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, 1996
                               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
incorporation or organization)          Identification No.)


   10370 Richmond., 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, 1996 was 11,448,430.


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

                 Part I - Financial Information


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

     Consolidated Balance Sheets
       September 30, 1996 (Unaudited) and
       December 31, 1995                                      3

     Consolidated Statements of Operations
       (Unaudited) - Three and Nine Months Ended
       September 30, 1996 and 1995                            5

     Consolidated Statements of Changes in
       Stockholders' Equity - Nine Months Ended 
       30, 1996 (Unaudited) and Year Ended December 31,1995   6

     Consolidated Statements of Cash Flows
       (Unaudited) - Nine Months Ended
       September 30, 1996 and 1995                            7

     Condensed Notes to Unaudited Consolidated
       Financial Statements                                   9
                                
Item 2. Management's Discussion and Analysis of
        Financial Condition and Results of Operations        14
                                
                                
                   Part II - Other Information

Item 1. Legal Proceedings                                    24

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                         1996         1995
                    --------                   ------------   ------------
                                                (Unaudited)  
<S>                                                <C>         <C>
INVESTMENTS:                                                  
  Fixed income securities:                                    
   Available for sale, at fair value                          
     (amortized cost of $255,404 at                           
     9/30/96 and $216,093 at 12/31/95)              $256,259    $227,509
  Held to maturity, at amortized cost                       
     (fair value of $370,824 at 9/30/96 and                   
     $396,729 at 12/31/95)                           361,878     374,364
 Equity securities, at fair value                                      
     (cost of $30,688 at 9/30/96 and
     $31,966 at 12/31/95)                             31,486      33,697
                                                   ---------   ---------
                                                                      
                 Total investments                   649,623     635,570
                                                                      
CASH AND CASH EQUIVALENTS                             85,853      85,176
                                                                      
PREMIUMS IN COURSE OF COLLECTION                      45,198      40,959
                                                                      
PREMIUMS DUE UNDER RETROSPECTIVE POLICIES            120,563     134,428
                                                                       
RECEIVABLE FROM REINSURERS                           554,195     602,380
                                                                       
FUNDS ON DEPOSIT WITH REINSURERS                      15,103      15,449
                                                                       
DEFERRED TAXES                                        34,109      29,534
                                                                       
RECEIVABLE FROM FORMER AFFILIATES                     27,752      41,255
                                                                       
ACCRUED INVESTMENT INCOME                              9,857      11,131
                                                                       
DEFERRED POLICY ACQUISITION COSTS                      8,252      11,744
                                                                       
OTHER ASSETS                                          26,592      28,465
                                                   ---------   ---------

                 Total assets                     $1,577,097  $1,636,091
                                                   =========   =========
</TABLE>
                                
                                
    See Condensed Notes to Consolidated Financial Statements.
<TABLE>
                 HIGHLANDS INSURANCE GROUP, INC.

             CONSOLIDATED BALANCE SHEETS, Continued
                                
                         (In Thousands)
<CAPTION>


                                             September 30,  December 31,
    LIABILITIES AND STOCKHOLDERS' EQUITY         1996           1995
   -------------------------------------      -----------   -----------
                                              (Unaudited)  
<S>                                              <C>           <C>
                                                        
LOSS AND LOSS ADJUSTMENT EXPENSE                $1,146,613    $1,253,627
                                                                       
UNEARNED PREMIUMS                                   36,898        52,571
                                                                       
CONVERTIBLE SUBORDINATED DEBENTURES                 55,260         -
                                                                        
FUNDS HELD                                          31,855        22,702
                                                                       
PAYABLE TO FORMER AFFILIATES                           341           676
                                                                       
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES            41,114        39,405
                                                 ---------     ---------
       Total liabilities                         1,312,081     1,368,981
                                                 ---------     ---------
                                                                        
COMMITMENTS AND CONTINGENT LIABILITIES                                  
                                                                        
                                                                       
STOCKHOLDERS' EQUITY:                                                    
  Common stock, $.01 par value; 50,000,000                               
  shares authorized; 11,448,430 outstanding in                           
  1996 ($1,000 par value; 10,000 shares                                  
  authorized, 1,000 shares issued and                                    
  outstanding in 1995)                                  114         1,000
  Additional paid-in capital                        192,492       184,168
  Net unrealized gain on investments                  1,074         8,547
  Retained earnings                                  71,336        73,395
                                                  ---------     ---------
       Total stockholders' equity                   265,016       267,110
                                                  ---------     ---------
       Total liabilities and stockholders'                             
       equity                                    $1,577,097    $1,636,091
                                                  =========     =========
</TABLE>

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

              CONSOLIDATED STATEMENTS OF OPERATIONS
                                
                           (Unaudited)
                                
                          (In Thousands)

<CAPTION>
                                Three Months           Nine Months
                            Ended September 30,     Ended September 30,
                            --------------------    --------------------
                               1996       1995        1996        1995
                             --------  --------      -------    -------
<S>                           <C>     <C>            <C>       <C>

REVENUES:                                                       
  Net premiums earned       $ 35,057   $51,272      $121,911   $164,326
  Net investment income       12,502    12,800        37,877     36,621
  Net realized investment                                       
    gains                        255     1,659           921      2,094
                            --------  --------      --------   --------
           Total revenues     47,814    65,731       160,709    203,041
                            --------  --------      --------   --------
                                                                
EXPENSES:                                                       
  Loss and loss adjustment                                      
    expense incurred          31,900   162,225       114,143    266,789
  Underwriting expenses       12,550    26,461        42,284     55,119
  Other expenses (income),                                      
    net                        1,883       288         6,763       (802)
                            --------  --------      --------   --------
          Total expenses      46,333   188,974       163,190    321,106
                            --------  --------      --------   --------
                                                               
INCOME (LOSS) BEFORE INCOME                                    
   TAX                         1,481  (123,243)       (2,481)  (118,065)
FEDERAL AND FOREIGN INCOME                                     
   TAX (BENEFIT)                 248       -            (422)      -
                            --------  --------      --------   --------
                                                               
