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

                                    FORM 10-K
                                   [Mark One]
[X]  ANNUAL  REPORT  PURSUANT  TO  SECTION  13 OR 15(d)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934

     For the fiscal  year  ended  December  31,  2007
                                       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 0-17071

                           FIRST MERCHANTS CORPORATION

             (Exact name of registrant as specified in its charter)

            Indiana                                              35-1544218
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)

       200 East Jackson                                          47305-2814
        Muncie, Indiana                                          (Zip Code)

(Address of principal executive offices)

       Registrant's telephone number, including area code: (765) 747-1500

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12 (g) of the Act:

                   Common Stock, $.125 stated value per share

                                (Title of class)

     Indicate by check mark if the registrant is a well-known  seasoned  issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

     Indicate by check mark if the  registrant  is not  required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

     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 reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

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

     Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated  filer, a non-accelerated  filer, or a smaller reporting company.
See the definition of "large accelerated filer,""accelerated filer,"and "smaller
reporting company".  Rule 12b-2 of the Exchange Act. Large accelerated filer [ ]
Accelerated filer[X] Non-accelerated filer[ ] Smaller Reporting Company [ ]

     Indicate  by check mark  whether  the  registrant  is a shell  company  (as
defined in Rule 12b-2 of the Act). Yes [ ] No[X]

     The aggregate  market value (not  necessarily a reliable  indication of the
price at which more than a limited  number of shares  would trade) of the voting
stock held by  non-affiliates  of the registrant was $439,397,000 as of the last
business day of the registrant's  most recently  completed second fiscal quarter
(June 30, 2007).

     As of February 20, 2008 there were  18,551,275  outstanding  common shares,
without par value, of the registrant.

                       DOCUMENTS INCORPORATED BY REFERENCE

             Documents                                Part of Form 10-K
           ------------                            into which incorporated
Portions of the Registrant's Definitive          --------------------------
Proxy Statement for Annual Meeting of           Part III (Items 10 through 14)
Shareholders to be held April 29, 2008

                                     Page 1
<PAGE>
TABLE OF CONTENTS


FIRST MERCHANTS CORPORATION
-------------------------------------------------------------------------------

Five-Year Summary of Selected Financial Data                             3

Statement Regarding Forward-Looking Statements                           4

PART I
         Item 1.           Business                                      5
         Item 1A.          Risk Factors                                 21
         Item 1B.          Unresolved Staff Comments                    24
         Item 2.           Properties                                   25
         Item 3.           Legal Proceedings                            25
         Item 4.           Submission of Matters to a
                           Vote of Security Holders                     25
                           Supplemental Information -
                           Executive Officers of the Registrant         26

PART II
         Item 5.           Market for Registrant's Common Equity,
                           Related Stockholder Matters and Issuer
                           Purchases of Equity Securities               27
         Item 6.           Selected Financial Data                      29
         Item 7.           Management's Discussion and Analysis of
                           Financial Condition and Results
                           of Operations                                30
         Item 7A.          Quantitative and Qualitative Disclosure
                           about Market Risk                            41
         Item 8.           Financial Statements and Supplementary Data  42
         Item 9.           Changes in and Disagreements with
                           Accountants on Accounting and Financial
                           Disclosure                                   71
         Item 9A.          Controls and Procedures                      71
         Item 9B.          Other Information                            72

PART III
         Item 10.          Directors, Executive Officers and
                           Corporate Governance                         73
         Item 11.          Executive Compensation                       73
         Item 12.          Security Ownership of Certain Beneficial
                           Owners and Management and Related
                           Stockholder Matters                          73
         Item 13.          Certain Relationships and Related
                           Transactions                                 73
         Item 14.          Principal Accountant Fees and Services       73

PART IV
         Item 15.          Exhibits and Financial Statement Schedules   74


                                     Page 2
<PAGE>
<Table>
<Caption>

FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
==================================================================================================================================
(Dollars in Thousands, except share data)                      2007           2006           2005           2004           2003
==================================================================================================================================

                                                            <c>            <c>            <c>             <c>              <c>
Operations
Net Interest Income
     Fully Taxable Equivalent (FTE) Basis ..............   $  117,247     $  114,076     $  114,907     $  108,986     $  106,899
Less Tax Equivalent Adjustment .........................        4,127          3,981          3,778          3,597          3,757
                                                           ----------     ----------     ----------     ----------     ----------
Net Interest Income ....................................      113,120        110,095        111,129        105,389        103,142
Provision for Loan Losses ..............................        8,507          6,258          8,354          5,705          9,477
                                                           ----------     ----------     ----------     ----------     ----------
Net Interest Income
     After Provision for Loan Losses ...................      104,613        103,837        102,775         99,684         93,665
Total Other Income .....................................       40,551         34,613         34,717         34,554         35,902
Total Other Expenses ...................................      102,182         96,057         93,957         91,642         91,279
                                                           ----------     ----------     ----------     ----------     ----------
     Income Before Income Tax Expense ..................       42,982         42,393         43,535         42,596         38,288
Income Tax Expense .....................................       11,343         12,195         13,296         13,185         10,717
                                                           ----------     ----------     ----------     ----------     ----------
Net Income .............................................   $   31,639     $   30,198     $   30,239     $   29,411     $   27,571
                                                           ==========     ==========     ==========     ==========     ==========
Per Share Data<F1>
Basic Net Income .......................................   $     1.73     $     1.64     $     1.64     $     1.59     $     1.51
Diluted Net Income .....................................         1.73           1.64           1.63           1.58           1.50
Cash Dividends Paid ....................................          .92            .92            .92            .92            .90
December 31 Book Value .................................        18.88          17.75          17.02          16.93          16.42
December 31 Market Value (Bid Price) ...................        21.84          27.19          26.00          28.30          25.51

Average Balances
Total Assets ...........................................   $3,639,772     $3,371,386     $3,179,464     $3,109,104     $2,960,195
Total Loans<F2>........ ................................    2,794,824      2,569,847      2,434,134      2,369,017      2,281,614
Total Deposits .........................................    2,752,443      2,568,070      2,418,752      2,365,306      2,257,075
Securities Sold Under Repurchase Agreements
     (long-term portion) ...............................                                                       181
Total Federal Home Loan Bank Advances ..................      259,463        234,629        227,311        225,375        208,733
Total Subordinated Debentures, Revolving
      Credit Lines and Term Loans ......................      104,680         99,456        106,811         96,230         94,203
Total Stockholders' Equity .............................      330,786        319,519        315,525        310,004        293,603

Year-end Balances
Total Assets ...........................................   $3,782,087     $3,554,870     $3,237,079     $3,191,668     $3,076,812
Total Loans <F2>........................................    2,880,578      2,698,014      2,462,337      2,431,418      2,356,546
Total Deposits .........................................    2,884,121      2,750,538      2,382,576      2,408,150      2,362,101
Securities Sold Under Repurchase Agreements
      (long-term portion) ..............................                                                       320
Total Federal Home Loan Bank Advances ..................      294,101        242,408        247,865        223,663        212,779
Total Subordinated Debentures, Revolving
      Credit Lines and Term Loans ......................      115,826         83,956        103,956         97,206         97,782
Total Stockholders' Equity .............................      339,936        327,325        313,396        314,603        303,965

Financial Ratios
Return on Average Assets ...............................          .87%           .90%           .95%           .95%           .93%
Return on Average Stockholders' Equity .................         9.56           9.45           9.58           9.49           9.39
Average Earning Assets to Total Assets .................        90.91          91.15          90.93          90.28          89.99
Allowance for Loan Losses as % of Total Loans ..........          .98            .99           1.02            .93           1.08
Dividend Payout Ratio ..................................        53.18          56.10          56.44          58.23          60.00
Average Stockholders' Equity to Average Assets .........         9.09           9.48           9.92           9.97           9.92
Tax Equivalent Yield on Earning Assets  ................         7.10           6.92           6.26           5.72           5.98
Cost of Supporting Liabilities .........................         3.55           3.21           2.29           1.84           1.97
Net Interest Margin on Earning Assets ..................         3.55           3.71           3.97           3.88           4.01
<FN>
<F1>Restated for all stock  dividends and stock splits.
<F2>Includes loans held for sale.
</FN>
</table>

                                     Page 3
<PAGE>
FORWARD-LOOKING STATEMENTS

First  Merchants   Corporation   ("Corporation")  from  time  to  time  includes
forward-looking   statements  in  its  oral  and  written   communication.   The
Corporation  may  include   forward-looking   statements  in  filings  with  the
Securities  and Exchange  Commission,  such as Form 10-K and Form 10-Q, in other
written  materials and in oral statements made by senior management to analysts,
investors,  representatives  of the media and others.  The  Corporation  intends
these forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995,  and the  Corporation  is including  this statement for purposes of
these safe harbor provisions. Forward-looking statements can often be identified
by  the  use  of  words  like  "believe",  "continue",   "pattern",  "estimate",
"project", "intend", "anticipate", "expect" and similar expressions or future or
conditional verbs such as "will", "would",  "should",  "could",  "might", "can",
"may" or similar expressions. These forward-looking statements include:

o    statements of the Corporation's goals, intentions and expectations;
o    statements regarding the Corporation's business plan and growth strategies;
o    statements  regarding  the  asset  quality  of the  Corporation's  loan and
     investment  portfolios;  and
o    estimates of the Corporation's risks and future costs and benefits.

These forward-looking  statements are subject to significant risks,  assumptions
and uncertainties,  including,  among other things,  those discussed in Item 1A,
"RISK FACTORS".

Because  of these and  other  uncertainties,  the  Corporation's  actual  future
results  may be  materially  different  from  the  results  indicated  by  these
forward-looking  statements.  In  addition,  the  Corporation's  past results of
operations do not necessarily indicate its future results.


                                     Page 4

<PAGE>
PART I: ITEM 1. BUSINESS


PART I

Item 1. BUSINESS

GENERAL

First Merchants  Corporation (the  "Corporation") is a financial holding company
headquartered in Muncie,  Indiana.  The Corporation's  Common Stock is traded on
NASDAQ's  National  Market  System  under the symbol FRME and was  organized  in
September  1982.  Since its  organization,  the Corporation has grown to include
four affiliate banks with sixty-six  banking  locations in eighteen Indiana and
three Ohio  counties.  In  addition  to its branch  network,  the  Corporation's
delivery channels include ATMs, check cards,  interactive voice response systems
and internet  technology.  The Corporation's  business  activities are currently
limited to one significant business segment, which is community banking.

The bank subsidiaries of the Corporation include the following:

o    First Merchants Bank, National Association ("First Merchants") in Delaware,
     Hamilton, Marion, Henry, Randolph, Union, Fayette, Wayne, Butler (OH), Jay,
     Adams, Wabash, Howard and Miami counties;

o    First Merchants Bank of Central  Indiana,  National  Association  ("Central
     Indiana") in Madison County;

o    Lafayette Bank and Trust Company,  National Association  ("Lafayette"),  in
     Tippecanoe, Carroll, Jasper, and White counties; and

o    Commerce  National Bank  ("Commerce") in Franklin and Hamilton  counties in
     Ohio.

The Corporation operates First Merchants Trust Company, National Association,  a
trust and asset management services company. The Corporation also operates First
Merchants Insurance Services, Inc., a full-service property,  casualty, personal
lines, and employee benefit insurance agency  headquartered in Muncie,  Indiana.
The Corporation is also the majority owner of Indiana Title  Insurance  Company,
LLC, which is a full-service  title insurance agency.  The Corporation  operates
First  Merchants  Reinsurance Co. Ltd., a small life  reinsurance  company whose
primary business includes underwriting  short-duration  contracts of credit life
and accidental and health insurance  policies and debt  cancellation  contracts.
Such policies and contracts are purchased by the Corporation's bank customers to
cover the amount of debt  incurred by the  insured.  No policies  are issued for
loans other than those  originated  by the  subsidiary  banks.  First  Merchants
Reinsurance  Co. Ltd.  limits its  self-insurance  risk to the first  $15,000 of
exposure  under each credit life policy and $350 per month on each  accident and
health policy. The company maintains the same standard for its debt cancellation
contracts.  The total  self-insurance  exposure as of December  31, 2007 totaled
$22.5  million.  All  inter-company   transactions  are  eliminated  during  the
preparation of consolidated financial statements.

On April 1, 2007, the  Corporation  combined five of its bank charters into one.
Frances Slocum Bank & Trust Company, National Association,  Decatur Bank & Trust
Company,  National  Association,  The First National Bank of Portland and United
Communities National Bank combined with First Merchants Bank, N.A. Also on April
1, 2007, the name of The Madison  Community Bank was changed to First  Merchants
Bank of Central Indiana, National Association.

As of  December  31,  2007,  the  Corporation  had  consolidated  assets of $3.8
billion,  consolidated deposits of $2.8 billion and stockholders' equity of $340
million.  The Corporation is presently engaged in conducting  commercial banking
business  through the offices of its four banking  subsidiaries.  As of December
31, 2007, the Corporation and its  subsidiaries  had 1,121 full-time  equivalent
employees.

Through its bank subsidiaries, the Corporation offers a broad range of financial
services,   including  accepting  time,  savings  and  demand  deposits;  making
consumer, commercial, agri-business and real estate mortgage loans; renting safe
deposit facilities;  providing personal and corporate trust services;  providing
full-service  brokerage;  and providing  other  corporate  services,  letters of
credit and repurchase  agreements.  Through various non-bank  subsidiaries,  the
Corporation  also offers personal and commercial  lines of insurance and engages
in the title agency business and the reinsurance of credit life,  accident,  and
health insurance.

AVAILABLE INFORMATION

The Corporation makes its Annual Report on Form 10-K,  Quarterly Reports on Form
10-Q,  Current  Reports on Form 8-K and  amendments  to those  reports  filed or
furnished  pursuant to Section 13(a) or 15(d) of the Securities  Exchange Act of
1934,  as amended,  available on its website at  www.firstmerchants.com  without
charge, as soon as reasonably  practicable after such reports are electronically
filed with,  or furnished  to, the  Securities  and Exchange  Commission.  These
documents  can  also  be  read  and  copied  at  the   Securities  and  Exchange
Commission's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549.

                                     Page 5
<page>
PART I: ITEM 1. BUSINESS


GENERAL continued

Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further
information on the public  reference room. Our SEC filings are also available to
the   public  at  the   Securities   and   Exchange   Commission's   website  at
http://www.sec.gov.  Additionally,  the  Corporation  will also provide  without
charge,  a copy of its Annual  Report on Form 10-K to any  shareholder  by mail.
Requests  should be sent to Ms. Cindy Holaday,  Shareholder  Relations  Officer,
First Merchants Corporation, P.O. Box 792, Muncie, IN 47308-0792.

ACQUISITION POLICY

The  Corporation  anticipates  that it will  continue  its policy of  geographic
expansion  of its  banking  business  through  the  acquisition  of banks  whose
operations  are consistent  with its community  banking  philosophy.  Management
routinely  explores  opportunities to acquire  financial  institutions and other
financial  services-related  businesses and to enter into strategic alliances to
expand the scope of its services and its customer base.

COMPETITION

The Corporation's  banking subsidiaries are located in Indiana and Ohio counties
where other financial  services  companies provide similar banking services.  In
addition to the  competition  provided  by the  lending  and  deposit  gathering
subsidiaries  of national  manufacturers,  retailers,  insurance  companies  and
investment  brokers,  the banking  subsidiaries  compete  vigorously  with other
banks, thrift  institutions,  credit unions and finance companies located within
their service areas.

REGULATION AND SUPERVISION OF FIRST MERCHANTS CORPORATION AND SUBSIDIARIES

BANK HOLDING COMPANY REGULATION

The  Corporation is registered as a bank holding company and has elected to be a
financial  holding company.  It is subject to the supervision of, and regulation
by the Board of  Governors of the Federal  Reserve  System  ("Federal  Reserve")
under the Bank Holding  Company Act of 1956,  as amended  (the "BHC Act").  Bank
holding  companies are required to file periodic reports with and are subject to
periodic  examination  by the Federal  Reserve.  The Federal  Reserve has issued
regulations  under the BHC Act  requiring a bank  holding  company to serve as a
source of financial and managerial strength to its subsidiary banks. Thus, it is
the policy of the Federal Reserve that a bank holding company should stand ready
to use its resources to provide  adequate  capital funds to its subsidiary banks
during periods of financial stress or adversity. Additionally, under the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), a bank holding
company is required to guarantee the compliance of any subsidiary  bank that may
become  "undercapitalized"  (as defined in the FDICIA section of this Form 10-K)
with the terms of any capital restoration plan filed by such subsidiary with its
appropriate  federal banking agency.  Under the BHC Act, the Federal Reserve has
the  authority  to require a bank holding  company to terminate  any activity or
relinquish control of a non-bank subsidiary (other than a non-bank subsidiary of
a bank) upon the determination that such activity  constitutes a serious risk to
the financial stability of any bank subsidiary.

The BHC Act requires the Corporation to obtain the prior approval of the Federal
Reserve before:

1.   Acquiring  direct or indirect  control or ownership of any voting shares of
     any bank or bank  holding  company  if,  after such  acquisition,  the bank
     holding  company will directly or indirectly own or control more than 5% of
     the voting shares of the bank or bank holding company;
2.   Merging or consolidating with another bank holding company; or
3.   Acquiring substantially all of the assets of any bank.

The BHC Act  generally  prohibits  bank holding  companies  that have not become
financial  holding  companies from (i) engaging in activities other than banking
or managing or controlling  banks or other  permissible  subsidiaries,  and (ii)
acquiring or retaining  direct or indirect control of any company engaged in the
activities other than those  activities  determined by the Federal Reserve to be
closely related to banking or managing or controlling banks.

The BHC Act does not place territorial  restrictions on such non-banking related
activities.

CAPITAL ADEQUACY GUIDELINES FOR BANK HOLDING COMPANIES

The  Corporation  is required to comply  with the Federal  Reserve's  risk-based
capital  guidelines.  These  guidelines  require a minimum  ratio of  capital to
risk-weighted  assets of 8% (including certain off-balance sheet activities such
as standby letters of credit).  At least half of the total required capital must
be  "Tier  1  capital,"   consisting   principally  of   stockholders'   equity,
noncumulative   perpetual  preferred  stock,  a  limited  amount  of  cumulative
perpetual  preferred  stock and  minority  interest  in the equity  accounts  of
consolidated  subsidiaries,  less certain  goodwill  items.  The  remainder  may
consist of a limited amount of subordinate debt and intermediate-term  preferred
stock, certain hybrid capital instruments and other debt securities,  cumulative
perpetual  preferred  stock,  and a  limited  amount  of the  general  loan loss
allowance.


                                     Page 6
<PAGE>
PART I: ITEM 1. BUSINESS


CAPITAL ADEQUACY GUIDELINES FOR BANK HOLDING COMPANIES continued

In addition  to the  risk-based  capital  guidelines,  the  Federal  Reserve has
adopted a Tier 1  (leverage)  capital  ratio  under which the  Corporation  must
maintain a minimum level of Tier 1 capital to average total consolidated assets.
The ratio is 3% in the case of bank  holding  companies,  which have the highest
regulatory  examination ratings and are not contemplating  significant growth or
expansion.  All other bank holding companies are expected to maintain a ratio of
at least 1% to 2% above the stated minimum.

The following are the Corporation's regulatory capital ratios as of December 31,
2007:
<table>
<caption>
=============================================================================
                               Regulatory Minimum
                                      Corporation            Requirement
=============================================================================
<S>                                        <c>                   <c>
Tier 1 Capital:                           8.8%                  4.0%
(to Risk-weighted Assets)

Total Capital:                           10.6%                  8.0%

</table>

BANK REGULATION

Each  of  the  Corporation's  bank  subsidiaries  are  national  banks  and  are
supervised,  regulated  and  examined  by the Office of the  Comptroller  of the
Currency (the "OCC"). The OCC has the authority to issue cease-and-desist orders
if it determines that  activities of the bank regularly  represent an unsafe and
unsound  banking  practice  or a  violation  of  law.  Federal  law  extensively
regulates various aspects of the banking business such as reserve  requirements,
truth-in-lending  and  truth-in-savings  disclosures,  equal credit opportunity,
fair  credit  reporting,  trading  in  securities  and other  aspects of banking
operations. Current federal law also requires banks, among other things, to make
deposited funds available within specified time periods.

BANK CAPITAL REQUIREMENTS

The OCC has adopted  risk-based capital ratio guidelines to which national banks
are subject.  The guidelines establish a framework that makes regulatory capital
requirements more sensitive to differences in risk profiles.  Risk-based capital
ratios are  determined by  allocating  assets and  specified  off-balance  sheet
commitments  to four  risk-weighted  categories,  with higher  levels of capital
being required for the categories perceived as representing greater risk.

Like the capital guidelines established by the Federal Reserve, these guidelines
divide a bank's  capital  into  tiers.  Banks are  required  to maintain a total
risk-based  capital  ratio  of 8%.  The OCC may,  however,  set  higher  capital
requirements when a bank's particular  circumstances warrant. Banks experiencing
or  anticipating  significant  growth are expected to maintain  capital  ratios,
including tangible capital positions, well above the minimum levels.

In  addition,  the OCC  established  guidelines  prescribing  a  minimum  Tier 1
leverage  ratio (Tier 1 capital to adjusted  total  assets as  specified  in the
guidelines).  These guidelines provide for a minimum Tier 1 leverage ratio of 3%
for banks that meet  specified  criteria,  including  that they have the highest
regulatory rating and are not experiencing or anticipating  significant  growth.
All other banks are  required to maintain a Tier 1 leverage  ratio of 3% plus an
additional 100 to 200 basis points.

All  of  the  Corporation's   affiliate  banks  exceed  the  risk-based  capital
guidelines of the OCC as of December 31, 2007.

FDIC IMPROVEMENT ACT OF 1991

The Federal  Deposit  Insurance  Corporation  Improvement Act of 1991 ("FDICIA")
requires,  among other  things,  federal  bank  regulatory  authorities  to take
"prompt  corrective  action"  with  respect to banks,  which do not meet minimum
capital requirements. For these purposes, FDICIA establishes five capital tiers:
well  capitalized,  adequately  capitalized,   undercapitalized,   significantly
undercapitalized   and  critically   undercapitalized.   The  FDIC  has  adopted
regulations to implement the prompt corrective action provisions of FDICIA.

"Undercapitalized"  banks are subject to growth  limitations and are required to
submit a  capital  restoration  plan.  A bank's  compliance  with  such  plan is
required  to  be  guaranteed  by  the  bank's  parent  holding  company.  If  an
"undercapitalized"  bank fails to submit an acceptable plan, it is treated as if
it is significantly

                                     Page 7
<page>
PART 1: ITEM 1. BUSINESS


FDIC IMPROVEMENT ACT OF 1991 continued

undercapitalized.  "Significantly  undercapitalized" banks are subject to one or
more  restrictions,  including  an order by the FDIC to sell  sufficient  voting
stock to become adequately capitalized,  requirements to reduce total assets and
cease  receipt  of  deposits  from  correspondent  banks,  and  restrictions  on
compensation of executive officers.  "Critically undercapitalized"  institutions
may not, beginning 60 days after becoming  "critically  undercapitalized,"  make
any payment of  principal  or interest  on certain  subordinated  debt or extend
credit for a highly leveraged  transaction or enter into any transaction outside
the ordinary  course of business.  In  addition,  "critically  undercapitalized"
institutions are subject to appointment of a receiver or conservator.

As of December  31,  2007,  each bank  subsidiary  of First  Merchants  is "well
capitalized"  based on the  "prompt  corrective  action"  ratios  and  deadlines
described above. It should be noted,  however, that a bank's capital category is
determined  solely for the  purpose of  applying  the OCC's  "prompt  corrective
action" regulations and that the capital category may not constitute an accurate
representation of the bank's overall financial condition or prospects.

DEPOSIT INSURANCE

The  Corporation's  affiliated banks are insured up to regulatory  limits by the
FDIC; and, accordingly, are subject to deposit insurance assessments to maintain
the Bank Insurance Fund (the "BIF") and the Savings  Association  Insurance Fund
("SAIF") administered by the FDIC. The FDIC has adopted regulations establishing
a permanent risk-related deposit insurance assessment system. Under this system,
the FDIC places each  insured bank in one of nine risk  categories  based on (i)
the bank's capitalization, and (ii) supervisory evaluations provided to the FDIC
by the institution's  primary federal  regulator.  Each insured bank's insurance
assessment  rate  is  then  determined  by the  risk  category  in  which  it is
classified by the FDIC.

DIVIDEND LIMITATIONS

National  banking laws restrict the amount of dividends  that an affiliate  bank
may declare in a year without  obtaining  prior  regulatory  approval.  National
banks are limited to the bank's retained net income (as defined) for the current
year  plus  those  for the  previous  two  years.  At  December  31,  2007,  the
Corporation's  affiliate  banks had a total of $40,084,000  retained net profits
available  for  2008  dividends  to the  Corporation  without  prior  regulatory
approval.

BROKERED DEPOSITS

Under  FDIC  regulations,  no  FDIC-insured  depository  institution  can accept
brokered  deposits  unless  it (i) is well  capitalized,  or (ii) is  adequately
capitalized and received a waiver from the FDIC. In addition,  these regulations
prohibit any depository institution that is not well capitalized from (a) paying
an  interest  rate on  deposits  in  excess  of 76  basis  points  over  certain
prevailing  market rates or (b) offering  "pass  through"  deposit  insurance on
certain  employee  benefit plan accounts  unless it provides  certain  notice to
affected depositors.

INTERSTATE BANKING AND BRANCHING

Under the Riegle-Neal  Interstate  Banking and Branching  Efficiency Act of 1994
("Riegle-Neal"),  subject to certain concentration  limits,  required regulatory
approvals and other  requirements,  (i) financial  holding companies such as the
Corporation are permitted to acquire banks and bank holding companies located in
any  state;  (ii) any bank that is a  subsidiary  of a bank  holding  company is
permitted to receive deposits,  renew time deposits,  close loans, service loans
and  receive  loan  payments as an agent for any other bank  subsidiary  of that
holding company; and (iii) banks are permitted to acquire branch offices outside
their home states by merging with  out-of-state  banks,  purchasing  branches in
other states, and establishing de novo branch offices in other states.

FINANCIAL SERVICES MODERNIZATION ACT

The  Gramm-Leach-Bliley Act of 1999 (the "Financial Services Modernization Act")
establishes a comprehensive  framework to permit  affiliations  among commercial
banks,  insurance  companies,  securities  firms,  and other  financial  service
providers  by  revising  and  expanding   the  existing  BHC  Act.   Under  this
legislation,  bank holding  companies would be permitted to conduct  essentially
unlimited  securities  and  insurance  activities  as well as  other  activities
determined by the Federal  Reserve Board to be financial in nature or related to
financial  services.  As a result, the Corporation is able to provide securities
and insurance services.  Furthermore, under this legislation, the Corporation is
able to acquire, or be acquired, by brokerage and

                                     Page 8
<page>
PART I: ITEM 1. BUSINESS


FINANCIAL SERVICES MODERNIZATION ACT continued

securities firms and insurance underwriters. In addition, the Financial Services
Modernization  Act  broadens  the  activities  that may be conducted by national
banks through the formation of financial  subsidiaries.  Finally,  the Financial
Services Modernization Act modifies the laws governing the implementation of the
Community Reinvestment Act and addresses a variety of other legal and regulatory
issues  affecting  both  day-to-day   operations  and  long-term  activities  of
financial institutions.

A bank  holding  company may become a financial  holding  company if each of its
subsidiary  banks  is well  capitalized,  is  well  managed  and has at  least a
satisfactory   rating  under  the  Community   Reinvestment  Act,  by  filing  a
declaration  that the bank holding company wishes to become a financial  holding
company. Also effective March 11, 2000, no regulatory approval is required for a
financial  holding  company to  acquire a company,  other than a bank or savings
association, engaged in activities that are financial in nature or incidental to
activities  that are financial in nature,  as determined by the Federal  Reserve
Board.  The  Federal  Reserve  Bank  of  Chicago   approved  the   Corporation's
application to become a Financial Holding Company effective September 13, 2000.

USA PATRIOT ACT

As part of the USA Patriot Act,  signed into law on October 26,  2001,  Congress
adopted   the   International   Money   Laundering   Abatement   and   Financial
Anti-Terrorism  Act of 2001 (the "Act"). The Act authorizes the Secretary of the
Treasury,  in consultation with the heads of other government agencies, to adopt
special  measures  applicable  to  financial  institutions  such as banks,  bank
holding  companies,  broker-dealers  and  insurance  companies.  Among its other
provisions,  the Act requires each  financial  institution:  (i) to establish an
anti-money  laundering  program;  (ii)  to  establish  due  diligence  policies,
procedures  and  controls  that are  reasonably  designed  to detect  and report
instances of money  laundering in United  States  private  banking  accounts and
correspondent  accounts  maintained  for  non-United  States  persons  or  their
representatives; and (iii) to avoid establishing, maintaining, administering, or
managing  correspondent  accounts  in the United  States for, or on behalf of, a
foreign  shell bank that does not have a physical  presence in any  country.  In
addition,  the Act expands the circumstances under which funds in a bank account
may be forfeited and requires  covered  financial  institutions to respond under
certain  circumstances to requests for information from federal banking agencies
within 120 hours.

Treasury regulations  implementing the due diligence requirements were issued in
2002. These regulations  required minimum standards to verify customer identity,
encouraged cooperation among financial  institutions,  federal banking agencies,
and law enforcement authorities regarding possible money laundering or terrorist
activities,  prohibited  the  anonymous  use of  "concentration  accounts,"  and
required  all  covered  financial  institutions  to have in place an  anti-money
laundering compliance program.

The Act also  amended  the Bank  Holding  Company Act and the Bank Merger Act to
require  the  federal  banking  agencies  to  consider  the  effectiveness  of a
financial  institution's  anti-money  laundering  activities  when  reviewing an
application under these acts.

THE SARBANES-OXLEY ACT

The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley  Act"), which became law on July
30, 2002, added new legal requirements for public companies  affecting corporate
governance,  accounting and corporate reporting. The Sarbanes-Oxley Act provides
for, among other things:

o    a  prohibition  on  personal  loans made or  arranged  by the issuer to its
     directors and executive  officers  (except for loans made by a bank subject
     to Regulation O);

o    independence requirements for audit committee members;

o    independence requirements for company auditors;

o    certification of financial statements on Forms 10-K and 10-Q reports by the
     chief executive officer and the chief financial officer;

o    the forfeiture by the chief executive  officer and chief financial  officer
     of bonuses or other incentive-based  compensation and profits from the sale
     of an  issuer's  securities  by such  officers in the  twelve-month  period
     following  initial  publication  of any  financial  statements  that  later
     require restatement due to corporate misconduct;

o    disclosure of off-balance sheet transactions;

o    two-business day filing requirements for insiders filing Form 4s;

o    disclosure of a code of ethics for financial officers and filing a Form 8-K
     for a change in or waiver of such code;

                                     Page 9
<page>
PART I: ITEM 1. BUSINESS


THE SARBANES-OXLEY ACT continued

o    the reporting of securities violations "up the ladder" by both in-house and
     outside attorneys;

o    restrictions  on the use of non-GAAP  financial  measures in press releases
     and SEC filings;

o    the formation of a public accounting oversight board; and

o    various increased criminal penalties for violations of securities laws.

The  Sarbanes-Oxley  Act  contains  provisions,   which  became  effective  upon
enactment on July 30, 2002,  including  provisions,  which became effective from
within 30 days to one year from  enactment.  The SEC has been delegated the task
of enacting  rules to implement  various  provisions.  In addition,  each of the
national stock exchanges  developed new corporate  governance  rules,  including
rules strengthening director independence  requirements for boards, the adoption
of  corporate  governance  codes  and  charters  for the  nominating,  corporate
governance and audit committees.

ADDITIONAL MATTERS

The  Corporation and its affiliate banks are subject to the Federal Reserve Act,
which restricts financial  transactions between banks and affiliated  companies.
The statute limits credit transactions  between banks,  affiliated companies and
its executive  officers and its  affiliates.  The statute  prescribes  terms and
conditions for bank affiliate transactions deemed to be consistent with safe and
sound  banking  practices,  and  restricts  the  types  of  collateral  security
permitted in  connection  with the bank's  extension of credit to an  affiliate.
Additionally,  all transactions with an affiliate must be on terms substantially
the same or at least as favorable to the institution as those  prevailing at the
time for comparable transactions with non-affiliated parties.

In addition to the matters  discussed above, the  Corporation's  affiliate banks
are subject to additional regulation of their activities, including a variety of
consumer protection regulations affecting their lending,  deposit and collection
activities and regulations affecting secondary mortgage market activities.

The earnings of financial  institutions  are also  affected by general  economic
conditions and prevailing interest rates, both domestic and foreign,  and by the
monetary and fiscal  policies of the United  States  Government  and its various
agencies,  particularly the Federal Reserve.  The Federal Reserve  regulates the
supply of credit in order to influence  general economic  conditions,  primarily
through open market operations in United States government obligations,  varying
the  discount  rate  on  financial  institution   borrowings,   varying  reserve
requirements  against financial  institution  deposits,  and restricting certain
borrowings  by  financial  institutions  and their  subsidiaries.  The  monetary
policies of the Federal  Reserve have had a significant  effect on the operating
results of the bank  subsidiaries in the past and are expected to continue to do
so in the future.

Additional legislation and administrative actions affecting the banking industry
may be considered by the United States Congress,  state legislatures and various
regulatory  agencies,  including those referred to above. It cannot be predicted
with certainty whether such legislation or administrative action will be enacted
or the extent to which the banking  industry in general or the  Corporation  and
its affiliate banks in particular would be affected.

                                    Page 10
<page>
PART I: ITEM 1. BUSINESS


STATISTICAL DATA

The  following  tables set forth  statistical  data on the  Corporation  and its
subsidiaries.

