SECURITIES AND EXCHANGE COMMISSION
                     Washington, D.C. 20549
                     ----------------------

                            FORM 10-Q
                                
                                
(Mark One)
          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
 X        OF THE SECURITIES EXCHANGE ACT OF 1934
-----
          For the quarterly period ended September 30, 1997
                               or
          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
          OF THE SECURITIES EXCHANGE ACT OF 1934
-----
          For the transition period from          to
                                        ------    ------

                     Commission File Number
                             1-14028
                 -------------------------------

                 HIGHLANDS INSURANCE GROUP, INC.
-----------------------------------------------------------------
     (Exact name of Registrant as specified in its charter)

            Delaware                              75-2370945
--------------------------------------  -------------------------
  (State or other jurisdiction of            (I.R.S. Employer
    incorporated or organization)           Identification No.)


  10370 Richmond Avenue, Houston, Texas           77042
--------------------------------------  -------------------------
  (Address of principal executive              (Zip Code)
        offices)


Registrant's telephone number, including area code (713) 952-9555
                                                   -------------

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
(or for such shorter period that the Registrant was required to
file such filing requirements for the past 90 days.

Yes  X  No
   ----    ----

The number of shares of the Registrant's Common Stock, par value
$.01 per share, outstanding at September 30, 1997 was 13,108,321

                 HIGHLANDS INSURANCE GROUP, INC.
                                
                        TABLE OF CONTENTS
                        -----------------

                 Part I - Financial Information


Item 1.   Financial Statements:                        Page No.
                                                       --------

     Consolidated Balance Sheets
       September 30, 1997 (Unaudited) and
       December 31, 1996                                   3

     Consolidated Statements of Operations
       (Unaudited) - Three and Nine Months Ended
       September 30, 1997 and 1996                         5

     Consolidated Statements of Stockholders' Equity
       Nine Months Ended September 30, 1997
       (Unaudited) and Year Ended December 31, 1996        6

     Consolidated Statements of Cash Flows
       (Unaudited) - Nine Months Ended September 30,
       1997 and 1996                                       7

     Condensed Notes to Unaudited Consolidated
       Financial Statements                                9
                                
Item 2.Management's Discussion and Analysis of
       Financial Condition and Results of Operations      16
                                
                                
                   Part II - Other Information

Item 1.Legal Proceedings                                  25

Item 6.Exhibits and Reports on Form 8-K                   26

Signatures                                                27








<TABLE>



                 HIGHLANDS INSURANCE GROUP, INC.

                   CONSOLIDATED BALANCE SHEETS

                         (In Thousands)
<CAPTION>

                                            September 30,  December 31,
                  ASSETS                          1997        1996
                 --------                   ------------  ------------

<S>                                          <C>           <C>
                                             (Unaudited)   
Investments:                                                 
  Fixed income securities:                                   
   Available for sale, at fair value                         
     (amortized cost of $1,127,915 at                        
     9/30/97 and $320,909 at 12/31/96)        $1,157,360      324,905
  Held to maturity, at amortized cost                      
   (fair value of $0 at 9/30/97 and                        
   $367,446 at 12/31/96)                             -        355,492
 Equity securities, at fair value                                      
   (cost of $21,478 at 9/30/97 and
   $26,293 at 12/31/96)                           22,842       26,967
 Other invested assets, at cost                    4,064        3,770
                                               ---------    ---------
          Total investments                    1,184,266      711,134
                                                                       
Cash and cash equivalents                         68,077       49,484
                                                                       
Premiums in course of collection                  92,569       24,048
                                                                       
Premiums due under retrospective                 123,268      121,276
  arrangements
                                                                        
Receivable from reinsurers                       682,558      556,900
                                                                        
Prepaid reinsurance premiums                      26,056        2,829
                                                                        
Funds on deposit with reinsurers                  17,595       14,456
                                                                        
Deferred taxes                                    36,577       37,126
                                                                        
Accrued investment income                         15,321       12,600
                                                                        
Deferred policy acquisition costs                 35,120        6,436
                                                                        
Other assets                                      63,463       29,742
                                               ---------    ---------
                                                                        
          Total assets                        $2,344,870    1,566,031
                                              ==========    =========
                                
                                
                                
   See Condensed Notes to Unaudited Consolidated Financial Statements.
</TABLE>
<TABLE>
                     HIGHLANDS INSURANCE GROUP, INC.

                 CONSOLIDATED BALANCE SHEETS, Continued
                                    
                             (In Thousands)

<CAPTION>

                                           September 30,   December 31,
  LIABILITIES AND STOCKHOLDERS' EQUITY         1997            1996
  -------------------------------------     ------------   -----------
                                             (Unaudited)    

<S>                                          <C>             <C>      
Loss and loss adjustment expense reserves    $1,607,762      1,156,824
                                                          
Unearned premiums                               188,005         31,474
                                                          
Senior bank debt                                 65,000            -
                                                            
Convertible subordinated debentures              56,034         55,452
                                                            
Funds held                                       22,315         16,475
                                                            
Accounts payable and accrued liabilities         88,583         42,331
                                              ---------      ---------
       Total liabilities                      2,027,699      1,302,556
                                              ---------      ---------
                                                            
                                                          
Stockholders' equity:                                        
  Common stock, $.01 par value; 50,000,000                   
   shares authorized; 13,108,321 issued and                   
   outstanding in 1997, 11,448,208 issued                     
   and outstanding in 1996                         131            114
  Additional paid-in capital                   221,523        192,273
  Net unrealized gain on investments            20,032          3,036
  Retained earnings                             75,485         68,052
                                             ---------      ---------
       Total stockholders' equity              317,171        263,475
                                             ---------      ---------
       Total liabilities and                               
        stockholders' equity                $2,344,870      1,566,031
                                             =========      =========



  See Condensed Notes to Unaudited Consolidated Financial Statements.
</TABLE>
<TABLE>
                      HIGHLANDS INSURANCE GROUP, INC.