 NET INCOME (LOSS)          $  1,233 $(123,243)      $(2,059) $(118,065)
                            ========  ========      ========   ========
                                                               
 NET INCOME (LOSS) PER                                         
   COMMON SHARE               $  .11  $ (10.77)      $ (0.18)  $ (10.31)
                            ========  ========      ========   ========

</TABLE>

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

   CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                         (In Thousands)
<CAPTION>
                                             Nine Months          
                                                Ended        Year Ended
                                           --------------  -------------
                                             September 30,   December 31,
                                                 1996           1995
                                              ---------     ---------
                                              (Unaudited)   
<S>                                            <C>            <C>
                                                           
COMMON STOCK:                                               
                                                           
Balance, beginning of year                      $ 1,000       $  1,000
   Change in par value of common stock             (886)            -
                                               --------       --------
Balance, end of period                              114          1,000
                                               --------       --------
                                                                      
ADDITIONAL PAID-IN CAPITAL:                                            
 Balance, beginning of year                     184,168        110,803
 Addition resulting from issuance of                                   
   convertible subordinated                                        
   debentures with detachable common
   stock warrants                                 7,438              -
 Change in par value of common stock                886              -
 Contribution from former parent for                                    
   net tax benefit                                   -          39,229
 Contribution from former parent for                                   
   net deferred tax benefit                          -          34,136
                                               --------       --------

 Balance, end of period                         192,492        184,168
                                               --------       --------
                                                                      
NET UNREALIZED GAIN (LOSS) ON INVESTMENTS:                             
   Balance, beginning of year                     8,547        (10,132)
     Changes in net unrealized (loss) gain,                         
     net of the applicable federal income tax    (7,473)        18,679
                                               --------       --------
 Balance, end of period                           1,074          8,547
                                               --------       --------
RETAINED EARNINGS:                                                    
 Balance, beginning of year                      73,395        194,137
 Net loss                                        (2,059)      (120,742)
                                               --------       --------
 Balance, end of period                          71,336         73,395
                                               --------       --------
TOTAL STOCKHOLDERS' EQUITY                     $265,016       $267,110
                                               ========       ========

</TABLE>

    See Condensed Notes to Consolidated Financial Statements.
<TABLE>
                 HIGHLANDS INSURANCE GROUP, INC.
                                
              CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (Unaudited)
                         (In Thousands)
<CAPTION>
                                                   Nine Months
                                               Ended September 30,
                                              --------------------
                                                  1996       1995
                                               --------    --------
<S>                                           <C>          <C>

CASH FLOWS FROM OPERATING ACTIVITIES:                      
  Net (loss)                                   $(2,059)   $(118,065)
                                               --------    --------
Adjustments to reconcile net (loss)to net cash             
  used in operating activities:
     Depreciation and amortization                (113)         201
     Change in deferred policy                                 
       acquisition costs                         3,492         (175)
     Gain on sale of investments                  (926)      (1,807)
     (Increase) decrease in premiums in                    
       course of collection                     (4,239)       5,319
     (Increase) decrease in premiums due                   
       under retrospective policies             13,865      (12,355)
     (Increase) decrease in receivables from               
       reinsurers                               48,185      (93,370)
     Decrease in funds on deposit with                    
       reinsurer                                   346          748
     Advances from former affiliates, net        9,427        9,146
     Increase (decrease) in loss and                       
       loss adjustment expense reserves       (107,014)     170,994
     (Decrease) increase in unearned                         
       premiums                                (15,673)       2,565
     Increase in funds held                      9,153        7,164
     Change in other operating assets and                   
       liabilities                              12,939       20,445
                                              --------     --------
       Total adjustments                       (30,558)     108,875
                                              --------     --------
       Net cash used in operating activities   (32,617)      (9,190)
                                              --------     --------
                                                           
                                                           
CASH FLOWS FROM INVESTING ACTIVITIES:                      
  Proceeds from sales -                                    
   Fixed income securities available                       
     for sale                                     -           7,003
   Equity securities -                          3,980         4,890
  Investment collections                                   
   Fixed income securities available                       
     for sale                                  25,498        11,864
   Fixed income securities held to                          
     maturity                                  32,534        26,844
  Investment purchases -                                   
   Fixed income securities available                       
     for sale                                 (64,564)      (38,307)
   Fixed income securities held to                         
     maturity                                 (19,140)       (2,290)
   Equity securities                           (2,282)       (2,103)
  Purchases of property and equipment          (1,103)         (546)
  Sales of property and equipment                 194            (2)
  Proceeds from disposal of subsidiary, net        22            -
  Cash returned by (invested with)                         
    former affiliates, net                      3,860          (212)
                                             --------      --------
     Net provided by investing activities     (21,001)        7,141
                                             --------      --------
CASH FLOWS FROM FINANCING ACTIVITIES                       
  Proceeds from issuance of convertible                    
    subordinated debentures                    60,000           -
  Payment of debt issuance expense             (5,705)          -
                                             --------      --------
     Net cash provided by financing                        
       activities                              54,295           -
                                             --------      --------
NET INCREASE (DECREASE) IN CASH AND CASH                  
  EQUIVALENTS                                     677       (2,049)
                                                         
CASH AND CASH EQUIVALENTS AT BEGINNING OF                 
  PERIOD                                       85,176       52,789
                                             --------     --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD    $85,853      $50,740
                                             ========     ========
                                
Supplemental disclosure of cash flow                     
  information:
    Interest paid                             $ 2,623      $  -
                                             ========     ========
                                
                                
</TABLE>
                                
                                
                                
    See Condensed Notes to Consolidated Financial Statements.


        
                HIGHLANDS INSURANCE GROUP, INC.
                                
     CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                
                       SEPTEMBER 30, 1996
                                





1.   BASIS OF PRESENTATION
     ---------------------

The accompanying condensed consolidated financial statements as
of September 30, 1996 and for both the three and nine months
periods ended September 30, 1996 and 1995 are unaudited and
include the accounts of Highlands Insurance Group, Inc., (HIC)
and its subsidiaries (the Company).  The Company is an insurance
holding Company that through Highlands Insurance Company
(Highlands) and its other insurance subsidiaries (collectively,
the Insurance Subsidiaries), is primarily engaged in the
commercial property and casualty insurance business.  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, 1995.

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.

HIC was wholly owned by Halliburton Company (Halliburton) until
January 23, 1996 when Halliburton distributed all of the
outstanding shares of common stock of HIC (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
HIC for every ten shares of common stock of Halliburton held on
that date.  Approximately 11.4 million common shares of HIC were
issued in conjunction with the Distribution.

2.   ACCOUNTING STANDARDS
     --------------------

In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation to Employees" (SFAS 123).  SFAS 123
establishes accounting and reporting standards for stock-based
employee compensation plans.  SFAS 123 recommends but does not
require entities to adopt the fair value based method of
accounting for all employee stock compensation plans, under which
compensation cost is measured based on the fair value of the
award at the grant date and recognized over the vesting period.
Entities may continue to account for these plans using the
intrinsic value based method of accounting, under which
compensation cost is measured as the excess, if any, of the
quoted market price of the stock at the grant date over the
amount an employee must pay to acquire the stock.  Entities not
adopting the fair value based method must present proforma
disclosures of net income and earnings per share as if the fair
value method of accounting had been applied.  The Company has
elected to use the intrinsic value based method of accounting.

Pursuant to the Company's 1995 Stock Option Plan, Highlands may
grant either incentive stock options (ISO) or non-qualified stock
options (NQSO). The exercise price for each share subject to an 
option will be an amount that the Compensation Committee determines,
in its good faith judgment. In the case of ISO's however, the
exercise price per share shall not be less than the amount the
Committee determines, in its good faith judgment, to be not less
than 100% of the fair value of Company common stock on the date
the option is granted.  Options are typically exercisable over a
period not in excess of ten years.  The options generally vest
over three to four years, or in full upon a change of control of
the Company.  The maximum number of shares that are reserved for
issuance under all option plans is 750,000; at September 30,
1996.  Granted but unexercisable options (principally NQSOs at 
an exercise price per share of $14.69) to 488,000 shares remain
outstanding.

3.   INCOME TAX (BENEFIT)
     -------------------

The Company provides for income taxes on its statements of
operations pursuant to Statement of Financial Accounting
Standards 109, "Accounting for Income Taxes" (SFAS 109).  With
respect to losses for periods preceding the Distribution (January
23, 1996), no tax benefit was recorded in the statements of
operations pursuant to SFAS 109 and the Company's tax-sharing
arrangement with its former parent, Halliburton Company.  Tax
receipts under its intercompany tax-sharing arrangements with its
former parent were recorded as additions to stockholders' equity
for the periods preceding the Distribution.

4.   NET INCOME (LOSS) PER SHARE
     ---------------------------

The net income (loss) per share amounts for both the three and
nine months ended September 30, 1996 are based upon the weighted
average number of common shares outstanding during the period.
The effects of common stock equivalents, common stock warrants
and options, and the convertible subordinated debentures are
considered to be antidilutive, therefore, the effects are not
reflected in either primary or fully net diluted income net
(loss) per share amounts.  The (loss) per share amounts for both
the three and nine months ended September 30, 1995 are based upon
the 11,448,430 shares of common stock that were distributed and
outstanding immediately following the Distribution.

5.   DEBT
     ----
On January 23, 1996, HIC issued $62.85 million in principal
amount of HIC's 10% convertible subordinated debentures
(Debentures) due December 31, 2005, together with Series A and A-
2 (collectively the "Series A Warrants") and B and B-2
(collectively the "Series B Warrants") common stock purchase
warrants, to Insurance Partners, L.P., Insurance Partners
Offshore (Bermuda), L.P. and certain members of the Company's
management team.

The carrying values of the Debentures, Series A Warrants and
Series B Warrants at the Distribution date were determined by
allocating the $62.85 million purchase price based upon estimated
relative fair value of such securities.  The estimated fair value
of the Series A Warrants and Series B Warrants amounting to $8.1
million was recorded in paid-in capital, net of $.75 million of
acquisition costs.  The debt discount related to the Series A
Warrants and Series B Warrants is being amortized over the ten-
year life of the Debentures.

The Debentures are convertible into common stock of HIC after one
year from issuance at the option of the holders.  If all of the
Debentures are converted into HIC common stock at the conversion
price of $16.16 per share, the holders would receive
approximately 3.9 million shares of HIC common stock and have an
ownership interest in HIC of approximately 25%.  Interest on the
Debentures is payable semi-annually in cash at 10% per annum. HIC
can redeem the Debentures at any time after December 3, 2002.

The detachable Series A Warrants enable the holders to purchase
HIC common stock at an exercise price of $14.69 per share, equal
to an additional ownership interest in HIC of approximately 21%
after giving effect to the assumed conversion of the Debentures
and the exercise of the Series A Warrants.  If all of the Series
A Warrants were exercised, the holders would receive
approximately 4.0 million shares of common stock of HIC.  The
exercise price and the number of shares of HIC common stock into
which the Series A Warrants are exercisable will be subject to
adjustment in certain circumstances.  These warrants expire on
December 31, 2005.

The detachable Series B Warrants enable the holders to purchase
HIC common stock at an exercise price of $14.69 per share, equal
to an additional ownership interest of 5% after giving effect to
the assumed conversion of the Debentures and the exercise of the
Series A and B Warrants.  The Series B Warrants become
exercisable by the holders in the event that the average closing
market price of HIC common stock exceeds 1.61 times the exercise
price for any 30 consecutive trading days prior to December 31,
2000 but after December 31, 1998.  If all of the Series B
Warrants were exercised, the holders would receive approximately
1.0 million additional shares of HIC common stock.  The exercise
price and the number of shares of HIC common stock into which the
Series B Warrants are exercisable will be subject to adjustment
in certain circumstances.  The detachable Series B Warrants
expire on December 31, 2005.