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND
                             INTEREST DIFFERENTIAL

The daily average balance sheet amounts, the related interest income or expense,
and average rates earned or paid are presented in the following table:
<table>
<caption>
====================================================================================================================================
                                              Interest                        Interest                        Interest
                                   Average    Income/    Average   Average    Income/    Average   Average    Income/    Average
(Dollars in Thousands)             Balance    Balance     Rate     Balance    Balance     Rate     Balance    Balance     Rate
====================================================================================================================================
                                             2007                           2006                             2005
                                            -----                          -----                            -----

                                     <c>         <c>    <c>         <c>          <c>    <c>         <c>         <c>      <c>
Assets:
Federal Funds Sold ............   $    3,308    $    172   5.2%   $    6,983    $    373   5.3%   $    8,385    $    264   3.1%
Interest-bearing Deposits......       10,580         582   5.5         7,831         500   6.4        16,683         695   4.2
Federal Reserve and
  Federal Home Loan Bank Stock.       24,221       1,299   5.4        23,473       1,256   5.4        23,019       1,185   5.1
Securities: <F1>
  Taxable .......................    300,854      13,744   4.6       289,692      12,316   4.3       263,435       9,612   3.6
  Tax-exempt <F2>................    175,152      10,074   5.8       175,072      10,100   5.8       162,965       9,807   6.0
                                  ----------    --------          ----------    --------          ----------    --------
    Total Securities.............    476,006      23,818   5.0       464,764      22,416   4.8       426,400      19,419   4.6
Mortgage Loans Held for Sale.....      6,107         549   9.0         4,620         176   3.8         2,746         113   4.1
Loans: <F3>
  Commercial ....................  1,955,750     151,158   7.7     1,704,026     128,888   7.6     1,569,270     105,740   6.7
  Real Estate Mortgage...........    412,008      26,288   6.4       441,407      27,813   6.3       464,426      27,334   5.9
  Installment ...................    400,191      29,276   7.3       405,006      29,891   7.4       385,097      25,248   6.6
  Tax-exempt <F2>................     20,768       1,718   8.3        14,788       1,274   8.6        12,595         989   7.9
                                  ----------    --------          ----------    --------          ----------    --------
    Total Loans .................  2,794,824     208,989   7.5     2,569,847     188,042   7.3     2,434,134     159,424   6.5
                                  ----------    --------          ----------    --------          ----------    --------
    Total Earning Assets.........  3,308,939     234,860   7.1     3,072,898     212,587   6.9     2,908,621     180,987   6.3
                                  ----------    --------          ----------    --------          ----------    --------
Net Unrealized Gain (Loss) on Securities
    Available for Sale...........     (3,624)                         (7,353)                         (1,217)
Allowance for Loan Losses........    (27,495)                        (26,443)                        (24,889)
Cash and Due from Banks..........     64,571                          58,305                          53,037
Premises and Equipment ..........     43,945                          40,227                          38,284
Other Assets ....................    253,436                         233,752                         205,628
                                   ---------                       ---------                       ---------
    Total Assets ................ $3,639,772                      $3,371,386                      $3,179,464
                                  ==========                      ==========                      ==========
Liabilities:
Interest-bearing Deposits:
    NOW Accounts ................ $  490,908      11,034   2.2%   $  396,477       6,065   1.5%   $  395,356       2,058   0.5%
    Money Market Deposit Accounts    246,706       7,648   3.1       251,746       7,551   3.0       280,508       4,899   1.7
    Savings Deposits ............    264,134       4,604   1.7       259,052       3,927   1.5       319,552       2,583   0.8
    Certificates and Other
      Time Deposits .............  1,407,151      66,635   4.7     1,333,408      56,771   4.3     1,149,679      36,581   3.2
                                  ----------    --------          ----------    --------          ----------    --------
  Total Interest-bearing
    Deposits.....................  2,408,899      89,921   3.7     2,240,683      74,314   3.3     2,145,095      46,121   2.2

Borrowings ......................    515,562      27,692   5.4       445,806      24,197   5.4       412,091      19,959   4.8
                                  ----------    --------          ----------    --------          ----------    --------
    Total Interest-bearing
     Liabilities.................  2,924,461     117,613   4.0     2,686,489      98,511   3.7     2,557,186      66,080   2.6
Noninterest-bearing Deposits.....    343,544                         327,387                         273,657
Other Liabilities ...............     40,981                          37,991                          33,096
                                  ----------                      ----------                      ----------
    Total Liabilities............  3,308,986                       3,051,867                       2,863,939
Stockholders' Equity ............    330,786                         319,519                         315,525
                                  ----------                      ----------                      ----------
    Total Liabilities and
     Stockholders' Equity........ $3,639,772     117,613   3.6    $3,371,386      98,511   3.2    $3,179,464      66,080   2.3
                                  ==========    --------          ==========    --------          ==========    --------
    Net Interest Income .........               $117,247                        $114,076                        $114,907
                                                ========                        ========                        ========
    Net Interest Margin..........                          3.5                             3.7                             4.0
<FN>
<F1>Average  balance of  securities  is  computed  based on the  average of the
historical  amortized  cost  balances  without  the  effects  of the fair  value
adjustment.
<F2>Tax-exempt  securities and loans are presented on a fully taxable  equivalent
basis,  using a marginal tax rate of 35% from 2007, 2006, and 2005. Those totals
equal $4,127, $3,981 and $3,778, respectively.
<F3>Nonaccruing loans have been included in the average balances.
</FN>
</table>

                                    Page 11
<PAGE>
PART I: ITEM 1. BUSINESS


ANALYSIS OF CHANGES IN NET INTEREST INCOME

The following table presents net interest income components on a tax-equivalent
basis and reflects changes between periods attributable to movement in either
the average balance or average interest rate for both earning assets and
interest-bearing liabilities. The volume differences were computed as the
difference in volume between the current and prior year times the interest rate
of the prior year, while the interest rate changes were computed as the
difference in rate between the current and prior year times the volume of the
prior year. Volume/rate variances have been allocated on the basis of the
absolute relationship between volume variances and rate variances.
<table>
<caption>
====================================================================================================================================
(Dollars in Thousands on Fully                    2007 Compared to 2006                              2006 Compared to 2005
 Taxable Equivalent Basis)                     Increase (Decrease) Due To                         Increase (Decrease) Due To
====================================================================================================================================

                                        <c>           <c>            <c>                    <c>          <c>            <c>
                                          Volume         Rate          Total                 Volume         Rate          Total
                                         ========      ========       =======               ========      ========       =======


Interest Income:
  Federal Funds Sold ...............     $  (298)      $     97      $  (201)               $   (50)      $    159      $   109
  Interest-bearing Deposits ........         200           (118)          82                   (467)           272         (195)
  Federal Reserve and Federal
    Home Loan Bank Stock ...........          40              3           43                     24             47           71
  Securities .......................         550            852        1,402                  1,809          1,188        2,997
  Mortgage Loans Held for Sale .....          71            302          373                     72             (9)          63
  Loans ............................      16,640          3,934       20,574                  9,098         19,457       28,555
                                         --------      ---------    ---------               --------      ---------    ---------
  Totals ...........................      17,203          5,070       22,273                10,486         21,114       31,600
                                         --------      ---------    ---------               --------      ---------    ---------
Interest Expense:
  NOW Accounts .....................       1,673          3,296        4,969                      6          4,001        4,007
  Money Market Deposit
    Accounts........................        (153)           250           97                   (547)         3,199        2,652
  Savings Deposits..................          78            599          677                   (565)         1,909        1,344
  Certificates and Other
    Time Deposits...................       3,256          6,608        9,864                  6,480         13,710       20,190
  Borrowings........................       3,749           (254)       3,495                  1,713          2,525        4,238
                                         --------      ---------    ---------               --------      ---------    ---------
    Totals..........................       8,603         10,499       19,102                  7,087         25,344       32,431
                                         --------      ---------    ---------               --------      ---------    ---------

Change in Net Interest
  Income (Fully Taxable
  Equivalent Basis)................      $ 8,600       $ (5,429)   $   3,171                $ 3,399       $ (4,230)    $   (831)
                                         ========      =========                            ========      =========

Tax Equivalent Adjustment
  Using Marginal Rate
  of 35% for 2007, 2006,
  and 2005..........................                                    (146)                                             (203)
                                                                   ----------                                         ----------


Change in Net Interest
  Income...........................                                $   3,025                                          $  (1,034)
                                                                   =========                                          ==========
</table>
                                    Page 12
<page>
PART I: ITEM 1. BUSINESS


INVESTMENT SECURITIES

The  amortized  cost,  gross  unrealized  gains,  gross  unrealized  losses  and
approximate  market value of the  investment  securities at the dates  indicated
were:
<table>
<caption>
====================================================================================================================================
                                                                                          GROSS             GROSS
                                                                     AMORTIZED          UNREALIZED        UNREALIZED          FAIR
(Dollars in Thousands)                                                  COST              GAINS             LOSSES            VALUE
====================================================================================================================================

                                                                      <c>               <c>                 <c>             <c>
Available for Sale at December 31, 2007
   U.S. Treasury ...............................                    $   1,501           $     18                           $  1,519
   U.S. Government-sponsored Agency Securities..                       67,793                240         $     98            67,935
   State and Municipal .........................                      150,744              2,324              156           152,912
   Mortgage-backed Securities ..................                      199,591              1,654            1,444           199,801
   Corporate Obligations........ ...............                       13,740                               1,294            12,446
   Marketable Equity Securities ................                        6,835                                 612             6,223
                                                                     --------           --------         --------          --------
      Total Available for Sale .................                      440,204              4,236            3,604           440,836
                                                                     --------           --------         --------          --------

Held to Maturity at December 31, 2007
   State and Municipal .........................                       10,317                237              298            10,256
   Mortgage-backed Securities ..................                           14                                                    14
                                                                     --------           --------         --------          --------
      Total Held to Maturity ...................                       10,331                237              298            10,270
                                                                     --------           --------         --------          --------
      Total Investment Securities ..............                     $450,535           $  4,473         $  3,902          $451,106
                                                                     ========           ========         ========          ========

Available for Sale at December 31, 2006
   U.S. Treasury ..........................................          $  1,502          $      1                            $  1,503
   U.S. Government-sponsored Agency Securities ............            87,193                69          $  1,284            85,978
   State and Municipal ....................................           168,262             2,251               892           169,621
   Mortgage-backed Securities .............................           195,228               600             3,983           191,845
   Other Asset-backed Securities ..........................
   Marketable Equity Securities ...........................             7,296                                 310             6,986
                                                                     --------          --------          --------          --------
      Total Available for Sale ............................           459,481             2,921             6,469           455,933
                                                                     --------          --------          --------          --------

Held to Maturity at December 31, 2006
   State and Municipal ....................................             9,266               432               200             9,498
   Mortgage-backed Securities .............................                18                                                    18
                                                                     --------          --------          --------          --------
      Total Held to Maturity ..............................             9,284               432               200             9,516
                                                                     --------          --------          --------          --------
      Total Investment Securities .........................          $468,765          $  3,353          $  6,669          $465,449
                                                                     ========          ========          ========          ========

Available for Sale at December 31, 2005
   U.S. Treasury ..........................................          $  1,586                            $      1          $  1,585
   U.S. Government-sponsored Agency Securities ............            83,026          $      1             1,836            81,191
   State and Municipal ....................................           167,095             2,159             1,131           168,123
   Mortgage-backed Securities .............................           168,019               139             5,656           162,502
   Other Asset-backed Securities ..........................                 1                                                     1
   Marketable equity securities ...........................             9,660                                 435             9,225
                                                                     --------          --------          --------          --------
      Total Available for Sale ............................           429,387             2,299             9,059           422,627
                                                                     --------          --------          --------          --------

Held to Maturity at December 31, 2005
   State and Municipal ....................................            11,609               283               412            11,480
   Mortgage-backed Securities .............................                30                                                    30
                                                                     --------          --------          --------          --------
      Total Held to Maturity ..............................            11,639               283               412            11,510
                                                                     --------          --------          --------          --------
      Total Investment Securities .........................          $441,026          $  2,582          $  9,471          $434,137
                                                                     ========          ========          ========          ========
<caption>
====================================================================================================================================

(Dollars in Thousands)                                   Cost    Yield       Cost      Yield       Cost      Yield
====================================================================================================================================

                                                     <c>        <c>        <c>        <C>       <c>          <c>
                                                        2007                 2006                  2005
                                                       -----                -----                 -----
Federal Reserve and Federal Home Loan
   Bank Stock at December 31:
Federal Reserve Bank Stock ....................        $ 9,223      6.0%     $ 9,091      6.0%    $ 8,913       6.0%
Federal Home Loan Bank Stock ..................         16,027      4.3       14,600      4.3      14,287       4.3
                                                       -------               -------              -------
    Total .....................................        $25,250      4.9%     $23,691      4.9%    $23,200       4.9%
                                                       =======               =======              =======

The fair value of Federal Reserve and Federal Home Loan Bank stock approximates cost.
</table>
                                    Page 13
<page>
PART I: ITEM 1. BUSINESS


INVESTMENT SECURITIES continued

There were no issuers included in our investment  security portfolio at December
31,  2007,  2006 or 2005 where the  aggregate  carrying  value of any one issuer
exceeded 10 percent of the  Corporation's  stockholders'  equity at those dates.
The term "issuer"  excludes the U.S.  Government and its sponsored  agencies and
corporations.

The maturity  distribution  (Dollars in  Thousands)  and average  yields for the
securities portfolio at December 31, 2007 were:

Securities available for sale December 31, 2007:
<table>
<caption>
====================================================================================================================================
                                                       Within 1 Year                 1-5 Years                  5-10 Years
(Dollars in Thousands)                              Amount        Yield<F1>         Amount        Yield<F1>        Amount
Yield(1)
====================================================================================================================================

                                                  <c>            <c>          <c>           <c>          <c>             <c>
U.S. Treasury................................      $ 1,519          4.8%
U.S. Government-sponsored Agency Securities..       43,357          3.8       $ 24,479         4.7        $    99          4.6%
State and Municipal..........................       31,580          4.4         74,076         5.3         39,371          6.6
Corporate Obligations .......................                                       30         0.0
                                                   -------                    --------                    -------
    Total....................................      $76,456          4.1%      $ 98,585         5.1%       $39,470          6.6%
                                                   =======                    ========                    =======
</table>
<table>
<caption>

                                                                            Marketable Equity
                                                                              and Mortgage -
                                             Due After Ten Years            Backed Securities                   Total
                                             -------------------         -----------------------                -----
                                            Amount         Yield<F1>       Amount         Yield<F1>        Amount      Yield<F1>
                                            ------         ------         ------         ------          ------        ------
<S>                                          <C>             <C>           <C>             <C>           <C>             <c>
U.S. Treasury........................                                                                  $  1,519         4.8%
U.S. Government-sponsored
   Agency Securities.................                                                                    67,935         4.1
State and Municipal..................     $  7,885           7.8%                                       152,912         5.6
Marketable Equity Securities.........                                  $   6,223           5.5%           6,223         5.5
Corporate Obligations ...............       12,416           6.5                                         12,446         6.5
Mortgage-backed Securities...........                                    199,801           4.8          199,801         4.8
                                          --------                     ---------                       --------
    Total............................     $ 20,301           7.0%      $ 206,024           4.8%        $440,836         5.0%
                                          ========                     =========                       ========

</table>
<table>
<caption>
Securities held to maturity at December 31, 2007:
====================================================================================================================================
                                                Within 1 Year                   1-5 Years                  5-10 Years
(Dollars in Thousands)                     Amount         Yield<F1>         Amount        Yield<F1>   Amount         Yield<F1>
====================================================================================================================================

                                           <c>           <c>              <c>          <c>          <c>             <c>

State and Municipal..................     $    704           7.4%        $   276          7.8%       $  810           6.0%


<FN>
<F1> Interest yields on state and municipal securities are presented on a fully taxable equivalent basis using a 35% tax rate.
</FN>
</table>
<table>
<caption>
                                                                             Mortgage-Backed
                                            Due After Ten Years                Securities                     Total
                                           =====================            =================                =======
                                           Amount          Yield(1)       Amount        Yield(1)      Amount        Yield(1)
                                           ------          ------         ------        ------        ------        ------

                                         <c>             <c>              <c>         <c>            <c>           <c>

State and Municipal..................     $ 8,527            7.1%                                     $10,317         7.1%
Other Asset-backed Securities........                                    $    14          8.4%             14         8.4
                                          -------                        -------                      -------
     Total............................    $ 8,527            7.1%        $    14          8.4%        $10,331         7.1%
                                          =======                        =======                      ======

</table>

                                    Page 14
<page>
PART I: ITEM 1. BUSINESS


INVESTMENT SECURITIES continued

The following tables show the  Corporation's  gross  unrealized  losses and fair
value,  aggregated  by  investment  category and length of time that  individual
securities  have been in a continuous  unrealized  loss position at December 31,
2007 and 2006:
<table>
<caption>
====================================================================================================================================
                                                                              GROSS                   GROSS                  GROSS
                                                                 FAIR      UNREALIZED    FAIR      UNREALIZED    FAIR     UNREALIZED
(Dollars in Thousands)                                           VALUE        LOSSES     VALUE        LOSSES     VALUE       LOSSES
====================================================================================================================================
                                                                   Less than 12            12 Months or
                                                                       Months                  Longer                        Total
                                                                   --------------          --------------                 ---------

                                                                <c>        <C>         <C>            <C>       <C>         <C>
Temporarily Impaired Investment
   Securities at December 31, 2007:
U.S. Government-sponsored Agency Securities ...............                            $ 45,572     $   (98)     $45,572   $    (98)
State and Municipal .......................................     $   858      $   (7)     60,996        (447)      61,854       (454)
Mortgage-backed Securities ................................       3,489         (30)     86,161      (1,414)      89,560     (1,444)
Corporate Obligations .....................................      12,415      (1,294)                              12,415     (1,294)
Marketable Equity Securities ..............................                                 900        (612)         900       (612)
                                                               --------     -------    --------     -------     --------   --------
   Total Temporarily Impaired Investment Securities .......    $ 16,762     $(1,331)   $193,629     $(2,571)    $210,391   $ (3,902)
                                                               ========     =======    ========     =======     ========   ========

<caption>
                                                               ---------------------------------------------------------------------
                                                                              GROSS                   GROSS                  GROSS
                                                                 FAIR      UNREALIZED    FAIR      UNREALIZED    FAIR     UNREALIZED
                                                                VALUE        LOSSES     VALUE        LOSSES     VALUE       LOSSES
                                                               ---------------------------------------------------------------------
                                                                    Less than 12            12 Months or
                                                                       Months                  Longer                       Total
                                                                   --------------          --------------                 ---------
<S>                                                                <C>         <C>       <C>         <C>            <C>        <C>
Temporarily Impaired Investment
   Securities at December 31, 2006:
U.S. Government-sponsored agency securities ...............    $  1,576     $    (3)   $ 71,702     $(1,281)    $ 73,278   $ (1,284)
State and Municipal .......................................       9,608         (35)     81,841      (1,057)      91,449     (1,092)
Mortgage-backed Securities ................................       7,459         (20)    126,555      (3,963)     134,014     (3,983)
Corporate Obligations ....................................                                   28          (6)          28         (6)
Marketable Equity Securities ..............................       1,215        (304)                               1,215       (304)
                                                               --------     -------    --------     -------     --------   --------
   Total Temporarily Impaired Investment Securities .......    $ 19,858     $  (362)   $280,126     $(6,307)    $299,984   $ (6,669)
                                                               ========     =======    ========     =======     ========   ========
</table>

LOAN PORTFOLIO

TYPES OF LOANS
<table>
<caption>
====================================================================================================================================

(Dollars in Thousands)                               2007              2006              2005              2004                2003
====================================================================================================================================

                                                  <C>             <C>                 <C>              <C>                   <C>
Loans at December 31:
  Commercial and Industrial Loans..............  $  662,701        $  537,305        $  461,102        $  451,227         $  435,221
  Agricultural Production
    Financing and Other Loans to Farmers.......     114,324           100,098            95,130            98,902             95,048
  Real Estate Loans:
    Construction...............................     165,425           169,491           174,783           164,738            149,865
    Commercial and Farmland....................     947,234           861,429           734,865           709,163            564,578
    Residential................................     744,627           749,921           751,217           761,163            866,477
  Individuals' Loans for
    Household and Other Personal Expenditures..     187,880           223,504           200,139           198,532            196,093
  Tax-exempt Loans.............................      16,423            14,423             8,263             8,203             16,363
  Lease Financing Receivables,
    Net of Unearned Income ....................       8,351             8,010             8,713            11,311              7,919
  Other Loans..................................      29,878            28,420            23,215            24,812             21,939
                                                 ----------        ----------        ----------        ----------         ----------
                                                  2,876,843         2,692,601         2,457,427         2,428,501         2,353,503
   Allowance for Loan Losses...................     (28,228)          (26,540)          (25,188)          (22,548)          (25,493)
                                                 ----------        ----------        ----------        ----------         ----------
       Total Loans.............................  $2,848,615        $2,666,061        $2,432,239        $2,405,503         $2,328,010
                                                 ==========        ==========        ==========        ==========         ==========
</table>
Residential  Real Estate Loans Held for Sale at December 31, 2007,  2006,  2005,
2004  and  2003  were  $3,735,000,   $5,413,000,   $4,910,000,  $3,367,000,  and
$3,043,000, respectively.

                                    Page 15
<page>
PART I: ITEM 1. BUSINESS


MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES

Presented in the table below are the maturities of loans (excluding  residential
real estate,  individuals'  loans for household and other personal  expenditures
and lease financing) outstanding as of December 31, 2007. Also presented are the
amounts due after one year classified according to the sensitivity to changes in
interest rates.
<table>
<caption>
====================================================================================================================================
                                                    Maturing         Maturing            Maturing
                                                    Within            1 - 5               Over
(Dollars in Thousands)                              1 Year            Years              5 Years              Total
====================================================================================================================================
<S>                                                   <C>                <C>                <C>               <C>
Commercial and Industrial Loans................  $  365,246        $ 215,075           $  82,380          $  662,701
Agricultural Production Financing
  and Other Loans to Farmers...................      88,359           17,721               8,244             114,324
Real Estate - Construction.....................     121,260           40,901               3,264             165,425
Real Estate - Commercial and Farmland..........     342,938          469,754             134,542             947,234
Tax-exempt Loans...............................       9,953            3,363               3,107              16,423
Other Loans....................................      21,465            5,158               3,255              29,878
                                                 ----------        ---------            ---------         ----------
      Total....................................  $  949,221        $ 751,972            $234,792          $1,935,985
                                                 ==========        =========            =========         ==========


<caption>
                                                  ================================================
                                                         Maturing                   Maturing
                                                          1 - 5                       Over
                                                          Years                     5 Years
                                                  ================================================
<S>                                                       <C>                       <C>
Loans Maturing After One Year with:

  Fixed Rate..............................          $     259,354               $    211,689
  Variable Rate...........................                492,618                     23,103
                                                    -------------               ------------
    Total.................................          $     751,972               $    234,792
                                                    =============               ============

</table>
NONACCRUING,  CONTRACTUALLY  PAST DUE 90 DAYS OR MORE OTHER THAN NONACCRUING AND
RESTRUCTURED LOANS
<table>
<caption>
====================================================================================================================================

(Dollars in Thousands)                              2007               2006             2005              2004               2003
====================================================================================================================================
<S>                                                 <C>                <C>              <C>               <C>                 <C>
Non-accrual Loans.........................       $ 29,031            $ 17,926        $ 10,030          $ 15,355           $ 19,453
Loans Contractually Past Due 90
  Days or More Other Than Nonaccruing.....          3,578              2,870            3,965             1,907              6,530
Restructured Loans........................            145                 84              310             2,019                641
                                                  -------            -------           -------           -------           -------
     Total Non-performing Loans...........        $32,754           $ 20,880         $ 14,305          $ 19,281           $ 26,624
                                                  =======            =======           =======           =======           =======
</table>
Nonaccruing loans are loans, which are reclassified to a nonaccruing status when
in  management's  judgment the collateral  value and financial  condition of the
borrower do not justify accruing interest. Interest previously recorded, but not
deemed  collectible,  is reversed and charged against  current income.  Interest
income on these loans is then recognized when collected.

Restructured  loans are loans for which the  contractual  interest rate has been
reduced  or  other  concessions  are  granted  to  the  borrower,  because  of a
deterioration  in the  financial  condition  of the  borrower  resulting  in the
inability of the borrower to meet the original contractual terms of the loans.

Interest  income  of  $1,143,000  for the year  ended  December  31,  2007,  was
recognized on the nonaccruing and restructured  loans listed in the table above,
whereas  interest income of $2,009,000  would have been  recognized  under their
original loan terms.

Potential problem loans:

Management  has  identified  certain  other  loans  totaling  $65,867,000  as of
December 31, 2007,  not included in the table above,  or the impaired loan table
in the footnotes to the consolidated financial statements, about which there are
doubts as to the borrowers'  ability to comply with present repayment terms. For
the Corporation, all criticized loans, including substandard,  doubtful and loss
credits are included in the impaired loan total.

The  Corporation's  affiliate banks generate  commercial,  mortgage and consumer
loans from customers located primarily in north central and east-central Indiana
and  Butler,  Franklin  and  Hamilton  counties  in Ohio.  The Banks'  loans are
generally  secured by specific  items of  collateral,  including  real property,
consumer assets, and business assets.

                                    Page 16
<page>
PART I: ITEM 1. BUSINESS


SUMMARY OF LOAN LOSS EXPERIENCE

The following table summarizes the loan loss experience for the years indicated.
<table>
<caption>
====================================================================================================================================

(Dollars in Thousands)                                2007             2006             2005             2004            2003
====================================================================================================================================
<S>                                                    <C>             <C>                <C>           <C>                <C>
Allowance for Loan Losses:
  Balance at January<F1>....................         $ 26,540         $ 25,188         $ 22,548         $ 25,493        $ 22,417

  Charge offs:
    Commercial and Industrial<F1>...........            2,403            1,369            3,763            7,455           5,023
    Real Estate Mortgage<F2>................            4,309            3,613            2,117            1,588           2,111
    Individuals' Loans for Household and
      Other Personal Expenditures,
      Including Other Loans.................            1,845            1,528            1,864            1,858           5,005
                                                      --------         --------         --------         --------        --------
      Total Charge offs.....................            8,557            6,510            7,744           10,901          12,139
                                                      --------         --------         --------         --------        --------
  Recoveries:
    Commercial and Industrial<F3>............             551              291            1,283            1,629           1,002
    Real Estate Mortgage<F4> ................             750              863              122              161             421
    Individuals' Loans For Household and
      Other Personal Expenditures,
      Including Other Loans..................             437              450              625              461             588
                                                      --------         --------         --------         --------        --------
      Total Recoveries.......................           1,738            1,604            2,030            2,251           2,011
                                                      --------         --------         --------         --------        --------

  Net Charge offs............................           6,819            4,906            5,714            8,650          10,128
                                                      --------         --------         --------         --------        --------
  Provisions for Loan Losses.................           8,507            6,258            8,354            5,705           9,477
  Allowance Acquired in Purchase.............                                                                              3,727
                                                      --------         --------         --------         --------        --------
  Balance at December 31.....................         $28,228          $26,540          $25,188          $22,548         $25,493
                                                      ========         ========         ========         ========        ========



  Ratio of Net Charge offs During the
   Period to Average Loans
   Outstanding During the Period.............             .24%             .19%             .23%             .37%           .44%

<FN>
<F1> Category  also  includes  the charge  offs for lease  financing,  loans to
financial  institutions,  tax-exempt loans and agricultural production financing
and other loans to farmers.
<F2> Category includes the charge offs for construction, commercial and farmland
and residential real estate loans.
<F3>  Category  also  includes  the  recoveries  for lease  financing,  loans to
financial  institutions,  tax-exempt loans and agricultural production financing
and other loans to farmers.
<F4> Category includes the recoveries for construction,  commercial and farmland
and residential real estate loans.
</FN>
</table>

See the information  regarding the analysis of loan loss experience in the Asset
Quality/Provision  for  Loan  Losses  section  of  Management's  Discussion  and
Analysis of Financial  Condition and Results of Operations included as Item 7 of
this Annual Report on Form 10-K.

                                    Page 17
<page>
PART I: ITEM 1. BUSINESS


SUMMARY OF LOAN LOSS EXPERIENCE continued

Allocation of the Allowance for Loan Losses at December 31:

Presented  below is an analysis of the  composition  of the  allowance  for loan
losses and percent of loans in each category to total loans.
<table>
<caption>
==============================================================================================================================
                                                                    2007                             2006
(Dollars in Thousands)                                    Amount            Percent        Amount            Percent
==============================================================================================================================

                                                       <C>                <C>              <C>               <C>
Balance at December 31:
  Commercial and Industrial <f1>................         $  9,598            34.1%        $  9,598            31.0%
  Real Estate Mortgage <f2>.....................           12,561            58.8           12,479            60.5
  Individuals' Loans for Household and
    Other Personal Expenditures,
    Including Other Loans.....................              5,969             7.1            4,363             8.5
  Unallocated.................................                100             N/A              100             N/A
                                                         --------           ------        --------           ------
  Totals......................................           $ 28,228           100.0%        $ 26,540           100.0%
                                                         ========           ======        ========           ======



<caption>
                                                                    2005                               2004
                                                         -------------------------         -------------------------
                                                          Amount          Per Cent          Amount          Per Cent
                                                         --------         --------         --------         --------
<S>                                                        <C>               <C>           <C>                  <C>
Balance at December 31:
  Commercial and Industrial <f1>..............           $  7,430            30.9%        $ 16,821            30.9%
  Real Estate Mortgage <f2>...................             13,149            60.6            1,916            60.9
  Individuals' Loans for Household and
    Other Personal Expenditures,
    Including Other Loans.....................              4,509             8.5            3,711             8.5
  Unallocated.................................                100             N/A              100             N/A
                                                         --------           ------        --------           ------
  Totals......................................           $ 25,188           100.0%        $ 22,548           100.0%
                                                         ========           ======        ========           ======
<Caption>

                                                                    2003
                                                         -------------------------
                                                          Amount          Per Cent
                                                         --------         --------

                                                        <C>                 <C>
Balance at December 31:
  Commercial and industrial <f1>..............           $ 17,517            29.9%
  Real estate mortgage <f2>...................              4,441            60.8
  Individuals' Loans for Household and
    Other Personal Expenditures,
    Including Other Loans.....................              3,435             9.3
  Unallocated. .... ..........................                100             N/A
                                                         --------           ------
  Totals......................................           $ 25,493           100.0%
                                                         ========           ======

<FN>
<F1>  Category  also includes the allowance for loan losses and percent of loans
for  lease  financing,  loans  to  financial  institutions,   tax-exempt  loans,
agricultural  production  financing and other loans to farmers and  construction
real estate loans.
<F2>  Category  includes the  allowance for loan losses and percent of loans for
commercial real estate, farmland and residential real estate loans.
</FN>
</table>
At December 31, 2007, the Corporation had no concentration of loans exceeding 10
percent of total loans, which are not otherwise  disclosed.  Loan concentrations
are  considered to exist when there are amounts  loaned to a multiple  number of
borrowers engaged in similar activities,  which would cause them to be similarly
impacted by economic or other conditions.

Loan Administration and Loan Loss Charge-off Procedures

Primary  responsibility  and  accountability  for day-to-day  lending activities
rests with the  Corporation's  affiliate banks. Loan personnel at each bank have
the authority to extend credit under guidelines  approved by the bank's board of
directors.  Executive  committees  active at each  bank  serve as  vehicles  for
communication  between the banks and for the pooling of knowledge,  judgment and
experience  of the  Corporation's  affiliate  banks.  These  committees  provide
valuable  input to lending  personnel,  act as an approval body, and monitor the
overall quality of the banks' loan portfolios.  The Corporation also maintains a
loan  grading  and  review  program  for its  affiliate  banks,  which  includes
quarterly  reviews of problem loans,  delinquencies and charge offs. The purpose
of this  program  is to  evaluate  loan  administration,  credit  quality,  loan
documentation and the adequacy of the allowance for loan losses.

                                    Page 18
<page>
PART I: ITEM 1. BUSINESS


Loan Administration and Loan Loss Charge-off Procedures continued

The Corporation  maintains an allowance for loan losses to cover probable credit
losses identified during its loan review process.  The allowance is increased by
the provision for loan losses and decreased by charge offs less recoveries.  All
charge offs are  approved by the Banks'  senior loan officer and are reported to
the Banks' Boards.  The Banks charge off loans when a determination is made that
all or a portion of a loan is  uncollectible  or as a result of  examinations by
regulators and the independent auditors.

Provision for Loan Losses

In banking,  loan losses are one of the costs of doing  business.  Although  the
Banks'  management  emphasize the early detection and charge-off of loan losses,
it is inevitable  that at any time certain losses exist in the portfolio,  which
have not been  specifically  identified.  Accordingly,  the  provision  for loan
losses is charged to earnings on an  anticipatory  basis,  and  recognized  loan
losses are deducted from the allowance so  established.  Over time, all net loan
losses  must be charged to  earnings.  During the year,  an estimate of the loss
experience  for  the  year  serves  as  a  starting  point  in  determining  the
appropriate  level for the provision.  However,  the amount actually provided in
any period may be greater or less than net loan  losses,  based on  management's
judgment as to the  appropriate  level of the  allowance  for loan  losses.  The
determination of the provision in any period is based on management's continuing
review and evaluation of the loan  portfolio,  and its judgment as to the impact
of current  economic  conditions on the portfolio.  The evaluation by management
includes consideration of past loan loss experience,  changes in the composition
of  the  loan  portfolio,   and  the  current  condition  and  amount  of  loans
outstanding.

Impaired loans are measured by the present value of expected  future cash flows,
or the fair value of the collateral of the loans, if collateral  dependent.  For
the Corporation, all criticized loans, including sub standard,  doubtfulness and
loss credits are included in the impaired  loan total.  Information  on impaired
loans is summarized below:
<table>
<caption>
===================================================================================================================================

(Dollars in Thousands)                                                      2007               2006              2005
===================================================================================================================================

                                                                          <C>              <C>                 <C>
As of, and for the Year Ending December 31:
  Impaired Loans With an Allowance............................        $     21,304       $     17,291      $      7,540
  Impaired Loans for which the Discounted
    Cash Flows or Collateral Value Exceeds the
    Carrying Value of the Loan................................              65,645             43,029            44,840
                                                                      ------------       ------------      ------------

        Total Impaired Loans..................................        $     86,949       $     60,320      $     52,380
                                                                      ==============     ==============    ==============


Total Impaired Loans as a Percent of Total Loans..............               3.02%              2.24%             2.13%

  Allowance for Impaired Loans (Included in the
    Corporation's Allowance for Loan Losses)..................        $      6,034       $      4,130      $      2,824
  Average Balance of Impaired Loans...........................             103,272             66,139            44,790
  Interest Income Recognized on Impaired Loans................               6,675              5,143             3,511
  Cash Basis Interest Included Above..........................               1,143              1,364               650

</table>

DEPOSITS

The average balances,  interest income and expense and average rates on deposits
for the years  ended  December  2007,  2006 and 2005 are  presented  within  the
"Distribution of Assets,  Liabilities and Stockholders'  Equity,  Interest Rates
and Interest Differential" table on page 11 of this Form 10-K.


As of December  31,  2007,  certificates  of deposit and other time  deposits of
$100,000 or more mature as follows:
<table>
<caption>
=====================================================================================================================
                                     Maturing         Maturing          Maturing          Maturing
                                     3 Months           3-6               6-12            Over 12
(Dollars in Thousands)               or less           Months            Months            Months             Total
=====================================================================================================================

                                   <C>             <C>                 <C>              <C>                 <C>
Certificates of Deposit and
  Other Time Deposits..........     $269,578         $ 91,199           $ 85,216         $ 49,637          $495,630
Percent .......................           54%              19%                17%              10%              100%

</table>

                                    Page 19
<page>
PART I: ITEM 1. BUSINESS


RETURN ON EQUITY AND ASSETS

See the information regarding return on equity and assets presented within the
"Five - Year Summary of Selected Financial Data" on page 3 of this Form 10-K.

SHORT-TERM BORROWINGS
<table>
<caption>
=============================================================================================

(Dollars in Thousands)                                        2007         2006         2005
=============================================================================================
<S>                                                            <C>         <C>           <C>
Balance at December 31:
   Securities Sold Under Repurchase
     Agreements (Short-term Portion)..................     $ 72,247     $ 42,750     $106,415
   Federal Funds Purchased............................       52,350       56,150       50,000
                                                           --------     --------     --------
           Total Short-term Borrowings................     $124,597     $ 98,900     $156,415
                                                           ========     ========     ========
</table>
Securities sold under repurchase  agreements are borrowings  maturing within one
year and are  secured  by U.S.  Treasury  and U.S.  Government-sponsored  agency
securities.

Pertinent information with respect to short-term borrowings is summarized below:
<table>
<caption>
=============================================================================================

(Dollars in Thousands)                                        2007         2006         2005
=============================================================================================
<S>                                                            <C>           <C>           <C>
Weighted Average Interest Rate on Outstanding
   Balance at December 31:

      Securities Sold Under Repurchase
         Agreements (Short-term Portion)..............          3.7%         4.4%         3.8%
      Total Short-term Borrowings.....................          3.9          4.9          4.3

Weighted Average Interest Rate During the Year:
      Securities Sold Under Repurchase
         Agreements(Short-term Portion)...............          4.3%         4.4%         2.1%
      Total Short-term Borrowings.....................          4.9          4.6          2.3

Highest Amount Outstanding at Any Month End
   During the Year:
      Securities Sold Under Repurchase
         Agreements (Short-term Portion)..............     $ 98,735     $ 98,765     $ 68,198
      Total Short-term Borrowings.....................      226,894      219,337      144,898

Average Amount Outstanding During the Year:
      Securities Sold Under Repurchase
         Agreements (Short-term Portion)..............    $ 62,040     $ 73,818      $ 77,969
      Total Short-term Borrowings.....................     127,345      109,577        95,447
</table>
                                    Page 20

<PAGE>
PART I: ITEM 1A. AND ITEM 1B.


ITEM 1A. RISK FACTORS

RISK FACTORS

There are a number of factors, including those specified below, that may
adversely affect the Corporation's business, financial results or stock price.
Additional risks that the Corporation currently does not know about or currently
views as immaterial may also impair the Corporation's business or adversely
impact its financial results or stock price.

INDUSTRY RISK FACTORS

o    The Corporation's business and financial results are significantly affected
     by general business and economic conditions.

The  Corporation's  business  activities  and  earnings  are affected by general
business  conditions in the United States and abroad.  These conditions  include
short-term  and  long-term   interest   rates,   inflation,   monetary   supply,
fluctuations  in both debt and equity capital  markets,  and the strength of the
United States economy and the state and local economies in which the Corporation
operates.  For example,  an economic downturn,  an increase in unemployment,  or
other events that affect household  and/or  corporate  incomes could result in a
deterioration of credit quality,  a change in the allowance for loan losses,  or
reduced  demand for loan or  fee-based  products  and  services.  Changes in the
financial  performance  and  condition  of  the  Corporation's  borrowers  could
negatively affect repayment of those borrowers'  loans. In addition,  changes in
securities  market conditions and monetary  fluctuations  could adversely affect
the  availability  and  terms of  funding  necessary  to meet the  Corporation's
liquidity needs.

o    Changes  in  the  domestic  interest  rate  environment  could  reduce  the
     Corporation's net interest income.

The operations of financial institutions, such as the Corporation, are dependent
to a large  degree  on net  interest  income,  which is the  difference  between
interest income from loans and investments and interest  expense on deposits and
borrowings.  An institution's  net interest income is significantly  affected by
market rates of  interest,  which in turn are  affected by  prevailing  economic
conditions, by the fiscal and monetary policies of the federal government and by
the policies of various regulatory  agencies.  Like all financial  institutions,
the  Corporation's  balance sheet is affected by fluctuations in interest rates.
Volatility  in  interest  rates can also  result in the flow of funds  away from
financial institutions into direct investments. Direct investments, such as U.S.
Government and corporate  securities and other  investment  vehicles,  including
mutual funds, generally pay higher rates of return than financial  institutions,
because of the absence of federal insurance premiums and reserve requirements.

o    Changes in the laws, regulations and policies governing banks and financial
     services companies could alter the Corporation's  business  environment and
     adversely affect operations.

The Board of Governors of the Federal  Reserve  System  regulates  the supply of
money and  credit  in the  United  States.  Its  fiscal  and  monetary  policies
determine  in a large  part the  Corporation's  cost of funds  for  lending  and
investing and the return that can be earned on those loans and investments, both
of which affect the  Corporation's  net interest  margin.  Federal Reserve Board
policies can also materially affect the value of financial  instruments that the
Corporation  holds,  such as  debt  securities.  The  Corporation  and its  bank
subsidiaries  are  heavily  regulated  at the  federal  and state  levels.  This
regulation is to protect  depositors,  federal  deposit  insurance funds and the
banking system as a whole. Congress and state legislatures and federal and state
agencies continually review banking laws,  regulations and policies for possible
changes.  Changes  in  statutes,   regulations  or  policies  could  affect  the
Corporation in substantial and unpredictable ways,  including limiting the types
of financial services and products that the Corporation offers and/or increasing
the ability of non-banks to offer competing financial services and products. The
Corporation  cannot predict  whether any of this potential  legislation  will be
enacted, and if enacted, the effect that it or any regulations would have on the
Corporation's financial condition or results of operations.

o    The banking and  financial  services  industry is highly  competitive,  and
     competitive   pressures   could   intensify   and   adversely   affect  the
     Corporation's financial results.

The Corporation operates in a highly competitive industry that could become even
more  competitive  as a result  of  legislative,  regulatory  and  technological
changes and continued consolidation.  The Corporation competes with other banks,
savings and loan associations, mutual savings banks, finance companies, mortgage
banking  companies,   credit  unions  and  investment  companies.  In  addition,
technology  has lowered  barriers to entry and made it possible for non-banks to
offer  products  and  services  traditionally  provided  by  banks.  Many of the
Corporation's  competitors have fewer regulatory constraints and some have lower
cost  structures.  Also,  the  potential  need to adapt to  industry  changes in
information  technology systems, on which the Corporation and financial services
industry are highly  dependent,  could  present  operational  issues and require
capital spending.

