is secured by a floating blanket lien on
assets of the Bank, including loans.             $ 1,000 $ 1,000 $     -

Note payable Federal Home Loan Bank dated
June 6, 1996 for $1,000,000 with an annual
interest rate of 7.02%, due June 6, 2003.  The
note requires semi-annual installments of
$71,429 plus interest.  The loan is secured by a
floating blanket lien on assets of the Bank,
including loans.                                     786     929       -
</TABLE>
                                  (Continued)
<PAGE>F13
                 HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             December 31, 1997
                               (In thousands)


Note 10. Long-Term Debt (Continued)
<TABLE>
<CAPTION>
                                                   1997     1996     1995
                                                   ____     ____     ____
<S>                                                <C>      <C>      <C>
Note payable to Company's Subsidiary
(amount participated with other financial
institutions only) dated March 4, 1997 for
$900,000 with an annual interest rate of
8.25%, due March 4, 2002.  The note
requires monthly installments of $7,669
with a balloon payment at maturity.  The
loan is secured by a first deed of trust on
a commercial building.                           $   828  $     -  $      -
                                                 _______  _______  ________

    Total long-term debt                         $ 2,614  $ 1,929  $      -
                                                 _______  _______  ________
</TABLE>

     Principal maturities of notes  payable at December 31, 1997 are as
follows:
<TABLE>
          <S>                <C>
          1998               $1,162
          1999                  163
          2000                  165
          2001                  166
          2002                  885
    Thereafter                   71
                             ______
                             $2,612
                             ______
</TABLE>

Note 11.  Operating Leases

The following is a schedule by years of future minimum rental payments
required  under operating leases that have initial  or  remaining
noncancelable terms in excess of one year as follows:
<TABLE>
<CAPTION>

Year ending December 31:
</CAPTION>
          <S>                <C>
          1998               $  198
          1999                  111
          2000                    -
          2001                    -
          2002                    -
Total minimum                ______
 payments required           $  309
                             ______
</TABLE>

Total operating lease expense was  $330, $359, and $261 for December 31,
1997, 1996 and 1995 respectively.

                                 (Continued)
<PAGE>F14

                 HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             December 31, 1997
                               (In thousands)

Note 11.  Operating Leases (Continued)

The Company occupies a building for use by its' subsidiary, and leases the
remaining space.  The following is a schedule by years of future minimum
rental payments due to be received under operating leases that have initial
or remaining noncancelable terms in excess of one year as follows:
<TABLE>
<CAPTION>

Year Ending December 31:
</CAPTION>
       <S>                 <C>
       1998                $     88
       1999                      72
       2000                      28
       2001                       -
       2002                       -
                           ________
    Total minimum
  payments required        $    188
                           ________
</TABLE>

Total operating lease income was $90, $0 and $0 for December 31, 1997, 1996
and 1995, respectively.

Note 12.  Common Stock, Stock Split, and Earnings Per Common Share

On April 13, 1996, the Board authorized a 2 for 1 stock split to be
distributed to all shareholders of record as of April 12, 1996.  As a
result, authorized shares increased from 5,000,000 to 10,000,000 and par
value decreased from $5.00 to $2.50 per share.  All references in the
financial statements to number of shares, per share amounts and market
prices of the Company's common stock have been retroactively restated to
reflect the increased number of common shares outstanding.

At December 31, 1997, 1996 and 1995, the Company had 1,232, 1,222, and 1,218
shares of common stock issued and outstanding, respectively.  Earnings per
common share is computed using the weighted average outstanding shares of
1,228, 1,220, and 1,214 for the periods ended December 31, 1997, 1996 and
1995, respectively.  The stock options (Note 14) have an antidilutive effect
on earnings per share.