If the Debentures are converted into common stock of HIC and the
Series A and B Warrants are utilized by the holders to purchase
common stock of HIC, the holders will have an ownership interest
in HIC of approximately 44%.

6.  RESTRUCTURING CHARGE
    --------------------

The Company recorded a $1.3 million restructuring charge for
severance and lease costs in the first quarter of 1996.  The
restructuring charge included the elimination of approximately
100 positions and the consolidation of office space.
Accordingly, such charge also included costs related to vacating
excess leased office space.

7.  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
past 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 period 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.  Highlands 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 were involved 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 Form 10-K for the year ended
December 31, 1995 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

For reporting purposes, the Company has three lines of business
which are considered Discontinued Lines, specifically business
originated by the Company's London reinsurance operations
(Highlands (UK)), an umbrella/excess liability policy program and
assumed casualty and property reinsurance contracts.  The Company
has ceased to write these Discontinued Lines.  Although the
Company has discontinued other lines of business, primarily
personal and probate bonding business, the Company has included
the financial results of those lines in underwriting results
excluding Discontinued Lines for consistency purposes. (Please
refer to the Company's 1995 Form 10-K for a more complete
description of the Discontinued Lines.)
<TABLE>
The results of the Company's consolidated operations for three
months and nine months ended September 30, 1996 and 1995 are set
forth below:
<CAPTION>
                             Three Months Ended     Nine Months Ended
                               September 30,         September 30,
                           --------------------   -------------------
                                 1996      1995      1996       1995
                               -------   -------   -------    -------
                                       (Dollars in millions)
<S>                             <C>      <C>         <C>       <C>
                                  
Consolidated Results                                         
                                                             
Gross premiums written        $  57.8   $  72.8    $ 135.2     $178.4
Net premiums written             53.9      65.7      123.0      153.9
                             ========  ========   ========   ========
                                                             
Net premiums earned:                                         
  Excluding Discontinued                                     
    Lines                     $  33.5   $  48.3    $ 114.4     $154.3
  Discontinued Lines              1.6       2.9        7.5       10.0
                              -------- --------   --------   -------- 
                              $  35.1   $  51.2    $ 121.9     $164.3
                              ======== ========   ========   ========
                                                             
Underwriting loss:                                           
  Excluding Discontinued                                     
    Lines                        (5.5)    (50.0)     (28.6)    (64.2)
  Discontinued Lines             (3.9)    (87.4)      (5.9)    (93.4)
                              --------  --------  --------  --------
                                 (9.4)   (137.4)     (34.5)   (157.6)   
Net investment income            12.5      12.8       37.9      36.6
Net realized investment gains     0.2       1.7        0.9       2.1
Other (expense) income                                       
(including taxes)                (2.1)      (.3)      (6.4)       .8
                              -------- --------   --------  --------
                                          
Net income (loss)             $   1.2   $(123.2)   $  (2.1)  $(118.1)
                              ======== ========   ========  ========
Ratios:                                                      
  Loss ratio                     91.0%    316.4%      93.6%    162.4%
  Expense ratio                  35.8      51.6       34.7      33.5
                              -------- --------   --------  --------
   Combined ratio               126.8%    368.0%     128.3%    195.9%
                              ======== ========   ========  ========
</TABLE>
A $125 million pre-tax charge is reflected in the Company's
results of operations for the three months and nine months ended
September 30, 1995.  See "1995 Third Quarter Charge" below.  The
Company's consolidated results prior to 1996 have been
significantly influenced by the underwriting results of the
Discontinued Lines (see Underwriting Results of Discontinued
Lines). In order to indicate the significance of those
influences, underwriting results exclusive of the discontinued
lines and with respect to the discontinued lines are presented
and discussed separately below.

Net investment income for the three months and nine months ended
September 30, 1996 and 1995 amounted to $12.5 million and $12.8
million and $37.9 million and $36.6 million, respectively.  Net
investment income for the first nine months of 1996 increased
from 1995 primarily as a result of additional investable funds
from the issuance of the convertible subordinated debentures.
The increase is partially offset by lower reinvestment rates in
1996.  Net realized investment gains have not been a significant
portion of revenue for the Company and amount to $.2 million and
$1.7 million and $.9 million and $2.1 million for the three
months and nine months ended September 30, 1996 and 1995,
respectively.

Other expenses for the three months and nine months ended
September 30, 1996 compared with the same periods for 1995
increased as a result of the net interest expense and
amortization of the debt discount related to the convertible
subordinated debentures and additional expenses associated with
being a separate public company.  For the three months ended
September 30, 1996, accruals for incentive compensation were
reduced by $1 million as a result of the Company's year to date
results of operations.

The Company provides for income taxes on its statements of
operations pursuant to Statement of Financial Accounting
Standards no. 109, "Accounting for Income Taxes" (SFAS 109).
Total tax expense (benefit) for the three months and nine months
ended September 30, 1996 amounted to $.25 million and $(.42)
million, respectively.  With respect to losses for periods
preceding the Distribution (January 23, 1996), no tax benefit was
recorded in the statements of operations pursuant to SFAS 109 and
the Company's tax-sharing arrangement with its former parent,
Halliburton Company.  Tax receipts under its intercompany tax-
sharing arrangements with Halliburton were recorded as additions
to stockholders' equity for the periods preceding the
Distribution.
<TABLE>
Underwriting Loss Excluding Discontinued Lines
-------------------------------------------------

<CAPTION>
                             Three Months Ended     Nine Months Ended
                               September 30,          September 30,
                            -------------------   -------------------
                               1996       1995      1996        1995
                              ------     ------    ------      ------
                                       (Dollars in millions)             
                                                             
<S>                         <C>          <C>      <C>         <C>
   Gross premiums written   $   56.3     $ 69.3    $128.4     $164.3
   Net premiums written         52.8       63.0     117.8      145.6
                            =========   ========  ========   ========
                                                             
