German American Bancorp, Inc. is a financial services holding company based in Jasper, Indiana. The Company's Common Stock is traded on NASDAQ's Global Select Market, under the symbol GABC. The principal subsidiary of German American Bancorp, Inc. is its banking subsidiary, German American Bancorp, which operates through six community banking affiliates with 28 retail banking offices in the ten contiguous Southern Indiana counties of Daviess, Dubois, Gibson, Knox, Lawrence, Martin, Monroe, Perry, Pike, and Spencer. German American Bancorp owns a trust, brokerage, and financial planning subsidiary, which operates from its banking offices, and a full line property and casualty insurance agency with six insurance agency offices throughout its market area.

Throughout this Management's Discussion and Analysis, as elsewhere in this report, when we use the term "Company", we will usually be referring to the business and affairs (financial and otherwise) of the Company and its subsidiaries and affiliates as a whole. Occasionally, we will refer to the term "parent company" or "holding company" when we mean to refer to only German American Bancorp, Inc.

This section presents an analysis of the consolidated financial condition of the Company as of June 30, 2008 and December 31, 2007 and the consolidated results of operations for the three and six months ended June 30, 2008 and 2007. This discussion should be read in conjunction with the consolidated financial statements and other financial data presented elsewhere herein and with the financial statements and other financial data, as well as the Management's Discussion and Analysis of Financial Condition and Results of Operations, included in the Company's December 31, 2007 Annual Report on Form 10-K.

MANAGEMENT OVERVIEW

This updated discussion should be read in conjunction with the Management Overview that was included in our Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's December 31, 2007 Annual Report on Form 10-K.

During the second quarter of 2008, the Company generated earnings of $3,111,000 or $0.28 per share, an 18% increase from the $2,643,000 or $0.24 per share in the second quarter of 2007. This level of quarterly earnings represents the third successive quarter that the Company has reported the highest level of quarterly earnings in its history. In comparison with prior year results, the Company produced enhanced performance during the second quarter of 2008 in each major category within the income statement reflecting increased revenue from both net interest income and total non-interest income coupled with a reduction in non-interest expense. Partially offsetting these improvements was an increased level of provision for loan loss. Each of these areas will be discussed in more detail below.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The financial condition and results of operations for German American Bancorp, Inc. presented in the Consolidated Financial Statements, accompanying Notes to the Consolidated Financial Statements, and selected financial data appearing elsewhere within this report, are, to a large degree, dependent upon the Company's accounting policies. The selection of and application of these policies involve estimates, judgments and uncertainties that are subject to change. The critical accounting policies and estimates that the Company has determined to be the most susceptible to change in the near term relate to the determination of the allowance for loan losses, the valuation of securities available for sale, and income tax expense.

Allowance for Loan Losses

The Company maintains an allowance for loan losses to cover probable incurred credit losses at the balance sheet date. 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. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off. A provision for loan losses is charged to operations based on management's periodic evaluation of the necessary allowance balance. Evaluations are conducted at least quarterly and more often if deemed necessary. The ultimate recovery of all loans is susceptible to future market factors beyond the Company's control.

The Company has an established process to determine the adequacy of the allowance for loan losses. The determination of the allowance is inherently subjective, as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on other classified loans and pools of homogeneous loans, and consideration of past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors, all of which may be susceptible to significant change. The allowance consists of two components of allocations, specific and general. These two components represent the total allowance for loan losses deemed adequate to cover losses inherent in the loan portfolio.

General allocations are made for other pools of loans, including non-classified loans, homogeneous portfolios of consumer and residential real estate loans, and loans within certain industry categories believed to present unique risk of loss. General allocations of the allowance are primarily made based on a five-year historical average for loan losses for these portfolios, judgmentally adjusted for economic factors and portfolio trends.

