March 25, 1999



Dear Shareholders and Friends:


I am sure you have all heard the saying  "Time  flies when you're  having  fun."
Well,  these past twelve months have certainly flown by. The growth and progress
towards profitability during the first full twelve months of operations have far
exceeded our expectations.  If you have followed our quarterly updates,  you are
aware  that we ended  the year  December  31,  1998 with  total  assets of $64.7
million.  Even though we experienced  rapid asset growth,  our capital  position
remains  strong.  The Bank's total capital to total assets ratio at year-end was
12.95%, which is well above the 8% minimum level established by our regulators.

Even more gratifying than the growth was the fact that the fourth quarter ending
December  31, 1998  produced  net income of $8,000.  Net loss for the year ended
December 31, 1998 was  $628,000,  which  included a provision for loan losses of
$700,000. Our current balance in the allowance for loans losses is 1.5% of gross
loans, while delinquent loans are still virtually nonexistent.  Loans 30 days or
more past due at year-end totaled $35,000 or .07% of total loans outstanding.

The economy in Johnson County, which is the market we serve, remains strong. The
unemployment  rate was below 2% and new housing permits were at record levels in
1998. The County continues to be the second fastest growing county in the state.
During  our first  year,  Heartland  Community  Bank  originated  over 143 first
residential mortgage loans totaling over $14,000,000. The majority of those were
fixed rate mortgages that were sold into the secondary  market,  eliminating the
interest rate risk for the Bank.

As we look to the future,  we intend to maintain a strong capital position and a
high quality loan portfolio representing prudent investments in our community we
serve.  Heartland  Community  Bank  strives  to be a  creative  but  disciplined
risk-taker  which sustains  attractive loan growth while  maintaining  excellent
credit quality.

Other than our rapid growth,  we have stayed  significantly on schedule with our
original  business plan,  which  included the opening of our second  location in
Greenwood.  We opened in a  temporary  location  in  January  and moved into our
permanent  location,  which is being leased,  on May 18, 1998. This location has
proven to be very  successful as core deposits have already  surpassed  those of
the Franklin office and new accounts  continue to be opened at a rapid pace. One
thing that  continues  to spur this growth is the merger  activity of the larger
banks and the name changes.

The one  absolutely  certain thing about the future is that it will involve more
change.  However, at Heartland Community Bank our employees and their commitment
will  remain the same.  We must also have the  ability to  continually  learn in
order to evolve and adapt to our ever-changing environment.


<PAGE>



Satisfying our customers continues to be our top priority. Our marketing dollars
are not spent on flashy promotions or gimmicks.  Instead,  we invest those funds
in community projects,  sponsorships of many youth activities, as well as senior
service organizations.  Also this past year, we developed a quarterly newsletter
to better  communicate  with our customers,  which includes  asking for feedback
regarding new and potential products and services.

We believe  that the number one thing that has led to our  success  during  this
first year is our team of employees. To us this is not just a job, but a family.
We have all  embraced  and practice the  philosophy  of  "Community  Banking" by
becoming  involved in local  organizations  such as Chamber of Commerce,  United
Way, Rotary, Sertoma,  Health Foundation,  Meals on Wheels, and the Big Brothers
program,  just to name a few. During the holiday season, we also adopted a needy
family of five  providing  them food,  clothing,  and toys. It is this unselfish
commitment to the community that sets us apart from the competition.

Rapid growth  creates  challenges to look ahead and anticipate  needs.  There is
great optimism and excitement about the future for Heartland  Bancshares,  along
with recognition that appropriate  diligence and caution will always be required
as we explore new  opportunities  and challenges.  Our plan for the future is an
emphasis on soundness, profitability, and growth in that order of priority.

We also know that the future success of Heartland Bancshares is dependent on the
continued  support of its  shareholders.  With this in mind,  the  directors and
employees  extend a special  invitation  to each of you to visit our Franklin or
Greenwood  location and take  advantage of the many  services  offered by "your"
bank.

Thank you for your continued confidence and support.



Steve Bechman                                   Jeffrey L. Goben
President                                       Executive Vice President


<PAGE>


MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS  FOR THE YEAR ENDED DECEMBER 31, 1998 AND FOR THE PERIOD FROM MAY 27,
1997  (INCEPTION)  THROUGH  DECEMBER 31, 1997.  (Dollar amounts are in thousands
except per share data.)