   Net premiums earned      $   33.5     $ 48.3    $114.4     $154.3
   Loss and loss                                             
      adjustment expense                                        
      incurred                 (27.0)     (74.5)   (103.8)    (168.7)
   Underwriting expenses       (12.0)     (23.8)    (39.2)     (49.8)
                            ========    ========  ========   ========
                                                             
   Underwriting loss        $  (5.5)     $(50.0)   $(28.6)    $(64.2)
                            ========    ========  ========   ========
   Ratios:                                                   
     Loss ratio                80.6%      154.2%     90.7%     109.3%
                                       
     Expense ratio             35.8        49.3      34.3       32.3
                           --------    --------   --------   --------
      Combined ratio          116.4%      203.5%    125.0%     141.6%
                           ========    ========   ========   ========
</TABLE>
The underwriting results excluding Discontinued Lines primarily
consist of relatively large commercial accounts (Special
Accounts), medium to small commercial accounts (Commercial
Insurance), insurance for Halliburton (Insurance Services) and a
mix of commercial marine products (Marine Division).

Period to Period Comparisons of Underwriting Loss Excluding
Discontinued Lines

Gross Premiums Written. Gross premiums written for the three
months and nine months ended September 30, 1996 and 1995 amounted
to $56.3 million and $69.3 million and $128.4 million and $164.3
million, respectively.  The decrease for the three months and
nine months ended September 30, 1996 of $13.0 million and $35.9
million, respectively, compared to like periods in 1995 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 decreases in gross premiums written.  Also
contributing to declines in gross premiums written is the highly
competitive market conditions for Special Accounts customers.  In
this highly competitive market, Special Accounts has become more
selective in its initial underwriting as well as renewal
activity.  Finally, Insurance Services's mix of business
continues to change from retrospectively rated policies to high
deductible policies which produce lower gross premiums.  These
factors are expected to cause gross premiums written to decline
for the remainder of 1996.

Gross premiums written for the nine months ended September 30,
1996 were also impacted by a reduction of $6.9 million of accrued
premium adjustments recorded in the first and second quarter.

Gross premiums written for 1996 continue to be impacted by the
decision to exit the probate bonding business produced by
Southern California Bonding Service, Incorporated (SCBS).  On
March 1, 1996, the Company sold all of the common stock of SCBS
and ceded 100% of its inforce policies, subject to a profit
sharing arrangement.  The nine months ended September 30, 1996
include $1.5 million of SCBS gross premiums written compared to
$5.6 million for the comparable 1995 period.

Net Premiums Earned. Net premiums earned for the three months and
nine months ended September 30, 1996 and 1995 amounted to $33.5
million and $48.3 million and $114.4 million and $154.3. million,
respectively.  The decrease of $14.8 million and $39.9 million or
30.6% and 25.9% for the three months and nine months ended
September 30, respectively, is related to the same factors
affecting gross premiums written.

In addition to the above items, net premiums earned for the nine
months ended September 30, 1996 includes net reductions of $6.8
million related to improperly accrued net premiums and accrued
premium on retrospectively rated policies recorded in the first
and second quarters.

Net premiums earned 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 net premiums
earned and premiums due from policyholders under retrospectively
rated policies for changes in the estimated ultimate loss and
loss adjustment expense from the date of the prior valuation.
These adjustments may cause net premiums earned to fluctuate
significantly from period to period.  Net premiums earned for the
nine months ended September 30, 1996 are less than the like
period in 1995 due primarily to a $26 million decrease in earned
premium on Insurance Services retrospectively rated policies.
Experience rated contracts reduce but do not eliminate risk to
the insurer.

Net premiums earned are also expected to decline for the
remainder of 1996.

Loss and Loss Adjustment Expense Incurred. Loss and loss
adjustment expense incurred for the three months and nine months
ended September 30, 1996 and 1995 amounted to $27.0 million and
$74.5 million and $103.8 million and $168.7 million,
respectively.  The decrease for the three months and nine months
ended September 30, 1996 of $47.5 million and $64.9 million,
respectively, compared to like periods in 1995 can be primarily
attributed to the 1995 Third Quarter Charge of $35.7 million.
See "1995 Third Quarter Charge."

Additionally, the three months ended September 30, 1996 includes
prior year reserve strengthening of $2.4 million for retained
probate bond losses incurred prior to 1996.  Loss and loss
adjustment expenses for the nine months ended September 30, 1996
also reflect the lower incurred losses subject to retrospectively
rated policies, declining premium volume and adverse development
on prior years reserves.

Underwriting Expenses. Underwriting expenses for the three months
and nine months ended September 30, 1996 and 1995 amounted to
$12.0 million and $23.8 million and $39.2 million and $49.8
million, respectively.  The decrease of $11.8 million and $10.6
million for the three months and nine months ended September 30,
1996, respectively, is related to declining premium volume and
the 1995 Third Quarter Charge.  In the third quarter of 1995, the
Company recorded $8 million of reserve increases for litigation
and administrative proceedings against the Company.  See "1995
Third Quarter Charge."

During the three months ended September 30, 1996, the Company
recorded an additional $1 million for litigation proceedings
against the Company.  See Item 1 of Part II of this report for
further discussion.