                  CONSOLIDATED STATEMENTS OF OPERATIONS
                                    
                               (Unaudited)
                                    
                              (In Thousands)
<CAPTION>
                                   Three Months          Nine Months
                                Ended September 30,  Ended September 30,
                                -------------------  -------------------
                                  1997        1996      1997       1996
                                -------      -------   -------    -------


<S>                            <C>           <C>        <C>        <C>
Revenues:                                                           
  Net premiums earned          $107,640      35,057     216,030    121,911
  Net investment income          22,325      12,502      53,610     37,877
  Net realized investment gains     763         255       1,867        921
                                -------     -------    --------    -------
            Total revenues      130,728      47,814     271,507    160,709
                                -------     -------    --------    -------
                                                                    
Expenses:                                                           
  Losses and loss adjustment                                        
   expenses incurred             83,787      31,900     178,117    114,143
  Underwriting expenses          35,857      12,550      76,634     42,284
  Interest expense and debt                                         
   amortization                   3,001       1,824       7,411      5,078
  Other expenses                    413          59         947      1,685
                                -------    --------    --------   --------
            Total expenses      123,058      46,333     263,109    163,190
                                -------    --------    --------   --------
                                                                   
Income (loss) before income tax   7,670       1,481       8,398     (2,481)
Income tax expense (benefit)        926         248         965       (422)
                                -------    --------    --------    --------
                                                                   
 Net income (loss)             $  6,744       1,233       7,433     (2,059)
                               ========    ========    ========    ========
Net income (loss) per common                                   
  share and common stock
  equivalents                                                  
     Primary                   $    .42         .11         .52       (.18)
     Fully diluted             $    .40        -           -            -
                               ========    ========    ========   ========
                                                               
Weighted average number of                                     
  common stock equivalents:
   Primary                       16,235      11,448      15,494     11,448
                               ========    ========    ========   ========
   Fully diluted                 20,124      11,448      15,494     11,448
                               ========    ========    ========   ========
                                    
                                    
   See Condensed Notes to Unaudited Consolidated Financial Statements.
</TABLE>
<TABLE>
                    
                     HIGHLANDS INSURANCE GROUP, INC.
                                    
             CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                             (In Thousands)
                                    
<CAPTION>
                                    
                                             September 30,   December 31,
                                                  1997          1996
                                             ------------    -----------
                                              (Unaudited)   

<S>                                          <C>              <C>              
Common stock                                                
                                                           
Balance, beginning of year                   $    114           1,000
   Change in par value of common stock            -              (886)
   Issuance of Company common stock, par                    
    value                                          17              -
                                             --------        --------
 Balance, end of period                           131             114
                                             --------        --------
                                                           
Additional paid-in capital:                                 
 Balance, beginning of year                   192,273        184,168
   Change in par value of common stock           -               886
   Addition resulting from issuance of                      
    convertible subordinated debentures       
    with detachable common stock warrants        -             7,439
   Contribution from former parent:                         
    Net current tax asset                        -             7,723
    Net deferred tax asset                       -            (7,943)
   Issuance of Company common stock, paid                    
    in capital                                 29,250            -
                                             --------       --------
 Balance, end of period                       221,523        192,273
                                             --------       --------
                                                           
Net unrealized gain on investments:                         
                                                3,036          8,547
Balance, beginning of year
  Changes in net unrealized gain, net of                   
   the applicable federal income tax           16,996         (5,511)
                                             --------       --------
   Balance, end of period                      20,032          3,036
                                             --------       --------
Retained earnings:                                         
 Balance, beginning of year                    68,052         73,395
  Net income (loss)                             7,433         (5,343)
                                             --------       --------
 Balance, end of period                        75,485         68,052
                                             --------       --------
Total stockholders' equity                   $317,171        263,475
                                             ========       ========
                                    
                                    
                                    
  See Condensed Notes to Unaudited Consolidated Financial Statements.
                                    
</TABLE>
<TABLE>
                                    
                     HIGHLANDS INSURANCE GROUP, INC.
                                    
                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                                    
                               (Unaudited)
                                    
                             (In Thousands)
<CAPTION>
                                                  Nine Months Ended
                                                     September 30,
                                                  -----------------
                                                    1997      1996
                                                   -------   -------

<S>                                              <C>        <C>
Cash flows from operating activities:                         
  Net income (loss)                                $7,433     (2,059)
                                                  --------   --------
Adjustment to reconcile net income to net                     
  cash used in operating activities:
     Depreciation and amortization                    283       (113)
     Change in deferred policy acquisition costs      816      3,492
     Gain on sale of investments                   (1,867)      (921)
     Decrease (increase) in premiums in course of              
       collection                                  12,379     (4,239)
     Decrease in receivables from reinsurers       55,576     48,185
     Decrease in loss and loss adjustment expense              
       reserves                                   (72,877)  (107,014)
     (Increase) decrease in funds on deposit with              
       reinsurer                                   (3,139)       346
     Advances from former affiliates, net             -        9,427
     Decrease in deferred taxes                       243        -
     Decrease (increase) in premiums due under                 
       retrospective arrangements                  (1,992)    13,865
     Decrease in unearned premiums                (21,424)   (15,673)
     Increase in funds held                         5,840      9,153
     Change in other operating assets and                     
       liabilities                                   (843)    12,934
                                                 --------   --------
     Total adjustments                            (27,005)   (30,558)
                                                 --------   --------
     Net cash (used in) operating activities      (19,572)   (32,617)
                                                 --------   --------
                                                            
Cash flows from investing activities:                       
 Proceeds from sales:                                       
  Fixed income securities available for sale       50,757       -
  Equity securities                                 5,217      3,980
  Other invested assets                             1,559       -
 Maturities or calls:                                       
  Fixed maturity securities available for sale    118,542     25,498
  Fixed maturity securities held to maturity        5,972     32,534
 Investment purchases:                                      
  Fixed maturity securities available for sale   (168,422)   (64,564)
  Fixed maturity securities held to maturity         -       (19,140)
  Equity securities                                  -        (2,282)
 Net sales (purchase) of property and                       
  equipment                                        (5,299)      (909)
 Acquisition, net of cash acquired                  5,124       -
 Payment of acquisition expenses                   (3,722)      -
 Other proceeds                                        92       -
 Other proceeds from disposal of subsidiary,             
   net                                               -            22
 Cash returned by former affiliates, net             -         3,860
                                                 --------   --------
     Net cash provided by (used in) investing               
       activities                                   9,820    (21,001)
                                                 --------   --------
Cash flows from financing activities:                       
 Proceeds from senior bank debt                    65,000       -
 Repayment of ARI bank debt                       (35,638)      -
 Senior bank debt issuance expense                 (1,017)      -
 Proceeds from issuance of convertible                      
   subordinated debentures                           -        60,000
 Convertible subordinated debentures issuance               
   expense                                           -        (5,705)
                                                 --------   --------
                                                            
     Net cash provided by financing activities     28,345     54,295
                                                 --------   --------
Net increase in cash and cash equivalents          18,593        677
                                                            
Cash and cash equivalents at beginning of period   49,484     85,176
                                                 --------   --------
Cash and cash equivalents at end of period        $68,077     85,853
                                                 ========   ========
                                                            
Supplemental disclosure of cashflow                         
  information:
                                                            
  Interest paid                                    $4,005      2,623
                                                 ========   ========
                                    
 Reclassification of fixed income securities                
   from held to maturity to available for sale   $348,130       -
                                                 ========   ========
                                    

                                    
   See Condensed Notes to Unaudited Consolidated Financial Statements.
</TABLE>

 
                 HIGHLANDS INSURANCE GROUP, INC.
                                
 CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                
                       SEPTEMBER 30, 1997
                                





1.   Basis of Presentation
     ---------------------

The accompanying consolidated financial statements as of
September 30, 1997 and for both the three and nine months periods
ended September 30, 1997 and 1996 are unaudited and include the
accounts of Highlands Insurance Group, Inc., (Highlands Group)
and its subsidiaries (the Company). In the opinion of management,
all adjustments, consisting of normal recurring adjustments
necessary for a fair presentation, have been reflected.  The
results for the period are not necessarily indicative of the
results to be expected for the entire year.  The accompanying
consolidated financial statements should be read in conjunction
with the consolidated financial statements and related notes
included in the Company's Form 10-K for the year ended December
31, 1996 and Form 8-KA Report, Amendment No. 2 dated April, 30,
1997.

Highlands Group is an insurance holding company for Highlands
Insurance Company and its subsidiaries (Highlands), American
Reliance, Inc. and its subsidiaries (American Reliance) beginning
April 30, 1997, and Highlands Holdings (U.K.) Limited and its
subsidiary (Highlands UK) (a foreign reinsurance company located
in the United Kingdom) and certain other immaterial companies
(collectively, the Insurance Subsidiaries).

Certain financial information that is normally included in annual
financial statements prepared in accordance with generally
accepted accounting principles but is not required for interim
reporting purposes has been condensed or omitted.  Certain
reclassifications have been made to the prior year's financial
statements to conform to the current year's presentation.

Highlands Group was wholly owned by Halliburton Company
(Halliburton) until January 23, 1996 when Halliburton distributed
all of the outstanding shares of common stock of Highlands Group
(the Distribution) to holders of record of common stock of
Halliburton on January 4, 1996.  Holders of record received one
share of common stock of Highlands Group for every ten shares of
common stock of Halliburton held on that date.  Approximately
11.4 million common shares of Highlands Group were issued in
conjunction with the Distribution.

2.   Acquisition
     -----------

On April 30, 1997, Highlands Group acquired Vik Brothers
Insurance, Inc. and its subsidiaries (VBI).  Immediately after
the consummation of the acquisition, VBI was renamed American
Reliance, Inc.  The acquisition was accounted for as a purchase
and, accordingly, the financial results of American Reliance,
Inc. and subsidiaries (American Reliance) are included in these
consolidated financial statements effective April 30, 1997.

The acquisition was financed with a combination of common stock,
bank debt, preferred stock and cash.  In connection with the
acquisition, Highlands Group paid approximately $55.4 million in
cash (including $35.6 million to repay American Reliance's
outstanding bank debt) and issued 1,656,700 shares of its common
stock (representing approximately 12.6% of Highlands Group's then
outstanding common stock) and 21,366 shares of newly issued
series one preferred stock to the holders of the common stock
warrants, preferred stockholders and creditors of American
Reliance.  The closing price of Highlands Group's common stock
was $17.625 on April 30, 1997.  The preferred stock is currently
owned by a subsidiary of American Reliance and has a preference
value of $1,000 per share.  Simultaneously with the closing,
Highlands Group contributed approximately $41.5 million to the
capital of the insurance companies within the American Reliance
organization.

On April 30, 1997, Highlands Group estimated the fair value of
American Reliance's total assets and liabilities as $886.6
million and $884.3 million, respectively.  Highlands Group's
evaluation and appraisal of certain assets and liabilities is
based on management's current best estimates.  In connection with
the sale of an American Reliance company, Northwestern National
County Mutual Insurance Company (NNCM), and the cession of all
the existing business of the NNCM (see Note 9), the initial
purchase price allocation has been reallocated to appropriately
reflect the fair value of the American Reliance net assets
acquired.  The purchase price reallocation resulted in an
additional $11.3 million in fair value assigned to NNCM and its
existing business with corresponding reductions to goodwill of
$3.9 million and land and buildings, recorded in other assets, in
the amount of $6.1 million and an increase in other liabilities
for loss reserve contingencies in the amount of $1.3 million.

The assets and liabilities of American Reliance are reflected in
the consolidated balance sheets at September 30,1997 on a fully
consolidated basis at management's best estimate of their fair
values, based on currently available information.  Evaluation and
appraisal of assets and liabilities is continuing and, therefore,
allocation of the purchase price may be adjusted.

In connection with the acquisition, Highlands Group obtained a
$65 million senior revolving credit facility from a consortium of
banks led by the Chase Manhattan Bank (Credit Agreement).
Highlands Group funded the cash portion of the acquisition by
utilizing the credit facility and available working capital.

American Reliance is an insurance holding company for the
following property and casualty insurance companies.  State
Capital Insurance Company (SCI); American Professionals Insurance
Company (APIC); LMI Insurance Company (LMI); Northwestern
National Casualty Company (NNCC); NN Insurance Company (NNIC);
Statesman Insurance Company (SIC); Pacific National Insurance
Company (PNIC); and Pacific Automobile Insurance Company (PAIC)
(collectively, the American Reliance Companies).

3. American Reliance Acquisition - Pro forma Results of
   Operations
   ----------------------------------------------------

The following unaudited pro forma information presents the
results of operations of the Company and American Reliance for
the nine months ended September 30, 1997 and 1996, with pro forma
adjustments as if the acquisition and transactions related to the
funding of the acquisition had been consummated as of the
beginning of the periods presented.  This pro forma information
is not necessarily indicative of what would have occurred had the
acquisition and related transactions been made on the dates
indicated, or of future results of the Company.
<TABLE>
<CAPTION>
                                            Nine Months Ended
                                              September 30,
                                          --------------------
                                            1997         1996
                                           ------       ------

<S>                                     <C>            <C>                    
(In thousands, except per share data)                
                                                     
Revenues                                $ 386,584      439,741                 
Net income (loss)                       $   8,969       (8,875)
Net income (loss) per share             $     .61         (.68)
</TABLE>
4.   Changes in Accounting Principles
     --------------------------------

In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 128
"Earnings Per Share" (SFAS 128) which specifies the computation,
presentation, and disclosure requirements for earnings per share
(EPS) for entities with publicly held common stock or potential
common stock.  SFAS 128 was issued to simplify the existing
computational guidelines, revise the disclosure requirements and
increase EPS comparability on an international basis.

SFAS 128 is effective for financial statements for both interim
and annual periods ending after December 15, 1997.  Although
earlier application is not permitted, all prior period
information is required to be restated upon adoption.  Management
does not expect that the adoption of SFAS 128 will have a
material impact on its earnings per share.

In June, 1997, FASB issued Statement of Financial Accounting
Standards No. 130, "Comprehensive Income" (SFAS 130).  SFAS 130
establishes standards for the reporting and disclosure of
comprehensive income and its components (revenues, expenses,
gains and losses).  SFAS 130 requires that all items that are
required to be recognized under accounting standards as
components of comprehensive income be reported in the statement
of operations.  SFAS 130 requires that an enterprise (a) classify
items of other comprehensive income by their nature in the
statement of operations and (b) display the accumulated balance
of other comprehensive income separately from retained earnings
and additional paid-in capital in the equity section of the
balance sheet.  Unrealized gain and losses is Highlands Group's
significant item of other comprehensive income.  SFAS 130 is
effective for fiscal years beginning after December 15, 1997.