SUMMARY

Heartland  Bancshares,   Inc.   ("Heartland")  is  a  one-bank  holding  company
incorporated May 27, 1997. Heartland's primary asset is its wholly owned banking
subsidiary,   Heartland  Community  Bank  ("the  Bank"),  an   Indiana-chartered
commercial  bank. The Bank received  regulatory  approval to open in the fall of
1997 and commenced  banking  operation  December 17, 1997.  Heartland's  primary
business consists of attracting deposits from the general public and originating
real estate,  commercial and consumer loans and purchasing  investments  through
its offices located in Franklin and Greenwood, Indiana.

Due to the short period of actual operations  preceding December 31, 1997, it is
difficult to make  meaningful  comparisons  between the amounts  outstanding  at
December 31, 1998 and those at the previous period end.

At December 31, 1998, Heartland had approximately $64.7 million in total assets,
an increase of $50.2  million  from  December  31, 1997 total of $14.5  million.
Those assets were primarily loans of $49.4 million and investment  securities of
$10.5  million at December 31, 1998 compared to December 31, 1997 totals of $4.0
million and $8.0 million respectively.  Total deposits at December 31, 1998 were
approximately $52.8 million compared to $2.1 million at December 31, 1997. Total
shareholders'  equity  was  approximately  $10.9  million  and $11.5  million at
December 31, 1998 and  December 31, 1997.  The decrease in equity was due to the
net loss for the year ended December 31, 1998.

The Bank's  deposits are insured to the maximum  extent  permitted by law by the
Federal  Deposit  Insurance   Corporation   (FDIC).   The  Bank  is  subject  to
comprehensive regulation,  examination and supervision by the Indiana Department
of Financial Institutions ("DFI") and the FDIC.

Heartland's  profitability  depends primarily upon the difference between income
on its loans and investments  and the cost of its deposits and borrowings.  This
difference is referred to as the spread or net interest  margin.  The difference
between the amount of interest  earned on loans and investments and the interest
incurred on deposits  and  borrowings  is  referred to as net  interest  income.
Interest  income from loans and investments is a function of the amount of loans
and  investments  outstanding  during the period and the interest  rates earned.
Interest  expense related to deposits and borrowings is a function of the amount
of deposits and borrowings  outstanding during the period and the interest rates
paid.


YEAR 2000

The  Federal  Financial  Institutions  Examination  Council  (FFIEC)  has issued
several statements regarding preparing for the Year 2000 date change and related
issues.  Those  statements  have  identified  specific  actions  and plans to be
adopted  by  financial  institutions,  in an  effort  for  them to  avoid  being
materially  adversely affected by Year 2000 failure of data processing  systems.
As of December 31, 1998,  Heartland has implemented the procedures and plans set
out by FFIEC. Heartland has completed the evaluation and testing of computer and
software  systems in cooperation  with its primary  independent  data processing
service provider and estimates that the amount of costs that will be incurred to
prepare  for the  date  change  will  not be  significant.  Heartland  has  also
implemented  evaluation and testing  strategies for all areas of the company and
has  begun  efforts  to  communicate   with  customers  and  vendors   regarding
Heartland's efforts toward Year 2000 compliance.

Although  Heartland has no reason to expect that its data  processing  and other
costs and expenses  will be  significant  or that its  financial  condition  and
results of operations will be adversely affected by Year 2000 problems,  this is
a  forward-looking  statement,  and actual  expenses  may vary  materially  from
current  expectations  due to the  possibility,  among  other  risks,  that  the
Company's  data  processing  service  provider  will be  unable  to  perform  in
accordance  with  the Year  2000  plan and the  possibility  that the  Company's
customers may not be Year 2000 compliant.


RESULTS OF OPERATIONS

Heartland's  operating  results during the period from inception on May 27, 1997
through  December  31,  1997 were  limited  to various  expenses  related to the
development stage and 14 calendar days of banking operations at the close of the
period and are  therefore not  comparable to the operating  results for the year
ended December 31, 1998.  Changes in income and expenses between the two periods
relate  primarily to this difference  unless  otherwise  stated in the following
discussion.  Heartland  incurred net losses of $628 for the year ended  December
31,  1998 or $(.50) per share and $240 or $(.19)  per share for the period  from
inception, through December 31, 1997.