                                    Page 21
<page>
PART I: ITEM 1A. AND ITEM 1B.


INDUSTRY RISK FACTORS continued


o    Acts or threats of terrorism and political or military actions taken by the
     United States or other  governments could adversely affect general economic
     or industry conditions.

Geopolitical  conditions  may also affect the  Corporation's  earnings.  Acts or
threats or  terrorism  and  political  or military  actions  taken by the United
States or other governments in response to terrorism, or similar activity, could
adversely affect general economic or industry conditions.

CORPORATION RISK FACTORS

o    The  Corporation's  allowance  for loan losses may not be adequate to cover
     actual losses.

The  Corporation  maintains  an  allowance  for loan  losses to provide for loan
defaults  and   non-performance.   The  allowance  for  loan  losses  represents
management's  estimate of probable  losses  inherent in the  Corporation's  loan
portfolio.  The Corporation's  allowance consists of three components:  probable
losses  estimated from  individual  reviews of specific  loans,  probable losses
estimated  from  historical  loss rates,  and  probable  losses  resulting  from
economic,  environmental,  qualitative or other  deterioration  above and beyond
what is reflected in the first two components of the allowance.  The process for
determining  the  adequacy of the  allowance  for loan losses is critical to our
financial  results.  It requires  management to make  difficult,  subjective and
complex judgments, as a result of the need to make estimates about the effect of
matters  that  are  uncertain.   Therefore,   the  allowance  for  loan  losses,
considering  current  factors at the time,  including  economic  conditions  and
ongoing internal and external examination  processes,  will increase or decrease
as deemed necessary to ensure the allowance for loan losses remains adequate. In
addition,  the allowance as a percentage of charge offs and nonperforming  loans
will change at different  points in time based on credit  performance,  loan mix
and collateral values.

o    The  Corporation  may  suffer  losses  in its loan  portfolio  despite  its
     underwriting practices.

The  Corporation  seeks to mitigate the risks  inherent in its loan portfolio by
adhering to specific  underwriting  practices.  The  Corporation's  strategy for
credit risk management  includes  conservative  credit policies and underwriting
criteria for all loans,  as well as an overall  credit  limit for each  customer
significantly   below  legal  lending  limits.   The  strategy  also  emphasizes
diversification  on a geographic,  industry and customer  level,  regular credit
quality  reviews and  management  reviews of large  credit  exposures  and loans
experiencing  deterioration of credit quality.  There is a continuous  review of
the loan portfolio,  including an internally  administered loan "watch" list and
an independent loan review. The evaluation takes into  consideration  identified
credit  problems,  as well as the  possibility  of losses  inherent  in the loan
portfolio  that  are  not  specifically  identified.  Although  the  Corporation
believes that its underwriting criteria are appropriate for the various kinds of
loans it makes,  the  Corporation  may incur  losses on loans due to the factors
previously discussed.

o    Because  the  nature of the  financial  services  business  involves a high
     volume of  transactions,  the  Corporation  faces  significant  operational
     risks.

The  Corporation  operates  in diverse  markets and relies on the ability of its
employees and systems to process a high number of transactions. Operational risk
is the risk of loss resulting from the Corporation's operations,  including, but
not  limited  to,  the risk of fraud by  employees  or  persons  outside  of the
Corporation,  the execution of unauthorized  transactions  by employees,  errors
relating to  transaction  processing  and  technology,  breaches of the internal
control  system  and  compliance  requirements  and  business  continuation  and
disaster  recovery.  This risk of loss also includes the potential legal actions
that  could  arise as a result of an  operational  deficiency  or as a result of
noncompliance with applicable regulatory  standards,  adverse business decisions
or their  implementation,  and  customer  attrition  due to  potential  negative
publicity.  In the event of a breakdown in the internal control system, improper
operation of systems or improper employee actions,  the Corporation could suffer
financial loss, face regulatory action and suffer damage to its reputation.

o    A natural disaster could harm the Corporation's business.

Natural  disasters  could harm the  Corporation's  operations  directly  through
interference  with  communications,  as  well  as  through  the  destruction  of
facilities and operational,  financial and management information systems. These
events could prevent the Corporation from gathering deposits,  originating loans
and processing and controlling its flow of business.

                                    Page 22
<page>
PART I: ITEM 1A. AND ITEM 1B.


CORPORATION RISK FACTORS continued

o    The   Corporation   faces  systems   failure  risks  as  well  as  security
     risks,including "hacking" and "identity theft".

The computer  systems and network  infrastructure  the Corporation uses could be
vulnerable to unforeseen problems. Our operations are dependent upon our ability
to  protect  computer   equipment  against  damage  from  fire,  power  loss  or
telecommunication  failure. Any damage or failure that causes an interruption in
our operations  could adversely  affect our business and financial  results.  In
addition,  our  computer  systems and network  infrastructure  present  security
risks, and could be susceptible to hacking or identity theft.

o    The Corporation relies on dividends from its subsidiaries for its liquidity
     needs.

The  Corporation  is a separate  and  distinct  legal  entity  from its bank and
non-bank  subsidiaries.  The Corporation receives  substantially all of its cash
from  dividends  paid by its  subsidiaries.  These  dividends  are the principal
source of funds to pay  dividends  on the  Corporation's  stock and interest and
principal on its debt.  Various federal and state laws and regulations limit the
amount of dividends that our bank subsidiaries may pay to the Corporation.

o    The  Corporation's   reported  financial  results  depend  on  management's
     selection of accounting methods and certain assumptions and estimates.

The  Corporation's  accounting  policies and methods are  fundamental  to how it
records and reports  its  financial  condition  and results of  operations.  The
Corporation's  management must exercise  judgment in selecting and applying many
of these accounting policies and methods, so they comply with Generally Accepted
Accounting  Principles and reflect management's judgment of the most appropriate
manner to report the  Corporation's  financial  condition  and results.  In some
cases,  management must select the accounting policy or method to apply from two
or more  alternatives,  any of which might be reasonable under the circumstances
yet might result in the  Corporation's  reporting  materially  different results
than would have been reported under a different alternative.  Certain accounting
policies are critical to presenting the  Corporation's  financial  condition and
results,  and  require  management  to make  difficult,  subjective  or  complex
judgments about matters that are uncertain.  Materially  different amounts could
be  reported  under  different  conditions  or using  different  assumptions  or
estimates.  These critical accounting  policies include:  the allowance for loan
losses;  the valuation of investment  securities;  the valuation of goodwill and
intangible  assets;  and  pension  accounting.  Because  of the  uncertainty  of
estimates  involved in these matters,  the Corporation may be required to do one
or more of the following:  significantly  increase the allowance for loan losses
and/or  sustain  loan  losses  that are  significantly  higher  than the reserve
provided;  recognize  significant  provision for  impairment  of its  investment
securities;  recognize  significant  impairment  on its goodwill and  intangible
assets; or significantly  increase its pension liability.  For more information,
refer to  "Critical  Accounting  Policies"  under Item 7. Part II.  Management's
Discussion and Analysis of Financial Condition and Results of Operations.

o    Changes in accounting  standards could materially  impact the Corporation's
     financial statements.

From  time to  time,  the  Financial  Accounting  Standards  Board  changes  the
financial  accounting and reporting standards that govern the preparation of the
Corporation's financial statements. These changes can be hard to predict and can
materially  impact  how  the  Corporation  records  and  reports  its  financial
condition and results of operations.  In some cases,  the  Corporation  could be
required  to apply a new or revised  standard  retroactively,  resulting  in the
Corporation's restating prior period financial statements.

o    Significant  legal  actions could subject the  Corporation  to  substantial
     uninsured liabilities.

The  Corporation  is  from  time  to  time  subject  to  claims  related  to its
operations. These claims and legal actions, including supervisory actions by the
Corporation's  regulators,  could involve large monetary  claims and significant
defense costs. To protect itself from the cost of these claims,  the Corporation
maintains  insurance  coverage in amounts and with  deductibles that it believes
are  appropriate  for  its  operations.  However,  the  Corporation's  insurance
coverage  may not cover all claims  against  the  Corporation  or continue to be
available to the Corporation at a reasonable cost. As a result,  the Corporation
may be exposed to  substantial  uninsured  liabilities,  which  could  adversely
affect the Corporation's results of operations and financial condition.

                                    Page 23
<PAGE>
PART I: ITEM 1A. AND ITEM 1B.


CORPORATION RISK FACTORS continued

o    Negative publicity could damage the Corporation's  reputation and adversely
     impact its business and financial results.

Reputation  risk,  or the risk to the  Corporation's  earnings  and capital from
negative  publicity,  is  inherent  in  the  Corporation's  business.   Negative
publicity  can result from the  Corporation's  actual or alleged  conduct in any
number of activities,  including  lending  practices,  corporate  governance and
acquisitions,   and  actions  taken  by  government   regulators  and  community
organizations in response to those activities.  Negative publicity can adversely
affect the  Corporation's  ability to keep and attract  customers and can expose
the  Corporation to litigation and regulatory  action.  Although the Corporation
takes steps to minimize  reputation  risk in dealing  with  customers  and other
constituencies, the Corporation is inherently exposed to this risk.

o    Acquisitions may not produce revenue enhancements or cost savings at levels
     or within  timeframes  originally  anticipated and may result in unforeseen
     integration difficulties.

The Corporation  regularly  explores  opportunities to acquire banks,  financial
institutions,  or other financial services businesses or assets. The Corporation
cannot  predict  the  number,  size or timing  of  acquisitions.  Difficulty  in
integrating  an acquired  business or company may cause the  Corporation  not to
realize expected  revenue  increases,  cost savings,  increases in geographic or
product  presence,  and/or other projected  benefits from the  acquisition.  The
integration  could result in higher than expected deposit  attrition  (run-off),
loss of key employees,  disruption of the Corporation's business or the business
of the acquired company, or otherwise adversely affect the Corporation's ability
to  maintain   relationships   with  customers  and  employees  or  achieve  the
anticipated  benefits  of the  acquisition.  Also,  the  negative  effect of any
divestitures  required by regulatory  authorities  in  acquisitions  or business
combinations may be greater than expected.

o    The Corporation's stock price can be volatile.

The  Corporation's  stock price can fluctuate widely in response to a variety of
factors,  including:  actual  or  anticipated  variations  in the  Corporation's
quarterly operating results; recommendations by securities analysts; significant
acquisitions or business combinations; strategic partnerships, joint ventures or
capital  commitments;  operating and stock price  performance of other companies
that  investors  deem  comparable to the  Corporation;  new  technology  used or
services  offered by the  Corporation's  competitors;  news reports  relating to
trends,  concerns  and  other  issues  in the  banking  and  financial  services
industry,  and changes in government  regulations.  General market fluctuations,
industry  factors and general  economic  and  political  conditions  and events,
including  terrorist attacks,  economic  slowdowns or recessions,  interest rate
changes,  credit  loss  trends or  currency  fluctuations,  could also cause the
Corporation's stock price to decrease, regardless of the Corporation's operating
results.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

                                    Page 24
<PAGE>
PART I: ITEM 2., ITEM 3., AND ITEM 4.


ITEM 2.  PROPERTIES.

The  headquarters  of the  Corporation  and First  Merchants  are  located  in a
five-story building at 200 East Jackson Street, Muncie, Indiana. The building is
owned by First Merchants.

The Corporation's  affiliate banks conduct business through numerous  facilities
owned and leased by the respective  affiliate  banks.  Of the 66 banking offices
operated by the  Corporation's  affiliate  banks, 46 are owned by the respective
banks and 20 are leased from non-affiliated third parties.

None of the properties owned by the Corporation's affiliate banks are subject to
any major  encumbrances.  The net investment of the Corporation and subsidiaries
in real estate and equipment at December 31, 2007 was $44,445,000.

ITEM 3.  LEGAL PROCEEDINGS.

There is no pending legal  proceeding,  other than ordinary  routine  litigation
incidental to the business of the Corporation or its subsidiaries, of a material
nature to which the  Corporation or its  subsidiaries is a party or of which any
of their properties are subject.  Further, there is no material legal proceeding
in which any  director,  officer,  principal  shareholder,  or  affiliate of the
Corporation,  or any  associate  of any  such  director,  officer  or  principal
shareholder,  is a party, or has a material interest, adverse to the Corporation
or any of its subsidiaries.

None of the routine legal  proceedings,  individually  or in the  aggregate,  in
which the  Corporation  or its  affiliates  are  involved are expected to have a
material  adverse impact on the financial  position or the results of operations
of the Corporation.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No  matters  were  submitted  during  the  fourth  quarter  of 2007 to a vote of
security holders, through the solicitation of proxies or otherwise.

                                    Page 25
<page>
SUPPLEMENTAL INFORMATION


SUPPLEMENTAL INFORMATION - EXECUTIVE OFFICERS OF THE REGISTRANT.

The names,  ages, and positions with the Corporation and subsidiary banks of all
executive officers of the Corporation and all persons chosen to become executive
officers are listed below. The officers are elected by the Board of Directors of
the  Corporation  for a term of one (1)  year or  until  the  election  of their
successors.  There are no arrangements  between any officer and any other person
pursuant to which he was selected as an officer.

Michael C. Rechin,  49, President and Chief Executive  Officer,  Corporation (1)
Chief  Executive  Officer of the Corporation  since April 2007;  Chief Operating
Officer,  Corporation since November 2005;  Executive Vice President,  Corporate
Banking National City Bank from 1995 to November 2005.(1)

Mark K. Hardwick,  37,  Executive Vice  President and Chief  Financial  Officer,
Corporation  Executive  Vice  President  and  Chief  Financial  Officer  of  the
Corporation  since  December  2005;  Senior Vice  President and Chief  Financial
Officer from April 2002 to December 2005; Corporate Controller, Corporation from
November 1997 to April 2002.

Jami L.  Bradshaw,  45,  Senior Vice  President  and Chief  Accounting  Officer,
Corporation  Senior Vice President and Chief Accounting  Officer since May 2007;
Vice  President and  Corporate  Controller,  Corporation  from 2006 to May 2007;
Assistant Vice President and Assistant Controller from 2002 to 2006.

Robert R.  Connors,  58,  Senior  Vice  President,  Chief  Information  Officer,
Corporation  and First  Merchants  Senior Vice  President and Chief  Information
Officer of the Corporation  and First Merchants since January 2006;  Senior Vice
President of Operations and  Technology,  Corporation  and First  Merchants from
August 2002 to January 2006.

Kimberly  J.  Ellington,  48,  Senior  Vice  President  and  Director  of  Human
Resources,  Corporation  Senior Vice  President and Director of Human  Resources
since 2004;  Vice President and Director of Human  Resources,  Corporation  from
1999 to 2004.

Jeffrey  B.  Lorentson,  44,  Senior  Vice  President  and Chief  Risk  Officer,
Corporation  Senior  Vice  President  and Chief  Risk  Officer  since June 2007;
Corporate  Controller of First  Indiana Bank from June 2006 to June 2007;  First
Vice President and Corporate  Controller of the  Corporation  from 2003 to 2006;
Vice President and Corporate Controller of the Corporation from 2002 to 2003.

David W. Spade, 55, Senior Vice President and Chief Credit Officer,  Corporation
Senior Vice President and Chief Credit Officer of the Corporation since February
2007; Vice President and Chief Credit Officer of the  Corporation  from December
2006 to February 2007;

(1) Michael L. Cox retired as the President and Chief Executive  Officer of the
Corporation on April 24, 2007, the date of the  Corporation's  annual meeting of
shareholders.  Mr. Rechin became the  President and Chief  Executive  Officer at
that time.

                                    Page 26
<PAGE>
PART II: ITEM 5. AND ITEM 6.


PART II

ITEM 5. MARKET FOR THE  REGISTRANT'S  COMMON  EQUITY,  AND  RELATED  STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

PERFORMANCE GRAPH

The following graph compares the cumulative  5-year total return to shareholders
on First Merchants  Corporation's  common stock relative to the cumulative total
returns of the Russell 2000 index and the Russell 2000 Financial Services index.
The graph assumes that the value of the investment in the  Corporation's  common
stock and in each of the indexes (including  reinvestment of dividends) was $100
on December 31, 2002 and tracks it through December 31, 2007.


                  COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
            Among First Merchants Corporation, The Russell 2000 Index
                  And The Russell 2000 Financial Services Index

                              [LINE GRAPH OMITTED]

* $100  invested  on  12/31/01  in  stock  or  index-including  reinvestment  of
dividends. Fiscal year ending December 31.







<table>
<caption>
---------------------------------------------------------------------------------------------------------------------------
                                                     12/31/02    12/31/03     12/31/04    12/31/05    12/31/06    12/31/07
---------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>         <C>          <C>         <C>          <C>          <C>
First Merchants Corporation                            100.00      121.92       140.26      133.47      144.77      121.13
Russell 2000                                           100.00      147.25       174.24      182.18      215.64      212.26
Russell 2000 Financial Services                        100.00      139.84       169.34      173.06      206.72      171.95
</table>
The stock price performance included in this graph is not necessarily indicative
of future stock price performance.

                                    Page 27
<PAGE>
PART II: ITEM 5. AND ITEM 6.


STOCK INFORMATION
<table>
<Caption>
====================================================================================================================================
                                                           PRICE PER SHARE
    QUARTER                                      HIGH                              LOW                    DIVIDENDS DECLARED<F1>
====================================================================================================================================
                                         2007             2006          2007             2006            2007             2006
                                      --------------------------     ---------------------------    ---------------------------
<S>                                       <C>             <C>             <C>             <C>           <C>                <C>
First Quarter  .............          $  27.46         $  29.42      $   22.75        $   24.37     $    .23         $    .23
Second Quarter .............             25.00            26.50          21.51            22.20          .23              .23
Third Quarter ..............             24.95            25.00          18.30            22.51          .23              .23
Fourth Quarter .............             23.44            27.99          19.92            22.81          .23              .23
</table>
The table above lists per share  prices and  dividend  payments  during 2007 and
2006. Prices are as reported by the National  Association of Securities  Dealers
Automated Quotation - National Market System.

Numbers rounded to nearest cent when applicable.

COMMON STOCK LISTING

First  Merchants  Corporation  common  stock is traded  over-the-counter  on the
NASDAQ National Market System.  Quotations are carried in many daily papers. The
NASDAQ symbol is FRME (Cusip #320817-10-9). At the close of business on February
20, 2008,  the number of shares  outstanding  was  18,551,275.  There were 6,180
stockholders of record on that date.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASES

The following table presents information relating to the Corporation's purchases
of its  equity  securities  during the  quarter  ended  December  31,  2007,  as
follows:<f2>
<table>
<caption>
=========================================================================================================================
                                                                   TOTAL NUMBER OF            MAXIMUM NUMBER OF
                        TOTAL NUMBER OF     AVERAGE PRICE      SHARES PURCHASED AS PART      SHARES THAT MAY YET
      PERIOD            SHARES PURCHASED    PAID PER SHARE     OF PUBLICALLY ANNOUNCED        BE PURCHASED UNDER
                                                                  PLANS OR PROGRAMS<f1>        THE PLANS OR PROGRAMS<f2>
=========================================================================================================================
<S>                            <C>                    <C>                  <C>                           <C>
October 1-31, 2007               0                       0                      0                      150,000
November 1-30, 2007        124,063<F2>               20.87                124,000                       26,000
December 1-31, 2007         41,198<f3>               22.29                 41,000                      485,000

<FN>
<F1> The Liquidity  section of  Management's  Discussion & Analysis of Financial
Condition and Results of Operations  included as Item 7 of this Annual Report on
Form 10-K and Note 14 to Consolidated Financial Statements included as Item 5 of
this  Annual  Report  on  Form  10-K  include  discussions   regarding  dividend
restrictions from the bank subsidiaries to the Corporation.
<F2> Of the 124,063 shares,  124,000 were purchased in open market  transactions
pursuant  to the  above-listed  authorizations.  The  remaining  63 shares  were
purchased in connection with the exercise of certain outstanding stock options.
<F3> Of the 41,198  shares,  41,000 were  purchased in open market  transactions
pursuant  to the  above-listed  authorizations.  The  remaining  198 shares were
purchased in connection with the exercise of certain outstanding stock options.
</FN>
</table>
On January 23, 2007, the Corporation's Board authorized management to repurchase
up to 250,000 shares of the Corporation's  Common Stock. This  authorization was
not publicly announced and expired January 22, 2008.


On July 24, 2007, the Corporation's Board authorized management to repurchase up
to 150,000 shares of the Corporation's  Common Stock. This authorization was not
publicly announced and also expired on January 22, 2008.


On October 23, 2007 the Corporation's Board authorized  management to repurchase
up to 150,000  shares of the  Corporation's  Common  Stock.  This  authorization
expired on January  22,  2008 and was  publicly  announced  on Form 8-K filed on
October 29, 2007.


On December 4, 2007, the Corporation's Board authorized management to repurchase
up to 500,000  shares of the  Corporation's  Common  Stock.  This  authorization
expires on December  31, 2008 and was  publicly  announced  on Form 8-K filed on
December 11, 2007.

                                    Page 28
<page>
PART II: ITEM 5. AND ITEM 6.


EQUITY COMPENSATION PLAN INFORMATION

The following table provides  information about the  Corporation's  common stock
that may be issued under equity compensation plans as of December 31, 2007.
<table>
<caption>
====================================================================================================================================
                                                                                          Number of securities remaining
                                      Number of securities to      Weighted-average        available for future issuance
                                      be issued upon exercise      exercise price of        under equity compensations
                                      of outstanding options,     outstanding options,      plans (excluding securities
    Plan category                       warrants and rights       warrants and rights       reflected in first column)
====================================================================================================================================
<S>                                                  <C>                      <C>                                 <C>
Equity Compensation Plans Approved
  by Stockholders                                  1,018,076     $             24.37                          400,000<F1>
Equity Compensation Plans Not
  Approved by Stockholders<F2>                        36,354                   22.33
                                      -----------------------    --------------------    -----------------------------
  Total                                            1,054,430     $             24.30                          400,000(1)
                                      =======================    ====================    =============================

<FN>
<F1> This number does not include shares remaining available for future issuance
under the 1999  Long-term  Equity  Incentive  Plan,  which was  approved  by the
Corporation's  shareholders at the 1999 annual meeting.  The aggregate number of
shares that are  available  for grants under that Plan in any  calendar  year is
equal to the sum of:  (a> 1% of the number of common  shares of the  Corporation
outstanding  as of the last day of the  preceding  calednar  year;  plus (b> the
number of shares that were available for grants, but not granted, under the Plan
in any previous year;  but in now event will the number of shares  available for
grants in any  calednar  year exceed 1.5% of the number of common  shares of the
Corporation  outstanding as of the last day of the preceding  calendar year. The
1999 Long-term Equity Incentive Plan will expire in 2009.
<F2> The only plan  reflected  above that was not approved by the  Corporation's
stockholders  relates  to  certain  First  Merchants  Corporation  Stock  Option
Agreements  ("Agreements").  These Agreements  provided for non-qualified  stock
options of the common stock of the Corporation, awarded between 1995 and 2002 to
each director of First Merchants Bank, National  Association who, on the date of
the grants:  (a) were serving as a director of First Merchants;  (b) were not an
employee of the Corporation,  First Merchants, or any of the Corporation's other
affiliated  banks or the  non-bank  subsidiaries;  and (c) were not serving as a
director of the  Corporation.  The exercise price of the shares was equal to the
fair market value of the shares upon the grant of the option. Options became 100
percent vested when granted and are fully  exercisable six months after the date
of the grant, for a period of ten years.
</FN>
</table>
ITEM 6.  SELECTED FINANCIAL DATA.

The  selected  financial  data is  presented  within the "Five - Year Summary of
Selected Financial Data" on page 3 of this Annual Report on Form 10-K.

                                    Page 29
<page>
PART II: ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS


ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

CRITICAL ACCOUNTING POLICIES

Generally accepted accounting principles require management to apply significant
judgment to certain  accounting,  reporting and disclosure  matters.  Management
must use  assumptions  and  estimates  to apply those  principles  where  actual
measurement  is not  possible or  practical.  For a complete  discussion  of the
Corporation's significant accounting policies, see the notes to the consolidated
financial  statements  and  discussion  throughout  this Form  10-K.  Below is a
discussion of the Corporation's critical accounting policies. These policies are
critical because they are highly dependent upon subjective or complex judgments,
assumptions  and  estimates.  Changes in such  estimates  may have a significant
impact on the Corporation's  financial  statements.  Management has reviewed the
application of these policies with the Corporation's Audit Committee.

Allowance for Loan Losses. The allowance for loan losses represents management's
estimate of probable losses  inherent in the  Corporation's  loan portfolio.  In
determining the appropriate amount of the allowance for loan losses,  management
makes numerous assumptions, estimates and assessments.

The  Corporation's  strategy for credit risk  management  includes  conservative
credit policies and  underwriting  criteria for all loans, as well as an overall
credit limit for each customer  significantly  below legal lending  limits.  The
strategy also emphasizes diversification on a geographic,  industry and customer
level,  regular  credit quality  reviews and management  reviews of large credit
exposures and loans experiencing deterioration of credit quality.

The  Corporation's  allowance  consists  of three  components:  probable  losses
estimated from individual  reviews of specific loans,  probable losses estimated
from  historical  loss rates,  and  probable  losses  resulting  from  economic,
environmental,  qualitative  or other  deterioration  above and  beyond  what is
reflected in the first two components of the allowance.

Larger  commercial loans that exhibit probable or observed credit weaknesses are
subject to  individual  review.  Where  appropriate,  reserves are  allocated to
individual  loans based on  management's  estimate of the borrower's  ability to
repay the loan given the availability of collateral,  other sources of cash flow
and legal  options  available  to the  Corporation.  Included  in the  review of
individual  loans are those  that are  impaired  as  provided  in SFAS No.  114,
Accounting by Creditors for  Impairment of a Loan.  Any  allowances for impaired
loans are  measured  based on the present  value of  expected  future cash flows
discounted at the loan's effective interest rate or fair value of the underlying
collateral.  The Corporation  evaluates the collectibility of both principal and
interest when assessing the need for a loss accrual.  Historical  loss rates are
applied to other commercial loans not subject to specific reserve allocations.

Homogenous loans, such as consumer  installment and residential  mortgage loans,
are not  individually  risk graded.  Reserves are  established  for each pool of
loans using loss rates based on a three-year  average net charge-off  history by
loan category.

Historical  loss  allocations  for commercial and consumer loans may be adjusted
for significant  factors that, in management's  judgment,  reflect the impact of
any current conditions on loss recognition.  Factors which management  considers
in the analysis include the effects of the national and local economies,  trends
in loan growth and charge-off rates, changes in mix,  concentrations of loans in
specific  industries,  asset  quality  trends  (delinquencies,  charge  offs and
nonaccrual  loans),  risk  management  and loan  administration,  changes in the
internal lending policies and credit  standards,  examination  results from bank
regulatory agencies and the Corporation's internal loan review.

An  unallocated  reserve,  primarily  based  on  the  factors  noted  above,  is
maintained to recognize the  imprecision  in estimating  and measuring loss when
evaluating  reserves  for  individual  loans or pools of  loans.  Allowances  on
individual  loans and historical  loss  allocations  are reviewed  quarterly and
adjusted as necessary based on changing borrower and/or collateral conditions.

The Corporation's primary market areas for lending are north-central and
east-central Indiana and Columbus, Ohio. When evaluating the adequacy of
allowance, consideration is given to this regional geographic concentration and
the closely associated effect changing economic conditions have on the
Corporation's customers.

The Corporation has not substantively changed any aspect of its overall approach
in the  determination  of the  allowance  for loan  losses.  There  have been no
material  changes in assumptions  or estimation  techniques as compared to prior
periods that impacted the determination of the current period allowance.

Valuation of Securities. The Corporation's available-for-sale security portfolio
is reported at fair value.  The fair value of a security is determined  based on
quoted market prices.  If quoted market prices are not available,  fair value is
determined based on quoted prices of similar instruments. Available-for-sale and
held-to-maturity    securities    are    reviewed    quarterly    for   possible
other-than-temporary  impairment.  The review  includes an analysis of the facts
and circumstances of each individual investment such as the
                                    Page 30
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PART II: ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS


CRITICAL ACCOUNTING POLICIES continued

length of time the fair  value has been below  cost,  the  expectation  for that
security's performance, the creditworthiness of the issuer and the Corporation's
ability to hold the security to maturity.  A decline in value that is considered
to be other-than  temporary is recorded as a loss within other operating  income
in the consolidated statements of income.

Pension.  The  Corporation  provides  pension  benefits  to  its  employees.  In
accordance  with  applicable   accounting   rules,   the  Corporation  does  not
consolidate  the  assets  and  liabilities  associated  with the  pension  plan.
Instead, the Corporation recognizes the funded status of the plan in the balance
sheet.  The  measurement  of the funded  status and the annual  pension  expense
involves actuarial and economic assumptions.

The assumptions used in pension accounting relate to the expected rate of return
on plan assets, the rate of increase in salaries, the  interest-crediting  rate,
the discount rate, and other  assumptions.  See Note 16 "Employee Benefit Plans"
in the Annual Report for the specific assumptions used by the Corporation.

The annual  pension  expense for the  Corporation is currently most sensitive to
the discount  rate.  Each 25 basis point  reduction in the 2007 discount rate of
5.5  percent  would  increase  the   Corporation's   2007  pension   expense  by
approximately  $95,000.  In addition,  each 25 basis point reduction in the 2007
expected rate of return of 7.75 percent would  increase the  Corporation's  2007
pension expense by approximately $101,000.

Goodwill and Intangibles. For purchase acquisitions, the Corporation is required
to record the assets acquired,  including identified  intangible assets, and the
liabilities  assumed  at their  fair  value,  which in many  instances  involves
estimates  based on  third-party  valuations,  such as  appraisals,  or internal
valuations based on discounted cash flow analyses or other valuation  techniques
that may include estimates of attrition,  inflation, asset growth rates or other
relevant factors.  In addition,  the determination of the useful lives for which
an intangible asset will be amortized is subjective.

Goodwill and indefinite-lived assets recorded must be reviewed for impairment on
an annual basis, as well as on an interim basis,  if events or changes  indicate
that the asset might be impaired.  An impairment loss must be recognized for any
excess of carrying value over fair value of the goodwill or the indefinite-lived
intangible with subsequent reversal of the impairment loss being prohibited. The
tests  for  impairment  fair  values  are  based on  internal  valuations  using
management's  assumptions  of future growth rates,  future  attrition,  discount
rates,  multiples of earnings or other relevant factors. The resulting estimated
fair values could have a significant  impact on the carrying  values of goodwill
or  intangibles  and could result in impairment  losses being recorded in future
periods.

Derivative Instruments.  As part of our asset/liability  management program, the
Corporation will utilize, from time-to-time, interest rate floors, caps or swaps
to reduce its  sensitivity to interest rate  fluctuations.  These are derivative
instruments,  which are recorded as assets or  liabilities  in the  consolidated
balance  sheets at fair  value.  Changes in the fair values of  derivatives  are
reported in the consolidated  income  statements or other  comprehensive  income
(OCI)  depending  on the  use of  the  derivative  and  whether  the  instrument
qualifies for hedge  accounting.  The key criterion for the hedge  accounting is
that the hedged  relationship  must be highly effective in achieving  offsetting
changes in those cash flows that are  attributable  to the hedged risk,  both at
inception of the hedge and on an ongoing basis.

Derivatives  that qualify for the hedge  accounting  treatment are designated as
either:  a hedge of the fair value of the recognized asset or liability or of an
unrecognized  firm  commitment  (a fair value  hedge) or a hedge of a forecasted
transaction or the variability of cash flows to be received or paid related to a
recognized asset or liability (a cash flow hedge).  To date, the Corporation has
only entered into a cash flow hedge.  For cash flow hedges,  changes in the fair
values of the derivative instruments are reported in OCI to the extent the hedge
is effective.  The gains and losses on derivative  instruments that are reported
in OCI are  reflected  in the  consolidated  income  statement in the periods in
which the results of  operations  are  impacted by the  variability  of the cash
flows of the  hedged  item.  Generally,  net  interest  income is  increased  or
decreased by amounts  receivable  or payable  with  respect to the  derivatives,
which qualify for hedge  accounting.  At inception of the hedge, the Corporation
establishes  the method it uses for assessing the  effectiveness  of the hedging
derivative and the measurement  approach for determining the ineffective  aspect
of the  hedge.  The  ineffective  portion of the hedge,  if any,  is  recognized
currently in the consolidated statements of income. The Corporation excludes the
time value expiration of the hedge when measuring ineffectiveness.

RESULTS OF OPERATIONS

As of December  31, 2007 total  assets  equaled  $3,782,087,000,  an increase of
$227,217,000  from December 31, 2006. Loans and investments,  the  Corporation's
primary earning assets, increased by $168,500,000,  or 5.4 percent. During 2007,
management  strategically reduced several earning asset categories,  with a view
toward higher performance and capital maximization. Details of these changes are
discussed  within the "EARNING  ASSETS" section of  Management's  Discussion and
Analysis of Financial Condition and Results of Operations.

                                    Page 31
<page>
PART II: ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS


RESULTS OF OPERATIONS continued

As of December  31, 2006 total  assets  equaled  $3,554,870,000,  an increase of
$317,791,000   from  December  31,  2005.  Of  this  amount,   loans   increased
$235,677,000,   investments  increased   $30,951,000,   intangibles,   including
goodwill,  decreased  $195,000  and cash value of life  insurance  increased  by
$20,634,000.  Details of these changes are discussed within the "EARNING ASSETS"
section of  Management's  Discussion  and  Analysis of Financial  Condition  and
Results of Operations.

Net income for 2007  totaled  $31,639,000,  an  increase of  $1,441,000,  or 4.8
percent from 2006.  Diluted  earnings  per share  totaled  $1.73,  a 5.6 percent
increase from $1.64 reported in 2006.  The increase was primarily  attributed to
increases in earning  assets.  This volume  increase was offset by a decrease in
net interest  margin of 16 basis points and  increased  expenses  related to two
strategic  non-recurring  expenses. The first is related to the early redemption
of the Corporation's  subordinated debentures payable to First Merchants Capital
Trust I and  subsequent  redemption  by First  Merchants  Capital Trust I of its
outstanding common and preferred fixed rate securities (NASDAQ-FRMEP). The early
redemption  of  the  debentures  required  the  Corporation  to  accelerate  the
recognition of the remaining unamortized  underwriting fee of approximately $1.8
million,  or $.06 per share.  The second is related to expenses of $1.1  million
related  to the  successful  completion  of  the  Corporation's  integration  of
Commerce  National  Bank,  as well as the charter and data mergers of four banks
into First Merchants Bank,  National  Association.  These factors and others are
discussed within the respective sections of Management's Discussion and Analysis
of Financial condition and Results of Operations.

Net income for 2006 totaled  $30,198,000,  a decrease of $41,000,  or .1 percent
from 2005.  Diluted earnings per share totaled $1.64, a .6 percent increase from
$1.63 reported in 2005. Net interest  margin declined by 26 basis points in 2006
to 3.71  percent  from 3.97 percent in 2005.  As a result,  net interest  income
declined by $1,034,000  despite strong  improvements  in earning  assets.  These
factors and others are discussed within the respective  sections of Management's
Discussion and Analysis of Financial condition and Results of Operations.

Return on equity  totaled 9.56 percent in 2007,  9.45 percent in 2006,  and 9.58
percent in 2005.  Return on assets  totaled .87 percent in 2007,  .90 percent in
2006 and .95 percent in 2005.  Multiple factors impacting the reported financial
results are discussed within the respective sections of Management's  Discussion
and Analysis of Financial Condition and Results of Operations.

CAPITAL

The  Corporation's  regulatory  capital  continues  to exceed  regulatory  "well
capitalized"  standards.  To be categorized as well capitalized,  the Banks must
maintain a minimum  total  capital to  risk-weighted  assets,  Tier I capital to
risk-weighted  assets  and Tier I capital  to average  assets of 10  percent,  6
percent  and  5  percent,  respectively.  Tier  I  regulatory  capital  consists
primarily of total  stockholders'  equity and subordinated  debentures issued to
business  trusts  categorized  as  qualifying  borrowings,  less  non-qualifying
intangible   assets  and  unrealized  net  securities   gains  or  losses.   The
Corporation's  Tier I capital to average  assets ratio was 7.19 percent and 7.37
percent at December 31, 2007 and 2006, respectively.

In  addition,  at December  31, 2007,  the  Corporation  had a Tier I risk-based
capital  ratio of 8.75  percent  and  total  risk-based  capital  ratio of 10.55
percent. Regulatory capital guidelines require a Tier I risk-based capital ratio
of at least 4.0 percent  and a total  risk-based  capital  ratio of at least 8.0
percent.

The Corporation's GAAP capital ratio,  defined as total stockholders'  equity to
total  assets,  equaled 8.99  percent as of December  31,  2007,  down from 9.21
percent in 2006.

The Corporation's  tangible capital ratio, defined as total stockholders' equity
less intangibles net of tax to total assets less intangibles net of tax, equaled
5.72 percent as of December 31, 2007, up from 5.67 percent in 2006.

Management  believes  that  all of  the  above  capital  ratios  are  meaningful
measurements  for  evaluating  the  safety  and  soundness  of the  Corporation.
Additionally,  management  believes the following  table is also meaningful when
considering  performance  measures  of the  Corporation.  The table  details and
reconciles  tangible earnings per share, return on tangible capital and tangible
assets to traditional GAAP measures.