The following is a reconciliation of the numerators and the denominators of
the basic and diluted earnings per common share computation:
<TABLE>
<CAPTION>
                                                      1997
                                       ___________________________________
                                         Income        Shares    Per-Share
                                      (Numerator)  (Denominator)  Amount
                                      ___________  _____________  ______
</CAPTION>
<S>                                    <C>          <C>          <C>
Net income                             $ 1,952
                                       _______
Basic Earnings per Common Share
  Income available to common
  stockholders                           1,952        1,228      $  1.59
                                                                 _______
Effect of Dilutive Stock options
  outstanding                                -           54
                                       _______      _______
Diluted Earnings per Common Share
  Income available to common
  stockholders + assumed conversions   $ 1,952      $ 1,282      $  1.52
                                       _______      _______      _______
</TABLE>
                                 (Continued)
<PAGE>F15

                 HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             December 31, 1997
                               (In thousands)

Note 12.  Common Stock, Stock Split, and Earnings Per Common Share (Continued)
<TABLE>
<CAPTION>
                                                     1996
                                     ___________________________________
                                        Income      Shares     Per-Share
                                     (Numerator) (Denominator)   Amount
                                     ___________ _____________   ______
</CAPTION>
<S>                                    <C>          <C>         <C>
Net income                             $ 1,764
                                       _______
Basic Earnings per Common Share
  Income available to common
  stockholders                           1,764       1,220       $ 1.45
                                                                 ______
Effect of Dilutive Stock options
  outstanding                                -          59
                                       _______     _______
Diluted Earnings per Common Share
  Income available to common
  stockholders + assumed conversions   $ 1,764     $ 1,279       $ 1.38
                                       _______     _______       ______
</TABLE>
<TABLE>
<CAPTION>
                                                     1995
                                     ___________________________________
                                        Income       Shares    Per-Share
                                     (Numerator) (Denominator)   Amount
                                     ___________ _____________   ______
</CAPTION>
<S>                                    <C>           <C>         <C>
Net income                             $ 1,449
                                       _______
Basic Earnings per Common Share
  Income available to common
  stockholders                           1,449       1,214       $ 1.19
                                                                 ______
Effect of Dilutive Stock options
  outstanding                                -          60
                                       _______     _______
Diluted Earnings per Common Share
  Income available to common
  stockholders + assumed conversions   $ 1,449     $ 1,274       $ 1.14
                                       _______     _______       ______
</TABLE>

Note 13.  Profit Sharing and Retirement Savings Plan

Effective January 1, 1986, the Bank adopted a profit sharing plan covering
substantially all employees with over one year of service.  The plan
provides for contributions in such amounts as the Board of Directors may
annually determine, but not in excess of the amount permitted under the
Internal Revenue Code as a deductible expense.  The Bank accrued to the plan
$0, $120, and $92 for the years ended December 31, 1997, 1996 and 1995,
respectively, which represents approximately 0%, 6%, and 7% of qualifying
salaries and wages of the Bank.

On July 1, 1997 the Bank converted its existing profit sharing plan to a
401(K) saving plan.  The plan is available to substantially all employees
meeting minimum eligibility requirements.  The Bank will make matching
contributions of 50% of employee contributions to the plan up to 6% of base
pay, and additional voluntary contributions by participating employees are
available up to an additional 9% of base pay which are not matched by the
Bank.  The Bank also guarantees a 2% contribution to all employees exclusive
of employee contributions and employer matching.  The cost of Bank
contributions under the savings plan was $5, $0, and $0 in 1997, 1996 and
1995 respectively.
<PAGE>F16

                 HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             December 31, 1997
                               (In thousands)

Note 14.  Stock Option Plan

In 1996, Highlands Bankshares, Inc. adopted a non-qualified stock incentive
option plan, which is identical to and replaced the plan adoped by Highlands
Union Bank in 1986, for key employees, officers, and directors and reserved
150,000 shares of common stock for issuance thereunder.  Options granted
under the plan expire ten years from date of grant.