In June, 1997, FASB issued Statement of Financial Accounting
Standards Statement No. 131 "Disclosure about Segments of an
Enterprise and Related Information" (SFAS 131).  SFAS 131
establishes standards for public business enterprises to report
information about operating segments in annual financial
statements.  SFAS 131 requires that those enterprises report
selected information about operating segments in interim
financial reports issued to stockholders.  SFAS 131 is effective
for fiscal years beginning after December 15, 1997.  Management
does not expect SFAS 131 to significantly change the Company's
current financial reporting.

5.   Income Tax
     ----------

The Company provides for income taxes on its statements of income
pursuant to Statement of Financial Accounting Standards 109,
"Accounting for Income Taxes" (SFAS 109).

6.   Net Income Per Share
     --------------------

Primary net income per share amounts are based upon the weighted
average number of common stock shares and common stock
equivalents (common stock warrants and options) outstanding
during the period.  Common stock equivalents are included in
primary per share calculations when their effect is dilutive.
Primary net income was increased by $.1 million and $.5 million
for the three months and nine months ended September 30, 1997,
respectively, due to the application of the modified treasury
stock method used to calculate the effect of common stock
equivalents.

Fully diluted net income per share for the quarter was determined
on the assumption that the convertible subordinated debentures,
stock options and warrants were converted on the first day of the
quarter.  As to the convertible subordinated debentures, net
income was adjusted for interest expense.  Fully diluted earnings
per share is not presented for the nine months ended September
30, 1997 as the effects of the convertible subordinated
debentures are antidilutive for that period.
<TABLE>
The following table presents the components of primary and fully
diluted per share amounts (in thousands):
<CAPTION>
                                   Three Months          Nine Months
                                Ended September 30,  Ended September 30,
                                -------------------  -------------------       
                                  1997      1996         1997       1996
                                -------    -------      -------   -------
<S>                              <C>        <C>          <C>       <C>         
Weighted average number of                                     
  outstanding:
   Common shares                 13,108     11,448       12,377    11,448
   Common share equivalents       3,127        -          3,117       -
                               --------   --------     --------   -------
                                 16,235     11,448       15,494    11,448
Primary shares                                                    
  As if conversion of                                          
    convertible subordinated                                       
    debentures                    3,889        -            -         -
                                --------  --------     --------   -------
                                
     Fully diluted shares        20,124     11,448       15,494    11,448
                               ========   ========     ========   =======
</TABLE>
7. Debt Outstanding
   ----------------

During the second quarter of 1997, the Company entered into a $65
million Credit Agreement, dated April 30, 1997.  The Credit
Agreement, which contains customary terms and restrictions,
currently provides for an interest rate of LIBOR plus 75 to 150
basis points based upon a performance grid with the full
principal amount thereunder due on April 30, 2002.  The Credit
Agreement was used to finance the purchase of American Reliance.
The average interest rate for the three months ended September
30, 1997 was 6.71%.

8.  Warrant Price Adjustment
    ------------------------
The exercise price of the Series A, A-2, B and B-2 common stock
purchase warrants which were issued with the convertible
subordinated debentures are subject to adjustment for adverse
loss reserve and uncollectible reinsurance development,
commencing two years after issue and terminating after nine
years.  The Warrants were issued on January 23, 1996, as such the
first such adjustment will be made as of January 23, 1998.
However, a preliminary calculation of such adjustment has been
made which indicates a reduction in the exercise price by $.93
and $1.80 per share for nine months ended September 30, 1997 and
the year ended December 31, 1996, respectively.  This preliminary
adjustment has been reflected in the calculation of fully diluted
earnings per share.

9.   Disposal of Assets
     ------------------

On September 29, 1997, the Company entered into an agreement to
sell its management contract, which establishes control over
NNCM, to an independent purchaser.

NNCM is a Texas county mutual insurance company that writes non-
standard personal automobile insurance business in Texas which is
currently 100% reinsured by NNCC.  Under the terms of the
agreement, management and control of NNCM will be transferred to
the purchaser.

In a separate transaction, all the existing inforce business of
NNCM, including the outstanding unearned premium reserves and
outstanding loss reserves, and the renewal rights and broker
agreements were transferred to an independent purchaser.
Highlands Group has provided a partial guarantee of the adequacy
of the loss reserves.

Total proceeds to the Company from both transactions will
approximate $13.5 million.  Highlands Group's cost basis for the
assets being sold does not exceed $2.5 million; however, these
transactions resulted in a reallocation of purchase price of
American Reliance (see Note 2).

10. Contingent Liabilities:
    -----------------------

 Loss and Loss Adjustment Expense Reserves
 -----------------------------------------

The Company establishes loss reserves which are estimates of
future payments of reported and unreported claims for losses and
the related expenses with respect to insured events that have
occurred.  The process of establishing loss reserves is subject
to uncertainties that are normal, recurring and inherent in the
property and casualty business.  The process requires reliance
upon estimates based on available data that reflect past
experience, current trends and other information and the exercise
of informed judgment.  As information develops that varies from
experience, provides additional data or, in some cases, augments
data that previously was not considered sufficient for use in
determining reserves, changes in the Company's estimate of
ultimate liabilities may be required.  The effect of these
changes, net of reinsurance, is charged or credited to income for
the periods in which they are determined.

Reserving for asbestos, environmental-related and certain other
long-term exposure claims is subject to significant additional
uncertainties that are not generally present for other types of
claims.  Developed case law and adequate claim history do not
exist for such claims.  The Company and the insurance industry
dispute coverage for certain environmental, pollution and
asbestos liabilities of their policyholders.  These claims 
differ from almost all others in that it is not often
clear that an insurable event has occurred and which,
if any, multiple policy years and insurers will be 
liable.  These uncertainties prevent identification of
applicable policy and policy limits until after a claim is
reported and substantial time is spent (many years in
some cases) resolving contract issues and determining facts
necessary to evaluate the claim.  If the courts continue in the
future to expand the intent of the policies and the scope of the
coverage as they have in the past, additional liabilities could
emerge for amounts in excess of the current reserves held.

The Company uses methods and assumptions that are consistent with
prevailing actuarial practice and are modified periodically based
on changes in circumstances.  However, estimation of loss
reserves for  asbestos, environmental related and other long-term
exposure claims is one of the most difficult aspects of
establishing reserves, especially given the above uncertainties.
Reference is made to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 for a discussion of the
Company's asbestos-related and environmental pollution claims.
Because of the significant uncertainties involved and the
likelihood that these uncertainties will not be resolved in the
near future, the Company believes that no meaningful range of
loss and loss adjustment expense reserves beyond recorded
reserves can be established.

In management's judgment, information currently available has
been appropriately considered in estimating the Company's loss
reserves.  However, future changes in estimates of the Company's
liability for insured events may adversely affect results in
future periods although such effects cannot be reasonably
estimated.

 Other
 -----

The information set forth in Item 1 of Part II of this report is
incorporated herein by reference.