                                    Page 32
<page>
PART II: ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS


CAPITAL continued
<table>
<caption>
========================================================================================
                                                                    December 31,
(Dollars in Thousands)                                          2007            2006
========================================================================================
<S>                                                              <C>               <C>
Average Goodwill.....................................        $  123,191      $  121,831
Average Core Deposit Intangible (CDI)................            13,868          16,103
Average Deferred Tax on CDI..........................            (3,659)         (4,994)
                                                             ----------      ----------
  Intangible Adjustment..............................        $  133,400      $  132,940
                                                             ==========      ==========
Average Stockholders' Equity (GAAP Capital)..........        $  330,786      $  319,519
Intangible Adjustment................................          (133,400)       (132,940)
                                                             ----------      ----------
  Average Tangible Capital...........................        $  197,386      $  186,579
                                                             ==========      ==========
Average Assets.......................................        $3,639,772      $3,371,386
Intangible Adjustment................................          (133,400)       (132,940)
                                                             ----------      ----------
  Average Tangible Assets............................        $3,506,372      $3,328,446
                                                             ==========      ==========
Net Income...........................................        $   31,639      $   30,198
CDI Amortization, Net of Tax.........................             1,919           1,920
                                                             ----------      ----------
  Tangible Net Income................................        $   33,558      $   32,118
                                                             ==========      ==========
Diluted Earnings Per Share...........................        $     1.73      $     1.64
Diluted Tangible Earnings Per Share..................        $     1.83      $     1.75

Return on Average GAAP Capital.......................              9.56%           9.45%
Return on Average Tangible Capital...................             17.00%          17.21%

Return on Average Assets.............................              0.87%           0.90%
Return on Average Tangible Assets....................              0.96%           0.99%
</table>
ASSET QUALITY/PROVISION FOR LOAN LOSSES

The  Corporation's  primary  business  focus is small business and middle market
commercial and residential real estate,  auto and small consumer lending,  which
results  in  portfolio  diversification.  Management  ensures  that  appropriate
methods to understand and  underwrite  risk are utilized.  Commercial  loans are
individually  underwritten  and judgmentally  risk rated.  They are periodically
monitored and prompt corrective actions are taken on deteriorating loans. Retail
loans are typically underwritten with statistical  decision-making tools and are
managed throughout their life cycle on a portfolio basis.

The  allowance  for loan losses is  maintained  through the  provision  for loan
losses, which is a charge against earnings.  The amount provided for loan losses
and the determination of the adequacy of the allowance are based on a continuous
review of the loan portfolio,  including an internally administered loan "watch"
list and an independent  loan review.  The evaluation  takes into  consideration
identified credit problems, as well as the possibility of losses inherent in the
loan portfolio that are not specifically  identified.  (See Critical  Accounting
Policies)

At December 31, 2007,  non-performing loans totaled $32,754,000,  an increase of
$11,874,000.  Loans 90 days past due other  than  non-accrual  and  restructured
loans increased by $769,000. The amount of non-accrual loans totaled $29,031,000
at December  31,  2007.  Non-performing  loans will  increase or decrease  going
forward due to portfolio growth, routine problem loan recognition and resolution
through  collections,  sales or charge offs. The  performance of any loan can be
affected by external factors, such as economic conditions, or factors particular
to a borrower, such as actions of a borrower's management.

At  December  31,  2007,  impaired  loans  totaled  $86,949,000,  an increase of
$26,629,000  from year-end 2006. At December 31, 2007, a specific  allowance for
losses was not deemed necessary for impaired loans totaling  $65,645,000,  but a
specific  allowance of  $6,034,000  was recorded  for the  remaining  balance of
impaired loans of $21,304,000 and is included in the Corporation's allowance for
loan losses.  The average  balance of impaired loans for 2007 was  $103,272,000.
The  increase  of total  impaired  loans is  primarily  due to the  increase  of
performing,  substandard  classified  loans,  which  comprise  a portion  of the
Corporation's  total impaired  loans. A loan is deemed  impaired when,  based on
current  information or events, it is probable that all amounts due of principal
and interest  according to the contractual  terms of the loan agreement will not
be collected.  For the Corporation,  all criticized loans including substandard,
doubtful and loss credits are included in the impaired loan total.

At December 31, 2007, the allowance for loan losses was $28,228,000, an increase
of $1,688,000  from year-end 2006. As a percent of loans,  the allowance was .98
percent at December 31, 2007 and .99 percent at December  31,  2006.  Management
believes that the allowance for loan losses is adequate to cover losses inherent
in the loan  portfolio  at December 31, 2007.  The process for  determining  the
adequacy of the allowance for loan losses is critical to our financial  results.
It requires management to make difficult,

                                    Page 33
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PART II: ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS


ASSET QUALITY/PROVISION FOR LOAN LOSSES continued

subjective  and  complex  judgments,  as a result of the need to make  estimates
about the effect of matters that are  uncertain.  Therefore,  the  allowance for
loan  losses,  considering  current  factors  at the  time,  including  economic
conditions  and  ongoing  internal  and  external  examination  processes,  will
increase or decrease as deemed necessary to ensure the allowance for loan losses
remains adequate. In addition,  the allowance as a percentage of charge offs and
nonperforming  loans  will  change at  different  points in time based on credit
performance, loan mix and collateral values.

The provision  for loan losses in 2007 was  $8,507,000,  or 30 basis points,  an
increase of $2,249,000 from $6,258,000,  or 24 basis points, in 2006, reflecting
the increase of 5 basis points in net charge offs during the year.

The provision  for loan losses in 2006 was  $6,258,000,  or 24 basis  points,  a
decrease of $2,096,000 from $8,354,000,  or 34 basis points, in 2005, reflecting
the decline of 4 basis points in net charge offs during the year.

The following table summarizes the non-accrual,  contractually  past due 90 days
or more other than non-accruing and restructured loans for the Corporation.
<table>
<caption>
================================================================================
                                                                December 31,
(Dollars in Thousands)                                      2007            2006
================================================================================

                                                       <C>              <C>
Non-accrual Loans ..............................         $29,031         $17,926

Loans Contractually
   Past Due 90 Days or More
   Other than Non-accruing .....................           3,578           2,870

Restructured Loans .............................             145              84
                                                         -------         -------

   Total .......................................         $32,754         $20,880
                                                         =======         =======
</table>
The table below represents loan loss experience for the years indicated.
<table>
<caption>
========================================================================================================

(Dollars in Thousands)                                             2007            2006            2005
========================================================================================================
<S>                                                               <C>               <C>             <C>
Allowance for Loan Losses:
    Balance at January 1 ..................................      $26,540         $25,188         $22,548
                                                                 -------         -------         -------
    Charge offs ...........................................        8,557           6,510           7,744
    Recoveries ............................................        1,738           1,604           2,030
                                                                 -------         -------         -------
    Net charge offs .......................................        6,819           4,906           5,714
    Provision for Loan Losses .............................        8,507           6,258           8,354
                                                                 -------         -------         -------
    Balance at December 31 ................................      $28,228         $26,540         $25,188
                                                                 =======         =======         =======
   Ratio of Net Charge offs During the Period to
     Average Loans Outstanding During the Period ..........         .24%            .19%            .23%
</table>

                                    Page 34
<page>
PART II: ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS


LIQUIDITY

Liquidity  management  is the  process  by which the  Corporation  ensures  that
adequate liquid funds are available.  These funds are necessary in order for the
Corporation  and its  subsidiaries  to meet  financial  commitments  on a timely
basis.  These  commitments  include  withdrawals by  depositors,  funding credit
obligations to borrowers,  paying  dividends to  shareholders,  paying operating
expenses,   funding  capital  expenditures,   and  maintaining  deposit  reserve
requirements.  Liquidity is monitored and closely managed by the asset/liability
committee at each subsidiary and by the Corporation's asset/liability committee.

Liquidity is dependent  upon the receipt of  dividends  from bank  subsidiaries,
which are subject to certain  regulatory  limitations as explained in Note 14 to
the  consolidated  financial  statements,  and access to other funding  sources.
Liquidity  of our bank  subsidiaries  is  derived  primarily  from core  deposit
growth,  principal  payments  received  on  loans,  the  sale  and  maturity  of
investment securities,  net cash provided by operating activities, and access to
other funding sources.

The most stable source of liability-funded  liquidity for both the long-term and
short-term  is  deposit  growth  and  retention  in the core  deposit  base.  In
addition,  the  Corporation  utilizes  advances  from the Federal Home Loan Bank
("FHLB") and a revolving line of credit with LaSalle Bank,  N.A.  ("LaSalle") as
funding  sources.  At December 31,  2007,  total  borrowings  from the FHLB were
$294,101,000.  Our bank  subsidiaries  have pledged  certain  mortgage loans and
certain  investments  to the  FHLB.  The  total  available  remaining  borrowing
capacity from FHLB at December 31, 2007, was $18,486,000.  At December 31, 2007,
the revolving line of credit with LaSalle Bank had a balance of $25,000,000 with
no remaining borrowing capacity.

For further  discussion,  see Note 10 to the Consolidated  Financial  Statements
included in Item 8 of this Annual Report on Form 10-K.

The  principal  source  of  asset-funded   liquidity  is  investment  securities
classified   as   available-for-sale,   the  market   values  of  which  totaled
$440,836,000  at December 31, 2007,  a decrease of  $15,097,000,  or 3.3 percent
below  December 31, 2006.  Securities  classified as  held-to-maturity  that are
maturing  within a short  period  of time can  also be a  source  of  liquidity.
Securities  classified as held-to-maturity  and that are maturing in one year or
less totaled $704,000 at December 31, 2007. In addition,  other types of assets,
such as cash and due from banks,  federal  funds sold and  securities  purchased
under agreements to resell, and loans and  interest-bearing  deposits with other
banks maturing within one year are sources of liquidity.

In the normal  course of  business,  the  Corporation  is a party to a number of
other off-balance  sheet activities that contain credit,  market and operational
risk  that  are  not  reflected  in  whole  or  in  part  in  the  Corporation's
consolidated   financial   statements.   Such  activities  include   traditional
off-balance  sheet  credit-related  financial  instruments,   commitments  under
operating leases and long-term debt.

The Corporation provides customers with off-balance sheet credit support through
loan  commitments  and  standby  letters  of credit.  Summarized  credit-related
financial instruments at December 31, 2007 are as follows:
<table>
<caption>
=======================================================================================
                                                              At December 31,
(Dollars in Thousands)                                            2007
=======================================================================================
<S>                                                               <C>
Amounts of Commitments:
Loan Commitments to Extend Credit ......................      $  747,070
Standby Letters of Credit ..............................          25,431
                                                              ----------
                                                               $ 772,501
                                                              ==========
</table>
Since  many  of the  commitments  are  expected  to  expire  unused,  or be only
partially  used, the total amount of unused  commitments in the preceding  table
does not necessarily represent future cash requirements.

                                    Page 35
<page>
PART II: ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS


LIQUIDITY continued

In addition to owned  banking  facilities,  the  Corporation  has entered into a
number of long-term leasing arrangements to support the ongoing activities.  The
required  payments under such  commitments and other  borrowing  arrangements at
December 31, 2007 are as follows:
<table>
<caption>
===========================================================================================================
                                                                                       2013 and
(Dollars in Thousands)               2008      2009      2010      2011       2012      after     Total
===========================================================================================================
<S>                                   <C>       <C>       <C>       <C>      <C>         <C>        <C>
Operating Leases                  $  1,708   $ 1,385   $ 1,178   $   953   $    600   $     73  $  5,897
Federal Funds Purchased             52,350                                                        52,350
Securities Sold Under
  Repurchase Agreements             72,247              10,000               14,250     10,000   106,497
Federal Home Loan Bank advances    108,398    53,351    46,080    18,944     51,679     15,649   294,101
Subordinated Debentures,
  Revolving Credit Lines and
  Term Loans                        25,000                                              90,826   115,826
                                  --------   -------   -------   -------   --------   --------  --------
Total                             $259,703   $54,736   $57,258   $19,897   $ 66,529   $116,548  $574,671
                                  ========   =======   =======   =======   ========   ========  ========
</table>

INTEREST SENSITIVITY AND DISCLOSURES ABOUT MARKET RISK

Asset/Liability  Management  has been an important  factor in the  Corporation's
ability to record  consistent  earnings  growth through periods of interest rate
volatility  and  product  deregulation.  Management  and the Board of  Directors
monitor the  Corporation's  liquidity  and  interest  sensitivity  positions  at
regular  meetings to review how changes in interest  rates may affect  earnings.
Decisions regarding  investment and the pricing of loan and deposit products are
made after analysis of reports designed to measure liquidity,  rate sensitivity,
the Corporation's  exposure to changes in net interest income given various rate
scenarios and the economic and competitive environments.

It is the  objective of the  Corporation  to monitor and manage risk exposure to
net interest  income caused by changes in interest  rates. It is the goal of the
Corporation's  Asset/Liability  function  to  provide  optimum  and  stable  net
interest income. To accomplish this,  management uses two asset liability tools.
GAP/Interest  Rate  Sensitivity  Reports  and  Net  Interest  Income  Simulation
Modeling are both constructed, presented and monitored quarterly.

Management  believes that the Corporation's  liquidity and interest  sensitivity
position at  December  31,  2007,  remained  adequate to meet the  Corporation's
primary goal of achieving optimum interest margins while avoiding undue interest
rate  risk.  The  following  table  presents  the  Corporation's  interest  rate
sensitivity analysis as of December 31, 2007.
<table>
<caption>
===================================================================================================================================
                                                                                      At December 31, 2007

(Dollars in Thousands)                                          1-180 DAYS   181-365 DAYS    1-5 YEARS    BEYOND 5 YEARS    TOTAL
===================================================================================================================================
<S>                                                                 <C>          <C>             <C>          <C>             <C>
Rate-Sensitive Assets:
   Interest-bearing Deposits ...............................   $   24,931                                               $   24,931
   Investment Securities ...................................       68,237    $   48,785     $  294,972     $   39,173      451,167
   Loans ...................................................    1,418,945       445,722        914,738        101,173    2,880,578
   Federal Reserve and Federal Home Loan Bank stock ........                                    25,250                      25,250
                                                               ----------    ----------     ----------     ----------   ----------
        Total Rate-sensitive Assets ........................    1,512,113       494,507      1,234,960        140,346    3,381,926
                                                               ----------    ----------     ----------     ----------   ----------
Rate-Sensitive Liabilities:
   Federal Funds Purchased .................................       52,350                                                   52,350
   Interest-bearing Deposits ...............................    1,843,652       301,391        318,066         20,463    2,478,421
   Securities Sold Under Repurchase Agreements .............       72,247                       10,000         24,250      106,497
   Federal Home Loan Bank Advances .........................      109,050        10,631        119,837         54,583      294,101
   Subordinated Debentures, Revolving Credit
     Lines and Term Loans  .................................       55,000                                      60,826      115,826
                                                               ----------    ----------     ----------     ----------   ----------
        Total Rate-sensitive Liabilities ...................    2,132,299       312,022        447,903        160,122    3,047,195
                                                               ----------    ----------     ----------     ----------   ----------

Interest Rate Sensitivity gap by Period ....................   $ (613,597)   $  182,485     $  787,057     $  (16,517)
Cumulative Rate Sensitivity gap ............................     (613,597)     (431,113)       355,945        339,428
Cumulative Rate Sensitivity gap Ratio
   at December 31, 2007 ....................................         71.1%         82.3%         112.3%         111.2%
   at December 31, 2006 ....................................         73.5%         78.0%         113.3%         113.0%
</table>
The  Corporation  had a cumulative  negative gap of $437,207,000 in the one-year
horizon at December 31, 2007, just over 11.6 percent of total assets.

The Corporation  places its greatest  credence in net interest income simulation
modeling.  The above  GAP/Interest  Rate  Sensitivity  Report is believed by the
Corporation's  management to have two major  shortfalls.  The GAP/Interest  Rate
Sensitivity Report fails to precisely gauge how often an interest rate sensitive
product  reprices,  nor is it able to measure the magnitude of potential  future
rate movements.

                                    Page 36
<page>
PART II: ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS


INTEREST SENSITIVITY AND DISCLOSURES ABOUT MARKET RISK continued

Net interest  income  simulation  modeling,  or  earnings-at-risk,  measures the
sensitivity  of net interest  income to various  interest  rate  movements.  The
Corporation's  asset liability  process  monitors  simulated net interest income
under  three  separate  interest  rate  scenarios;  base,  rising  and  falling.
Estimated net interest  income for each  scenario is calculated  over a 12-month
horizon.  The immediate  and parallel  changes to the base case scenario used in
the  model  are  presented  below.  The  interest  rate  scenarios  are used for
analytical purposes and do not necessarily represent management's view of future
market movements.  Rather, these are intended to provide a measure of the degree
of  volatility  interest rate  movements may introduce  into the earnings of the
Corporation.

The base scenario is highly  dependent on numerous  assumptions  embedded in the
model,  including  assumptions  related to future interest rates. While the base
sensitivity  analysis  incorporates  management's best estimate of interest rate
and balance sheet  dynamics  under  various  market rate  movements,  the actual
behavior and resulting  earnings  impact will likely differ from that projected.
For  mortgage-related  assets,  the base simulation  model captures the expected
prepayment  behavior under changing interest rate environments.  Assumptions and
methodologies  regarding the interest rate or balance  behavior of indeterminate
maturity  products,  such as savings,  money  market,  NOW and demand  deposits,
reflect management's best estimate of expected future behavior.

The comparative  rising and falling scenarios below assume further interest rate
changes in addition to the base simulation  discussed  above.  These changes are
immediate and parallel  changes to the base case  scenario.  In addition,  total
rate  movements  (beginning  point  minus  ending  point) to each of the various
driver rates utilized by management in the base simulation are as follows:
<table>
<caption>
================================================================================
Driver Rates                      RISING              FALLING
================================================================================
<S>                                   <C>                   <C>
Prime                             200 Basis Points      (200) Basis Points
Federal Funds                     200                   (200)
One-Year CMT                      200                   (200)
Two-Year CMT                      200                   (200)
CD's                              200                   (193)
FHLB Advances                     200                   (200)
</table>
Results for the base,  rising and falling  interest  rate  scenarios  are listed
below based upon the  Corporation's  rate  sensitive  assets and  liabilities at
December 31, 2007.  The net interest  income  shown  represents  cumulative  net
interest income over a 12-month time horizon. Balance sheet assumptions used for
the base scenario are the same for the rising and falling simulations.
<table>
<caption>
================================================================================
                                              BASE      RISING      FALLING
================================================================================
<S>                                           <C>        <C>          <C>
Net Interest Income (Dollars in Thousands)  $117,693  $120,089    $116,063
Variance from Base                                    $  2,396    $ (1,630)
Percent of Change from Base                               2.0%       (1.4)%
</table>
The comparative  rising and falling scenarios below assume further interest rate
changes in addition to the base simulation  discussed  above.  These changes are
immediate and parallel  changes to the base case  scenario.  In addition,  total
rate  movements  (beginning  point  minus  ending  point) to each of the various
driver rates utilized by management in the base simulation are as follows:
<table>
<caption>
================================================================================
Driver Rates                      RISING              FALLING
================================================================================
<S>                               <C>                  <C>
Prime                             200 Basis Points    (200) Basis Points
Federal Funds                     200                 (200)
One-Year CMT                      200                 (200)
Two-Year CMT                      200                 (200)
Three-Year CMT                    200                 (200)
Five-Year CMT                     200                 (200)
CD's                              200                 (191)
FHLB Advances                     200                 (200)
</table>
Results for the base,  rising and falling  interest  rate  scenarios  are listed
below. The net interest income shown  represents  cumulative net interest income
over a  12-month  time  horizon.  Balance  sheet  assumptions  used for the base
scenario are the same for the rising and falling simulations.
<table>
<caption>
===============================================================================
                                              BASE       RISING     FALLING
===============================================================================
<S>                                           <C>         <C>          <C>
Net Interest Income (Dollars in Thousands)  $109,090   $108,036    $108,429
Variance from Base                                     $ (1,054)   $  (631)
Percent of Change from Base                                (.96)%     (.58)%
</table>
                                    Page 37
<page>
PART II: ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS


EARNING ASSETS

The following  table presents the earning asset mix as of December 31, 2007, and
December 31, 2006. Earnings assets increased by $183,720,000. Loans increased by
$182,564,000.  The largest loan segments that  increased  were in commercial and
industrial  of   $125,396,000   and  commercial  and  farmland  real  estate  of
$85,805,000. Loan categories that decreased included residential real estate and
loans to  individuals.  The  residential  real  estate loan  category  decreased
primarily  due the sale of $27  million of  seasoned,  long-duration  conforming
mortgage loans. The loans to individuals  decreased as management  strategically
reduced its indirect lending function, our lowest yielding loan category.

Investments  decreased by $14,050,000 as lower yielding  investments matured and
were reinvested in the higher yielding loans.
<table>
<caption>
==================================================================================================
(Dollars in Thousands)                                          December 31,
==================================================================================================
<S>                                                           <C>             <C>
                                                            2007              2006
                                                          --------          --------
Interest-bearing Time Deposits                          $   24,931        $   11,284
Investment Securities Available for Sale ............      440,836           455,933
Investment Securities Held to Maturity ..............       10,331             9,284
Mortgage Loans Held for Sale ........................        3,735             5,413
Loans ...............................................    2,876,843         2,692,601
Federal Reserve and Federal Home Loan Bank stock ....       25,250            23,691
                                                         ---------         ---------
    Total ...........................................   $3,381,926        $3,198,206
                                                         =========         =========
</table>
DEPOSITS AND BORROWINGS

The table below reflects the level of deposits and borrowed funds (federal funds
purchased;  repurchase agreements; Federal Home Loan Bank advances; subordinated
debentures,  revolving  credit lines and term loans) based on year-end levels at
December 31, 2007 and 2006.
<table>
<caption>
==================================================================================================
(Dollars in Thousands)                                        December 31,
==================================================================================================
  <S>                                                   <C>                <C>
                                                       2007                  2006
                                                    ----------           ----------
Deposits ........................................   $2,844,121           $2,750,538
Federal Funds Purchased..........................       52,350               56,150
Securities Sold Under Repurchase Agreements......      106,497               42,750
Federal Home Loan Bank Advances .................      294,101              242,408
Subordinated Debentures, Revolving Credit Lines
   and Term Loans................................      115,826               99,456
                                                    ----------           ----------
                                                    $3,412,895           $3,191,302
                                                    ==========           ==========
</table>
The Corporation has continued to leverage its capital position with Federal Home
Loan Bank advances, as well as repurchase agreements,  which are pledged against
acquired  investment  securities as collateral for the borrowings.  The interest
rate risk is included as part of the Corporation's interest simulation discussed
in  Management's  Discussion and Analysis of Financial  Condition and Results of
Operations  under  the  headings  "LIQUIDITY"  and  "INTEREST   SENSITIVITY  AND
DISCLOSURES ABOUT MARKET RISK".

NET INTEREST INCOME

Net interest income is the primary source of the Corporation's earnings. It is a
function of net interest  margin and the level of average  earning  assets.  The
following table presents the Corporation's asset yields,  interest expense,  and
net interest  income as a percent of average  earning  assets for the three-year
period ending in 2007.

In 2007,  asset yields  increased 18 basis points on a fully taxable  equivalent
basis (FTE) and interest cost increased 34 basis points, resulting in a 16 basis
point (FTE)  decrease  in net  interest  margin as compared to 2006.  During the
period,  growth in  earning  assets  produced  a  positive  volume  variance  of
$8,600,000  (FTE),  while  interest  rate  compression  produced a negative rate
variance of  $5,429,000  (FTE),  resulting in an increase of  $3,025,000  in net
interest income.

In 2006,  asset  yields  increased  66 basis  points  (FTE)  and  interest  cost
increased 92 basis points,  resulting in a 26 basis point (FTE)  decrease in net
interest  margin as  compared  to 2005.  The  increase  in  interest  income and
interest expense was primarily a result of four 25 basis point overnight federal
funds rate  increases by the Federal Open Market  Committee  during this period.
During the period,  interest rate compression  produced a negative rate variance
of  $8,021,000,  while  growth in earning  assets  produced  a  positive  volume
variance of  $6,987,000,  resulting in a decline of  $1,034,000  in net interest
income.

                                    Page 38
<page>
PART II: ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS


NET INTEREST INCOME continued

<table>
<caption>
=========================================================================================================

(Dollars in Thousands)                                                 December 31,
=========================================================================================================
<S>                                                          <C>           <C>           <C>
                                                             2007          2006          2005
                                                            ------        ------        ------
Net Interest Income...................................  $  113,120    $  110,095    $  111,129

FTE Adjustment........................................  $    4,127    $    3,981    $    3,778

Net Interest Income
  on a Fully Taxable Equivalent Basis.................  $  117,247    $  114,076    $  114,907

Average Earning Assets................................  $3,308,939    $3,072,898    $2,891,121

Interest Income (FTE) as a Percent
  of Average Earning Assets...........................        7.10%         6.92%         6.26%

Interest Expense as a Percent
  of Average Earning Assets...........................        3.55%         3.21%         2.29%

Net Interest Income (FTE) as a Percent
  of Average Earning Assets...........................        3.55%         3.71%         3.97%

</table>
Average earning assets include the average  balance of securities  classified as
available for sale,  computed based on the average of the  historical  amortized
cost  balances  without the effects of the fair value  adjustment.  In addition,
annualized amounts are computed utilizing a 30/360 basis.

OTHER INCOME

The  Corporation  offers a wide range of fee-based  services.  Fee schedules are
regularly  reviewed  by a pricing  committee  to ensure  that the  products  and
services offered by the Corporation are priced to be competitive and profitable.

Other income in 2007 amounted to $40,551,000, a 17.2 percent increase from 2006.
The  change in other  income  from 2007 to 2006 was  primarily  attributable  to
fluctuations within the following other income items:

o    Earnings on bank-owned life insurance increased  $1,365,000 compared to the
     same period in 2006 due to a purchase of  $18,000,000 of new life insurance
     policies in mid-2006, and $4,500,000 in 2007. Additionally, a death benefit
     of $440,000 was received in 2007.
o    Service  charges  for 2007 were  $1,159,000  higher than in 2006 due to fee
     increases.
o    The sale of a branch  building  and other real estate  resulted in gains of
     $987,000 in 2007.
o    Insurance  commissions  increased $811,000 from 2006 due to the purchase of
     an insurance agency in late 2006.
o    Trust fees  increased  $747,000  compared  to the same  period in 2006 as a
     result of increased trust business.

Other income in 2006 amounted to $34,613,000,  a .3 percent  decrease from 2005.
The  change  in  other  income  from  2006  to  2005  was  minor  and  primarily
attributable to fluctuations within the following other income items:

o    Fees on debit  cards  and  ATMs  increased  by  approximately  $297,000  as
     compared  to the same  period  in  2005.  This was  primarily  a result  of
     increase card usage by customers.
o    Earnings on cash surrender value of life insurance increased  approximately
     $619,000  compared  to  the  same  period  in  2005  due to a  purchase  of
     $18,000,000 of new life insurance policies in 2006.
o    Net gains and fees on sales of mortgage  loans  decreased by $731,000  from
     the  same  period  in  2005  due to  stabilizing  mortgage  interest  rates
     resulting in reduced mortgage originations.
o    A cash payment was received in 2005 of approximately  $232,000,  related to
     our  membership  in a credit card network that was merged with another card
     network.No such payment was received during 2006.

OTHER EXPENSES

Other expenses  represent  non-interest  operating  expenses of the Corporation.
Total  other  expenses  for 2007 were  $102,182,000,  $6,125,000  or 6.4 percent
higher than the prior year of  $96,057,000.  The change in other  expenses  from
2007 to 2006 was primarily  attributable  to  fluctuations  within the following
other expense items:

o    Salary and employee  benefits grew $2,718,000,  or 4.8 percent due to staff
     additions  and  normal  salary  increases.  Approximately  $635,000  of the
     increase is due to share-based compensation expense recorded in 2007.

                                    Page 39
<page>
PART II: ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS


OTHER EXPENSES continued

o    The  Corporation  wrote off  $1,800,000 in  unamortized  underwriting  fees
     associated with the First Merchants Capital Trust I subordinated debentures
     being called during 2007. Going forward, this early redemption will provide
     the Corporation with savings of $1.2 million annually.

o    Other expenses increased  $1,129,000  primarily due to integration expenses
     related to bank combinations and name changes.

Other expenses  amounted to $96,057,000 in 2006, an increase of 2.2 percent from
the prior year.  Salaries and benefit expense grew  $2,100,000,  or 3.9 percent,
due to staff additions and normal salary  increases.  Approximately  $833,000 of
the increase is due to share-based compensation expense recorded in 2006.

INCOME TAXES

Income tax expense totaled $11,343,000 for 2007, which is a decrease of $852,000
from 2006.  The  effective tax rates for the periods  ending  December 31, 2007,
2006 and 2005 were 26.4 percent,  28.8 percent and 30.5  percent,  respectively.
The effective tax rate has remained lower than the federal  statutory income tax
rate of 35 percent,  primarily due to the  Corporation's  tax-exempt  investment
income on securities and loan income  generated by  subsidiaries  domiciled in a
state with no state or local  income  tax,  income tax  credits  generated  from
investments in affordable  housing  projects,  increases in tax-exempt  earnings
from bank-owned life insurance contracts and reduced state taxes, resulting from
the effect of state income apportionment.

INFLATION

Changing prices of goods,  services and capital affect the financial position of
every business  enterprise.  The level of market interest rates and the price of
funds loaned or borrowed  fluctuate  due to changes in the rate of inflation and
various other factors, including government monetary policy.

Fluctuating  interest rates affect the Corporation's  net interest income,  loan
volume and other  operating  expenses,  such as employee  salaries and benefits,
reflecting  the effects of  escalating  prices,  as well as increased  levels of
operations and other factors.  As the inflation rate  increases,  the purchasing
power of the dollar decreases.  Those holding fixed-rate monetary assets incur a
loss,  while those holding  fixed-rate  monetary  liabilities  enjoy a gain. The
nature of a  financial  holding  company's  operations  is such that  there will
generally be an excess of monetary assets over monetary liabilities,  and, thus,
a financial  holding company will tend to suffer from an increase in the rate of
inflation and benefit from a decrease.

OTHER

The  Securities  and  Exchange  Commission  maintains  a website  that  contains
reports,  proxy  and  information  statements  and other  information  regarding
registrants  that  file  electronically  with  the  commission,   including  the
Corporation, and that address is (http://www.sec.gov).

                                    Page 40
<PAGE>
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.


The quantitative and qualitative disclosures about market risk information are
presented under Item 7 under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" within the section "Interest
Sensitivity and Disclosures About Market Risk", of this Annual Report on Form
10-K.

                                    Page 41
<PAGE>
ITEM 8.  FINANCIAL  STATEMENTS  AND  SUPPLEMENTARY  DATA  REPORT OF  INDEPENDENT
                       REGISTERED PUBLIC ACCOUNTING FIRM


Audit Committee, Board of Directors and Stockholders
First Merchants Corporation
Muncie, Indiana


We have audited the accompanying  consolidated balance sheets of First Merchants
Corporation  as of December 31,  2007,  and 2006,  and the related  consolidated
statements of income,  comprehensive income, stockholders' equity and cash flows
for each of the years in the  three-year  period ended  December  31, 2007.  The
Company's  management  is  responsible  for  these  financial  statements.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audits to  obtain  reasonable  assurance  about  whether  the
financial  statements  are free of material  misstatement.  Our audits  included
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements,   assessing  the  accounting  principles  used  and
significant  estimates made by management  and evaluating the overall  financial
statement  presentation.  We believe that our audits provide a reasonable  basis
for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the financial  position of First  Merchants
Corporation  as of December 31, 2007 and 2006, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 2007, in conformity with  accounting  principles  generally  accepted in the
Unites States of America.

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight  Board  (United  States),  First  Merchants  Corporation's
internal  control over  financial  reporting  as of December 31, 2007,  based on
criteria  established  in Internal  Control-Integrated  Framework  issued by the
Committee of Sponsoring  Organizations of the Treadway Commission (COSO) and our
report  dated  February  8,  2008,  expressed  an  unqualified  opinion  on  the
effectiveness of the Company's internal control over financial reporting.



BKD, LLP
Indianapolis, Indiana
February 8, 2008


                                    Page 42
<PAGE>
          PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                       CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS
<table>
<caption>
(in thousands, except share data)                                                                            December 31,
===================================================================================================================================
                                                                                                    2007                    2006
====================================================================================================================================
<S>                                                                                                   <C>                     <C>
Assets
   Cash and Due From Banks ..........................................................           $   134,683             $    89,957
   Interest-bearing Time Deposits ...................................................                24,931                  11,284
   Investment Securities
      Available for Sale ............................................................               440,836                 455,933
      Held to Maturity (Fair Value of $10,270 and $9,516) ...........................                10,331                   9,284
                                                                                                -----------             -----------
        Total Investment Securities .................................................               451,167                 465,217

   Mortgage Loans Held for Sale .....................................................                 3,735                   5,413
   Loans, Net of Allowance for Loan Losses of $28,228 and $26,540....................             2,848,615               2,666,061
   Premises and Equipment ...........................................................                44,445                  42,393
   Federal Reserve and Federal Home Loan Bank Stock .................................                25,250                  23,691
   Interest Receivable ..............................................................                23,402                  24,345
   Core Deposit Intangibles  ........................................................                12,412                  15,470
   Goodwill..........................................................................               123,444                 123,168
   Cash value of Life Insurance......................................................                70,970                  64,213
   Other Assets .....................................................................                19,033                  23,658
                                                                                                -----------             -----------
       Total Assets .................................................................           $ 3,782,087             $ 3,554,870
                                                                                                ===========             ===========

Liabilities
   Deposits
     Noninterest-bearing ............................................................           $   370,397             $   362,058
     Interest-bearing ...............................................................             2,473,724               2,388,480
                                                                                                -----------             -----------
       Total Deposits ...............................................................             2,844,121               2,750,538
   Borrowings .......................................................................               568,774                 440,764
   Interest Payable .................................................................                 8,325                   9,326
   Other Liabilities ................................................................                20,931                  26,917
                                                                                                -----------             -----------
       Total Liabilities ............................................................             3,442,151               3,227,545
                                                                                                -----------              -----------

Commitments and Contingent Liabilities

Stockholders' Equity
   Preferred Stock, No-par Value
      Authorized and Unissued -- 500,000 Shares
   Common Stock, $.125 Stated Value
      Authorized -- 50,000,000 Shares
      Issued and Outstanding - 18,002,787 and 18,439,843 Shares  ....................                 2,250                   2,305
   Additional Paid-in Capital .......................................................               137,801                 146,460
   Retained Earnings ................................................................               202,750                 187,965
   Accumulated Other Comprehensive Loss .............................................                (2,865)                 (9,405)
                                                                                                -----------             -----------
        Total Stockholders' Equity ..................................................               339,936                 327,325
                                                                                                -----------             -----------
        Total Liabilities and Stockholders' Equity ..................................           $ 3,782,087             $ 3,554,870
                                                                                                ===========             ===========

See notes to consolidated financial statements.
</table>

                                    Page 43
<page>
          PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                       CONSOLIDATED FINANCIAL STATEMENTS


CONSOLIDATED STATEMENTS OF INCOME
<table>
<caption>
(in thousands, except share data)                                                                Year Ended December 31,
===================================================================================================================================
                                                                                       2007               2006               2005
====================================================================================================================================
<S>                                                                                     <C>               <C>                 <C>
Interest Income
   Loans Receivable
     Taxable .............................................................           $207,268           $186,768           $158,436
     Tax Exempt ..........................................................              1,120                828                643
   Investment Securities
     Taxable .............................................................             13,744             12,316              9,612
     Tax Exempt ..........................................................              6,548              6,565              6,374
   Federal Funds Sold ....................................................                172                373                264
   Deposits with Financial Institutions ..................................                582                500                695
   Federal Reserve and Federal Home Loan Bank Stock ......................              1,299              1,256              1,185
                                                                                     --------           --------           --------
       Total Interest Income .............................................            230,733            208,606            177,209
                                                                                     --------           --------           --------
Interest Expense
   Deposits ..............................................................             89,921             74,314             46,121
   Federal Funds Purchased ...............................................              3,589              1,842                623
   Securities Sold Under Repurchase Agreements ...........................              3,856              3,228              1,612
   Federal Home Loan Bank Advances .......................................             12,497             10,734              9,777
   Subordinated Debentures, Revolving
     Credit Lines and Term Loans .........................................              7,750              8,124              7,432
   Other Borrowings ......................................................                                   269                515
                                                                                     --------           --------           --------
        Total Interest Expense ...........................................            117,613             98,511             66,080
                                                                                     --------           --------           --------
Net Interest Income ......................................................            113,120            110,095            111,129
   Provision for Loan Losses .............................................              8,507              6,258              8,354
                                                                                     --------           --------           --------

Net Interest Income After Provision for Loan Losses ......................            104,613            103,837            102,775
                                                                                     --------           --------           --------
Other Income
   Fiduciary Activities ..................................................              8,372              7,625              7,481
   Service Charges on Deposit Accounts ...................................             12,421             11,262             11,298
   Other Customer Fees ...................................................              6,479              5,517              5,094
   Net Realized Gains (Losses) on
     Sales of Available-for-sale Securities ..............................                                    (4)                (2)
   Commission Income .....................................................              5,113              4,302              3,821
   Earnings on Cash Surrender Value
     of Life Insurance ...................................................              3,651              2,286              1,667
   Net Gains and Fees on Sales of Loans ..................................              2,438              2,171              2,902
   Other Income ..........................................................              2,077              1,454              2,456
                                                                                     --------           --------           --------
        Total Other Income ...............................................             40,551             34,613             34,717
                                                                                     --------           --------           --------

Other Expenses
   Salaries and Employee Benefits ........................................             58,843             56,125             54,059
   Net Occupancy Expenses ................................................              6,647              5,886              5,796
   Equipment Expenses ....................................................              6,769              7,947              7,562
   Marketing Expenses.....................................................              2,205              1,932              2,012
   Outside Data Processing Fees ..........................................              3,831              3,449              4,010
   Printing and Office Supplies ..........................................              1,410              1,496              1,369
   Core Deposit Amortization..............................................              3,159              3,066              3,102
   Write-off of Unamortized Underwriting Expenses ........................              1,771
   Other Expenses ........................................................             17,547             16,156             16,047
                                                                                     --------           --------           --------
        Total Other Expenses .............................................            102,182             96,057             93,957
                                                                                     --------           --------           --------

Income Before Income Tax .................................................             42,982             42,393             43,535
   Income Tax Expense ....................................................             11,343             12,195             13,296
                                                                                     --------           --------           --------
Net Income ...............................................................           $ 31,639           $ 30,198           $ 30,239
                                                                                     ========           ========           ========

Net Income Per Share:
   Basic .................................................................           $   1.73           $   1.64           $   1.64
   Diluted ...............................................................               1.73               1.64               1.63
</table>

See notes to consolidated financial statements.