Shares under options which subsequently expire, or are canceled are
available for subsequent grant.  Option prices are determined by the Board
of Directors, but shall not be less than the greater of the par value of
such stock or 100% of the book value of such stock as shown by the Company's
last published statement prior to granting of the option.  Proceeds received
upon exercise of options are credited to common stock, to the extent of par
value of the related shares, and the balance is credited to surplus.  During
1997, 1996 and 1995 11,650, 12,900, and 700 shares were granted at $23.00,
$15.000, and $9.333 per share at grant date, respectively.

Options outstanding at option price for the years ended December 31, are as
follows:
<TABLE>
<CAPTION>
                            1997                1996               1995
                    ___________________ __________________ ___________________

                      Dollars Number of  Dollars Number of  Dollars  Number of
                    (Thousands) Shares  (Thousands) Shares (Thousands) Shares
                    ___________ ______  ___________ ______ ___________ ______
</CAPTION>
<S>                 <C>       <C>        <C>        <C>       <C>       <C>
Options outstanding
 January 1          $  266     73,788    $  226     65,082    $  225    66,742
Granted                 32     11,650        53     12,900         4       700
Exercised              (18)   (10,462)      (13)    (4,194)       (3)   (2,360)
                    ______    _______    ______    _______    ______   _______
Options outstanding
 December 31        $  280     74,976    $  266     73,788    $  226    65,082
                    ______    _______    ______    _______    ______   _______
</TABLE>

At the time options are granted, the difference in the market value of the
stock and the option price is recorded as an expense and the related accrual
is included in surplus.  For 1997, 1996 and 1995 $32, $53 and $4 thousand
was recorded as compensation as a result of options granted.  The 1997 stock
options were granted at the current market value of the stock.  As of
December 31, 1997, 1996 and 1995 $280, $266 and $226 thousand remained as
accrued stock options outstanding included in surplus.

Note 15.  Commitments, Contingencies and Concentrations of Credit

The Bank is party to various financial instruments with off-balance sheet
risk arising in the normal course of business to meet the financing needs of
their customers.  Those financial instruments include commitments to extend
credit and standby letters of credit.  These commitments include standby
letters of credit of approximately $2,408, $2,026, and $218 and unused
portions of credit lines of $12,297, $10,335 and $8,202 for the years ended
December 31, 1997, 1996 and 1995, respectively.  These instruments contain
various elements of credit and interest rate risk in excess of the amount
recognized in the statements of financial condition.

The Bank's exposure to credit loss, in the event of non-performance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit, is the contractual amount of those instruments.
The Bank uses the  same  credit  policies  in making commitments and
conditional obligations that they do for on-balance sheet instruments.

The  Bank has made arrangements with and has available from other
corresponding banks, approximately $50,886 of unused lines of credit to fund
any necessary cash requirements.  The Bank has $1,786 of Federal Home Loan
Bank advances outstanding as of December 31, 1997.

                                 (Continued)
<PAGE>F17

                 HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             December 31, 1997
                               (In thousands)

Note 15.  Commitments, Contingencies and Concentrations of Credit
(Continued)

The Bank grants various types of credit including but not limited to,
agribusiness, commercial, consumer, and residential loans to customers
primarily located throughout Southwest Virginia.  Each customer's credit
worthiness is examined on a case by case basis.  The amount of collateral
obtained, if any, is determined by management's credit evaluation of the
customer.  Collateral held varies, but may include property, accounts
receivable, inventory, plant and equipment, securities and other income
producing properties.  Although the loan portfolio is generally well
diversified and geographically dispersed within the region, aggregate loans
extended for real estate mortgages represent greater than 50% of the loan
portfolio.  A substantial portion of the customers' ability to honor their
contractual commitment is largely dependent upon the economic conditions of
the region.