Comprehensive  income consists of net income and other comprehensive income such
as unrealized  gains and losses on securities  available for sale which are also
recognized as separate components of equity. Comprehensive loss was $588 for the
year ended  December  31,  1998 and $227 for the period from  inception  through
December 31, 1997.

Interest  income of $3.1 million was earned  during the year ended  December 31,
1998 compared to $165 for the period from  inception  through  December 31, 1997
and was primarily  generated  from  investment  securities  and loans.  Interest
expense of $1.3 million was incurred during the year ended December 31, 1998 and
$12 during the period from inception through December 31, 1997. Interest expense
is primarily  related to deposits  during 1998. For 1997,  interest  expense was
primarily for related party notes payable used to fund start-up costs and a note
payable  obtained  during the  organization  period to purchase  the main office
facility. All such notes payable were repaid in 1997.

The net  interest  income for the year ended  December 31, 1998 was $1.8 million
compared to $153 for the period from inception through December 31, 1997.

The provision for loan losses was $700 for the year ended  December 31, 1998 and
$46 for the period from inception  through December 31, 1997. Total  charge-offs
were $4 during the year ended  December  31,  1998 and $0 during the period from
inception through December 31, 1997.
There were no recoveries of loans during the periods.

Non-interest  income was $56 for the year ended December 31, 1998 and $0 for the
period from inception  through  December 31, 1997 and consisted of miscellaneous
fees, service charges and other income.

Salaries  and  benefits  expense for the year ended  December  31, 1998 was $1.0
million  compared to $195 for the period from  inception  through  December  31,
1997.  Salaries and benefits were paid to employees during the development stage
for services performed.

Occupancy and equipment  expenses of $167 and $28 were incurred  during the year
ended December 31, 1998 and the period from inception through December 31, 1997.
During 1998 those  expenses  consisted  primarily of the lease  payments for the
branch  facility,  depreciation and utilities  expenses.  During the period from
inception  through  December 31, 1997,  occupancy  and  equipment  expenses were
primarily depreciation and utilities expenses. The permanent branch facility was
occupied in the second  quarter of 1998 and  therefore a full 12 months of lease
expense was not incurred in the year ended December 31, 1998.

Data processing expenses were $183 for the year ended December 31, 1998 and were
$31 for the period from inception through December 31, 1997.

Printing and Supplies expenses for the year ended December 31, 1998 totaled $69,
while they were $31 for the period from inception through December 31, 1997.

Advertising  expenses  during the year ended December 31, 1998 were $79 and were
$17 during the period from inception through December 31, 1997.

Director  fees were $28 for the year ended  December 31, 1998.  No director fees
were paid during the period from inception through December 31, 1997.

Credit  reports and loan expenses were $45 for the year ended  December 31, 1998
and were $2 for the period from inception through December 31, 1997

Professional  fees of $54 and $7 were  incurred for the year ended  December 31,
1998 and the period from inception through December 31, 1997.

During the year ended  December 31,  1998,  Heartland  adopted a new  accounting
standard that requires that costs  associated with the organization and start-up
of a business be expensed as incurred.  Consequently, all previously unamortized
costs associated with the organization of Heartland were expensed during 1998 in
the amount of $75. The  amortization  expense incurred for  organizational  cost
under the  previous  accounting  standard  was $1 for the period from  inception
through December 31, 1997.

The remaining  expenses of $101 for the year ended December 31, 1998 and $35 for
the period from  inception  through  December 31, 1997,  relate to various other
items such as postage, insurance and training.




<PAGE>


LENDING ACTIVITIES

A loan  officer's  approval is required for loans up to specified  amounts,  and
either the officer loan  committee or the Board loan  committee must approve all
other  loans.  The officer  loan  committee  is comprised of at least three loan
officers and the Board loan committee consists of at least two loan officers and
at least two outside  directors.  The Bank has  established  policies  regarding
financial  statement  requirements,  credit  verification  procedures  and other
matters intended to minimize  underwriting  risk. Fire and casualty insurance is
required on all mortgage loans as well as abstracts of title or title insurance.

