FORWARD-LOOKING STATEMENTS

From time to time, we include forward-looking statements in our oral and written communication. We may include forward-looking statements in filings with the Securities and Exchange Commission, such as this Form 10-Q, in other written materials and in oral statements made by senior management to analysts, investors, representatives of the media and others. We intend 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 we are 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:

* statements of our goals, intentions and expectations;

* statements regarding our business plan and growth strategies;

* statements regarding the asset quality of our loan and investment portfolios; and

* estimates of our risks and future costs and benefits.

These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following important factors which could affect the actual outcome of future events:

* fluctuations in market rates of interest and loan and deposit pricing, which could negatively affect our net interest margin, asset valuations and expense expectations;

* adverse changes in the economy, which might affect our business prospects and could cause credit-related losses and expenses;

* adverse developments in our loan and investment portfolios;

* competitive factors in the banking industry, such as the trend towards consolidation in our market;

* changes in the banking legislation or the regulatory requirements of federal and state agencies applicable to bank holding companies and banks like our affiliate banks;

* acquisitions of other businesses by us and integration of such acquired businesses;

* changes in market, economic, operational, liquidity, credit and interest rate risks associated with our business; and

* the continued availability of earnings and excess capital sufficient for the lawful and prudent declaration and payment of cash dividends.

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

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations continued

RECENT MARKET DEVELOPMENTS

The global and U.S. economies are experiencing significantly reduced business activity as a result of, among other factors, disruptions in the financial system during the past year. Dramatic declines in the housing market during the past year, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative securities have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail.

Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced, and in some cases, ceased to provide funding to borrowers, including other financial institutions. The availability of credit, confidence in the financial sector, and level of volatility in the financial markets have been significantly adversely affected as a result. In recent weeks, volatility and disruption in the capital and credit markets has reached unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit capacity for certain issuers without regard to those issuers' underlying financial strength.

In response to the financial crises affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, on October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the "EESA") was signed into law. Pursuant to the EESA, the U.S. Treasury will have the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets.

On October 14, 2008, Secretary Paulson, after consulting with the Federal Reserve and the FDIC, announced that the Department of the Treasury will purchase equity stakes in a wide variety of banks and thrifts. Under this program, known as the Troubled Asset Relief Program Capital Purchase Program (the "TARP Capital Purchase Program"), from the $700 billion authorized by the EESA, the Treasury will make $250 billion of capital available to U.S. financial institutions in the form of preferred stock. In conjunction with the purchase of preferred stock, the Treasury will receive warrants to purchase common stock with an aggregate market price equal to 15% of the preferred investment. Participating financial institutions will be required to adopt the Treasury's standards for executive compensation and corporate governance for the period during which the Treasury holds equity issued under the TARP Capital Purchase Program. Secretary Paulson also announced that nine large financial institutions have already agreed to participate in the TARP Capital Purchase Program.

Also on October 14, 2008, after receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Paulson signed the systemic risk exception to the FDIC Act, enabling the FDIC to temporarily provide a 100% guarantee of the senior debt of all FDIC-insured institutions and their holding companies, as well as deposits in non-interest bearing transaction deposit accounts under a Temporary Liquidity Guarantee Program. Coverage under the Temporary Liquidity Guarantee Program is available for 30 days without charge and thereafter at a cost of 75 basis points per annum for senior unsecured debt and 10 basis points per annum for non-interest bearing transaction deposits. The Corporation is assessing its participation in both the TARP Capital Purchase Program and the Temporary Liquidity Guarantee Program but has not yet made a definitive decision as to whether it will participate.