                                    Page 44
<page>
          PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                       CONSOLIDATED FINANCIAL STATEMENTS


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<table>
<caption>
====================================================================================================================================
                                                                                                    Year Ended December 31,
(in thousands, except share data)                                                              2007           2006           2005
====================================================================================================================================
<S>                                                                                             <C>           <C>             <C>
Net Income ...........................................................................      $ 31,639       $ 30,198       $ 30,239
                                                                                             --------       --------       --------
Other Comprehensive Income (Loss), Net of Tax:
  Unrealized Losses on Securities Available for Sale:
     Unrealized Holding Gains/(Losses) Arising During the Period,
       Net of Income Tax Benefit (Expense) of $(1,437), $(1,242), and $3,562..........         2,743          2,087         (6,615)
     Reclassification Adjustment for Gains (Losses) Included in Net Income,
       Net of Income Tax (Expenses) Benefit of $0, $(2), and $(1).....................                            2              1
  Unrealized Gains (Losses) on Cash Flow Hedge Assets:
     Unrealized Gain (Loss) Arising During the Period,
       Net of Income Tax Benefit of $(501), $83, and $0...............................         1,057           (125)
  Unrealized Loss on Pension Minimum Funding Liability:
     Unrealized Loss Arising During the Period,
       Net of Income Tax Benefit of $0, $0, and $1,767 ...............................                                      (2.651)
  Defined Benefit Pension Plans, Net of Income Tax Expense of ($1,827)
     Net Gain Arising During Period ..................................................         2,725
     Prior Service Cost Arising During Period ........................................            30
     Amortization of Prior Service Cost ..............................................           (15)
                                                                                            --------       --------       ---------
                                                                                               6,540          1,964         (9,265)
                                                                                            --------       --------       ---------
  COMPREHENSIVE INCOME                                                                      $ 38,179       $ 32,162       $ 20,974
                                                                                            ========       ========       =========
</table>
<table>
<caption>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                                        COMMON STOCK
                                                   =======================    ADDITIONAL    RETAINED   ACCUMULATED OTHER
                                                      SHARES       AMOUNT   PAID-IN CAPITAL EARNINGS     COMPREHENSIVE      TOTAL
                                                                                                         INCOME (LOSS)
                                                   -----------    --------  --------------  --------- ------------------- --------

                                                     <C>           <C>          <C>         <C>              <C>          <C>
Balances, December 31, 2004                        18,573,997    $  2,322      $150,862     $161,459       $    (40)      $314,603
  Net Income for 2005..........................                                               30,239                        30,239
  Cash Dividends ($.92 per Share)..............                                              (16,981)                      (16,981)
  Other Comprehensive Income (Loss),
     Net of Tax ...............................                                                              (9,265)        (9,265)
  Stock Issued Under Employee Benefit Plans ...        43,238           6           908                                        914
  Stock Issued Under Dividend Reinvestment
     and Stock Purchase Plan ..................        35,565           4           929                                        933
  Stock Options Exercised .....................       121,750          15         2,159                                      2,174
  Stock Redeemed ..............................      (374,598)        (47)       (9,611)                                    (9,658)
  Issuance of Stock Related to Acquisition.....        16,762           2           435                                        437
                                                  -----------    --------      --------    ---------      ---------      ---------
Balances, December 31, 2005                        18,416,714       2,302       145,682      174,717         (9,305)       313,396
                                                  ===========    ========      ========    =========      =========      =========
  Net Income for 2006..........................                                               30,198                        30,198
  Cash Dividends ($.92 per Share)..............                                              (16,950)                      (16,950)
  Other Comprehensive Income (Loss),
     Net of Tax ...............................                                                               1,964          1,964
  Adjustment to Initially Apply FASB Statement
     No. 158, Net of Tax ......................                                                              (2,064)        (2,064)
  Share-based Compensation ....................                                     972                                        972
  Stock Issued Under Employee Benefit Plans ...        41,391           5           852                                        857
  Stock Issued Under Dividend Reinvestment
     and Stock Purchase Plan ..................        48,788           6         1,184                                      1,190
  Stock Options Exercised .....................        90,138          11         1,598                                      1,609
  Stock Redeemed ..............................      (234,495)        (29)       (5,661)                                    (5,690)
  Issuance of Stock Related to Acquisition.....        77,307          10         1,833                                      1,843
                                                  -----------    --------      --------    ---------      ---------      ---------
Balances, December 31, 2006                       18,439,843     $  2,305      $146,460    $ 187,965      $  (9,405)     $ 327,325
                                                  -----------    --------      --------    ---------      ---------      ---------
  Net Income for 2007..........................                                               31,639                        31,639
  Cash Dividends ($.92 per Share)..............                                              (16,854)                      (16,854)
  Other Comprehensive Income (Loss),
     Net of Tax ...............................                                                               6,540          6,540
  Tax Benefit from Stock Options Exercised ....                                     116                                        116
  Share-based Compensation ....................         3,292                     1,468                                      1,468
  Stock Issued Under Employee Benefit Plans ...        38,537           5           782                                        787
  Stock Issued Under Dividend Reinvestment
     and Stock Purchase Plan ..................        51,168           6         1,164                                      1,170
  Stock Options Exercised .....................        35,142           5           491                                        496
  Stock Redeemed ..............................      (565,195)        (71)      (12,680)                                   (12,751)
                                                  -----------    --------      --------    ---------      ---------      ---------
Balances, December 31, 2007                       18,002,787     $  2,250      $137,801    $ 202,750      $  (2,865)     $ 339,936
                                                  ===========    ========      ========    =========      =========      =========

See notes to consolidated financial statements.

</table>
                                    Page 45
<page>
          PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                       CONSOLIDATED FINANCIAL STATEMENTS


CONSOLIDATED STATEMENTS OF CASH FLOWS
<table>
<caption>
====================================================================================================================================
                                                                                             Year Ended December 31,
(in thousands, except share data)                                                  2007               2006               2005
====================================================================================================================================
<S>                                                                                 <C>               <C>                 <C>
Operating Activities:
   Net Income .........................................................         $  31,639          $  30,198          $  30,239
   Adjustments to Reconcile Net Income to
     Net Cash Provided by Operating Activities:
     Provision for Loan Losses ........................................             8,507              6,258              8,354
     Depreciation and Amortization.....................................             4,331              5,382              5,070
     Share-based Compensation .........................................             1,468                833
     Tax Benefits from Stock Options Exercised ........................              (116)              (139)
     Mortgage Loans Originated for Sale ...............................          (123,051)          (123,256)           (86,122)
     Proceeds from Sales of Mortgage Loans ............................           124,729            122,753             84,579
     Net Change in:
         Interest Receivable ..........................................               943             (4,655)            (2,372)
         Interest Payable .............................................            (1,001)             3,452              1,463
     Other Adjustments ................................................             2,165             (4,549)             5,283
                                                                                ---------          ---------          ---------
         Net Cash Provided by Operating Activities ....................            49,614             36,277             46,494
                                                                                ---------          ---------          ---------

Investing Activities:
   Net Change in Interest-bearing Deposits ............................           (13,647)            (2,536)               595
   Purchases of
     Securities Available for Sale ....................................           (69,536)          (100,355)           (97,861)
     Securities Held to Maturity ......................................            (8,466)
   Proceeds from Maturities of
     Securities Available for Sale ....................................            81,069             64,778             69,236
     Securities Held to Maturity ......................................             7,418              6,526
   Proceeds from Sales of
     Securities Available for Sale ....................................             7,219                575              4,718
   Proceeds from Sales of Mortgages ...................................            26,773
   Purchase of Federal Reserve and Federal Home Loan Bank stock .......            (1,559)              (491)              (342)
   Purchase of Bank-owned Life Insurance ..............................            (4,500)           (18,000)
   Net Change in Loans ................................................          (217,834)          (240,080)           (35,090)
   Net Cash Paid in Acquisition ........................................             (370)               (59)              (213)
   Other Adjustments ..................................................            (4,143)            (8,358)            (6,233)
                                                                                ---------          ---------          ---------
         Net Cash Used by Investing Activities.........................          (197,576)          (298,000)           (65,190)
                                                                                ---------          ---------          ---------

Cash Flows from Financing Activities:
   Net Change in:
     Demand and Savings Deposits ......................................            65,035            133,591            (80,986)
     Certificates of Deposit and Other Time Deposits ..................            28,548            234,372             55,412
   Receipt of Borrowings ..............................................           457,157            182,454            191,002
   Repayment of Borrowings ............................................          (331,016)          (249,927)          (123,657)
   Cash Dividends .....................................................           (16,854)           (16,899)           (16,981)
   Stock Issued Under Employee Benefit Plans ..........................               787                857                914
   Stock Issued Under Dividend Reinvestment
     and Stock Purchase Plan ..........................................             1,170              1,190                933
   Stock Options Exercised ............................................               496              1,228              2,174
   Tax Benefits from Stock Options Exercised ..........................               116                139
   Stock Redeemed .....................................................           (12,751)            (5,690)            (9,658)
                                                                                ---------          ---------          ---------
         Net Cash Provided by Financing Activities ....................           192,688            281,263             19,153
                                                                                ---------          ---------          ---------
Net Change in Cash and Cash Equivalents ...............................            44,726             19,540                457
Cash and Cash Equivalents, Beginning of Year ..........................            89,957             70,417             69,960
                                                                                ---------          ---------          ---------
Cash and Cash Equivalents, End of Year.................................         $ 134,683          $  89,957          $  70,417
                                                                                =========          =========          =========
Additional Cash Flows Information:
   Interest Paid .......................................................        $ 118,614          $  95,059          $  64,617
   Income Tax Paid .....................................................           12,206             14,385             16,775


See notes to consolidated financial statements.
</table>
                                    Page 46
<PAGE>
          PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (table dollar amounts in thousands, except share data)


NOTE 1

NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The  accounting   and  reporting   policies  of  First   Merchants   Corporation
("Corporation"),  and its wholly owned subsidiaries,  First Merchants Bank, N.A.
("First  Merchants"),  First Merchants Bank of Central Indiana,  N.A.  ("Central
Indiana"),  Lafayette Bank and Trust Company, N.A.  ("Lafayette"),  and Commerce
National Bank ("Commerce National"), (collectively the "Banks"), First Merchants
Trust  Company,   National  Association  ("FMTC"),   First  Merchants  Insurance
Services,  Inc.  ("FMIS"),  First  Merchants  Reinsurance  Company  ("FMRC") and
Indiana Title  Insurance  Company  ("ITIC"),  conform to  accounting  principles
generally  accepted  in the United  States of America  and  reporting  practices
followed by the banking industry.

On April 1, 2007, the  Corporation  combined five of its bank charters into one.
Frances Slocum Bank & Trust Company, National Association,  Decatur Bank & Trust
Company,  National  Association,  The First National Bank of Portland and United
Communities National Bank combined with First Merchants Bank, N.A. Also on April
1, 2007, the name of The Madison  Community Bank was changed to First  Merchants
Bank of Central Indiana, National Association.

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States of America requires  management to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting period. Actual results could differ from those estimates.

The Corporation is a financial  holding company whose principal  activity is the
ownership  and  management  of the Banks and  operates  in a single  significant
business  segment.  The Banks operate  under  national bank charters and provide
full  banking  services.  As  national  banks,  the  Banks  are  subject  to the
regulation  of the Office of the  Comptroller  of the  Currency  and the Federal
Deposit Insurance Corporation.

The Banks generate commercial, mortgage, and consumer loans and receive deposits
from customers located  primarily in north-central and east-central  Indiana and
Butler,  Franklin and Hamilton  counties in Ohio. The Banks' loans are generally
secured by specific  items of  collateral,  including  real  property,  consumer
assets and business assets.

CONSOLIDATION

The consolidated  financial  statements  include the accounts of the Corporation
and  all  its  subsidiaries,  after  elimination  of all  material  intercompany
transactions.

INVESTMENT  SECURITIES-Debt  securities  are classified as held to maturity when
the  Corporation  has the positive  intent and ability to hold the securities to
maturity.  Securities  held to maturity  are  carried at  amortized  cost.  Debt
securities  not  classified as held to maturity are  classified as available for
sale.  Securities  available for sale are carried at fair value with  unrealized
gains and losses reported separately in accumulated other comprehensive  income,
net of tax.

Amortization  of premiums and  accretion  of discounts  are recorded as interest
income from  securities.  Realized gains and losses are recorded as net security
gains  (losses).  Gains and losses on sales of securities  are determined on the
specific-identification method.

Available-for-sale  and  held-to-maturity  securities are reviewed quarterly for
possible other-than-temporary impairment. The review includes an analysis of the
facts and circumstances of each individual investment such as the length of time
the  fair  value  has been  below  cost,  the  expectation  for that  security's
performance, the creditworthiness of the issuer and the Corporation's ability to
hold the  security  to  maturity.  A decline in value that is  considered  to be
other-than  temporary is recorded as a loss within other operating income in the
consolidated statements of income.

LOANS HELD FOR SALE are carried at the lower of aggregate cost or market. Market
is determined using the aggregate  method.  Net unrealized  losses,  if any, are
recognized  through a  valuation  allowance  by charges  to income  based on the
difference between estimated sales proceeds and aggregate cost.

LOANS held in the  Corporation's  portfolio are carried at the principal  amount
outstanding.  Certain  nonaccrual  and  substantially  delinquent  loans  may be
considered to be impaired. A loan is impaired when, based on current information
or events,  it is probable  that the Banks will be unable to collect all amounts
due  (principal  and interest)  according to the  contractual  terms of the loan
agreement.  In applying the  provisions  of  Statement  of Financial  Accounting
Standards  ("SFAS")  No.  114,  the  Corporation  considers  its  investment  in
one-to-four  family  residential  loans  and  consumer  installment  loans to be
homogeneous and therefore  excluded from separate  identification for evaluation
of impairment.  Interest  income is accrued on the principal  balances of loans,
except for installment loans with add-on interest, for which a method that

                                    Page 47
<page>
          PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (table dollar amounts in thousands, except share data)


NOTE 1

CONSOLIDATION continued

approximates the level yield method is used. The accrual of interest on impaired
loans is discontinued when, in management's  opinion, the borrower may be unable
to meet payments as they become due. When interest accrual is discontinued,  all
unpaid  accrued  interest is reversed when  considered  uncollectable.  Interest
income is subsequently recognized only to the extent cash payments are received.
Certain  loan fees and  direct  costs are being  deferred  and  amortized  as an
adjustment of yield on the loans.

ALLOWANCE FOR LOAN LOSSES is  maintained  to absorb losses  inherent in the loan
portfolio and is based on ongoing,  quarterly assessments of the probable losses
inherent in the loan portfolio.  The allowance is increased by the provision for
loan losses, which is charged against current operating results. Loan losses are
charged against the allowance when management believes the uncollectibility of a
loan balance is confirmed.  Subsequent  recoveries,  if any, are credited to the
allowance.  The Corporation's  methodology for assessing the  appropriateness of
the  allowance  consists  of  three  key  elements  - the  determination  of the
appropriate reserves for specifically  identified loans,  historical losses, and
economic, environmental or qualitative factors.

Larger  commercial loans that exhibit probable or observed credit weaknesses are
subject to  individual  review.  Where  appropriate,  reserves are  allocated to
individual  loans based on  management's  estimate of the borrower's  ability to
repay the loan given the availability of collateral,  other sources of cash flow
and legal  options  available  to the  Corporation.  Included  in the  review of
individual  loans are those that are  impaired as provided in SFAS No. 114.  Any
allowances  for  impaired  loans  are  measured  based on the  present  value of
expected future cash flows discounted at the loan's  effective  interest rate or
fair  value  of  the  underlying  collateral.   The  Corporation  evaluates  the
collectibility of both principal and interest when assessing the need for a loss
accrual. Historical loss rates are applied to other commercial loans not subject
to specific reserve allocations.

Homogenous loans, such as consumer  installment and residential  mortgage loans,
are not  individually  risk graded.  Reserves are  established  for each pool of
loans using loss rates based on a three-year  average net charge-off  history by
loan category.

Historical  loss  allocations  for commercial and consumer loans may be adjusted
for significant  factors that, in management's  judgment,  reflect the impact of
any current conditions on loss recognition.  Factors which management  considers
in the analysis include the effects of the national and local economies,  trends
in loan growth and charge-off rates,  changes in mix,  concentration of loans in
specific  industries,  asset  quality  trends  (delinquencies,  charge  offs and
nonaccrual  loans),  risk  management  and loan  administration,  changes in the
internal lending policies and credit  standards,  examination  results from bank
regulatory agencies and the Corporation's internal loan review.

An  unallocated  reserve,  primarily  based  on  the  factors  noted  above,  is
maintained to recognize the  imprecision  in estimating  and measuring loss when
evaluating  reserves  for  individual  loans or pools of  loans.  Allowances  on
individual  loans and historical  loss  allocations  are reviewed  quarterly and
adjusted as necessary based on changing borrower and/or collateral conditions.

PREMISES  AND  EQUIPMENT  are carried at cost net of  accumulated  depreciation.
Depreciation is computed using the  straight-line  and declining balance methods
based on the estimated  useful lives of the assets.  Maintenance and repairs are
expensed as incurred,  while major additions and  improvements  are capitalized.
Gains and losses on dispositions are included in current operations.

FEDERAL  RESERVE AND FEDERAL HOME LOAN BANK STOCK are required  investments  for
institutions  that are members of the Federal  Reserve  Bank ("FRB") and Federal
Home Loan Bank systems.  The required investment in the common stock is based on
a predetermined formula.

INTANGIBLE  ASSETS  that are subject to  amortization,  including  core  deposit
intangibles, are being amortized on both the straight-line and accelerated basis
over 3 to 20 years.  Intangible  assets  are  periodically  evaluated  as to the
recoverability of their carrying value.

GOODWILL is maintained by applying the  provisions of SFAS No. 142.  Goodwill is
reviewed for impairment annually in accordance with this statement with any loss
recognized through the income statement, at that time.

DERIVATIVE INSTRUMENTS are carried at the fair value of the derivatives reflects
the estimated  amounts that we would receive to terminate these contracts at the
reporting date based upon pricing or valuation  models applied to current market
information. Interest rate floors are valued using the market standard


                                    Page 48
<page>
          PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (table dollar amounts in thousands, except share data)


NOTE 1

CONSOLIDATION continued

methodology of discounting the future expected cash receipts that would occur if
variable interest rates fell below the strike rate of the floors.  The projected
cash receipts on the floor are based on an expectation of future  interest rates
derived from observed market interest rate curves and volatilities.

INCOME TAX in the consolidated statements of income includes deferred income tax
provisions or benefits for all significant  temporary differences in recognizing
income and  expenses  for  financial  reporting  and income  tax  purposes.  The
Corporation files consolidated income tax returns with its subsidiaries.

The  Corporation  adopted the provisions of the Financial  Accounting  Standards
Board (FASB)  Interpretation  No. 48 (FIN 48),  Accounting  for  Uncertainty  in
Income Taxes - an  interpretation of FASB Statement No. 109, on January 1, 2007.
FIN 48 prescribes a  recognition  threshold  and  measurement  attribute for the
financial  statement  recognition  and  measurement  of a tax position  taken or
expected  to be  taken  in a tax  return.  FIN  48  also  provides  guidance  on
derecognition,  classification,  interest and  penalties,  accounting in interim
periods, disclosure and transition. As a result of the implementation of FIN 48,
the  Corporation  did not identify any uncertain tax positions  that it believes
should be recognized in the financial statements. The tax years still subject to
examination by taxing authorities are years subsequent to 2003.

STOCK OPTION AND RESTRICTED  STOCK AWARD PLANS are maintained by the Corporation
and are  described  more  fully in Note  16.  Prior  to  2006,  the  Corporation
accounted for these plans under the recognition  and  measurement  principles of
APB Opinion No.  25.,  Accounting  for Stock  Issued to  Employees,  and related
Interpretations.  Accordingly, in 2005 no stock-based employee compensation cost
is  reflected  in net  income,  as all awards  granted  under these plans had an
exercise price equal to the market value of the  underlying  common stock at the
grant date.

Effective  January 1, 2006 the  Corporation  adopted the fair value  recognition
provisions  of  Statement  of Financial  Accounting  Standards  (SFAS) No. 123R,
Share-Based   Payment.   The  Corporation   selected  the  modified  prospective
application. Accordingly, after January 1, 2006, the Corporation began expensing
the fair value of stock awards granted, modified, repurchased or cancelled.

The following table  illustrates the effect on net income and earnings per share
if the  Corporation  had  applied  the fair value  provisions  of SFAS No.  123,
Accounting for Stock-Based Compensation, to stock-based compensation in 2005.
<table>
<caption>
                                             Year Ended December 31
                                                        2005
                                                     =========
<S>                                                      <C>
Net Income, as Reported ......................         $30,239
Add:  Total Stock-based Employee Compensation
   Cost Included in Reported Net Income, Net
   of Income Taxes ...........................
Less:  Total Stock-based Employee Compensation
   Cost Determined Under the Fair Value Based
   Method, Net of Income Taxes ...............           (2,159)
                                                       -------
Pro Forma Net Income                                   $28,080
                                                       =======

Earnings per Share:
   Basic - as Reported .......................         $  1.64
   Basic - Pro Forma .........................         $  1.52
   Diluted - as Reported .....................         $  1.63
   Diluted - Pro Forma .......................         $  1.51
</table>
EARNINGS PER SHARE have been computed based upon the weighted average common and
common equivalent shares outstanding during each year.

Certain  reclassifications  have been made to the 2006  financial  statements to
conform to the 2007 financial statement  presentation.  These  reclassifications
had no effect on net income.

NOTE 2

BUSINESS COMBINATIONS

Effective December 31, 2007, the Corporation acquired Oliver-Dorton Insurance of
Muncie,  Indiana,  which has been merged into FMIS, a wholly owned subsidiary of
the  Corporation.  The cash purchase  price was $370,000.  The  acquisition  was
deemed to be an immaterial acquisition.

Effective October 13, 2006, the Corporation acquired Armstrong  Insurance,  Inc.
of Parker  City,  an Indiana  corporation,  which has merged into FMIS, a wholly
owned subsidiary of the Corporation. The Corporation issued 77,307 shares of its
common  stock at a cost of $23.845 per share to complete  the  transaction.  The
acquisition was deemed to be an immaterial acquisition.

                                    Page 49
<page>
          PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (table dollar amounts in thousands, except share data)


NOTE 2

BUSINESS COMBINATIONS continued

Effective  September  1, 2005,  the  Corporation  acquired  Trustcorp  Financial
Services of Greenville, Inc., an Ohio corporation, which was merged into FMIS, a
wholly owned subsidiary of the Corporation. The Corporation issued 16,762 shares
of its common stock at a cost of $26.10 per share to complete  the  transaction.
The acquisition was deemed to be an immaterial acquisition.

NOTE 3

RESTRICTION ON CASH AND DUE FROM BANKS

The Banks are required to maintain  reserve funds in cash and/or on deposit with
the Federal  Reserve  Bank.  The reserve  required at  December  31,  2007,  was
$15,896,000.

NOTE 4

INVESTMENT SECURITIES
<table>
<caption>
====================================================================================================================================
                                                                                         GROSS             GROSS
                                                                     AMORTIZED         UNREALIZED        UNREALIZED          FAIR
                                                                       COST              GAINS             LOSSES           VALUE
====================================================================================================================================
<S>                                                                     <C>                 <C>              <C>             <C>
Available for Sale at December 31, 2007
   U.S. Treasury ...............................                    $   1,501           $     18                           $  1,519
   U.S. Government-sponsored Agency Securities..                       67,793                240         $     98            67,935
   State and Municipal .........................                      150,744              2,324              156           152,912
   Mortgage-backed Securities ..................                      199,591              1,654            1,444           199,801
   Corporate Obligations........ ...............                       13,740                               1,294            12,446
   Marketable Equity Securities ................                        6,835                                 612             6,223
                                                                     --------           --------         --------          --------
      Total Available for Sale .................                      440,204              4,236            3,604           440,836
                                                                     --------           --------         --------          --------

Held to maturity at December 31, 2007
   State and Municipal .........................                       10,317                237              298            10,256
   Mortgage-backed Securities ..................                           14                                                    14
                                                                     --------           --------         --------          --------
      Total Held to Maturity ...................                       10,331                237              298            10,270
                                                                     --------           --------         --------          --------
      Total Investment Securities ..............                     $450,535           $  4,473         $  3,902          $451,106
                                                                     ========           ========         ========          ========


Available for Sale at December 31, 2006
   U.S. Treasury ..........................................          $  1,502          $      1                            $  1,503
   U.S. Government-sponsored Agency Securities ............            87,193                69          $  1,284            85,978
   State and Municipal ....................................           168,262             2,251               892           169,621
   Mortgage-backed Securities .............................           195,228               600             3,983           191,845
   Marketable Equity and Other Securities..................             7,296                                 310             6,986
                                                                     --------          --------          --------          --------
      Total Available for Sale ............................           459,481             2,921             6,469           455,933
                                                                     --------          --------          --------          --------

Held to Maturity at December 31, 2006
   State and Municipal ....................................             9,266               432               200             9,498
   Mortgage-backed Securities .............................                18                                                    18
                                                                     --------          --------          --------          --------
      Total Held to Maturity ..............................             9,284               432               200             9,516
                                                                     --------          --------          --------          --------
      Total Investment Securities .........................          $468,765          $  3,353          $  6,669          $465,449
                                                                     ========          ========          ========          ========
</table>

Certain investments in debt securities are reported in the financial  statements
at an amount  less than their  historical  cost.  The  historical  cost of these
investments totaled $214,293,000 and $306,650,000 at December 31, 2007 and 2006,
respectively.  Total  fair  value  of these  investments  was  $210,391,000  and
$299,984,000,  which is approximately 46.6 and 64.5 percent of the Corporation's
available-for-sale  and  held-to-maturity  investment  portfolio at December 31,
2007 and 2006, respectively. These declines primarily resulted from increases in
market interest rates.

Based on evaluation of available  evidence,  including  recent changes in market
interest  rates,  credit  rating  information  and  information   obtained  from
regulatory  filings,  management  believes  the declines in fair value for these
securities  are  temporary.  Should the  impairment  of any of these  securities
become other than  temporary,  the cost basis of the investment  will be reduced
and  the   resulting   loss   recognized   in  net  income  in  the  period  the
other-than-temporary impairment is identified.

                                    Page 50
<page>
          PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (table dollar amounts in thousands, except share data)


NOTE 4

INVESTMENT SECURITIES continued

The following tables show the  Corporation's  gross  unrealized  losses and fair
value,  aggregated  by  investment  category and length of time that  individual
securities  have been in a continuous  unrealized  loss position at December 31,
2007 and 2006:

<table>
<caption>
                                                                           Less than 12            12 Months or               Total
                                                                              Months                  Longer
                                                               =====================================================================
                                                                              GROSS                   GROSS                  GROSS
                                                                 FAIR      UNREALIZED    FAIR      UNREALIZED    FAIR     UNREALIZED
                                                                VALUE        LOSSES     VALUE        LOSSES     VALUE       LOSSES
                                                               =====================================================================
<S>                                                                <S>         <S>         <S>          <S>        <S>          <S>
Temporarily Impaired investment
   securities at December 31, 2007:
U.S. Government-sponsored Agency Securities ...............                            $ 45,572     $   (98)    $ 45,572   $    (98)
State and Municipal .......................................     $   858      $   (7)     60,996        (447)      61,854       (454)
Mortgage-backed Securities ................................       3,489         (30)     86,161      (1,414)      89,650     (1,444)
Corporate Obligations .....................................      12,415      (1,294)                              12,415     (1,294)
Marketable Equity Securities ..............................                                 900        (612)         900       (612)
                                                               --------     -------    --------     -------     --------   --------
   Total Temporarily Impaired Investment Securities .......    $ 16,762     $(1,331)   $193,629     $(2,571)    $210,391   $ (3,902)
                                                               ========     =======    ========     =======     ========   ========

</table>
<table>
<caption>
                                                                           Less than 12            12 Months or               Total
                                                                              Months                  Longer
                                                               =====================================================================
                                                                              GROSS                   GROSS                  GROSS
                                                                 FAIR      UNREALIZED    FAIR      UNREALIZED    FAIR     UNREALIZED
                                                                VALUE        LOSSES     VALUE        LOSSES     VALUE       LOSSES
                                                               =====================================================================
<S>                                                                <C>          <C>        <C>         <C>        <C>           <C>
Temporarily Impaired Investment
   Securities at December 31, 2006:
U.S. Government-sponsored Agency Securities ...............    $  1,576     $    (3)   $ 71,702     $(1,281)    $ 73,278   $ (1,284)
State and Municipal .......................................       9,608         (35)     81,841      (1,057)      91,449     (1,092)
Mortgage-backed Securities ................................       7,459         (20)    126,555      (3,963)     134,014     (3,983)
Corporate Obligations ....................................                                   28          (6)          28         (6)
Marketable Equity Securities ..............................       1,215        (304)                               1,215       (304)
                                                               --------     -------    --------     -------     --------   --------
   Total Temporarily Impaired Investment Securities .......    $ 19,858     $  (362)   $280,126     $(6,307)    $299,984   $ (6,669)
                                                               ========     =======    ========     =======     ========   ========
</table>

The amortized  cost and fair value of securities  available for sale and held to
maturity at  December  31,  2007,  by  contractual  maturity,  are shown  below.
Expected maturities will differ from contractual  maturities because issuers may
have the right to call or prepay  obligations with or without call or prepayment
penalties.
<table>
<caption>
===================================================================================================================================
                                                                               AVAILABLE FOR SALE               HELD TO MATURITY
                                                                        AMORTIZED COST    FAIR VALUE    AMORTIZED COST   FAIR VALUE
===================================================================================================================================
<S>                                                                          <C>              <C>             <C>               <C>
Maturity Sistribution at December 31, 2007:
  Due in One Year or Less..........................................        $ 76,553        $ 76,456        $    704        $    705
  Due After One Through Five Years ................................          97,649          98,585             276             280
  Due After Five Through Ten Years ................................          38,253          39,470             810             801
  Due After Ten Years .............................................          21,323          20,301           8,527           8,470
                                                                           --------        --------        --------        --------
                                                                            233,778         234,812          10,317          10,256

  Mortgage-backed Securities ......................................         199,591         199,801              11              11
  Other Asset-backed Securities ...................................                                               3               3
  Marketable Equity Securities ....................................           6,835           6,223
                                                                           --------        --------        --------        --------

    Totals ........................................................        $440,204        $440,836        $ 10,331        $ 10,270
</table>
Securities with a carrying value of approximately $191,470,000,  143,652,000 and
$190,079,000  were pledged at December 31, 2007,  2006 and 2005  respectively to
secure certain deposits and securities sold under repurchase agreements, and for
other purposes as permitted or required by law.

Proceeds from sales of securities  available for sale during 2007, 2006 and 2005
were $7,219,000, $575,000 and $4,718,000 respectively. Gross gains of $0, $0 and
$28,000 in 2007,  2006 and 2005, and gross losses of $0, $4,000,  and $30,000 in
2007, 2006 and 2005 were realized on those sales.

                                    Page 51
<page>
          PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (table dollar amounts in thousands, except share data)


NOTE 5

LOANS AND ALLOWANCE
<table>
<caption>

                                                     2007              2006
                                                ==================================

                                                 <C>               <C>
Loans at December 31:
  Commercial and Industrial Loans..............  $  662,701        $  537,305
  Agricultural Production
    Financing and Other Loans to Farmers.......     114,324           100,098
  Real Estate Loans:
    Construction...............................     165,425           169,491
    Commercial and Farmland....................     947,234           861,429
    Residential................................     744,627           749,921
  Individuals' Loans for
    Household and Other Personal Expenditures..     187,880           223,504
  Tax-exempt Loans.............................      16,423            14,423
  Lease Financing Receivables,
    Net of Unearned Income ....................       8,351             8,010
  Other Loans..................................      29,878            28,420
                                                 ----------        ----------
                                                  2,786,843         2,692,601
   Allowance for Loan Losses...................     (28,228)          (26,540)
                                                 ----------        ----------
       Total Loans........................       $2,848,615        $2,666,061
                                                 ==========        ==========
</table>
Residential  Real Estate  Loans Held for Sale at December 31, 2007 and 2006 were
$3,735,000 and $5,413,000 respectively.

<table>
<caption>
                                                     2007              2006
                                                ==================================
<S>                                                <C>                    <C>
Allowance for Loan Losses
   Balance, January 1 .........................   $  26,540        $   25,188

   Provision for Losses .......................       8,507             6,258

   Recoveries on Loans ........................       1,738             1,604
   Loans Charged Off ..........................      (8,557)           (6,510)
                                                 ----------        ----------
   Balance, December 31 .......................   $  28,228        $   26,540
                                                 ==========        ==========
</table>

Information on  nonaccruing,  contractually  past due 90 days or more other than
nonaccruing and restructured loans is summarized below:

<table>
<caption>
                                                     2007               2006
                                                ==================================
<S>                                                <C>                 <C>
Non-accrual Loans.........................        $ 29,031           $ 17,926
Loans Contractually Past Due 90
  Days or More Other Than Nonaccruing.....           3,578              2,870
Restructured Loans........................             145                 84
                                                  --------           --------
     Total Non-performing Loans...........        $ 32,754          $  20,880
                                                  ========          =========
</table>

                                    Page 52
<page>
          PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (table dollar amounts in thousands, except share data)


NOTE 5

LOANS AND ALLOWANCE continued


Information on impaired loans is summarized below:
<table>
<caption>
                                                                    2007                 2006                 2005
=====================================================================================================================
<S>                                                                <C>                  <C>                    <C>
As of, and for the Year Ending December 31:
   Impaired Loans with an Allowance ..........................    $ 21,304             $ 17,291             $  7,540
   Impaired Loans for which the Discounted
       Cash Flows or Collateral Value Exceeds the
       Carrying Value of the Loan ............................      65,645               43,029               44,840
                                                                   -------              -------              -------
          Total Impaired Loans ...............................     $86,949              $60,320              $52,380
                                                                   =======              =======              =======
   Total Impaired Loans as a Percent
       of Total Loans ........................................        3.02%                2.24%                2.13%

   Allowance for Impaired Loans (Included in the
       Corporation's Allowance for Loan Losses) ..............    $  6,034             $  4,130             $  2,824
   Average Balance of Impaired Loans .........................     103,272               66,139               44,790
   Interest Income Recognized on Impaired Loans ..............       6,675                5,143                3,511
   Cash Basis Interest Included Above ........................       1,143                1,364                  650
</table>


NOTE 6

PREMISES AND EQUIPMENT
<table>
<caption>
                                                          2007           2006
================================================================================
<S>                                                        <C>            <C>
Cost at December 31:
   Land ..........................................      $  7,993       $  7,767
   Buildings and Leasehold Improvements ..........        47,853         37,791
   Equipment .....................................        40,455         46,895
                                                        --------       --------
       Total Cost ................................        96,301         92,453
   Accumulated Depreciation and Amortization .....       (51,856)       (50,060)
                                                        --------       --------
       Net .......................................      $ 44,445       $ 42,393
                                                        ========       ========
</table>
The  Corporation is committed  under various  noncancelable  lease contracts for
certain  subsidiary  office  facilities and  equipment.  Total lease expense for
2007, 2006 and 2005 was $2,477,000, $2,651,000 and $2,391,000, respectively. The
future minimum rental commitments  required under the operating leases in effect
at December 31,  2007,  expiring at various  dates  through the year 2016 are as
follows for the years ending December 31:
<table>
<caption>
====================================================

                                             <C>
2008  ................................        $1,708
2009  ................................         1,385
2010  ................................         1,178
2011  ................................           953
2012  ................................           600
After 2012 ...........................            73
                                              ------
Total Future Minimum Obligations              $5,897
                                              ======
</table>

NOTE 7

GOODWILL

The changes in the  carrying  amount of goodwill at December 31 are noted below.
No impairment loss was recorded in 2007 and 2006.
<table>
<caption>
                                                      2007             2006
================================================================================
<S>                                                     <c>             <c>
Balance, January 1 ..............................  $ 123,168        $ 121,266
Goodwill Acquired ...............................        276            1,902
                                                   ---------        ---------
Balance, December 31 ............................  $ 123,444        $ 123,168
                                                   =========        =========
</table>

                                    Page 53
<page>
          PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (table dollar amounts in thousands, except share data)


NOTE 8

CORE DEPOSIT AND OTHER INTANGIBLES

The carrying basis and  accumulated  amortization of recognized core deposit and
other intangibles at December 31 were:
<table>
<caption>
                                                      2007             2006
================================================================================
<S>                                                   <C>              <C>
Gross Carrying Amount ...........................  $  32,126        $  32,025
Accumulated Amortization ........................    (19,714)         (16,555)
                                                   ---------        ---------
   Core Deposit and Other Intangibles ...........  $  12,412        $  15,470
                                                   =========        =========
</table>

Amortization  expense for the years ended December 31, 2007,  2006 and 2005, was
$3,159,000,  $3,066,000 and  $3,102,000,  respectively.  Estimated  amortization
expense for each of the following five years is:
<table>
<caption>
====================================================
<S>                                             <C>
2008 ................................       $ 3,159
2009 ................................         3,157
2010 ................................         3,048
2011 ................................         2,114
2012 ................................           528
After 2012 ..........................           406
                                             ------
                                            $12,412
                                             ======
</table>
NOTE 9

DEPOSITS
<table>
<caption>
                                                      2007           2006
================================================================================
Deposits at December 31:
    <S>                                               <C>              <C>
   Demand Deposits .............................   $  903,380     $  883,294
   Savings Deposits ............................      552,380        507,431
   Certificates and Other Time Deposits
     of $100,000 or more .......................      495,630        431,068
   Other Certificates and Time Deposits ........      892,731        928,745
                                                   ----------     ----------
       Total Deposits ..........................   $2,844,121     $2,750,538
                                                   ==========     ==========
</table>
<table>
<caption>
=====================================================
Certificates and Other Time Deposits Maturing
in Years Ending December 31:
<S>                                           <C>
2008 .......................               $1,053,782
2009 .......................                  175,108
2010 .......................                   63,000
2011 .......................                   35,739
2012 .......................                   43,774
After 2012 .................                   16,958
                                           ----------
                                           $1,388,361
                                           ==========
</table>
Time deposits  obtained  through brokers were  $239,019,000  and $256,632,000 at
December 31, 2007 and 2006, respectively.