Due to the imprecise nature of estimating the allowance for loan losses, the Company's allowance for loan losses may include a minor unallocated component. The unallocated component of the allowance for loan losses incorporates the Company's judgmental determination of inherent losses that may not be fully reflected in other allocations, including factors such as economic uncertainties, lending staff quality, industry trends impacting specific portfolio segments, and broad portfolio quality trends. Therefore, the ratio of allocated to unallocated components within the total allowance may fluctuate from period to period.

Securities Valuation

Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported separately in accumulated other comprehensive income
(loss), net of tax. The Company obtains market values from a third party on a monthly basis in order to adjust the securities to fair value. Equity securities that do not have readily determinable fair values are carried at cost. Additionally, all securities are required to be written down to fair value when a decline in fair value is other than temporary; therefore, future changes in the fair value of securities could have a significant impact on the Company's operating results. In determining whether a market value decline is other than temporary, management considers the reason for the decline, the extent of the decline and the duration of the decline. As of June 30, 2008, gross unrealized losses on the securities available-for-sale portfolio totaled approximately $1,996,000.

Income Tax Expense

Income tax expense involves estimates related to the valuation allowance on deferred tax assets and loss contingencies related to exposure from tax examinations.

A valuation allowance reduces deferred tax assets to the amount management believes is more likely than not to be realized. In evaluating the realization of deferred tax assets, management considers the likelihood that sufficient taxable income of appropriate character will be generated within carryback and carryforward periods, including consideration of available tax planning strategies. As of December 31, 2007, the Company had a deferred tax asset of $649,000 which includes tax credit carryforwards of $403,000. Based on the long carryforward periods available, management has assessed it more likely than not that these credits will be realized and no valuation allowance has been established on this asset.

Tax-related loss contingencies, including assessments arising from tax examinations and tax strategies, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. In considering the likelihood of loss, management considers the nature of the contingency, the progress of any examination or related protest or appeal, the views of legal counsel and other advisors, experience of the Company or other enterprises in similar matters, if any, and management's intended response to any assessment.

RESULTS OF OPERATIONS

Net Income:

Net income increased $468,000 or 18% to $3,111,000 or $0.28 per share for the quarter ended June 30, 2008, compared to $2,643,000 or $0.24 per share for the second quarter of 2007. The increase in net income during the second quarter 2008 compared with same quarter of 2007 was due to improvement across the major categories of the income statement including net interest income, non-interest income, non-interest expense, partially offset by an increased level of provision for loan losses.

Net income for the first six months of 2008 totaled $6,131,000 or $0.55 per share representing an increase of $2,009,000 or 49% over the $4,122,000 or $0.37 per share recorded in the six months ended June 30, 2007. The increase in net income during the first half of 2008 compared with the same period of 2007 was attributable to improvement in net interest income, non-interest income and expense, and a relatively flat level of provision for loan losses.

Net Interest Income:

Net interest income is the Company's single largest source of earnings, and
represents the difference between interest and fees realized on earning assets,
less interest paid on deposits and borrowed funds. The following table
summarizes the Company's net interest income (on a tax-equivalent basis, at an
effective tax rate of 34%) for each of the periods presented herein (dollars in
thousands):

                               Three Months           Change from
                              Ended June 30,         Prior Period
                              2008       2007      Amount    Percent
Interest Income (T/E)       $ 16,911   $ 18,109   $ (1,198 )     (6.6 )%
Interest Expense               6,713      8,464     (1,751 )    (20.7 )%
Net Interest Income (T/E)   $ 10,198   $  9,645   $    553        5.7 %

Net interest income increased $571,000 or 6% (an increase of $553,000 or 6% on a tax-equivalent basis) for the quarter ended June 30, 2008 compared with the same quarter of 2007. The net interest margin represents tax-equivalent net interest income expressed as a percentage of average earning assets. The tax equivalent net interest margin for the second quarter 2008 was 3.75% compared to 3.78% for the second quarter of 2007. The yield on earning assets totaled 6.23% during the quarter ended June 30, 2008 compared to 7.11% in the same period of 2007 while the cost of funds (expressed as a percentage of average earning assets) totaled 2.48% during 2008 compared to 3.33% in 2007.