It is not clear at this time what impact the EESA, the TARP Capital Purchase Program, the Temporary Liquidity Guarantee Program, other liquidity and funding initiatives of the Federal Reserve and other agencies that have been previously announced, and any additional programs that may be initiated in the future will have on the financial markets and the other difficulties described above, including the extreme levels of volatility and limited credit availability currently being experienced, or on the U.S. banking and financial industries and the broader U.S. and global economies. Further adverse effects could have an adverse effect on the Corporation and its business.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations continued

CRITICAL ACCOUNTING POLICIES

Generally accepted accounting principles are complex and require us to apply significant judgments to various accounting, reporting and disclosure matters. We must use assumptions and estimates to apply these principles where actual measurement is not possible or practical. For a complete discussion of our significant accounting policies, see "Notes to the Consolidated Financial Statements" in our Annual Report on Form 10-K for the year ended December 31, 2007. Certain policies are considered 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 financial statements. We have reviewed the application of these policies with the Audit Committee of our Board of Directors.

We believe there have been no significant changes during the nine months ended September 30, 2008 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2007.

BUSINESS SUMMARY

We are a diversified financial holding company headquartered in Muncie, Indiana. Since its organization in 1982, the Corporation has grown to include 65 banking center locations in 18 Indiana and 3 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. As of September 30, 2008, the Corporation's financial service affiliates included four nationally chartered banks: First Merchants Bank, National Association, First Merchants Bank of Central Indiana, National Association, Lafayette Bank and Trust Company, National Association and Commerce National Bank. The banks provide commercial and retail banking services. In addition, our trust company, multi-line insurance company and a title company provide trust asset management services, retail and commercial insurance agency services and title services, respectively.

On September 3, 2008, the Corporation announced a definitive agreement to acquire Lincoln Bancorp through a merger of Lincoln into First Merchants. At September 30, 2008, Lincoln Bancorp had $831.3 million in assets. Lincoln Bancorp and Lincoln Bank are headquartered in Plainfield, Indiana with additional offices in Avon, Bargersville, Brownsburg, Crawfordsville, Frankfort, Franklin, Greenwood, Mooresville, Morgantown, Nashville and Trafalgar. Lincoln Bank also has 2 loan production offices located in Carmel and Greenwood, Indiana. First Merchants and Lincoln will have combined assets of $4.7 billion and create the largest financial holding company based in Central Indiana. The combined company will have eighty-two banking offices in twenty-three Indiana and three Ohio counties, a trust company with assets under management in excess of $1.7 billion, and a multi-line insurance agency. The merger is pending Lincoln Bancorp shareholder approval and regulatory approval. The company has filed the registration statement which includes the terms and conditions of the merger agreement on form S-4 dated September 24, 2008 (file No. 333-153656).

Management believes that its vision, mission, culture statement and core values produce profitable growth for shareholders. Management also believes it is important to maintain a strong control environment as we continue to grow our businesses. Interest rate and market risks inherent in our asset and liability balances are managed within prudent ranges, while ensuring adequate liquidity and funding. Sound credit policies are maintained and interest rate and market risks inherent in our asset and liability balances are managed within prudent ranges, while ensuring adequate liquidity and funding.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations continued

RESULTS OF OPERATIONS

Net income for the three months ended September 30, 2008, equaled $5,749,000, compared to $8,350,000 in the same period of 2007. Diluted earnings per share were $.32, compared to $.46 reported for the third quarter 2007. Net income for the nine months ended September 30, 2008 was $20,417,000 compared to $22,329,000 for the same period in 2007. Diluted earnings per share were $1.13 in 2008 and $1.22 in 2007.

Net-interest margin expanded by 39 basis points from 3.52 percent in the third quarter of 2007 to 3.91 percent in 2008. As a result, net-interest income increased by $4.7 million, or 16.5 percent. Year-to-date net interest margin improved by 32 basis points as net interest income increased by $13 million or 15.6 percent.

Provision expense totaled $7.1 million for the quarter, an increase of $4.3 million, as net charge-offs totaled $3.7 million. Year-to-date provision expense totaled $18 million, an increase of $12 million over the prior year, as charge-off's totaled $11.2 million. Non-performing assets increased from 84 basis points of total assets to 142 basis points during the year.