Note 16.  Fair Values of Financial Instruments

The  carrying  amounts  and  fair  values of the Bank's financial
instruments at December 31 were as follows (asset/liability):
<TABLE>
<CAPTION>
                                 1997                 1996
                        ____________________  ____________________
                         Carrying     Fair     Carrying    Fair
                          Amount      Value     Amount     Value
                          ______      _____     ______     _____
</CAPTION>
<S>                     <C>        <C>        <C>        <C>
Cash and short-term
   investments          $  14,925  $  14,925  $  15,956  $  15,956
Investments in
   securities              41,963     41,963     31,345     31,345
Loans, net                190,369    195,020    153,879    156,977
Deposits                 (236,646)  (237,429)  (189,471)  (190,071)
Long-term
   debt                    (2,614)    (2,448)    (1,929)    (1,837)

</TABLE>

Cash and Short-Term Investments

The carrying amount reported in the balance sheets for cash and short-term
investments approximates fair value.

Investments in Securities

The carrying amount reported in the balance sheets for cash and short-term
investments approximates fair value.

Loans

The fair values of loans represent the amount at which the loans of the Bank
could be exchanged on the open market, as determined based on the current
lending rate for similar types of lending arrangements discounted over the
remaining life of the loans.

Deposits

The fair values of deposits represent the amount at which the liabilities of
the Bank could be exchanged on the open market, as determined based on the
incremental borrowing rate of the Bank for similar types of borrowing
arrangements.
                                 (Continued)
<PAGE>F18

                 HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             December 31, 1997
                               (In thousands)

Note 16.  Fair Values of Financial Instruments (Continued)

Long-Term Debt

Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.

Commitments to Extend Credit, Stand-by Letters of Credit, and Financial
Guarantees

The amount of off-balance sheet commitments to extend credit, stand-by
letters of credit, and financial guarantees, is considered equal to fair
value.  Because of the uncertainty involved in attempting to assess the
likelihood and timing of commitments being drawn upon, coupled with the lack
of an established market and the wide diversity of fee structures, the
Company does not believe it is meaningful to provide an estimate of fair
value that differs from the given value of the commitment.

Note 17.  Related Party Transactions

In the normal course of business, the Bank has made loans to and received
deposits from directors and officers of the Bank.  All loans and commitments
made to such officers and directors and to companies in which they are
officers or have significant ownership interest have been made on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with unrelated
persons, and did not involve more than the normal risk of collectibility or
present other unfavorable features.  The activity of such loans and deposits
are approximately as follows:
<TABLE>
<CAPTION>
                         1997     1996      1995
                         ____     ____      ____
</CAPTION>
<S>                   <C>       <C>       <C>
Balance, beginning    $  5,541  $  6,317  $  5,712
Loan additions           3,889     2,712     3,525
Amounts collected       (3,664)   (3,488)   (2,920)
                      ________  ________  ________

Balance, ending       $  5,766  $  5,541  $  6,317
                      ________  ________  ________
Unused Commitments    $    216  $    107  $    247
                      ________  ________  ________
</TABLE>

Note 18.  Restrictions on Cash

The Bank is required to maintain reserve balances in cash with the Federal
Reserve Bank.  The total of those reserve balances at December 31, 1997 and
1996 were $1,034 and $789, respectively.

Note 19.  Undivided Profits and Capital

Banking laws and regulations limit the amount of dividends that may be paid
without prior approval of the Bank's regulatory agency.  Under that
limitation, the Bank could have declared dividends of $3,189, $3,211 and
$3,517 in 1997, 1996 and 1995 respectively.  The Bank declined to pay cash
dividends for 1997 and 1995, in order to maintain the capital necessary to
support the present rate of growth.

                                 (Continued)
<PAGE>F19

                 HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             December 31, 1997
                               (In thousands)

Note 19.  Undivided Profits and Capital (Continued)

The Bank is subject to various regulatory capital requirements administered
by its primary regulator, the Federal Reserve Board.  Failure to meet the
minimum regulatory capital requirements can initiate certain mandatory and
possible additional discretionary actions by regulators, that if undertaken,
could have a direct material affect on the Bank and the consolidated
financial statements.  Under the regulatory capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines involving quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices.  The Bank's capital amounts  and
classification under the prompt corrective action guidelines are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of:  total risk-
based capital and Tier I capital to risk-weighted assets (as defined in the
regulations), and Tier I capital to adjusted total assets (as defined).
Management believes, as of December 31, 1997, that the Bank meets all the
capital adequacy requirements to which it is subject.