The following  table sets forth  information  concerning the  composition of the
Bank's loan portfolio in dollar  amounts stated in thousands and  percentages of
net loans.
<TABLE>
<CAPTION>
                                     1998                  1997
                                     ----                  ----
                                        Percent of             Percent of
                              Amount      Total       Amount     Total
                              ------      -----       ------     -----
<S>                           <C>       <C>          <C>       <C>
TYPE OF LOAN
Commercial loans and leases   $33,884      69.58%    $ 3,096      79.14%
Residential mortgages
 (1-4 family homes)             6,241      12.81         189       4.83
Consumer                        9,317      19.13         673      17.20
                              -------   --------     -------   --------
Gross loans                    49,442     101.52       3,958     101.17
Allowance for loan losses        (742)     (1.50)        (46)     (1.17)
                              -------   --------     -------   --------
Loans, net                    $48,700     100.00%    $ 3,912     100.00%
                              =======   ========     =======   ========
</TABLE>

COMMERCIAL  LENDING.  Commercial  loans include loans secured by commercial real
estate or  deposits;  construction  loans;  and loans  for  business  purchases,
operations,  inventory  and lines of credit.  At December 31,  1998,  commercial
loans  totaled  $33.9  million  or 69.6% of the  Bank's  total  loan  portfolio.
Commercial loans totaled $3.1 million, or 79.14% of the Bank's loan portfolio at
December 31, 1997.

RESIDENTIAL MORTGAGE LOANS. Residential mortgage loans are predominantly secured
by single-family homes. To reduce its exposure to changes in interest rates, the
Bank currently originates adjustable rate first mortgage loans ("ARMs"),  second
mortgage loans and home equity lines of credit,  also with adjustable  rates. At
December 31, 1998, the Bank's residential  mortgage loans totaled  approximately
$6.2  million or 12.8% of the Bank's  total loan  portfolio  compared to $189 or
4.83% of the Bank's total loans at December 31, 1997.

The Bank has negotiated with third party mortgage companies an agreement whereby
the Bank would receive a fee for originating  fixed rate 1-4 family  residential
real estate mortgages. Underwriting and servicing would be the responsibility of
the third party mortgage company.

The Bank offers  residential  construction  mortgage  loans with  maturities  of
twelve months or less at interest rates that vary with current market rates. The
application  process  includes  the same  items  that  are  required  for  other
residential   mortgage  loans  and  include  a  submission  of  accurate  plans,
specifications and costs of the home to be constructed.  These items are used as
a basis to determine  the  appraised  value of the subject  property.  Appraisal
reports are completed by designated fee  appraisers,  and loans are based on the
current appraised value.  Loans of up to 80% of such amount may be offered for a
maximum period of twelve months for the construction of the properties  securing
the loans. Extensions are permitted, when circumstances warrant, if construction
has continued satisfactorily and the loan is current.

CONSUMER LENDING. The Bank makes various types of consumer loans including loans
to  depositors  secured  by  pledges  of their  deposit  accounts,  new and used
automobile loans, and secured and unsecured personal loans.


NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES

Nonperforming  assets consist of impaired and  nonperforming  loans, real estate
owned (acquired in foreclosure),  and other repossessed  assets.  Impaired loans
include loans on which interest  recognition has been suspended because they are
90 days past due as to interest or principal and loans where there is a question
about the Bank's  ability to collect all principal  and interest.  Nonperforming
loans include accruing loans that are contractually  past due 90 days or more as
to interest or principal  payments.  Nonperforming  assets  totaled $3 and $0 at
December 31, 1998 and 1997.

Due to risks inherent in lending,  management estimates that a certain amount of
loan  balances  outstanding  at  December  31,  1998  and  1997 may not be fully
collected.  Although the Bank's  management  emphasizes 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.  To reflect
the expense for such losses, a provision for loan losses is charged to earnings.
Actual losses, when identified,  are deducted from the allowance so established.
Over time, all net loan losses must be charged to earnings. The determination of
the adequacy of the allowance for loan loss 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.  Management  estimates  the
allowance  balance  required based on known and inherent risks in the portfolio,
information about specific borrower situations and estimated  collateral values,
economic  conditions,  and other factors.  Allocations  may be made for specific
loans,  but the entire allowance is available for any loan that, in management's
judgement, should be charged-off.