The Company is a party to various claims and legal actions
arising in the ordinary course of its insurance business which,
in the opinion of management, will not have a material effect on
the Company's financial position or results of operations.


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



The Results of Operations reflect the consolidated results of
operations of Highlands Insurance Group, Inc. (Highlands Group)
and its subsidiaries (the Company).

As discussed in Note 2 of the Condensed Notes to Unaudited
Consolidated Financial Statements, on April 30, 1997, Highlands
Group completed the acquisition of American Reliance, Inc.
(American Reliance).  The acquisition was accounted for under the
purchase method of accounting and, accordingly, the consolidated
financial statements include the results of American Reliance's
operations only from date of acquisition.

For reporting purposes, the Company has three segments: (a)
business managed by Highlands Insurance Company excluding its
discontinued lines (Highlands), (b) business managed by American
Reliance and (c) the Highlands discontinued business
(Discontinued Lines).  Discontinued Lines consist of (i) business
originated by the Highlands' London reinsurance operations
(Highlands (UK)), (ii) an umbrella/excess liability policy
program and (iii) assumed casualty and property reinsurance
contracts.  Highlands has ceased to write these Discontinued
Lines.  Although Highlands has exited other lines of business,
primarily its Florida and Texas personal lines and probate
bonding business, the Company has included the financial results
of those lines in the Highlands' underwriting results for
consistency purposes. (Please refer to the Company's 1996 Annual
Report Form 10-K for a more complete description of the
Discontinued Lines.)
<TABLE>
The results of the Company's consolidated operations for the
periods indicated are set forth below:
<CAPTION>
                                Three Months Ended   Nine Months Ended
                                   September 30,       September 30,
                                ------------------  -------------------
                                  1997      1996      1997       1996
                                -------   -------   -------    -------
                                         (Dollars in millions)

<S>                             <C>        <C>       <C>       <C>             
Consolidated Results:                                          
                                                               
Gross premiums written          $ 124.9     36.6      242.1     121.4
Net premiums written            $ 101.5     32.7      198.9     109.2
                                =======  =======    =======   =======
                                                               
Net premiums earned:                                           
  Highlands                     $  36.2     33.5       94.1     114.4
  American Reliance                71.7      -        121.6       -
  Discontinued Lines                (.3)     1.6         .3       7.5
                                -------  -------    -------   -------
                                $ 107.6     35.1      216.0     121.9
                                =======  =======    =======   =======
                                                               
Underwriting loss:                                             
  Highlands                     $  (1.5)    (5.5)     (23.0)    (28.6)
  American Reliance                (7.3)     -         (9.5)      -
  Discontinued Lines               (3.2)    (3.9)      (6.2)     (5.9)
                                 -------  -------   -------   -------
                                $ (12.0)    (9.4)     (38.7)    (34.5)
                                 ======= =======    =======   =======
                                                               
Net investment income           $  22.3     12.5       53.6      37.9
                                =======  =======    =======   =======
                                                               
Net realized investment gains   $    .7       .2        1.8        .9
                                =======  =======    =======   =======
                                                               
Interest expense and debt                                      
  amortization                  $   3.0      1.8        7.4       5.1
                                =======  =======    =======   =======
                                                               
Other expense                   $   1.3       .3        1.9       1.3
                                =======  =======    =======   =======
                                                               
Net income (loss)               $   6.7      1.2        7.4      (2.1)
                                =======  =======    =======   =======

Ratios:                                                         
  Loss                             77.8%    91.0%     82.4%      93.6%
  Expense                          33.3%    35.8%     35.5%      34.7%
                               --------  --------   -------   -------
   Combined                       111.1%   126.8%    117.9%     128.3%
                               ========  ========   =======   =======
</TABLE>
Net premiums earned amounted to $107.6 million and $216.0 million
for the third quarter and nine months ended September 30, 1997,
respectively, an increase of $72.5 million and $94.1 million,
compared with the same 1996 periods.  The increases primarily
result from the additional earned premium from American Reliance.

Underwriting losses of $12.0 million and $38.7 million in the
third quarter and nine months ended September 30, 1997 increased
$2.6 million and $4.2 million compared to the same 1996 periods.
The increase in underwriting losses for both the three months and
the first nine months of 1997 include the American Reliance
underwriting losses and reductions in Highlands' underwriting
losses from 1996.  Highlands' underwriting loss for the nine
months ended September 30, 1997 includes $6.1 million of loss
reserve increases related to California construction defect
claims, $3.5 million of accrued expenses related to the Texas
Workers' Compensation Facility's (Facility) final industry
assessment and industry litigation involving surpluses from the
Facility.  Highlands' underwriting losses for the nine months
ended September 30, 1996 included write-offs of $6.9 million of
accrued premiums and accruals for litigation proceedings against
the Company.

Net investment income for the three months and nine months ended
September 30, 1997 and 1996 amounted to $22.3 million and $12.5
million and $53.6 million and $37.9 million, respectively.  Net
investment income for the third quarter and year to date 1997
increased $9.8 million and $15.7 million, respectively, from 1996
primarily due to the acquisition of American Reliance.  Net
realized investment gains have not been a significant portion of
revenue for the Company.

Interest expense and debt amortization for the three months and
nine months ended September 30, 1997 compared with the same
period for 1996 increased $1.2 million and $2.3 million,
respectively, as a result of the $65 million Credit Agreement.
The Credit Agreement was used to finance the acquisition of
American Reliance.
<TABLE>
Highlands
---------
<CAPTION>
                                 Three Months Ended  Nine Months Ended
                                   September 30,       September 30,
                                 ------------------  ------------------
                                   1997      1996      1997      1996
                                  ------    ------    ------    ------
                                         (Dollars in millions)
<S>                              <C>        <C>       <C>       <C>            
   Gross premiums written        $ 39.8      35.1      97.9      114.6
   Net premiums written          $ 36.7      31.6      89.8      104.0
                                =======   =======   =======    =======
                                                               
   Net premiums earned           $ 36.2      33.5      94.1      114.4
   Losses and loss adjustment                                  
     expenses incurred            (28.8)    (27.0)    (86.2)    (103.8)
   Underwriting expenses           (8.9)    (12.0)    (30.9)     (39.2)
                                -------   -------   -------    -------
                                                               
     Underwriting loss           $ (1.5)     (5.5)    (23.0)     (28.6)
                                =======   =======   =======    =======
   Ratios:                                                     
     Loss                          79.6%     80.6%     91.6%      90.7%
     Expense                       24.6%     35.8%     32.8%      34.3%
                                -------    -------  -------    -------
       Combined                   104.2%    116.4%    124.4%     125.0%
                                =======   =======   =======   =======
</TABLE>
The Highlands underwriting results primarily consist of
relatively large commercial accounts (Special Accounts), medium
to small commercial accounts (Commercial Insurance), insurance
for Halliburton (Insurance Services), commercial marine products
(Marine Division) and surety products (Surety Division).