As of December 31, 1997, the most recent notification from the Federal
Reserve Board of Richmond dated May 8, 1997 stated that the Bank was
categorized as well capitalized under the regulatory framework for prompt
corrective action.  To remain categorized as well capitalized, the Bank will
have to maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as disclosed in the table below.  There are no conditions or
events since the most recent notification that management believes have
changed the Bank's prompt corrective action category.

The Bank's actual and required capital amounts and ratios are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
                                                 For   To Be Well Capitalized
                                               Capital    under the Prompt
                                               Adequacy  Corrective Action
                                  Actual       Purposes      Provisions
                             ______________ ______________ ______________
                              Amount  Ratio  Amount  Ratio  Amount  Ratio
                              ______  _____  ______  _____  ______  _____
</CAPTION>
<S>                          <C>       <C>    <C>      <C>   <C>     <C>
As of December 31, 1997:
Total Risk-Based Capital
  (to Risk-Weighted Assets)  $17,874   9.74%  $14,686 > 8.0%  $18,358 > 10.0%
Tier I Capital                                        -               -
  (to Risk-Weighted Assets)   16,238   8.85%    7,343 > 4.0%   11,015 >  6.0%
Tier I Capital                                        -               -
  (to Adjusted Total Assets)  16,238   6.53%    9,942 > 4.0%   12,427 >  5.0%
                                                      -               -
As of December 31, 1996:
Total Risk-Based Capital
  (to Risk-Weighted Assets)  $15,213  10.12%  $12,022 > 8.0%  $15,028 > 10.0%
Tier I Capital                                        -               -
  (to Risk-Weighted Assets)   14,141   9.41%    6,011 > 4.0%    9,016 >  6.0%
Tier I Capital                                        -               -
  (to Adjusted Total Assets)  14,141   6.82%    8,298 > 4.0%   10,372 >  5.0%
                                                      -               -
</TABLE>
                                 (Continued)
<PAGE>F20
                 HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             December 31, 1997
                               (In thousands)

Note 19.  Undivided Profits and Capital (Continued)
<TABLE>
<CAPTION>
As of December 31, 1995:
</CAPTION>
<S>                          <C>      <C>     <C>       <C>   <C>       <C>
Total Risk-Based Capital
  (to Risk-Weighted Assets)  $13,702  13.00%  $ 8,432 > 8.0%  $10,540 > 10.0%
Tier I Capital                                        -               -
  (to Risk-Weighted Assets)   12,753  12.10%    4,216 > 4.0%    6,324 >  6.0%
Tier I Capital                                        -               -
  (to Adjusted Total Assets)  12,753   8.32%    6,131 > 4.0%    7,664 >  5.0%
                                                      -               -
</TABLE>

Note 20.  Other Operating Expenses

Other operating expenses consist of the following:
<TABLE>
<CAPTION>
                                1997     1996     1995
                                ____     ____     ____
</CAPTION>
<S>                           <C>      <C>      <C>
Data processing               $     9  $     9  $    22
FDIC insurance                     24        2      134
Postage and freight               197      161      130
Regulatory agency assessments      40       33       34
Supplies                          183      146      124
Bank stock tax                    151      122      126
Other                             737      570      341
                              _______  _______  _______
                              $ 1,341  $ 1,043  $   911
                              _______  _______  _______
</TABLE>

Note 21.  Subsequent Events

In January, 1998, Highlands Bankshares, Inc. issued $7,500 in Trust-
Preferred Capital Securities with a rate of 9.25% and a maturity of 30
years.  Trust-Preferred Capital Securities have two primary benefits:  the
interest payments are tax deductible and the debt can be included in the
Tier I capital ratio up to 25% of the total capital after the issue.

In January 1998, Highlands Bankshares, Inc. paid off their note payable to
Highlands Union Bank.  The balance of the note payable at December 31, 1997
was $828.