Average earning assets totaled approximately $1.090 billion for the quarter ended June 30, 2008 compared with $1.021 billion for the quarter ended June 30, 2007. During the second quarter of 2008, average loans outstanding totaled $872.3 million, an increase of $37.8 million or 5%, compared to the $834.5 million in average loans outstanding during the second quarter of 2007. Average commercial and agricultural loans totaled $629.4 million, an increase of $45.5 million or 8% during the quarter ended June 30, 2008 compared with the same quarter of the prior year. Average residential mortgage loans and consumer loans totaled $242.9 million during the quarter ended June 30, 2008 representing an decline of $7.7 million or 3% over 2007.

                                Six Months            Change from
                              Ended June 30,         Prior Period
                              2008       2007      Amount    Percent
Interest Income (T/E)       $ 34,862   $ 35,616   $   (754 )     (2.1 )%
Interest Expense              14,419     16,418     (1,999 )    (12.2 )%
Net Interest Income (T/E)   $ 20,443   $ 19,198   $  1,245        6.5 %

Net interest income increased $1,315,000 or 7% (an increase of $1,245,000 or 7% on a tax-equivalent basis) for the six months ended June 30, 2008 compared with the six months ended June 30, 2007. The tax equivalent net interest margin for the six months ended June 30, 2008 was 3.82% compared to 3.83% for the same period of 2007. The yield on earning assets totaled 6.53% during the first half of 2008 compared to 7.10% in the same period of 2007 while the cost of funds (expressed as a percentage of average earning assets) totaled 2.71% during 2008 compared to 3.27% in 2007.

Average earning assets totaled approximately $1.073 billion for the six months ended June 30, 2008 compared with $1.010 billion for the six months ended June 30, 2007. During the first half of 2008, average loans outstanding totaled $870.3 million, an increase of $53.4 million or 7%, compared to the $816.9 million in average loans outstanding during the first half of 2007. Average commercial and agricultural loans totaled $623.8 million, an increase of $56.0 million or 10% during the six months ended June 30, 2008 compared with the same period of the prior year. Average residential mortgage loans and consumer loans totaled $246.5 million during the six months ended June 30, 2008 representing a decrease of $2.5 million or 1% over 2007.

The Company provides for loan losses through regular provisions to the allowance for loan losses. The provision is affected by net charge-offs on loans and changes in specific and general allocations of the allowance. The provision for loan loss totaled $934,000 during the quarter ended June 30, 2008, representing an increase of $559,000 from the second quarter 2007 provision of $375,000. During the second quarter of 2008, the annualized provision for loan loss represented 0.43% of average loans outstanding compared with 0.18% on an annualized basis of average loans outstanding during the second quarter of 2007. The higher level of provision during the second quarter of 2008 compared with the same period of 2007 was largely attributable to loan growth and an increased level of non-performing loans.

The provision for loan loss totaled $2,278,000 during the six months ended June 30, 2008, representing a decline of $25,000 from the first half of 2007 provision of $2,303,000. During the six months ended June 30, 2008, the annualized provision for loan loss represented 0.52% of average loans outstanding compared with 0.56% on an annualized basis of average loans outstanding during the six months ended June 30, 2007.

Net charge-offs totaled $279,000 or 0.13% on an annualized basis of average loans outstanding during the three months ended June 30, 2008 compared with $219,000 or 0.10% on an annualized basis of average loans outstanding during the same period of 2007. Net charge-offs totaled $469,000 or 0.11% on an annualized basis of average loans outstanding during the six months ended June 30, 2008 compared with $1,656,000 or 0.41% on an annualized basis of average loans outstanding during the same period of 2007. The significantly higher level of net charge-offs during the six months ended June 30, 2007, was primarily attributable to the charge-off related to a single large commercial credit facility.