The nine months ended September 30, 1996 underwriting expenses
includes two other unusual items of significance amounting to
$2.4 million.  In the first quarter of 1996, the Company
implemented a plan under which it recorded a $1.3 million
restructuring charge as part of its strategic and financial
assessment of the Company's business.  Additionally, a charge of
$1.1 million was recorded in the second quarter of 1996 for
underaccrued premium taxes.
<TABLE>
Underwriting Loss of Discontinued Lines
------------------------------------------
<CAPTION>
                                Three Months Ended   Nine Months Ended
                                   September 30,       September 30,
                                -------------------  -----------------
                                  1996      1995      1996      1995
                                --------  --------  --------  --------
                                         (Dollars in millions)
<S>                                <C>       <C>       <C>      <C>
                                
Gross premiums written          $   1.5   $    3.5  $    6.8  $  14.1
Net premiums written                1.1        2.7       5.2      8.3
                                ========  ========  ========  ========
                                                              
Net premiums earned             $   1.6   $    2.9  $    7.5  $  10.0
Loss and loss adjustment                                      
  expense incurred                 (4.9)     (87.7)    (10.3)   (98.1)
Underwriting expenses              (0.6)      (2.6)     (3.1)    (5.3)
                                --------  --------  --------  --------
                                                              
 Underwriting loss              $  (3.9)    $(87.4)   $ (5.9) $ (93.4)
                                ========  ========  ========  ========
</TABLE>
For reporting purposes, the Company has three lines of business
which are considered Discontinued Lines, specifically business
originated by the Company's London reinsurance operations
(Highlands (UK)), an umbrella/excess liability policy program and
assumed casualty and property reinsurance contracts.  The Company
has ceased to write these Discontinued Lines.

Period to Period Comparisons of Underwriting Loss of Discontinued
Lines

Net Premiums Earned. Net premiums earned were $1.6 million and
$2.9 million for the three months and $7.5 million and $10.0
million for the nine months ended September 30, 1996 and 1995,
respectively.  The decline for both periods is due to the run off
of canceled assumed reinsurance and the declining premiums from
Highlands (UK), which ceased writing new business in 1993.
However, due to the nature of the Company's policies and
reinsurance contracts, small premium adjustments can continue
subsequent to cancellation.

Loss and Loss Adjustment Expense Incurred. Loss and loss
adjustment expense was $4.9 million and $87.7 million for the
three months and $10.3 and $98.1 for the nine months ended
September 30, 1996 and 1995, respectively.  The decrease for the
three months ended September 30, 1996 compared to the same period
for 1995 is primarily the result of the third quarter loss and
loss adjustment expense reserve charge of $81.3 million.  See
"1995 Third Quarter Charge".  The decline in loss and loss
adjustment expense for both the three months and the first nine
months of 1996 reflects the decline in premium volume offset by
development on prior year loss reserves.  In addition, the
Company's participation in an assumed reinsurance contract
resulted in a $.5 million loss from the ValuJet catastrophe in
the three months ended June 30, 1996 and a $.5 million loss from
the TWA flight 800 in the three months ended September 30, 1996.

1995 Third Quarter Charge

In the third quarter of 1995, the Company and its external
actuaries conducted an extensive review of its loss and loss
adjustment expense reserves to assess the Company's reserve
position.  As a result of such review, the Company recorded a
charge to pre-tax earnings during the nine months ended September
30, 1995 of $125.0 million.  Of this amount, $117.0 million
related to loss and loss adjustment expense reserves ($242.5
million before deducting reinsurance) and $8 million represents
an increase in reserves related to litigation proceedings against
the Company.  Of the $117 million amount for loss and loss
adjustment expense reserves, adjustments of risks arising from
(i) environmental claims constitute $59.5 million ($125.5 million
before deducting reinsurance), (ii) assumed reinsurance claims
constitute $13.1 million ($27.7 million before deducting
reinsurance) and (iii) increased losses from catastrophes
reinsured by Highlands (UK) constitute $12.0 million ($50.7
million before deducting reinsurance).  An additional $13.0
million ($13.0 million before deducting reinsurance) was added to
unallocated loss adjustment expense reserves to reflect
additional costs related to the settlement of claims and run-off
costs related to Highlands (UK), and the remaining $19.4 million
($25.6 million before deducting reinsurance) reflects changes to
reserves for unreported losses in order to reflect the current
evaluation of overall loss and loss adjustment expense reserves.
Please refer to the Company's 1995 Form 10-K for a more complete
description of the 1995 Third Quarter Charge.

For periods subsequent to September 30, 1995 the Company's
internal actuaries have performed the loss and loss adjustment
expense reserve analysis in order to establish the Company's
reserve position.  The Company will utilize external independent
actuaries to review the 1996 year end loss and loss adjustment
expense reserves.

Liquidity and Capital Resources

The Company is a holding company, the principal asset of which is
all of the capital stock of Highlands. The Company's property and
casualty insurance business is conducted by Highlands and the
other Insurance Subsidiaries. The liquidity and capital resource
considerations for the Company are different from those of its
Insurance Subsidiaries.

  Holding Company

Immediately following the Distribution, the Company issued $62.85
million in principal amount of Debentures for $60.0 million in
cash and $2.85 million of notes. Of such cash proceeds, the
Company invested $10.0 million in Highlands as a contribution to
surplus, paid approximately $5.6 million in transaction fees and
for reimbursement of out-of-pocket expenses incurred in
connection with the issuance of the Debentures and Warrants, and
retained the remaining approximately $44.4 million for general
corporate purposes.

Prior to the Distribution, the Company was included in the
Halliburton consolidated U.S. federal tax return. An intercompany
tax-sharing arrangement between the Company and Halliburton
resulted in the Company receiving from or paying to Halliburton a
cash payment for U.S. federal income taxes based on financial
reporting (book) income at rates that were determined by
Halliburton. The Company was not charged more U.S. federal income
tax than it would have paid on a separate return basis. Pursuant
to SFAS 109, the Company provided for income taxes on its
statements of operations as if it had filed separate tax returns
in each taxing jurisdiction (separate return method). Differences
between income tax provisions calculated using the separate
return method and amounts calculated under the intercompany tax-
sharing arrangements were reflected as additions or reductions to
stockholders' equity, as appropriate.  The Company received and
forwarded to its Insurance Subsidiaries approximately $35 million
in cash  ($8 million in February 1996; $27 million in October
1996) from Halliburton related to the tax benefit of the
significant tax losses incurred in 1995 which were utilizable by
Halliburton.

