Highlands is usually called the best song on Time out of Mind (=TOOM) (even by those who would say there are only 3 other good ones on it), and has generated a lot of analysis and discussion on the message boards of www.bobdylan.com - which seem to have been removed, possibly in an attempt to increase world GDP by getting thousands of people to stop surfing and get on with their work. Although it lasts 16 minutes (longer than it took the world to end in 'Desolation Row'), it is vague enough in specifics to be open to different readings. Essentially it is a song of dislocation and loss, contrasting a realistic urban landscape with an imagined, and probably mythical, Highlands; interspersed with a long and inconclusive conversation with a waitress.
The song has usually been interpreted as a depiction of breakdown as loss-of-moral-worth (in contrast to the 'downer' albums Planet Waves and Blood on the Tracks, which, despite their desperation, affirm the redemptive power of love, TOOM explores damnation as a result of past rejection of love), with the waitress episode as a lighter moment.
But before we get there, he says:
"I'm listening to Neil Young, gotta turn up the sound
Someone's always telling me to turn it down"
which is a situation familiar to any NY fan in a non-fan household. If this is Bob talking (and it sounds like it), it makes you wonder what he's listening to - my bet would be the title track from On the Beach, the third (and least obviously doomy) of his Doom trilogy: this long, flowing, eloquent exposition of urban breakdown contrasted with an imagined escaped to the beach is similar both musically and lyrically:
"The world is turning, I hope it don't turn away"
"I need a crowd of people, I can't face them day-to-day"
"I came to the radio interview, ended up alone at the microphone"
"Though my problems are meaningless, that don't make them go away"
One of the first verses to "Highlands" includes:
"Don't want nothing from no-one, ain't much to take
Wouldn't know the difference between a real blonde and a fake"
These lines have been criticised as poor, part of the lazy versifying that crops up elsewhere on the album (by Michael Gray in his usually-sound Song and Dance Man III). Technically, it's a bit strange: you have an awkward first line and a weak second line, or vice versa; in his delivery, Dylan has to hurry to fit the second line in with the tune, when it could lose some syllables instead. As an example of indifference it is specific without being very enlightening.
But I'd turn this around. It was the second line Dylan wanted, even if it didn't fit: the first line is the make-weight, although it does in fact reinforce the theme, which echoes the line in TOOM's 'Not Dark Yet':
"I'm not looking for nothing in anyone's eyes"
Because what IS the difference between a real blonde and a fake? The answer is that fake blondes only dye the hair on their heads. [on both TOOM and Love and Theft he has re-discovered his liking for including obscene and sexually explicit references, often derived from blues usage]. So what he is saying is that he is unlikely to be in a position to find out whether any blondes he meets are fake or not, because he feels cut off from sexual / romantic contact. In this context, the chat with the waitress is the opposite of flirting: it is sparring leading nowhere because he wouldn't want it to, going through the motions.
And so where are the Highlands? I think that they represent the state where he has cut himself off from life and love, and has come to terms with it, almost a regression to a pre-adolescent sexless state in which a hunting trip looking for deer in the woods was as good as it got.
And therefore, by re-interpreting this line the song can be seen to fall in with the main theme of the album, finding out how to live without love.