                                    Page 54
<page>
          PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (table dollar amounts in thousands, except share data)


NOTE 10

BORROWINGS
<table>
<caption>
                                                             2007         2006
===================================================================================
   <S>                                                       <C>           <C>
Borrowings at December 31:
   Federal Funds Purchased ...........................     $ 52,350     $ 56,150
   Securities Sold Under Repurchase Agreements .......      106,497       42,750
   Federal Home Loan Bank Advances ...................      294,101      242,408
   Subordinated Debentures, Revolving Credit
     Lines and Term Loans ............................      115,826       99,456
                                                           --------     --------
       Total Borrowings ..............................     $568,774     $440,764
                                                           ========     ========
</table>

Securities sold under repurchase  agreements consist of obligations of the Banks
to  other  parties.   The  obligations  are  secured  by  U.S.  Treasury,   U.S.
Government-sponsored  agency  security  obligations  and corporate  asset-backed
securities. The maximum amount of outstanding agreements at any month-end during
2007 and 2006 totaled $128,023,000 and $98,765,000 respectively, and the average
of such agreements  totaled  $85,853,000  and  $73,818,000  during 2007 and 2006
respectively.

Maturities of securities  sold under  repurchase  agreements;  Federal Home Loan
Bank advances;  and  subordinated  debentures,  revolving  credit lines and term
loans as of December 31, 2007, are as follows:

<table>
<caption>
                                                                                                   SUBORDINATED DEBENTURES
                                               SECURITIES SOLD UNDER       FEDERAL HOME LOAN        REVOLVING CREDIT LINES
                                               REPURCHASE AGREEMENTS         BANK ADVANCES              AND TERM LOANS
==================================================================================================================================

                                                      AMOUNT                    AMOUNT                     AMOUNT
==================================================================================================================================
Maturities in Years Ending December 31:
        <S>                                         <C>                           <C>                        <C>
      2008 ..............                          $ 72,247                    $108,398                   $ 25,000
      2009 ..............                                                        53,351
      2010 ..............                            10,000                      46,080
      2011 ..............                                                        18,944
      2012 ..............                            14,250                      51,679
      After 2012 ........                            10,000                      15,649                     90,826
                                                    --------                   --------                   --------
             Total ......                           $106,497                   $294,101                   $115,826
                                                    ========                   ========                   ========
</table>
The terms of a security  agreement  with the FHLB  require  the  Corporation  to
pledge,  as collateral  for advances,  qualifying  first  mortgage loans and all
otherwise  unpledged  investment  securities  in an amount equal to at least 145
percent  of these  advances.  Advances,  with  interest  rates from 2.36 to 6.84
percent,  are subject to  restrictions  or penalties in the event of prepayment.
The total available  remaining  borrowing capacity from the FHLB at December 31,
2007, was $18,487,000.

Subordinated Debentures, Revolving Credit Lines and Term Loans. Three borrowings
were outstanding on December 31, 2007, for $115,826,000.

o    First Merchants Capital Trust II. The subordinated debenture,  entered into
     on July 2, 2007,  for  $56,702,000  will mature on September 15, 2037.  The
     Corporation  may redeem the  debenture no earlier than  September 15, 2012,
     subject to the prior approval of the Federal Reserve, as required by law or
     regulation. Interest is fixed at 6.495 percent for the period from the date
     of issuance  through  September  15,  2012,  and  thereafter,  at an annual
     floating  rate  equal to the  three-month  LIBOR plus 1.56  percent,  reset
     quarterly.  Interest is payable in March,  June,  September and December of
     each year. First Merchants Capital Trust II is a wholly owned subsidiary of
     the Corporation.

o    CNBC Statutory  Trust I. As part of the March 1, 2003,  acquisition of CNBC
     Bancorp,  the  Corporation  assumed  $4,124,000  of a  junior  subordinated
     debenture entered into on February 22, 2001. The subordinated  debenture of
     $4,124,000  will mature on February  22,  2031.  Interest is fixed at 10.20
     percent  and  payable  on  February  22 and  August  22 of each  year.  The
     Corporation  may redeem the  debenture,  in whole or in part, at its option
     commencing  February 22, 2011, at a redemption  price of 105.10  percent of
     the  outstanding  principal  amount  and,  thereafter,  at a premium  which
     declines  annually.  On or after  February 22, 2021,  the securities may be
     redeemed at face value with prior approval of the Board of Governors of the
     Federal Reserve System. CNBC Statutory Trust I is a wholly owned subsidiary
     of the Corporation.

                                    Page 55
<page>
          PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (table dollar amounts in thousands, except share data)


NOTE 10

BORROWINGS continued

o    LaSalle  Bank,  N.A.  A Loan  and  Subordinated  Debenture  Loan  Agreement
     ("LaSalle Agreement") was entered into with LaSalle Bank, N.A. on March 25,
     2003 and later  amended as of  September  5, 2007.  The  LaSalle  Agreement
     includes three credit facilities:

     o    The Term Loan of  $5,000,000  matures  on March 7, 2014.  Interest  is
          calculated at a floating rate equal to the lender's base rate or LIBOR
          plus 1.00  percent.  The Term Loan is  secured  by 100  percent of the
          common  stock of  First  Merchants.  The  Agreement  contains  several
          restrictive  covenants,  including the  maintenance of various capital
          adequacy levels,  asset quality and profitability  ratios, and certain
          restrictions on dividends and other indebtedness.

     o    The Revolving  Loan had a balance of $25,000,000 at December 31, 2007.
          Interest is payable  quarterly  based on a floating  rate equal to the
          lender's base rate or LIBOR plus 1.00 percent.  Principal and interest
          are due on or  before  March  5,  2008.  The  total  principal  amount
          outstanding at any one time may not exceed $25,000,000.  The Revolving
          Loan is secured by 100 percent of the common stock of First Merchants.
          The Agreement contains several  restrictive  covenants,  including the
          maintenance  of various  capital  adequacy  levels,  asset quality and
          profitability  ratios, and certain restrictions on dividends and other
          indebtedness.

     o    The  Subordinated  Debenture of $25,000,000  matures on March 7, 2014.
          Interest is  calculated  at a floating rate equal to the lender's base
          rate or LIBOR plus 1.25 percent. The Subordinated Debenture is treated
          as  Tier  2  Capital   for   regulatory   capital   purposes   and  is
          unconditionally guaranteed by the Corporation.

The Corporation redeemed its subordinated  debentures payable to First Merchants
Capital Trust I during 2007.  The aggregate  redemption  price was the principal
amount of $54,832,000  plus any accrued but unpaid  interest.  The redemption of
the debentures  was  immediately  followed by the redemption by First  Merchants
Capital Trust I of its outstanding common and preferred  securities at their $25
liquidation value, plus any accrued but unpaid distributions.

Subordinated Debentures, Revolving Credit Lines and Term Loans. Three borrowings
were outstanding on December 31, 2006, for $99,456,000.

o    First Merchants Capital Trust I. The subordinated  debenture,  entered into
     on April 12,  2002,  for  $54,832,000  will  mature on June 20,  2032.  The
     Corporation may redeem the debenture no earlier than June 30, 2007, subject
     to the  prior  approval  of the  Federal  Reserve,  as  required  by law or
     regulation. Interest is fixed at 8.75 percent and payable on March 31, June
     30, September 30 and December 31 of each year.

o    CNBC Statutory  Trust I. As part of the March 1, 2003,  acquisition of CNBC
     Bancorp,  the  Corporation  assumed  $4,124,000  of a  junior  subordinated
     debenture entered into on February 22, 2001. The subordinated  debenture of
     $4,124,000  will mature on February  22,  2031.  Interest is fixed at 10.20
     percent  and  payable  on  February  22 and  August  22 of each  year.  The
     Corporation  may redeem the  debenture,  in whole or in part, at its option
     commencing  February 22, 2011, at a redemption  price of 105.10  percent of
     the  outstanding  principal  amount  and,  thereafter,  at a premium  which
     declines  annually.  On or after  February 22, 2021,  the securities may be
     redeemed at face value with prior approval of the Board of Governors of the
     Federal Reserve System.

o    LaSalle  Bank,  N.A.  A Loan  and  Subordinated  Debenture  Loan  Agreement
     ("LaSalle Agreement") was entered into with LaSalle Bank, N.A. on March 25,
     2003 and later amended as of March 7, 2006. The LaSalle Agreement  includes
     three credit facilities:

     o    The Term Loan of  $5,000,000  matures  on March 7, 2012.  Interest  is
          calculated  at a  floating  rate equal to the  lender's  prime rate or
          LIBOR plus 1.00  percent.  The Term Loan is secured by 100  percent of
          the common stock of First  Merchants.  The Agreement  contains several
          restrictive  covenants,  including the  maintenance of various capital
          adequacy levels,  asset quality and profitability  ratios, and certain
          restrictions on dividends and other indebtedness.

                                 Page 56
<page>
          PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (table dollar amounts in thousands, except share data)


NOTE 10

BORROWINGS continued

     o    The Revolving  Loan had a balance of $10,500,000 at December 31, 2006.
          Interest is payable quarterly based on LIBOR plus 1 percent. Principal
          and interest are due on or before March  6,2007.  The total  principal
          amount  outstanding  at any one time may not exceed  $20,000,000.  The
          Revolving  Loan is secured by 100 percent of the common stock of First
          Merchants.  The  Agreement  contains  several  restrictive  covenants,
          including the maintenance of various capital  adequacy  levels,  asset
          quality  and  profitability   ratios,  and  certain   restrictions  on
          dividends and other indebtedness.

     o    The  Subordinated  Debenture of $25,000,000  matures on March 7, 2012.
          Interest  is   calculated   at  a  floating  rate  equal  to,  at  the
          Corporation's  option,  either the  lender's  prime rate or LIBOR plus
          1.50 percent. The Subordinated  Debenture is treated as Tier 2 Capital
          for regulatory capital purposes.

NOTE 11

LOAN SERVICING

Mortgage  loans  serviced  for  others  are  not  included  in the  accompanying
consolidated  balance sheets.  The loans are serviced  primarily for the Federal
Home Loan Mortgage  Corporation,  and the unpaid balances totaled  $115,618,000,
$98,538,000 and  $107,730,000  at December 31, 2007, 2006 and 2005  respectively
the amount of capitalized servicing assets is considered immaterial.

NOTE 12

INCOME TAX
<table>
<caption>
                                                                                         2007             2006            2005
=================================================================================================================================
<S>                                                                                      <C>              <C>               <C>
Income Tax Expense for the Year Ended December 31:
  Currently Payable:
     Federal ................................................................          $ 13,343         $ 13,192        $ 14,814
     State ..................................................................               162            1,415           2,231
  Deferred:
     Federal ................................................................            (1,664)          (1,785)         (3,248)
     State ..................................................................              (498)            (627)           (501)
                                                                                       --------         --------        --------
        Total Income Tax Expense ............................................          $ 11,343         $ 12,195        $ 13,296
                                                                                       ========         ========        ========

Reconciliation of Federal Statutory to Actual Tax Expense:
     Federal Statutory Income Tax at 35% ....................................          $ 15,043         $ 14,837        $ 15,158
     Tax-exempt Interest ....................................................            (2,259)          (2,215)         (2,204)
     Effect of State Income Taxes ...........................................              (220)             475           1,115
     Earnings on Life Insurance .............................................            (1,064)            (594)           (452)
     Tax Credits ............................................................              (348)            (391)           (395)
     Other ..................................................................               191               83              74
                                                                                       --------         --------        --------
        Actual Tax Expense .................................................           $ 11,343         $ 12,195        $ 13,296
                                                                                       ========         ========        ========
</table>
Tax expense  (benefit)  applicable  to  security  gains and losses for the years
ended  December  31,  2007,  2006  and  2005,  was $0,  $(2,000)  and  $(1,000),
respectively.

                                 Page 57
<page>
          PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (table dollar amounts in thousands, except share data)


NOTE 12

INCOME TAX continued

A  cumulative  net  deferred  tax  asset  is  included  in other  assets  in the
consolidated balance sheets. The components of the net asset are as follows:
<table>
<caption>
                                                                                           2007                 2006
======================================================================================================================
     <S>                                                                                   <C>                    <C>
Deferred Tax Asset at December 31:
Assets:
   Differences in Accounting for Loan Losses .............................               $11,086              $10,641
   Deferred Compensation .................................................                 3,841                3,078
   Difference in Accounting for Pensions
     and Other Employee Benefits .........................................                 3,071                5,442
   State Income Tax ......................................................                   156                  187
   Net Unrealized Loss on Securities Available for Sale...................                                      1,241
   Other .................................................................                   322                  399
                                                                                          ------               ------
       Total Assets ......................................................                18,476               20,988
                                                                                          ------               ------
Liabilities:
   Differences in Depreciation Methods ...................................                 3,508                3,114
   Differences in Accounting for Loans and Securities ....................                 3,889                4,974
   Differences in Accounting for Loan Fees ...............................                   399                  534
   Net Unrealized Gain on Securities Available for Sale...................                   220
   Other .................................................................                 2,344                2,381
                                                                                          ------               ------
       Total Liabilities .................................................                10,360               11,003
                                                                                          ------               ------
       Net Deferred Tax Asset ............................................               $ 8,116              $ 9,985
                                                                                          ======               ======
</table>
NOTE 13

COMMITMENTS AND CONTINGENT LIABILITIES

In  the  normal  course  of  business  there  are  outstanding  commitments  and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying financial statements.  The
Corporation's  exposure  to credit  loss in the event of  nonperformance  by the
other party to the financial  instruments  for  commitments to extend credit and
standby  letters of credit is represented by the  contractual or notional amount
of those  instruments.  The Banks use the same  credit  policies  in making such
commitments  as they do for  instruments  that are included in the  consolidated
balance sheets.

Financial  instruments  whose  contract  amount  represents  credit  risk  as of
December 31, were as follows:
<table>
<caption>
                              2007               2006
                            ========           ========
<S>                           <C>                <C>
Commitments
to Extend Credit            $747,070           $681,462

Standby Letters
of Credit                     25,431             23,286
</table>
Commitments  to extend credit are  agreements to lend to a customer,  as long as
there is no violation of any condition established in the contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require  payment of a fee. Since many of the  commitments are expected to expire
without  being  drawn  upon,  the total  commitment  amounts do not  necessarily
represent  future  cash   requirements.   The  Banks  evaluate  each  customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained,  if
deemed necessary by the Banks upon extension of credit, is based on management's
credit evaluation.  Collateral held varies, but may include accounts receivable,
inventory, property and equipment, and income-producing commercial properties.

Standby  letters of credit are  conditional  commitments  issued by the Banks to
guarantee the performance of a customer to a third party.

The Corporation and subsidiaries are also subject to claims and lawsuits,  which
arise  primarily  in the  ordinary  course of  business.  It is the  opinion  of
management  that the  disposition  or  ultimate  resolution  of such  claims and
lawsuits will not have a material adverse effect on the  consolidated  financial
position of the Corporation.

                                    Page 58
<page>
          PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (table dollar amounts in thousands, except share data)


NOTE 14

STOCKHOLDERS' EQUITY

National  banking laws restrict the maximum  amount of dividends that a bank may
pay in any calendar year.  National banks are limited to the bank's retained net
income (as  defined) for the current year plus those for the previous two years.
The  amount at  December  31,  2007,  available  for 2008  dividends  from First
Merchants,  Central Indiana, Lafayette,  Commerce National, FMTC and FMIS to the
Corporation totaled $18,719,000,  $1,877,000,  $1,039,000,  $8,313,000, $520,000
and $9,616,000, respectively.

Total  stockholders'  equity for all  subsidiaries  at December  31,  2007,  was
$445,104,000 of which $405,020,000 was restricted from dividend  distribution to
the Corporation.

The Corporation has a Dividend  Reinvestment  and Stock Purchase Plan,  enabling
stockholders  to  elect  to  have  their  cash  dividends  on  all  shares  held
automatically reinvested in additional shares of the Corporation's common stock.
In addition,  stockholders  may elect to make  optional  cash  payments up to an
aggregate of $2,500 per quarter for the purchase of additional  shares of common
stock.  The stock is credited  to  participant  accounts  at fair market  value.
Dividends are reinvested on a quarterly basis.


NOTE 15

REGULATORY CAPITAL

The Corporation and Banks are subject to various regulatory capital requirements
administered  by the  federal  banking  agencies  and are  assigned to a capital
category.  The assigned capital  category is largely  determined by three ratios
that are calculated  according to the regulations:  total risk adjusted capital,
Tier 1 capital,  and Tier 1 leverage ratios.  The ratios are intended to measure
capital  relative to assets and credit  risk  associated  with those  assets and
off-balance  sheet exposures of the entity.  The capital category assigned to an
entity can also be affected by qualitative judgments made by regulatory agencies
about the risk  inherent  in the  entity's  activities  that are not part of the
calculated ratios.

There are five capital categories defined in the regulations,  ranging from well
capitalized to critically  undercapitalized.  Classification of a bank in any of
the  undercapitalized  categories can result in actions by regulators that could
have a material effect on a bank's operations.

At December 31, 2007, the management of the  Corporation  believes that it meets
all  capital  adequacy  requirements  to which it is  subject.  The most  recent
notifications from the regulatory agencies categorized the Corporation and Banks
as well capitalized under the regulatory framework for prompt corrective action.
To be categorized as well  capitalized,  the Banks must maintain a minimum total
capital to risk-weighted assets, Tier I capital to risk-weighted assets and Tier
I  capital  to  average  assets  of  10  percent,   6  percent  and  5  percent,
respectively.  There have been no conditions  or events since that  notification
that management believes have changed this categorization.

                                    Page 59
<page>
          PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (table dollar amounts in thousands, except share data)


NOTE 15

REGULATORY CAPITAL continued

Actual and required capital amounts and ratios are listed below.
<table>
<caption>
====================================================================================================================================
                                                                           2007                                       2006
                                                                       REQUIRED FOR                                REQUIRED FOR
                                                     ACTUAL         ADEQUATE CAPITAL<F1>          ACTUAL        ADEQUATE CAPITAL<F1>
                                                AMOUNT      RATIO    AMOUNT      RATIO      AMOUNT      RATIO   AMOUNT      RATIO
====================================================================================================================================
<S>                                             <C>         <C>       <C>         <C>        <C>          <C>      <C>        <C>
December 31
Total Capital<F1>,<F2>,<F3> (to Risk-weighted Assets)
   Consolidated ......................        $312,080     10.55%  $236,636      8.00%    $299,353     11.09%  $215,906      8.00%
   First Merchants ...................         169,678     11.07    122,567      8.00       77,072     10.46     58,965      8.00
   Central Indiana....................          29,268     11.72     19,984      8.00       28,541     11.06     20,637      8.00
   United Communities ................                                                      27,723     11.21     19,790      8.00
   First National ....................                                                      10,881     11.13      7,820      8.00
   Decatur ...........................                                                      12,200     11.06      8,828      8.00
   Frances Slocum ....................                                                      20,016     11.87     13,488      8.00
   Lafayette .........................          79,692     11.46     55,646      8.00       79,106     11.60     54,539      8.00
   Commerce National .................          52,353     10.76     38,922      8.00       46,997     11.28     33,320      8.00

Tier I Capital<F1>,<F2>,<F3> (to Risk-weighted Assets)
   Consolidated ......................        $258,918      8.75%  $118,318      4.00%    $247,813      9.18%  $107,953      4.00%
   First Merchants ...................         154,624     10.09     61,284      4.00       69,957      9.45     29,482      4.00
   Central Indiana....................          26,669     10.68      9,992      4.00       26,036     10.09     10,318      4.00
   United Communities ................                                                      25,201     10.19      9,895      4.00
   First National ....................                                                      10,126     10.36      3,910      4.00
   Decatur ...........................                                                      11,261     10.20      4,414      4.00
   Frances Slocum.....................                                                      17,918     10.63      6,744      4.00
   Lafayette .........................          73,437     10.56     27,823      4.00       72,646     10.66     27,269      4.00
   Commerce National .................          48,099      9.89     19,461      4.00       43,149     10.36     16,660      4.00

Tier I Capital<F1>,<F2>,<F3> (to Average Assets)
   Consolidated ......................        $258,918      7.19%  $144,000      4.00%    $247,813      7.37%  $134,443      4.00%
   First Merchants ...................         154,624      8.10     76,293      4.00       69,657      7.33     38,005      4.00
   Central Indiana....................          26,669      8.91     11,966      4.00       26,036      8.63     12,068      4.00
   United Communities ................                                                      25,201      7.91     12,747      4.00
   First National ....................                                                      10,126      8.04      5,040      4.00
   Decatur ...........................                                                      11,261      7,31      6,162      4.00
   Frances Slocum.....................                                                      17,918      9.08      7,895      4.00
   Lafayette .........................          73,437      8.01     36,669      4.00       72,646      7.99     36,385      4.00
   Commerce National .................          48,099      9.11     21,119      4.00       43,149      8.99     19,203      4.00

<FN>
<F1> As defined by regulatory agencies
<F2> Effective April 1, 2007, United  Communities,  First National,  Decatur and
Frances Slocum were merged into First Merchants Bank, N.A.
<F3> Effective April 1, 2007, Madison's name was changed to First Merchants Bank
of Central Indiana, National Association.
</FN>
</table>
NOTE 16

SHARE-BASED COMPENSATION

Stock options and restricted stock awards ("RSAs"), which are non-vested shares,
have been issued to directors, officers and other management employees under the
Corporation's  1994 Stock Option Plan and The 1999  Long-term  Equity  Incentive
Plan. The stock options,  which have a ten-year life,  become 100 percent vested
ranging  from three months to two years and are fully  exercisable  when vested.
Option  exercise  prices equal the  Corporation's  common stock closing price on
NASDAQ on the date of grant.  RSAs  provide  for the  issuance  of shares of the
Corporation's  common  stock at no cost to the holder and  generally  vest after
three  years.  The RSAs only vest if the  employee is  actively  employed by the
Corporation on the vesting date.

The  Corporation's  2004 Employee Stock Purchase Plan ("ESPP") provides eligible
employees of the  Corporation  and its  subsidiaries  an opportunity to purchase
shares of common stock of the Corporation  through annual offerings  financed by
payroll  deductions.  The price of the stock to be paid by the employees may not
be  less  than  85  percent  of the  lesser  of the  fair  market  value  of the
Corporation's  common  stock  at the  beginning  or at the  end of the  offering
period.  Common stock  purchases are made annually and are paid through  advance
payroll deductions of up to 20 percent of eligible compensation.

SFAS 123(R) required the Corporation to begin recording  compensation expense in
2006 related to unvested share-based awards outstanding as of December 31, 2005,
by recognizing the  un-amortized  grant date fair value of these awards over the
remaining service periods of those awards, with no change in historical reported
fair values and earnings.  Awards  granted after December 31, 2005 are valued at
fair value in accordance  with provisions of SFAS 123(R) and are recognized on a
straight-line  basis over the  service  periods of each award.  To complete  the
exercise  of vested  stock  options,  RSA's and ESPP  options,  the  Corporation
generally  issues  new shares  from its  authorized  but  unissued  share  pool.
Share-based
                                    Page 60
<page>
          PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (table dollar amounts in thousands, except share data)


NOTE 16

SHARE-BASED COMPENSATION continued

compensation  for the years ended December 31, 2007 and 2006 totaled  $1,468,000
and $833,000,  respectively,  and has been recognized as a component of salaries
and benefits expense in the accompanying  Consolidated  Condensed  Statements of
Income.

Prior to  2006,  the  Corporation  accounted  for  share-based  compensation  in
accordance with APB 25 using the intrinsic  value method,  which did not require
that  compensation  expense be recognized for the  Corporation's  stock and ESPP
options.  However,  under  APB  25,  the  Corporation  was  required  to  record
compensation  expense over the vesting period for the value of RSAs granted,  if
any.

The Corporation  provided pro forma  disclosure  amounts in accordance with SFAS
No. 148,  "Accounting for Stock-Based  Compensation - Transition and Disclosure"
(SFAS No.  148),  as if the fair value  method  defined by SFAS No. 123 had been
applied to its share-based  compensation.  The  Corporation's net income and net
income per share for the period ended  December 31, 2005 would have been reduced
if  compensation  expense related to stock and ESPP options had been recorded in
the financial statements, based on fair value at the grant dates.

The estimated fair value of the stock options granted during 2007, 2006 and 2005
was  calculated  using a Black  Scholes  options  pricing  model.  The following
summarizes the assumptions used in the Black Scholes model:
<table>
<caption>
                                                                       2007           2006           2005
                                                                       ----           ----           ----
          <S>                                                          <C>            <C>             <C>
        Risk-free Interest Rate .................................     4.67%          4.59%          4.05%
        Expected Price Volatility ...............................    29.76%         29.84%         30.20%
        Dividend Yield ..........................................     3.64%          3.54%          3.56%
        Forfeiture Rate .........................................     5.00%          4.00%          4.00%
        Weighted-average Expected Life, Until Exercise ..........     5.99 years     5.75 years     8.50 years
</table>
The Black Scholes model  incorporates  assumptions to value share-based  awards.
The  risk-free  rate of interest,  for periods equal to the expected life of the
option,  is based on a zero-coupon  U.S.  government  instrument  over a similar
contractual term of the equity instrument. Expected price volatility is based on
historical  volatility  of the  Corporation's  common  stock.  In addition,  the
Corporation  generally  uses  historical  information  to determine the dividend
yield  and  weighted-average  expected  life  of the  options,  until  exercise.
Separate groups of employees that have similar historical exercise behavior with
regard to option exercise timing and forfeiture rates are considered  separately
for valuation and attribution purposes.

Share-based  compensation  expense  recognized  in  the  Consolidated  Condensed
Statements  of  Income  is based on awards  ultimately  expected  to vest and is
reduced for  estimated  forfeitures.  SFAS  123(R)  requires  forfeitures  to be
estimated at the time of grant and revised, if necessary, in subsequent periods,
if actual forfeitures differ from those estimates.  Pre-vesting forfeitures were
estimated to be  approximately  5 percent for the year ended  December 31, 2007,
based on  historical  experience.  In the  Corporation's  pro forma  disclosures
required under SFAS 123(R) for the periods prior to fiscal 2006, the Corporation
accounted for forfeitures as they occurred.

As a result of adopting SFAS 123(R),  net income of the Corporation for the year
ended  December 31, 2007 and 2006 were  $1,124,000  and $656,000,  respectively,
lower (net of $344,000 and $177,000 in tax  benefits),  than if it had continued
to account for share-based  compensation  under APB 25. The impact on both basic
and diluted  earnings  per share for the year ended  December  31, 2007 and 2006
were $.06 and $.04 per share.

                                    Page 61
<page>
          PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (table dollar amounts in thousands, except share data)


NOTE 16

SHARE-BASED COMPENSATION continued

The following table summarizes the components of the  Corporation's  share-based
compensation awards recorded as expense.

Components of the share-based compensation:
<table>
<caption>
                                                                  Year Ended               Year Ended
                                                               December 31, 2007        December 31, 2006
                                                               -----------------        -----------------
                  <S>                                                   <C>                      <C>
        Stock and ESPP Options:
          Pre-tax Compensation Expense ......................  $            602         $            449
          Income Tax Benefit ................................               (41)                     (42)
                                                               -----------------        -----------------
        Stock and ESPP Options Expense, Net of Income........  $            561         $            407
                                                               =================        =================

        Restricted Stock Awards:
          Pre-tax Compensation Expense ......................  $            866         $            384
          Income Tax Benefit ................................              (303)                    (135)
                                                               -----------------        -----------------
        Restricted Stock Awards Expense, Net of Tax .........  $            563         $            249
                                                               =================        =================

        Total Share-based Compensation:
          Pre-tax Compensation Expense ......................  $          1,468         $            833
          Income Tax Benefit ................................              (344)                    (177)
                                                               -----------------        -----------------
        Total Share-based Compensation Expense, Net of Tax...  $          1,124         $            656
                                                               =================        =================
</table>
As of December  31, 2007,  unrecognized  compensation  expense  related to stock
options,  RSAs and ESPP  options  totaling  $221,000,  $1,320,000  and  $92,000,
respectively, is expected to be recognized over weighted-average periods of .61,
1.67 and .5 years, respectively.

Stock option activity under the Corporation's  stock option plans as of December
31, 2007 and changes during the year ended December 31, 2007 were as follows:
<table>
<caption>

                                                                                      Weighted-
                                                                                       Average
                                                                       Weighted-      Remaining
                                                       Number           Average      Contractual      Aggregate
                                                         of            Exercise         Term          Intrinsic
                                                       Shares           Price        (in Years)        Value
                                                     ----------      ------------   -----------     ----------
    <S>                                                 <C>                 <C>            <C>          <C>
  Outstanding at January 1, 2007 ..................  1,067,247       $     23.87
  Granted .........................................     75,968             26.00
  Exercised .......................................    (48,609)            18.11
  Cancelled .......................................    (40,176)            23.68
                                                     ----------
  Outstanding at December 31, 2007 ................   1,054,430      $     24.30           5.33       $568,511
                                                     ==========
  Vested and Expected to Vest at December 31, 2007.  1,042,511       $     24.28           5.29       $568,511
  Exercisable at December 31, 2007 ................    924,467       $     24.12           4.86       $568,511
</table>
The weighted-average  grant date fair value was $5.85, $6.22 and $6.93 for stock
options  granted  during  the year  ended  December  31,  2007,  2006 and  2005,
respectively.

The aggregate  intrinsic  value in the table above  represents the total pre-tax
intrinsic value (the difference between the Corporation's closing stock price on
the last trading day of 2007 and the exercise price, multiplied by the number of
in-the-money  options) that would have been  received by the option  holders had
all option  holders  exercised  their stock  options on the last  trading day of
2007.  The amount of  aggregate  intrinsic  value will change  based on the fair
market value of the Corporation's common stock.

The aggregate  intrinsic value of stock options exercised during the years ended
December  31,  2007,  2006  and  2005  were  $250,185,  $665,000  and  $903,000,
respectively.  Exercise of options  during these same  periods  resulted in cash
receipts of $496,000, $1,228,000 and $1,347,000,  respectively.  The Corporation
recognized a tax benefit of  approximately  $116,000 for the year ended December
31,  2007,  related to the  exercise  of  employee  stock  options  and has been
recorded as an increase to additional paid-in capital.

                                    Page 62
<page>
          PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (table dollar amounts in thousands, except share data)


NOTE 16

SHARE-BASED COMPENSATION continued

The following table summarizes  information on unvested  restricted stock awards
outstanding as of December 31, 2007:
<table>
<caption>
                                                        Number of       Grant-Date
                                                         Shares         Fair Value
                                                       ----------       ----------
                <S>                                        <C>               <C>
        Unvested RSAs at January 1, 2007 ...........      55,000        $  27.83
        Granted ....................................      57,775           26.07
        Forfeited ..................................       6,306           25.78
        Vested .....................................       8,442           25.56
                                                       ----------
        Unvested RSAs at December 31, 2007 .........      98,027        $  27.12
                                                       ==========        ========
</table>
The grant date fair value of ESPP options was  estimated at the beginning of the
July 1, 2007 offering period and approximates  $184,000. The ESPP options vested
during the twelve-month period ending June 30, 2008. At December 31, 2007, total
unrecognized  compensation expense related to unvested ESPP options was $92,000,
which is expected to be recognized over a six-month period ending June 30, 2008.

NOTE 17

PENSION AND OTHER POST RETIREMENT BENEFIT PLANS

The Corporation's  defined-benefit  pension plans cover substantially all of the
Corporation's  employees.  On  December  31,  2006 the  Corporation  adopted the
recognition provision of SFAS No. 158 Employers' Accounting for Defined Benefit,
Pension and other  Post-Retirement  Plans.  The benefits are based  primarily on
years of service and employees' pay near retirement.  Contributions are intended
to provide not only for benefits  attributed  to  service-to-date,  but also for
those expected to be earned in the future.

The table below sets forth the plans'  funded  status and amounts  recognized in
the  consolidated  balance  sheet at December  31,  using  measurement  dates of
September 30, 2007 and 2006.
<table>
<caption>
                                                                     December 31
                                                                   2007       2006
=====================================================================================
<S>                                                                <C>         <C>
Change in Benefit Obligation
     Benefit Obligation at Beginning of Year ............       $ 58,078   $ 55,484
     Service Cost .......................................            671        688
     Interest Cost ......................................          3,146      2,985
     Actuarial (Gain)/Loss ..............................         (1,640)     1,303
     Benefits Paid ......................................         (2,755)    (2,382)
                                                                --------   --------
     Benefit Obligation at End of Year ..................         57,500     58,078
                                                                --------   --------
Change in Plan Assets
     Fair Value of Plan Assets at Beginning of Year .....         41,591     39,913
     Actual Return on Plan Assets .......................          6,563      3,243
     Employer Contributions .............................            853        817
     Benefits Paid ......................................         (2,755)    (2,382)
                                                                --------   --------
     End of Year ........................................         46,252     41,591
                                                                --------   --------
Funded Status at End of Year ............................       $ 11,248   $ 16,487
                                                                ========   ========
Assets and Liabilities Recognized in the Balance Sheets:
     Deferred Tax Assets ................................       $  2,804   $  4,654
     Liabilities ........................................       $ 11,248   $ 16,487

Amounts Recognized in Accumulated Other Comprehensive Income Not Yet Recognized
  as Components of Net Periodic Benefit Cost Consist of:

     Net Loss (Gain) ....................................       $  4,089   $  6,701
     Prior Service Cost (Credit) ........................            118         34
                                                                --------   --------
                                                                $  4,207   $  6,735
                                                                ========   ========
</table>
In  January  2005,  the  Board of  Directors  of the  Corporation  approved  the
curtailment of the accumulation of defined benefits for future services provided
by certain  participants in the First Merchants  Corporation  Retirement Pension
Plan (the "Plan").  Employees of the Corporation and certain of its subsidiaries
who are participants in the Plan were notified that, on and after March 1, 2005,
no  additional  pension  benefits  will be earned by employees who have not both
attained  the age of  fifty-five  (55) and  accrued  at least ten (10)  years of
"Vesting  Service".  As a result of this  action,  the  Corporation  incurred  a
$1,630,000  pension  curtailment loss to record  previously  unrecognized  prior
service costs in accordance with SFAS No. 88,

                                    Page 63
<page>
          PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (table dollar amounts in thousands, except share data)


NOTE 17

PENSION AND OTHER POST RETIREMENT BENEFIT PLANS continued

"Employers' Accounting for Settlements and Curtailments of Defined Benefit Plans
and for  Termination  Benefits."  This loss was  recognized  and recorded by the
Corporation in 2005.

The accumulated benefit obligation for all defined benefit plans was $56,739,000
and $51,732,000 at December 31, 2007 and 2006, respectively.

Information for pension plans with an accumulated  benefit  obligation in excess
of plan assets:
<table>
<caption>
                                                                     December 31
                                                                   2007       2006
=====================================================================================
           <S>                                                      <C>      <C>
     Projected Benefit Obligation .......................       $ 57,500   $ 58,078
                                                                ========   ========
     Accumulated Benefit Obligation .....................       $ 51,770   $ 56,583
                                                                ========   ========
     Fair Value of Plan Assets ..........................       $ 46,252   $ 41,591
                                                                ========   ========
</table>
Components of net periodic pension cost:
<table>
<caption>
                                                                     December 31
                                                                   2007       2006
=====================================================================================
     <S>                                                           <C>         <C>
     Service Cost .......................................       $    671   $    688
     Interest Cost ......................................          3,146      2,985
     Expected Return on Plan Assets......................         (3,164)    (2,913)
     Amortization of Prior Service Costs ................             25         26
     Amortization of Net (Gain) Loss ....................            527        445
                                                                --------   --------
     Net Periodic Pension Cost ..........................       $  1,205   $  1,231
                                                                ========   ========
</table>
Other  changes  in plan  assets  and  benefit  obligations  recognized  in other
comprehensive income:
<table>
<caption>
                                                                           December 31,
                                                                               2007
=========================================================================================
      <S>                                                                     <C>
  Net Periodic Pension Cost ..............................................  $ 1,205
  Defined Benefit Pension Plans, Net of Income Tax Expense of ($1,475)
     Net Gain Arising During Period ......................................    2,725
     Prior Service Cost Arising During Period ............................       30
     Amortization of Prior Service Cost ..................................      (15)
                                                                            -------
     Total Recognized in Other Comprehensive Income ......................    2,740
                                                                            -------
  Total Recognized in NPPC and OCI .......................................  $ 3,945
                                                                            =======
</table>
The estimated net loss and transition obligation for the defined benefit pension
plans that will be amortized from accumulated  other  comprehensive  income into
net periodic pension cost over the next fiscal year are:
<table>
<caption>
==========================================================================================
<S>                                                                         <C>
Amortization of Net Loss (Gain) .........................             $     152
Amortization of Prior Service Cost ......................                    16
                                                                      ---------
   Total ...............................................             $      168
                                                                      =========
</table>
Significant assumptions include:
<table>
<caption>
                                                                     December 31
                                                                   2007       2006
=====================================================================================
<S>                                                                 <C>        <C>
Weighted-average Assumptions Used to Determine Benefit Obligation:
     Discount Rate ......................................          5.50%     5.50%
     Rate of Compensation Increase ......................          3.50%     3.50%
Weighted-average Assumptions Used to Determine Benefit Cost:
     Discount Rate ......................................          5.50%     5.50%
     Expected Return on Plan Assets .....................          7.75%     7.50%
     Rate of Compensation Increase ......................          3.52%     4.00%
</table>
At  September  30,  2007 and 2006,  the  Corporation  based its  estimate of the
expected  long-term rate of return on analysis of the historical  returns of the
plans and current market information available. The plans' investment strategies
are to provide for preservation of capital with an emphasis on long-term growth

                                    Page 64
<page>
          PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (table dollar amounts in thousands, except share data)


NOTE 17

PENSION AND OTHER POST RETIREMENT BENEFIT PLANS continued

without  undue  exposure  to risk.  The  assets of the plans'  are  invested  in
accordance  with the  plans'  Investment  Policy  Statement,  subject  to strict
compliance with ERISA and any other applicable statutes.