Period to Period Comparisons of Highlands Underwriting Results

Gross Premiums Written.  Gross premiums written for the three
months ended September 30, 1997 and 1996 amounted to $39.8
million and $35.1 million, respectively.  The increase of $4.7
million or 13% is primarily attributable to increases to
retrospectively rated policies in the Insurance Services division
and production increases in the Marine division.  Gross premiums
written for the nine months ended September 30, 1997 decreased
$16.7 million or 15% as compared to the same period in 1996.  The
gross premiums written for the nine months ended September 30,
1997 and 1996 amounted to $97.9 million and $114.6 million,
respectively.  The decrease is attributable to several factors.
The Company began its underwriting initiatives in March 1996 and
continues to focus on stricter underwriting standards and price
increases both of which have contributed to declines in gross
premiums written in the Special Accounts and Commercial Insurance
Divisions.  Also contributing to declines in gross premiums
written is the continued highly competitive pricing environment
as insurers compete to retain business.  The Company remains more
selective in its initial underwriting as well as renewal
activity.

Gross premiums written for the nine months ended September 30,
1996 were reduced by $6.9 million as a result of adjustments to
accrued premium.

Gross premiums written for retrospectively rated policies may be
adjusted up or down, subject to certain limitations contained in
the policy, based on the estimated loss experience of the insured
during the policy period. The Company estimates ultimate losses
for retrospectively rated policies and then adjusts gross
premiums written and premiums due from policyholders under
retrospectively rated policies for changes in estimated ultimate
losses and loss adjustment expenses from the date of the prior
valuation. These adjustments may cause gross premiums written to
fluctuate significantly from period to period. Experience rated
contracts reduce but do not eliminate risk to the insurer.

Net Premiums Written. Net premiums written for the three months
and nine months ended September 30, 1997 and 1996 amounted to
$36.7 million and $31.6 million and $89.8 million and $104.0
million, respectively.  The increase of $5.1 million or 16% and
the decrease of $14.2 million or 14% for the three months and the
nine months ended September 30, respectively, is primarily
related to the same issues affecting gross premiums written.

Net premiums written for the nine months ended September 30, 1996
were increased by an adjustment to ceded premiums written of $3.2
million related to prior years reinsurance treaties.

Net Premiums Earned.  Net premiums earned for the three months
and nine months ended September 30, 1997 and 1996 amounted to
$36.2 million and $33.5 million and $94.1 million and $114.4
million, respectively.  The increase of $2.7 million or 8% and
the decrease of $20.3 million or 18% for the three months and
nine months ended September 30, respectively, are related to the
same issues affecting gross and net premiums written.

Losses and Loss Adjustment Expenses Incurred. Losses and loss
adjustment expenses incurred for the three months and nine months
ended September 30, 1997 and 1996 amounted to $28.8 million and
$27.0 million and $86.2 million and $103.8 million, respectively.
The increase for the three months ended September 30, 1997 is
related to higher incurred losses subject to retrospectively
rated policies.  The increase is partially offset by the overall
declining premium volume and improvements in the Commercial
Insurance division.  The decrease for the nine months ended
September 30, 1997 of 17% compared to the same period of 1996 is
related to the declining premium volume and a reduction in
adverse loss development related to prior years loss reserves.

Underwriting Expenses. Underwriting expenses for the three months
and nine months ended September 30, 1997 and 1996 amounted to
$8.9 million and $12.0 million and $30.9 million and $39.2
million, respectively.  The decline for the three months ended
September 30, 1997 compared to the same 1996 period is primarily
due to declining premium related expenses and reduced operating
costs.  The nine months ended September 30, 1997 expenses include
accrued expenses of $3.5 million related to the Facility's final
industry assessments and industry litigation involving surpluses
from the Facility that were previously received by the Company.

The nine months ended September 30, 1996 underwriting expenses
were increased by charges of $1.1 million for underaccrued
premium taxes and $1.3 million for restructuring charges and $1
million for litigation proceedings against the Company.
<TABLE>
American Reliance
-----------------
<CAPTION>
                                 Three Months Ended   Five Months Ended
                                   September 30,        September 30,
                                -------------------  -------------------
                                   1997       1996       1997      1996
                                 -------    -------   -------    -------
                                          (Dollars in millions)
                                                             

<S>                             <C>            <C>       <C>         <C>       
Gross premiums written          $  85.1        -         142.9       -         
Net premiums written            $  65.3        -         109.1       -         
                                =======     =======    =======   =======
                                                                
Net premiums earned             $  71.7        -         121.6       -
Losses and loss adjustment                    
  expenses incurred               (51.9)       -         (86.4)      -
Underwriting expenses             (27.1)       -         (44.7)      -
                                -------     -------    -------   -------       
   Underwriting loss            $  (7.3)       -          (9.5)      -
                                =======     =======    =======   =======
                                                                

Ratios:                                                         
  Loss                             72.4%       -          71.0%      -
  Expense                          37.8%       -          36.8%      -
                               --------    --------    -------   -------
  Combined                        110.2%       -         107.8%      -
                               ========    ========   =======    =======
</TABLE>
American Reliance was acquired on April 30, 1997 and accounted as
a purchase and, accordingly, the above results are for the three
months and five months ended September 30, 1997 and are included
in the consolidated results of the Company.

Underwriting Results of American Reliance

Gross Premiums Written.  Gross premiums written for the three
months and five months ended September 30, 1997 amounted to $85.1
million and $142.9 million, respectively.  Although, prior period
gross premiums written are not presented, gross premiums written
have declined approximately 15% due to stricter underwriting
standards, increased price competition in the Northeast region of
the United States and the temporary decline for certain of the
American Reliance Company's A.M. Best ratings.  These factors are
expected to cause gross premiums written to decline in the fourth
quarter of 1997 compared to the three months ended September 30,
1997.  In addition, the cession of the unearned premium reserves
of Northwestern National County Mutual's (NNCM) book of business
decreased gross premiums written in the third quarter of 1997 by
$6.5 million.

Net Premiums Written.  Net premiums written for the three months
and five months ended September 30, 1997 amounted to $65.3
million and $109.1 million, respectively.  Net premiums written
have been impacted by the same issues affecting gross premiums
written.  The cession of the NNCM book of business reduced net
premiums written by $5.0 million in the third quarter of 1997.

Net Premiums Earned.  Net premiums earned for the three months
and five months ended September 30, 1997 amounted to $71.7
million and $121.6 million, respectively.  Reductions in net
premiums earned are related to the same factors affecting gross
and net premiums except for the cession of the NNCM book of
business which had no effect on net premiums earned.

Losses and Loss Adjustment Expenses Incurred.  Loss and loss
adjustment expenses incurred for the three months and five months
ended September 30, 1997 amounted to $51.9 million and $86.4
million, respectively.  Losses and loss adjustment expenses
incurred for the quarter were increased by $2.2 million of
adverse development on prior years reserves.