At December 31, 1998,  the balance of the  allowance for loan losses was $742 or
1.5%  of  gross  loans  outstanding,  compared  to $46 or 1.2%  of  gross  loans
outstanding  at December  31,  1997.  Provision  charged to earnings in the year
ended  December  31,  1998 was $700  compared to $46 for the period from May 27,
1997  (inception)  to December 31, 1997.  Charge-offs  were $4 in the year ended
December 31, 1998 and $0 in the period from May 27, 1997 (inception) to December
31, 1997. There were no recoveries during either period.


DEPOSIT ACTIVITIES

The Bank offers  several  types of deposit  programs  designed  to attract  both
short-term and long-term  savings by providing a wide assortment of accounts and
rates. The Bank also obtains deposits on a bid basis from customers or potential
customers  wishing to deposit  amounts of at least  $100.  Deposits  from public
entities  such as state and local  government  entities,  schools and  hospitals
totaled $14.9 million or 28.3% of total  deposits at December 31, 1998 and $0 at
December 31, 1997.

Interest earned on statement  savings  accounts is paid from the date of deposit
to the date of withdrawal, compounded and credited quarterly. Interest earned on
money market demand  deposit  accounts is compounded and credited  monthly.  The
interest  rates on these  accounts are reviewed by  management of the Bank daily
and adjusted as often as deemed necessary.

LIQUIDITY AND INTEREST RATE SENSITIVITY

Liquidity is a measure of Heartland's ability to meet its customers' present and
future  deposit   withdrawals   and/or  increased  loan  demand  without  unduly
penalizing earnings. Interest rate sensitivity involves the relationship between
rate  sensitive  assets and  liabilities  and is an  indication  of the probable
effects of interest rate movements on Heartland's net interest income. Heartland
manages  both its  liquidity  and  interest  sensitivity  through a  coordinated
asset/liability management program directed by the Asset Liability Committee.

Liquidity is provided by projecting  loan demand and other  financial  needs and
then maintaining  sufficient funding sources and assets readily convertible into
cash to meet these requirements.  Heartland has provided for its liquidity needs
by maintaining adequate balances in money market assets,  through growth in core
deposits,  maturing loans and  investments  in its  securities  portfolio and by
maintaining  various  short-term   borrowing  sources.  At  December  31,  1998,
Heartland had $10.5  million or 16.2% of total assets in  investment  securities
available for sale. Heartland also had $1.2 million of federal funds sold and an
additional $2 million available from unused federal funds purchased agreements.

As of December 31, 1998,  the Bank was awaiting  approval for  membership to the
Federal Home Loan Bank of Indianapolis (FHLBI),  which was received prior to the
date of this report.  Membership in the FHLBI will provide an additional  source
of borrowing with limits based on  availability  of specific  collateral such as
certain mortgages and investment securities.

Management believes that expected deposit growth, maturing investment securities
and unused  borrowing  sources will be adequate to meet the liquidity  needs for
the foreseeable future.

Heartland manages its rate sensitivity position through the use of variable-rate
loans and by matching funds acquired,  having a specific  maturity,  with loans,
securities  or money  market  investments  with  similar  maturities.  Heartland
employs a variety of measurement  techniques to identify and manage its exposure
to changing  interest rates. A simulation  model is used to measure  Heartland's
net  interest  income  volatility  to  changes in the level of  interest  rates,
interest rate spreads,  the shape of the yield curve and changing product growth
patterns and investment strategies. Additionally, a rate sensitivity position is
computed for various repricing intervals by calculating rate sensitivity gaps.


CAPITAL ADEQUACY

The Bank is subject to regulatory capital  requirements  administered by federal
banking  agencies.  Capital  adequacy  guidelines and prompt  corrective  action
regulations involve quantitative and qualitative measures of assets, liabilities
and certain  off-balance-sheet  items  calculated  under  regulatory  accounting
practices.