The Corporation's allowance for loan losses as a percent of total loans increased from .96 to 1.14 percent since September 30, 2007. The increase totals $7.4 million in additional reserves. The increased allowance for loan losses total is comprised of a $2.0 million increase in the general historical loss component, a $6.3 million increase in environmental factors and a decline in specific reserves of $924,000.

Total non-interest income decreased by $1.6 million, during the quarter, due primarily to a $1.4 million write-off of the other than temporarily impairment of Federal Home Loan Mortgage Corporation preferred stock. The investment was deemed to be permanently impaired as the market value continued to decline rapidly with no indication of recovery. Total expenses increased during the quarter by $2.1 million totaling $27.1 million. Year-to-date non-interest income declined by $337,000 and non-interest expense increased $2,857,000.

Annualized returns on average assets and average stockholders' equity for the nine months ended September 30, 2008, were .72 percent and 7.81 percent, respectively, compared with .83 percent and 9.05 percent for the same period of 2007.

CAPITAL

Our regulatory capital continues to exceed regulatory "well capitalized" standards. 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. Our Tier I capital to average assets ratio was 7.3 percent at September 30, 2008 and 7.2 percent at year end 2007. In addition, at September 30, 2008, we had a Tier I risk-based capital ratio of 8.5 percent and total risk-based capital ratio of 11.2 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.

Our GAAP capital ratio, defined as total stockholders' equity to total assets, equaled 9.1 percent at September 30, 2008 and 9.0 percent at December 31, 2007. When we acquire other companies for stock, GAAP capital increases by the entire amount of the purchase price.

Our tangible capital ratio, defined as total stockholders' equity less intangibles net of tax to total assets less intangibles net of tax, equaled 5.9 percent as of September 30, 2008, and 5.7 percent at December 31, 2007.

Item 2.  Management's Discussion and Analysis of Financial Condition and Results
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of Operations  continued
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We believe that all of the above capital ratios are meaningful  measurements for
evaluating  our safety and  soundness.  Additionally,  we believe the  following
table is also meaningful when  considering our performance  measures.  The table
details and reconciles  tangible earnings per share,  return on tangible capital
and tangible assets to traditional GAAP measures.
                                           September 30,    December 31,
(Dollars in thousands)                          2008            2007
                                            -----------     -----------
Average goodwill .......................... $   124,310     $   123,191
Average core deposit intangible (CDI) .....      11,679          13,868
Average deferred tax on CDI ...............      (2,971)         (3,659)
                                            -----------     -----------
  Intangible adjustment ................... $   133,018     $   133,400
                                            ===========     ===========

Average stockholders' equity (GAAP capital) $   348,415     $   330,786
Intangible adjustment .....................    (133,018)       (133,400)
                                            -----------     -----------
  Average tangible capital ................ $   215,397     $   197,386
                                            ===========     ===========

Average assets ............................ $ 3,791,305     $ 3,639,772
Intangible adjustment .....................    (133,018)       (133,400)
                                            -----------     -----------
  Average tangible assets ................. $ 3,658,287     $ 3,506,372
                                            ===========     ===========

Net income ................................ $    20,417     $    31,639
CDI amortization, net of tax ..............       1,119           1,919
                                            -----------     -----------
  Tangible net income ..................... $    21,536     $    33,558
                                            ===========     ===========

Diluted earnings per share ................ $      1.13     $      1.73
Diluted tangible earnings per share ....... $      1.19     $      1.83

Return on average GAAP capital ............        7.81%           9.56%
Return on average tangible capital ........       13.33%          17.00%

Return on average assets ..................         .72%            .87%
Return on average tangible assets .........         .78%            .96%

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations continued

ASSET QUALITY/PROVISION FOR LOAN LOSSES

Our primary business focus is middle market commercial and residential real estate, auto and small consumer lending, which results in portfolio diversification. We ensure 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 ongoing 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.