Underwriting Expenses.  Underwriting expenses for the three
months and five months ended September 30, 1997 amounted to $27.1
million and $44.7 million, respectively.
<TABLE>
Discontinued Lines
------------------
<CAPTION>
                                Three Months Ended  Nine Months Ended
                                  September 30,       September 30,
                                -----------------    ----------------
                                  1997      1996     1997      1996
                                 ------    ------   ------    ------
                                        (Dollars in millions)

<S>                             <C>         <C>      <C>      <C>               
   Gross premiums written       $   .0       1.5      1.3       6.8
   Net premiums written         $ (0.5)      1.1       .0       5.2
                               =======   =======  =======   =======            
                                                             
   Net premiums earned          $ (0.3)      1.6       .3       7.5
   Losses and loss adjustment                                
     expenses incurred            (3.1)     (4.9)    (5.5)    (10.3)
   Underwriting expenses            .2      (0.6)    (1.0)     (3.1)
                               -------   -------   -------  -------
                                              
                                                             
   Underwriting loss            $ (3.2)     (3.9)    (6.2)     (5.9)
                               =======   =======  =======   =======
</TABLE>
For reporting purposes, Highlands Group has three lines of
business which are considered Discontinued Lines, specifically
business originated by the Highlands Group's London operations,
an umbrella/excess liability policy program and assumed casualty
and property reinsurance contracts.  The Company has ceased to
write these Discontinued Lines and canceled all remaining                      
voluntary assumed casualty and property reinsurance contracts
during 1996.

Period to Period Comparisons of Underwriting Results of
Discontinued Lines

Net Premiums Earned. Net premiums earned were $(0.3) million and
$1.6 million and $0.3 million and $7.5 million for the three
months and nine months ended September 30, 1997 and 1996,
respectively.  The decline is due to the cancellation of all
remaining voluntary assumed reinsurance contracts in 1996.  Due
to the nature of the Company's reinsurance contracts, small
premium adjustments can continue long after cancellation of such
agreements.

Losses and Loss Adjustment Expenses Incurred. Loss and loss
adjustment expense for the three months and nine months ended
September 30, 1997 compared to 1996 decreased by $1.8 million and
$4.8 million, respectively.  Although the losses and loss
adjustment expenses decreased for the third quarter 1997, the
Company experienced adverse development on prior year loss
reserves and increased the provision for uncollectible
reinsurance.

Liquidity and Capital Resources

Highlands Group is a holding company, the principal assets of
which at September 30, 1997 are all of the capital stock of
Highlands and American Reliance.  The Company's property and
casualty insurance business is conducted by its indirect wholly
owned insurance subsidiaries. The liquidity and capital resource
considerations for the Highlands Group are different than those
of the Company's insurance operations.

  Holding Company

On April 30, 1997, Highlands Group acquired Vik Brothers
Insurance, Inc. (VBI) and its subsidiaries.  Immediately after
the consummation of the acquisition, VBI was renamed American
Reliance, Inc. (American Reliance).  American Reliance is a
holding company and has no direct operations.  American
Reliance's principal assets are the capital stock of its
insurance subsidiaries.

The acquisition was financed with a combination of common stock,
bank debt, preferred stock and cash.  In connection with the
acquisition, Highlands Group paid approximately $55.4 million in
cash (including $35.6 million to repay American Reliance's
outstanding bank debt) and issued 1,656,700 shares of its common
stock (representing approximately 12.6% of HIC's then outstanding
common stock) and 21,366 shares of newly issued series one
preferred stock to the holders of the common stock warrants,
preferred stockholders and creditors of American Reliance.  The
closing price of Highlands Group's common stock was $17.625 on
April 30, 1997.  The preferred stock is currently owned by a
subsidiary of American Reliance and has a preference value of
$1,000 per share.  Simultaneously with the closing, Highlands
Group contributed approximately $41.5 million to the capital of
the insurance subsidiaries of American Reliance.

In connection with the acquisition, Highlands Group obtained a
$65 million senior revolving credit facility from a consortium of
banks led by the Chase Manhattan Bank (Credit Agreement).
Highlands Group funded the cash portion of the acquisition by
utilizing the credit facility and available working capital.

As a holding company, Highlands Group's principal requirements
for funds are to pay operating expenses, franchise and other
taxes, debt service and dividends. Operating expenses and
franchise and other taxes imposed on the Company are not expected
to be material.  The annual cash interest requirements relating
to the Debentures and the Credit Agreement are approximately
$10.7 million. Highlands Group does not currently intend to pay
dividends on its Common Stock.  In light of the Company's
corporate strategy, an additional use of funds may be to invest
in other insurance companies or other insurance operations.

The Company's principal sources of funds are dividend and tax
sharing payments from Highlands and American Reliance, if any,
and funds that may be raised from time to time from the issuance
of additional debt or equity securities. The payment of dividends
by the insurance subsidiaries is subject to restrictions and
limitations imposed by the insurance regulatory authorities.
Dividend payments to Highlands Group from its insurance
subsidiaries are limited to $22.0 million in 1997 without prior
regulatory approval.  Both the issuance of additional debt and
the issuance of additional equity securities at a price less than
current market price would require the consent of the holders of
a majority in interest of the Debentures pursuant to the
covenants contained in the Debentures.

Management believes that Highlands Group's liquid assets and
access to the capital markets enable it to meet its liquidity
needs.

  Insurance Subsidiaries

Insurance Operations. The principal sources of funds for the
Insurance Subsidiaries are premiums and amounts earned from the
investment of such premiums. The principal uses of funds by these
subsidiaries are the payment of losses and related expenses,
underwriting expenses, other operating expenses and dividends and
tax sharing payments to Highlands Group.

In the insurance industry, liquidity refers to the ability of an
enterprise to generate adequate amounts of cash from its
operations, including from its investment portfolio, in order to
meet its financial commitments, which are principally obligations
under the insurance policies it has written. Liquidity
requirements of insurance companies are influenced significantly
by product mix. Future catastrophe claims, the timing and amount
of which are inherently unpredictable, may create increased
liquidity requirements for the Insurance Subsidiaries.  The
liquidity requirements of the Insurance Subsidiaries are met by
that portion of the investment portfolio that is held in cash and
highly liquid securities.

Various regulatory and legal actions are currently pending
involving the Insurance Subsidiaries and specific aspects of the
conduct of their business. See Part II:  "Other Information".
While the aggregate dollar amounts involved in such regulatory
and legal matters cannot be determined with certainty, the
amounts at issue could have a significant effect on the Company's
consolidated results of operations. In the opinion of management,
however, the ultimate liability in one or more of these actions
in excess of amounts currently reserved is not expected to have a
material effect on the Company's liquidity or capital resources.