The most restrictive capital adequacy requirement currently in place is from the
agreement with the Federal Deposit Insurance Corporation in conjunction with the
approval for deposit  insurance,  which requires that a minimum total capital to
total assets ratio of 8% be  maintained  for the first three years of operation.
The Bank's  corresponding  capital ratio at December 31, 1998 was 13.0% compared
to 74.3% at December 31, 1997.


SERVICE AREA

The Bank's primary service area is Johnson County,  Indiana.  Johnson County has
been described as one of the fastest growing  Indiana  counties by population in
recent years.  The majority of the Bank's  customers  reside in Johnson  County,
particularly in the northern  two-thirds of the county,  which accounts for over
88% of the county's population,  according to the 1990 U.S. Census. The Bank has
branches  in Franklin  and  Greenwood,  which are the two largest  cities in the
county.


COMMON STOCK

Heartland had 1,265,000 shares of Common Stock issued and outstanding  which are
currently held by approximately 1,800 shareholders  (including those shares held
in street name) on March 1, 1999.  The daily  trading per share price and volume
of  shares  traded  may be  found on the NASD  Over-the-Counter  Bulletin  Board
listing under the ticker symbol HRTB.


FINANCIAL STATEMENTS

The items listed below are presented on the  following  pages for your review in
conjunction with the foregoing discussion:

     Independent Auditor's Report on consolidated financial statements.

     Consolidated Balance Sheets at December 31, 1998 and 1997.

     Consolidated Statements of Income for the year ended December 31, 1998 and
     the period from May 27, 1997 (inception) through December 31, 1997.

     Consolidated  Statements of Changes In  Stockholders'  Equity for the year
     ended  December  31,  1998 and the  period  from May 27,  1997  (inception)
     through December 31, 1997.

     Consolidated Statements of Cash Flows for the year ended December 31, 1998
     the period from May 27, 1997 (inception) through December 31, 1997.

     Notes to consolidated financial statements.



<PAGE>


 DIRECTORS AND OFFICERS

Heartland  Community Bank is a full service commercial bank with a wide array of
easy to understand  checking,  savings,  certificate  and IRA deposit  accounts,
along with commercial,  residential, consumer and home equity loan products. The
following is a list of directors and officers of the Bank:


Directors:                          Officers:

Gordon R. Dunn,                     Steve Bechman,
Chairman of the Board               President and Chief Executive Officer

Patrick A. Sherman,                 Jeffrey L. Goben,
Vice Chairman                       Executive Vice President and
                                    Chief Operating Officer

Sharon Acton,                       John M. Morin,
Director                            Vice President Consumer loans

J. Michael Jarvis,                  K. Keith Fox,
Director                            Vice President Commercial Loans

John Norton,                        R. Trent McWilliams,
Director                            Vice President Business Development

Robert Richardson,                  Jeff Joyce,
Director                            Vice President and Controller

James C. Stewart,                   Pam Fender,
Director                            Assistant Vice President, Deposit Operations

Steve Bechman,                      Alexa McKnight,
Director                            Assistant Vice President, Teller Operations

Jeffrey L. Goben,                   Terri Webb,
Director                            Assistant Vice President, Loan Operations


<PAGE>






Banking Facilities

Franklin:                           Greenwood:
420 North Morton Street (U.S. 31)   489 South State Road 135
Franklin, Indiana  46131            Greenwood, Indiana  46142
Phone (317) 738-3915                Phone (317) 881-3915
FAX (317) 736-5022                  FAX (317) 859-3849

Investor Relations/Analyst Contact

Jeff D. Joyce, Chief Financial Officer
(317) 738-2854
(317) 736-5022 facsimile
JeffJHRTB@AOL.com
























ANNUAL REPORT ON FORM 10-KSB


UPON WRITTEN REQUEST HEARTLAND WILL PROVIDE TO EACH SHAREHOLDER, WITHOUT CHARGE,
A COPY OF  HEARTLAND'S  ANNUAL REPORT ON FORM 10-KSB FOR 1998, AS FILED WITH THE
SECURITIES AND EXCHANGE  COMMISSION.  REQUESTS SHOULD BE DIRECTED TO JEFF JOYCE,
CFO, HEARTLAND BANCSHARES, INC. PO BOX 469 FRANKLIN, INDIANA 46131.