Note 22.  Condensed Parent Company Financial Statements

The condensed financial statements below relate to Highlands Bankshares,
Inc. for December 31, 1997 and 1996 and for the years then ended.  Highlands
Bankshares, Inc. was formed December 29, 1995 and exchanged common stock for
the common stock of Highlands Union Bank.

                                 (Continued)
<PAGE>F21
                 HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             December 31, 1997
                               (In thousands)

Note 22.  Condensed Parent Company Financial Statements (Continued)
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS

                                 1997      1996      1995
                                 ____      ____      ____
</CAPTION>
<S>                            <C>       <C>       <C>
ASSETS
  Cash                         $      1  $    331  $      -
  Investments in subsidiaries    16,343    14,122    12,812
  Premises and equipment, net     1,276       141         -
  Other assets                       86        24        10
                               ________  ________  ________
          Total Assets         $ 17,706  $ 14,618  $ 12,822
                               ________  ________  ________

LIABILITIES AND STOCKHOLDERS' EQUITY
  Interest, taxes and other
     liabilities               $     23  $      -  $     10
                               ________  ________  ________
  Long-term debt                    886         -         -
                               ________  ________  ________
          Total Liabilities    $    909  $      -  $     10
                               ________  ________  ________
STOCKHOLDERS' EQUITY
  Net unrealized gains (losses)
   on securities                    104       (18)       18
  Common stock                    3,081     3,055     3,044
  Surplus                         5,271     5,187     5,120
  Undivided profits               8,341     6,394     4,630
                               ________  ________  ________
          Total Stockholders'
            Equity               16,797    14,618    12,812
                               ________  ________  ________
          Total Liabilities
           and Stockholders'
           Equity              $ 17,706  $ 14,618  $ 12,822
                               ________  ________  ________
</TABLE>
<TABLE>
<CAPTION>
CONDENSED INCOME STATEMENTS
                                            1997     1996
                                            ____     ____
</CAPTION>
<S>                                      <C>       <C>
Cash dividends received from subsidiary  $      -  $    500
Revenues                                      102         -
Long-term debt interest expense               (61)        -
Operating expense                             (57)       (5)
                                         ________  ________
                                         $    (16) $    495
Income tax (expense) benefit                    5        (2)
Equity in undistributed earnings
 of subsidiary                              1,963     1,271
                                         ________  ________
Net income                               $  1,952  $  1,764
                                         ________  ________
</TABLE>
                                 (Continued)
<PAGE>F22
                 HIGHLANDS BANKSHARES, INC. AND SUBSIDIARY
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             December 31, 1997
                               (In thousands)

Note 22.  Condensed Parent Company Financial Statements (Continued)

<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS

                                                 1997      1996
                                                 ____      ____
</CAPTION>
<S>                                           <C>       <C>
Cash flows from operating activities:
  Net income                                  $  1,952  $  1,764
  Adjustments to reconcile net income to
   net cash provided by operating activities:
    Depreciation and amortization                   25         5
    Equity in undistributed earnings of
     subsidiary                                 (1,963)   (1,271)
    (Increase) decrease in other assets            (62)      (24)
    Increase (decrease) in other liabilities        25        (2)
                                              ________  ________
       Net cash provided by operating activities   (23)      472
                                              ________  ________
Cash flows from investing activities:
  Net purchases of premises and equipment       (1,154)     (141)
                                              ________  ________

      Net cash provided by investing activities (1,154)     (141)
                                              ________  ________
Cash flows from financing activities:
  Net increase in long-term debt                   900         -
  Repayment of long-term debt                      (14)        -
  Purchase of subsidiary stock                     (39)        -
                                              ________  ________

      Net cash provided by financing activities    847         -

  Net increase (decrease) in cash
    and cash equivalents                          (330)      331

  Cash and cash equivalents
    at beginning of year                           331         -
                                              ________  ________
  Cash at end of year                         $      1  $    331
                                              ________  ________
</TABLE>
<PAGE>F23