The plans' risk management practices include quarterly evaluations of investment
managers, including reviews of compliance with investment manager guidelines and
restrictions;  ability  to  exceed  performance  objectives;  adherence  to  the
investment  philosophy and style; and ability to exceed the performance of other
investment managers. The evaluations are reviewed by management with appropriate
follow-up  and  actions  taken,  as  deemed  necessary.  The  Investment  Policy
Statement  generally  allows  investments  in cash  and cash  equivalents,  real
estate,  fixed income debt securities and equity  securities,  and  specifically
prohibits  investments in derivatives,  options,  futures,  private  placements,
short selling,  non-marketable  securities and purchases of non-investment grade
bonds.

At December 31, 2007, the maturities of the plans' debt  securities  ranged from
18 days to 8.7 years, with a weighted average maturity of 3.2 years. At December
31, 2006, the maturities of the plans' debt securities ranged from 1 day to 10.4
years, with a weighted average maturity of 3.0 years.

The following  benefit  payments,  which reflect  expected  future  service,  as
appropriate,  are expected to be paid as of December 31, 2007.  The  Corporation
plans to contribute as least $386,000 to the plans in 2008.
<table>
<caption>
======================================================

                                              <C>
2008  ................................        $ 2,672
2009  ................................          2,777
2010  ................................          2,990
2011  ................................          3,207
2012  ................................          3,401
2013 and After .......................         18,340
</table>
Plan  assets are  re-balanced  quarterly.  At December  31, 2007 and 2006,  plan
assets by category are as follows:
<table>
<caption>
                                                             December 31
                                                           2007       2006
==============================================================================
         <S>                                                <C>        <C>
     Equity Securities ................................     65%        66%
     Debt Securities ..................................     32%        32%
     Other ............................................      3%         2%
                                                        --------   --------
                                                           100%       100%
                                                        ========   ========
</table>
The following table reflects the adjustments  recorded during 2006 in accordance
with the adoption of the recognition and disclosure requirement of SFAS No. 158:
<table>
<caption>
                                                            Before                           After
                                                        Application of                   Application of
                                                         Statement 158    Adjustments    Statement 158
=======================================================================================================
          <S>                                                 <C>             <C>              <C>
     Other Assets .................................     $    22,281     $    1,377       $    23,658
     Total Assets .................................       3,553,493          1,377         3,554,870
     Other Liabilities ............................          23,486          3,431            26,917
     Total Liabilities ............................       3,224,114          3,431         3,227,545
     Accumulated Other Comprehensive Loss .........          (7,341)        (2,064)           (9,405)
     Total Stockholders' Equity ...................         329,389         (2,064)          327,325
</table>
The First Merchants Corporation Retirement and Income Savings Plan (the "Savings
Plan"), a Section 401(k)  qualified  defined  contribution  plan, was amended on
March 1, 2005 to provide enhanced  retirement  benefits,  including employer and
matching  contributions,  for  eligible  employees  of the  Corporation  and its
subsidiaries.  The Corporation matches employees' contributions primarily at the
rate of 50  percent  for the  first 6  percent  of base  salary  contributed  by
participants.  Beginning in 2005,  employees who have  completed  1,000 hours of
service  and are an  active  employee  on the last day of the  year  receive  an
additional retirement contribution after year-end. The amount of a participant's
retirement contribution varies from 2 to 7 percent of salary based upon years of
service. Full vesting occurs after 5 years of service. The Corporation's expense
for the Savings Plan was $2,454,000 for 2007, $2,026,000 for 2006 and $2,052,000
for 2005.

The  Corporation  maintains  post-retirement  benefit plans that provide  health
insurance benefits to retirees. The plans allow retirees to be carried under the
Corporation's  health insurance plan, generally from ages 55 to 65. The retirees
pay most of the premiums due for their  coverage,  with amounts paid by retirees
ranging from 70 to 100 percent of the  premiums  payable.  The accrued  benefits
payable under the plans totaled  $1,317,000  and $1,089,000 at December 31, 2007
and 2006.  Post-retirement plan expense totaled $171,000,  $127,000 and $120,000
for the years ending December 31, 2007, 2006 and 2005, respectively.

                                 Page 65
<page>
          PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (table dollar amounts in thousands, except share data)


NOTE 18

NET INCOME PER SHARE
<table>
<caption>
====================================================================================================================================
Year Ended December 31,                           2007                           2006                           2005
----------------------------------------------------------------------------------------------------------------------------------
                                       WEIGHTED-AVERAGE   PER SHARE   WEIGHTED-AVERAGE   PER SHARE  WEIGHTED-AVERAGE    PER SHARE
                                      INCOME     SHARES     AMOUNT   INCOME     SHARES     AMOUNT   INCOME     SHARES     AMOUNT
====================================================================================================================================
    <S>                                 <C>        <C>         <C>     <C>         <C>       <C>     <C>        <C>          <C>
Basic Net Income Per Share:
  Net Income Available to
    Common Stockholders ..........   $31,639    18,249,919   $1.73  $30,198    18,383,074   $1.64  $30,239    18,484,832   $1.64
                                                             =====                          =====                          =====
Effect of Dilutive Stock Options..                  64,843                         83,679                        110,863
                                     -------    ----------          -------    ----------          -------    ----------
Diluted Net Income Per Share:
  Net Income Available to
    Common Stockholders
    and Assumed Conversions ......   $31,639    18,313,964   $1.73  $30,198    18,466,753   $1.64  $30,239    18,595,695   $1.63
                                     =======    ==========   =====  =======    ==========   =====  =======    ==========   =====
</table>
Options to purchase  831,795,  590,736,  and 214,840 shares of common stock with
weighted  average  exercise prices of $25.67,  $26.21 and $26.81 at December 31,
2007, 2006 and 2005, respectively, were excluded from the computation of diluted
net income per share  because the options  exercise  price was greater  than the
average market price of the common stock.


NOTE 19

FAIR VALUES OF FINANCIAL INSTRUMENTS

The following  methods and  assumptions  were used to estimate the fair value of
each class of financial instrument:

CASH  AND  CASH  EQUIVALENTS  The  fair  value  of  cash  and  cash  equivalents
approximates carrying value.

INTEREST-BEARING  TIME DEPOSITS The fair value of interest-bearing time deposits
approximates carrying value.

INVESTMENT SECURITIES Fair values are based on quoted market prices.

MORTGAGE  LOANS  HELD  FOR  SALE  The  fair  value  of  mortgages  held for sale
approximates carrying values.

LOANS For both short-term loans and variable-rate  loans that reprice frequently
and with no significant change in credit risk, fair values are based on carrying
values.  The fair value for other loans is estimated using  discounted cash flow
analyses,  using interest rates  currently  being offered for loans with similar
terms to borrowers of similar credit quality.

FEDERAL  RESERVE AND FEDERAL HOME LOAN BANK STOCK The fair value of FRB and FHLB
stock is based on the price at which it may be resold to the FRB and FHLB.

INTEREST  RECEIVABLE/PAYABLE  The fair  values  of  interest  receivable/payable
approximate carrying values.

DEPOSITS   The   fair   values   of    noninterest-bearing    demand   accounts,
interest-bearing  demand  accounts and savings  deposits are equal to the amount
payable on demand at the balance sheet date.  The carrying  amounts for variable
rate,  fixed-term  certificates of deposit  approximate their fair values at the
balance sheet date. Fair values for fixed-rate certificates of deposit and other
time  deposits are  estimated  using a  discounted  cash flow  calculation  that
applies  interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on such time deposits.

BORROWINGS  The fair value of  borrowings is estimated  using a discounted  cash
flow calculation, based on current rates for similar debt, except for short-term
and adjustable rate borrowing  arrangements.  At December 31, the fair value for
these instruments approximates carrying value.

DERIVATIVE  INSTRUMENTS The fair value of the derivatives reflects the estimated
amounts that we would receive to terminate these contracts at the reporting date
based upon pricing or valuation  models applied to current  market  information.
Interest  rate  floors  are  valued  using the market  standard  methodology  of
discounting  the future  expected  cash  receipts  that would  occur if variable
interest  rates fell below the strike rate of the  floors.  The  projected  cash
receipts  on the floor  are based on an  expectation  of future  interest  rates
derived from observed market interest rate curves and volatilities.


                                 Page 66
<page>
          PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (table dollar amounts in thousands, except share data)


NOTE 19

FAIR VALUES OF FINANCIAL INSTRUMENTS continued

OFF-BALANCE SHEET COMMITMENTS

Loan commitments and letters-of-credit generally have short-term,  variable-rate
features  and  contain  clauses  which  limit the Banks'  exposure to changes in
customer  credit  quality.   Accordingly,   their  carrying  values,  which  are
immaterial at the respective  balance sheet dates,  are reasonable  estimates of
fair value.

The estimated  fair values of the  Corporation's  financial  instruments  are as
follows:
<table>
<caption>
                                                                                     2007                           2006
====================================================================================================================================
                                                                          CARRYING           FAIR          CARRYING          FAIR
                                                                           AMOUNT            VALUE          AMOUNT           VALUE
====================================================================================================================================
<S>                                                                       <C>              <C>             <C>               <C>
Assets at December 31:
   Cash and Due from Banks ....................................      $  134,683        $  134,683     $   89,957        $   89,957
   Interest-bearing Time Deposits .............................          24,931            24,931         11,284            11,284
   Investment Securities Available for Sale ...................         440,836           440,836        455,933           455,933
   Investment Securities Held to Maturity .....................          10,331            10,270          9,284             9,516
   Mortgage Loans Held for Sale ...............................           3,735             3,735          5,413             5,413
   Loans ......................................................       2,848,615         2,846,625      2,666,061         2,649,916
   FRB and FHLB Stock .........................................          25,250            25,250         23,691            23,691
   Interest Receivable ........................................          23,402            23,402         24,345            24,345
   Interest Rate Floors .......................................           2,001             2,001            428               428

Liabilities at December 31:
   Deposits ...................................................      $2,844,121        $2,731,895     $2,750,538        $2,661,866
   Borrowings:
       Federal Funds Purchased ................................          52,350            52,350         56,150            56,150
       Securities Sold Under Repurchase Agreements ............         106,497           106,497         42,750            42,750
       FHLB Advances ..........................................         294,101           298,574        242,408           242,954
       Subordinated Debentures, Revolving Credit
         Lines and Term Loans .................................         115,826           121,177         99,456           112,966
   Interest Payable ...........................................           8,325             8,325          9,326             9,326
</table>
NOTE 20

CONDENSED FINANCIAL INFORMATION   (parent company only)

Presented  below is condensed  financial  information as to financial  position,
results of operations, and cash flows of the Corporation:

CONDENSED BALANCE SHEETS
<table>
<caption>
                                                                December 31,
                                                              2007         2006
================================================================================
<S>                                                           <C>           <C>
Assets
   Cash ..............................................     $  8,192     $  6,122
   Investment in Subsidiaries ........................      445,104      417,287
   Goodwill ..........................................          448          448
   Other Assets ......................................       12,282       15,425
                                                           --------     --------
      Total Assets ...................................     $466,026     $439,282
                                                           ========     ========
Liabilities
   Borrowings ........................................     $115,826     $ 99,456
   Other Liabilities .................................       10,264       12,501
                                                           --------     --------
      Total Liabilities ..............................      126,090      111,957

Stockholders' Equity .................................      339,936      327,325
                                                           --------     --------
      Total Liabilities and Stockholders' Equity .....     $466,026     $439,282
                                                           ========     ========
</table>

                                    Page 67
<page>
          PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (table dollar amounts in thousands, except share data)


NOTE 20

CONDENSED FINANCIAL INFORMATION   (parent company only) continued

CONDENSED STATEMENTS OF INCOME
<table>
<caption>
                                                                                                         December 31,
                                                                                            2007            2006            2005
===================================================================================================================================
<S>                                                                                         <C>             <C>              <C>
Income
  Dividends from Subsidiaries ................................................           $ 20,979        $ 33,919        $ 30,930
  Administrative Services Fees from Subsidiaries..............................             17,670          15,104          13,823
  Other Income ...............................................................                102             240             644
                                                                                         --------        --------        --------
     Total Income ............................................................             38,750          49,263          45,397
                                                                                         --------        --------        --------
Expenses
  Amortization of Core Deposit Intangibles
   and Fair Value Adjustments ................................................                 11              11              11
  Interest Expense............................................................              7,750           8,124           7,432
  Salaries and Employee Benefits..............................................             16,111          13,934          12,500
  Net Occupancy Expenses......................................................              1,198           1,232           1,294
  Equipment Expenses..........................................................              3,772           4,210           3,418
  Telephone Expenses..........................................................                915           1,108           1,181
  Postage and Courier Expenses................................................              1,797           1,658           1,528
  Other Expenses..............................................................              5,898           2,548           2,394
                                                                                         --------        --------        --------
     Total Expenses ..........................................................             37,452          32,825          29,758
                                                                                         --------        --------        --------
Income Before Income Tax Benefit and Equity in
  Undistributed Income of Subsidiaries .........................................            1,298          16,438          15,639
     Income Tax Benefit ......................................................              7,355           6,771           5,404
                                                                                         --------        --------        --------
Income Before Equity in Undistributed Income of Subsidiaries .................              8,653          23,209          21,043

   Equity in Undistributed (Distributions in Excess of)
    Income of Subsidiaries ...................................................             22,986           6,989           9,196
                                                                                         --------        --------        --------
Net Income ...................................................................           $ 31,639        $ 30,198        $ 30,239
                                                                                         ========        ========        ========
</table>
CONDENSED STATEMENTS OF CASH FLOWS
<table>
<caption>
                                                                                    Year Ended December 31,
=====================================================================================================================
                                                                             2007             2006             2005
=====================================================================================================================
<S>                                                                           <C>              <C>             <C>
Operating Activities:
   Net Income ........................................................    $ 31,639         $ 30,198         $ 30,239
   Adjustments to Reconcile Net Income to Net Cash
     Provided by Operating Activities:
     Amortization ....................................................          11               11               11
     Share-based Compensation ........................................         723               41

     Distributions in Excess of (Equity in Undistributed)
       Income of Subsidiaries ............... ........................     (22,986)          (6,989)          (9,196)
     Net Change in:
        Other Assets .................................................       3,143           (3,166)          (2,220)
        Other Liabilities ............................................      (2,237)           5,923            1,680
                                                                          --------         --------         --------
           Net Cash Provided by Operating Activities .................      10,293           26,018           20,514
                                                                          --------         --------         --------
Investing Activities - Investment in Subsidiaries ....................       2,559              840           (2,884)
                                                                          --------         --------         --------
           Net Cash Provided (Used) by Investing Activities ..........       2,559              840           (2,884)
                                                                          --------         --------         --------
Financing Activities:
   Cash Dividends ....................................................     (16,854)         (16,951)         (16,981)
   Borrowings.........................................................      73,202            3,750            9,833
   Repayment of Borrowings ...........................................     (56,832)          (8,250)          (3,083)
   Stock Issued Under Employee Benefit Plans .........................         787              857              914
   Stock Issued Under Dividend Reinvestment
     and Stock Purchase Plan .........................................       1,170            1,190              933
   Stock Options Exercised ...........................................         496            1,228            2,174
   Stock Redeemed ....................................................     (12,751)          (5,690)          (9,658)
   Other .............................................................                          381
                                                                          --------         --------         --------
           Net Cash Used by Financing Activities .....................     (10,782)         (23,485)         (15,868)
                                                                          --------         --------         --------
Net Change in Cash ...................................................       2,070            3,373            1,762
Cash, Beginning of Year ..............................................       6,122            2,749              987
                                                                          --------         --------         --------
Cash, End of Year ....................................................    $  8,192         $  6,122         $  2,749
                                                                          ========         ========         ========
</table>

                                    Page 68
<page>
          PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (table dollar amounts in thousands, except share data)


NOTE 21

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The  following  table sets forth certain  quarterly  results for the years ended
December 31, 2007 and 2006:
<table>
<caption>

-----------------------------------------------------------------------------------------------------------------------------------
                                                                                   AVERAGE SHARES OUTSTANDING  NET INCOME PER SHARE
   QUARTER            INTEREST    INTEREST    NET INTEREST  PROVISION FOR     NET  --------------------------  --------------------
    ENDED              INCOME      EXPENSE       INCOME      LOAN LOSSES     INCOME      BASIC        DILUTED     BASIC   DILUTED
<S>                     <C>           <C>             <C>         <C>          <C>     <C>              <C>          <C>     <C>
2007:
March ............   $   55,241   $  28,166    $    27,075   $  1,599      $  7,771    18,410,958    18,495,926   $ .42   $ .42
June .............       57,008      29,393         27,615      1,648         6,208    18,290,918    18,368,513     .34     .34
September.........       59,157      30,622         28,535      2,810         8,350    18,221,467    18,276,180     .46     .46
December..........       59,327      29,432         29,895      2,450         9,310    18,080,281    18,137,667     .51     .51
                     ----------   ----------   -----------   --------      --------                               -----   -----
                     $  230,733   $ 117,613    $   113,120   $  8,507      $ 31,639    18,249,919    18,313,964   $1.73   $1.73
                     ==========   ==========   ===========   ========      ========                               =====   =====

2006:
March ............   $   48,062   $  20,473    $    27,589   $  1,726      $  7,509    18,425,047    18,532,136   $ .41   $ .41
June .............       51,047      23,281         27,766      1,729         7,291    18,385,298    18,463,278     .39     .39
September.........       54,325      26,701         27,624      1,558         7,739    18,317,558    18,380,631     .42     .42
December..........       55,172      28,056         27,116      1,245         7,659    18,405,330    18,497,507     .42     .42
                     ----------   ----------   -----------   --------      --------                               -----   -----
                     $  208,606   $  98,511    $   110,095   $  6,258      $ 30,198    18,383,074    18,466,753   $1.64   $1.64
                     ==========   ==========   ===========   ========      ========                               =====   =====
</table>
NOTE 22

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Statement of Financial  Accounting  Standards No. 133, Accounting for Derivative
Instruments  and  Hedging  Activities  (SFAS 133),  as amended and  interpreted,
establishes  accounting  and  reporting  standards for  derivative  instruments,
including certain derivative  instruments  embedded in other contracts,  and for
hedging  activities.  As  required  by SFAS 133,  the  Corporation  records  all
derivatives  on the balance sheet at fair value.  The  accounting for changes in
the fair value of derivatives  depends on the intended use of the derivative and
the resulting designation.  Derivatives used to hedge the exposure to changes in
the fair value of an asset,  liability,  or firm  commitment  attributable  to a
particular  risk,  such as interest rate risk, are considered fair value hedges.
Derivatives  used to hedge the exposure to variability  in expected  future cash
flows,  or other types of  forecasted  transactions,  are  considered  cash flow
hedges.  To qualify for hedge  accounting,  the Corporation must comply with the
detailed  rules and strict  documentation  requirements  at the inception of the
hedge,  and hedge  effectiveness  is  assessed  at  inception  and  periodically
throughout the life of each hedging relationship. Hedge ineffectiveness, if any,
is measured periodically throughout the life of the hedging relationship.

The Corporation's objective in using derivatives is to add stability to interest
income and to manage its exposure to changes in interest  rates.  To  accomplish
this  objective,  the  Corporation  uses interest rate floors to protect against
movements in interest  rates below the floors' strike rates over the life of the
agreements.  The  interest  rate floors have  notional  amounts of  $50,000,000,
$100,000,000  and $1,000,000 with  corresponding  strike rates of 6.0%, 7.0% and
7.5%  respectively.  All of the floors  have  maturity  dates of August 1, 2009.
During 2007,  the floors were used to hedge the variable  cash flows  associated
with  existing  variable-rate  loan  assets  that are  based on the  prime  rate
(Prime). For accounting purposes, the floors are designated as a cash flow hedge
of the overall changes in cash flows on the first Prime-based  interest payments
received by the  Corporation  each calendar  month during the term of the hedges
that,  in aggregate  for each period,  are interest  payments on principal  from
specified portfolios equal to the notional amount of the floors.

For derivatives designated as cash flow hedges, the effective portion of changes
in the fair value of the derivative is initially reported in other comprehensive
income  (outside  of  earnings)  and   subsequently   reclassified  to  earnings
("interest  income on loans")  when the  hedged  transaction  affects  earnings.
Ineffectiveness resulting from the hedging relationship,  if any, is recorded as
a gain  or loss  in  earnings  as part  of  non-interest  income.  Based  on the
Corporation's  assessments  both at  inception  and  throughout  the life of the
hedging  relationship,  it is  probable  that  sufficient  Prime-based  interest
receipts will exist through the maturity dates of the floors.

The Corporation uses the "Hypothetical Derivative Method" described in Statement
133 Implementation Issue No. G20, "Cash Flow Hedges: Assessing and Measuring the
Effectiveness  of a Purchased  Option Used in a Cash Flow Hedge," for  quarterly
prospective and retrospective assessments of hedge effectiveness, as well as for
measurements of hedge  ineffectiveness.  The effective portion of changes in the
fair value of the derivative is initially reported in other comprehensive income
(outside of  earnings)  and  subsequently  reclassified  to earnings  ("interest
income on loans") when the hedged transactions affect earnings.  Ineffectiveness
resulting  from the  hedge  is  recorded  as a gain or loss in the  consolidated
statement  of  income  as part of  non-interest  income.  The  Corporation  also
monitors the risk of counterparty default on an ongoing basis.

Prepayments in hedged loan  portfolios are treated in a manner  consistent  with
the guidance in Statement 133  Implementation  Issue No. G25, "Cash Flow hedges:
Using the  First-Payments-Received  Technique in Hedging the  Variable  Interest
Payments  on a  Group  of  Non-Benchmark-Rate-Based  Loans,"  which  allows  the
designated forecasted transactions to be the variable, Prime-rate-based interest
payments on a rolling portfolio of prepayable  interest-bearing  loans using the
first-payments-received technique, thereby allowing interest payments from loans
that prepay to be replaced with interest payments from new loan originations.

                                    Page 69
<page>
          PART II: ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (table dollar amounts in thousands, except share data)


NOTE 22

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES continued

As of December 31, 2007, no derivatives  were designated as fair value hedges or
hedges of net investments in foreign operations.  Additionally,  the Corporation
does not use derivatives for trading or speculative purposes.

For the years  ended  December  31,  2007 and 2006,  the  interest  rate  floors
designated  as cash flow  hedges had a fair value of  $2,001,000  and  $428,000,
respectively,  which  were  included  in  "Other  Assets".  The  change  in  net
unrealized  gains/losses  on  cash  flow  hedges  reported  in the  consolidated
statements  of  changes  in  shareholders'  equity  was a net  of  tax  gain  of
$1,057,000 during 2007, and a loss of $125,000 during 2006.

For the year ended  December  31,  2007,  the  Corporation  recognized a gain of
$64,000 for hedge  ineffectiveness  due to  mismatches in the terms of the floor
and the hedged  loans,  which is  reported in other  income in the  consolidated
statements of income.

Amounts  reported  in  accumulated  other  comprehensive  income  related to the
interest rate floor will be reclassified to interest income as interest payments
are  received  on the  Corporation's  variable-rate  assets.  The  change in net
unrealized  gains/losses  on cash flow  hedges  reflects a  reclassification  of
$48,000 of net  unrealized  gains and  $38,000  of net  unrealized  losses  from
accumulated other comprehensive  income to interest income during 2007 and 2006,
respectively. During 2008, the Corporation estimates that an additional $787,000
will be reclassified.

Interest  rate  floors are  valued  using  market  standard  methodologies  that
incorporate implied forward interest rates and implied volatility as inputs. The
fair value of each floor is obtained  by summing  the values of each  individual
floorlet    -   which    are    monthly    European-style    options    on   the
daily-weighted-average Prime rate. The fair value of each floorlet is calculated
using the Black-Scholes Model.

NOTE 23

ACCOUNTING MATTERS

In September 2006, the FASB issued SFAS No. 157, Fair Value  Measurements.  SFAS
No. 157 defines fair value,  establishes a framework for measuring fair value in
generally  accepted  accounting  standards,  and expands  disclosures about fair
value  measurements.  SFAS No. 157 is effective for financial  statements issued
for fiscal years  beginning  after November 15, 2007, and interim periods within
those fiscal years. We do not expect that the adoption of SFAS No. 157 will have
a material impact on our financial condition or results of operations.

The  Corporation  adopted the provisions of the Financial  Accounting  Standards
Board (FASB)  Interpretation  No. 48 (FIN 48),  Accounting  for  Uncertainty  in
Income Taxes - an  interpretation of FASB Statement No. 109, on January 1, 2007.
FIN 48 prescribes a  recognition  threshold  and  measurement  attribute for the
financial  statement  recognition  and  measurement  of a tax position  taken or
expected  to be  taken  in a tax  return.  FIN  48  also  provides  guidance  on
derecognition,  classification,  interest and  penalties,  accounting in interim
periods, disclosure and transition. As a result of the implementation of FIN 48,
the  Corporation  did not identify any uncertain tax positions  that it believes
should be recognized in the financial statements. The tax years still subject to
examination by taxing authorities are years subsequent to 2003.

In February  2007,  the FASB issued  SFAS No.  159,  "The Fair Value  Option for
Financial  Assets and  Financial  Liabilities;  including  an  Amendment of FASB
Statement No. 115" (SFAS 159).  SFAS 159 permits  entities  with an  irrevocable
option to report most  financial  assets and  liabilities  at fair  value,  with
subsequent  changes in fair value  reported in  earnings.  The  election  can be
applied  on  an   instrument-by-instrument   basis.  The  statement  establishes
presentation  and  disclosure  requirements  designed to facilitate  comparisons
between entities that choose different measurement  attributes for similar types
of assets and  liabilities.  Unrealized  gains and losses on items for which the
fair value  option has been  elected  will be  recognized  in  earnings  at each
subsequent  reporting  date.  The  provisions  of FAS 159 are  effective for the
fiscal  year  beginning  January 1, 2008.  The  Corporation  does not expect the
adoption  of SFAS No. 159 to have a  material  impact on the  operations  of the
Corporation.

                                    Page 70

<PAGE>
PART II: ITEM 9., ITEM 9A. AND ITEM 9B.


ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE.

In  connection  with its  audits  for the two most  recent  fiscal  years  ended
December  31,  2007,  there have been no  disagreements  with the  Corporation's
independent  registered  public  accounting  firm on any  matter  of  accounting
principles  or  practices,  financial  statement  disclosure  or audit  scope or
procedure, nor have there been any changes in accountants.

ITEM 9A.   CONTROLS AND PROCEDURES

At the end of the period  covered by this report (the  "Evaluation  Date"),  the
Corporation  carried  out an  evaluation,  under  the  supervision  and with the
participation of the Corporation's management, including the Corporation's Chief
Executive  Officer and Chief  Financial  Officer,  of the  effectiveness  of the
design and operation of its disclosure  controls and procedures pursuant to Rule
13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934 ("Exchange Act").
Based upon that evaluation,  the Corporation's Chief Executive Officer and Chief
Financial  Officer  concluded that, as of the Evaluation Date, the Corporation's
disclosure  controls  and  procedures  are  effective.  Disclosure  controls and
procedures  are  controls  and  procedures  that are  designed  to  ensure  that
information  required to be disclosed in Corporation  reports filed or submitted
under the Exchange Act is recorded,  processed,  summarized and reported  within
the time periods specified in the Securities and Exchange Commission's rules and
forms.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of the  Corporation is responsible for  establishing  and maintaining
effective internal control over financial reporting as defined in Rule 13a-15(f)
under the Securities  Exchange Act of 1934. The  Corporation's  internal control
over  financial  reporting  is designed to provide  reasonable  assurance to the
Corporation's  management and board of directors  regarding the  preparation and
fair presentation of published financial statements.

Because of its inherent  limitations,  internal control over financial reporting
may not  prevent  or  detect  misstatements.  Accordingly,  even  those  systems
determined to be effective can provide only reasonable assurance with respect to
financial  statement  preparation and  presentation.

Management assessed the effectiveness of the Corporation's internal control over
financial  reporting  as of  December  31,  2007.  In  making  this  assessment,
management  used the  criteria  set  forth in  "Internal  Control  -  Integrated
Framework"  issued by the  Committee of Sponsoring  Organizations  (COSO) of the
Treadway  Commission.  Based on this assessment,  management has determined that
the Corporation's  internal control over financial  reporting as of December 31,
2007 is effective based on the specified criteria.

There have been no changes in the Corporation's internal controls over financial
reporting  identified in connection  with the evaluation  referenced  above that
occurred  during the  Corporation's  last fiscal  quarter  that have  materially
affected,  or are  reasonably  likely to materially  affect,  the  Corporation's
internal control over financial reporting.

                                    Page 71
<page>
PART II: ITEM 9., ITEM 9A. AND ITEM 9B.


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Audit Committee, Board of Directors and Stockholders
First Merchants Corporation
Muncie, Indiana

We have audited First Merchants  Corporation's  internal  control over financial
reporting  as of December 31, 2007,  based on criteria  established  in Internal
Control  -  Integrated   Framework   issued  by  the   Committee  of  Sponsoring
Organizations of the Treadway  Commission  (COSO).  The Company's  management is
responsible for maintaining  effective internal control over financial reporting
and for its assessment of the  effectiveness  of internal control over financial
reporting,  included in the accompanying Management's Report on Internal Control
Over Financial  Reporting.  Our  responsibility  is to express an opinion on the
Company's internal control over financial reporting based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain  reasonable  assurance  about whether  effective
internal  control  over  financial  reporting  was  maintained  in all  material
respects. Our audit included obtaining an understanding of internal control over
financial  reporting,  assessing  the risk that a material  weakness  exists and
testing  and  evaluating  the design and  operating  effectiveness  of  internal
control  based on the assessed  risk.  Our audit also included  performing  such
other  procedures as we considered  necessary in the  circumstances.  We believe
that our audit provides a reasonable basis for our opinion.

A company's  internal control over financial  reporting is a process designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial  reporting  includes those policies and procedures that (1) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions  of the assets of the company;  (2)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of  unauthorized  acquisition,  use or  disposition  of the  company's
assets that could have a material effect on the financial statements.

Because of its inherent  limitations,  internal control over financial reporting
may not prevent or detect misstatements.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions  or that the degree of  compliance
with the policies or procedures may deteriorate.

In  our  opinion,  First  Merchants  Corporation  maintained,  in  all  material
respects, effective internal control over financial reporting as of December 31,
2007, based on criteria  established in Internal Control - Integrated  Framework
issued by the Committee of Sponsoring  Organizations of the Treadway  Commission
(COSO).

We have also  audited,  in accordance  with the standards of the Public  Company
Accounting   Oversight  Board  (United  States),   the  consolidated   financial
statements of First Merchants Corporation and our report dated February 8, 2008,
expressed an unqualified opinion thereon.



BKD, LLP
Indianapolis, Indiana
February 8, 2008



ITEM 9B.  OTHER INFORMATION

None

                                    Page 72
<PAGE>
Part III: ITEM 10., ITEM 11., ITEM 12., ITEM 13., AND ITEM 14.


PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The  information  in the  Corporation's  Proxy  Statement  dated  March 19, 2008
furnished to its  stockholders  in connection  with an annual meeting to be held
April 29, 2008 (the "2008 Proxy  Statement"),  under the  captions  "INFORMATION
REGARDING  DIRECTORS",  "COMMITTEES OF THE BOARD" and "SECTION 16(a)  BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE",  is expressly incorporated herein by reference.
The information  required under this item relating to executive  officers is set
forth  in  Part  I,  "Supplemental  Information  -  Executive  Officers  of  the
Registrant" on this Annual Report on Form 10-K.

The Corporation has adopted a Code of Ethics that applies to its Chief Executive
Officer,  Chief  Operating  Officer,  Chief  Financial  Officer,  Controller and
Treasurer.  It is part of the  Corporation's  Code of  Business  Conduct,  which
applies to all employees and directors of the Corporation and its affiliates.  A
copy of the Code of Business Conduct may be obtained, free of charge, by writing
to First Merchants Corporation at 200 East Jackson Street,  Muncie, IN 47305. In
addition,  the Code of Ethics is maintained on the Corporation's  website, which
can be accessed at http://www.firstmerchants.com.

ITEM 11.  EXECUTIVE COMPENSATION

The information in the Corporation's  2008 Proxy Statement,  under the captions,
"COMPENSATION OF DIRECTORS",  "COMPENSATION OF EXECUTIVE OFFICERS",  "COMMITTEES
OF THE  BOARD-Compensation  and Human Resources Committee Interlocks and Insider
Participation"  and  "COMMITTEES OF THE  BOARD-Compensation  and Human Resources
Committee Report" is expressly incorporated herein by reference.

ITEM 12.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information in the  Corporation's  2008 Proxy Statement,  under the caption,
"SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT-Securities  Ownership of
Certain  Beneficial  Owners" and "SECURITY  OWNERSHIP OF  BENEFICIAL  OWNERS AND
MANAGEMENT-Security Ownership of Directors and Executive Officers", is expressly
incorporated  herein by  reference.  The  information  required  under this item
relating to equity  compensation plans is set forth in Part II, Item 5 under the
table entitled "Equity  Compensation  Plan Information" on this Annual Report on
Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information in the Corporation's  2008 Proxy Statement,  under the captions,
SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND  MANAGEMENT-Securities  Ownership of
Certian Beneficial Owners" and "TRANSACTIONS WITH RELATED PERSONS", is expressly
incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information in the  Corporation's  2008 Proxy  Statement,  under the caption
"INDEPENDENT AUDITOR", is expressly incorporated herein by reference.


                                 Page 73
<PAGE>
Part IV: ITEM 15. FINANCIAL STATEMENT SCHEDULES AND EXHIBITS


PART IV

ITEM 15.  FINANCIAL STATEMENT SCHEDULES AND EXHIBITS.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S>                                                                          <C>

(a) 1.      Financial Statements:
                 Independent accountants' report
                 Consolidated balance sheets at
                      December 31, 2007 and 2006
                 Consolidated statements of income,
                      years ended December 31, 2007,
                      2006 and 2005
                 Consolidated statements of comprehensive income,
                      years ended December 31, 2007, 2006 and 2005
                 Consolidated statements of stockholders' equity,
                      years ended December 31, 2007, 2006 and 2005
                 Consolidated statements of cash flows,
                      years ended December 31, 2007,
                      2006 and 2005
                 Notes to consolidated financial
                      statements

</TABLE>

(a) 2.      Financial statement schedules:
                    All schedules are omitted because they are not applicable or
                    not  required,   or  because  the  required  information  is
                    included in the consolidated financial statements or related
                    notes.