The tax-sharing agreement resulted in Halliburton acquiring the
domestic deferred tax assets and liabilities from its U.S.
subsidiaries. In contemplation of Halliburton's distribution of
the Company's common stock, Halliburton contributed to the
Company the net deferred tax assets attributable to the Company
which the Company recorded as a contribution to capital. Based on
the tax-free nature of the spin-off, the deferred tax asset
attributes are available to the Company.

The Company's other principal sources of funds are dividend and
tax sharing payments from Highlands, 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 Texas domiciled
companies is subject to restrictions, limitations and notification
requirements imposed by the insurance laws of the State of Texas.
The maximum dividend payable by Highlands for 1996 without prior
approval is approximately $18.0 million.  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.

As a holding company, the Company's principal requirements for
funds are to pay operating expenses, to pay franchise and other
taxes, to pay debt service and to pay 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 will be approximately
$6.0 million. The Company does not currently intend to pay
dividends on the Company 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.

  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 the Company.

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 short- and intermediate-term securities.  Prior
to the Distribution, liquidity requirements of the Insurance
Subsidiaries were also provided for by the payments made by
Halliburton to the Company and the Insurance Subsidiaries under
the income tax sharing arrangements for losses generated by the
Company and its subsidiaries.  These tax sharing arrangements
were terminated in connection with the Distribution and resulted
in the Insurance Subsidiaries receiving $35 million in 1996.
Management believes that the current levels of cash flows from
operations of the Insurance Subsidiaries provide sufficient
liquidity for the operations of the Insurance Subsidiaries as
well as funds for the Company so that the Company will be able to
meet its tax and debt obligations.

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 period in which the
matter is resolved. 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 liquidity or capital resources.

Statutory Surplus.  Maintenance of appropriate levels of
statutory surplus of the Company's U.S. Insurance Subsidiaries is
a primary objective of the Company and is also important to
regulatory authorities and U.S. 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.  Each of the U.S. Insurance
Subsidiaries and Highlands have been assigned as "A-" (Excellent)
rating by A.M. Best.

The National Association of Insurance Commissioners (NAIC) has
adopted risk based capital ("RBC") requirements that require
insurance companies to calculate and report information under a
risk-based formula which measures statutory capital and surplus
needs based on a regulatory definition of risk with respect to a
company's mix of products and its balance sheet.  Highlands'
authorized control level RBC, as defined by the NAIC, was $58.9
million on December 31, 1995 which was substantially below
Highlands' existing capital of $178.7 million.  The other U.S.
Insurance Subsidiaries have an RBC amount above the authorized
control level RBC as defined by the NAIC.

The NAIC's Insurance Regulatory Information System ("IRIS") was
developed by a committee of state insurance regulators primarily
to assist state insurance departments in executing their
statutory mandate to oversee the financial condition of insurance
companies operating in their respective states.  IRIS helps to
identify those companies that merit the highest priority in the
allocation of the regulators' resources on the basis of eleven
financial ratios which are calculated annually from financial
information obtained from insurers' statutory annual statements.
A "usual range" of results for each ratio is used as a benchmark.
The ratios and benchmark comparisons are calculated within defined
parameters and are not intended to replace the Insurance Commissioners'
own in-depth financial analysis or on-site examinations.  Departure
from the usual range on four or more of the ratios could lead to
inquiries from individual Commissioners.

An annual range of ratio results has been established from
studies of the ratios for companies that have become insolvent or
have experienced financial difficulties falling outside the usual
range.  The analytical phase is a review of annual statements and
the financial ratios.  Companies that receive financial ratio
values outside the usual range generally are analyzed in order to
identify those companies that appear to require immediate
regulatory attention.  A more comprehensive review of the ratio
results in an insurer's annual statement is performed later to
confirm that an insurer's situation in fact calls for increased
and closer regulatory attention.  If the review confirms that the
insurer's situation should be accorded the highest priority in
the Insurance Commissioners' surveillance process, the insurer
receives a "first priority" designation.  Highlands received
"first priority" designation as a result of the review of its
financial ratio results and statutory annual statements for 1995.
The primary reason Highlands received a "first priority"
designation was due to the large reserve increase it recorded in
1995.  Highlands' statutory surplus decreased by $75.4 million in
1995, principally as a result of a third quarter charge (see
"1995 Third Quarter Charge"), and was $178.7 million as of
December 31, 1995.

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.

Based on the Company's evaluation of the financial condition of
its reinsurers, the Company has established reserves for
potentially uncollectible reinsurance which amounted to $2.4
million and $4.6 million as of September 30, 1996 and December
31, 1995, respectively.  Additionally, at September 30, 1996, the
Company has retained $14.1 million of ceded reserves related to
potentially uncollectible reinsurance.

Part II Other Information

Item 1. Legal Proceedings

On May 15, 1991, Weatherford Roofing Company and other plaintiffs
commenced an action against Employers National Insurance Company
in the 116th Texas State District Court in Dallas County, Texas,
alleging that they had been overcharged for workers' compensation
insurance. On April 23, 1992, the plaintiffs amended their
petition to allege a class action on behalf of all employers 
overcharged for workers' compensation insurance purchased 
between 1989 and 1992 to cover Texas employees. On April 18, 1994,
Highlands and Highlands Underwriters Insurance Company were added
to the action as named defendants. The lawsuit, styled
Weatherford Roofing Company, et al. v. Employers National
Insurance Company (Case No. 91-05637), alleges, among other
things, that the defendants conspired to charge rates of premium
for retrospectively rated insurance policies that exceeded rates
then permitted under applicable Texas law and regulations.  On
July 2, 1996, the named plaintiffs and a group of 14 insurance
company defendants, including the Company, entered into a
settlement agreement (the "Settlement Agreement"), and said
agreement has received preliminary approval of the court.
Pursuant to the terms of the Settlement Agreement, in July of
1996, notification of the settlement was published in several
Texas newspapers and mailed to all insureds within the settlement
class. The insureds that have elected to opt-out will not impact
Highlands or terminate the Settlement Agreement.  Final approval
of the agreement and the distribution of the settlement fund
should occur in the last quarter of 1996.  At the final approval
hearing, it is anticipated that there will be objections to the
amount of the legal fees of the plaintiffs' attorneys.  However,
the Company still anticipates that the Settlement Agreement will
be approved by the court.  The Company's liability, pursuant to
the terms of the Settlement Agreement, is not in excess of
current legal reserves and is not expected to have a material
adverse effect on the financial position of the Company.  In the
event that the Court does not approve the Settlement Agreement
due to an appeal or any other reason, the Company would continue
to defend this matter and its resolution could have a material
adverse effect on results of operations of the Company in the
period in which the matter is resolved.