The provisions for loan losses made during the quarter ended June 30, 2008 were made at a level deemed necessary by management to absorb estimated, probable incurred losses in the loan portfolio. A detailed evaluation of the adequacy of the allowance for loan losses is completed quarterly by management, the results of which are used to determine provisions for loan losses. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.

Non-interest Income:

During the second quarter of 2008, non-interest income totaled $4,493,000 representing an increase of $268,000 or 6% over the second quarter of 2007. During the six months ended June 30, 2008, non-interest income totaled $9,525,000 representing an increase of $1,348,000 or 16% over 2007.

Trust and investment product fees totaled $636,000 during the quarter ended June 30, 2008 representing a decline of $24,000 or 4% from the same period of 2007. Trust and investment product fees totaled $1,223,000 during the six months ended June 30, 2008 representing a decline of $118,000 or 9% from the same period of 2007.

Deposit service charges and fees totaled $1,245,000 during the quarter ended June 30, 2008 representing an increase of $131,000 or 12% over the same period of 2007. Deposit service charges and fees totaled $2,428,000 during the six months ended June 30, 2008 representing an increase of $396,000 or 19% over the same period of 2007. The increase was attributable to a combination of increased gross fees and a reduced level of refunded and waived fees.

During the second quarter of 2008, insurance commission and fees totaled $1,307,000 which is a decline of $234,000 or 15% compared to the second quarter of 2007. The decline was largely attributable to the receipt of $109,000 in contingency revenue at the Company's property and casualty insurance subsidiary, German American Insurance during the second quarter of 2007 while all 2008 contingency revenues were received during the first quarter of 2008. During the six month period ended June 30, 2008, insurance commission and fees totaled $3,210,000 which is an increase of $165,000 or 5% compared to 2007. The increase was attributable to an increase of $316,000 in contingency revenue during the first half of 2008 compared with the first half of 2007.

During the quarter ended June 30, 2008, the net gain on sale of residential loans totaled $404,000, an increase of $231,000 or 134% over the gain recognized in the quarter ended June 30, 2007. The increase was primarily attributable to higher levels of residential loan sales which totaled $32.3 million in the second quarter of 2008, compared to $15.5 million in the same period of 2007. During the six months ended June 30, 2008, the net gain on sale of residential loans totaled $728,000, an increase of $395,000 or 119% over the gain of $333,000 recognized in the six months ended June 30, 2007. The increase was attributable to higher levels of residential loan sales which totaled $60.7 million in the first half of 2008, compared to $27.6 million in the same period of 2007.

Non-interest Expense:

During the quarter ended June 30, 2008, non-interest expense totaled $8,985,000, a decline of $483,000 or 5% from the same period of 2007. During the six months ended June 30, 2008, non-interest expense totaled $18,333,000, a decline of $611,000 or 3% from the same period of 2007.

Salaries and benefits totaled $5,118,000 in the quarter ended June 30, 2008 representing a decline of $436,000 or 8% from 2007. Salaries and benefits totaled $10,445,000 in the first half of 2008 representing a decline of $612,000 or 6% from 2007. The declines were largely attributable to a decrease in excess of 30 full-time equivalent employees, or 8% of total full-time equivalent employees, during the three and six months ended June 30, 2008 compared with the same periods of 2007. The decline in salaries and benefits was achieved while the Company recognized $196,000 and $466,000 in the three and six months ended June 30, 2008, respectively, for post-retirement benefits for employees that were accrued as part of the Company's formal review of effectiveness and efficiency.

In the quarter ended June 30, 2008, occupancy and furniture and equipment expense totaled $1,398,000, an increase of $50,000 or 4% compared to the quarter ended June 30, 2007. During the six months ended June 30, 2008, occupancy and furniture and equipment expense totaled $2,870,000, an increase of $172,000 or 6% compared to the six months ended June 30, 2007. The increases were largely attributable to higher levels of real estate taxes and higher levels of furniture, fixtures and equipment depreciation.