Statutory Surplus.  Maintenance of appropriate levels of
statutory surplus of the Company's United States domiciled
Insurance Subsidiaries is a primary objective of the Company and
is also important to regulatory authorities and insurance rating
agencies.  In addition, increased public and regulatory concerns
regarding the financial stability of participants in the
insurance industry have caused greater emphasis to be placed by
current and potential customers upon the ratings assigned to
property and casualty insurance companies.  Highlands has been
assigned as "A-" (Excellent) rating by A.M. Best.  The principal
insurance subsidiaries of American Reliance have been assigned an
A.M. Best rating of "B+" (Very Good).  One other insurance
subsidiary has been rated "B" (Fair) and LMI Insurance Company
(LMI), which has ceased current operations, has been rated "D"
(Poor).

For discussion of the regulatory monitoring process, see
descriptions that appear in the Company's Form 10-K for the year
ended December 31, 1996, Form 10-Q for the quarterly period ended
March 31, 1997 and Form 10-Q for the quarterly period ended June
30, 1997, which descriptions are incorporated by reference
herein.

Reinsurance Receivables. The Company monitors the financial
condition of the reinsurance companies with which it places
significant reinsurance coverage and strives to place current
reinsurance coverages with financially sound reinsurance
companies. In the past, the Company has placed reinsurance
coverage with several hundred reinsurance companies. It monitors
the financial condition of many of such companies only on a
periodic basis. A number of such companies are in run-off or have
ceased writing reinsurance and some have become insolvent. The
Company's ability to monitor the financial condition of some
reinsurance companies is limited because of the difficulty of
acquiring accurate information.

Safe Harbor Statement. Certain sections of this Form 10-Q contain
statements which represent the Company's expectations or beliefs
concerning future events and are "forward looking statements"
within the meaning of Section 21E of the Exchange Act.  The
Company cautions that there are a variety of factors which may
cause actual results to differ materially from those in the
forward looking statements, including without limitation, changes
in the regulatory environment, the outcome of various litigation
matters, market acceptance of new products, and the effect of
general economic conditions.

Part II Other Information
        -----------------

Item 1. Legal Proceedings
        -----------------

For information concerning actions involving the Company, see
descriptions that appear in the Company's Form 10-K for the year
ended December 31, 1996, Form 10-Q for the quarterly period ended
March 31, 1997 and Form 10-Q for the quarterly period ended June
30, 1997, which descriptions are incorporated by reference
herein.

Item 6:   Exhibits and Reports on Form 8-K.
     
     a)   Exhibits

          (12) Computation of Earnings Per Share

          (27) Financial Data Schedule (Filed Electronically)

     b)   The Registrant filed a Form 8-K Current Report, dated
          February 25, 1997, pertaining to the Registrant's press
          release reporting the results of operations for the
          three months and twelve months ended December 31, 1996,
          and certain other selected financial data.

          The Registrant filed a Form 8-K Current Report, dated
          March 31, 1997, pertaining to the Registrant's press
          release on the status of the Registrant's acquisition of
          Vik Brothers Insurance Inc.

          The Registrant filed a Form 8-K Current Report, dated
          April 30, 1997, pertaining to the Registrant's press
          release of the Registrant's completion of the
          acquisition of Vik Brothers Insurance, Inc.

          The Registrant filed a Form 8-K Current Report, dated 
          April 30, 1997, pertaining to the Registrant's
          acquisition of Vik Brothers Insurance, Inc.

          The Registrant filed a Form 8-KA Amendment No. 1 Current
          Report, dated April 30, 1997, pertaining to the
          Registrants acquisition of Vik Brothers Insurance, Inc.

          The Registrant filed a Form 8-KA Amendment No. 2 Current
          Report dated April 30, 1997, filing certain additional
          financial information related to Vik Brothers Insurance,
          Inc., which was acquired by the Registrant.

          The Registrant filed a Form 8-K Current Report, dated
          May 7, 1997, pertaining to the Registrant's press
          release reporting the results of operations for the
          three months ended March 31, 1997, and certain other
          selected financial data.

SIGNATURES

Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.

HIGHLANDS INSURANCE GROUP, INC.
(Registrant)


Date:        November 13, 1997 By   /s/  Richard M. Haverland
                           --------------------
                           Richard M. Haverland 
                           Chairman, President and Chief
                           Executive Officer
                           (Authorized Signatory)Date:


             November 13, 1997 By   /s/  Charles J. Bachand
                           ------------------
                           Charles J. Bachand
                           Vice President, Treasurer and
                           Principal Accounting Officer
                           (Authorized Signatory)












                                
                                
                                
<TABLE>
                                
                                
        HIGHLANDS INSURANCE GROUP, INC. AND SUBSIDIARIES
                COMPUTATION OF EARNINGS PER SHARE
                                
          (In thousands, except for per share amounts)
<CAPTION>

                                       Three Months        Nine Months
                                           Ended              Ended
                                       September 30,      September 30,
                                     -----------------  ----------------
                                      1997      1996      1997      1996
                                     -------   -------   -------  -------

<S>                                  <C>       <C>      <C>       <C>          
EARNINGS:                                                            
                                                                 
Primary:                                                         
                                                                 
Net income (loss), as reported       $ 6,744    1,233    7,433    (2,059)
After tax interest adjustment for                                
  excess stock warrant and option                                
  proceeds                               143      -        545       -
                                     -------  -------  -------   -------
  Net income (loss), as adjusted     $ 6,887    1,233    7,978    (2,059)
                                     =======  =======  =======   =======
                                                                               
Fully diluted:                                                   
Net income, as reported              $ 6,744      -        -         -
After tax interest adjustment for                                
excess stock warrant and option                                  
  proceeds                                96      -        -         -
After tax debt and amortization                                  
  expense applicable to convertible                                
  subordinated debentures              1,193      -        -         -
                                     -------  -------  -------   -------
                                                                        
  Net income, as adjusted            $ 8,033      -        -         -         
                                     =======  =======  =======  ========       =
SHARES:                                                          
Primary:                                                         
Weighted average number of common                                
  shares outstanding, per                                        
  consolidated financial statements   13,108   11,448   12,377    11,448
Additional dilutive effect of                                    
  outstanding stock warrants and                                 
  options (based on modified                                     
  treasury stock method)               3,127      -      3,117       -
                                     -------  -------  -------   -------
                                                                               
  Weighted average, as adjusted       16,235   11,448   15,494    11,448
                                     =======  =======  =======   =======       

Fully diluted:                                                   
Weighted average number of common                                
  shares outstanding, per                                        
  consolidated financial statements   13,108      -        -        -
Additional dilutive effect of:                                   
  Outstanding stock warrants and                                 
   options (based on modified                                    
   treasury stock method)              3,127      -        -        -
  Common shares from conversion of                               
   the convertible subordinated                                  
   debentures                          3,889      -        -        -
                                     -------  -------  -------  -------
                                                                
  Weighted average, as adjusted       20,124      -        -        -
                                     =======  =======  =======  =======
EARNINGS PER COMMON SHARE:                                                   
  Primary                            $   .42      .11      .52     (.18)
  Fully diluted                      $   .40      -        -        -
                                     =======  =======  =======  =======
</TABLE>