In November 1988, the State of California adopted by ballot
initiative Proposition 103, a comprehensive system of regulation
applicable to all property and casualty insurance written in
California. Proposition 103 does not apply to workers'
compensation insurance or reinsurance.  Proposition 103 provided,
among other things, that rates for automobile and certain other
insurance policies issued or renewed on or after November 8, 1988
be rolled back to levels of November 8, 1987 and then reduced by
an additional 20%. In January 1995, the State of California 
notified the Company that it believed that the Company had a
premium rollback obligation to policyholders under Proposition 103
in the amount of $2.7 million, plus interest.  On April 18, 1995,
the Department of Insurance of the State of California issued a
Notice of Hearing Re Proposition 103 Rollback Exemption
Application In the Matter of the Rate Rollback Liability of
Highlands and Highlands Underwriters Insurance Company.
Subsequent to the issuance of the Notice of Hearing, there was a
Prehearing Conference Order and several motions regarding the
extent and nature of discovery. On June 30, 1995, Highlands and
Highlands Underwriters Insurance Company mailed a settlement
offer to the Insurance Commissioner of the State of California,
which was rejected by the Commissioner on July 18, 1995.  During 
the third quarter of 1995, the Company determined that it was
probable that there would be an unfavorable outcome with respect
to this matter in excess of established reserves and legal
reserves were accordingly increased.  In December of 1995,
a decision was entered in the matter of Amwest Surety Insurance
Company v. Pete Wilson, et al.  In that case, the Supreme Court
of the State of California determined that surety insurance
would be subject to Proposition 103.  There were hearings
pursuant to the above-referenced Notice of Hearing during May
and June of 1996 at which the California Department of Insurance
("DOI") asserted that the rollback obligation of Highlands
and Highlands Underwriters Insurance Company was $3.9 million,
plus interest, for a total amount of $6.5 million.  In
connection with such hearing, the administrative law judge is
expected to render a decision regarding the Company's rollback
liability during the last quarter of 1996.  Subsequent to the
June, 1996 hearing, the Company re-evaluated its legal reserves,
and such reserves were increased by $1 million to reflect the
Company's current estimate of its most probable loss.  The
Company continues to believe that it has meritorious defenses
to a rollback liability, and if the decision of the
administrative law judge at the referenced hearing is adverse
to the Company, it is the current intention of the Company
to appeal such decision.

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

          (12) Computation of Earnings Per Share (page 28)

          (27) Financial Data Schedule (Filed Electronically)

     b)   The Registrant filed a Form 8-K Current Report, dated
          January 23, 1996, pertaining to the Registrant's press 
          release of the Registrant's spin-off from Halliburton
          Company.
     
          The Registrant filed a Form 8-K Current Report, dated
          March 8, 1996 pertaining to the Registrant's press
          release reporting the results of operations for the
          three months and twelve months ended December 31, 1995,
          and certain other selected financial data.

          The Registrant filed a Form 8-K Current Report, dated
          May 14, 1996 pertaining to the Registrants' press
          release reporting the results of operations for the
          three months ended March 31, 1996, and certain other
          selected financial data.
          
          The Registrant filed a Form 8-K Current Report, dated
          June 21, 1996 pertaining to the Registrant's press
          release of its agreement to acquire VIK Brothers
          Insurance Inc.
          
          The Registrant filed a Form 8-K Current Report, dated
          August 30, 1996, pertaining to changes in Registrant's
          certifying accountant.


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 7, 1996   By   /s/  Richard M. Haverland
                                --------------------
                                Richard M. Haverland
                                Chairman, President and Chief
                                Executive Officer
                                (Authorized Signatory)

Date:        November 7, 1996   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 (LOSS) PER SHARE
                                
          (In thousands, except for per share amounts)
<CAPTION>
                                
                               Three Months Ended    Nine Months Ended
                                 September 30,         September 30,
                               ------------------     ----------------
                                1996       1995       1996       1995
                               --------  --------   --------   --------
<S>                            <C>       <C>         <C>       <C>
                            
EARNINGS (LOSS):                                                   
Primary (1):                                                  
Net income (loss), as         $ 1,233   $(123,243)  $(2,059)  $(118,065)
   reported                  ========    ========  ========    ========
Fully diluted (1)(2):                                         
Net income (loss), as       
   reported                   $ 1,233   $(123,243)  $(2,059)  $(118,065)
                             ========    ========   ========   ========
                                                              
SHARES:                                                       
                                                              
Primary(1):
Number of common shares       
   outstanding, per
   consolidated financial
   statements                  11,448     11,448      11,448    11,448
                              ========   ========   ========   ========
                        
                                                              
Fully diluted(1)(2):                                          
Weighted average number of   
   common shares outstanding,
   per consolidated financial
   statements                  11,448     11,448      11,448    11,448
                             ========   ========    ========  ========
                            
                                                              
EARNINGS PER COMMON SHARE:                                    
  Primary                     $   .11   $(10.77)    $  (.18)  $ (10.31)
                             ========   ========    ========  ========
  Fully diluted               $   .11   $(10.77)    $  (.18)  $ (10.31)
                             ========   ========    ========  ========
                                
1. Common stock purchase warrants and stock options are
   considered common stock equivalents and were antidilutive for
   the periods presented.
                                
2. The assumed effects (issuance of common stock and elimination
   of debt expense from results of operations) of the conversion
   of the convertible subordinated debt were antidilutive for all
   periods presented.
</TABLE>