Professional fees increased $91,000 or 26% during the second quarter of 2008 and $264,000 or 36% during the six months ended June 30, 2008, compared with the same periods of 2007. The increases were due primarily to professional fees associated with the Company's formal review of effectiveness and efficiency.

During the three and six months ended June 30, 2008, collection costs declined by $120,000 and $239,000, respectively, as compared with the same periods of 2007. The declines were largely due to elevated levels in 2007 related to the resolution of a single large non-performing commercial credit facility. During the three and six months ended June 30, 2008, losses related to fraudulent ATM/debit card transactions decreased by $168,000 and $244,000, respectively, compared with the same periods of 2007; however, losses of this type have been incurred at an increased level during the third quarter of 2008 and it is therefore likely that losses of this type for the full year 2008 could be closer to those incurred in 2007 than the partial year comparisons might otherwise suggest.

Income Taxes:

The Company's effective income tax rate approximated 32.9% during the three months ended June 30, 2008 compared with 31.8% during the same period of 2007. The Company's effective income tax rate approximated 32.6% during the six months ended June 30, 2008 compared with 28.9% during the same period of 2007. The higher effective tax rate during the three and six month periods ended June 30, 2008 compared with the same periods of 2007 was the result of higher levels of before tax net income combined with a lower level of tax-exempt investment income. The effective tax rate in both 2008 and 2007 was lower than the blended statutory rate of 39.6% resulting primarily from the Company's tax-exempt investment income on securities and loans, income tax credits generated from investments in affordable housing projects, and income generated by subsidiaries domiciled in a state with no state or local income tax.

FINANCIAL CONDITION

Total assets at June 30, 2008 increased $43.3 million to $1.175 billion compared with $1.132 billion in total assets at December 31, 2007. Cash and cash equivalents increased $18.6 million to $46.5 million at June 30, 2008 compared with $27.9 million at year-end 2007. This increase was largely attributable to an increase in deposits during 2008. Securities available-for-sale and held-to-maturity increased $14.0 million to $166.8 million at June 30, 2008 compared with $152.8 million at year-end 2007. Loans, net of unearned income, increased $9.5 million to $877.2 million at June 30, 2008 compared to $867.7 million at December 31, 2007. Commercial and industrial loans increased $36.5 million or 8%, agricultural based loans decreased $11.2 million or 7%, consumer loans decreased $5.6 million or 4% and residential mortgage loans declined $10.2 million or 9% during the six months ended June 30, 2008.

Non-performing Assets:

The following is an analysis of the Company's non-performing assets at June 30,
2008 and December 31, 2007 (dollars in thousands):

                                                  June 30,     December 31,
                                                    2008           2007
Non-accrual Loans                                 $   9,633   $        4,356
Past Due Loans (90 days or more)                         16                8
Restructured Loans                                        -                -
Total Non-performing Loans                            9,649            4,364
Other Real Estate                                     1,815            1,517
Total Non-performing Assets                       $  11,464   $        5,881

Non-performing Loans to Total Loans                    1.10 %            .50 %
Allowance for Loan Loss to Non-performing Loans      102.11 %         184.33 %

The Company's level of overall non-performing assets increased by approximately $5.6 million and non-performing loans increased by approximately $5.3 million during the six months ended June 30, 2008. This level of non-performing loans represents 1.10% of total loans outstanding at June 30, 2008, an increase from 0.50% as of year-end 2007. The majority of the increase was related to a single commercial real estate credit which is secured by a newly constructed apartment complex. This credit is a participation loan in which the Company is a 53% participant, with the Company's outstanding balance at June 30, 2008 totaling approximately $2.9 million. The remaining increase in non-performing loans was primarily related to commercial credits that each totaled less than $1.0 million.

The largest credit facility, other than the above referenced apartment complex credit, included in non-performing assets is an approximately $736,000 loan (after a partial charge-off during 2006) to a manufacturing entity which has ceased operations. During the third quarter of 2005, the real estate and . . .