At September 30, 2008, non-performing assets, which includes nonaccrual loans, restructured loans, and other real estate owned totaled $54,930,000, an increase of $23,181,000 from December 31, 2007 as noted in Note 5 Loans and Allowance, included within the Notes to Consolidated Condensed Financial Statements of this Form 10Q. Other real estate owned increased $14,343,000 from December 31, 2007, largely due to two relationships, one that came into other real estate owned in the first quarter of 2008 and one in the second quarter. Other real estate owned declined by $300,000 in the third quarter due to a sale of property. Additional sales are anticipated in the fourth quarter. Current appraisals are obtained to determine value as management continues to agressively market these real estate assets.

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 September 30, 2008, impaired loans totaled $129,052,000, an increase of $42,103,000 from December 31, 2007. At September 30, 2008, an allowance for losses was not deemed necessary for impaired loans totaling $114,940,000, as there was no identified loss on these credits. An allowance of $6,123,000 was recorded for the remaining balance of impaired loans of $14,112,000 and is included in our allowance for loan losses.

The increase of total impaired loans is primarily due to the increase of performing, substandard classified loans, which comprise a portion of our total impaired loans. A loan is deemed impaired when, based on current information or events, it is probable all amounts due of principal and interest according to the contractual terms of the loan agreement will not be collected. All of our criticized loans, including substandard, doubtful and loss credits, are included in the impaired loan total.

At September 30, 2008, the allowance for loan losses was $34,985,000,an increase of $6,757,000 from year end 2007. As a percent of loans, the allowance was 1.14 percent at September 30, 2008 and .98 percent at December 31, 2007.

The provision for loan losses for the first nine months of 2008 was $17,987,000, an increase of $11,930,000 from $6,057,000 for the same period in 2007. The increase from the prior year was a result of an increase in net charge offs and the increase in non-performing loans.

The decline in the value of the residential real estate in our market has negatively impacted the underlying collateral value in our residential, land development and construction loans. This downturn in the real estate market is expected to continue and management is proactive in evaluating loans collateralized by real estate. The evaluation by management includes consideration of specific borrower cash flow analysis and estimated collateral values, types and amounts on non-performing loans, past and anticipated loan loss experience, changes in the composition of the loan portfolio, and the current condition and amount of loans outstanding. 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.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations continued

LIQUIDITY

Liquidity management is the process by which we ensure that adequate liquid funds are available for us and our subsidiaries. These funds are necessary in order 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 our asset/liability committee.

Our liquidity is dependent upon our receipt of dividends from our bank subsidiaries, which are subject to certain regulatory limitations 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, we utilize advances from the Federal Home Loan Bank ("FHLB") and a revolving line of credit with LaSalle Bank, N.A. as funding sources. At September 30, 2008, total borrowings from the FHLB were $237,225,000. Our bank subsidiaries have pledged certain mortgage loans and investments to the FHLB. The total available remaining borrowing capacity from the FHLB at September 30, 2008, was $15,247,000. At September 30, 2008, our revolving line of credit had no balance and a remaining borrowing capacity of $25,000,000.

The principal source of asset-funded liquidity is investment securities classified as available for sale, the market values of which totaled $377,329,000 at September 30, 2008, a decrease of $63,507,000 or 14.4 percent below December 31, 2007. 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 $2,254,000 at September 30, 2008. 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, we are 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 our consolidated financial statements. Such activities include: traditional off-balance sheet credit-related financial instruments, commitments under operating leases and long-term debt.

We provide customers with off-balance sheet credit support through loan commitments and standby letters of credit. Summarized credit-related financial instruments at September 30, 2008 are as follows:

                                                                At September 30,
(Dollars in thousands)                                               2008
                                                                --------------
Amounts of commitments:
Loan commitments to extend credit ............................... $  700,555
Standby letters of credit .......................................     32,523
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