(a) 3.      Exhibits:


Exhibit No:                           Description of Exhibits:
-----------                           ------------------------

     3a   First Merchants  Corporation Articles of Incorporation.  (Incorporated
          by  reference  to  registrant's  Form 10-Q for quarter  ended June 30,
          1999)

     3b   Bylaws  of  First  Merchants   Corporation   dated  October  23,  2007
          (Incorporated  by reference to registrant's  Form 10-Q for the quarter
          ended September 30, 2007)

     4.1  First Merchants  Corporation Amended and Restated Declaration of Trust
          of  First  Merchants  Capital  Trust  II  dated  as of  July  2,  2007
          (Incorporated  by reference to registrant's  Form 8-K filed on July 3,
          2007)

     4.2  Indenture  dated as of July 2,  2007  (Incorporated  by  reference  to
          registrant's Form 8-K filed on July 3, 2007)

     4.3  Guarantee  Agreement  dated  as  of  July  2,  2007  (Incorporated  by
          reference to registrant's Form 8-K filed on July 3, 2007)

     4.4  Form of Capital  Securities  Certification of First Merchants  Capital
          Trust II (Incorporated by reference to registrant's  Form 8-K filed on
          July 3, 2007)

     10.1 Placement  Agreement dated June 29, 2007 (Incorporated by reference to
          registrant's Form 8-K filed on July 3, 2007)

                                    Page 74
<PAGE>
ITEM 15.  FINANCIAL STATEMENT SCHEDULES AND EXHIBITS (continued)
--------------------------------------------------------------------------------

     10a  First Merchants  Corporation Senior Management Incentive  Compensation
          Program, dated February 27, 2008.(2)

     10b  First Merchants  Corporation 1994 Stock Option Plan.  (Incorporated by
          reference  to  registrant's  Form  10-K for year  ended  December  31,
          1993)(1)

     10c  First Merchants  Corporation Change of Control Agreement,  as amended,
          with Mark K.  Hardwick  dated  February  14,  2006.  (Incorporated  by
          reference to registrant's Form 8-K filed on March 9, 2006)(1)

     10d  First Merchants  Corporation  Change of Control Agreement with Michael
          C. Rechin  dated  December  13,  2005.  (Incorporated  by reference to
          registrant's Form 8-K filed on December 19, 2005)(1)

     10e  First Merchants Corporation Change of Control Agreement with Robert R.
          Connors  dated  August  26,  2002  as  amended  on  January  1,  2008.
          (Incorporated  by reference to registrant's  Form 8-K filed on January
          3, 2008)(1)

     10f  First Merchants  Corporation Change of Control Agreement with Kimberly
          J.  Ellington  dated  January  1, 2005 as  amended on January 1, 2008.
          (Incorporated  by reference to registrant's  Form 8-K filed on January
          3, 2008)(1)

     10g  First Merchants  Corporation  Change of Control Agreement with Jami L.
          Bradshaw  dated  October  23,  2007.  (Incorporated  by  reference  to
          registrant's Form 8-K filed on October 29, 2007)(1)

     10h  First Merchants  Corporation Change of Control Agreement with David W.
          Spade  dated   October  23,  2007.   (Incorporated   by  reference  to
          registrant's Form 8-K filed on October 29, 2007)(1)

     10i  First Merchants  Corporation  Change of Control Agreement with Jeffrey
          B.  Lorentson  dated October 23, 2007.  (Incorporated  by reference to
          registrant's Form 8-K filed on October 29, 2007)(1)

     10j  Resolution of the Board of Directors of First Merchants Corporation on
          director compensation dated December 4, 2007. (2)

     10k  First Merchants Corporation Supplemental Executive Retirement Plan and
          amendments  thereto.  (Incorporated by reference to registrant's  Form
          10-K for year ended December 31, 1997)(1)

     10l  First Merchants  Corporation  1999 Long-Term Equity Incentive Plan, as
          amended.  (Incorporated  by  reference to  registrant's  Form 10-Q for
          quarter ended September 30, 2004) (1)

     10m  First Merchants  Corporation  Letter Agreement between the Corporation
          and Michael L. Cox, dated January 23, 2007. (Incorporated by reference
          to registrant's Form 8-K filed on January 24, 2007)

     10n  First  Merchants   Corporation   Defined   Contribution   Supplemental
          Retirement Plan dated January 1, 2006.  (Incorporated  by reference to
          registrant's Form 8-K filed on February 6, 2007)

     10o  First  Merchants  Corporation  Participation  Agreement  of Michael C.
          Rechin  dated  January  26,  2007.   (Incorporated   by  reference  to
          registrant's Form 8-K filed on February 6, 2007)

     21   Subsidiaries of Registrant(2)

     23   Consent of Independent Registered Public Accounting Firm(2)

     24   Limited Power of Attorney(2)

     31.1 Certification  of Chief Executive  Officer  Pursuant to Section 302 of
          the Sarbanes - Oxley Act of 2002(2)

     31.2 Certification  of Chief Financial  Officer  Pursuant to Section 302 of
          the Sarbanes - Oxley Act of 2002(2)

     32   Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
          to Section 906 of the Sarbanes-Oxley Act of 2002(2)

     99.1 Financial  statements and  independent  registered  public  accounting
          firm's report for First Merchants  Corporation Employee Stock Purchase
          Plan (2)

       (1) Management contract or compensatory plan.
       (2) Filed here within.

                                    Page 75
     <PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 17th day of March,
2008.

                                          FIRST MERCHANTS CORPORATION

                                      By: /s/ Michael C. Rechin
                                          -----------------------------
                                          Michael C. Rechin, President and
                                                             Chief Executive
                                                             Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
on Form  10-K  has  been  signed  by the  following  persons  on  behalf  of the
registrant and in the capacities indicated, on this 17th day of March, 2008.

/s/ Michael C. Rechin*                    /s/ Mark K. Hardwick
--------------------------------------    --------------------------------------
Michael C. Rechin  President and          Mark K. Hardwick  Executive Vice
                   Chief Executive                          President and Chief
                   Officer (Principal                       Financial Officer
                   Executive Officer)                       (Principal Financial
                                                            Officer)


/s/ Richard A. Boehning*                   /s/
------------------------------------       ------------------------------------
    Richard A. Boehning     Director           Barry J. Hudson         Director

/s/ Thomas B. Clark*                       /s/ Michael C. Rechin*
------------------------------------       ------------------------------------
    Thomas B. Clark         Director           Michael C. Rechin       Director

/s/ Michael L. Cox*                        /s/ Charles E. Schalliol*
------------------------------------       ------------------------------------
    Michael L. Cox          Director           Charles E. Schalliol    Director

/s/ Roderick English*                      /s/ Terry L. Walker*
------------------------------------       ------------------------------------
    Roderick English        Director           Teryy L. Walker         Director

/s/ Dr. Jo Ann Gora*                       /s/ Jean L. Wojtowicz*
------------------------------------       ------------------------------------
    Dr. Jo Ann Gora         Director           Jean L. Wojtowicz       Director

/s/ William L. Hoy*
------------------------------------
    William L. Hoy          Director


* By Mark K.  Hardwick  as  Attorney-in  Fact  pursuant  to a  Limited  Power of
Attorney  executed by the  directors  listed  above,  which Power of Attorney is
being filed with the Securities and Exchange Commission as an exhibit hereto.

                                       By  /s/ Mark K. Hardwick
                                           ------------------------------
                                           Mark K. Hardwick
                                           As Attorney-in-Fact
                                           March 17, 2008

                                     Page 76

<PAGE>

INDEX TO EXHIBITS
--------------------------------------------------------------------------------

(a) 3.      Exhibits:


Exhibit No:                           Description of Exhibits:
-----------                           ------------------------

     3a   First Merchants  Corporation Articles of Incorporation.  (Incorporated
          by  reference  to  registrant's  Form 10-Q for quarter  ended June 30,
          1999)

     3b   Bylaws  of  First  Merchants   Corporation   dated  October  23,  2007
          (Incorporated  by reference to registrant's  Form 10-Q for the quarter
          ended September 30, 2007)

     4.1  First Merchants  Corporation Amended and Restated Declaration of Trust
          of  First  Merchants  Capital  Trust  II  dated  as of  July  2,  2007
          (Incorporated  by reference to registrant's  Form 8-K filed on July 3,
          2007)

     4.2  Indenture  dated as of July 2,  2007  (Incorporated  by  reference  to
          registrant's Form 8-K filed on July 3, 2007)

     4.3  Guarantee  Agreement  dated  as  of  July  2,  2007  (Incorporated  by
          reference to registrant's Form 8-K filed on July 3, 2007)

     4.4  Form of Capital  Securities  Certification of First Merchants  Capital
          Trust II (Incorporated by reference to registrant's  Form 8-K filed on
          July 3, 2007)

     10.1 Placement  Agreement dated June 29, 2007 (Incorporated by reference to
          registrant's Form 8-K filed on July 3, 2007)


                                    Page 77

<PAGE>
ITEM 15.  FINANCIAL STATEMENT SCHEDULES AND EXHIBITS (continued)
--------------------------------------------------------------------------------

     10a  First Merchants  Corporation Senior Management Incentive  Compensation
          Program, dated February 27, 2008.(2)

     10b  First Merchants  Corporation 1994 Stock Option Plan.  (Incorporated by
          reference  to  registrant's  Form  10-K for year  ended  December  31,
          1993)(1)

     10c  First Merchants  Corporation Change of Control Agreement,  as amended,
          with Mark K.  Hardwick  dated  February  14,  2006.  (Incorporated  by
          reference to registrant's Form 8-K filed on March 9, 2006)(1)

     10d  First Merchants  Corporation  Change of Control Agreement with Michael
          C. Rechin  dated  December  13,  2005.  (Incorporated  by reference to
          registrant's Form 8-K filed on December 19, 2005)(1)

     10e  First Merchants Corporation Change of Control Agreement with Robert R.
          Connors  dated  August  26,  2002  as  amended  on  January  1,  2008.
          (Incorporated  by reference to registrant's  Form 8-K filed on January
          3, 2008)(1)

     10f  First Merchants  Corporation Change of Control Agreement with Kimberly
          J.  Ellington  dated  January  1, 2005 as  amended on January 1, 2008.
          (Incorporated  by reference to registrant's  Form 8-K filed on January
          3, 2008)(1)

     10g  First Merchants  Corporation  Change of Control Agreement with Jami L.
          Bradshaw  dated  October  23,  2007.  (Incorporated  by  reference  to
          registrant's Form 8-K filed on October 29, 2007)(1)

     10h  First Merchants  Corporation Change of Control Agreement with David W.
          Spade  dated   October  23,  2007.   (Incorporated   by  reference  to
          registrant's Form 8-K filed on October 29, 2007)(1)

     10i  First Merchants  Corporation  Change of Control Agreement with Jeffrey
          B.  Lorentson  dated October 23, 2007.  (Incorporated  by reference to
          registrant's Form 8-K filed on October 29, 2007)(1)

     10j  Resolution of the Board of Directors of First Merchants Corporation on
          director compensation dated December 4, 2007. (2)

     10k  First Merchants Corporation Supplemental Executive Retirement Plan and
          amendments  thereto.  (Incorporated by reference to registrant's  Form
          10-K for year ended December 31, 1997)(1)

     10l  First Merchants  Corporation  1999 Long-Term Equity Incentive Plan, as
          amended.  (Incorporated  by  reference to  registrant's  Form 10-Q for
          quarter ended September 30, 2004) (1)

     10m  First Merchants  Corporation  Letter Agreement between the Corporation
          and Michael L. Cox, dated January 23, 2007. (Incorporated by reference
          to registrant's Form 8-K filed on January 24, 2007)

     10n  First  Merchants   Corporation   Defined   Contribution   Supplemental
          Retirement Plan dated January 1, 2006.  (Incorporated  by reference to
          registrant's Form 8-K filed on February 6, 2007)

     10o  First  Merchants  Corporation  Participation  Agreement  of Michael C.
          Rechin  dated  January  26,  2007.   (Incorporated   by  reference  to
          registrant's Form 8-K filed on February 6, 2007)

     21   Subsidiaries of Registrant(2)

     23   Consent of Independent Registered Public Accounting Firm(2)

     24   Limited Power of Attorney(2)

     31.1 Certification  of Chief Executive  Officer  Pursuant to Section 302 of
          the Sarbanes - Oxley Act of 2002(2)

     31.2 Certification  of Chief Financial  Officer  Pursuant to Section 302 of
          the Sarbanes - Oxley Act of 2002(2)

     32   Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
          to Section 906 of the Sarbanes-Oxley Act of 2002(2)

     99.1 Financial  statements and  independent  registered  public  accounting
          firm's report for First Merchants  Corporation Employee Stock Purchase
          Plan (2)

       (1) Management contract or compensatory plan.
       (2) Filed here within.

                                     Page 78

<PAGE>
                                   EXHIBIT-10a
                           First Merchants Corporation
                           Senior Management Incentive
                              Compensation Program
                           Approved February 27, 2008

I.   Purpose
     The Board of Directors of First Merchants Corporation (FMC) has established
     an executive  compensation program,  which is designed to closely align the
     interests of executives with those of our  shareholders by rewarding senior
     managers for achieving  short-term and long-term  strategic  management and
     earnings goals, with the ultimate  objective of obtaining a superior return
     on the shareholders' investment.

II.  Administration
     This  plan  will be  administered  solely  by the  Compensation  and  Human
     Resources Committee  (Committee) of FMC, with supporting  documentation and
     recommendations  provided by the Chief Executive  Officer (CEO) of FMC. The
     Committee  will  annually   review  the  targets  for   applicability   and
     competitiveness.

     The  Committee  will have the  authority  to: (a)  modify  the formal  plan
     document;  (b) make the final award determinations;  (c) set conditions for
     eligibility  and  awards;  (d) define  extraordinary  accounting  events in
     calculating earnings; (e) establish future payout schedules;  (f) determine
     circumstances/causes for which payouts can be withheld; and (g) abolish the
     plan.

III. Covered Individuals by Officer Level/Role
     A. President and Chief Executive Officer of FMC;
     B. Executive Vice Presidents of FMC;
     C. Executive Officers and Bank CEOs;
     D. Non-Bank CEOs and Regional Presidents;
     E. Senior Management/Leadership;
     F. Department Heads, Division Heads and Other Management Leadership; and
     G. Mortgage Sales Managers.

     In order to receive an award, a participant must be employed at the time of
     the award except for conditions of death, disability or retirement.

     Participants will be disqualified if their individual  overall  performance
     is rated "improvement needed" or "unacceptable."

IV.  Implementation Parameters
A.   The FMC CEO  and EVP  earnings  component  payouts  will be  determined  by
     changes in FMC EPS calculated on a diluted GAAP basis.

     Payouts to affiliate  participants  on their  respective  company  earnings
     component will be determined by changes in "operating earnings" (net income
     plus or minus  non-operating  items  including  goodwill  amortization  and
     corporate administrative charges.)

B.   When  utilized,   balanced   scorecards  will  be  tailored  to  each  unit
     incorporating a specific weighting on various operating  initiatives as set
     by the CEO and COO.

                                    Page 79
<page>
V.  Plan Structure
     All payouts will be determined  from the schedules of percentage  change in
     EPS  (Section  VI.B.).  Participants  will be  notified  in  writing at the
     beginning of the plan year.
<table>
<caption>
------------    -------         --------                -----------------                ----------------------------------
                  A                B                           C                                           D
------------    -------         --------                -----------------                ----------------------------------
------------    -------         --------                -----------------                ----------------------------------
<S>              <C>              <C>                         <C>                                         <C>
Target %:        45%              40%                         30%                                         25%
------------    -------         --------                -----------------                ----------------------------------
------------    -------         --------                -----------------                ----------------------------------
Participants:   FMC             FMC EVP                 o Executive                      o Non-Bank
                CEO                                       Officers                         Presidents
                                                        o Bank                           o Regional
                                                          CEO                              Presidents

------------    -------         --------                ---------------------            -----------------------------------
------------    -------         --------                --------      -------            --------   -------        --------
Incentive       Operating       Operating               Non-bank       Bank              FMIS:       FMTC:         Bank
Components:     EPS at          EPS at                  participants   participants      Change in   Change in     Participants:
                100%            100%                    Change in      Balanced          EPS at      FMTC at       Balanced
                (calculated     (calculated             EPS at 70%     Scorecards        70%;        75%; Change   Scorecard
                on GAAP         on GAAP                 Personal                         Personal    in EPS at
                basis)          basis)                  Objectives                       Objectives  15%;
                                                        at 30%                           at 30%      Personal
                                                                                                     Objectives
                                                                                                     at 10%

------------   -----------     --------                 --------      --------          --------    -------        --------
</table>
<table>
<caption>
------------   -------------------------------------              --------------------------                --------
                                E                                              F                               G
------------   -------------------------------------              --------------------------                --------
------------   -------------------------------------              --------------------------                --------
<S>                            <C>                                            <C>                             <C>
Target %:                   15% - 20%                                      10%- 15%                          5 bps
------------   -------------------------------------              --------------------------                --------
------------   -------------------------------------              --------------------------                --------
Participants:                                                     o Department                              Mortgage
               Senior Management/                                   Heads                                   Sales
               Leadership                                         o Division Heads                          Managers
                                                                  o Other Management
                                                                    Leadership
------------   -------------------------------------              --------------------------                --------
------------   --------      ---------      --------              --------      --------      --------      --------
Incentive      Bank          FMIS:          FMTC:                 FMIS:         Bank          FMTC:         5 bps
Components:    Participants: Change in EPS  Change in             Change in EPS Participants: Change in     of
               Balanced      at 70%;        FMTC at               at 70%;       Balanced      FMTC at       subordinate
               Scorecard     Personal       75%; Change           Personal      Scorecard     75%; Change   mortgage
                             Objectives     Change in             Objectives                  Change in     volume
                             at 30%         EPS at 15%;           at 30%                      EPS at 15%;
                                            Personal                                          Personal
                                            Objectives                                        Objectives
                                            at 10%                                            at 10%
------------            -------- --------- -------- -------- -------- -------- --------


</table>
                                    Page 80
<page>
<table>
<caption>
VI.  Supporting Parameters
A.   Where  individual  components are applicable,  they must be measurable with
     both beginning points and standard targets cited.
B.   Schedule  Determining  EPS on a diluted GAAP basis and  Operating  Earnings
     Payouts for Year 2008
                                          % Change*                                Payout %
                 
                          <C>                                    <C>
                                             <3%                                      0%
                                              3%                                     30%
                                              4%                                     40%
                                              5%                                     50%
                                              6%                                     60%
                                              7%                                     70%
                                              8%                                     80%
                                              9%                                     90%
                  Target                     10%                                    100%
                                             12%                                    120%
                                             14%                                    140%
                                             16%                                    160%
                                             18%                                    180%
                                             20%                                    200%
</table>
* Operating  earnings adds back charges for  amortization  of goodwill and other
non-operating expenses and excludes unplanned  extraordinary income or expenses,
all as determined by the Committee
<table>
<caption>
C.   Schedule Determining  Operating Earnings Payouts for Year 2008 for FMTC and
     FMIS
                    
                   <C>                                       <C>
                               Operating Earnings % Change*                      Payout %
                                            <10%                                      0%
                                             10%                                     40%
                                           12.5%                                     50%
                                             15%                                     60%
                                           17.5%                                     70%
                                             20%                                     80%
                                           22.5%                                     90%
                   Target                    25%                                    100%
                                           27.5%                                    110%
                                             30%                                    120%
                                           32.5%                                    130%
                                           35.0%                                    140%
                                           37.5%                                    150%
                                             40%                                    160%
                                           42.5%                                    170%
                                             45%                                    180%
                                           47.5%                                    190%
                                           =>50%                                    200%
</table>
* Operating  earnings adds back charges for  amortization  of goodwill and other
non-operating expenses and excludes unplanned  extraordinary income or expenses,
all as determined by the Committee.  Operating  earnings will also be normalized
for subsidiary acquisitions.

                                    Page 81

<page>
<table>
<caption>
D.   Schedule of Participants (referenced in Section III)
   <S>         <C>                       <C>       <C>                                    <C>
  Section     Company                   Target    Name                                 Job Title
     A.       FMC                         45%     Michael Rechin                       Chief Executive Officer

     B.       FMC                         40%     Mark Hardwick                        Chief Financial Officer
              FMC                                 Michael Stewart                      Chief Banking Officer

     C        LBTC                        30%     Tony Albrecht                        Bank President & CEO
              FMBCI                               Michael Baker                        Bank President & CEO
              FMC                                 Jeff Lorentson                       Senior Vice President
              FMC                                 Robert Connors                       Senior Vice President
              FMC                                 Kimberly Ellington                   Senior Vice President
              FMB                                 James Meinerding                     Bank President & CEO
              CNB                                 Tom McAuliffe                        Bank President & CEO
              FMC                                 David Spade                          Senior Vice President
              FMC                                 Jami Bradshaw                        Senior Vice President

     D.       Decatur Region              25%     Steven Bailey                        Regional President
              Portland Region                     Robert Bell                          Regional President
              Muncie Region                       Jack Demaree                         Regional President
              FMC                                 Karen Evens                          Vice President
              Wabash Region                       Ron Kerby                            Regional President
              FMTC                                Terri Matchett                       Trust President & CEO
              FMIS                                Curt Stephenson                      FMIS President & CEO
              FMB                                 Scott McKee                          Regional President
              FMB                                 Bill Redman                          Market Executive

     E.       FMBCI                       20%     Stephen Bill                         Senior Vice President
              FMTC                                Terry Blaker                         Senior Vice President
              LBTC                                Todd Burklow                         Executive Vice President
              FMTC                                David Forbes                         Senior Vice President
              LBTC                                Dan Gick                             Executive Vice President
              Wabash Region                       John Gouveia                         Senior Vice President
              Portland Region                     Chuck Huffman                        Senior Vice President
              LBTC                                Sherry Keith                         Senior Vice President
              FMBCI                               Kirk Klabunde                        Senior Vice President
              Wabash Region                       Tony Millspaugh                      Senior Vice President
              Muncie Region                       Chris Parker                         Senior Vice President
              Portland Region                     Duane Sautbine                       Senior Vice President
              Richmond Region                     Rick Tudor                           Senior Vice President
              CNB                                 Jennifer Griffith                    Senior Vice President
              CNB                                 Catherine Dieckman                   Senior Vice President
              LBT                                 David Flint                          Senior Vice President
              CNB                                 Pamela Miller                        Senior Vice President
              FMC                                 Michael Sipos                        First Vice President
              CNB                                 Paul Carlin                          Regional President
              FMIS                                Michael Gilbert                      Senior Vice President
              FMB                                 Jennifer Phillips                    Vice President
              Wabash Region               15%     Duane Davis                          Vice President
              FMC                                 Stephan Fluhler                      First Vice President
              FMC                                 Philip Fortner                       Vice President
              LBT                                 David Flint                          Vice President
              FMC                                 Jeff Davis                           First Vice President
              FMC                                 David Ortega                         Vice President
              FMC                                 John Martin                          First Vice President
              FMC                                 Julie Crabtree                       Vice President
              FMC                                 Brad Wise                            First Vice President

     F.       FMTC                        15%     Pam Haager                           Vice President
              FMTC                                Nichole Kinghorn                     Vice President
              FMC                                 Gretchen Patterson                   Vice President
              Indy Region                         Cindy White                          Vice President
              FMTC                                Jane Smith                           Vice President
              FMTC                        10%     Larry Anthrop                        Senior Vice President
              FMTC                                Neal Barnum                          Vice President
              FMTC                                Jim Keene                            Vice President
              CNB                                 Mike Higbee                          Vice President
              Decatur Region                      Dennis Bieberich                     Senior Executive
              CNB                                 Amy Mollenkopf                       Vice President
              FMC                                 Rick Bantz                           Assistant Vice President
              FMC                                 Diane Bolser                         Vice President
              CNB                                 Jessica Homan                        Vice President
              CNB                                 Joseph Sauline                       Vice President
              CNB                                 Christina Kessler                    Vice President
              CNB                                 Andrew Reardon                       Vice President
              CNB                                 David Benjamin                       Assistant Vice President

     G.       LBT                        5 bps    Janell Commons                       Vice President
              FMB                                 Jim Sprouse                          Vice President

</table>
                                    Page 82
<PAGE>
                                  EXHIBIT-10j
                       RESOLUTIONS OF THE BOARD OF DIRECTORS
                         OF FIRST MERCHANTS CORPORATION


     WHEREAS,  the  responsibilities  of the  Compensation  and Human  Resources
Committee  ("Committee")  of  the  Corporation  include,   amongst  others:  (a)
overseeing the  development  and  implementation  of  compensation  policies and
programs  to  carry  out the  compensation  philosophy,  (b)  administering  the
Corporation's incentive compensation plans, equity-based compensation plans, and
deferred  compensation  plans,  (c)  making  recommendations  to  the  Board  of
Directors ("Board") with respect to the adoption,  amendment,  or termination of
incentive  compensation  plans,  equity-based  compensation  plans, and deferred
compensation  plans, and (d) reviewing and making  recommendations  to the Board
regarding the compensation of non-employee directors, and

     WHEREAS,  the  Committee  engaged  in a  thorough  review of the amount and
composition of director compensation, and

     WHEREAS, the Committee determined that part of director compensation should
be in the form of equity and guidelines should be adopted to encourage directors
to acquire and hold material amounts of the Corporation's  stock,  while serving
on the Board, and

     WHEREAS,  Indiana law empowers the Board to set director compensation,  but
to the extent such compensation  includes equity in addition to the annual stock
option  grants  to   non-employee   directors   previously   authorized  by  the
Corporation's  shareholders  under  the  Corporation's  1999  Long  Term  Equity
Incentive Plan, the NASDAQ Marketplace Rules require shareholder approval, and

     WHEREAS,  the  Committee   recommended  a  modified  non-employee  director
compensation program to be adopted beginning in 2008 to the Board at its October
23, 2007 regular meeting for consideration and possible adoption at the December
3-4, 2007 Board meetings, and

     WHEREAS, the components of the proposal are as follows:

          1.   Directors would not receive meeting fees.

          2.   Directors'  annual  retainers  would  be  increased  to  $40,000,
               commencing January 1, 2008, payable in quarterly  installments in
               cash for the first quarter of 2008 and, for  subsequent  quarters
               (if approved by the shareholders at the 2008 annual meeting),  at
               least one-half in restricted  shares of the  Corporation's  stock
               vesting   three  years  after   issuance  or  upon  a  director's
               retirement, if sooner.

          3.   The Audit Committee Chair would receive an additional $10,000 and
               the other committee chairs an additional  $5,000  annually,  also
               divided between cash and restricted stock as described above.

          4.   The Board Chair's annual  retainer would be increased to $75,000,
               with no additional  compensation  for chairing  committees,  also
               divided between cash and restricted stock as described above.

          5.   A  guideline  would be adopted  under  which  directors  would be
               expected to acquire and hold stock in the Corporation equal to at
               least three times their total annual director compensation,  such
               guideline to be met as soon as reasonably  possible  (taking into
               account   the   director's    relevant    financial   and   other
               circumstances)  but in no event  more  than six  years  after the
               director is first elected to the Board.

          6.   During 2008, the Compensation and Human Resources Committee would
               review the current program  providing that directors will receive
               annual stock option  grants (the program  expires  following  the
               July 1,  2008  awards)  and make a  recommendation  to the  Board
               whether  to  continue  the  program  in the  future  (subject  to
               shareholder approval).



     NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors determines that
it is in  the  best  interest  of  the  Corporation  to  adopt  the  Committee's
recommended  modified  non-employee  director  compensation program as set forth
above, and hereby approves said program, and


     BE IT FURTHER RESOLVED that the Board authorizes the executive  officers of
management  to take such  actions as are  necessary to present said program with
the Board's recommendation for approval by the shareholders at the Corporation's
annual meeting to be held April 29, 2008.



     December 4, 2007.


                                    Page 83
<page>
                                  EXHIBIT-21
                         SUBSIDIARIES OF THE REGISTRANT

EXHIBIT 21--SUBSIDIARIES OF THE REGISTRANT
--------------------------------------------------------------------------------

                                                          State of
Name                                                    Incorporation
----                                                    -------------

First Merchants Bank, National Association..................U.S.

First Merchants Bank of Central Indiana,
National Association........................................U.S.

Lafayette Bank and Trust Company, National Association......U.S.

Commerce National Bank......................................U.S.

First Merchants Capital Trust II........................Delaware

First Merchants Insurance Services, Inc..................Indiana

First Merchants Reinsurance Co. Ltd.....................Providencials Turkes and
                                                        Caicos, Island

Indiana Title Insurance Company..........................Indiana

Indiana Title Insurance Company, LLC.....................Indiana

FMB Portfolio Management, Inc...........................Delaware

Wabash Valley Investments, Inc............................Nevada

Wabash Valley, LLC........................................Nevada

Wabash Valley Holdings, Inc...............................Nevada

First Merchants Trust Company, National Association.........U.S.

CNBC Statutory Trust I...............................Connecticut

                                    Page 84
<PAGE>

                                   EXHIBIT-23
            CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


EXHIBIT 23 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the  incorporation by reference in the  registration  statement on
Form S-8 (File Nos. 033-54065,  333-116074,  333-50484, 333-80119 and 333-80117)
of First Merchants Corporation (the "Corporation") of our reports dated February
8,  2008 on the  consolidated  financial  statements  of the  Corporation  as of
December 31, 2007 and 2006,  and for each of the three years in the period ended
December 31, 2007, and on our audit of internal control over financial reporting
of the  Corporation as of December 31, 2007,  which reports are included in this
Annual Report on Form 10-K.


/s/ BKD, LLP

Indianapolis, Indiana
March 14, 2008


                                    Page 85
<PAGE>
                                   EXHIBIT-24
                            LIMITED POWER OF ATTORNEY

EXHIBIT 24--LIMITED POWER OF ATTORNEY

KNOW ALL MEN BY THESE  PRESENTS that the  undersigned  directors and officers of
First  Merchants  Corporation,  an Indiana  corporation,  hereby  constitute and
appoint Mark K. Hardwick, the true and lawful agent and attorney-in-fact  of the
undersigned with full power and authority in said agent and  attorney-in-fact to
sign for the undersigned and in their respective names as directors and officers
of the  Corporation  the  Form  10-K of the  Corporation  to be  filed  with the
Securities  and Exchange  Commission,  Washington,  D.C.,  under the  Securities
Exchange Act of 1934,  as amended,  and to sign any amendment to such Form 10-K,
hereby   ratifying   and   confirming   all  acts   taken  by  such   agent  and
attorney-in-fact, as herein authorized.

Dated: January 29, 2008

/s/ Michael C. Rechin                       /s/ Richard A. Boehning
--------------------------------------      ------------------------------------
    Michael C. Rechin President and             Richard A. Boehning     Director
                      Chief Executive
                      Officer (Principal
                      Executive Officer)

/s/ Mark K. Hardwick                        /s/ Thomas B. Clark
--------------------------------------     ------------------------------------
    Mark K. Hardwick Executive Vice             Thomas B. Clark         Director
                     President and Chief
                     Financial Officer
                     (Principal Financial
                     Officer)
                                            /s/ Michael L. Cox
                                            ------------------------------------
                                                Michael L. Cox          Director

                                            /s/ Roderick English
                                            ------------------------------------
                                                Roderick English        Director

                                            /s/ Dr. Jo Ann M. Gora
                                            ------------------------------------
                                                Dr. Jo Ann M. Gora      Director

                                           /s/ William L. Hoy
                                           -------------------------------------
                                               William L. Hoy           Director

                                            /s/
                                            ------------------------------------
                                                Barry J. Hudson         Director

                                            /s/ Michael C. Rechin
                                            ------------------------------------
                                                Michael C. Rechin       Director

                                            /s/ Charles E. Schalliol
                                            ------------------------------------
                                                Charles E. Schalliol    Director

                                            /s/ Terry L. Walker
                                            ------------------------------------
                                                Terry L. Walker         Director

                                            /s/ Jean L. Wojtowicz
                                            ------------------------------------
                                                Jean L. Wojtowicz       Director


                                    Page 86
<PAGE>
                                  EXHIBIT-31.1

                           FIRST MERCHANTS CORPORATION

                                   FORM 10-K
                            CERTIFICATION PURSUANT TO
                                 SECTION 302 OF
                         THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION
-------------

I, Michael C. Rechin,  President and Chief Executive  Officer of First Merchants
Corporation, certify that:

1.     I have reviewed this Annual Report on Form 10-K of First Merchants
       Corporation;

2.     Based on my knowledge, this report does not contain any untrue statement
       of a material fact or omit to state a material fact necessary to make the
       statements made, in light of the circumstances under which such
       statements were made, not misleading with respect to the period covered
       by this report;

3.     Based on my knowledge, the financial statements, and other financial
       information included in this report, fairly present in all material
       respects the financial condition, results of operations and cash flows of
       the registrant as of, and for, the periods presented in this report;

4.     The registrant's other certifying officer and I are responsible for
       establishing and maintaining disclosure controls and procedures (as
       defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
       control over financial reporting (as defined in the Exchange Act Rules
       13a-15(f) and 15d-15(f)) for the registrant and have:

       (a) Designed such disclosure controls and procedures, or caused such
           disclosure controls and procedures to be designed under our
           supervision, to ensure that material information relating to the
           registrant, including its consolidated subsidiaries, is made known to
           us by others within those entities, particularly during the period in
           which this report is being prepared;

       (b) Designed such internal control over financial reporting, or caused
           such internal control over financial reporting to be designed under
           our supervision, to provide reasonable assurance regarding the
           reliability of financial reporting and the preparation of financial
           statements for external purposes in accordance with generally
           accepted accounting principles;

       (c) Evaluated the effectiveness of the registrant's disclosure controls
           and procedures and presented in this report our conclusions about the
           effectiveness of the disclosure controls and procedures, as of the
           end of the period covered by this report, based on such evaluation;
           and

       (d) Disclosed in this report any change in the registrant's internal
           control over financial reporting that occurred during the
           registrant's most recent fiscal quarter (the registrant's fourth
           fiscal quarter in the case of an annual report) that has materially
           affected, or is reasonably likely to materially affect, the
           registrant's internal control over financial reporting; and

5.     The registrant's other certifying officer and I have disclosed, based on
       our most recent evaluation of internal control over financial reporting,
       to the registrant's auditors and the audit committee of the registrant's
       board or directors (or persons performing the equivalent functions):

       (a) All significant deficiencies and material weaknesses in the design or
           operation of internal control over financial reporting which are
           reasonably likely to adversely affect the registrant's ability to
           record, process, summarize and report financial information; and

       (b) Any fraud, whether or not material, that involves management or other
           employees who have a significant role in the registrant's internal
           control over financial reporting.

Date:  March 17, 2008              /s/ Michael C. Rechin
                                   ----------------------------------------
                                       Michael C. Rechin
                                       President and Chief Executive Officer
                                       (Principal Executive Officer)


                                    Page 87
<PAGE>
                                  EXHIBIT-31.2

                           FIRST MERCHANTS CORPORATION

                                   FORM 10-K
                            CERTIFICATION PURSUANT TO
                                 SECTION 302 OF
                         THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION
-------------

I, Mark K. Hardwick,  Executive Vice  President and Chief  Financial  Officer of
First Merchants Corporation, certify that:

1.     I have reviewed this Annual Report on Form 10-K of First Merchants
       Corporation;

2.     Based on my knowledge, this report does not contain any untrue statement
       of a material fact or omit to state a material fact necessary to make the
       statements made, in light of the circumstances under which such
       statements were made, not misleading with respect to the period covered
       by this report;

3.     Based on my knowledge, the financial statements, and other financial
       information included in this report, fairly present in all material
       respects the financial condition, results of operations and cash flows of
       the registrant as of, and for, the periods presented in this report;

4.     The registrant's other certifying officer and I are responsible for
       establishing and maintaining disclosure controls and procedures (as
       defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
       control over financial reporting (as defined in the Exchange Act Rules
       13a-15(f) and 15d-15(f)) for the registrant and have:

       (a) Designed such disclosure controls and procedures, or caused such
           disclosure controls and procedures to be designed under our
           supervision, to ensure that material information relating to the
           registrant, including its consolidated subsidiaries, is made known to
           us by others within those entities, particularly during the period in
           which this report is being prepared;

       (b) Designed such internal control over financial reporting, or caused
           such internal control over financial reporting to be designed under
           our supervision, to provide reasonable assurance regarding the
           reliability of financial reporting and the preparation of financial
           statements for external purposes in accordance with generally
           accepted accounting principles;

       (c) Evaluated the effectiveness of the registrant's disclosure controls
           and procedures and presented in this report our conclusions about the
           effectiveness of the disclosure controls and procedures, as of the
           end of the period covered by this report, based on such evaluation;
           and

       (d) Disclosed in this report any change in the registrant's internal
           control over financial reporting that occurred during the
           registrant's most recent fiscal quarter (the registrant's fourth
           fiscal quarter in the case of an annual report) that has materially
           affected, or is reasonably likely to materially affect, the
           registrant's internal control over financial reporting; and

5.     The registrant's other certifying officer and I have disclosed, based on
       our most recent evaluation of internal control over financial reporting,
       to the registrant's auditors and the audit committee of the registrant's
       board or directors (or persons performing the equivalent functions):

       (a) All significant deficiencies and material weaknesses in the design or
           operation of internal control over financial reporting which are
           reasonably likely to adversely affect the registrant's ability to
           record, process, summarize and report financial information; and

       (b) Any fraud, whether or not material, that involves management or other
           employees who have a significant role in the registrant's internal
           control over financial reporting.

Date:  March 17, 2008              /s/ Mark K. Hardwick
                                   ----------------------------------------
                                       Mark K. Hardwick
                                       Executive Vice President and
                                       Chief Financial Officer
                                       (Principal Financial Officer)


                                    Page 88
<PAGE>

                                  EXHIBIT-32

                           CERTIFICATIONS PURSUANT TO
                            18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                 SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In  connection  with the  annual  report  of First  Merchants  Corporation  (the
"Corporation")  on Form 10-K for the period  ending  December  31, 2007 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"), I
Michael C. Rechin, President and Chief Executive Officer of the Corporation,  do
hereby certify,  in accordance with 18 U.S.C.  Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that:

        (1) The Report fully complies with the requirements of  section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o (d)); and

        (2) The  information  contained  in  the  Report fairly presents, in all
material  respects,  the  financial  condition  and results of operations of the
Corporation.

Date  March 17, 2008               by /s/ Michael C. Rechin
      -------------------------       -------------------------------------
                                      Michael C. Rechin
                                      President and Chief Executive Officer
                                      (Principal Executive Officer)

A  signed  copy of this  written  statement  required  by  Section  906 has been
provided to First Merchants  Corporation and will be retained by First Merchants
Corporation and furnished to the Securities and Exchange Commission or its staff
upon request.



In  connection  with the  annual  report  of First  Merchants  Corporation  (the
"Corporation")  on Form 10-K for the period  ending  December  31, 2007 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"), I
Mark K. Hardwick,  Executive Vice President and Chief  Financial  Officer of the
Corporation,  do hereby certify,  in accordance with 18 U.S.C.  Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

        (1) The Report fully  complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o (d)); and

        (2) The  information  contained  in  the  Report fairly presents, in all
material  respects,  the  financial  condition  and results of operations of the
Corporation.

Date  March 17, 2008               by /s/ Mark K. Hardwick
      -------------------------       -------------------------------------
                                      Mark K. Hardwick
                                      Executive Vice President and
                                      Chief Financial Officer
                                      (Principal Financial Officer)

A  signed  copy of this  written  statement  required  by  Section  906 has been
provided to First Merchants  Corporation and will be retained by First Merchants
Corporation and furnished to the Securities and Exchange Commission or its staff
upon request.


                                    Page 89

<PAGE>
                                  EXHIBIT-99.1
             INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM'S REPORT
          FOR FIRST MERCHANTS CORPORATION EMPLOYEE STOCK PURCHASE PLAN

EXHIBIT 99.1--FINANCIAL STATEMENTS AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING
              FIRM'S REPORT FOR FIRST MERCHANTS CORPORATION EMPLOYEE STOCK
              PURCHASE PLAN
--------------------------------------------------------------------------------

The annual financial  statements and  independent  registered  public accounting
firm's report thereon for First  Merchants  Corporation  Employee Stock Purchase
Plan for the year ending December 31, 2007, will be filed as an amendment to the
2007 Annual Report on Form 10-K.


                                    Page 90